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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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(Mark One)



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



For the quarterly period ended June 30, 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



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AAMES INVESTMENT CORPORATION

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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)



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



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



At August 8, 2005 Registrant had 61,648,304 shares of common stock
outstanding.



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1



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TABLE OF CONTENTS



|                             |  |                                                                                                                       |  |         
|---------------------------- |  | --------------------------------------------------------------------------------------------------------------------- |  | --------
|Item No.                     |  |                                                                                                                       |  | Page No.
|PART IFINANCIAL INFORMATION
|                             |  |                                                                                                                      
|Item 1                       |  | Financial Statements                                                                                                  |  | 3       
|                             |  |                                                                                                                      
|                             |  | Condensed Consolidated Balance Sheets at June 30, 2005 (Unaudited) and December 31, 2004 (Audited)                    |  | 3       
|                             |  |                                                                                                                      
|                             |  | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2005 and 2004 (Unaudited) |  | 4       
|                             |  |                                                                                                                      
|                             |  | Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 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                                 |  | 13      
|                             |  |                                                                                                                      
|Item 3                       |  | Quantitative and Qualitative Disclosures About Market Risk                                                            |  | 13      
|                             |  |                                                                                                                      
|Item 4                       |  | Controls and Procedures                                                                                               |  | 47      
|                            
|PART IIOTHER INFORMATION   
|                             |  |                                                                                                                      
|Item 1                       |  | Legal Proceedings                                                                                                     |  | 48      
|                             |  |                                                                                                                      
|Item 2                       |  | Changes in Securities and Use of Proceeds                                                                             |  | 48      
|                             |  |                                                                                                                      
|Item 3                       |  | Defaults Upon Senior Securities                                                                                       |  | 48      
|                             |  |                                                                                                                      
|Item 4                       |  | Submission of Matters to a Vote of Security Holders                                                                   |  | 48      
|                             |  |                                                                                                                      
|Item 5                       |  | Other Information                                                                                                     |  | 49      
|                             |  |                                                                                                                      
|Item 6                       |  | Exhibits                                                                                                              |  | 49      
|                             |  |                                                                                                                      
|                             |  | Signature Page                                                                                                        |  | 53      



2



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|Item 1. | Financial Statements
|------- | --------------------



AAMES INVESTMENT CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                           |  |               |           |   |                  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                           |  | June 30, 2005 |           |   | December 31,2004 |  
|                                                                                                                           |  | (Unaudited)   |           |   | (Audited)        |  
|ASSETS                                                                                                                     |  |               |           |   |                  |   |           |  
|Cash and cash equivalents:                                                                                                 |  |               |           |   |                  |   |           |  
|Unrestricted                                                                                                               |  | $             | 63,697    |   |                  | $ | 31,641    |  
|Restricted                                                                                                                 |  |               | 59,455    |   |                  |   | 6,139     |  
|Loans held for sale, at lower of cost or market                                                                            |  |               | 380,491   |   |                  |   | 484,963   |  
|Loans held for investment, net                                                                                             |  |               | 3,873,873 |   |                  |   | 1,725,046 |  
|Advances and other receivables, net                                                                                        |  |               | 23,802    |   |                  |   | 22,740    |  
|Residual interests, at estimated fair value                                                                                |  |               |          |   |                  |   | 39,082    |  
|Deferred income taxes                                                                                                      |  |               | 28,401    |   |                  |   | 28,401    |  
|Equipment and improvements, net                                                                                            |  |               | 9,125     |   |                  |   | 8,840     |  
|Prepaid and other                                                                                                          |  |               | 29,133    |   |                  |   | 22,076    |  
|Derivative instruments, at estimated fair value                                                                            |  |               | 49,183    |   |                  |   | 31,947    |  
|                                                                                                                           |  |               |           |   |                  |   |           |  
|Total assets                                                                                                               |  | $             | 4,517,160 |   |                  | $ | 2,400,875 |  
|                                                                                                                           |  |               |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                       |  |               |           |   |                  |   |           |  
|Financings on loans held for investment                                                                                    |  | $             | 3,162,354 |   |                  | $ | 1,157,470 |  
|Revolving warehouse and repurchase facilities                                                                              |  |               | 967,798   |   |                  |   | 809,213   |  
|Borrowings                                                                                                                 |  |               |          |   |                  |   | 7,680     |  
|Accounts payable and accrued expenses                                                                                      |  |               | 70,343    |   |                  |   | 63,242    |  
|Accrued dividends                                                                                                          |  |               |          |   |                  |   | 3,780     |  
|Income taxes payable                                                                                                       |  |               | 775       |   |                  |   | 1,864     |  
|                                                                                                                           |  |               |           |   |                  |   |           |  
|Total liabilities                                                                                                          |  |               | 4,201,270 |   |                  |   | 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; 61,645,141 shares and 61,360,271 shares outstanding |  |               | 616       |   |                  |   | 614       |  
|Additional paid-in capital                                                                                                 |  |               | 654,191   |   |                  |   | 655,437   |  
|Retained deficit                                                                                                           |  |               | (338,917  | ) |                  |   | (298,425  | )
|                                                                                                                           |  |               |           |   |                  |   |           |  
|Total stockholders equity                                                                                                 |  |               | 315,890   |   |                  |   | 357,626   |  
|                                                                                                                           |  |               |           |   |                  |   |           |  
|Total liabilities and stockholders' equity                                                                                 |  | $             | 4,517,160 |   |                  | $ | 2,400,875 |  
|                                                                                                                           |  |               |           |   |                  |   |           |  



See accompanying notes
to condensed consolidated financial statements.



3



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AAMES INVESTMENT CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED INCOME STATEMENTS

(UNAUDITED)

(In thousands, except per share data)



|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|----------------------------------------------------- |  | -------------------------- | ------- | ------------------------ | ---- | - | ------- |  | - | ------- | - |  | - | -------
|                                                      |  | Three Months EndedJune 30, |         | Six Months EndedJune 30,
|                                                      |  | 2005                       |         |                          | 2004 |   | 2005    |  |   | 2004   
|Interest income                                       |  | $                          | 74,943  |                          |      | $ | 19,270  |  | $ | 128,595 |   |  | $ | 36,947 
|Interest expense                                      |  |                            | 46,446  |                          |      |   | 7,285   |  |   | 58,362  |   |  |   | 13,863 
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Net interest income                                   |  |                            | 28,497  |                          |      |   | 11,985  |  |   | 70,233  |   |  |   | 23,084 
|Provision for loan losses                             |  |                            | 11,865  |                          |      |   |        |  |   | 18,365  |   |  |   |       
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Net interest income after provision for loan losses   |  |                            | 16,632  |                          |      |   | 11,985  |  |   | 51,868  |   |  |   | 23,084 
|Noninterest income:                                   |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Gain on sale of loans                                 |  |                            | 4,666   |                          |      |   | 63,292  |  |   | 10,349  |   |  |   | 117,891
|Loan servicing                                        |  |                            | 1,364   |                          |      |   | 1,497   |  |   | 2,404   |   |  |   | 3,651  
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Total noninterest income                              |  |                            | 6,030   |                          |      |   | 64,789  |  |   | 12,753  |   |  |   | 121,542
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Net interest income and noninterest income            |  |                            | 22,662  |                          |      |   | 76,774  |  |   | 64,621  |   |  |   | 144,626
|Noninterest expenses:                                 |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Personnel                                             |  |                            | 20,980  |                          |      |   | 32,600  |  |   | 43,327  |   |  |   | 57,948 
|Production                                            |  |                            | 8,577   |                          |      |   | 9,005   |  |   | 17,377  |   |  |   | 19,339 
|General and administrative                            |  |                            | 15,015  |                          |      |   | 10,793  |  |   | 25,828  |   |  |   | 22,167 
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Total noninterest expenses                            |  |                            | 44,572  |                          |      |   | 52,398  |  |   | 86,532  |   |  |   | 99,454 
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Income (loss) before income taxes                     |  |                            | (21,910 | )                        |      |   | 24,376  |  |   | (21,911 | ) |  |   | 45,172 
|Provision for income taxes                            |  |                            | 665     |                          |      |   | 395     |  |   | 1,430   |   |  |   | 302    
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Net income (loss)                                     |  | $                          | (22,575 | )                        |      | $ | 23,981  |  | $ | (23,341 | ) |  | $ | 44,870 
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Net income (loss) to common stockholders:             |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Basic                                                 |  | $                          | (22,575 | )                        |      | $ | 21,112  |  | $ | (23,341 | ) |  | $ | 39,132 
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Diluted                                               |  | $                          | (22,575 | )                        |      | $ | 24,503  |  | $ | (23,341 | ) |  | $ | 45,915 
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Net income (loss) per common share:                   |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Basic                                                 |  | $                          | (0.37   | )                        |      | $ | 2.94    |  | $ | (0.38   | ) |  | $ | 5.48   
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Diluted                                               |  | $                          | (0.37   | )                        |      | $ | 0.24    |  | $ | (0.38   | ) |  | $ | 0.48   
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Dividends per common share - declared                 |  | $                          | 0.27    |                          |      | $ |        |  | $ | 0.27    |   |  | $ |       
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Weighted average number of common shares outstanding: |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Basic                                                 |  |                            | 61,535  |                          |      |   | 7,170   |  |   | 61,478  |   |  |   | 7,145  
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        
|Diluted                                               |  |                            | 61,535  |                          |      |   | 104,071 |  |   | 61,478  |   |  |   | 96,375 
|                                                      |  |                            |         |                          |      |   |         |  |   |         |   |  |   |        



See accompanying notes
to condensed consolidated financial statements.



4



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AAMES INVESTMENT CORPORATION AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)



|                                                                                                   |  |                          |            |   |      |   |            |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                                   |  | Six Months EndedJune 30, |           
|                                                                                                   |  | 2005                     |            |   | 2004 |  
|Operating activities:                                                                              |  |                          |            |   |      |   |            |  
|Net income (loss)                                                                                  |  | $                        | (23,341    | ) |      | $ | 44,870     |  
|Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: |  |                          |            |   |      |   |            |  
|Provision for losses on loans held for investment                                                  |  |                          | 18,365     |   |      |   |           |  
|Depreciation and amortization                                                                      |  |                          | 1,685      |   |      |   | 2,102      |  
|Accretion of residual interests                                                                    |  |                          |           |   |      |   | (972       | )
|Deferred income taxes                                                                              |  |                          |           |   |      |   | (5,679     | )
|Mark-to-market adjustment to derivative instruments                                                |  |                          | (1,963     | ) |      |   |           |  
|Changes in assets and liabilities:                                                                 |  |                          |            |   |      |   |            |  
|Loans held for sale originated                                                                     |  |                          | (2,958,630 | ) |      |   | (3,832,097 | )
|Proceeds from sale of loans held for sale                                                          |  |                          | 3,063,102  |   |      |   | 3,510,800  |  
|Decrease (increase) in:                                                                            |  |                          |            |   |      |   |            |  
|Advances and other receivables, net                                                                |  |                          | (1,062     | ) |      |   | 3,732      |  
|Residual interests                                                                                 |  |                          | 39,082     |   |      |   | 8,831      |  
|Prepaid and other                                                                                  |  |                          | (7,057     | ) |      |   | (2,386     | )
|Derivative instruments                                                                             |  |                          | (15,273    | ) |      |   | (6,316     | )
|Increase (decrease) in:                                                                            |  |                          |            |   |      |   |            |  
|Accounts payable and accrued expenses                                                              |  |                          | 7,101      |   |      |   | 19,485     |  
|Income taxes payable                                                                               |  |                          | (1,089     | ) |      |   | 1,807      |  
|                                                                                                   |  |                          |            |   |      |   |            |  
|Net cash provided by (used in) operating activities                                                |  |                          | 120,920    |   |      |   | (255,823   | )
|                                                                                                   |  |                          |            |   |      |   |            |  
|Investing activities:                                                                              |  |                          |            |   |      |   |            |  
|Increase in loans held for investment                                                              |  |                          | (2,167,192 | ) |      |   |           |  
|Purchases of equipment and improvements                                                            |  |                          | (1,970     | ) |      |   | (1,747     | )
|                                                                                                   |  |                          |            |   |      |   |            |  
|Net cash used in investment activities                                                             |  |                          | (2,169,162 | ) |      |   | (1,747     | )
|                                                                                                   |  |                          |            |   |      |   |            |  
|Financing activities:                                                                              |  |                          |            |   |      |   |            |  
|Reduction in borrowings                                                                            |  |                          | (7,680     | ) |      |   | (8,934     | )
|Conversion of restricted stock units                                                               |  |                          | (1,215     | ) |      |   |           |  
|Payment of common stock dividends                                                                  |  |                          | (20,932    | ) |      |   |           |  
|Payment of preferred stock dividends                                                               |  |                          |           |   |      |   | (5,738     | )
|Financing on loans held for investment                                                             |  |                          | 2,004,884  |   |      |   |           |  
|Net proceeds from revolving warehouse and repurchase facilities                                    |  |                          | 158,585    |   |      |   | 283,382    |  
|Proceeds from exercise of common stock options                                                     |  |                          |           |   |      |   | 116        |  
|Payment of expenses related to equity issuance                                                     |  |                          | (28        | ) |      |   |           |  
|Net cash provided by financing activities                                                          |  |                          | 2,133,614  |   |      |   | 268,826    |  
|                                                                                                   |  |                          |            |   |      |   |            |  
|Net increase in cash and cash equivalents                                                          |  |                          | 85,372     |   |      |   | 11,256     |  
|Cash and cash equivalents at beginning of period                                                   |  |                          | 37,780     |   |      |   | 11,611     |  
|                                                                                                   |  |                          |            |   |      |   |            |  
|Cash and cash equivalents at end of period                                                         |  | $                        | 123,152    |   |      | $ | 22,867     |  
|                                                                                                   |  |                          |            |   |      |   |            |  



See accompanying notes
to condensed consolidated financial statements.



5



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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 and the Series B, C and D Convertible Preferred Stock were exchanged in connection with the reorganization.



At June 30, 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 approximately 14.1 million shares, or approximately 23% 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 is currently on extension. On a consolidated
basis, Aames Financial and subsidiaries is the taxable REIT subsidiary of Aames Investment.



Aames Investments strategy is to use its equity capital and funds borrowed under revolving warehouse and repurchase facilities to finance mortgage loan originations, and to use those financing sources together
with on-balance sheet securitizations to finance its REIT portfolio of mortgage loans. 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. Aames Investment will retain in its REIT portfolio a portion of these loans, largely hybrid/adjustable rate mortgage loans, which accounted for 77.8% of total mortgage loan production during the
six months ended June 30, 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 operations of the Company in conformity with accounting principles generally
accepted in the United States for the interim periods reported. The results of operations for the Company for the three and six months ended June 30, 2005 are not necessarily indicative of the results expected for the full calendar year.



6



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|Note 2. | Cash and Cash Equivalents
|------- | -------------------------



At June 30, 2005 and December 31, 2004, the Company had corporate cash and cash equivalents available of $123.2 million and $37.8 million, of which $59.5
million and $6.1 million were restricted, respectively. At June 30, 2005 and December 31, 2004, the Company had $85.4 million and $7.0 million of overnight investments, respectively.



