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~~SECURITIES AND EXCHANGE COMMISSION~~ Washington, D.C. 20549

FORM 10-K

(Mark one)

/X/		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2003
Or
/ /		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-19604

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

~~AAMES~~For ~~FINANCIAL~~the ~~CORPORATION (Exact~~Fiscal ~~name~~Year ofEnded ~~Registrant~~June as30, ~~specified~~2004 ~~in its charter)~~

Delaware (State or other jurisdiction of incorporation)	95-4340340 (I.R.S. Employer Identification No.)
350 S. Grand Avenue, Los Angeles, California (Address of principal executive offices)	90071 (Zip Code)

~~Registrant's~~¨ ~~telephone~~TRANSITION ~~number,~~REPORT ~~including~~PURSUANT ~~area~~TO ~~code:~~SECTION 13 OR 15(~~323~~d) ~~210-5000~~ OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 0-19604

AAMES FINANCIAL CORPORATION

(Exact name of Registrant as specified in its charter)


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


350 S. Grand Avenue, Los Angeles, California		90071
(Address of principal executive offices)		(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:


Title of each Class		Name of each exchange on which registered

Securities registered pursuant to Section 12(g) of the Act: ~~Common~~ ~~Stock, par value $0.001 Preferred Stock purchase rights~~

~~Indicate~~Common 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)Stock, ~~and~~par ~~(2) has~~value ~~been subject to such filing requirements for the past 90 days~~$0. ~~Yes /X/ No / /~~001

~~Indicate~~Preferred byStock ~~check mark~~purchase ifrights disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / /

Indicate by check mark whether the ~~registrant~~Registrant (1) ishas anfiled ~~accelerated~~all ~~filer~~reports ~~(as~~required ~~defined~~to inbe ~~Rule 12b-2~~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)., ~~Yes/~~and /(2) has been subject to such filing requirements for the past 90 days. Yes x No~~/X/~~ ¨

AtIndicate ~~September~~by ~~22, 2003,~~check ~~there~~mark ~~were~~if disclosure ~~outstanding 7,006,114 shares~~ of ~~the~~delinquent ~~Common~~filers ~~Stock~~pursuant ofto ~~Registrant, and~~Item ~~the~~405 ~~aggregate market value~~ of ~~the~~Regulation ~~shares~~S-K ~~held~~is onnot ~~that~~contained ~~date~~herein, byand ~~non-affiliates of~~will ~~the~~not ~~Registrant~~be contained, ~~based~~to on the ~~closing~~best ~~price ($2.07 per share)~~ of the Registrant'’s ~~Common~~ ~~Stock as quoted on the Over-the-Counter Bulletin Board was $14~~knowledge,~~502,656. For~~ ~~purposes~~in ofdefinitive ~~this~~proxy ~~computation,~~or itinformation ~~has~~statements ~~been~~incorporated ~~assumed~~by ~~that~~reference ~~the shares beneficially~~in ~~held~~Part byIII ~~directors and executive officers~~ of ~~Registrant were "held by affiliates";~~ this ~~assumption~~Form is10-K ~~not~~or toany beamendment ~~deemed~~ to bethis ~~an admission by such persons that they are affiliates of Registrant~~Form 10-K. x

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

At August 17, 2004, there were outstanding 7,006,114 shares of the Common Stock of Registrant, and the aggregate market value of the shares held on that date by non-affiliates of the Registrant, based on the closing price ($2.07 per share) of the Registrant’s Common Stock as quoted on the Over-the-Counter Bulletin Board was $14,502,656. For purposes of this computation, it has been assumed that the shares beneficially held by directors and executive officers of Registrant were “held by affiliates”; this assumption is not to be deemed to be an admission by such persons that they are affiliates of Registrant.

Documents Incorporated by Reference

Portions of Registrant's Proxy Statement relating to its 2003 Annual Meeting of Stockholders or an amendment to this Form 10-K are incorporated by reference in Items 10, 11, 12 and 13 of Part III of this Annual ReportNone.

PART I

Item 1. Business

General

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

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

The Company originates loans in 47 states through its retail and ~~broker production~~ wholesale channels. The Company’s retail channel produces loans through its retail branch network and through the National Loan Centers, ~~which~~serving ~~produce~~borrowers ~~loans~~throughout ~~primarily through affiliations with sites on~~ the ~~Internet~~United States. The Company’s ~~broker~~wholesale channel produces loans through account executives working throughout the United States (including purchasing a limited amount of closed loans from mortgage brokers on a continuous or “flow” basis) and by sourcing loans through telemarketing and the Internet. During the years ended June 30, ~~2003~~2004, ~~2002~~ 2003 and ~~2001~~2002, the Company originated $47.4 0 billion, $34.2 4 billion and $23.4 2 billion, respectively, of mortgage loans.

As a fundamental part of its business and financing strategy, the Company sells its loans to third party investors in the secondary market as market ~~conditions~~ conditions allow. The Company maximizes opportunities in its loan disposition transactions by disposing of its loan production through a combination of securitizations and whole loan sales, depending on market conditions, profitability and cash flows. During the years ended June 30, ~~2003~~2004, ~~2002~~2003 and ~~2001~~2002, the Company sold $46.5 4 billion, $34.2 5 billion and $2.3 .2 billion, respectively, of loans. See “—Loan Disposition.”

The Company’s servicing portfolio consists primarily of mortgage loans serviced for others on an interim basis, which includes loans sold where servicing has not yet been transferred and loans held for sale and, to a lesser extent, loans securitized prior to the year ended June 30, 2000 for which the Company retained servicing. During the ~~years~~year ended June 30, ~~2003~~2004, the ~~2002~~Company did not dispose of mortgage loans through a securitization. During the years ended June 30, 2003 and ~~2001~~2002, the Company sold for cash the servicing rights on the mortgage loans in the securitizations it closed during those periods. The Company has not added any new mortgage loans to the servicing portfolio (except for loans serviced on an interim basis) since January 1, 2000 due to the Company’s sale of all of its mortgage loan production in servicing released transactions. At At June 30, ~~2003~~2004, ~~2002~~2003 and ~~2001~~2002, the Company’s total servicing portfolio was $12.7 3 billion, $21.3 7 billion and $2.7 3 billion, respectively. The Company’s portfolio of mortgage loans in securitization trusts serviced in-house was $0.7 2 billion, $10.2 7 billion and $1.8 2 billion at June 30, ~~2003~~2004, ~~2002~~2003 and ~~2001~~2002, respectively.

~~The Company~~2 continues to focus on increasing its profitability through executing its core business strategy of: (i) increasing the amount and value of its loan production; (ii) reducing its cost of production; and (iii) maintaining adequate liquidity and access to the capital markets.

1 Business Strategy

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

~~Reducing Its~~• ~~Cost~~Converting ofto ~~Production.~~a ~~The~~REIT ~~Company~~and ~~intends~~building toa ~~reduce~~portfolio ~~its cost~~ of ~~production~~high ~~by leveraging~~yielding ~~its~~subprime ~~investment~~mortgage inloans ~~its~~and ~~origination~~leveraging ~~technology~~the ~~platform,~~equity ~~increasing~~of the ~~amount~~ ofREIT ~~automation~~to inincrease the ~~loan~~size ~~origination~~of ~~process~~the portfolio and ~~increasing~~ the ~~scale~~REIT’s ~~of the~~returns ~~origination~~while ~~business~~at ~~driving~~the ~~fixed~~same ~~costs~~time ~~down~~managing asthe aREIT’s ~~percentage~~financing ~~of overall production~~ costs. ~~The~~and ~~Company~~the ~~will~~increased ~~also~~risk ~~continue its on-going effort~~ of ~~identifying~~ ~~opportunities~~loss ~~for~~associated ~~cost~~with ~~reductions across all levels of~~ the ~~Company~~ REIT’s ~~operations.~~ leverage;

~~The recent~~• ~~increases~~Continuing into ~~mortgage~~improve ~~rates~~the ~~and~~Company’s ~~the~~efficiency ~~resulting~~and ~~less~~loan ~~favorable~~quality ~~mortgage interest~~and ~~rate~~serving ~~environment~~as ~~has~~an ~~reduced~~efficient ~~the~~high ~~overall~~quality ~~demand~~originator. ~~for~~The ~~mortgage~~Company ~~loans generally.~~intends ~~While~~to ~~the~~accomplish ~~Company~~this ~~has~~by ~~not~~increasing tothe ~~date~~use ~~experienced~~of atechnology ~~reduced~~to ~~demand~~streamline ~~for~~ further its ~~mortgage~~ loan ~~products~~origination ~~specifically,~~ and ~~while~~underwriting noprocesses, ~~assurances~~by ~~can~~rigorously beapplying ~~made, should~~and ~~that~~continuously ~~event~~improving ~~occur~~its ~~the~~underwriting ~~Company~~criteria ~~expects~~and toprocesses bein ~~responsive~~order to ~~such~~minimize ~~changes~~defaults ~~in market~~and ~~conditions~~losses and by ~~reducing~~collecting ~~its~~comprehensive ~~loan~~performance ~~origination~~data ~~costs~~on inits ~~light~~portfolio ofto ~~reduced loan~~refine ~~origination~~its ~~levels.~~underwriting guidelines and risk-based pricing;

~~Maintaining Adequate~~• ~~Liquidity~~Growing ~~and~~the ~~Access~~Company’s toloan ~~the~~originations ~~Capital~~by ~~Markets.~~growing ~~The~~both ~~Company~~its ~~intends~~retail ~~to continue~~and towholesale ~~increase~~channels, ~~and~~improving ~~diversify~~market ~~its~~penetration ~~funding~~in ~~sources~~the byCompany’s ~~expanding~~existing ~~its~~markets, ~~current funding~~increasing ~~relationships~~loan originations through the Internet and ~~identifying~~building ~~new~~the ~~funding~~“Aames ~~sources~~Home Loan” brand. ~~The~~In addition, the Company ~~intends to~~will continue to ~~fund~~originate ~~its~~loan ~~operations~~products bythat ~~disposing~~are ofless asensitive ~~majority~~to ofincreases ~~its~~in ~~loan production~~interest ~~for~~rates ~~cash~~than inrate-term ~~the~~refinance ~~whole~~mortgage ~~loan market~~loans, ~~monetizing~~such ~~residual~~as ~~interests, mortgage~~purchase ~~servicing~~money ~~rights~~mortgage ~~(“MSRs”)~~loans and ~~the~~cash-out ~~rights~~refinance toloans, ~~prepayment~~which ~~fees on~~ the ~~mortgage~~Company ~~loans~~believes inmakes its ~~new~~originations ~~securitizations,~~less ifvulnerable ~~any,~~to ~~monetizing~~declines ~~servicing advances~~resulting ~~and~~from ~~developing~~increases ~~new~~in ~~sources~~interest ~~for~~rates; ~~working capital.~~ and

•	Servicing the Company’s loans to enhance the performance of its retained portfolio, and growing the Company’s servicing operation with its portfolio which will lower the Company’s 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.” Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Thus, no assurance can be given that the Company will be able to accomplish the above strategies.

Recent Events

~~The Company~~Proposed ~~reported~~REIT ~~net income of $29~~Conversion.~~2 million~~ On ~~for~~March ~~the year ended June 30~~24, ~~2003 compared to a net income of $4.5 million during the year ended June 30~~2004, ~~2002.~~Aames ~~Net~~Investment ~~income during the year ended June 30~~Corporation, ~~2003 includes~~ a ~~$6.0~~wholly-owned ~~million~~subsidiary ~~reversal~~ of ~~deferred tax credits. Total revenue during~~ the ~~year ended June 30~~Company, ~~2003 was $263.6 million, an increase of~~filed ~~$43.5 million~~with ~~over~~ the ~~$220.1 million~~United ~~reported~~States ~~for~~Securities ~~the~~and ~~year~~Exchange ~~ended June 30,~~Commission ~~2002.~~a ~~Included~~registration instatement ~~total~~on ~~revenue~~Form ~~during the year ended June 30~~S-4, ~~2003~~including ~~was $31.7 million of debt extinguishment income. Included in total revenue during~~ the ~~years~~preliminary ~~ended~~joint ~~June 30,~~proxy ~~2003~~statement/prospectus ~~and~~which ~~2002~~constitutes ~~were~~a ~~residual interest~~part ~~write-downs~~ of ~~$34.9 million and $27.0 million, respectively. Excluding debt extinguishment income during~~ the ~~year~~Form ~~ended June 30, 2003 and the write~~S-~~downs of residual interests during the years ended June 30~~4, ~~2003~~ and ~~2002, operating~~a ~~revenue~~registration ~~during~~statement ~~the~~on ~~year~~Form ~~ended~~S-11 ~~June 30, 2003 was~~in ~~$266.9 million,~~connection anwith ~~increase of $19.8 million over~~ the ~~$247.1 million~~ ~~during the year ended June 30, 2002. The~~ Company’s ~~total~~ ~~expenses~~proposed ~~increased~~conversion byinto ~~$23.8 million~~a toreal ~~$236.3 million~~estate ~~during~~investment ~~the year~~trust, ~~ended~~or ~~June 30~~REIT, ~~2003~~and ~~over~~initial ~~the~~public ~~$212~~offering.~~5 million~~ ~~during the year ended June 30, 2002.~~

After careful review, on May 12, 2004, the Company’s Board of Directors unanimously approved a plan to change the Company’s corporate structure 2 to become a REIT and conduct an initial public offering of the shares of Aames Investment Corporation’s common stock, subject to relevant legal, accounting and financial matters, and stockholder approval.

~~As previously~~Although ~~announced,~~the onregistration ~~June~~statements ~~30,~~relating ~~2003,~~to the ~~Company~~issuance ~~redeemed~~of ~~$127.9 million~~Aames ~~principal~~Investment ~~balance~~Corporation’s ofcommon ~~its~~stock ~~9.125%~~in ~~Senior~~connection ~~Notes~~with ~~due November 2003 (~~the ~~“Senior Notes”)~~proposed ~~representing~~REIT ~~all~~conversion ~~remaining~~and ~~outstanding~~initial ~~Senior~~public ~~Notes,~~offering athave ~~par~~been ~~plus accrued~~filed ~~and~~with ~~unpaid interest. The Company funded~~ the ~~redemption~~SEC, ofthey ~~its~~have ~~Senior Notes~~not byyet ~~borrowing~~become ~~$74~~effective.1 ~~million~~These ~~through~~securities amay ~~financing~~not ~~facility~~be ~~secured~~sold, bynor ~~its residual~~may ~~interests~~offers ~~and~~to ~~certain~~buy ~~of its servicing advances (~~the ~~“Financing~~ ~~Facility”)~~securities ~~and~~be ~~paying~~accepted, ~~the~~prior ~~remaining~~to ~~$53.8 million in cash. The Financing Facility has a term of 18 months and bears interest at a rate of LIBOR plus 2.75% per annum. Eighty percent of~~ the ~~monthly~~time ~~cash flows generated from~~ the ~~Company’s~~ ~~residual~~registration ~~interests~~statements ~~and~~become ~~at least 70~~effective.0% ofThis ~~cash~~disclosure ~~flows~~does ~~from~~not ~~recoveries of~~constitute ~~servicing~~an ~~advances~~offer ~~securing the Financing Facility will be paid~~ to ~~the~~sell ~~lender to~~or ~~reduce~~ the ~~outstanding~~solicitation ~~balance.~~of ~~Subject~~an offer to ~~certain~~buy ~~limitations,~~nor ~~the~~will ~~Company may~~there ~~prepay,~~be ~~without~~any ~~penalty,~~sale ~~the~~of ~~amount~~these ~~outstanding~~securities ~~under~~in ~~the Financing Facility at~~ any ~~time.~~State ~~Capital~~in Zwhich such ~~Financial Services Fund II~~offer, ~~L.P.,~~solicitation aor ~~Bermuda~~sale ~~partnership (“Capital~~would ~~Z”),~~be anunlawful ~~affiliate~~prior ofto ~~Specialty~~registration ~~Finance~~or ~~Partners,~~qualification ~~the~~under ~~Company's largest stockholder (“SFP”), is~~ the ~~limited~~securities ~~guarantor~~laws onof ~~the~~any ~~Financing~~such ~~Facility~~State.

As master servicer of the mortgage loans in the securitization trusts, the Company has the right to call the securitization trusts when the remaining balance of the mortgage loans sold in the securitization trusts falls below 10.0% of the original mortgage loan balance. The principal benefit of calling securitization trusts is to improve the Company’s liquidity position. If the Company calls any of the securitization trusts, the Company receives a majority of the overcollateralization balance from the called trusts in a combination of mortgage loans in the securitization trusts and in cash.

On May 15, 2003, the Company called seven securitization trusts with an unpaid principal balance of $17.6 million of mortgage loans. During the three months ended June 30, 2003, $14.5 million of the mortgage loans from these securitization trusts were sold by the Company with the remainder held as loans held for sale at June 30, 2003. This transaction did not materially impact the Company’s results of operations during the year ended June 30, 2003. In connection with the May 15, 2003 call of seven securitization trusts, the Company received cash of approximately $4.4 million.

On August 15, 2003, the Company called four additional securitization trusts with an unpaid principal balance of $29.3 million of mortgage loans ($30.5 million at June 30, 2003). The August 15, 2003 call resulted in a $3.0 million write-down to the carrying value of the Company’s retained residual interests relating to these securitization trusts during the year ended June 30, 2003. If the Company calls any of the securitization trusts underlying the residual interests pledged under the Financing Facility, it is required to prepay the Financing Facility in an amount equal to the amount ascribed to the called residual interest and the servicing advances on mortgage loans in the securitization trusts by the lender under the Financing Facility. As a result of the August 15, 2003 call of such securitization trusts, the Company repaid the Financing Facility $3.4 million. In connection with the August 15, 2003 call of four securitization trusts, the Company received cash of approximately $5.1 million.

As of August 31, 2003, of the Company’s remaining thirteen securitization trusts which had a mortgage loan balance of $735.9 million ($798.5 million at June 30, 2003, as adjusted for the call on August 15, 2003), six securitization trusts with a mortgage loan balance of $199.2 million ($214.7 million at June 30, 2003) were callable. If the Company calls any of these securitization trusts, it might be required to write down the value of the residual interests relating to the called securitization trusts. The Company would also be required to prepay the Financing Facility from proceeds realized from a call transaction in an amount equal to the amount ascribed to the called residual interest and the servicing advances on mortgage loans in the securitization trusts pledged to the lender under the Financing Facility. Additionally, the Company’s portfolio of mortgage loans serviced in securitization trusts would be reduced.

As previously announced, the Company redeemed $4.8 million principal balance of its 5.5% Convertible Subordinated Debentures due 2012 (the “2012 Debentures”) on June 30, 2003, representing all remaining outstanding 2012 Debentures pursuant to a 5.0% optional call provision on the outstanding principal balance, or $0.2 million, plus accrued and unpaid interest.

Subsequent to June 30, 2003, the Company increased its total capacity under its revolving warehouse and repurchase facilities to $1.2 billion of which $1.1 billion and $100.0 million was committed and uncommitted, respectively, from $900.0 million committed at June 30, 2003.

~~On September 16,~~Aames ~~2003~~Investment Corporation will file an amended Form S-4 registration statement, including a definitive joint proxy statement/prospectus that is a part of the ~~Company~~registration ~~amended~~statement, and ~~restated~~other ~~its~~documents ~~certificate~~with ofthe ~~incorporation permitting~~SEC. Stockholders of the Company are encouraged to ~~issue~~read upthe toregistration ~~26.7~~statement, ~~million~~the ~~shares~~joint ofproxy astatement/prospectus ~~new~~and ~~series~~any ~~of preferred~~other ~~stock,~~relevant ~~Series~~documents Efiled ~~Preferred~~with ~~Stock,~~the ~~par~~SEC ~~value~~because ~~$0.001~~they ~~per~~will ~~share~~contain important information about the proposed transaction. The ~~Series E~~definitive ~~Preferred Stock~~joint isproxy ~~not~~statement/prospectus ~~convertible~~will ~~into~~be ~~any~~mailed ~~other~~to the Company’s ~~security,~~stockholders. isInvestors ~~not~~and ~~entitled to~~security ~~receive~~holders ~~dividends,~~can ~~ranks~~obtain ~~pari~~the ~~passu~~documents ~~with~~free of charge at the ~~Company~~SEC’s ~~other~~web ~~series of~~site ~~Preferred~~at ~~Stock~~www.sec.gov. ~~and has~~After athe ~~stated~~registration ~~value~~statement ofcontaining ~~$1.00~~the ~~per~~joint ~~share.~~proxy ~~Subsequently, on~~statement/prospectus ~~September~~is ~~18,~~declared ~~2003~~effective by the ~~Company~~SEC, the joint proxy statement/prospectus and ~~adopted~~other ~~its~~documents ~~2003~~will ~~Series~~be Eavailable ~~Preferred~~free ~~Stock Option~~of ~~Plan~~charge by contacting John F. Madden, ~~pursuant~~Jr., toSecretary, ~~which~~Aames ~~the~~Financial ~~Company plans~~Corporation, to350 ~~issue~~S. toGrand ~~certain~~Avenue, ~~directors and~~43rd ~~executive~~Floor, ~~officers~~Los ~~options~~Angeles, toCalifornia ~~purchase~~90071, ~~shares~~or ~~of Series~~by Ee-mailing ~~Preferred~~the ~~Stock~~Company’s Investor Relations Department at info@aamescorp. com.

~~Mortgage~~The Company, Aames Investment Corporation, their directors, and certain of their executive officers may be considered ~~Loan~~participants ~~Production~~in the solicitation of proxies in connection with the proposed reorganization. Information about such persons’ interest in the reorganization, by way of security holdings or otherwise, may be found in the proxy statement for the Company’s 2003 annual meeting of stockholders and in the registration statement on Form S-4 filed by Aames Investment Corporation, including the joint proxy statement/prospectus, that will be sent to the Company’s stockholders.

The ~~Company’s~~ ~~principal~~statements ~~loan~~above ~~product~~regarding ~~is a non-conforming residential mortgage loan with a fixed principal amount and term to maturity which is secured by a first or second mortgage on~~ the ~~borrower~~Company’s ~~residence~~REIT ~~with~~conversion ~~either~~may ~~a fixed or~~be ~~adjustable~~deemed ~~interest rate. Non-conforming residential mortgage loans are loans made~~ to ~~homeowners whose borrowing needs may not~~ be ~~met~~forward-looking bystatements ~~traditional~~under ~~financial institutions~~federal ~~due~~securities tolaws. ~~credit~~The ~~exceptions~~Company orintends ~~other~~that ~~factors~~such ~~and~~forward-looking ~~generally~~statements ~~cannot~~ be ~~directly~~ ~~marketed~~subject to ~~agencies~~the ~~such~~safe asharbor ~~Fannie~~created ~~Mae and Freddie Mac~~thereby. ~~During~~Such ~~the year~~forward-looking ~~ended~~statements ~~June 30~~include, ~~2003,~~but ~~the~~are ~~Company~~not ~~originated~~limited ~~its~~to, ~~residential mortgage loans through its retail and broker production channels. The Company’s retail channel produces loans through its retail branch network and through~~ the ~~National~~expectation ~~Loan~~that ~~Centers, which produce loans primarily through affiliations with sites on~~ the ~~Internet. The~~ Company’s ~~broker~~will ~~channel~~complete ~~produces loans through its account executives throughout~~ the ~~United~~REIT ~~States (including purchasing a limited amount of closed loans from mortgage brokers on a continuous or “flow” basis) and by sourcing loans through telemarketing and the Internet~~conversion.

Net Income. The Company reported net income of $90.7 million for the year ended June 30, 2004 compared to a net income of $29.2 million during the year ended June 30, 2003. Net income during the year ended June 30, 2004 and 2003 includes income tax benefits of $17.7 million and $1.8 million, respectively. Net interest income and other income during the year ended June 30, 2004 was $312.8 million, an increase of $81.1 million over the $231.7 million reported for the year ended June 30, 2003. Operating expenses, which includes personnel, production, general and administrative expenses and residual interest write-downs, was $239.8 million, an increase of $3.7 million over the $236.1 million of operating expenses during the year ended June 30, 2003. During the year ended June 30, 2004, the Company did not report any non-operating income or non-operating expense items. During the year ended June 30, 2003, the Company recognized $31.7 million of debt extinguishment income which it classified as non-operating income.

Revolving Warehouse and Repurchase Facilities. During the year ended June 30, 2004, the Company increased its total capacity under its revolving warehouse and repurchase facilities to $1.9 billion of which $1.8 billion and $100.0 million was committed and uncommitted, respectively, from $900.0 million committed at June 30, 2003. Subsequent to June 30, 2004, the Company obtained one additional $500.0 million fully committed warehouse facility.

Quarterly Cash Preferred Stock Dividend. On August 25, 2004, the Company’s Board of Directors declared a cash dividend of approximately $2.9 million, to be paid on September 30, 2004 to holders of its preferred stock on September 15, 2004.

~~The following~~Mortgage ~~table~~Loan ~~presents~~Production ~~certain information about the Company’s mortgage loan production at or during the years ended June 30, 2003, 2002 and 2001:~~

			Year Ended June 30,
			2003		2002		2001
Retail loan production::
	Retail branch network:
		Total dollar amount	$	1,333,550,000	$	1,280,225,000	$	1,104,676,000
		Number of loans		11,641		14,374		14,571
		Average loan amount	$	114,556	$	89,065	$	75,813
		Average initial combined LTV		77.64%		76.37%		74.71%
		Weighted average interest rate (1)		7.73%		9.11%		10.33%
		Number of retail branch offices at period end		91		98		100
	National Loan Centers:
		Total dollar amount	$	461,897,000	$	329,650,000	$	75,875,000
		Number of loans		3,684		2,734		827
		Average loan amount	$	125,379	$	120,574	$	$91,747
		Average initial combined LTV		75.96%		74.92%		76.50%
		Weighted average interest rate (1)		7.50%		8.04%		9.48%
		Number of National Loan Centers at period end		2		2		1
	Total retail		$	1,795,447,000	$	1,609,875,000	$	1,180,551,000
		Number of loans		15,325		17,108		15,398
		Average loan amount	$	117,158	$	94,101	$	76,669
		Average initial combined LTV		77.21%		76.07%		74.83%
		Weighted average interest rate (1)		7.67%		8.89%		10.27%
		Number of retail branch offices and National Loan Centers		93		100		101
Broker loan production:
	Regional broker office network (2):
		Total dollar amount	$	2,325,706,000	$	1,510,254,000	$	1,135,754,000
		Number of loans		17,106		11,993		10,404
		Average loan amount	$	135,959	$	125,928	$	109,165
		Average initial combined LTV		79.99%		78.70%		78.71%
		Weighted average interest rate (1)		8.00%		9.03%		10.25%
		Number of regional broker offices at period end		4		4		5
	Telemarketing and Internet originations:
		Total dollar amount	$	325,027,000	$	122,380,000	$	55,325,000
		Number of loans		1,903		800		506
		Average loan amount	$	170,797	$	152,975	$	109,339
		Average initial combined LTV		80.83%		80.70%		78.86%
		Weighted average interest rate (1)		7.68%		9.06%		10.56%
	Total broker		$	2,650,733,000	$	1,632,634,000	$	1,191,079,000
		Number of loans		19,009		12,793		10,910
		Average loan amount	$	139,446	$	127,619	$	109,173
		Average initial combined LTV		80.10%		78.85%		78.89%
		Weighted average interest rate (1)		7.96%		9.04%		10.26%
		Number of regional broker offices at period end		4		4		5

The Company offers a variety of both fixed rate and hybrid/adjustable rate loans. The Company’s principal loan product is a subprime residential mortgage loan with a fixed principal amount and term to maturity which is secured by a first or second mortgage on the borrower’s residence with either a fixed or adjustable interest rate. Subprime residential mortgage loans are loans made to homeowners whose borrowing needs may not be met by traditional financial institutions due to credit exceptions or other factors and generally cannot be directly marketed to agencies such as Fannie Mae and Freddie Mac. During the year ended June 30, 2004, the Company originated its residential mortgage loans through its retail and wholesale production channels. The Company’s retail channel produces loans through its retail branch network and through the National Loan Centers serving borrowers throughout the United States. The Company’s wholesale channel produces loans through its account executives throughout the United States (including purchasing a limited amount of closed loans from mortgage brokers on a continuous or “flow” basis) and by sourcing loans through telemarketing and the Internet.

5 The following table presents certain information about the Company’s mortgage loan production at or during the years ended June 30, 2004, 2003 and 2002:

	Year Ended June 30,		~~Year Ended June 30,~~
				2003			2002		2001
	2004				2003			2002
Total loan production:
Retail loan production:
	Total dollar amount		$	4,446,180,000		$	3,242,509,000	$	2,371,630,000
Total dollar amount (in thousands)	$	2,400,493			$	1,795,447		$	1,609,875
Number of loans	~~Number of loans~~	18,841		~~34,334~~		15,325	~~29,901~~		2617,~~308~~108
Average loan amount	~~Average loan amount~~$	127,408	$	~~129,498~~	$	$117,158	~~108,441~~	$	9094,~~149~~101
	Average initial combined LTV			78.93%			77.47%		76.78%
Average initial LTV		76.93	%			77.21	%		76.07	%
	Weighted average interest rate (1)			7.84%			8.96%		10.27%
Weighted average interest rate(1)		7.27	%			7.67	%		8.89	%
Number of retail branch offices and National Loan Centers at period end		99				93			100
Wholesale loan production(2):
Total dollar amount (in thousands)	$	4,588,501			$	2,650,733		$	1,632,634
Number of loans		31,554				19,009			12,793
Average loan amount	$	145,417			$	139,446		$	127,619
Average initial LTV		81.59	%			80.10	%		78.85	%
Weighted average interest rate(1)		7.43	%			7.96	%		9.04	%
Number of regional wholesale operations centers at period end		5				4			4
Total loan production:
Total dollar amount (in thousands)	$	6,988,994			$	4,446,180		$	3,242,509
Number of loans		50,395				34,334			29,901
Average loan amount	$	138,684			$	129,498		$	108,441
Average initial LTV		79.99	%			78.93	%		77.47	%
Weighted average interest rate(1)		7.38	%			7.84	%		8.96	%

__________________

(1)	Calculated with respect to the interest rate at the time the mortgage loan was originated or purchased by the Company.