The Company services mortgage loans in its portfolio of loans held for investment 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. Until June 15, 2005, when the remaining securitization trusts were called, it serviced mortgage loans in its securitization trusts.
In such capacity, certain funds are collected from borrowers and placed in segregated trust accounts which totaled $33.4 million and $29.4 million at June 30, 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 June 30, 2005 and December 31, 2004 (in thousands):



|                                      |  |               |           |   |                   |   |           |  
|------------------------------------- |  | ------------- | --------- | - | ----------------- | - | --------- | -
|                                      |  | June 30, 2005 |           |   | December 31, 2004 |  
|Loans held for investment:            |  |               |           |   |                   |   |           |  
|Securitized                           |  | $             | 3,195,144 |   |                   | $ | 1,187,435 |  
|Not yet securitized                   |  |               | 686,493   |   |                   |   | 531,261   |  
|                                      |  |               |           |   |                   |   |           |  
|                                      |  |               | 3,881,637 |   |                   |   | 1,718,696 |  
|Add: Net deferred loan fees and costs |  |               | 12,501    |   |                   |   | 8,250     |  
|Less: Allowance for credit losses     |  |               | (20,265   | ) |                   |   | (1,900    | )
|                                      |  |               |           |   |                   |   |           |  
|                                      |  | $             | 3,873,873 |   |                   | $ | 1,725,046 |  
|                                      |  |               |           |   |                   |   |           |  



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



|                             |  |               |        |                   |   |      
|---------------------------- |  | ------------- | ------ | ----------------- | - | -----
|                             |  | June 30, 2005 |        | December 31, 2004
|Balance, beginning of period |  | $             | 1,900  |                   | $ |     
|Provision                    |  |               | 18,365 |                   |   | 1,900
|Charge-offs                  |  |               |       |                   |   |     
|Recoveries                   |  |               |       |                   |   |     
|Net charge-offs              |  |               |       |                   |   |     
|                             |  |               |        |                   |   |      
|                             |  | $             | 20,265 |                   | $ | 1,900
|                             |  |               |        |                   |   |      



7



---

|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 Ended June 30, |         |   | Six Months Ended June 30, |  
|                                                                         |  | 2005                        |         |   | 2004                      |   |         | 2005 |  |   | 2004    |  
|Basic net income (loss) per common share:                                |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |        |  
|Net income (loss)                                                        |  | $                           | (22,575 | ) |                           | $ | 23,981  |      |  | $ | (23,341 | ) |  | $ | 44,870 |  
|Less: Accrued dividends on Series B, C and D Convertible Preferred Stock |  |                             |        |   |                           |   | (2,869  | )    |  |   |        |   |  |   | (5,738 | )
|                                                                         |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |        |  
|Basic net income (loss) to common stockholders                           |  | $                           | (22,575 | ) |                           | $ | 21,112  |      |  | $ | (23,341 | ) |  | $ | 39,132 |  
|                                                                         |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |        |  
|Basic weighted average number of common shares outstanding               |  |                             | 61,535  |   |                           |   | 7,170   |      |  |   | 61,478  |   |  |   | 7,145  |  
|                                                                         |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |        |  
|Basic net income (loss) per common shares                                |  | $                           | (0.37   | ) |                           | $ | 2.94    |      |  | $ | (0.38   | ) |  | $ | 5.48   |  
|                                                                         |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |        |  
|Diluted net income (loss) per common share:                              |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |        |  
|Basic net income (loss) to common stockholders                           |  | $                           | (22,575 | ) |                           | $ | 21,112  |      |  | $ | (23,341 | ) |  | $ | 39,132 |  
|Plus: Accrued dividends on Series B, C and D Convertible Preferred Stock |  |                             |        |   |                           |   | 2,869   |      |  |   |        |   |  |   | 5,738  |  
|Interest on 5.5% Convertible Subordinated Debentures                     |  |                             |        |   |                           |   | 522     |      |  |   |        |   |  |   | 1,045  |  
|                                                                         |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |        |  
|Diluted net income (loss) to common stockholders                         |  | $                           | (22,575 | ) |                           | $ | 24,503  |      |  | $ | (23,341 | ) |  | $ | 45,915 |  
|                                                                         |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |        |  
|Basic weighted average number of common shares outstanding               |  |                             | 61,535  |   |                           |   | 7,170   |      |  |   | 61,478  |   |  |   | 7,145  |  
|Plus incremental shares from assumed conversions of:                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |        |  
|Series B, C and D Convertible Preferred Stock                            |  |                             |        |   |                           |   | 85,055  |      |  |   |        |   |  |   | 85,061 |  
|5.5% Convertible Subordinated Debentures                                 |  |                             |        |   |                           |   | 824     |      |  |   |        |   |  |   | 824    |  
|Incremental shares from assumed exercise of:                             |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |        |  
|Warrants                                                                 |  |                             |        |   |                           |   | 3,522   |      |  |   |        |   |  |   | 1,222  |  
|Common stock options                                                     |  |                             |        |   |                           |   | 7,500   |      |  |   |        |   |  |   | 2,123  |  
|                                                                         |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |        |  
|Diluted weighted average number of common shares outstanding             |  |                             | 61,535  |   |                           |   | 104,071 |      |  |   | 61,478  |   |  |   | 96,375 |  
|                                                                         |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |        |  
|Diluted net income (loss) per common share                               |  | $                           | (0.37   | ) |                           | $ | 0.24    |      |  | $ | (0.38   | ) |  | $ | 0.48   |  
|                                                                         |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |        |  



|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.



Information concerning
restricted stock units and awards outstanding at June 30, 2005 and December 31, 2004 were as follows:



|                        |  |               |  |                  
|----------------------- |  | ------------- |  | -----------------
|                        |  | June 30, 2005 |  | December 31, 2004
|Restricted stock units  |  | 805,919       |  | 1,232,520        
|                        |  |               |  |                  
|Restricted stock awards |  | 814,575       |  | 800,000          
|                        |  |               |  |                  



At June 30, 2005, none
of the restricted stock awards had vested.



8



---

During the six months ended June 30, 2005, activity in restricted stock units and awards were as follows:



|                           |  |           |  
|-------------------------- |  | --------- | -
|                           |  | Number    |  
|Restricted Stock Units:    |  |           |  
|                           | 
|Balance, December 31, 2004 |  | 1,232,520 |  
|Granted                    |  |          |  
|Cancelled                  |  | (141,731  | )
|Converted                  |  | (284,870  | )
|                           |  |           |  
|Balance, June 30, 2005     |  | 805,919   |  
|                           |  |           |  
|                           | 
|                           |  | Number    |  
|Restricted Stock Awards:   |  |           |  
|                           | 
|Balance, December 31, 2004 |  | 800,000   |  
|Granted                    |  | 129,160   |  
|Expired                    |  | (114,585  | )
|Vested                     |  |          |  
|                           |  |           |  
|Balance, June 30, 2005     |  | 814,575   |  
|                           |  |           |  



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 in 2006. Had compensation been recorded in accordance with FASB No. 123, the Companys net income (loss) and net income (loss) per common share data would have reflected the pro forma amounts indicated below (in
thousands, except per share data):



|                                              |  |                             |  |                           |        |      |     |      |   |       
|--------------------------------------------- |  | --------------------------- |  | ------------------------- | ------ | ---- | --- | ---- | - | ------
|                                              |  | Three Months Ended June 30, |  | Six Months Ended June 30,
|                                              |  | 2005                        |  | 2004                      |        | 2005 |     | 2004
|Net income (loss):                            |  |                             |  |                           |        |      |     |      |   |       
|As reported                                   |  | N/A                         |  | $                         | 23,981 |      | N/A |      | $ | 44,870
|Pro forma                                     |  | N/A                         |  |                           | 23,282 |      | N/A |      |   | 43,687
|                                              |  |                             |  |                          
|Basic income (loss) to common stockholders:   |  |                             |  |                           |        |      |     |      |   |       
|As reported                                   |  | N/A                         |  | $                         | 21,112 |      | N/A |      | $ | 39,132
|Pro forma                                     |  | N/A                         |  |                           | 20,413 |      | N/A |      |   | 37,949
|                                              |  |                             |  |                          
|Diluted income (loss) to common stockholders: |  |                             |  |                           |        |      |     |      |   |       
|As reported                                   |  | N/A                         |  | $                         | 24,503 |      | N/A |      | $ | 45,915
|Pro forma                                     |  | N/A                         |  |                           | 23,804 |      | N/A |      |   | 44,732
|                                              |  |                             |  |                          
|Basic income (loss) per common share:         |  |                             |  |                           |        |      |     |      |   |       
|As reported                                   |  | N/A                         |  | $                         | 2.94   |      | N/A |      | $ | 5.48  
|Pro forma                                     |  | N/A                         |  |                           | 2.85   |      | N/A |      |   | 5.31  
|                                              |  |                             |  |                          
|Diluted (loss) per common share:              |  |                             |  |                           |        |      |     |      |   |       
|As reported                                   |  | N/A                         |  | $                         | 0.24   |      | N/A |      | $ | 0.48  
|Pro forma                                     |  | N/A                         |  |                           | 0.23   |      | N/A |      |   | 0.46  



9



---

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 June 30, |  |             | Six Months Ended June 30, | 
|                        |  | 2005                        |  | 2004        |                           |  | 2005 |  | 2004        |  
|                        |  |                             |  | (unaudited) |                           |  |      |  | (unaudited) |  
|Dividend Yield          |  | N/A                         |  | 0.00        | %                         |  | N/A  |  | 0.00        | %
|                        |  |                             |  |            
|Expected Volatility     |  | N/A                         |  | 103.00      | %                         |  | N/A  |  | 103.00      | %
|                        |  |                             |  |            
|Risk-free interest rate |  | N/A                         |  | 3.00        | %                         |  | N/A  |  | 3.00        | %
|                        |  |                             |  |            
|Expected life of option |  | N/A                         |  | 4.5 years   |                           |  | N/A  |  | 4.5 years   |  



The proforma stock
based compensation cost, net of tax effects, was $0.7 million and $1.2 million during the three and six months ended June 30, 2004, respectively.



|Note 6. | Income Taxes
|------- | ------------



Aames Investment will elect to be treated as a real estate investment trust, or REIT, for U.S. federal tax purposes when it files its December 31, 2004
tax return which is currently on extension. 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 that no more than 20% of the value of Aames Investments
total assets may consist of securities of one or more taxable REIT subsidiaries, as discussed below. Aames Investment intends to distribute 100% of its REIT taxable income; therefore, no provision for income taxes has been made.



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 June 30, 2005 and 2004, the Company recorded an income tax provision of $0.7 million and $0.4 million, respectively. The
Companys $0.7 million tax provision for the three months ended June 30, 2005 differed from an expected federal benefit of $7.7 million calculated at the marginal federal tax rate of 35.0% due to the $0.5 million benefit related to the
non-taxability of the REIT earnings less the $9.5 million expense resulting from the increase in the tax valuation allowance, partially offset by the $0.7 million state tax benefit. The Companys $0.4 million tax provision for the three months
ended June 30, 2004 differed from an expected federal tax expense of $8.5 million calculated at the federal marginal rate of 35.0% due to the $8.5 million decrease in valuation allowance, partially offset by a $0.4 million state tax provision.



During the six months ended June 30, 2005 and 2004, the
Company recorded an income tax provision of $1.4 million and $0.3 million, respectively. The Companys $1.4 million tax provision for the six months ended June 30, 2005 differed from an expected federal benefit of $7.7 million calculated at the
marginal federal tax rate of 35.0% due to the $8.9 million benefit related to the non-taxability of the REIT earnings less the $19.4 million expense resulting from the increase in the tax valuation allowance, partially offset by the $1.4 million
state tax benefit. The Companys $0.3 million tax provision for the six months ended June 30, 2004 differed from an expected federal tax expense of $15.8 million calculated at the federal marginal rate of 35.0% due to the $18.7 million decrease
in valuation allowance, offset partially by a $3.2 million state tax provision.



10



---

At June 30, 2005, the Company had recognized $28.4 million of deferred tax assets based upon its
determination that it is more likely than not that it will realize such assets in future periods.



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 and six months ended June 30, 2005 (in thousands):



|                           |  |                                  |        |                                |   |       
|-------------------------- |  | -------------------------------- | ------ | ------------------------------ | - | ------
|                           |  | Three Months Ended June 30, 2005 |        | Six Months Ended June 30, 2005
|Pretax accounting income   |  | $                                | 1,464  |                                | $ | 25,392
|Add (subtract):            |  |                                  |        |                                |   |       
|Tax basis adjustments, net |  |                                  | 18,325 |                                |   | 11,438
|                           |  |                                  |        |                                |   |       
|Estimated taxable income   |  | $                                | 19,789 |                                | $ | 36,830
|                           |  |                                  |        |                                |   |       



As previously
announced, on July 19, 2005, the Company declared a cash dividend of $0.34 per common share for the quarter ended June 30, 2005, which was paid on August 8, 2005, to stockholders of record as of July 28, 2005.



|Note 7. | Reclassifications
|------- | -----------------



Certain amounts related to March 31, 2005 and June 30, 2004 have been reclassified to conform to the June 30, 2005 presentation.



|Note 8. | Commitments and Contingencies
|------- | -----------------------------



Certain of the Companys subsidiaries were defendants in Potteiger et. al. v. Aames Funding Corporation and Aames Financial Corporation, a
collective action filed in February 2004 in the U.S. District Court of Minnesota. Plaintiff, a former loan officer of the Company, filed this action on behalf of himself and current and former loan officers employed by the Company, and sought
damages consisting of alleged unpaid overtime, statutory liquidated damages and attorneys fees and costs. As previously reported, the Company agreed to a mediated settlement of this case.



On April 27, 2004, Aames Financial 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 Aames Financial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 0.01% and 0.3% of total mortgage loan production during the six months ended June 30, 2005 and 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.



11



---

Note 9. Parent Company Information



The condensed balance sheet of Aames Investment Corporation (parent company only, prior to intercompany elimination entries)
at June 30, 2005 and the related condensed statement of operations for the three and six months then ended follows (in thousands):



|                                              |  |                 |           |  
|--------------------------------------------- |  | --------------- | --------- | -
|Balance Sheet                                 |  |                 |           |  
|                                              |  | AtJune 30, 2005 |          
|Assets                                        |  |                 |           |  
|Cash and cash equivalents:                    |  |                 |           |  
|Nonrestricted                                 |  | $               | 49,200    |  
|Restricted                                    |  |                 | 59,455    |  
|Loans held for investment, net:               |  |                 |           |  
|Securitized                                   |  |                 | 3,195,144 |  
|Not yet securitized                           |  |                 | 686,493   |  
|Net deferred loan origination fees and costs  |  |                 | 12,501    |  
|Deferred loan acquisition premium             |  |                 | 45,025    |  
|Allowance for credit losses                   |  |                 | (20,265   | )
|                                              |  |                 |           |  
|Loans held for investment, net                |  |                 | 3,918,898 |  
|                                              |  |                 |           |  
|Investment in subsidiaries                    |  |                 | 116,092   |  
|Accrued interest receivable and other assets  |  |                 | 43,473    |  
|Derivatives, at estimated fair value          |  |                 | 49,183    |  
|                                              |  |                 |           |  
|                                              |  | $               | 4,236,301 |  
|                                              |  |                 |           |  
|Liabilities and stockholders equity          |  |                 |           |  
|Financings on loans held for investment       |  | $               | 3,162,354 |  
|Revolving warehouse and repurchase facilities |  |                 | 684,218   |  
|Other liabilities                             |  |                 | 28,814    |  
|                                              |  |                 |           |  
|                                              |  |                 | 3,875,386 |  
|                                              |  |                 |           |  
|Stockholders equity                          |  |                 | 360,915   |  
|                                              |  |                 |           |  
|                                              |  | $               | 4,236,301 |  
|                                              |  |                 |           |  



|                                               |  |                                |         |   |                              |   |         |  
|---------------------------------------------- |  | ------------------------------ | ------- | - | ---------------------------- | - | ------- | -
|Statements of Operations                       |  |                                |         |   |                              |   |         |  
|                                               |  | Three MonthsEndedJune 30, 2005 |         |   | Six MonthsEndedJune 30, 2005 |  
|                                               |  | (Unaudited)                    |        
|Net interest income                            |  | $                              | 15,493  |   |                              | $ | 47,956  |  
|Provision for credit losses                    |  |                                | (11,865 | ) |                              |   | (18,365 | )
|                                               |  |                                |         |   |                              |   |         |  
|NII after provision for loan losses            |  |                                | 3,628   |   |                              |   | 29,591  |  
|Noninterest expense                            |  |                                | (2,164  | ) |                              |   | (4,199  | )
|Equity in undistributed net loss of subsidiary |  |                                | (10,563 | ) |                              |   | (32,935 | )
|                                               |  |                                |         |   |                              |   |         |  
|Net loss                                       |  | $                              | (9,099  | ) |                              | $ | (7,543  | )
|                                               |  |                                |         |   |                              |   |         |  



12



---

|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.



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, 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 and funds borrowed under revolving warehouse and repurchase facilities to finance our mortgage loan
originations, and to use those financing sources 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 hybrid/adjustable rate
mortgage loans or ARMs, which accounted for 77.8% of our loan production during the six months ended June 30, 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 expect to qualify as a REIT for
U.S. federal income tax purposes when we file our December 31, 2004 federal income tax return which is currently on extension. 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 of mortgage loans 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 of mortgage loans 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
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



---

| | 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
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Selling a portion of Aames Financials mortgage loan production on a whole loan basis into the secondary markets so as to maximize its earnings. We will sell the loans
we do not retain for our REIT portfolio to third parties to capture gain on sale income from these loans and grow our equity capital on a consolidated basis.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Servicing our loans to enhance the performance of our REIT portfolio of mortgage loans, 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.



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 expect to qualify as a REIT, for U.S. federal income tax purposes upon filing our December 31, 2004 tax return which is currently on extension. 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.



14



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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 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.



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 present an opportunity
to earn a return commensurate with 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 gain on sale income from 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.



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



15



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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 $1.4 million and $1.5 million in loan servicing fee income during the three months ended June 30, 2005 and
2004, respectively, and $2.4 million and $3.7 million in loan servicing fee income during the six months ended June 30, 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.



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.



16



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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 June 30, 2005, we did not dispose of any of
our mortgage loans in off-balance sheet securitization transactions. Previously, our retained residual interests related to off-balance sheet securitizations which closed prior to and during the year ended June 30, 2000. We called the five remaining
securitization trusts on June 15, 2005. No adjustments to the carrying value of the retained residual interests by calling these securitization trusts was deemed necessary. In addition, during the period of April 1, 2005 through June 15, 2005 and
during the three months ended June 30, 2004, the actual performance of our retained residual interests as compared to the key assumptions and estimates used to evaluate their carrying value (i.e., credit losses, rate of prepayment and discount rate)
did not result in write-downs.



Performing mortgage loan
collateral received in the call was placed into the portfolio of loans held for investment for inclusion in an anticipated securitization currently expected to close during the three months ended September 30, 2005.



Accounting for Income Taxes. We expect to qualify as a real estate
investment trust, or REIT, for federal tax purposes when we file our December 31, 2004 tax return which is currently on extension. This means that generally we are not subject to U.S. federal income taxes on the REIT income that we distribute to our
stockholders.



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.



17



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Results of Operations



The following table sets forth information regarding our results of operations during the three and six months ended June 30, 2005 and 2004 (in
thousands):



|                                                    |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|--------------------------------------------------- |  | ------------------ | ------- | ---------------- | ------------- | - | ------------- |  | - | ------------- | - |  | - | -------
|                                                    |  | Three Months Ended |         | Six Months Ended
|                                                    |  | June 30, 2005      |         |                  | June 30, 2004 |   | June 30, 2005 |  |   | June 30, 2004
|Interest income                                     |  | $                  | 74,943  |                  |               | $ | 19,270        |  | $ | 128,595       |   |  | $ | 36,947 
|Interest expense                                    |  |                    | 46,446  |                  |               |   | 7,285         |  |   | 58,362        |   |  |   | 13,863 
|                                                    |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Net interest income                                 |  |                    | 28,497  |                  |               |   | 11,985        |  |   | 70,233        |   |  |   | 23,084 
|Provision for loan losses                           |  |                    | 11,865  |                  |               |   |              |  |   | 18,365        |   |  |   |       
|                                                    |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Net interest income after provision for loan losses |  |                    | 16,632  |                  |               |   | 11,985        |  |   | 51,868        |   |  |   | 23,084 
|Noninterest income:                                 |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Gain on sale of loans                               |  |                    | 4,666   |                  |               |   | 63,292        |  |   | 10,349        |   |  |   | 117,891
|Loan servicing                                      |  |                    | 1,364   |                  |               |   | 1,497         |  |   | 2,404         |   |  |   | 3,651  
|                                                    |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Total noninterest income                            |  |                    | 6,030   |                  |               |   | 64,789        |  |   | 12,753        |   |  |   | 121,542
|                                                    |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Net interest income and noninterest income          |  |                    | 22,662  |                  |               |   | 76,774        |  |   | 64,621        |   |  |   | 144,626
|Noninterest expense:                                |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Personnel                                           |  |                    | 20,980  |                  |               |   | 32,600        |  |   | 43,327        |   |  |   | 57,948 
|Production                                          |  |                    | 8,577   |                  |               |   | 9,005         |  |   | 17,377        |   |  |   | 19,339 
|General and administrative                          |  |                    | 15,015  |                  |               |   | 10,793        |  |   | 25,828        |   |  |   | 22,167 
|                                                    |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Total noninterest expense                           |  |                    | 44,572  |                  |               |   | 52,398        |  |   | 86,532        |   |  |   | 99,454 
|                                                    |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Income (loss) before income taxes                   |  |                    | (21,910 | )                |               |   | 24,376        |  |   | (21,911       | ) |  |   | 45,172 
|Provision for income taxes                          |  |                    | 665     |                  |               |   | 395           |  |   | 1,430         |   |  |   | 302    
|                                                    |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        
|Net income (loss)                                   |  | $                  | (22,575 | )                |               | $ | 23,981        |  | $ | (23,341       | ) |  | $ | 44,870 
|                                                    |  |                    |         |                  |               |   |               |  |   |               |   |  |   |        



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, prepayment fees earned on loans held for investment, interest income on
in-the-money interest rate cap agreements, 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 and six months ended June 30, 2005 and 2004 (in thousands):



|                                                    |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|--------------------------------------------------- |  | -------------------------- | ------ | ------------------------ | ---- | - | ------ |  | - | ------- | - |  | - | ------
|                                                    |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                                                    |  | 2005                       |        |                          | 2004 |   | 2005   |  |   | 2004   
|Interest earned on:                                 |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|Loans held for investment                           |  | $                          | 59,261 |                          |      | $ |       |  | $ | 100,866 |   |  | $ |      
|Loans held for sale                                 |  |                            | 6,754  |                          |      |   | 19,204 |  |   | 14,620  |   |  |   | 35,854
|Overnight investments                               |  |                            | 520    |                          |      |   |       |  |   | 740     |   |  |   |      
|Discount accretion on residual interests            |  |                            |       |                          |      |   |       |  |   |        |   |  |   | 972   
|Amortization of net deferred loan origination costs |  |                            | (1,142 | )                        |      |   |       |  |   | (1,815  | ) |  |   |      
|Prepayment fees                                     |  |                            | 4,856  |                          |      |   |       |  |   | 6,740   |   |  |   |      
|Other interest income                               |  |                            | 4,694  |                          |      |   | 66     |  |   | 7,444   |   |  |   | 121   
|                                                    |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       
|                                                    |  | $                          | 74,943 |                          |      | $ | 19,270 |  | $ | 128,595 |   |  | $ | 36,947
|                                                    |  |                            |        |                          |      |   |        |  |   |         |   |  |   |       



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 June 30, 2005, was comprised of mortgage loans with an unpaid principal balance of $3.9 billion. We did not
have a portfolio of loans held for investment at June 30, 2004.



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Our interest income increased $55.6 million to $74.9 million during the three months ended June 30, 2005
over $19.3 million during the three months ended June 30, 2004. The $55.6 million increase in interest income was due primarily to the $59.3 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 June 30, 2005 over the comparable three month period a year ago was due to increases of $4.9 million, $4.6 million and $0.5 million of prepayment fees, miscellaneous interest income and
interest income earned on overnight investments, respectively. Prepayment fees were earned on early loan pay-offs from loans in our portfolio of mortgage loans held for investment which was not in place during the three months ended June 30, 2004.
Substantially all of the $4.7 million of other interest income during the three months ended June 30, 2005 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 June 30, 2005 over the comparable three month period a year ago were declines of $12.5 million in interest income on loans held for
sale. 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 June 30,
2005 when compared to the average balance of loans held for sale outstanding during the three months ended June 30, 2004, partially offset by higher weighted average coupon rates on loans held for sale during the June 2005 quarter when compared to
such rates during the June 2004 quarter. These increases were partially offset by an increase of $1.1 million in the amortization of net deferred loan origination costs.



During the six months ended June 30, 2005, our interest income increased $91.6 million to $128.6 million from $36.9 million
during the six months ended June 30, 2004. The $91.6 million increase in interest income was due primarily to the $100.9 million of interest income earned on the portfolio of loans held for investment. To a lesser extent, the increase in interest
income during the six months ended June 30, 2005 over the comparable six month period a year ago was due to increases of $7.3 million, $6.7 million and $0.7 million of miscellaneous interest income, prepayment fees and interest income and interest
earned on overnight investments, respectively. Prepayment fees were earned on early loan pay-offs from loans in our portfolio of mortgage loans held for investment which was not in place during the six months ended June 30, 2004. Substantially all
of the $7.4 million of other interest income during the six months ended June 30, 2005 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 six months ended June 30, 2005 over the comparable six month period a year ago were declines of $21.2 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 six months ended June 30, 2005 when compared to the average balance of loans held of sale outstanding during the six months ended June 30, 2004, partially offset by higher weighted average coupon rates on loans held for sale
during the six months ended June 30, 2005 when compared to such rates during the six months ended June 30, 2004. Discount accretion on our residual interests was discontinued in light of our intention to call the remaining securitization trusts
which was consummated during the six months ended June 30, 2005. These increases were partially offset by an increase of $1.8 million in the amortization of net deferred loan origination costs.



19



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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 and six months ended June 30, 2005 and 2004 (in thousands):



|                                                                                                                               |  |                            |        |                          |   |       |  |      |        |  |   |       
|------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------- | ------ | ------------------------ | - | ----- |  | ---- | ------ |  | - | ------
|                                                                                                                               |  | Three Months EndedJune 30, |        | Six Months EndedJune 30,
|                                                                                                                               |  | 2005                       |        | 2004                     |   | 2005  |  | 2004
|Interest expense on:                                                                                                           |  |                            |        |                          |   |       |  |      |        |  |   |       
|Financings on loans held for investment                                                                                        |  | $                          | 22,466 |                          | $ |      |  | $    | 34,636 |  | $ |      
|Revolving warehouse and repurchase facilities                                                                                  |  |                            | 9,860  |                          |   | 4,850 |  |      | 17,638 |  |   | 8,977 
|Borrowings                                                                                                                     |  |                            |       |                          |   | 1,039 |  |      | 44     |  |   | 2,124 
|Other:                                                                                                                         |  |                            |        |                          |   |       |  |      |        |  |   |       
|Mark to market on interest rate cap agreements designed to hedge interest rate risk on financings of loans held for investment |  |                            | 11,495 |                          |   |      |  |      | 1,963  |  |   |      
|Amortization of commitment fees, debt issuance and debt discount                                                               |  |                            | 2,087  |                          |   | 1,272 |  |      | 3,282  |  |   | 2,480 
|Bank charges and other                                                                                                         |  |                            | 538    |                          |   | 124   |  |      | 799    |  |   | 282   
|                                                                                                                               |  |                            |        |                          |   |       |  |      |        |  |   |       
|Total interest expense                                                                                                         |  | $                          | 46,446 |                          | $ | 7,285 |  | $    | 58,362 |  | $ | 13,863
|                                                                                                                               |  |                            |        |                          |   |       |  |      |        |  |   |       



Interest expense
increased $39.1 million to $46.4 million during the three months ended June 30, 2005 over $7.3 million during the three months ended June 30, 2004. The increase in interest expense reported during the three months ended June 30, 2005 from levels
reported during the comparable three month period a year ago was primarily due to increases of $22.5 million and $5.0 million in interest expense on financings on loans held for investment and revolving warehouse and repurchase facilities,
respectively. At June 30, 2005, the unpaid principal balance of financings on loans held for investment was $3.2 billion. We had no financings on loans held for investment at June 30, 2004. During the three months ended June 30, 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. Also contributing to the increase in interest expense were increases of $0.8 million and $0.4 million in the amortization of commitment fees, debt issuance and debt discount, and bank charges, respectively,
and a $11.5 million charge to interest expense related to the negative mark to fair value at June 30, 2005 of open interest rate cap agreements in place to hedge interest rate risk exposure on our financings on loans held for investment. During the
three months ended June 30, 2005, there were no amounts outstanding on non-revolving or non-financing obligations. Therefore, interest expense on borrowings declined by $1.0 million during the three months ended June 30, 2005 from the same three
month period a year ago.



During the six months ended June 30,
2005, our interest expense increased $44.5 million over $13.9 million during the six months ended June 30, 2004. The increase in interest expense reported during the six months ended June 30, 2005 from levels reported during the comparable six month
period a year ago was primarily due to increases of $34.6 million and $8.7 million in interest expense on financing on loans held for investment and revolving warehouse and repurchase facilities, respectively. During the six months ended June 30,
2005, we continued to fund the securitized portfolio of loans held for investment through financings which were not in place during the comparable six month period a year ago. Accordingly, interest expense on financings on loans held for investment
increased during the six months ended June 30, 2005 over a year ago. During the six months ended June 30, 2005, average borrowings and interest rates associated with our revolving warehouse and repurchase facilities to fund our loans held for sale
and loans held for investment not yet securitized were higher than such average balances and interest rates during the comparable six month period a year ago. Also contributing to the increase in interest expense were increases of $0.8 million and
$0.5 million in the amortization of commitment fees, debt issuance and debt discount, and bank charges, respectively, and a $2.0 million charge to interest expense related to the negative mark to fair value during the six months ended June 30, 2005
of open interest rate cap agreements in place to hedge interest rate risk exposure on our financings on loans held for investment. During the six months ended June 30, 2005, borrowings outstanding were at lower levels than during the comparable six
month period a year ago. During the March 2005 quarter, the Aames Financial residual financing facility was fully redeemed. Therefore, interest expense on borrowing declined by $2.1 million during the six months ended June 30, 2005 from the six
months ended June 30, 2004.



Interest expense is expected to
increase in future periods due to our business strategy of financing our loans held for investment through on-balance sheet securitizations and warehouse and repurchase facilities, 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.



20



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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 sale of loans is impacted by the timing and mix of loan
origination and sales as, pursuant to FAS 91, net 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 components of
gain on sale of loans during the three and six months ended June 30, 2005 and 2004 are summarized in the following table (in thousands):



|                                                        |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|------------------------------------------------------- |  | -------------------------- | ------ | - | ------------------------ | - | ------ | ---- |  | - | ------ | - |  | - | ------- | -
|                                                        |  | Three Months EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                        |  | 2005                       |        |   | 2004                     |   |        | 2005 |  |   | 2004   |  
|Gain on loan sales                                      |  | $                          | 7,060  |   |                          | $ | 63,770 |      |  | $ | 11,643 |   |  | $ | 135,243 |  
|Loan origination fees and costs, net                    |  |                            | 2,617  |   |                          |   | 7,937  |      |  |   | 4,714  |   |  |   | (411    | )
|Provision for representation, warranty and other losses |  |                            | (4,016 | ) |                          |   | (8,129 | )    |  |   | (4,801 | ) |  |   | (16,521 | )
|Miscellaneous costs                                     |  |                            | (995   | ) |                          |   | (286   | )    |  |   | (1,207 | ) |  |   | (420    | )
|                                                        |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  
|Gain on sale of loans                                   |  | $                          | 4,666  |   |                          | $ | 63,292 |      |  | $ | 10,349 |   |  | $ | 117,891 |  
|                                                        |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |         |  



Gain on sale of loans
decreased $58.6 million, or 92.6%, to $4.7 million during the three months ended June 30, 2005 from $63.3 million during the comparable three month period a year ago. The $58.6 million decrease was due primarily to a $56.7 million decrease in gain
on sale from whole loan sale transactions, a decrease of $5.3 million in net loan origination fees and costs, and a $0.7 million increase in other miscellaneous costs. The decline in gain on sale of loans during the three months ended June 30, 2005
from the three months ended June 30, 2004 was partially offset by a $4.1 million decrease in the provision for representation, warranty and other miscellaneous losses.



The $56.7 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 76.8%, decrease in mortgage loan sales to third parties during the three months ended June 30, 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 June 2005 quarter, gain on sale also declined due to lower gain on sale rates realized on whole loan
sales during the three months ended June 30, 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 the three months ended June 30, 2005 from the same period
a year ago, realized net loan origination fees were $2.6 million during the June 2005 quarter compared to realized net loan origination fees of $7.9 million during the three months ended June 30, 2004. Finally, during the three months ended June 30,
2005, we charged $4.0 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 $4.1 million decrease from the $8.1 million provided during the three months ended June 30, 2004 was due principally to fewer loans having been sold in whole loan sales during the three months ended June 30,
2005 when compared to the same three month period a year ago.



During the six months ended June 30, 2005, gain on sale of loans decreased $107.5 million, or 91.2%, to $10.3 million from $117.9 million during the six months ended June 30, 2004. The $107.5 million decrease was primarily due to a $123.6
million decrease in gain on sale from whole loan sale transactions, and a $0.7 million increase in other miscellaneous costs partially offset by a decrease of $11.7 million in the provision for representation, warranty and other miscellaneous losses
and a $5.1 million increase in loan origination fees and costs.