(2) Includes the purchase of closed loans on a flow basis from correspondents of $194.32 million, $2419.23 million and $4024.42 million during the years ended June 30, ~~2003~~2004, ~~2002~~2003 and ~~2001~~2002, respectively.

~~Production~~5 ~~Channels~~

~~Total Loan Production. Total~~The ~~loan production during~~following ~~the~~table ~~year~~summarizes ~~ended~~certain ~~June~~information ~~30, 2003 increased $1.2~~about ~~billion, or 37.5%,~~the toCompany’s ~~$4.4~~mortgage ~~billion over $3.2 billion of total~~ loan ~~production~~ production during the ~~year~~years ended June 30, ~~2002~~ ~~which~~2004, in turn, was a $870.9 million, or 36.7%, increase over the $2.4 billion during the year ended June 30, 2001. The increase in the Company's total loan origination volumes during the year ended June 30, 2003 ~~over production volumes during~~and ~~the comparable periods in~~ 2002 ~~and 2001~~(in ~~was~~thousands): due primarily to the continuation of the favorable mortgage interest rate environment and, to a lesser extent, to the issuance of new uniform underwriting guidelines throughout the Company designed to improve the Company's competitive position and to provide greater underwriting consistency among the retail and broker origination channels.

Retail Loan Channel. The Company originates home equity mortgage loans through its retail branch network and through its National Loan Centers, which produce loans primarily through affiliations with sites on the Internet. At June 30, 2003, the Company had 91 retail offices and two National Loan Centers serving borrowers throughout the United States. The Company continually monitors its retail operations and evaluates current and potential retail offices on the basis of selected demographic statistics, marketing analyses and other criteria developed by the Company.


	Year Ended June 30,
	2004		Percentage of Total		2003		Percentage of Total		2002		Percentage of Total
Purpose:
Cash-out refinance	$	4,222,127	60.4	%	$	2,822,770	63.5	%	$	1,999,125	61.6	%
Purchase money		2,326,930	33.3			1,044,557	23.5			585,355	18.1
Rate/term refinance		439,937	6.3			578,853	13.0			658,029	20.3

	$	6,988,994	100.0	%	$	4,446,180	100.0	%	$	3,242,509	100.0	%

Property type:
Single family residence	$	6,131,440	87.7	%	$	3,943,157	88.7	%	$	2,897,012	89.3	%
Multi-family residence		472,405	6.8			262,968	5.9			189,774	5.9
Condominiums		385,039	5.5			230,994	5.2			147,290	4.5
All other		110	NM			9,061	0.2			8,433	0.3

	$	6,988,994	100.0	%	$	4,446,180	100.0	%	$	3,242,509	100.0	%

~~The Company~~NM ~~generates applications~~Not ~~for~~Meaningful loans through its retail loan office network principally through a direct response marketing program, which relies primarily on the use of direct mailings to homeowners, telemarketing and yellow-page listings. The Company generates customer leads for the retail network in two ways: produced by the Company based upon Company derived models and commercially developed customer lists and generated by the local branch by the loan officers who are familiar with the local area. The Company's direct mail invites prospective borrowers to call the Company to apply for a loan. Direct mail is often followed up by telephone calls to potential customers. Contact with the customer is handled through the local branch. On the basis of an initial screening conducted at the time of the call, the Company's loan officer at the local retail loan office makes a preliminary determination of whether the customer and the property meet the Company's lending criteria. The loan officer may complete the application over the telephone, or schedule an appointment in the retail loan office most conveniently located to the customer or in the customer's home, depending on the customer's needs.

~~Retail Production.~~ The ~~Company's~~following ~~total~~table ~~retail~~shows ~~production was $1.8 billion during~~ the ~~year ended~~Company’s ~~June~~loan ~~30, 2003, an~~originations ~~increase~~by ~~of $185.6 million, or 11.5%, from the $1.6 billion~~geographic ofregion ~~total retail production reported~~ during the ~~year~~years ended June 30, ~~2002~~ ~~which~~2004, ~~in turn,~~2003 ~~was~~and ~~a $429.3~~2002 ~~million, or~~(dollars ~~36.4%, increase~~in ~~over~~thousands): ~~the $1.2 billion of total retail production reported during the year ended June 30, 2001.~~


	Year Ended June 30, 2004				Year Ended June 30, 2003				Year Ended June 30, 2002
State of Mortgage Property	Loans Funded		Percentage of Total		Loans Funded		Percentage of Total		Loans Funded		Percentage of Total
California	$	2,414,835	34.6	%	$	1,529,113	34.4	%	$	943,684	29.1	%
Florida		1,208,872	17.3			571,078	12.8			307,970	9.5
New York		511,642	7.3			281,167	6.3			150,845	4.7
Texas		473,088	6.8			340,896	7.7			278,573	8.6
Other Western States (AZ, CO, HI, ID, MT, NV, NM, OR, UT, WA, WY)		734,040	10.5			538,699	12.1			496,249	15.3
Midwestern States (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI)		621,881	8.9			504,786	11.4			554,074	17.1
Other Northeastern States (CT, DE, ME, MD, MA, NH, NJ, PA, RI)		604,197	8.6			378,363	8.5			273,095	8.4
Other Southeastern States (AR, GA, KY, LA, MS, NC, OK, SC, TN, VA, WV)		420,439	6.0			302,078	6.8			238,019	7.3

Total	$	6,988,994	100.0	%	$	4,446,180	100.0	%	$	3,242,509	100.0	%

Total Loan Production. Total loan production during the year ended June 30, 2004 increased $2.5 billion, or 57.2%, to $7.0 billion over $4.4 billion of total loan production during the year ended June 30, 2003 which, in turn, was a $1.2 billion, or 37.5%, increase over the $3.2 billion during the year ended June 30, 2002. The Company’s total loan production volumes increased during the year ended June 30, 2004 over production volumes during the year ended June 30, 2003 due to a combination of the Company’s adoption of new mortgage loan product guidelines, continued strong demand for subprime products in the generally favorable mortgage

~~Retail~~ ~~Branch~~interest ~~Network~~rate environment prevailing in the marketplace, growth in the number of sales staff in the retail channel, and improved geographic diversification in the wholesale channel. The increase in the Company’s total loan origination volumes during the year ended June 30, 2003 over production volumes during the year ended June 30, 2002 was due to a combination of the continuing favorable mortgage interest rate environment and, to a lesser extent, the issuance of new uniform underwriting guidelines throughout the Company designed to improve the Company’s competitive position and to provide greater underwriting consistency among the retail and wholesale origination channels.

~~During the year ended June~~Production ~~30, 2003, loan production through the Company's retail~~Channels branch network was $1.3 billion, an increase of $53.3 million, or 4.2%, over the $1.3 billion of retail branch network loan production reported during the year ended June 30, 2002, which, in turn, was a $175.5 million, or 15.9%, increase over the $1.1 billion of retail branch network production reported during the year ended June 30, 2001. Retail branch network production increased in dollar volume during the year ended June 30, 2003 from a year ago primarily due to a 28.6% increase in average loan size, partially offset by a 19.0% decrease in the number of loans originated. The increase in average loan size and decrease in number of units was due primarily to the Company's decision to close retail branches in certain smaller markets and open additional branch offices in certain larger markets. Although the Company decreased its total number of retail branch offices by seven during the year ended June 30, 2003, the Company believes the benefits of the reduction in operating costs related to these closed branches exceeds the cost associated with the loss of production from the closed branches. The Company will continue to evaluate its retail branch presence in the markets in which it operates to further enhance its mortgage loan production capabilities.

~~National~~Retail Loan Channel. The Company originates mortgage loans through its retail branch network and through its National Loan Centers serving borrowers throughout the United States. At June 30, 2004, the Company had 99 retail offices including the National Loan Centers. The Company continually monitors its retail operations and evaluates current and potential retail offices on the basis of selected demographic statistics, marketing analyses and other criteria developed by the Company.

The Company generates applications for loans through its 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. The Company' believes that its marketing efforts establish name recognition and serve to distinguish the Company from its competitors. The Company continually monitors the sources of its applications to determine the most effective methods and manner of marketing. The Company conducts extensive telemarketing sales through which a significant portion of its retail loan business is generated. The Company generates customer leads for the retail network based upon Company derived models and commercially developed customer lists. The Company’s ~~National~~direct mail ~~Loan~~invites ~~Centers~~prospective ~~obtain~~borrowers to call the Company to apply for a loan. The Company also generates leads through several commercially available Internet sites as well as through its own Internet web site "“Aames.net"”. On Customer leads, whether generated through direct mail or the Internet, are generally followed up by telephone calls to potential customers. On the basis of ~~information provided~~an byinitial screening conducted at the ~~customer~~time ~~through~~of the ~~Internet~~call, the Company’s loan officer makes a preliminary determination isof ~~made as to~~ whether the customer and the property meet the Company'’s lending criteria. ~~Once~~ The loan officer may complete the ~~Company receives~~application over the ~~lead~~telephone or by mail, aor ~~loan~~schedule ~~officer contacts~~an appointment in the ~~prospective customer~~ byretail ~~telephone~~loan ~~and~~office most conveniently located to the customer ~~completes~~ or in the ~~application~~customer’s ~~by telephone~~home, ordepending ~~mail~~on the customer’s needs.

~~Mortgage loan production from~~Whether in the ~~Company's~~ retail branches or in the National Loan Centers, ~~which primarily originate loans~~ ~~through affiliations with~~the ~~certain~~loan ~~Internet~~officer ~~sites~~assists the applicant in completing the loan application, ~~increased $132.2~~ arranges for an ~~million~~appraisal, or ~~40.1%,~~orders ~~to $461.9~~a ~~million during~~credit ~~the~~report ~~year~~from ~~ended June~~an 30independent, ~~2003~~ ~~over $329.7~~nationally ~~million during~~recognized credit reporting agency and performs various other tasks in connection with the ~~year~~completion ~~ended~~of ~~June~~the ~~30, 2002~~loan package. ~~National~~ ~~Loan~~The ~~Center mortgage~~ loan ~~production during~~ ~~the~~package ~~year~~is ~~ended~~underwritten ~~June~~for ~~30, 2001~~loan ~~was~~approval ~~$75.9~~on ~~million. As previously~~a ~~reported, on~~centralized ~~November~~basis. ~~1, 2001~~If the ~~Company~~loan ~~acquired certain assets~~package ~~and~~is approved, the ~~operating platform~~ ofloan ~~another mortgage lender~~is ~~which~~funded ~~became~~by the Company'. The Company’s ~~second National~~ ~~Loan Center~~loan ~~and~~officers ~~only~~are ~~partially~~trained ~~contributed~~to ~~loan~~structure ~~production~~loans ~~during~~that meet the ~~year~~applicant’s ~~ended~~needs ~~June~~while ~~30,~~satisfying ~~2002.~~the Company’s lending guidelines.

~~Whether~~Retail Production. The inCompany’s ~~the~~total retail ~~branches~~ orproduction inwas ~~the National Loan Centers, the~~$2.4 ~~loan officer assists~~ billion during the ~~applicant in completing the~~ ~~loan application~~year ended June 30, ~~arranges for~~ ~~an appraisal~~2004, ~~orders~~ aan ~~credit report~~increase ~~from~~of ~~an independent~~$605.0 million, ~~nationally recognized credit reporting agency~~ ~~and performs various other~~or ~~tasks~~33.7%, ~~in connection with~~over the ~~completion of~~ ~~the loan package~~$1. ~~The~~8 ~~loan~~billion ~~package~~of istotal ~~underwritten~~retail ~~for~~production ~~loan~~reported ~~approval~~during onthe ayear ~~centralized basis.~~ended IfJune ~~the~~30, ~~loan~~2003 ~~package~~which, isin ~~approved~~turn, ~~the loan~~ iswas ~~funded~~a $185.6 bymillion, ~~the~~or ~~Company~~11. ~~The Company's~~5%, ~~loan~~increase ~~officers~~over ~~are~~the ~~trained~~$1.6 tobillion ~~structure~~of ~~loans~~total ~~that~~retail ~~meet~~production ~~the~~reported ~~applicant's needs while~~during ~~satisfying~~ the ~~Company's~~year ~~lending~~ended ~~guidelines~~June 30, 2002.

~~The Company believes~~Retail ~~that~~production ~~its~~increased ~~marketing efforts establish~~in ~~name~~dollar ~~recognition~~volume ~~and~~during ~~serve to distinguish~~ the ~~Company from~~year ~~its competitors. The~~ended ~~Company continually monitors~~June ~~the sources~~30, of2004 ~~its applications~~over toa ~~determine~~year ~~the~~ago ~~most~~primarily ~~effective methods~~due ~~and~~to ~~manner~~a ~~of marketing~~22. ~~The~~9% ~~Company~~increase ~~conducts~~in ~~extensive telemarketing sales~~the ~~through~~number ~~which~~of aloans ~~significant portion of~~originated ~~its~~coupled ~~retail~~with ~~loan~~an ~~business is generated~~8. ~~Effective October~~7% ~~1, 2003,~~increase ain ~~national do-not-call registry which a consumer can join to prevent unwanted telemarketing calls will become operational pursuant to recent rules promulgated by~~ the ~~Federal Communications Commission~~ asaverage ~~required~~loan bysize. ~~the~~The ~~Telephone~~increase ~~Consumer~~in ~~Protection Act~~average ofloan ~~1991.~~size Inand ~~addition, a~~increase in number of ~~states~~ ~~have~~units ~~enacted~~was ~~laws~~primarily ~~regulating telemarketing sales~~due ~~activities, some~~to ~~of which establish do-not-call registries and~~ the Company’s ~~has~~decision ~~operated~~to ~~in compliance with~~expand ~~these~~existing ~~state~~branches ~~laws~~ and ~~do-not-call registries and~~ ~~will~~open benew ~~required~~branches. toThe ~~comply with~~Company increased ~~this~~its ~~new~~total ~~national registry~~number ~~and~~of ~~will~~retail ~~be prohibited from~~branches ~~placing unsolicited marketing~~by ~~calls~~six toduring ~~any~~the ~~consumer~~year ~~who~~ended ~~has placed their~~June ~~name~~30, ~~in the registry~~2004.

The Company will continue to evaluate its retail branch presence in the markets in which it operates to further enhance its mortgage loan production capabilities.

~~Independent Mortgage~~Wholesale ~~Broker~~ Channel. During the year ended June 30, ~~2003~~ 2004, the Company originated loans through 2 its network of approximately 4,~~970~~760 independent wholesale mortgage brokers, nothroughout ~~one~~the United States, none of which accounted for more than 5.0% of total ~~broker~~wholesale originations.