The $123.6 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 $2.8 billion, or 79.3%, decrease in mortgage
loan sales to third parties during the comparable six month period a year ago. Because we sold only fixed rate first-lien loans and second-lien loans to third parties during the six months ended June 30, 2005, gain on sale also declined due to lower
gain on sale rates realized on whole loan sales during the six months ended June 30, 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 the six months
ended June 30, 2005 from the same six month period a year ago, realized net loan origination fees were $4.7 million during the six months ended June 30, 2005 compared to realized net loan origination costs of $0.4 million during the six months ended
June 30, 2004. Finally, during the six months ended June 30, 2005, we charged $4.8 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



21



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were delinquent, have collateral deficiencies or have other attributes that affect their sale potential. This $11.7 million decrease from the $16.5 million
provided during the six months ended June 30, 2004 was due primarily to fewer loans having been sold in whole loan sales during the six months ended June 30, 2005 when compared to the same six month period a year ago.



At June 30, 2005, we did not have derivative instruments in place to hedge
our inventory and pipeline of loans held for sale. At June 30, 2004, we had notional amounts of $550.0 million of interest rate cap agreements in place to hedge interest rate risk exposure to our inventory and pipeline of loans held for sale. During
the three and six months ended June 30, 2004, there were no material adjustments to mark the interest rate cap agreements to market.



Loan Servicing. Loan servicing revenue consists of prepayment fees on loans in off-balance sheet securitization trusts, 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 decreased $0.1 million and $1.2 million to $1.4
million and $2.4 million during the three and six months ended June 30, 2005, respectively, from $1.5 million and $3.7 million during the three and six months ended June 30, 2004. The decreases were primarily due to decreases of $0.5 million and
$1.5 million in servicing and beneficiary demand fees, respectively, partially offset by increases of $0.4 million and $0.2 million in late and prepayment fees, for the three and six months ended June 30, 2005, respectively.



Total Operating Expenses



General. Total operating expenses decreased $7.8 million and $12.9
million to $44.6 million and $86.5 million during the three and six months ended June 30, 2005, respectively, from $52.4 million and $99.5 million during the three and six months ended June 30, 2004, respectively. The decrease in total operating
expenses during the three months ended June 30, 2005 from total operating expenses during the comparable period in 2004 was attributable to decreases of $11.6 million and $0.4 million in personnel and production expense, respectively, partially
offset by a $4.2 million increase in general and administrative expenses. The decrease in total operating expenses during the six months ended June 30, 2005 from total operating expenses during the comparable six month period a year ago was
attributable to decreases of $14.6 million and $2.0 million in personnel and production expenses, respectively, partially offset by a $3.7 million increase in general and administrative expenses.



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 EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                    |  | 2005                       |         |   | 2004                     |   |         | 2005 |  |   | 2004    |  
|Compensation                        |  | $                          | 38,162  |   |                          | $ | 42,685  |      |  | $ | 73,844  |   |  | $ | 85,914  |  
|Net deferred loan origination costs |  |                            | (19,434 | ) |                          |   | (12,764 | )    |  |   | (36,054 | ) |  |   | (34,092 | )
|Medical and other benefits          |  |                            | 2,016   |   |                          |   | 2,242   |      |  |   | 4,727   |   |  |   | 5,261   |  
|Other                               |  |                            | 236     |   |                          |   | 437     |      |  |   | 810     |   |  |   | 865     |  
|                                    |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Total personnel expense             |  | $                          | 20,980  |   |                          | $ | 32,600  |      |  | $ | 43,327  |   |  | $ | 57,948  |  
|                                    |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  



Personnel expense
decreased $11.6 million during the three months ended June 30, 2005 from personnel expense during the comparable three-month period a year ago. The $11.6 million decrease was comprised of decreases of $4.5 million, $0.2 million and $0.2 million in
compensation, medical and other benefits and miscellaneous personnel expense, respectively, coupled with a $6.7 million increase in deferred loan origination costs. The $4.5 million decrease in compensation resulted from a $1.8 million decline in
commissions, bonuses and incentives, a $1.7 million decrease in management bonus incentives coupled with a $0.9 million decrease in salary expense due to reduction in headcount. The $1.8 million decrease in commissions, bonuses and incentives during
the three months ended June 30, 2005 from those reported during the comparable three month period during 2004 was due to the $368.9 million, or 18.8%, decrease in total loan originations reported during the three months ended June 30, 2005 when
compared to the same three month period a year



22



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ago. Deferred personnel costs on mortgage loans originated but not yet sold increased $6.7 million during the three months ended June 30, 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 $0.2 million decrease in health, medical and other benefit
costs during the three months ended June 30, 2005 from the amount reported during the comparable period a year ago was attributable to decreased staff levels.



The $14.6 million decrease in personnel expense during the six months ended June 30, 2005 from the same six month period a year ago was comprised of
decreases of $12.1 million, and $0.5 million in compensation and medical and other benefits, respectively, coupled with a $2.0 million increase in deferred loan origination costs. The $12.1 million decrease in compensation resulted from a $7.3
million decline in commissions, bonuses and incentives, a $3.7 million decrease in management bonus incentives, a $0.7 million decrease in salary expense, and a $0.4 million decrease in temporary help costs. The $7.3 million decrease in commissions,
bonuses and incentives during the six months ended June 30, 2005 from those reported during the comparable six month period a year ago was due to the $873.5 million, or 22.8%, decrease in total loan originations reported during the six months ended
June 30, 2005 when compared to the same six month period a year ago. Deferred personnel costs on mortgage loans originated but not yet sold increased $2.0 million during the six months ended June 30, 2005 over those reported during the same period 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 $0.5 million decrease in health, medical and other benefit costs during
the six months ended June 30, 2005 from the amount reported during the comparable period a year ago was attributable to a decrease in staff levels.



Production. Production expense decreased $0.4 million, or 4.7%, to $8.6 million during the three months ended June 30, 2005 from $9.0 million
during the three months ended June 30, 2004. The $0.4 million decrease in production expense was due primarily to a $0.5 million decrease in appraisal costs, a $0.2 million decrease in credit investigation expenses, coupled with a $0.2 million
decrease in sales incentives relative to the $368.9 million, or 18.8%, decrease in our loan production volumes during the three months ended June 30, 2005 from production volumes during the three months ended June 30, 2004, partially offset by a
$0.5 million increase in advertising expenses.



Production
expense when expressed as a percentage of total loan origination volume for the three months ended June 30, 2005 and June 30, 2004 remained constant at 0.5% primarily due to the decrease in loan production expense tracking with the decrease in
production volume during the three months ended June 30, 2005 from amounts reported during the three months ended June 30, 2004.



Production expense decreased $2.0 million, or 10.1%, to $17.4 million during the six months ended June 30, 2005 from $19.3 million during the six months
ended June 30, 2004. The $2.0 million decrease in production expense was due primarily to a $1.2 million decrease in appraisal costs, a $0.5 million decrease in sales incentives, a $0.2 million decrease in credit investigation expenses, and a $0.2
million decrease in travel and entertainment expenses, partially offset by a $0.1 million increase in advertising costs. The decrease in production costs during the six months ended June 30, 2005 when compared to production costs during the same six
month period a year ago, was primarily due to the $873.5 million, or 22.8%, decrease in total loan originations reported during the six months ended June 30, 2005 when compared to the same six month period a year ago.



Production expense when expressed as a percentage of total loan origination
volume for the six months ended June 30, 2005 increased to 0.6% from 0.5% during the six months ended June 30, 2004 primarily due to a larger decrease in loan production than in production expense during the six months ended June 30, 2005 from
amounts reported during the six months ended June 30, 2004.



General and Administrative. General and administrative expense increased $4.2 million, or 39.1%, to $15.0 million during the three months ended June 30, 2005 from $10.8 million during the three months ended June 30, 2004. The $4.2
million increase in general and administrative expense was due primarily to increases of $3.5 million and $1.0 million in legal and occupancy expenses, respectively. These increases were partially offset by decreases of $0.2 million and $0.1 million
in communication and depreciation expense, respectively.



During the three months ended June 30, 2005 and 2004, we paid total rent of $3.4 million and $2.5 million, respectively, and received total sublease payments of $0.4 million during both the three months ended June 30, 2005 and 2004.



General and administrative expense increased $3.7 million, or
16.5%, to $25.8 million during the six months ended June 30, 2005 from $22.2 million during the six months ended June 30, 2004. The $3.7 million increase in general and administrative expenses was due primarily to increases of $3.4 million, $1.3
million and $0.2 million in legal, occupancy and



23



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corporate related insurance expenses, respectively, partially offset by decreases of $0.7 million, $0.4 million and $0.1 million in communication,
depreciation, and professional expenses, respectively.



During
the six months ended June 30, 2005 and 2004, we paid rent of $6.2 million and $4.9 million, respectively, and received total sublease payments of $0.7 million during both the six months ended June 30, 2005 and 2004.



General and administrative expense during the three and six months includes a
$3.0 million charge to legal expense and a $0.7 million charge to occupancy expense. During the three months ended June 30, 2005, we agreed to a mediated settlement on a litigation matter. In addition, during the three months ended June 30, 2005, we
charged occupancy expense for costs related to branch closures in our retail and wholesale channels that remain subject to operating leases.



Financial Condition



Loans Held for Sale. Our portfolio of loans held for sale decreased to $380.5 million at June 30, 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 six months ended June 30, 2005.



Loans Held for Investment, Net. At June 30, 2005, our portfolio of loans held for investment, net was $3.9 billion,
an increase of $2.2 billion over the $1.7 billion portfolio of loans held for investment at December 31, 2004. During the six months ended June 30, 2005, we completed $2.4 billion of on-balance sheet securitizations. At June 30, 2005, the portfolio
of loans held for investment was comprised of $3.2 billion and $0.7 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 June 30, 2005 and December 31, 2004 of $3.9 billion and $1.7 billion, respectively, were net of a $20.3
million and $1.9 million allowance for loan losses, respectively. During the six months ended June 30, 2005, we recorded a provision for loan losses of $18.4 million and no loan charge-offs were recorded. We expect net charge-offs 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.



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 $1.1 million to $23.8 million at June 30, 2005 from $22.7 million at December 31, 2004. The increase was due
primarily to increases of $12.6 million and $2.8 million in accrued interest and other receivables, and principal and interest advances, respectively, partially offset by decreases of $13.4 million and $0.9 million in interest and servicing advances
and cash due from securitization trusts, respectively.



The
$12.6 million increase in accrued interest and other receivables at June 30, 2005 over the balance at December 31, 2004 is due primarily to a $12.4 million increase in accrued interest relative to the increase in the balance of loans held for
investment together with a $0.2 million increase in amounts due from counterparties. The $2.8 million increase in principal and interest advances is due to the advances made to bond holders in our on-balance sheet securitizations. The $13.4 million
decrease in interest and servicing advances at June 30, 2005 from December 31, 2004 was primarily due to recoveries of prior advances as a result of the call of our off-balance sheet securitizations. The $0.9 million decline in cash due from
securitization trusts at June 30, 2005 from December 31, 2004 is due to having no residual balances at June 30, 2005.



Residual Interests. Residual interests were fully realized during the June 2005 quarter, reflecting $39.1 million of cash received from the
securitization trusts. Of the $39.1 million of cash received from the securitization trusts during the six months ended June 30, 2005, $22.5 million was received in connection with our calling the remaining five securitization trusts on June 15,
2005.



Equipment and Improvements, Net. Equipment and
improvements, net, increased to $9.1 million at June 30, 2005 from $8.8 million at December 31, 2004 reflecting capitalization of new equipment and improvement acquisitions outpacing depreciation and amortization during the six months ended June 30,
2005.



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Prepaid and Other Assets. Prepaid assets increased to $29.1 million at June 30, 2005 from $22.1
million at December 31, 2004. The increase was due to increases of $12.2 million and $2.0 million in unamortized debt issuance costs and prepaids, security deposits and other deferred charges, partially offset by decreases of $3.4 million, $2.8
million and $0.9 million in defunded loans, licensing, permit and performance bond deposits and unamortized commitment fees, respectively.



Derivative Financial Instruments. At June 30, 2005, we had notional amounts of $5.9 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 our derivative financial instruments at estimated fair value which at June 30, 2005 was $49.2
million compared to $31.9 million at December 31, 2004. Included in interest expense during the six months ended June 30, 2005, was a $2.0 million charge related to the mark-to-market of our interest rate cap agreements at June 30, 2005.



Financings on Loans Held for Investment. Amounts outstanding under
our financings on loans held for investment increased to $3.2 billion at June 30, 2005 from $1.2 billion at December 31, 2004 resulting from the two on-balance sheet securitizations that closed during the six months ended June 30, 2005 partially
offset by principal reductions to the balance outstanding during the six months ended June 30, 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 $967.8 million at June 30, 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 May 31, 2005, we completed a securitization totaling
$1.1 billion, our third 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 previous securitizations were
structured as off-balance sheet securitizations for accounting purposes under SFAS No. 140. We did not complete any securitizations during the six months ended June 30, 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.



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.



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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 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 13.3 to 1.0 and 3.3 to 1.0 at June 30, 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



26



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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 of June 30, 2005 Aames Financial originated loans in 47 states through its retail and wholesale channels. Its wholesale channel operated four regional
wholesale operations centers and two satellite processing 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 84 retail branch offices directly serving borrowers throughout the United States. From time to time, depending on market conditions and attractiveness of terms, we may supplement our loan production by purchasing mortgage loans from
secondary market sellers.



The following table shows our total
loan originations by retail and wholesale channels and purchased loans for the three and six months ended June 30, 2005 and 2004 and March 31, 2005 and the six months ended June 30, 2005 and 2004 (in thousands):



|                   |  |                    |           |            |                    |   |   |                |            |  |       |   |  |            |           |  |       |  
|------------------ |  | ------------------ | --------- | ---------- | ------------------ | - | - | -------------- | ---------- |  | ----- | - |  | ---------- | --------- |  | ----- | -
|                   |  | Three Months Ended |           |            | Three Months Ended |  
|                   |  | June 30, 2005      |           |            | June 30, 2004      |   |   | March 31, 2005 |           
|                   |  | $                  |           | % of Total |                    |   | $ |                | % of Total |  |       | $ |  | % of Total |          
|Retail             |  | $                  | 624,816   |            | 39.1               | % |   | $              | 645,291    |  | 32.8  | % |  | $          | 516,558   |  | 37.9  | %
|Wholesale          |  |                    | 920,506   |            | 57.7               |   |   |                | 1,320,578  |  | 67.2  |   |  |            | 845,058   |  | 62.1  |  
|Purchased Loans(1) |  |                    | 51,692    |            | 3.2                |   |   |                |           |  |      |   |  |            |          |  |      |  
|                   |  |                    |           |            |                    |   |   |                |            |  |       |   |  |            |           |  |       |  
|Total              |  | $                  | 1,597,014 |            | 100.0              | % |   | $              | 1,965,869  |  | 100.0 | % |  | $          | 1,361,616 |  | 100.0 | %
|                   |  |                    |           |            |                    |   |   |                |            |  |       |   |  |            |           |  |       |  



|                   |  |                  |           |           |               |   |   |   |           |  |       |  
|------------------ |  | ---------------- | --------- | --------- | ------------- | - | - | - | --------- |  | ----- | -
|                   | 
|                   |  | Six Months Ended |          
|                   |  | June 30, 2005    |           |           | June 30, 2004 |  
|                   |  | $                |           | % ofTotal |               |   | $ |   | % ofTotal | 
|Retail             |  | $                | 1,141,374 |           | 38.6          | % |   | $ | 1,231,818 |  | 32.1  | %
|Wholesale          |  |                  | 1,765,564 |           | 59.7          |   |   |   | 2,600,279 |  | 67.9  |  
|Purchased Loans(1) |  |                  | 51,692    |           | 1.7           |   |   |   |          |  |      |  
|                   |  |                  |           |           |               |   |   |   |           |  |       |  
|Total              |  | $                | 2,958,630 |           | 100.0         | % |   | $ | 3,832,097 |  | 100.0 | %
|                   |  |                  |           |           |               |   |   |   |           |  |       |  

---

|(1) | Represents a portfolio of single family mortgage loans purchased from a commercial bank.
|--- | ----------------------------------------------------------------------------------------



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.



27



---

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. Our loan officers at the local retail loan office pre-qualify a potential customer and if the customer is
interested, takes an application over the telephone or schedules an appointment with the customer at 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 six months ended June 30, 2005, we originated
loans through our network of approximately 2,400 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 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.



During the three months ended June 30, 2005, we closed one
regional wholesale operations center in a market where it was not financially feasible to continue to operate and now service the area from other existing centers.



28



---

The following table presents certain information about our mortgage loan production at or during the
three months ended June 30, 2005 and 2004 and March 31, 2005 and the six months ended June 30, 2005 and 2004:



|                                                    |  |                    |           |   |                                 |   |           |                  |              |   |           |              |  |   |           |   |  |   |           |  
|--------------------------------------------------- |  | ------------------ | --------- | - | ------------------------------- | - | --------- | ---------------- | ------------ | - | --------- | ------------ |  | - | --------- | - |  | - | --------- | -
|                                                    |  | Three Months Ended |           |   | Three MonthsEndedMarch 31, 2005 |   |           | Six Months Ended |             
|                                                    |  | June 30,2005       |           |   | June 30,2004                    |   |           |                  | June 30,2005 |   |           | June 30,2004 | 
|Retail loan production:                             |  |                    |           |   |                                 |   |           |                  |              |   |           |              |  |   |           |   |  |   |           |  
|Total dollar amount (in thousands)                  |  | $                  | 624,816   |   |                                 | $ | 645,291   |                  |              | $ | 516,558   |              |  | $ | 1,141,374 |   |  | $ | 1,231,818 |  
|Number of loans                                     |  |                    | 4,315     |   |                                 |   | 5,087     |                  |              |   | 3,718     |              |  |   | 8,033     |   |  |   | 9,764     |  
|Average loan amount                                 |  | $                  | 144,801   |   |                                 | $ | 128,651   |                  |              | $ | 138,934   |              |  | $ | 142,086   |   |  | $ | 126,159   |  
|Average initial LTV                                 |  |                    | 76.33     | % |                                 |   | 76.92     | %                |              |   | 75.88     | %            |  |   | 76.12     | % |  |   | 77.36     | %
|Weighted average interest rate(1)                   |  |                    | 7.37      | % |                                 |   | 7.30      | %                |              |   | 7.53      | %            |  |   | 7.44      | % |  |   | 7.28      | %
|Retail branch offices at period end                 |  |                    | 84        |   |                                 |   | 99        |                  |              |   | 94        |              |  |   | 84        |   |  |   | 99        |  
|Wholesale loan production:                          |  |                    |           |   |                                 |   |           |                  |              |   |           |              |  |   |           |   |  |   |           |  
|Total dollar amount (in thousands)                  |  | $                  | 920,506   |   |                                 | $ | 1,320,578 |                  |              | $ | 845,058   |              |  | $ | 1,765,564 |   |  | $ | 2,600,279 |  
|Number of loans                                     |  |                    | 6,747     |   |                                 |   | 8,947     |                  |              |   | 6,028     |              |  |   | 12,775    |   |  |   | 17,577    |  
|Average loan amount                                 |  | $                  | 136,432   |   |                                 | $ | 147,600   |                  |              | $ | 140,189   |              |  | $ | 138,205   |   |  | $ | 147,936   |  
|Average initial LTV                                 |  |                    | 81.90     | % |                                 |   | 81.62     | %                |              |   | 81.25     | %            |  |   | 81.59     | % |  |   | 81.65     | %
|Weighted average interest rate(1)                   |  |                    | 7.78      | % |                                 |   | 7.30      | %                |              |   | 7.60      | %            |  |   | 7.69      | % |  |   | 7.24      | %
|Regional wholesale operations centers at period end |  |                    | 4         |   |                                 |   | 5         |                  |              |   | 5         |              |  |   | 4         |   |  |   | 5         |  
|Purchased Loans:                                    |  |                    |           |   |                                 |   |           |                  |              |   |           |              |  |   |           |   |  |   |           |  
|Total dollar amount (in thousands)                  |  | $                  | 51,692    |   |                                 | $ |          |                  |              | $ |          |              |  | $ | 51,692    |   |  | $ |          |  
|Number of loans                                     |  |                    | 83        |   |                                 |   |          |                  |              |   |          |              |  |   | 83        |   |  |   |          |  
|Average loan amount                                 |  | $                  | 622,800   |   |                                 | $ |          |                  |              | $ |          |              |  | $ | 622,800   |   |  | $ |          |  
|Average initial LTV                                 |  |                    | 53.29     | % |                                 |   |          | %                |              |   |          | %            |  |   | 53.29     | % |  |   |          | %
|Weighted average interest rate(1)                   |  |                    | 5.57      | % |                                 |   |          | %                |              |   |          | %            |  |   | 5.57      | % |  |   |          | %
|Total loan production:                              |  |                    |           |   |                                 |   |           |                  |              |   |           |              |  |   |           |   |  |   |           |  
|Total dollar amount (in thousands)                  |  | $                  | 1,597,014 |   |                                 | $ | 1,965,869 |                  |              | $ | 1,361,616 |              |  | $ | 2,958,630 |   |  | $ | 3,832,097 |  
|Number of loans                                     |  |                    | 11,145    |   |                                 |   | 14,034    |                  |              |   | 9,746     |              |  |   | 20,891    |   |  |   | 27,341    |  
|Average loan amount                                 |  | $                  | 143,294   |   |                                 | $ | 140,079   |                  |              | $ | 139,710   |              |  | $ | 141,622   |   |  | $ | 140,159   |  
|Average initial LTV                                 |  |                    | 78.79     | % |                                 |   | 80.08     | %                |              |   | 79.21     | %            |  |   | 78.98     | % |  |   | 80.27     | %
|Weighted average interest                           |  |                    | 7.55      | % |                                 |   | 7.30      | %                |              |   | 7.57      | %            |  |   | 7.56      | % |  |   | 7.25      | %

---

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



Total Loan Production



Total loan production during the three months ended June 30, 2005 increased $235.4 million, or 17.3%, to $1.6 billion over the $1.4 billion reported
during the three months ended March 31, 2005 and decreased $368.9 million, or 18.8%, from the $2.0 billion of total loan production reported during the three months ended June 30, 2004. Total loan production for the six months ended June 30, 2005
decreased $873.5 million, or 22.8%, to $3.0 billion from the $3.8 billion reported during the six months ended June 30, 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. As we have not pursued interest-only products and pricing as aggressively as several other sub-prime
lenders, our response to these marketplace changes negatively impacted our mortgage loan origination volume during the three and six months ended June 30, 2005 when compared to mortgage loan production volumes during the comparable three month
period a year ago.



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



29



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Our total retail production was $624.8 million during the three months ended June 30, 2005, an increase
of $108.3 million or 21.0%, over total retail production reported during the three months ended March 31, 2005, and a decrease of $20.5 million, or 3.2% from total retail production during the three months ended June 30, 2004. During the three
months ended June 30, 2005, the number of retail loans originated increased by 597, or 16.1%, from the number of loans originated during the three months ended March 31, 2005, and declined by 772, or 15.2%, from the number of loans originated during
the three months ended June 30, 2004. The increase in the number of loans originated during the three months ended June 30, 2005 compared to the three months ended March 31, 2005 was coupled with an increase in the average loan amount of retail
loans originated of $5,867.00. The decrease in the number of loans originated during the three months ended June 30, 2005 compared to the three months ended June 30, 2004 was partially offset by an increase in the average loan amount of retail loans
originated of $16,150.00. The increase in the average loan amount of our retail production during the three and six months ended June 30, 2005 over such amounts during the comparable three and six month periods a year ago was due to the retail
channels strategy of closing branches in smaller markets with smaller average loan amounts and focusing its loan origination efforts in larger markets with larger average loan amounts.



During the six months ended June 30, 2005, total retail production was $1.1
billion, a decrease of $90.4 million, or 7.3%, from the $1.2 billion of total retail production during the same six month period a year ago. During the six months ended June 30, 2005, the number of retail loans originated decreased by 1,731, while
the average dollar amount of retail loans originated increased by $15,927.00.



Our total wholesale production increased $75.4 million, or 8.9%, to $920.5 million during the three months ended June 30, 2005 over $845.1 million of total wholesale production during the three months ended March 31,
2005 and decreased $400.1 million or 30.3%, from the total wholesale production reported during the three months ended June 30, 2004. During the three months ended June 30, 2005, the number of wholesale loans increased by 719, or 11.9%, from the
number of loans originated during the three months ended March 31, 2005, and declined by 2,200, or 24.6%, from the number of loans originated during the three months ended June 30, 2004. During the three months ended March 31, 2005, the average
dollar amount of our wholesale loan originated decreased $3,757.00 and $11,168.00 from the average dollar amount of our wholesale loans originated during the three months ended March 31, 2005 and June 30, 2004, respectively.



During the six months ended June 30, 2005, our wholesale loan production
decreased $834.7 million, or 32.1%, to $1.8 billion from $2.6 billion of total wholesale loan production during the six months ended June 30, 2004. During the six months ended June 30, 2005, the number of wholesale loans decreased by 4,802, or
27.3%, from the number of loans originated during the six months ended June 30, 2004 and the average dollar amount of wholesale loans originated decreased $9,731.00, or 6.5%, from the average dollar amount of our loan originations during the six
months ended June 30, 2004.



During the three months ended June
30, 2005, we purchased a $51.7 million pool of mortgage loans collateralized by single family residences from a California based community bank. The mortgage loans in the pool, which had an average loan amount of $0.6 million, consisted of high
FICO, low LTV fixed rate loans. Due to their credit profile characteristics and fixed rate terms, we believe these mortgage loans provide an attractive risk-based yield, extend duration to our portfolio of loans held for investment and adds
portfolio diversification to the seasoned, higher coupon, higher LTV, and lower FICO collateral added to the REIT portfolio from the June 15, 2005 call. The purchased mortgage loans and the called mortgage loan collateral are to be combined in an
on-balance sheet securitization scheduled for closing during the three months ended September 30, 2005.



30



---

The following tables summarize certain information about our mortgage loan production by purpose and
property type during the three months ended June 30, 2005 and 2004 and March 31, 2005 and the six months ended June 30, 2005 and 2004 (dollars in thousands):



|                        |  |                    |           |                    |               |   |             |                |                    |  |       |             |  |                    |           |  |       |  
|----------------------- |  | ------------------ | --------- | ------------------ | ------------- | - | ----------- | -------------- | ------------------ |  | ----- | ----------- |  | ------------------ | --------- |  | ----- | -
|                        |  | Three Months Ended |          
|                        |  | June 30, 2005      |           |                    | June 30, 2004 |   |             | March 31, 2005 |                   
|                        |  | LoansFunded        |           | Percentageof Total |               |   | LoansFunded |                | Percentageof Total |  |       | LoansFunded |  | Percentageof Total |          
|Purpose:                |  |                    |           |                    |               |   |             |                |                    |  |       |             |  |                    |           |  |       |  
|Cash-out refinance      |  | $                  | 900,379   |                    | 56.4          | % |             | $              | 1,162,572          |  | 59.1  | %           |  | $                  | 799,368   |  | 58.7  | %
|Purchase money          |  |                    | 645,301   |                    | 40.4          |   |             |                | 717,387            |  | 36.5  |             |  |                    | 519,628   |  | 38.2  |  
|Rate/term refinance     |  |                    | 51,334    |                    | 3.2           |   |             |                | 85,910             |  | 4.4   |             |  |                    | 42,620    |  | 3.1   |  
|                        |  |                    |           |                    |               |   |             |                |                    |  |       |             |  |                    |           |  |       |  
|                        |  | $                  | 1,597,014 |                    | 100.0         | % |             | $              | 1,965,869          |  | 100.0 | %           |  | $                  | 1,361,616 |  | 100.0 | %
|                        |  |                    |           |                    |               |   |             |                |                    |  |       |             |  |                    |           |  |       |  
|Property type:          |  |                    |           |                    |               |   |             |                |                    |  |       |             |  |                    |           |  |       |  
|Single family residence |  | $                  | 1,399,906 |                    | 87.7          | % |             | $              | 1,711,934          |  | 87.1  | %           |  | $                  | 1,194,927 |  | 87.8  | %
|Multi-family residence  |  |                    | 114,499   |                    | 7.2           |   |             |                | 137,445            |  | 7.0   |             |  |                    | 94,399    |  | 6.9   |  
|Condominium             |  |                    | 82,609    |                    | 5.1           |   |             |                | 116,490            |  | 5.9   |             |  |                    | 72,290    |  | 5.3   |  
|                        |  |                    |           |                    |               |   |             |                |                    |  |       |             |  |                    |           |  |       |  
|                        |  | $                  | 1,597,014 |                    | 100.0         | % |             | $              | 1,965,869          |  | 100.0 | %           |  | $                  | 1,361,616 |  | 100.0 | %
|                        |  |                    |           |                    |               |   |             |                |                    |  |       |             |  |                    |           |  |       |  



|                        |  |                  |           |                    |               |   |             |   |                    |  |       |  
|----------------------- |  | ---------------- | --------- | ------------------ | ------------- | - | ----------- | - | ------------------ |  | ----- | -
|                        | 
|                        |  | Six Months Ended |          
|                        |  | June 30, 2005    |           |                    | June 30, 2004 |  
|                        |  | LoansFunded      |           | Percentageof Total |               |   | LoansFunded |   | Percentageof Total | 
|Purpose:                |  |                  |           |                    |               |   |             |   |                    |  |       |  
|Cash-out refinance      |  | $                | 1,699,747 |                    | 57.5          | % |             | $ | 2,314,465          |  | 60.4  | %
|Purchase money          |  |                  | 1,164,929 |                    | 39.3          |   |             |   | 1,325,596          |  | 34.6  |  
|Rate/term refinance     |  |                  | 93,954    |                    | 3.2           |   |             |   | 192,036            |  | 5.0   |  
|                        |  |                  |           |                    |               |   |             |   |                    |  |       |  
|                        |  | $                | 2,958,630 |                    | 100.0         | % |             | $ | 3,832,097          |  | 100.0 | %
|                        |  |                  |           |                    |               |   |             |   |                    |  |       |  
|Property type:          |  |                  |           |                    |               |   |             |   |                    |  |       |  
|Single family residence |  | $                | 2,594,833 |                    | 87.7          | % |             | $ | 3,342,176          |  | 87.2  | %
|Multi-family residence  |  |                  | 208,898   |                    | 7.1           |   |             |   | 273,656            |  | 7.1   |  
|Condominium             |  |                  | 154,899   |                    | 5.2           |   |             |   | 216,265            |  | 5.7   |  
|                        |  |                  |           |                    |               |   |             |   |                    |  |       |  
|                        |  | $                | 2,958,630 |                    | 100.0         | % |             | $ | 3,832,097          |  | 100.0 | %
|                        |  |                  |           |                    |               |   |             |   |                    |  |       |  



31



---

The following tables show our loan originations by geographic region during the three months ended June
30, 2005 and 2004 and March 31, 2005 and the six months ended June 30, 2005 and 2004 (dollars in thousands):



|                                                                       |  |                    |           |                    |               |   |             |                |                    |  |       |             |  |                    |           |  |       |  
|---------------------------------------------------------------------- |  | ------------------ | --------- | ------------------ | ------------- | - | ----------- | -------------- | ------------------ |  | ----- | ----------- |  | ------------------ | --------- |  | ----- | -
|                                                                       |  | Three Months Ended |          
|                                                                       |  | June 30, 2005      |           |                    | June 30, 2004 |   |             | March 31, 2005 |                   
|State of Mortgage Property                                             |  | LoansFunded        |           | Percentageof Total |               |   | LoansFunded |                | Percentageof Total |  |       | LoansFunded |  | Percentageof Total |          
|California                                                             |  | $                  | 439,308   |                    | 27.6          | % |             | $              | 667,690            |  | 34.0  | %           |  | $                  | 372,922   |  | 27.4  | %
|Florida                                                                |  |                    | 372,851   |                    | 23.3          |   |             |                | 369,802            |  | 18.8  |             |  |                    | 296,851   |  | 21.8  |  
|New York                                                               |  |                    | 94,357    |                    | 5.9           |   |             |                | 142,981            |  | 7.3   |             |  |                    | 93,558    |  | 6.9   |  
|Texas                                                                  |  |                    | 136,411   |                    | 8.5           |   |             |                | 123,530            |  | 6.3   |             |  |                    | 111,392   |  | 8.2   |  
|Other Western States (AZ, CO, HI, ID, MT, NV, NM, OR, UT, WA, WY)      |  |                    | 128,581   |                    | 8.1           |   |             |                | 196,614            |  | 10.0  |             |  |                    | 139,291   |  | 10.2  |  
|Midwestern States (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI)     |  |                    | 101,325   |                    | 6.3           |   |             |                | 163,293            |  | 8.3   |             |  |                    | 95,226    |  | 7.0   |  
|Other Northeastern States (CT, DE, ME, MD, MA, NH, NJ, PA, RI)         |  |                    | 177,435   |                    | 11.1          |   |             |                | 187,215            |  | 9.5   |             |  |                    | 145,853   |  | 10.7  |  
|Other Southeastern States (AR, GA, KY, LA, MS, NC, SC, OK, TN, VA, WV) |  |                    | 146,746   |                    | 9.2           |   |             |                | 114,744            |  | 5.8   |             |  |                    | 106,523   |  | 7.8   |  
|                                                                       |  |                    |           |                    |               |   |             |                |                    |  |       |             |  |                    |           |  |       |  
|Total                                                                  |  | $                  | 1,597,014 |                    | 100.0         | % |             | $              | 1,965,869          |  | 100.0 | %           |  | $                  | 1,361,616 |  | 100.0 | %
|                                                                       |  |                    |           |                    |               |   |             |                |                    |  |       |             |  |                    |           |  |       |  