The ~~broker's role~~ isCompany toreviews ~~identify~~all ~~the applicant, assist~~potential inbrokers ~~completing the loan application, gather necessary information~~ and ~~documents, submit~~ ~~the application requesting~~must ~~the~~approve ~~interest~~each ~~rate~~potential broker ~~and~~prior ~~terms~~to ofconducting ~~the~~business ~~loan, and serve as the Company's liaison~~ with ~~the borrower through the lending process~~it. ~~The~~ ~~Company~~Pursuant ~~reviews~~to ~~and underwrites the applications submitted~~its ~~by the~~ broker inapproval ~~accordance with the Company's underwriting guidelines~~procedures, ~~approves~~ ~~or denies~~ the ~~application. If approved, the~~ Company ~~approves or~~ ~~counter offers~~requires ~~the requested interest rate~~a ~~and~~prospective ~~other terms~~broker ofto ~~the~~complete ~~loan~~a ~~and~~formal application, ~~upon acceptance~~ byverifies the ~~borrower~~broker’s ~~and satisfaction of~~licensing ~~all~~status ~~conditions imposed~~with byapplicable ~~the~~regulatory ~~Company~~agencies, ~~funds~~reviews ~~the~~industry ~~loan. Because brokers conduct their~~reports ~~own marketing and~~concerning ~~employ their~~broker ~~own personnel~~conduct ~~to complete loan applications~~ and ~~maintain contact~~prior ~~with borrowers~~history of complaints, ~~originating loans~~ ~~through~~and requires the ~~Company's~~ broker ~~network~~to ~~allows~~acknowledge ~~the~~and ~~Company~~agree to ~~increase its~~abide ~~loan~~by ~~volume without incurring~~ the ~~higher~~Company’s ~~marketing~~fair lending and ~~employee~~consumer ~~costs~~best ~~associated with~~practices ~~retail~~lending ~~originations~~policies.

~~Because mortgage~~The ~~brokers~~broker’s ~~generally~~role ~~submit~~is ~~loan~~to ~~files~~identify tothe ~~several prospective lenders~~applicant, assist in completing the ~~simultaneously~~loan application, ~~consistent underwriting~~ gather necessary information and documents, ~~quick~~ ~~response~~submit ~~times~~the application requesting the interest rate and ~~personal~~terms ~~service~~of ~~are critical~~the toloan, ~~successfully producing~~and ~~loans~~serve as the Company’s liaison with the borrower through ~~independent mortgage~~ ~~brokers~~the lending process. To The Company reviews and ~~meet~~underwrites ~~these requirements,~~ the applications submitted by the broker in accordance with the Company’s ~~strives~~underwriting toguidelines. ~~provide~~The ~~quick~~Company ~~response~~approves ~~time~~or todenies the ~~loan~~ application ~~(generally within 24~~ ~~hours). In addition,~~ or counter offers the ~~loans~~requested ~~are processed~~ interest rate and ~~underwritten in~~ ~~regional offices~~other terms of the loan and, if approved, upon acceptance by the borrower and ~~loan consultants~~satisfaction of all conditions imposed by the Company, funds the loan. ~~processors~~Because brokers conduct their own marketing and ~~underwriters~~ ~~are~~employ ~~available~~their own personnel to ~~answer questions~~complete loan applications and maintain contact with borrowers, ~~assist~~ inoriginating loans through the Company’s wholesale network allows the Company to increase its loan ~~application process~~ volume without incurring the higher marketing, employee and ~~facilitate~~occupancy ~~ultimate~~costs ~~funding~~associated ofwith ~~the~~retail ~~loan~~originations.

~~Broker Production. The~~Because ~~Company's~~mortgage ~~total~~brokers ~~broker~~generally submit loan ~~production~~files ~~increased $1.1~~to ~~billion, or~~several prospective ~~62.4%~~lenders simultaneously, consistent underwriting, quick response times and personal service are critical to ~~$2.7~~successfully ~~billion during~~producing ~~the~~loans ~~year~~through ~~ended~~independent ~~June~~mortgage 30brokers. To meet these requirements, ~~2003~~ ~~over~~the ~~$1.6~~Company ~~billion~~strives ofto ~~total~~provide quick response ~~broker~~time to the loan ~~production~~application ~~during~~(generally ~~the~~within ~~year~~24 ~~ended~~hours). ~~June~~In 30addition, ~~2002 which,~~ the loans are processed and underwritten in ~~turn~~regional wholesale operations centers, ~~was~~ ~~an increase of $441.6~~and ~~million~~loan consultants, or ~~37.1%~~loan processors and underwriters are available to answer questions, ~~over~~ assist in the ~~$1.2~~ ~~billion reported during~~loan application process and facilitate ultimate funding of the ~~year~~ ~~ended June~~loan. ~~30,~~The ~~2001~~Company believes its wholesale processes enable it to fund loans faster than many of the Company’s competitors.

The Company uses telemarketing and the Internet to increase its wholesale loan production and further penetrate the wholesale subprime mortgage loan market through its “Broker Direct” program. Through Broker Direct, the Company makes outbound telemarketing calls to brokers that have been inactive for the past 90 ~~Office~~days ~~Network~~and brokers who are not currently doing business with the Company or are outside the geographic areas served by the loan officers. The Company also obtains leads through its internet web site “AamesDirect.com.” The Company expects “Broker Direct” to continue to generate an increasing dollar amount and percentage of wholesale loan production in the coming quarters as general market acceptance by brokers of broker telemarketing and Internet use grows and the Company continues to enhance its “Broker Direct” capabilities.

~~During the~~Wholesale ~~year~~Production. The ~~ended~~Company’s ~~June~~total ~~30, 2003, mortgage~~wholesale ~~loan~~ production ~~from the Company's regional broker office network~~ increased $~~815~~1.59 ~~million~~billion, or 5473.01%, to $24.36 billion during the year ended June 30, 2004 over the $12.57 billion ~~reported~~ of total wholesale production during the year ended June 30, ~~2002 which, in~~ ~~turn,~~2003. ~~was~~In ~~an increase~~November ~~of $374.5 million~~2003, or ~~33.0%, from~~ the ~~$1.1~~ ~~billion of~~Company added a regional ~~broker office~~ ~~network production~~wholesale ~~reported~~operations ~~during~~center in the ~~year~~Northeastern ~~ended~~United ~~June 30~~States, ~~2001~~which enabled it to increase its production in that region.

~~Broker~~The Company’s total wholesale loan production increased $1.1 billion, or ~~Telemarketing~~62.4%, ~~and~~to ~~Internet~~$2.7 billion during the year ended June 30, 2003 over $1.6 billion of total wholesale loan production during the year ended June 30, 2002.

~~The Company~~Underwriting uses telemarketing and the Internet to increase its broker loan production and further penetrate the non-conforming home equity broker market through its "Broker Direct" program. Through Broker Direct, the Company makes outbound telemarketing calls to brokers that have been inactive for the past 90 days and brokers who are not currently doing business with the Company or are outside the geographic areas served by the loan officers. The Company also obtains leads through its internet web site "Aamesdirect.com".

~~Broker mortgage~~The ~~loan~~Company ~~production~~underwrites ~~through telemarketing~~each ~~and~~mortgage ~~the~~loan ~~Internet~~that ~~was $325.0~~it ~~million during~~originates ~~the~~in ~~year~~both ~~ended June~~its ~~30, 2003,~~wholesale anand ~~increase~~retail ~~of $202.6~~channels ~~million, over~~in ~~the $122.4 million~~accordance ofwith ~~broker telemarketing~~its ~~and~~underwriting ~~Internet production reported during the year ended~~guidelines. ~~June~~The ~~30, 2002.~~Company ~~Broker~~has ~~mortgage~~developed ~~loan~~underwriting ~~production through telemarketing~~processes and ~~the~~criteria ~~Internet was $55.3~~that ~~million during~~it ~~the~~believes ~~year ended June 30, 2001. The Company expects "Broker Direct" to continue to~~ generate ~~an increasing dollar~~quality ~~amount~~loans and ~~percentage~~ ofgive ~~broker~~it ~~loan production in~~ the ~~coming quarters~~ability asto ~~general~~approve ~~market acceptance by brokers of broker telemarketing~~ and ~~Internet use~~ ~~grows~~fund ~~and~~loans ~~the Company continues to enhance its "Broker Direct" capabilities~~quickly. Its underwriting

Underwriting. The Company generally underwrites the loans it originates to its underwriting guidelines and, to a lesser extent, to the underwriting guidelines of its investors in the secondary markets. The Company's underwriting guidelines are designed to assess the borrower's creditworthiness and the adequacy of the real property as collateral for the loan. The borrower's creditworthiness is assessed by examination of a number of factors, including calculation of debt-to-income ratios, which is the sum of the borrower's monthly debt payments divided by the borrower's monthly income before taxes and other payroll deductions, an examination of the borrower's credit history and credit score through standard credit reporting bureaus, and by evaluating the borrower's payment history with respect to existing mortgages, if any, on the property.

~~Credit~~ ~~scores~~guidelines are ~~obtained by~~ ~~the Company~~designed ~~in connection with mortgage loan applications~~ to help ~~assess~~it ~~a borrower's creditworthiness. Credit scores~~evaluate are obtained from credit reports provided by various credit reporting organizations, each of which may employ differing computer models and methodologies. The credit score is designed to assess a borrower'’s ~~credit history~~ ~~at a single point in time, using objective information currently on file for the borrower at a particular~~ credit ~~reporting organization. Information~~ ~~utilized to create a credit score may include, among other things, payment~~ history, ~~delinquencies~~ ~~on accounts~~capacity, ~~level~~ ofwillingness ~~outstanding indebtedness, length of credit history, types of credit,~~ and ~~bankruptcy experience. Credit~~ability ~~scores range from approximately 400~~ to ~~approximately~~repay ~~800,~~the ~~with higher scores indicating an individual with a more favorable credit history compared to an individual with a lower score. However~~loan, a ~~credit~~and ~~score purports only~~the tovalue beand aadequacy ~~measurement~~ of the ~~relative degree~~collateral. ofThe ~~risk~~Company areviews ~~borrower represents to~~the ~~a lender; that is, a~~ borrower’s ~~with~~credit ahistory ~~higher~~from ~~score~~all ~~is statistically expected~~three tonationally berecognized ~~less~~credit ~~likely to default in payment than a borrower with a lower score~~bureaus. ~~Moreover, credit~~ ~~scores~~In ~~were developed to indicate a level of default probability over the period of the next two-years~~addition, ~~which~~ ~~does not correspond to~~ the ~~life~~Company ofreviews ~~a mortgage loan. Furthermore,~~ credit scores ~~were not~~derived ~~developed specifically for~~from ~~use~~the inborrower’s ~~connection with mortgage loans, but for consumer loans in general. Therefore, a~~ credit ~~score~~history ~~does~~by ~~not~~one ~~take into consideration the differences between mortgage loans and consumer loans generally~~ or ~~the specific characteristics of~~more ~~the related mortgage loan including, for~~nationally ~~example, the~~recognized ~~LTV or CLTV (defined below), the collateral for the mortgage loan, or the debt to income ratio. There can be no assurance that the~~ credit ~~scores~~scoring ~~of the mortgagors will be accurate predictors of the likelihood of repayment of the related mortgage loans~~models.

AnThe Company’s ~~assessment of~~underwriting ~~the adequacy of~~policy ~~the~~is ~~real property as collateral for~~to analyze the ~~loan~~overall ~~is primarily based~~situation ~~upon an appraisal~~ of the ~~property~~ borrower and ~~a calculation of the loan-~~to~~-value ratios~~ oftake ~~the~~into ~~loan~~account ~~applied~~compensating ~~for~~factors ~~(the~~that ~~"LTV")~~may ~~and~~be used to offset certain areas of ~~all mortgages existing~~weakness. onThese ~~the~~compensating ~~property, including~~factors include the ~~loan~~borrower’s ~~applied~~history ~~for,~~of ~~(the~~payments ~~"combined~~on ~~loan-to-value~~his ~~ratio"~~prior ormortgage, ~~"CLTV")~~credit toscores, ~~the appraised~~proposed ~~value~~reductions ofin the ~~property~~borrower’s ~~at the~~debt ~~time~~service ~~of origination. Appraisers determine~~expense, aemployment ~~property's value~~stability, bynumber ~~reference~~of toyears ~~the sales~~in ~~prices~~residence ~~of comparable properties recently sold, adjusted~~and tonet ~~reflect~~disposable ~~the condition~~income. ofBased ~~the~~upon ~~property~~this ~~as determined through~~analysis, ~~inspection. As~~the aCompany ~~lender~~can ~~that~~determine ~~generally~~loan terms and ~~specializes~~conditions into produce loans ~~made~~that toit ~~credit~~believes ~~impaired~~are ~~borrowers~~appropriately priced, ~~the~~ ~~Company~~meet ~~makes home equity mortgage loans~~its ~~to borrowers with credit histories or~~quality ~~other factors that might disqualify them~~standards, ~~from consideration for~~and aare ~~loan from traditional financial institutions~~profitable. The Company'’s underwriting ~~guidelines for such credit-impaired borrowers~~ ~~may,~~process inand ~~certain~~guidelines ~~instances, allow~~require ~~for~~a ~~higher~~rigorous ~~combined loan-to-value~~application ~~ratios than~~review ~~would~~and ~~typically be~~documentation ~~the~~designed ~~case~~to determine if the borrower ~~could~~’s ~~qualify~~ability ~~for~~to arepay the loan ~~from a traditional financial institution,~~ and atmaximize ~~generally higher interest rates than~~ the ~~borrower~~ ~~could~~value ~~qualify~~of ~~for~~its ~~from~~mortgage ~~a traditional financial institution~~loans.

~~The underwriting~~Underwriting Personnel. All of athe ~~mortgage~~Company’s ~~loan~~loans toare beunderwritten ~~originated~~by orits ~~purchased~~on-staff byunderwriting ~~the~~personnel. The Company ~~generally~~ ~~includes~~does anot ~~review~~delegate ~~of the~~underwriting ~~completed~~authority ~~loan~~to ~~package, which~~any ~~includes~~broker ~~the~~or ~~loan application, a~~third ~~current appraisal, a~~party. ~~preliminary~~The ~~title~~Company ~~report~~regularly ~~and~~trains ~~a credit report. All~~its loan ~~applications~~ originators on emerging trends in production, and ~~all~~believes ~~closed~~that ~~loans offered~~its tooriginators ~~the~~and ~~Company~~underwriters ~~for~~are ~~purchase must~~highly bequalified ~~approved by~~and ~~the Company~~experienced inand are ~~accordance~~familiar with its underwriting ~~criteria~~guidelines. The Company ~~regularly reviews~~believes that its underwriting ~~guidelines~~ ~~and~~process, ~~makes changes~~the ~~when~~experience ~~appropriate~~of toits ~~respond~~loan ~~to market conditions~~originators and branch managers, ~~the~~ ~~performance~~its ofinformation ~~loans~~systems ~~representing~~and aits ~~particular~~rigorous ~~loan~~quality ~~product or changes~~control inprocess ~~laws~~ensure orthe ~~regulations~~continued quality of its loans.