32



---

|                                                                       |  |                  |           |                    |               |   |             |   |                    |  |       |  
|---------------------------------------------------------------------- |  | ---------------- | --------- | ------------------ | ------------- | - | ----------- | - | ------------------ |  | ----- | -
|                                                                       |  | Six Months Ended |          
|                                                                       |  | June 30, 2005    |           |                    | June 30, 2004 |  
|State of Mortgage Property                                             |  | LoansFunded      |           | Percentageof Total |               |   | LoansFunded |   | Percentageof Total | 
|California                                                             |  | $                | 812,230   |                    | 27.5          | % |             | $ | 1,284,899          |  | 33.6  | %
|Florida                                                                |  |                  | 669,702   |                    | 22.6          |   |             |   | 733,934            |  | 19.2  |  
|New York                                                               |  |                  | 187,915   |                    | 6.4           |   |             |   | 294,561            |  | 7.7   |  
|Texas                                                                  |  |                  | 247,803   |                    | 8.4           |   |             |   | 242,649            |  | 6.3   |  
|Other Western States (AZ, CO, HI, ID, MT, NV, NM, OR, UT, WA, WY)      |  |                  | 267,872   |                    | 9.1           |   |             |   | 390,047            |  | 10.2  |  
|Midwestern States (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI)     |  |                  | 196,551   |                    | 6.6           |   |             |   | 331,418            |  | 8.6   |  
|Other Northeastern States (CT, DE, ME, MD, MA, NH, NJ, PA, RI)         |  |                  | 323,288   |                    | 10.9          |   |             |   | 327,085            |  | 8.5   |  
|Other Southeastern States (AR, GA, KY, LA, MS, NC, SC, OK, TN, VA, WV) |  |                  | 253,269   |                    | 8.5           |   |             |   | 227,504            |  | 5.9   |  
|                                                                       |  |                  |           |                    |               |   |             |   |                    |  |       |  
|Total                                                                  |  | $                | 2,958,630 |                    | 100.0         | % |             | $ | 3,832,097          |  | 100.0 | %
|                                                                       |  |                  |           |                    |               |   |             |   |                    |  |       |  



The following tables
summarize certain information by interest rate about our mortgage loan production during the three months ended June 30, 2005 and 2004 and March 31, 2005 and the six months ended June 30, 2005 and 2004 (dollars in thousands):



|              |  |                    |           |            |               |   |   |                |            |  |       |   |  |            |           |  |       |  
|------------- |  | ------------------ | --------- | ---------- | ------------- | - | - | -------------- | ---------- |  | ----- | - |  | ---------- | --------- |  | ----- | -
|              |  | Three Months Ended |          
|              |  | June 30, 2005      |           |            | June 30, 2004 |   |   | March 31, 2005 |           
|              |  | $                  |           | % of Total |               |   | $ |                | % of Total |  |       | $ |  | % of Total |          
|Hybrid:       |  |                    |           |            |               |   |   |                |            |  |       |   |  |            |           |  |       |  
|Traditional   |  | $                  | 1,014,616 |            | 63.5          | % |   | $              | 1,388,226  |  | 70.6  | % |  | $          | 947,520   |  | 69.6  | %
|Interest Only |  |                    | 190,111   |            | 11.9          |   |   |                | 93,310     |  | 4.8   |   |  |            | 148,807   |  | 10.9  |  
|              |  |                    |           |            |               |   |   |                |            |  |       |   |  |            |           |  |       |  
|              |  |                    | 1,204,727 |            | 75.4          |   |   |                | 1,481,536  |  | 75.4  |   |  |            | 1,096,327 |  | 80.5  |  
|Fixed Rate    |  |                    | 392,287   |            | 24.6          |   |   |                | 484,333    |  | 24.6  |   |  |            | 265,289   |  | 19.5  |  
|              |  |                    |           |            |               |   |   |                |            |  |       |   |  |            |           |  |       |  
|              |  | $                  | 1,597,014 |            | 100.0         | % |   | $              | 1,965,869  |  | 100.0 | % |  | $          | 1,361,616 |  | 100.0 | %
|              |  |                    |           |            |               |   |   |                |            |  |       |   |  |            |           |  |       |  



33



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|              |  |                  |           |            |               |   |   |   |            |  |       |  
|------------- |  | ---------------- | --------- | ---------- | ------------- | - | - | - | ---------- |  | ----- | -
|              |  | Six Months Ended |          
|              |  | June 30, 2005    |           |            | June 30, 2004 |  
|              |  | $                |           | % of Total |               |   | $ |   | % of Total | 
|Hybrid:       |  |                  |           |            |               |   |   |   |            |  |       |  
|Traditional   |  | $                | 1,962,136 |            | 66.3          | % |   | $ | 2,784,338  |  | 72.7  | %
|Interest Only |  |                  | 338,918   |            | 11.5          |   |   |   | 93,310     |  | 2.4   |  
|              |  |                  |           |            |               |   |   |   |            |  |       |  
|              |  |                  | 2,301,054 |            | 77.8          |   |   |   | 2,877,648  |  | 75.1  |  
|Fixed Rate    |  |                  | 657,576   |            | 22.2          |   |   |   | 954,449    |  | 24.9  |  
|              |  |                  |           |            |               |   |   |   |            |  |       |  
|              |  | $                | 2,958,630 |            | 100.0         | % |   | $ | 3,832,097  |  | 100.0 | %
|              |  |                  |           |            |               |   |   |   |            |  |       |  



LOAN PRODUCTION BY BORROWER RISK
CLASSIFICATION



The following tables set forth our loan
production under the Super Aim guidelines during the three months ended June 30, 2005 and 2004 (dollars in thousands):



LOAN ORIGINATIONS DURING THE THREE MONTHS ENDED JUNE 30, 2005



|             |  |                                |           |           |     |   |                     |     |                                |      |   |                                   |    |  
|------------ |  | ------------------------------ | --------- | --------- | --- | - | ------------------- | --- | ------------------------------ | ---- | - | --------------------------------- | -- | -
|Credit Grade |  | AggregateDollar Amountof Loans |           | % ofTotal |     |   | AverageCredit Score |     | WeightedAverageInterestRate(1) |      |   | WeightedAverageLoan-to-ValueRatio |   
|A+           |  | $                              | 1,209,249 |           | 76  | % |                     | 629 |                                | 7.5  | % |                                   | 81 | %
|A            |  |                                | 205,063   |           | 13  |   |                     | 625 |                                | 7.1  |   |                                   | 72 |  
|A-           |  |                                | 57,317    |           | 4   |   |                     | 566 |                                | 8.1  |   |                                   | 76 |  
|B            |  |                                | 82,829    |           | 5   |   |                     | 560 |                                | 8.5  |   |                                   | 76 |  
|C            |  |                                | 35,445    |           | 2   |   |                     | 553 |                                | 9.1  |   |                                   | 70 |  
|C-           |  |                                | 7,111     |           | NM  |   |                     | 536 |                                | 10.6 |   |                                   | 66 |  
|             |  |                                |           |           |     |   |                     |     |                                |      |   |                                   |    |  
|Total        |  | $                              | 1,597,014 |           | 100 | % |                     | 620 |                                | 7.6  | % |                                   | 79 | %
|             |  |                                |           |           |     |   |                     |     |                                |      |   |                                   |    |  



LOAN ORIGINATIONS
DURING THE THREE MONTHS ENDED JUNE 30, 2004



|             |  |                                |           |           |     |   |                     |     |                                |     |   |                                   |    |  
|------------ |  | ------------------------------ | --------- | --------- | --- | - | ------------------- | --- | ------------------------------ | --- | - | --------------------------------- | -- | -
|Credit Grade |  | AggregateDollar Amountof Loans |           | % ofTotal |     |   | AverageCredit Score |     | WeightedAverageInterestRate(1) |     |   | WeightedAverageLoan-to-ValueRatio |   
|A+           |  | $                              | 1,469,215 |           | 75  | % |                     | 626 |                                | 7.2 | % |                                   | 81 | %
|A            |  |                                | 229,521   |           | 12  |   |                     | 589 |                                | 7.3 |   |                                   | 80 |  
|A-           |  |                                | 94,508    |           | 5   |   |                     | 562 |                                | 7.7 |   |                                   | 77 |  
|B            |  |                                | 114,603   |           | 6   |   |                     | 558 |                                | 8.0 |   |                                   | 76 |  
|C            |  |                                | 48,288    |           | 2   |   |                     | 551 |                                | 8.8 |   |                                   | 71 |  
|C-           |  |                                | 9,734     |           | NM  |   |                     | 542 |                                | 9.8 |   |                                   | 69 |  
|             |  |                                |           |           |     |   |                     |     |                                |     |   |                                   |    |  
|Total        |  | $                              | 1,965,869 |           | 100 | % |                     | 612 |                                | 7.3 | % |                                   | 80 | %
|             |  |                                |           |           |     |   |                     |     |                                |     |   |                                   |    |  



34



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LOAN ORIGINATIONS DURING THE SIX MONTHS ENDED JUNE 30, 2005



|             |  |                                |           |           |     |   |                     |     |                                |      |   |                                   |    |  
|------------ |  | ------------------------------ | --------- | --------- | --- | - | ------------------- | --- | ------------------------------ | ---- | - | --------------------------------- | -- | -
|Credit Grade |  | AggregateDollar Amountof Loans |           | % ofTotal |     |   | AverageCredit Score |     | WeightedAverageInterestRate(1) |      |   | WeightedAverageLoan-to-ValueRatio |   
|A+           |  | $                              | 2,254,464 |           | 76  | % |                     | 628 |                                | 7.4  | % |                                   | 81 | %
|A            |  |                                | 340,386   |           | 12  |   |                     | 609 |                                | 7.3  |   |                                   | 74 |  
|A-           |  |                                | 114,982   |           | 4   |   |                     | 561 |                                | 8.0  |   |                                   | 76 |  
|B            |  |                                | 159,407   |           | 5   |   |                     | 559 |                                | 8.5  |   |                                   | 76 |  
|C            |  |                                | 72,978    |           | 2   |   |                     | 552 |                                | 9.0  |   |                                   | 70 |  
|C-           |  |                                | 16,413    |           | 1   |   |                     | 544 |                                | 10.5 |   |                                   | 65 |  
|             |  |                                |           |           |     |   |                     |     |                                |      |   |                                   |    |  
|Total        |  | $                              | 2,958,630 |           | 100 | % |                     | 617 |                                | 7.6  | % |                                   | 79 | %
|             |  |                                |           |           |     |   |                     |     |                                |      |   |                                   |    |  



LOAN ORIGINATIONS
DURING THE SIX MONTHS ENDED JUNE 30, 2004



|             |  |                                |           |           |     |   |                     |     |                                |     |   |                                   |    |  
|------------ |  | ------------------------------ | --------- | --------- | --- | - | ------------------- | --- | ------------------------------ | --- | - | --------------------------------- | -- | -
|Credit Grade |  | AggregateDollar Amountof Loans |           | % ofTotal |     |   | AverageCredit Score |     | WeightedAverageInterestRate(1) |     |   | WeightedAverageLoan-to-ValueRatio |   
|A+           |  | $                              | 2,810,664 |           | 74  | % |                     | 625 |                                | 7.1 | % |                                   | 81 | %
|A            |  |                                | 471,831   |           | 12  |   |                     | 590 |                                | 7.2 |   |                                   | 80 |  
|A-           |  |                                | 200,468   |           | 5   |   |                     | 562 |                                | 7.6 |   |                                   | 78 |  
|B            |  |                                | 232,811   |           | 6   |   |                     | 560 |                                | 8.0 |   |                                   | 76 |  
|C            |  |                                | 95,358    |           | 2   |   |                     | 552 |                                | 8.7 |   |                                   | 71 |  
|C-           |  |                                | 20,797    |           | 1   |   |                     | 541 |                                | 9.8 |   |                                   | 68 |  
|D            |  |                                | 168       |           | 0   |   |                     | 503 |                                | 6.7 |   |                                   | 71 |  
|             |  |                                |           |           |     |   |                     |     |                                |     |   |                                   |    |  
|Total        |  | $                              | 3,832,097 |           | 100 | % |                     | 611 |                                | 7.3 | % |                                   | 80 | %
|             |  |                                |           |           |     |   |                     |     |                                |     |   |                                   |    |  



The following tables
present certain information about our loan production by credit score range during the three months ended June 30, 2005 and 2004 (dollars in thousands):



LOAN ORIGINATIONS DURING THE THREE MONTHS ENDED JUNE 30, 2005



|                   |  |                    |           |           |     |   |                                |     |   |                                   |    |  
|------------------ |  | ------------------ | --------- | --------- | --- | - | ------------------------------ | --- | - | --------------------------------- | -- | -
|Credit Score Grade |  | CurrentLoanBalance |           | % ofTotal |     |   | WeightedAverageInterestRate(1) |     |   | WeightedAverageLoan-to-ValueRatio |   
|Above 700          |  | $                  | 140,071   |           | 8   | % |                                | 6.6 | % |                                   | 73 | %
|661-700            |  |                    | 218,264   |           | 14  |   |                                | 7.0 |   |                                   | 79 |  
|621-660            |  |                    | 426,012   |           | 27  |   |                                | 7.3 |   |                                   | 81 |  
|581-620            |  |                    | 428,174   |           | 27  |   |                                | 7.6 |   |                                   | 80 |  
|541-580            |  |                    | 226,715   |           | 14  |   |                                | 8.1 |   |                                   | 79 |  
|540 and below      |  |                    | 154,924   |           | 10  |   |                                | 8.8 |   |                                   | 74 |  
|Not available      |  |                    | 2,854     |           | 0   |   |                                | 8.0 |   |                                   | 72 |  
|                   |  |                    |           |           |     |   |                                |     |   |                                   |    |  
|                   |  | $                  | 1,597,014 |           | 100 | % |                                | 7.6 | % |                                   | 79 | %
|                   |  |                    |           |           |     |   |                                |     |   |                                   |    |  



35



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LOAN ORIGINATIONS DURING THE THREE MONTHS ENDED JUNE 30, 2004



|              |  |                    |           |           |     |   |                                |     |   |                                   |    |  
|------------- |  | ------------------ | --------- | --------- | --- | - | ------------------------------ | --- | - | --------------------------------- | -- | -
|Credit Grade  |  | CurrentLoanBalance |           | % ofTotal |     |   | WeightedAverageInterestRate(1) |     |   | WeightedAverageLoan-to-ValueRatio |   
|Above 700     |  | $                  | 137,107   |           | 7   | % |                                | 6.7 | % |                                   | 79 | %
|661-700       |  |                    | 246,475   |           | 13  |   |                                | 6.9 |   |                                   | 81 |  
|621-660       |  |                    | 491,730   |           | 25  |   |                                | 7.1 |   |                                   | 81 |  
|581-620       |  |                    | 474,929   |           | 24  |   |                                | 7.2 |   |                                   | 81 |  
|541-580       |  |                    | 372,193   |           | 19  |   |                                | 7.6 |   |                                   | 81 |  
|540 and below |  |                    | 239,416   |           | 12  |   |                                | 8.2 |   |                                   | 76 |  
|Not available |  |                    | 4,019     |           | 0   |   |                                | 7.4 |   |                                   | 82 |  
|              |  |                    |           |           |     |   |                                |     |   |                                   |    |  
|              |  | $                  | 1,965,869 |           | 100 | % |                                | 7.3 | % |                                   | 80 | %
|              |  |                    |           |           |     |   |                                |     |   |                                   |    |  