~~The~~Underwriting Guidelines. A critical function of the Company’s ~~requires~~underwriting ~~title~~process ~~insurance~~is ~~coverage~~to ~~issued~~identify onthe anlevel ~~American~~of ~~Land~~credit ~~Title~~risk ~~Association (or~~associated ~~similar)~~with ~~form~~each ofapplicant ~~title~~for ~~insurance~~a onmortgage ~~all~~loan. ~~residential~~The ~~properties~~Company ~~securing~~has established six principal classifications, ~~mortgage~~with ~~loans~~respect itto ~~originates~~the orcredit ~~purchases.~~profile ~~The~~of ~~loan~~potential ~~originator~~borrowers, and ~~its~~has ~~assignees are~~assigned ~~generally~~a ~~named~~rating asto ~~the~~each ~~insured~~loan based upon these classifications. ~~Title~~The ~~insurance~~Company ~~policies~~assigns ~~indicate~~credit ~~the~~grades ~~lien~~by analyzing mortgage payment history, consumer credit history, credit score, ~~position~~bankruptcy ofhistory ~~the~~and ~~mortgage~~debt-to-income ratio. If an individual loan ~~and~~application ~~protect~~does not meet the Company’s ~~against~~formal ~~loss~~written ifunderwriting guidelines, the ~~title or~~Company’s ~~lien~~underwriters ~~position~~can ismake ~~not~~underwriting asexceptions ~~indicated~~up to certain limits within its formal exception policies and approval authorities. The ~~applicant~~Company ismay, ~~also~~from ~~required~~time to ~~maintain~~time, apply underwriting criteria that are either more stringent or more flexible depending upon the economic conditions of a particular geographic market. For the ~~hazard~~nine ~~and~~months ended June 30, in2004, ~~certain~~during ~~instances~~which the Company’s current underwriting guidelines, ~~flood~~called ~~insurance~~Super Aim, were in aneffect, ~~amount~~71.1% ~~sufficient~~of ~~to cover~~the loans the ~~new~~Company ~~loan~~originated ~~and~~were ~~any~~classified ~~senior~~as ~~mortgage~~A+, ~~subject~~13.5% toas ~~the~~A, ~~maximum~~5.6% ~~amount~~as ~~available under~~A-, ~~the~~6.4% ~~National~~as ~~Flood~~B, ~~Insurance~~2.7% ~~Program~~as C and 0.7% as C-.

~~Set~~Credit scores are obtained by the Company in ~~forth~~connection ~~below~~with ismortgage loan applications to help assess a ~~general~~borrower’s ~~description~~creditworthiness. Credit scores are obtained from credit reports provided by various credit reporting organizations, each of ~~the~~which ~~different~~may ~~underwriting~~employ ~~guidelines~~differing computer models and methodologies. The credit score is designed to ~~provide~~assess ana ~~overview~~borrower’s ofcredit history at a single point in time, using objective information currently on file for the ~~general~~borrower at a particular credit ~~considerations~~reporting organization. Information utilized to bycreate ~~the~~a ~~Company~~credit score may include, among other things, payment history, delinquencies on accounts, level of outstanding indebtedness, length of credit history, types of credit, and isbankruptcy ~~not~~experience. ~~intended~~Credit scores generally range from approximately 400 to approximately 800, with higher scores indicating an individual with a more favorable credit history compared to an individual with a lower score. However, a credit score purports only to be a ~~detailed~~measurement ~~explanation~~of the relative degree of ~~all~~risk a borrower represents to a lender; that is, a borrower with a higher score is statistically expected to be less likely to default in payment than a borrower with a lower score. Moreover, credit scores were developed to indicate a level of ~~considerations~~default ~~analyzed~~probability byover the ~~Company~~period of the next two years, which does not correspond to the life of a mortgage loan. Furthermore, credit scores were not developed specifically for use in ~~underwriting~~connection with mortgage loans, but for consumer loans in general. Therefore, a credit score does not take into consideration the differences between mortgage loans and consumer loans generally or the specific characteristics of the related mortgage loan including, for example, the LTV or CLTV (defined below), the collateral for the mortgage loan, or the debt to income ratio. There can be no assurance that the credit scores of the mortgagors will be accurate predictors of the likelihood of repayment of the related mortgage loans.

~~‘Super Aim’~~An ~~Underwriting Guidelines. Subsequent~~assessment toof ~~June~~the ~~30,~~adequacy ~~2003,~~of the ~~Company~~real ~~has adopted~~property ~~new~~as ~~guidelines, which it~~collateral for the loan is inprimarily ~~the~~based ~~process~~upon an appraisal of ~~implementing in~~ ~~its wholesale~~ the property and ~~retail channels. The~~a ~~Super~~calculation ~~Aim guidelines are~~of ~~intended~~the loan-to ~~replace~~-value ratios of the ~~Traditional, Credit~~ ~~Score~~loan ~~and~~applied ~~Mortgage Only guidelines into~~for a(the ~~single~~LTV) ~~set~~and of ~~uniform guidelines that~~all ~~more appropriately price~~mortgages ~~for~~existing on the ~~credit risk. These guidelines require~~ aproperty, ~~minimum credit score~~including ofthe ~~500~~loan applied for, ~~although~~ a(the ~~higher credit~~combined ~~score~~loan-to-value isratio ~~often required~~or CLTV) to ~~qualify~~the ~~for~~appraised value of the ~~maximum~~property ~~LTV~~at ~~under~~ the ~~program~~time of origination. ~~The~~ ~~following chart generally outlines~~ Appraisers determine a property’s value by reference to the ~~parameters~~sales prices of ~~the~~comparable ~~credit~~properties ~~grades~~recently sold, adjusted to reflect the condition of the ~~Company's~~property ~~Super~~as ~~Aim underwriting~~determined ~~guidelines~~through inspection.

	Credit Grade
	"A+"	"A"	"A-"	"B"	"C"	"C-"
12 Month Mortgage History	0 x 30	1 x 30	3 x 30.	1 x 60	1 x 90	1 x 120
Minimum Credit Score	500	500	500.	500	500	500
BK/NOD/FC(1) Seasoning	24 months	24 months	24 months	18 months	12 months	No current BK/NOD
Full Documentation, Owner Occupied Max LTV	80%; 95% for credit score of 550 or above	80%; 95% for credit score of 550 or above	80%; 95% for credit score of 550 or above	80%; 90% for credit score of 550 or above	75%; 85% for credit score of 550 or above	70%
Stated Owner Occupied Max LTV	80%; 90% for credit score of 580 or above	80%; 90% for credit score of 620 and above	75%; 80% for credit score of 525 and above	75%; 80% for credit score of 550 and above	70%; 75% for credit score of 550 or above	Not available

The Company requires title insurance coverage issued on an American Land Title Association (or similar) form of title insurance on all residential properties securing mortgage loans the Company originates or purchases. The loan originator and its assignees are generally named as the insured. Title insurance policies indicate the lien position of the mortgage loan and protect the Company against loss if the title or lien position is not as indicated. The applicant is also required to maintain hazard and, in certain instances, flood insurance, in an amount sufficient to cover the new loan and any senior mortgage, subject to the maximum amount available under the National Flood Insurance Program.

~~_________________~~As a lender that generally specializes in loans made to credit impaired borrowers, the Company makes home equity mortgage loans to borrowers with credit histories or other factors that might disqualify them from consideration for a loan from traditional financial institutions. The Company’s underwriting guidelines for such credit impaired borrowers may, in certain instances, allow for higher combined loan-to-value ratios than would typically be the case if the borrower could qualify for a loan from a traditional financial institution, and at generally higher interest rates than the borrower could qualify for from a traditional financial institution.

The underwriting of a mortgage loan to be originated or purchased by the Company generally includes a review of the completed loan package, which includes the loan application, a current appraisal, a preliminary title report and a credit report. All loan applications and all closed loans offered to the Company for purchase must be approved by the Company in accordance with its underwriting criteria. The Company regularly reviews its underwriting guidelines and makes changes when appropriate to respond to market conditions, the performance of loans representing a particular loan product or changes in laws or regulations.

Current Underwriting Guidelines. The Company’s current underwriting guidelines, called Super Aim, became effective in October 2003 and generally require a minimum credit score of 500, although a higher credit score is often required to qualify for the maximum LTV under the program. The following chart generally outlines the parameters of the credit grades of the Super Aim underwriting guidelines.

“A+”

“A”

“A-”

“B”

“C”

“C-”

12 Month Mortgage History

0 X 30

1 X 30

3 X 30

1 X 60

1 X 90

1 X 120

Minimum Credit Score

500

BK/NOD/FC(1) Seasoning

24 months

18 months

12 months

No current BK/NOD

Full Documentation, Owner Occupied Max LTV

80%; 95% for credit score of 550 or above

80%; 90% for credit score of 550 or above

75%; 85% for credit score of 550 or above

70%

Limited Documentation, Owner Occupied Max LTV

80%; 90% for credit score of 550 and above

80%; 85% for credit score of 550 and above

75%; 80% for credit score of 550 and above

70%

Stated Income, Owner Occupied Max LTV

80%; 90% for credit score of 580 or above

80%; 90% for credit score of 620 and above

75%; 80% for credit score of 525 and above

75%; 80% for credit score of 550 and above

70%; 75% for credit score of 550 or above

Not available

(1)	Bankruptcy, notice of default and foreclosure

During the fiscal year ended June 30, 2003, the Company’s traditional retail branch office network, National Loan Centers and the independent mortgage broker channel employed unified underwriting guidelines. These guidelines have three separate programs or approaches to underwriting and pricing. They are the Traditional Underwriting Guidelines, Credit Score Guidelines, and the Mortgage Only Guidelines.

• the "traditional" underwriting program, under which the borrower's mortgage credit and consumer credit are each scored and weighted to determine the overall credit grade of the borrower with the borrower then being assigned an "A" through "C-" credit grade, and

• The "credit score" program under which the borrower's credit score as reported by various reporting agencies, the mortgage payment history, and the loan-to-value ratio, known as the LTV, of the loan are used to determine whether the borrower qualifies for the loan requested and the appropriate grade for that loan.

~~“Traditional” Underwriting~~The ~~Guidelines. Under the traditional underwriting guidelines, the~~ Company’s ~~assigns~~mortgage aprograms ~~credit~~include ~~grade~~several ~~(A,~~levels ~~A-, B, C and C-) to each loan it originates depending on the risk profile~~ of ~~the~~documentation ~~loan,~~used ~~with the higher credit grades exhibiting a lower risk profile and the lower credit grades exhibiting increasingly higher risk profiles. Generally, the higher credit grade loans have higher loan-~~to~~-value~~ ~~ratios~~verify ~~and carry a lower interest rate. The following chart generally outlines~~ the ~~parameters of the credit grades of the Company~~ borrower’s ~~traditional~~ ~~underwriting~~income: ~~program.~~

		Credit Grade
		"A"	"A-"	"B"	"C"	"C-"
General Repayment		Has good credit.	Has good credit but might have some minor delinquency.	Generally good mortgage pay history but may have marginal consumer credit history.	Marginal credit history which is offset by other positive attributes.	Marginal credit history not offset by other positive attributes.
Existing Mortgage Loans		Maximum of one 30 day late* in past 12 months	No more than 59 days late at closing and a maximum of two 30 day lates in the past 12 months.	No more than 89 days late at closing and a maximum of four 30 day lates in the past 12 months or one 60 day late and two 30 day lates.	Can have six 30 day lates and two 60 day lates or one 90 day late in the past 12 months; currently not more than 119 days late at closing.	No more than 149 days delinquent in the past 12 months. Can have multiple 90 day lates or one 120 day late in the past 12 months.
Consumer Credit		Consumer credit is good in the last 12 months. Up to 25% of credit report items derogatory with no 60 day or more lates.	Consumer credit is good in the last 12 months. Up to 35% of credit report items derogatory with no 90 day or more lates..	Consumer credit must be satisfactory in the last 12 months. Up to 40% of credit report items derogatory.	Consumer credit is fair in the last 12 months. The majority of the credit is not currently delinquent. Up to 50% of credit report items derogatory.	Consumer credit is poor in the last 12 months with currently delinquent accounts. Up to 60% of credit report items derogatory.
		Generally, requires a minimum credit score of 600.	Generally, requires a minimum credit score of 580.	Generally, requires a minimum credit score of 560.	Generally, requires a minimum credit score of 530.	Generally, requires a minimum credit score of 500.
Bankruptcy		2 years since discharge or dismissal with reestablished "A" credit.	2 years since discharge or dismissal with reestablished "A" credit.	1 year since discharge with reestablished "B" credit or 18 months since discharge without reestablished credit.	Bankruptcy filing 12 months old, discharged or dismissed prior to application	Bankruptcy filed within last 12 months and discharged or dismissed prior to application.
Maximum Loan to Value Ratio:
	Owner Occupied	Generally 90% for a 1 to 4 family dwelling.	Generally 90% for a 1 to 4 family dwelling.	Generally 80% for a 1 to 4 family dwelling.	Generally 75% for a 1 to 4 family dwelling.	Generally 70% for a 1 to 4 family dwelling.
	Non-Owner Occupied	Generally 80% for a 1 to 4 family dwelling.	Generally 75% for a 1 to 4 family dwelling.	Generally 70% for a 1 to 4 family dwelling.	Generally 65% for a 1 to 4 family dwelling.	Generally 65% for a 1 to 4 family dwelling.

•

Full Documentation: The highest level of income documentation. Generally a stable, two-year history of the income is required. A wage-earner may document income by any of the following: a verification of employment; the borrower’s most recent year’s W-2 forms and a current pay-stub reflecting year-to-date income; the borrower’s most recent year’s IRS Form 1040’s and a year-to-date statement of profit-and-loss; or the borrower’s most recent 24-month personal bank statements showing average monthly deposits sufficient to support the qualifying income. A self-employed borrower may document income with either the most recent two-years federal tax returns or bank statements.

* A “rolling” late in which a borrower becomes 30 or 60 days delinquent and makes subsequent mortgage payments but remains consistently 30 or 60 days delinquent as the case may be is considered one 30-day late or 60-day late for underwriting purposes.

“Credit Score” Program. Under the Credit Score program, the Company uses the credit score of the borrower, the mortgage payment history, and the LTV to determine the interest for the borrower. The minimum acceptable credit score under the Credit Score program is 550. Borrowers with lower credit scores and more mortgage delinquencies generally qualify for lower maximum LTVs and are charged higher interest rates than borrowers with higher credit scores and better mortgage payment histories. Most of the underwriting guidelines for the Credit Score program are the same as the Traditional underwriting program other than the following listed below:

	Credit Grade
	"A"	"A-"	"B"	"C"	"C-"
Maximum LTV for Full Doc on 1 and 2 Unit Properties	Owner Occupied to 95%, N/O/O to 85% *	Owner Occupied to 95%, N/O/O to 85% *	Owner Occupied to 90%, N/O/O to 80% *	Owner Occupied to 85%, N/O/O to 80% **	Owner Occupied to 80%, N/O/O to 75% **
Maximum LTV for Stated Doc on 1 and 2 Unit Properties	Owner Occupied to 90%, N/O/O to 80% **	Owner Occupied to 85%, N/O/O to 80% **	Owner Occupied to 80%*, N/O/O to 70%	Owner Occupied to 80% **, N/O/O to 65%	Owner Occupied to 75% **, N/O/O to 65%

* 3-4 Unit Maximum LTVs are 5% less

** 3-4 Unit Maximum LTVs are 10% less

“Mortgage Only” Program. This program is generally aimed at customers that have not paid their consumer credit in a timely basis, but consistently pay their mortgage. The minimum credit score for the mortgage only program is 500. Borrowers with credit scores below 500 are not eligible under any of the Company’s underwriting guidelines. Borrowers using the mortgage only program are not eligible for junior financing with the Company. The main elements of these guidelines are illustrated below.

	Credit Grade
	"A+"	"A"	"A-"
12 Month Mortgage History	0x30	2x30	3x30
Minimum Credit Score	550	500	500
NOD/FC Seasoning	None Ever	None Ever	2 Years
Bankruptcy Seasoning	2 Years since Discharge of Chapter 17 or Chapter 13 filing	12 Years since Discharge of Chapter 17 or Chapter 13 filing	2 Years since Discharge of Chapter 17 or Chapter 13 filing
Maximum Loan Amount	$300,000	$300,000	$250,000
Maximum LTV	85%	80%	75%

The Company's mortgage programs include several levels of documentation used to verify the borrower's income:

• Full Documentation: The highest level of income documentation. Generally a stable, two-year history of the income is required. A wage-earner may document income by any of the following: a verification of employment; the borrower's most recent two-years W-2 forms and a current pay-stub reflecting year-to-date income; the borrower's most recent two-years IRS Form 1040's and a year-to-date statement of profit-and-loss; or the borrower's most recent 24-months personal bank statements showing average monthly deposits sufficient to support the qualifying income. A self-employed borrower may document income with either the most recent two-years federal tax returns or bank statements.

•

Limited Documentation: For borrowers who have less than a two-year history of stable income or who otherwise cannot meet the requirements of the full documentation program. This program generally requires a six-month history of stable income, together with six-month personal bank statements to support their qualifying income.

• Stated Income: The borrower'’s income used to qualify for the loan is taken from the borrower'’s signed application and must be reasonable for the borrower'’s line of work or profession. All self-employed borrowers must provide satisfactory evidence of existence of the business and show a history of 2two years employment in the same profession on the loan application.

The ~~following~~ ~~tables~~Super ~~present~~Aim ~~certain~~underwriting ~~information~~guidelines ~~about~~became effective October 1, 2003. The following table sets forth the Company’s ~~total~~ loan production under the Super Aim guidelines during the ~~years~~nine months ended June 30, ~~2003,~~2004 ~~2002~~(unaudited and ~~2001~~dollars in thousands):


Credit Grade	Aggregate Dollar Amount of Loans		% of Total		Average Credit Score	Weighted Average Interest Rate(1)		Weighted Average Loan-to-Value Ratio
A+	$	3,905,393	71	%	626	7.2	%	81	%
A		739,692	13		592	7.4		80
A-		306,413	6		564	7.7		78
B		352,582	6		558	8.1		76
C		149,622	3		550	8.8		71
C-		37,483	1		541	9.9		69
D		400	NM		504	7.7		74

Total	$	5,491,585	100	%	611	7.4	%	80	%

Because the Company’s underwriting guidelines prior to October 1, 2003 were different from the Super Aim guidelines, information concerning loan production for prior periods by credit grade would not be meaningful.

The following table presents certain information about the Company’s loan production by credit score range during the nine months ended June 30, 2004 (unaudited and dollars in thousands):


Credit Score Range	Current Loan Balance		% of Total		Weighted Average Interest Rate(1)		Weighted Average Loan-to-Value Ratio
540 and below	$	711,028	13	%	8.2	%	76	%
541-580		1,033,743	19		7.7		81
581-620		1,282,295	23		7.2		81
621-660		1,384,199	25		7.1		81
661-700		694,436	13		6.9		81
Above 700		373,286	7		6.8		79
Not available		12,598	NM		8.4		86

	$	5,491,585	100	%	7.4	%	80	%

The following tables present certain information about the Company’s total loan production by credit score range during the years ended June 30, 2004, 2003 and 2002 (dollars in thousands):

LOAN ORIGINATIONS DURING THE YEAR ENDED JUNE 30, 2004


Credit Score Range	Aggregate Dollar Amount of Loans		% of Total		Weighted Average Interest Rate(1)		Weighted Average Loan-to-Value Ratio
540 and below	$	891,898	13	%	8.2	%	75	%
541-580		1,287,346	18		7.8		81
581-620		1,612,768	23		7.3		81
621-660		1,756,147	25		7.2		81
661-700		915,757	13		6.9		81
Above 700		509,928	8		6.7		78
Not available		15,150	N/M		8.6		86

Total	$	6,988,994	100	%	7.4	%	80	%

LOAN ORIGINATIONS DURING THE YEAR ENDED JUNE 30, 2003

All Underwriting Programs Combined


Credit Score Range	Aggregate Dollar Amount of Loans		% of Total		Weighted Average Interest Rate(1)		Weighted Average Loan-to-Value Ratio
540 and below	$	543,670	12	%	8.7	%	74	%
541-580		776,959	18		8.5		78
581-620		1,020,023	23		8.0		81
621-660		1,153,490	26		7.7		81
661-700		574,698	13		7.4		80
Above 700		371,272	8		7.1		77
Not available		6,068	NM		9.2		74

Total	$	4,446,180	100	%	7.9	%	79	%

Credit Grade	Dollar Amount of Loan		% of Total		Weighted Average Combined Loan to Value		Weighted Average Interest Rate(1)
A	$	3,093,532,000	70	%	81	%	7.6	%
A-		541,806,000	12		80		8.1
B		529,499,000	12		76		8.5
C		204,043,000	5		72		9.4
C-		63,522,000	1		70		9.9
D(2)		13,778,000	NM		64		10.8
Total	$	4,446,180,000	100	%	79	%	7.8	%

LOAN ORIGINATIONS DURING THE YEAR ENDED JUNE 30, 2002

All Underwriting Programs Combined


Credit Score Range	Aggregate Dollar Amount of Loans		% of Total		Weighted Average Interest Rate(1)		Weighted Average Loan-to-Value Ratio
540 and below	$	322,829	10	%	10.0	%	73	%
541-580		632,264	20		9.6		76
581-620		812,975	25		9.1		79
621-660		801,811	25		8.6		79
661-700		399,755	12		8.2		77
Above 700		264,715	8		7.8		74
Not available		8,160	NM		9.9		75

Total	$	3,242,509	100	%	9.0	%	77	%

Credit Grade	Dollar Amount of Loan		% of Total		Weighted Average Combined Loan to Value		Weighted Average Interest Rate(1)
A	$	1,340,729,000	41	%	78	%	8.3	%
A-		879,435,000	27		80		8.9
B		653,078,000	20		76		9.4
C		254,565,000	8		73		10.5
C-		68,458,000	2		78		10.0
D		46,244,000	2		64		11.7
Total	$	3,242,509,000	100	%	77	%	9.0	%

LOAN ORIGINATIONS DURING THE YEAR ENDED JUNE 30, 2001

All Underwriting Programs Combined

Credit Grade	Dollar Amount of Loan		% of Total		Weighted Average Combined Loan to Value		Weighted Average Interest Rate(1)
A	$	888,272,000	38	%	78	%	9.5	%
A-		552,268,000	23		78		10.0
B		553,131,000	23		76		10.6
C		274,589,000	12		74		11.7
C-		57,389,000	2		71		12.7
D		45,981,000	2		65		13.1
Total	$	2,371,630,000	100	%	77	%	10.3	%

________________________

(1)	Calculated with respect to the interest rate at the time the loan was originated or purchased by the Company, as applicable.

(2) The Company eliminated the "D" Credit Grade in its underwriting guidelines that went effective on September 16, 2002.

NM	Not meaningful

Quality Control. The Company'’s quality control program is intended to ~~(i)~~ monitor and improve the overall quality of loan production generated by the Company'’s retail loan channel and independent mortgage ~~broker~~ wholesale channel and ~~(ii)~~ 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 the Company'’s underwriting guidelines and federal and state regulations. This is accomplished by focusing on: (i) the accuracy of all credit and legal information; (ii) a collateral analysis which may include a desk or field re-appraisal of the property and review of the original appraisal; (iii) employment and/or income verification; and (iv) legal document review to ensure that the necessary documents are in place.

•	the accuracy of all credit and legal information;

•	a collateral analysis which may include a desk review of the original appraisal;

•	employment and/or income verification; and

•	legal document review to ensure that the necessary documents are in place.

Loan Disposition

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

The Company maximizes opportunities in its loan disposition transactions by selling its loan production through a combination of securitizations and whole 14loan sales, depending on market conditions, taking under consideration relative profitability and cash flows. The Company generally realizes higher gain on sale on securitizations than it does on whole loan sales for cash. The higher gain on sale in securitization transactions is attributable to the excess servicing spread and mortgage servicing rights associated with retaining a residual interest and the servicing on the mortgage loans in the securitization, respectively, net of transactional costs. In a securitization the underlying pass-through certificates or bonds are generally overcollateralized by the Company depositing mortgage loans with a principal balance exceeding the principal balance of the pass-through certificates or bonds. The upfront overcollateralization required in securitizations is generally cash flow negative to the Company in the early years of the securitization. In whole loan sales with servicing released, the gain on sale is generally lower than gains realized in securitizations, but the Company receives the gain in the form of cash.

~~The following~~13 ~~table sets forth certain information regarding the Company's securitizations and whole loan sales during the periods presented (in thousands):~~

		Year ended June 30,
		2003		2002		2001
Loans pooled and sold in securitizations		$	314,958	$	584,964	$	1,231,464
Whole loan sales			4,188,678		2,610,041		1,102,465
	Total loans sold	$	4,503,636	$	3,195,005	$	2,333,929

The following table sets forth certain information regarding the Company’s securitizations and whole loan sales during the periods presented (in thousands):

In fiscal 2003, the Company relied predominantly on whole loan sales as its loan disposition strategy due primarily to favorable conditions in the whole loan market, and to limited capacity under and the expiration of the Forward Residual Sale Facility (“Residual Facility”). In addition, the Company was able to sell a greater portion of its loan production by reducing the time between loan origination and loan disposition during the year ended June 30, 2003. The Company had used the Residual Facility, which expired on March 31, 2003, to include securitizations in its loan disposition strategy by reducing the negative cash flow aspects of securitization and by providing another source of cash to the Company through periodic sales of residual interests for cash. In the securitizations which closed during the years ended June 30, 2003, 2002 and 2001, the Company sold for cash of $8.7 million, $16.4 million and $45.1 million, respectively, its residual interests through utilization of the Residual Facility. The Residual Facility was made available through an affiliate of SFP, Capital Z Investments, L.P., a Bermuda partnership (“CZI”). The Company has sold all of its loan production in whole loan sales since the expiration of the facility. The Company’s evaluation of loan disposition strategies going forward will include the negative cash flow considerations associated with the upfront overcollateralization required in securitizations compared to the positive cash flow considerations of whole loan sales for cash.


	Year ended June 30,
	2004		2003		2002
Loans pooled and sold in securitizations	$	—	$	314,958	$	584,964
Whole loan sales		6,433,871		4,188,678		2,610,041

Total loans sold	$	6,433,871	$	4,503,636	$	3,195,005

The Company’s total loan dispositions during the year ended June 30, 2004 increased $1.9 billion, or 42.9%, to $6.4 billion over the $4.5 billion of total dispositions reported during the comparable period a year ago. During the year ended June 30, 2004, the Company relied solely on whole loan sales as its loan disposition strategy due to attractive pricing conditions prevailing in the whole loan markets. In addition, during the year ended June 30, 2004, the Company was able to sell a greater portion of its loan production by reducing the time between loan origination and loan disposition. During the year ended June 30, 2003, the Company relied predominantly on whole loan sales as its loan disposition strategy due primarily to favorable conditions in the whole loan market, and to limited capacity under and the expiration of the Forward Residual Sale Facility (“Residual Facility”). The Company had used the Residual Facility, which expired on March 31, 2003, to include securitizations in its loan disposition strategy by reducing the negative cash flow aspects of securitization and by providing another source of cash to the Company through periodic sales of residual interests for cash. In the securitizations which closed during the years ended June 30, 2003 and 2002, the Company sold for cash of $8.7 million and $16.4 million, respectively, the residual interests created in the securitizations through utilization of the Residual Facility. The Residual Facility was made available through an affiliate of Specialty Finance Partners, Capital Z Investments, L.P., a Bermuda partnership (“CZI”). The Company has sold all of its loan production in whole loan sales since the expiration of the Residual Facility. Changes in the secondary mortgage markets, the current interest rate environment and the current economic climate could affect the mix in the composition of the Company’s strategy of selling loans in the form of securitizations or whole loan sales. The Company’s evaluation of loan disposition strategies going forward will include the negative cash flow considerations associated with the upfront overcollateralization required in securitizations compared to the positive cash flow considerations of whole loan sales for cash.

In prior quarters, when the Company disposed of loans in securitization transactions, each agreement that the Company entered into in connection with such securitizations required either the overcollateralization of the trust or the establishment of a reserve account that may initially be funded by cash deposited by the Company. If delinquencies or losses exceed certain established limits, as applicable, certain additional credit-enhancement aspects of the trust are triggered. In a securitization credit-enhanced by a monoline insurance policy, any further losses experienced in excess of the established overcollateralization amount by holders of the senior interests in the related trust will be paid by the insurer under such policy. To date, there have been no claims on any monoline insurance policy obtained in any of the Company’s securitizations.

Loan Servicing

The Company’s servicing portfolio consists mainly of loans serviced on an interim basis, including loans held for sale and loans ~~subserviced~~sold ~~for~~to others onand subserviced on an interim basis, and to a lesser extent mortgage loans securitized prior to the year ended June 30, 2001 for which the Company retained servicing and loans sold to others and subserviced on a long-term basis. Servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, managing borrower defaults and liquidating foreclosed properties. As a means to maximize profitability and cash flow from securitizations, the Company has sold the servicing rights in securitizations during the years ended June 30, 2003~~, 2002~~ and ~~2001~~2002 for cash to nonaffiliated mortgage loan servicing companies. Moreover, the Company does not retain servicing on loans it sells in whole loan sales for cash.