LOAN ORIGINATIONS
DURING THE SIX MONTHS ENDED JUNE 30, 2005



|              |  |                    |           |           |     |   |                                |     |   |                                   |    |  
|------------- |  | ------------------ | --------- | --------- | --- | - | ------------------------------ | --- | - | --------------------------------- | -- | -
|Credit Grade  |  | CurrentLoanBalance |           | % ofTotal |     |   | WeightedAverageInterestRate(1) |     |   | WeightedAverageLoan-to-ValueRatio |   
|Above 700     |  | $                  | 228,556   |           | 8   | % |                                | 6.8 | % |                                   | 75 | %
|661-700       |  |                    | 394,716   |           | 13  |   |                                | 7.0 |   |                                   | 79 |  
|621-660       |  |                    | 797,235   |           | 27  |   |                                | 7.3 |   |                                   | 81 |  
|581-620       |  |                    | 758,084   |           | 26  |   |                                | 7.5 |   |                                   | 80 |  
|541-580       |  |                    | 457,191   |           | 15  |   |                                | 8.1 |   |                                   | 79 |  
|540 and below |  |                    | 318,830   |           | 11  |   |                                | 8.7 |   |                                   | 74 |  
|Not available |  |                    | 4,018     |           | 0   |   |                                | 8.1 |   |                                   | 76 |  
|              |  |                    |           |           |     |   |                                |     |   |                                   |    |  
|              |  | $                  | 2,958,630 |           | 100 | % |                                | 7.6 | % |                                   | 79 | %
|              |  |                    |           |           |     |   |                                |     |   |                                   |    |  



LOAN ORIGINATIONS
DURING THE SIX MONTHS ENDED JUNE 30, 2004



|              |  |                    |           |           |     |   |                                |     |   |                                   |    |  
|------------- |  | ------------------ | --------- | --------- | --- | - | ------------------------------ | --- | - | --------------------------------- | -- | -
|Credit Grade  |  | CurrentLoanBalance |           | % ofTotal |     |   | WeightedAverageInterestRate(1) |     |   | WeightedAverageLoan-to-ValueRatio |   
|Above 700     |  | $                  | 259,441   |           | 7   | % |                                | 6.7 | % |                                   | 79 | %
|661-700       |  |                    | 486,436   |           | 13  |   |                                | 6.8 |   |                                   | 81 |  
|621-660       |  |                    | 958,042   |           | 25  |   |                                | 7.0 |   |                                   | 81 |  
|581-620       |  |                    | 899,917   |           | 23  |   |                                | 7.1 |   |                                   | 81 |  
|541-580       |  |                    | 736,053   |           | 19  |   |                                | 7.6 |   |                                   | 81 |  
|540 and below |  |                    | 485,766   |           | 13  |   |                                | 8.1 |   |                                   | 76 |  
|Not available |  |                    | 6,442     |           | 0   |   |                                | 7.5 |   |                                   | 82 |  
|              |  |                    |           |           |     |   |                                |     |   |                                   |    |  
|              |  | $                  | 3,832,097 |           | 100 | % |                                | 7.3 | % |                                   | 80 | %
|              |  |                    |           |           |     |   |                                |     |   |                                   |    |  



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;
| | - |  | --------------------------------------------------------------------------------



36



---

| |  |  | 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 (dollars in thousands):



|                 |  |                    |         |                  |   |               |  |               |         |  |   |          
|---------------- |  | ------------------ | ------- | ---------------- | - | ------------- |  | ------------- | ------- |  | - | ---------
|                 |  | Three Months Ended |         | Six Months Ended
|                 |  | June 30, 2005      |         | June 30, 2004    |   | June 30, 2005 |  | June 30, 2004
|Whole loan sales |  | $                  | 410,714 |                  | $ | 1,769,638     |  | $             | 731,352 |  | $ | 3,533,073
|                 |  |                    |         |                  |   |               |  |               |         |  |   |          



Our whole loan sales
to third parties during the three months ended June 30, 2005 decreased $1.4 billion, or 76.8%, to $410.7 million from $1.8 billion of total dispositions reported during the comparable three month period a year ago. During the six months ended June
30, 2005, whole loan sales to third parties decreased $2.8 billion, or 79.3%, to $731.4 million from $3.5 billion during the six months ended June 30, 2004. The decline in loan sales into the secondary markets during the three and six months ended
June 30, 2005 from the sales during the comparable three and six month periods during 2004 was due to our retaining a significant portion of our loan production to build a REIT portfolio of loans held for investment.



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 $4.5 billion. We
believe that with our current servicing management and systems, our servicing platform is capable of servicing a portfolio of approximately $6.0 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 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.



37



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



|                                                                       |  |               |           |   |               |   |           |                   |  |   |           |  
|---------------------------------------------------------------------- |  | ------------- | --------- | - | ------------- | - | --------- | ----------------- |  | - | --------- | -
|                                                                       |  | June 30, 2005 |           |   | June 30, 2004 |   |           | December 31, 2004 | 
|Mortgage loans serviced:                                               |  |               |           |   |               |   |           |                   |  |   |           |  
|Loans held for investment                                              |  | $             | 3,830,109 |   |               | $ |          |                   |  | $ | 1,718,696 |  
|Loans serviced on an interim basis                                     |  |               | 491,464   |   |               |   | 1,897,464 |                   |  |   | 771,830   |  
|Loans subserviced for others on a long-term basis                      |  |               | 108,672   |   |               |   | 160,371   |                   |  |   | 129,016   |  
|Loans in off-balance sheet securitization trusts                       |  |               |          |   |               |   | 229,308   |                   |  |   | 224,345   |  
|                                                                       |  |               |           |   |               |   |           |                   |  |   |           |  
|Serviced in-house                                                      |  |               | 4,430,245 |   |               |   | 2,287,143 |                   |  |   | 2,843,887 |  
|Loans held for investment subserviced by others                        |  |               | 51,676    |   |               |   |          |                   |  |   |          |  
|Loans in off-balance sheet securitization trusts subserviced by others |  |               |          |   |               |   | 53,885    |                   |  |   |          |  
|                                                                       |  |               |           |   |               |   |           |                   |  |   |           |  
|Total servicing portfolio                                              |  | $             | 4,481,921 |   |               | $ | 2,341,028 |                   |  | $ | 2,843,887 |  
|                                                                       |  |               |           |   |               |   |           |                   |  |   |           |  
|Percentage serviced in-house                                           |  |               | 98.8      | % |               |   | 97.7      | %                 |  |   | 100.0     | %
|                                                                       |  |               |           |   |               |   |           |                   |  |   |           |  



Our total loan
servicing portfolio at June 30, 2005 increased $1.6 billion, or 57.6%, to $4.5 billion from $2.8 billion at December 31, 2004 due primarily to a $2.2 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 $280.4 million, $224.3 million and $20.3 million, respectively. The decline in loans serviced on an
interim basis reflects the decrease in loans held for sale at June 30, 2005 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 seven remaining off-balance sheet securitization trusts which caused the portfolio of mortgage loans in securitization trusts to decline by $202.1 million and, to a lesser
extent, to portfolio run-off. The decline in loans subserviced for others on a long-term basis was due to loan portfolio run-off.



Our total servicing portfolio at June 30, 2005 increased $2.1 billion over the $2.3 billion servicing portfolio at June 30, 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 June 30, 2005 compared to June 30, 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 collected 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 required 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 required us to make certain servicing advances (e.g., for property taxes or hazard insurance) unless we determined that
those advances would not be recoverable.



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 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



38



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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 June 30, |   |  | At March 31, |   |  | At December 31, |  
|                        |  | 2005        |   |  | 2004         |   |  | 2005            |   |  | 2004 |  
|Aames Investment        |  | 2.7         | % |  | 3.2          | % |  | 2.4             | % |  | 2.5  | %
|Subprime Mortgage Loans |  | NYA         |   |  | 10.0         | % |  | 10.2            | % |  | 9.9  | %
|All Mortgage Loans      |  | NYA         |   |  | 4.4          | % |  | 4.3             | % |  | 4.2  | %



NYA
= Not yet announced



39



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



|                                                                             |  |                                  |   |  |                                  |   |  |                   |  
|---------------------------------------------------------------------------- |  | -------------------------------- | - |  | -------------------------------- | - |  | ----------------- | -
|                                                                             |  | At or During theSix Months Ended |   |  | At or During theSix Months Ended |  
|                                                                             |  | June 30, 2005                    |   |  | June 30, 2004                    |   |  | December 31, 2004 |  
|Percentage of dollar amount of delinquent loans serviced (period end)(1)(2): |  |                                  |   |  |                                  |   |  |                   |  
|One month                                                                    |  | 0.9                              | % |  | 0.3                              | % |  | 0.3               | %
|Two months                                                                   |  | 0.4                              | % |  | 0.2                              | % |  | 0.2               | %
|Three or more months                                                         |  |                                  |   |  |                                  |   |  |                   |  
|Not foreclosed(3)                                                            |  | 1.3                              | % |  | 2.4                              | % |  | 1.8               | %
|Foreclosed(4)                                                                |  | 0.1                              | % |  | 0.3                              | % |  | 0.2               | %
|                                                                             |  |                                  |   |  |                                  |   |  |                   |  
|Total                                                                        |  | 2.7                              | % |  | 3.2                              | % |  | 2.5               | %
|                                                                             |  |                                  |   |  |                                  |   |  |                   |  
|Percentage of total dollar amount of delinquent loans in:                    |  |                                  |   |  |                                  |   |  |                   |  
|Loans held for investments serviced:                                         |  |                                  |   |  |                                  |   |  |                   |  
|In-house                                                                     |  | 1.9                              | % |  | N/A                              |   |  | 0.2               | %
|By others                                                                    |  | 0.0                              | % |  | N/A                              |   |  | 0.0               | %
|Loans serviced on an interim basis                                           |  | 7.7                              | % |  | 0.6                              | % |  | 1.5               | %
|Loans subserviced for others on a long-term basis                            |  | 6.1                              | % |  | 2.7                              | % |  | 4.8               | %
|Loans in off-balance sheet securitization trusts serviced:                   |  | N/A                              |   |  | 13.0                             | % |  | 22.5              | %
|In-house                                                                     |  |                                  |   |  |                                  |   |  |                   |  
|By others                                                                    |  | N/A                              |   |  | 7.7                              | % |  | 0.0               | %

---

|(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.
|--- | ---------------------------------------------------------------------------------------------------



|N/A | Not applicable
|--- | --------------



Delinquent loans, by principal balance of the total servicing portfolio, increased to $118.6 million at June 30, 2005 from $71.0 million at December 31,
2004 and $74.9 million at June 30, 2004. The delinquency rate at June 30, 2005 was 2.7% compared to 2.5% at December 31, 2004 and 3.2% at June 30, 2004. The delinquency rate at June 30, 2005 increased from the delinquency rate at December 31, 2004,
primarily due to an increase in delinquencies in our on-balance sheet portfolio of mortgage loans. 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.



40



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



|                                                           |  |               |         |               |   |                   |  |   |       
|---------------------------------------------------------- |  | ------------- | ------- | ------------- | - | ----------------- |  | - | ------
|                                                           |  | June 30, 2005 |         | June 30, 2004 |   | December 31, 2004
|Loans held for investment serviced:                        |  |               |         |               |   |                   |  |   |       
|In-house                                                   |  | $             | 73,923  |               | $ |                  |  | $ | 2,856 
|By others                                                  |  |               |        |               |   |                  |  |   |      
|Loans serviced on an interim basis                         |  |               | 38,050  |               |   | 11,937            |  |   | 11,459
|Loans subserviced for others on a long-term basis          |  |               | 6,648   |               |   | 4,316             |  |   | 6,229 
|Loans in off-balance sheet securitization trusts serviced: |  |               |         |               |   |                   |  |   |       
|In-house                                                   |  |               |        |               |   | 36,938            |  |   | 50,408
|By others                                                  |  |               |        |               |   | 21,725            |  |   |      
|                                                           |  |               |         |               |   |                   |  |   |       
|                                                           |  | $             | 118,621 |               | $ | 74,916            |  | $ | 70,952
|                                                           |  |               |         |               |   |                   |  |   |       



During the six months
ended June 30, 2005, net losses on loan liquidations decreased to $5.6 million from $8.2 million during the comparable six 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 $5.6 million of net losses on loan liquidations during the six months ended June 30, 2005, $2.9 million and $2.7 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.



41



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



|                                                                                                       |  |                                  |           |   |                                  |   |           |                   |  |   |           |  
|------------------------------------------------------------------------------------------------------ |  | -------------------------------- | --------- | - | -------------------------------- | - | --------- | ----------------- |  | - | --------- | -
|                                                                                                       |  | At or During theSix Months Ended |           |   | At or During theSix Months Ended |  
|                                                                                                       |  | June 30, 2005                    |           |   | June 30, 2004                    |   |           | December 31, 2004 | 
|Percentage of dollar amount of loans foreclosed during the period to loans serviced (period end)(1)(2) |  |                                  | 0.1       | % |                                  |   | 0.3       | %                 |  |   | 0.1       | %
|Number of loans foreclosed during the period                                                           |  |                                  | 83        |   |                                  |   | 120       |                   |  |   | 68        |  
|Principal amount of foreclosed loans during the period                                                 |  | $                                | 6,284     |   |                                  | $ | 7,343     |                   |  | $ | 3,585     |  
|Number of loans liquidated during the period                                                           |  |                                  | 151       |   |                                  |   | 234       |                   |  |   | 163       |  
|Net losses on liquidations during the period from(3):                                                  |  |                                  |           |   |                                  |   |           |                   |  |   |           |  
|Loans held for investment serviced:                                                                    |  |                                  |           |   |                                  |   |           |                   |  |   |           |  
|In-house                                                                                               |  | $                                | 42        |   |                                  | $ |          |                   |  | $ |          |  
|By others                                                                                              |  |                                  |          |   |                                  |   |          |                   |  |   |          |  
|Loans serviced on an interim basis                                                                     |  |                                  | 2,646     |   |                                  |   | 1,737     |                   |  |   | 1,224     |  
|Loans subserviced for others on a long-term basis                                                      |  |                                  | 19        |   |                                  |   |          |                   |  |   |           |  
|Loans in off-balance sheet securitization trusts serviced:                                             |  |                                  |           |   |                                  |   |           |                   |  |   |           |  
|In-house                                                                                               |  |                                  | 2,850     |   |                                  |   | 4,599     |                   |  |   | 5,554     |  
|By others                                                                                              |  |                                  |          |   |                                  |   | 1,856     |                   |  |   |          |  
|                                                                                                       |  |                                  |           |   |                                  |   |           |                   |  |   |           |  
|                                                                                                       |  | $                                | 5,557     |   |                                  | $ | 8,192     |                   |  | $ | 6,778     |  
|                                                                                                       |  |                                  |          
|Percentage of annualized losses to servicing portfolio(1)(2)                                           |  |                                  | 0.2       | % |                                  |   | 0.7       | %                 |  |   | 0.5       | %
|Servicing portfolio at period end                                                                      |  | $                                | 4,482,000 |   |                                  | $ | 2,341,000 |                   |  | $ | 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; 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;
| | - |  | ---------------------------------------------------------------------------



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| |  |  | 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 June 30, 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 June 30, 2005, amounts outstanding under our facilities were $967.8 million leaving us with $1.9 billion
of available committed borrowing capacity under the facilities. Of the $3.0 billion of revolving warehouse and repurchase facilities available at June 30, 2005, $700.0 million, $300.0 million, $500.0 million, $500.0 million, $700.0 million, $300.0
million and $700.0 million are scheduled to mature September 30, 2005, October 20, 2006, January 17, 2006, February 4, 2006, March 24, 2006 and August 4, 2006, respectively. The $700.0 million facility which matures on August 4, 2006 had a $200.0
million temporary overline sublimit that was provided to the Company to finance collateral received in pool call transactions until securitized. The sublimit expired on July 29, 2005 and mortgage loan collateral that was previously financed under
the overline sublimit remained financed under the committed portion of the facility. 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 six months ended June 30, 2005 and 2004, we sold $731.4 million and $3.5 billion of mortgage loans in whole loan
sales for cash to the secondary market. The $2.8 billion decline in whole loan sales during the six months ended June 30, 2005 from whole loan sales during the comparable six 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.



Other sources of cash previously used to fund our operations included the monetization of overcollateralization in our portfolio of mortgage loans in securitization trusts and the monetization of residual interests
and servicing advances.



Monetization of
Overcollateralization in Our Portfolio of Mortgage Loans in Securitization Trusts. As previously reported, on June 15, 2005 when we called these securitization trusts, we received a majority of the overcollateralization balance from the called
trusts in a combination of mortgage loans in the trust and in cash.



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.



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Cash Flow. The following summarizes our material cash flow activities during the six months ended
June 30, 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 six months ended June 30, 2005, our net cash provided by operating activities was $120.9 million, an increase of $376.7 million, over the
$255.8 million of net cash used in operating activities during the six months ended June 30, 2004. The increase in net cash provided by operating activities was due primarily to a $873.5 million decrease in cash used in the origination of mortgage
loans held for sale during the six months ended June 30, 2005 compared to the six months ended June 30, 2004. The increase in net cash provided by operating activities was partially offset by a $447.7 million decrease in cash provided by the sale of
mortgage loans during the six months ended June 30, 2005 from such cash flows during the six months ended June 30, 2004. To a lesser extent, the increase in net cash provided by operating activities during the six months ended June 30, 2005 over net
cash used in operating activities during the comparable six months ended June 30, 2004 was positively impacted by a $19.2 million change in other assets and liabilities offset by a decline in net income.



During the six months ended June 30, 2005, our net cash used in investing
activities increased $2.2 billion over such cash used during the comparable six 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 six months ended June 30, 2005, our net cash
provided by financing activities was $2.1 billion, an increase of $1.9 billion, over the $0.2 billion of net cash provided by financing activities during the six months ended June 30, 2004. The increase in net cash provided by financing activities
during the six months ended June 30, 2005 over net cash provided by financing activities during the comparable six month period in 2004 was primarily attributable to a $2.0 billion increase in financing on loans held for investment, partially offset
by increases in net cash used in financing activities of $124.8 million and $1.3 million related to redemptions in revolving warehouse and repurchase facilities and in borrowings, respectively, during the six months ended June 30, 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
$104.5 million during the six months ended June 30, 2005. The amount of net purchases of loans held for sale included in net cash used in operating activities was $321.3 million during the six months ended June 30, 2004. Excluding the purchase and
sale activity for loans held for sale, we provided $16.4 million of cash in our operating activities during the six months ended June 30, 2005 and, excluding such activity, our operating activities provided $65.5 million of cash during the six
months ended June 30, 2004.



At June 30, 2005, we had net
operating liquidity of approximately $139.3 million, which consisted of approximately $63.7 million of unrestricted cash and cash equivalents, plus approximately $75.6 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



44



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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.



Contractual Obligations



The following table summarizes our material contractual obligations as of
June 30, 2005 (dollars in millions):



|                                              |  |       |         |                 |   |          |  |          |         |                  |   |       |  |   |      
|--------------------------------------------- |  | ----- | ------- | --------------- | - | -------- |  | -------- | ------- | ---------------- | - | ----- |  | - | -----
|                                              |  | Total |         | Less Than1 year |   | 1-3Years |  | 3-5Years |         | More Than5 years
|Financing on loans held for investment        |  | $     | 3,168.7 |                 | $ | 1,169.7  |  | $        | 1,677.3 |                  | $ | 112.9 |  | $ | 208.8
|Revolving warehouse and repurchase agreements |  |       | 967.8   |                 |   | 967.8    |  |          |        |                  |   |      |  |   |     
|Operating leases, net                         |  |       | 46.7    |                 |   | 5.2      |  |          | 20.6    |                  |   | 13.0  |  |   | 7.9  
|Purchase and other obligations                |  |       | 3.7     |                 |   | 3.7      |  |          |        |                  |   |      |  |   |     
|                                              |  |       |         |                 |   |          |  |          |         |                  |   |       |  |   |      
|Total                                         |  | $     | 4,186.9 |                 | $ | 2,146.4  |  | $        | 1,697.9 |                  | $ | 125.9 |  | $ | 216.7
|                                              |  |       |         |                 |   |          |  |          |         |                  |   |       |  |   |      



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.



Risk Management



At June 30, 2005, we had notional amounts of $5.9 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 and six months ended June 30, 2005 includes charges of $11.5 million and a $2.0 million, respectively, related to the mark-to-market of these interest
rate cap agreements. Also, included in interest income during the three and six months ended June 30, 2005 was $4.6 million and $7.3 million, respectively, of income related to remittances to us from counterparties on in-the-money interest rate cap
agreements. At June 30, 2004, we had notional amounts of $550.0 million of interest rate cap agreements in place to hedge interest rate risk exposure to our inventory and pipeline of loans held for sale.



During the three and six months ended June 30, 2004, there were no material
adjustments to mark the interest rate cap agreements to market.



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 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.



45



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Rate Sensitive Assets



Residual Interests. We had no residual interests at June 30, 2005 and $39.1 million at December 31, 2004. These instruments were recorded at
estimated fair value at December 31, 2004. 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 December 31, 2004. The weighted average life of the mortgage loans used for valuation at December 31, 2004 was 2.0 years.



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
and loans held for sale.



Warehousing Exposure. We
utilize warehouse and repurchase financing facilities to facilitate the holding of mortgage loans prior to sale and securitization. At June 30, 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 June 30, 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
$967.8 million and $809.2 million at June 30, 2005 and December 31, 2004, respectively. Drawings available to us under the committed portions of the facilities were $1.9 billion and $1.7 billion at June 30, 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.



The following tables illustrate the timing
of the maturities of our interest rate sensitive assets and liabilities at June 30, 2005 and December 31, 2004 (dollars in thousands):



At June 30, 2005:



|                                                                          |  |                   |           |   |                       |   |          |          |  |          |           |          |   |            |  |       |         |  |   |         |  |   |          
|------------------------------------------------------------------------- |  | ----------------- | --------- | - | --------------------- | - | -------- | -------- |  | -------- | --------- | -------- | - | ---------- |  | ----- | ------- |  | - | ------- |  | - | ---------
|Description                                                               |  | Zero to sixmonths |           |   | Six monthsto one year |   |          | 1-2Years |  | 3-4Years |           | 5-6Years |   | Thereafter |  | Total
|Interest-sensitive assets:                                                |  |                   |           |   |                       |   |          |          |  |          |           |          |   |            |  |       |         |  |   |         |  |   |          
|Cash and cash equivalents                                                 |  | $                 | 123,152   |   |                       | $ |         |          |  | $        |          |          | $ |           |  | $     |        |  | $ |        |  | $ | 123,152  
|Loans receivable held for sale, net                                       |  |                   | 380,491   |   |                       |   |         |          |  |          |          |          |   |           |  |       |        |  |   |        |  |   | 380,491  
|Loans held for investment, net                                            |  |                   | 708,984   |   |                       |   | 699,037  |          |  |          | 1,228,324 |          |   | 880,498    |  |       | 130,879 |  |   | 226,151 |  |   | 3,873,873
|Interest rate cap contracts                                               |  |                   | 49,183    |   |                       |   |         |          |  |          |          |          |   |           |  |       |        |  |   |        |  |   | 49,183   
|                                                                          |  |                   |           |   |                       |   |          |          |  |          |           |          |   |            |  |       |         |  |   |         |  |   |          
|Total interest-sensitive assets                                           |  |                   | 1,261,810 |   |                       |   | 699,037  |          |  |          | 1,228,324 |          |   | 880,498    |  |       | 130,879 |  |   | 226,151 |  |   | 4,426,699
|Interest-sensitive liabilities:                                           |  |                   |           |   |                       |   |          |          |  |          |           |          |   |            |  |       |         |  |   |         |  |   |          
|Revolving warehouse and repurchase facilities                             |  |                   | 967,798   |   |                       |   |         |          |  |          |          |          |   |           |  |       |        |  |   |        |  |   | 967,798  
|Financings on loans held for investment                                   |  |                   | 594,116   |   |                       |   | 575,545  |          |  |          | 1,002,502 |          |   | 674,805    |  |       | 112,928 |  |   | 208,843 |  |   | 3,168,739
|                                                                          |  |                   |           |   |                       |   |          |          |  |          |           |          |   |            |  |       |         |  |   |         |  |   |          
|Total interest-sensitive liabilities                                      |  |                   | 1,561,914 |   |                       |   | 575,545  |          |  |          | 1,002,502 |          |   | 674,805    |  |       | 112,928 |  |   | 208,843 |  |   | 4,136,537
|Excess of interest - sensitive assets over interest-sensitive liabilities |  |                   | (300,104  | ) |                       |   | 123,492  |          |  |          | 225,822   |          |   | 205,693    |  |       | 17,951  |  |   | 17,308  |  |   | 290,162  
|                                                                          |  |                   |           |   |                       |   |          |          |  |          |           |          |   |            |  |       |         |  |   |         |  |   |          
|Cumulative net interest - sensitivity gap                                 |  | $                 | (300,104  | ) |                       | $ | (176,612 | )        |  | $        | 49,210    |          | $ | 254,903    |  | $     | 272,854 |  | $ | 290,162 |  | $ | 290,162  
|                                                                          |  |                   |           |   |                       |   |          |          |  |          |           |          |   |            |  |       |         |  |   |         |  |   |          



46



---

At December 31, 2004:



|                                                                          |  |                   |          |   |                       |   |          |          |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          
|------------------------------------------------------------------------- |  | ----------------- | -------- | - | --------------------- | - | -------- | -------- |  | -------- | ------- | -------- | - | ---------- |  | ----- | ------- |  | - | ------- |  | - | ---------
|Description                                                               |  | Zero tosix months |          |   | Six monthsto one year |   |          | 1-2Years |  | 3-4Years |         | 5-6Years |   | Thereafter |  | Total
|Interest-sensitive assets:                                                |  |                   |          |   |                       |   |          |          |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          
|Cash and cash equivalents                                                 |  | $                 | 37,780   |   |                       | $ |         |          |  | $        |        |          | $ |           |  | $     |        |  | $ |        |  | $ | 37,780   
|Loans receivable held for sale, net                                       |  |                   | 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  
|                                                                          |  |                   |          |   |                       |   |          |          |  |          |         |          |   |            |  |       |         |  |   |         |  |   |          



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.



47



---

PART IIOTHER INFORMATION



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



Certain of our subsidiaries were defendants in Potteiger et. al. v. Aames Funding Corporation and Aames Financial Corporation, a collective action
filed in February 2004 in the U.S. District Court of Minnesota. Plaintiff, a former loan officer of ours, filed this action on behalf of himself and current and former loan officers employed by us, and sought damages consisting of alleged unpaid
overtime, statutory liquidated damages and attorneys fees and costs. As previously reported, we agreed to a mediated settlement of this case.



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 0.01% and 0.3% of total mortgage loan production during the six months ended June 30, 2005 and 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
|------- | ---------------------------------------------------



|(a) | We held our annual meeting of stockholders on May 5, 2005.
|--- | ----------------------------------------------------------



|(b) | Votes regarding the election of seven directors for terms expiring at the 2006 annual meeting of stockholders were as follows:
|--- | ------------------------------------------------------------------------------------------------------------------------------



|                     |  |            |  |         
|-------------------- |  | ---------- |  | --------
|                     |  | For        |  | Withheld
|Jenne K. Britell     |  | 51,371,750 |  | 147,291 
|David H. Elliott     |  | 51,371,750 |  | 147,291 
|John F. Farrell, Jr. |  | 51,319,417 |  | 199,624 
|A. Jay Meyerson      |  | 50,994,329 |  | 524,712 
|Mani A. Sadeghi      |  | 50,850,227 |  | 668,814 
|Robert A. Spass      |  | 50,886,809 |  | 632,232 
|Stephen E. Wall      |  | 51,235,655 |  | 283,386 



|(c) | Votes on the ratification of the appointment of Ernst & Young as independent auditors to serve for the 2005 calendar year were as follows:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------



|           |  |         |  |                                
|---------- |  | ------- |  | -------------------------------
|For        |  | Against |  | Abstentions and Broker Nonvotes
|50,760,220 |  | 716,544 |  | 42,278                         



48



---

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



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



49



---

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).                                                                  
|            | 
|10.5(c)     |  | Amendment No. 2 to Master Repurchase Agreement dated as of June 20, 2005 by and among Bear Stearns Mortgage Capital Corporation, Aames Capital Corporation, Aames Investment Corporation and
Aames Funding Corporation.                                                                                                                                            
|            | 
|10.5(d)     |  | Extension Letter to the Master Repurchase Agreement dated as of July 29, 2005 by and among Bear Stearns Mortgage Capital Corporation, Aames Capital Corporation, Aames Investment Corporation
and Aames Funding Corporation.                                                                                                                                       
|            | 
|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).                                                                                                    



50



---

|            |  |                                                                                                                                                                                                                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                 
|            | 
|10.8(e)     |  | Amendment No. 5 dated as of June 30, 2005 to the Master Loan and Security Agreement among Aames Capital Corporation, Aames Funding Corporation, Aames Investment Corporation and Morgan Stanley
Bank dated October 2, 2004.                                                                                                                                 
|            | 
|10.9        |  | Amended and Restated Master Loan and Security Agreement dated as of April 28, 2005 among Aames Capital Corporation, Aames Investment Corporation and Citigroup Global Markets Realty
Corp.                                                                                                                                                                  
|            | 
|10.10(a)    |  | 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).                        
|            | 
|10.10(b)    |  | Amendment Number One to the Warehouse and Loan Security Agreement dated May 25, 2005 among Aames Investment Corporation, Aames Capital Corporation, Aames Funding Corporation and Greenwich
Capital Financial Products, Inc.                                                                                                                                
|            | 
|10.10(c)    |  | Amendment Number Two to the Warehouse and Loan Security Agreement dated June 20, 2005 among Aames Investment Corporation, Aames Capital Corporation, Aames Funding Corporation and Greenwich
Capital Financial Products, Inc.                                                                                                                               
|            | 
|10.11(a)    |  | Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans dated as of January 18, 2005 among Lehman Brothers Bank, FSB, Aames Capital Corporation and Aames Investment
Corporation (incorporated by reference to Exhibit 10.11 to the 2004 10-K).                                                                                         
|            | 
|10.11(b)    |  | First Amendment to Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans dated as of June 20, 2005 among Lehman Brothers Bank, FSB, Aames Capital Corporation and Aames
Investment Corporation.                                                                                                                                       
|            | 
|10.12(a)    |  | Revolving Credit and Security Agreement dated 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 for the Revolving Credit and Security Agreement dated March 25, 2005 among Aames Capital Corporation, Aames Funding Corporation, Aames Investment Corporation, Aames
Financial Corporation and Countrywide Warehouse Lending.                                                                                                             
|            | 
|10.12(d)    |  | Amendment No. 1 to the Countrywide Commitment Letter dated as of June 28, 2005.                                                                                                                                                                                                                                                                             
|            | 
|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
(incorporated by reference to Exhibit 10.12(e) to the Aames Investment Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 2005).                  
|            | 
|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 10.17(a) to the Aames Financial Corporation Form 10-K for the year ended June 30, 1997 (the Aames Financial 1997 10-K)).
|            | 
|10.14(b)    |  | First Amendment to Office Building Lease dated as of August 15, 1997 between Aames Financial Corporation and California Plaza IIA, LLC (incorporated by reference to Exhibit 10.17(b) to the
Aames Financial 1997 10-K).                                                                                                                                    
|            | 
|10.14(c)    |  | Second Amendment to Office Building Lease dated as of July 29, 2005 by and between EOP-TWO California Plaza, LLC and Aames Financial Corporation.                                                                                                                                                                                                           



51



---

|            |  |                                                                                                                                                                                                                                                                                                                            
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|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).*                                                                                                                                                                                          
|            | 
|10.18       |  | Employment Agreement dated July 18, 2005 among Aames Investment Corporation, Aames Financial Corporation and John A. Vella.*                                                                                                                                                                                               
|            | 
|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 Jon D. Van Deuren 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.
|- | ------------------------------------------------------------



52



---

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: August 15, 2005 |  | By:                          |  |  |  | /s/ JON D. VAN DEUREN
|                       |  |                              |  |  |  |                       |  | Jon D. Van Deuren                   
|                       |  |                              |  |  |  |                       |  | Executive Vice PresidentFinance and
|                       |  |                              |  |  |  |                       |  | Chief Financial Officer             



53