15 14

The following table sets forth certain information regarding the Company’s servicing portfolio for the periods indicated:

				2003			2002		2001
		At or During the Year Ended June 30,		~~At or During the Year Ended June 30,~~
		2004				2003			2002
		(in thousands)		~~(in thousands)~~
Mortgage loans serviced:
Loans serviced on an interim basis	~~Loans serviced on an interim basis~~	$	1,897,464	$	~~911,000~~	$	$910,671	~~991,000~~	$	~~722~~991,~~000~~189
	Loans in securitization trusts				741,000			1,192,0000		1,811,000
Loans subserviced for others on a long-term basis			160,371				—			—
		Serviced in-house			1,652,000			2,183,000		2,533,000
Loans in securitization trusts			229,308				741,132			1,191,560
	Loans in securitization trusts subserviced
Serviced in-house			2,287,143				1,651,803			2,182,749
		by others			88,000			125,000		184,000
Loans in securitization trusts subserviced by others			53,885				87,829			125,421
Total servicing portfolio	~~Total servicing portfolio~~	$	2,341,028	$	~~1,740,000~~	$	$1,739,632	~~2,308,000~~	$	2,~~717~~308,~~000~~170
Percentage serviced in-house	~~Percentage serviced in-house~~		97.7	%	~~94.9%~~		94.9	~~94.6~~%		9394.2%6	%
Loan servicing revenue	~~Loan servicing revenue~~	$	7,829	$	~~8,896~~	$	$8,896	~~12,462~~	$	1412,~~989~~462

The Company has not added any new loans to the total servicing portfolio (except for loans serviced on an interim basis) since January 1, 2000 due to the Company'’s sale of all of its mortgage loan production in whole loan sales for cash and securitizations with servicing released since that time. ~~The Company's total~~ loan servicing portfolio at June 30, 2003 decreased $568.0 million, or 24.6%, to $1.7 billion from $2.3 billion at June 30, 2002, due primarily to runoff, in the form of principal amortization, prepayments and liquidations in the Company's portfolio of mortgage loans in securitization trusts. The Company's portfolio of mortgage loans in securitization trusts serviced in-house declined $451.0 million, or 37.8%, to $0.7 billion at June 30, 2003 from $1.2 billion at June 30, 2002 which, in turn, was a $619.0 million, or 34.2%, decline from the $1.8 billion of mortgage loans in securitization trusts serviced in-house at June 30, 2001. Contributing to the decline was the Company's call of seven securitization trusts with mortgage loans with a principal balance of $17.6 million, which loans were reflected in the loans serviced on an interim basis at June 30, 2003. On August 15, 2003, the Company called four additional securitization trusts with a principal balance of $29.3 million ($30.5 million at June 30, 2003). In general, the Company's portfolio of mortgage loans in securitization trusts serviced in-house will continue to decline from run-off and as a result as all new mortgage loans are sold servicing released, and such decline may be exacerbated by the current mortgage interest rate environment which could accelerate prepayment activity. Moreover, five of the Company's remaining thirteen securitization trusts with a mortgage loan principal balance of $161.0 million out of $829.0 million in the total portfolio of mortgage loans in securitization trusts were callable at June 30, 2003. The Company's portfolio of mortgage loans in securitization trusts would be reduced further were the Company to decide to call any or all of these securitization trusts.

~~Mortgage~~The Company’s total ~~loans~~loan ~~serviced~~servicing onportfolio anat ~~interim~~June ~~basis~~30, ~~declined~~2004 byincreased $80601.04 million, or 834.16%, ~~despite~~to ~~an increase~~$2.3 inbillion ~~production of~~from $1.2 7 billion~~, or~~ ~~37.1%~~at June 30, ~~due~~ to2003 ~~quicker disposition of~~ reflecting an increase in loans serviced on an interim basis partially offset by a decline in loans in securitization trusts serviced in-house due to ~~mortgage loan~~ ~~sale process improvements~~ the Company’s call of certain securitization trusts and loan servicing ~~transfer~~portfolio ~~during~~ runoff, in the ~~year~~form ~~ended~~of principal amortization, prepayments and liquidations. The Company’s portfolio of mortgage loans serviced on an interim basis increased $986.7 million to $1.9 billion at June 30, 2004 over $910.7 million at June 30, 2003, ~~than~~which ~~during~~was a decrease of $80.5 million, or 8.1% from the ~~year~~$991.2 ~~ended~~million at June 30, 2002. The increase at June 30, 2004 was attributable to the Company’s increased mortgage loan production volumes resulting in more loans held for sale serviced by the Company on its own behalf and to increased servicing for buyers who had not yet transferred the loans to new servicers.

~~Loans~~ The Company’s portfolio of mortgage loans in securitization trusts ~~subserviced~~ serviced in-house declined by ~~others~~$511.8 ~~resulted~~million, or 69.1%, to $229.3 million at June 30, 2004 from an$741.1 ~~arrangement~~million ~~with~~at ~~a loan~~June ~~servicing~~30, ~~company entered~~2003 ~~into~~due inprimarily ~~fiscal~~to ~~1999~~the ~~whereby~~Company’s call of 10 securitization trusts which caused the ~~loan~~portfolio ~~servicing company~~of ~~purchased certain cumulative advances~~mortgage ~~and~~loans ~~agreed~~in securitization trusts to ~~make future servicing advances with~~decline ~~respect~~by $304.1 million and to ana ~~aggregate~~lesser extent, portfolio run-off. The Company’s $741.1 million portfolio of mortgage loans in securitization trusts serviced in-house at June 30, 2003 reflected a decrease of $~~388~~450.0 4 million , or 37.8%, from the $1.2 billion at June 30, 2002. In general, the Company’s portfolio of mortgage loans in securitization trusts serviced in-house will continue to decline from run-off as all new mortgage loans are sold servicing released, and such decline may be exacerbated by the current mortgage interest rate environment which could accelerate prepayment activity. Four of the Company’s remaining seven securitization trusts (including those subserviced by others) with a mortgage loan principal balance of $8873.0 4 million were callable at June 30, ~~2003)~~2004. Moreover, the Company expects two additional securitization trusts with a mortgage loan principal balance at June 30, 2004 of $134.0 to be callable in calendar year 2004. The Company expects to call these six securitization trusts (with a mortgage loan principal ~~amount~~ balance of $207.4 million out of $283.2 million in the total portfolio of mortgage loans in securitization trusts) by the end of calendar year 2004.

~~The Company's servicing portfolio will continue to~~Loans besubserviced ~~impacted in~~for others on a long-term basis resulted from the ~~future~~sale by the Company~~'s disposition strategy~~ of ~~its~~loans ~~loan~~from ~~production~~older ~~through~~securitization ~~whole~~trusts ~~loan~~called ~~sales~~during ~~and securitizations~~the fiscal year ended June 30, 2004 for which the Company agreed to continue service on a long-term basis. The Company receives a servicing ~~released~~fee ~~basis~~for loans in its securitization trusts based on a percentage of the unpaid principal balance of each loan serviced. Servicing fees are collected by the

Company out of the borrowers’ monthly payments. In addition, the Company, as servicer, generally receives all late fees and assumption charges paid by borrowers on loans serviced directly by the Company, as well as other miscellaneous fees for performing various loan servicing functions.

Loans in securitization trusts subserviced by others resulted from an arrangement with a loan servicing company entered into in fiscal 1999 whereby the loan servicing company purchased certain cumulative advances and agreed to make future servicing advances with respect to an aggregate of $388.0 million ($53.9 million at June 30, 2004) in principal amount of mortgage loans in securitization trusts.

Moreover, if the Company does not complete the proposed REIT conversion, the Company’s servicing portfolio will continue to be impacted in the future by its current disposition strategy of its loan production through whole loan sales and securitizations on a servicing released basis.

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

In a senior/subordinated structure, losses in excess of the overcollateralization amount generally are allocated first to the holders of the subordinated interests and then to the holders of the senior interests of the trust. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Securitization and Sale of Mortgage Loans.” Realized losses on the loans are paid out of the related credit loss estimates established by the Company at the time of securitization or paid out of principal and interest payments or overcollateralized amounts as applicable, and if necessary, from the related monoline insurance policy or the subordinated interests. In the case of the Company’s senior/subordinated securitization transactions, holders of 51% of the certificates may terminate the servicer upon certain events of default generally relating to certain levels of loss experience, but not delinquency rates. No such events of default have occurred to date in the Company’s senior/subordinated securitizations.

In addition, the agreements governing securitizations credit-enhanced by monoline insurance typically provide that the Company may be terminated as servicer by the monoline insurance company (or by the trustee with the consent of the monoline insurance company) upon certain events of default, including the Company’s failure to perform its obligations under the servicing agreement, the rate of over 90-day delinquent loans (including properties acquired by foreclosure and not sold) exceeding specified limits, losses on liquidation of collateral exceeding certain limits, any payment being made by the monoline insurance company under its policy, and events of bankruptcy or insolvency. Pursuant to agreements relating to the Company’s two 1999 securitization trusts, the monoline insurer requires the Company to maintain a specified net worth and level of liquidity in order to be able to continue to service the loans in those securitization trusts. Previously, the Company did not satisfy the net worth test and, as a result, the monoline insurer could have terminated the Company as a servicer with respect to those securitization trusts. The monoline insurer waived the Company’s failure to satisfy the net worth test and none of the servicing rights of the Company were terminated. At June 30, 2004, the Company met the specified net worth test. In addition, under the Company’s 1999 securitization trusts,

~~The~~ ~~agreements between~~ the Company ~~and~~is ~~the securitization trusts~~appointed ~~typically require the Company, in its role~~ as a servicer~~, to~~ ~~advance interest (but not principal)~~ on ~~delinquent loans~~ to the holders of the senior interests in the related securitization trusts. The agreements also require the Company to make certain servicing advances (e.g., for property taxes or hazard insurance) unless the Company determines that such advances would not be recoverable. Each agreement that the Company has entered into in connection with its securitizations requires either the overcollateralization of the trust or the establishment of a ~~reserve account that may initially be funded~~ ~~by cash deposited by the Company. If delinquencies or losses exceed certain established limits, as applicable, additional credit~~term-~~enhancement requirements of the trust are triggered. In a securitization credit~~to-~~enhanced by~~term ~~a monoline insurance policy~~basis, ~~any~~and ~~further losses experienced in excess of~~ the ~~established overcollateralization amount~~monoline byinsurer ~~holders~~has of the ~~senior interests~~right innot ~~the~~to ~~related trust~~renew ~~will be paid by~~ the ~~insurer under~~term ~~such~~at ~~policy. To date, there have been no claims on~~ any ~~monoline~~ ~~insurance policy obtained in any of the Company's securitizations~~time. In aNone ~~senior/subordinated structure, losses in excess~~ of the ~~overcollateralization amount~~servicing ~~generally~~rights ~~are allocated first to the holders~~ of the ~~subordinated~~ interests and then to the holders of the senior interests of the trust. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--The Securitization and Sale of Mortgage Loans." Realized losses on the loans are paid out of the related credit loss estimates established by the Company athave ~~the~~been time of securitization or paid out of principal and interest payments or overcollateralized amounts as applicable, and if necessary, from the related monoline insurance policy or the subordinated intereststerminated.

InThe ~~the~~table ~~case~~below ofillustrates ~~securitizations credit-enhanced~~certain byinformation ~~monoline~~regarding ~~insurance, the~~those ~~agreements~~securitization ~~also typically~~trusts ~~provide~~ that ~~the~~ ~~Company~~have ~~may~~exceeded ~~be terminated as~~delinquency servicer by the monoline insurance company (or by the trustee with the consent of the monoline insurance company) upon certain events of default, including the Company's failure to perform its obligations under the servicing agreement, the rate of over 90-day delinquent loans (including properties acquired by foreclosure and ~~not~~ ~~sold)~~loss ~~exceeding specified limits, losses~~triggers onat ~~liquidation~~June ~~of collateral exceeding certain limits~~30, ~~any~~ ~~payment being made~~2004 ~~by the monoline insurance company under its policy,~~ and ~~events~~2003 ~~of bankruptcy~~(dollars or insolvency. Pursuant to agreements relating to the Company's two 1999 securitization trusts, the monoline insurer requires the Company to maintain a specified net worth and level of liquidity in ~~order~~thousands): to be able to continue to service the loans in those securitization trusts. As previously reported, the Company currently does not satisfy the net worth test and, as a result, the monoline insurer can terminate the Company as servicer with respect to those securitization trusts. The monoline insurer has to date waived the Company's failure to satisfy the net worth test and none of the servicing rights of the Company has been terminated.

The table below illustrates certain information regarding those securitization trusts that have exceeded delinquency and loss triggers at June 30, 2003 and 2002 and the information at June 30, 2003 as adjusted for the Company's call of the mortgage loans in four securitization trusts on August 15, 2003.


	June 30, 2004			June 30, 2003
Securitization trusts:
Number		7			17
Total mortgage loans serviced in securitization trusts (in-house and subserviced)	$	283,193		$	828,939
Securitization trusts where the Company may be terminated as servicer:
Number		7			13
Dollar amount of mortgage loans serviced in securitization trusts (in-house and subserviced)	$	283,193		$	562,076
Percentage of total mortgage loans serviced in securitization trusts (in-house and subserviced)		100	%		67.8	%

		Actual at June 30, 2003 as Adjusted for the Call on August 15, 2003		Actual at June 30, 2003		Actual at June 30, 2002
Securitization trusts:
	Number		13		17		24
	Total mortgage loans serviced in securitization trusts (in-house and ubserviced)	$	798,483,000	$	828,939,000	$	1,317,000,000
Securitization trusts where the Company may be terminated as servicer:
	Number		9		13		15
	Dollar amount of mortgage loans serviced in securitization trusts (in-house and subserviced)	$	531,621,000	$	562,076,000		880,193,000
	Percentage of total mortgage loans serviced in securitization trusts (in-house and subserviced)		66.6%		67.8%		66.8%

In addition, under the Company’s 1999 securitization trusts, the Company is appointed as a servicer on a term-to-term basis, and the monoline insurer has the right not to renew the term at any time. None of the servicing rights of the Company have been terminated. Pursuant to agreements relating to the Company’s two 1999 securitization trusts, the monoline insurance company providing credit enhancement requires the Company to maintain a specified net worth and level of liquidity in order to be able to continue to service the loans in those securitization trusts. As previously reported, the Company currently does not satisfy the net worth test and, as a result, the monoline insurer can terminate the Company as servicer with respect to those securitization trusts. The monoline insurer has to date waived the Company’s failure to satisfy the net worth test. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors—Our right to service loans may be terminated because of the high delinquencies and losses on the loans in our servicing portfolio.” In the case of the Company’s senior/subordinated securitization transactions, holders of 51% of the certificates may terminate the servicer upon certain events of default generally relating to certain levels of loss experience, but not delinquency rates. No such events of default have occurred to date in the Company’s senior/subordinated securitizations.

The Company receives a servicing fee based on a percentage of the unpaid principal balance of each loan serviced. Servicing fees are collected by the Company out of the borrowers’ monthly payments. In addition, the Company, as servicer, generally receives all late fees and assumption charges paid by borrowers on loans serviced directly by the Company, as well as other miscellaneous fees for performing various loan servicing functions. Under the Company’s December 1999 securitization trust, the Company’s right to receive any prepayment penalties collected on loans in that securitization trust has been subordinated to the right to such prepayment penalties as payment to the securitization trust in order to create additional overcollateralization.

Collections, Delinquencies and Foreclosures

The Company sends 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, the Company commences collection efforts by notifying the borrower of the delinquency. In the case of borrowers in the “~~B,” “~~C,” ~~“C-”~~through ~~and~~ “D” credit grades, or with a poor payment history with the Company, collection efforts begin immediately after the due date. The Company continues 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 “C~~-“and~~” through “D” credit grades), providing 30 days’ notice of impending foreclosure action. During the 30-day notice period, collection efforts continue and the Company evaluates various legal options and remedies to protect the value of the loan, including arranging for extended ~~prepayment~~ 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, the Company will have commenced foreclosure proceedings when a loan is 4560 to 100 days delinquent, depending upon credit grade, other credit considerations or borrower bankruptcy status.

~~Servicing and~~The ~~collection~~Company ~~practices~~monitors ~~change~~its ~~over~~servicing ~~time~~and incollection ~~accordance~~practices ~~with, among other~~to ~~things,~~insure ~~the~~they ~~Company’s~~comply ~~business~~with ~~judgment,~~applicable ~~changes~~laws inand ~~portfolio~~regulations ~~performance~~ and ~~applicable~~meet ~~laws~~industry ~~and regulations~~standards.

~~The Company~~17 ~~has historically experienced delinquency rates that are higher than those prevailing in its industry due to the origination of lower credit grade mortgage loans by the Company.~~

The following table illustrates the mix of credit grades in the Company’s servicing portfolio as of 18 June 30, 2004 (dollars in thousands):

The following table illustrates the mix of credit grades in the Company’s servicing portfolio as of June 30, 2003 (dollars in thousands):


Credit Grade	Dollar Amount of Loans		% of		Weighted Average Combined Initial Loan-to-Value		Weighted Average Interest Rate
A	$	1,730,000	74	%	81	%	7.4	%
A-		257,000	11		75		8.9
B		220,000	9		74		9.2
C		82,000	4		69		9.9
C-		20,000	1		66		11.2
D		31,000	1		61		12.9
Other(1)		1,000	NM		66		10.6

Total	$	2,341,000	100.0	%	79	%	7.9	%

Credit Grade(1)	Dollar Amount of Loans		% of		Weighted Average Combined Initial Loan-to-Value		Weighted Average Interest Rate
A	$	830,000	48	%	81	%	8.0	%
A-		395,000	23		76		9.4
B		307,000	18		74		9.7
C		103,000	6		68		10.6
C-		42,000	2		65		11.4
D		61,000	3		61		13.2
Other(1)		2,000	NM		49		11.0
Total	$	1,740,000	100	%	77	%	9.0	%

_________________

(1)	Consists of older loans that were not assigned a credit grade at origination.

NM	Not meaningful.

~~Delinquent loans,~~Subprime bymortgage ~~principal~~loans ~~balance~~generally ofhave ~~the~~higher ~~total~~delinquency ~~servicing~~rates ~~portfolio,~~than ~~decreased~~those ~~to $156.5~~prevailing ~~million~~in atthe ~~June~~mortgage ~~30, 2003 from $222~~industry.1 ~~million~~As ata ~~June 30,~~subprime ~~2002.~~mortgage ~~The delinquency rate at June 30~~lender, ~~2003~~the ~~was 9.0% compared to 9.6% at~~Company ~~June 30,~~has ~~2002.~~historically ~~The~~experienced delinquency ~~rate~~rates atthat ~~June~~are ~~30,~~higher ~~2003~~than ~~declined~~those ~~from~~prevailing in the ~~delinquency~~ ~~rate~~mortgage atindustry ~~June 30, 2002~~ due to the ~~fact~~origination ~~that~~of ~~loans~~lower incredit ~~the Company’s~~grade ~~portfolio of~~ mortgage loans inby ~~securitization trusts, which contains~~ the ~~majority of delinquent loans, became a smaller part of the~~ Company’s. ~~total~~Set ~~servicing~~forth ~~portfolio.~~below Aare ~~decline~~delinquency inrates ~~delinquencies~~for ~~generally reduces~~ the Company’s ~~servicing advance obligations. The Company expects~~compared ~~the~~to delinquency ~~rate~~rates tofor ~~continue~~subprime tomortgage ~~decline~~loans as(seasonally ~~the~~adjusted) ~~Company’s~~and ~~portfolio~~all of mortgage loans in(seasonally ~~securitization~~adjusted) ~~trusts~~according ~~continues~~ to ~~decline~~the ~~and~~National ~~become~~Delinquency ~~a smaller~~Survey ~~component~~ of the ~~Company’s~~Mortgage ~~total~~Bankers ~~servicing~~Association ~~portfolio~~of America dated June 14, 2004.


	At March 31, 2004		At June 30,
	At March 31, 2004		2004		2003		2002
Aames Financial(1)	3.4	%	3.2	%	9.0	%	9.6	%
Subprime Mortgage Loans(1)	11.2	%	(2	)	18.0	%	15.7	%
All Mortgage Loans(1)	4.3	%	(2	)	5.0	%	5.3	%

~~The following~~(1) ~~table~~Delinquent ~~sets~~loans ~~forth~~are ~~delinquency~~loans ~~and~~for ~~foreclosure~~which ~~information~~more ~~relating~~than ~~to the~~one ~~Company’s~~payment ~~servicing~~is ~~portfolio as of or for the periods indicated:~~ due.

			At or During the Year Ended June 30,
			2003			2002			2001
Percentage of dollar amount of delinquent loans to loans serviced (period end)(1)(2):
	One month			0.7	%		0.7	%		1.7	%
	Two months			0.3			0.5			0.7
	Three or more months
		Not foreclosed(3)		7.2			7.4			8.9
		Foreclosed(4)		0.8			1.0			1.7
	Total			9.0	%		9.6	%		13.0	%
Percentage of total dollar amount of delinquent loans in: Loans serviced on an interim basis				1.3	%		1.50	%		2.4	%
Loans in securitization trusts serviced in-house and by others				17.4	%		15.7	%		16.8	%
Subnote explanations are on page 21.

(2)	Data not yet published.

~~Total delinquent~~The ~~loans in the~~ Company’s ~~portfolio~~delinquency ofrates ~~securitization~~have ~~trusts (serviced~~declined ~~in-house~~since ~~and~~2002 bydue ~~others)~~to ~~were~~the ~~$144.3~~fact ~~million~~that ~~and~~the ~~$207.1~~loans ~~million~~in atits ~~June 30,~~portfolio ~~2003~~of ~~and~~seasoned ~~2002,~~mortgage ~~respectively.~~loans ~~Total~~in ~~delinquent~~securitization trusts ~~loans~~became ina ~~the~~smaller ~~Company’s portfolio~~part of its servicing portfolio, and loans serviced on an interim basis, ~~were~~consisting ~~$12.2~~largely ~~million~~of ~~and~~newly ~~$15.0 million~~originated atloans, ~~June~~became ~~30,~~a ~~2003~~larger ~~and~~part ~~2002,~~of ~~respectively~~its servicing portfolio.

Delinquent loans, by principal balance of the total servicing portfolio, decreased to $74.9 million at June 30, 2004 from $156.5 million at June 30, 2003. The delinquency rate at June 30, 2004 was 3.2% compared to 9.0% at June 30, 2003. The delinquency rate at June 30, 2004 declined from the delinquency rate at June 30, 2002 due to the fact that loans in the Company’s portfolio of mortgage loans in securitization trusts, which contains the majority of delinquent loans, became a smaller part of the Company’s total servicing portfolio. A decline in delinquencies generally reduces the Company’s servicing advance obligations. The Company expects the delinquency rate to continue to decline as the Company’s portfolio of mortgage loans in securitization trusts continues to decline and become a smaller component of the Company’s total servicing portfolio.

The following table sets forth delinquency information relating to the Company’s servicing portfolio as of or for the periods indicated:


	At or During the Year Ended June 30,
	2004		2003		2002
Percentage of dollar amount of delinquent loans to loans serviced (period end)(1)(2):
One month	0.3	%	0.7	%	0.7	%
Two months	0.2		0.3		0.5
Three or more months
Not foreclosed(3)	2.4		7.2		7.4
Foreclosed(4)	0.3		0.8		1.0

Total	3.2	%	9.0	%	9.6	%

Percentage of total dollar amount of delinquent loans in:
Loans serviced on an interim basis	0.8	%	1.3	%	1.5	%

Loans in securitization trusts serviced in-house and by others	20.7	%	17.4	%	15.7	%

(1)	Delinquent loans are loans for which more than one payment is due.

(2)

The delinquency and foreclosure percentages are calculated on the basis of the total dollar amount of mortgage loans serviced by the Company, and any subservicers as of the end of the periods indicated, including loans serviced on an interim basis of $2.1 billion, $911.0 million and $991.0 million at June 30, 2004, 2003 and 2002, respectively.

(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 Aames Financial at period end.

Total delinquent loans in the Company’s portfolio of securitization trusts (serviced in-house and by others) were $58.7 million and $144.3 million at June 30, 2004 and 2003, respectively. Total delinquent loans in the Company’s portfolio of loans serviced on an interim basis were $16.3 million and $12.2 million at June 30, 2004 and 2003, respectively.

Loans originated or purchased by the Company are secured by mortgages, deeds of trust, security deeds or deeds to collateralize debt, depending upon the prevailing practice in the state in which the property collateralizing the loan is located. Depending on local law, foreclosure is effected by judicial action or nonjudicial sale, and is subject to various notice and filing requirements. In general, the borrower, or any person having a junior encumbrance on the real estate, may cure a monetary default by paying the entire amount in arrears plus other designated costs and expenses incurred in enforcing the obligation during a statutorily prescribed reinstatement period. Generally, state law controls the amount of foreclosure expenses and costs, including attorneys’ fees, which may be recovered by a lender, the minimum time required to foreclose and the reinstatement or redemption rights of the borrower.

Although foreclosure sales are typically public sales, frequently no third-party purchaser bids in excess of the lender’s lien because of the difficulty of determining the exact status of title to the property, the possible deterioration of the property during the foreclosure proceedings and a requirement that the purchaser pay for the property in cash or by cashier’s check. Thus, the Company often purchases the property from the trustee or referee through a credit bid in an amount up to the principal amount outstanding under the loan, accrued and unpaid interest, servicing advances and the expenses of foreclosure. Depending upon market conditions and other factors including the condition of the property, the ultimate proceeds of the sale may not equal the Company’s investment in the property.

As an alternative to foreclosure, the Company may, under limited circumstances, arrange for a special repayment arrangement, forestall foreclosure to enable a borrower to sell the mortgaged property or accept the payoff of less than the full principal balance and accrued interest owing on a mortgage loan. The Company believes that such loss mitigation efforts reduce overall losses in loan liquidations. However, the loss on such mitigation efforts is realized earlier in the life of the mortgage loan.

During the year ended June 30, 2004, net losses on loan liquidations decreased to $18.4 million from $35.7 million during 20the year ended June 30, 2003, primarily due to the decrease in number of liquidated loans which corresponded to the decline in the size of the Company’s portfolio of mortgage loans in securitization trusts. A majority of the foreclosures handled by the Company occur in connection with delinquent mortgage loans in securitization trusts serviced by the Company. Of the $18.4 million of net losses on loan liquidations during the year ended June 30, 2004, $14.7 million and $3.7 million related to mortgage loans in the securitization trusts and to mortgage loans held for sale, respectively. Of the $35.7 million of net losses on loan liquidations during the year ended June 30, 2003, $31.1 million and $4.5 million related to mortgage loans in the securitization trusts and to mortgage loans held for sale, respectively. The Company expects net losses on loan liquidations to continue to decline as the Company’s portfolio of mortgage loans overall in securitization trusts continues to decline.

During the fiscal year ended June 30, 2003, net losses on loan liquidations decreased to $35.7 million from $67.4 million during the year ended June 30, 2002, primarily due to the decrease in number of liquidated loans which corresponded to the decline in the size of the Company’s portfolio of mortgage loans in securitization trusts. Substantially all of the foreclosures handled by the Company occur in connection with delinquent mortgage loans in securitization trusts serviced by the Company. Of the $35.7 million of net losses on loan liquidations during the year ended June 30, 2003, $31.1 million and $4.5 million related to mortgage loans in the securitization trusts and to mortgage loans held for sale, respectively. Of the $67.4 million of net losses on loan liquidations during the year ended June 30, 2002, $63.0 million and $4.4 million related to mortgage loans in the securitization trusts and to mortgage loans held for sale, respectively. The Company expects net losses on loan liquidations to continue to decline as the Company’s portfolio of mortgage loans in securitization trusts continues to decline.

The following table sets forth foreclosure and loss information relating to the Company’s servicing portfolio for the period indicated (dollars in thousands):

	2003			2002			2001
	At or During the Year Ended June 30,
	2004				2003				2002
Percentage of dollar amount of loans foreclosed during the period to Servicing portfolio(2)(6)		1.3	%		2.2	%		3.0	%
Percentage of dollar amount of loans foreclosed during the period to servicing portfolio(1)(2)		0.5	%			1.3	%			2.2	%
Number of loans foreclosed during the period		~~417~~180			~~780~~	417		~~1,238~~		780
Principal amount of foreclosed loans during the period	$	2711,~~703~~667		$	~~56,419~~$	27,703	$	~~89,884~~	$	56,419
Number of loans liquidated during the period		~~1,033~~503			~~1,624~~	1,033		~~2,479~~		1,624
Net losses on liquidations during the period(5)	$	35,669		$	67,444		$	91,754
Net losses on liquidations during the period(3)	$	18,371			$	35,669			$	67,444
Percentage of annualized losses to servicing portfolio(2)(6)		1.6	%		2.6	%		3.0	%
Percentage of annualized losses to servicing portfolio(1)(2)		0.8	%			1.6	%			2.6	%
Servicing portfolio at period end	$	12,~~740~~341,000		$	~~2,308,000~~$	1,740,000	$	~~2,717,000~~	$	2,308,000

~~__________________~~(1) The delinquency and foreclosure percentages are calculated on the basis of the total dollar amount of mortgage loans serviced by the Company and any subservicers as of the end of the periods indicated, including loans serviced on an interim basis of $2.1 billion, $911.0 million and $991.0 million at June 30, 2004, 2003 and 2002, respectively.

(12) ~~Delinquent~~The percentages were calculated to reflect the dollar volume of loans ~~are~~foreclosed or annualized losses, as the case may be, to the average dollar amount of mortgage loans ~~for~~serviced ~~which~~by ~~more~~the ~~than~~Company ~~one~~and ~~payment~~any issubservicer ~~past~~during ~~due~~the related periods indicated.

(23) ~~The~~Represents ~~delinquency~~losses, ~~and~~net ~~foreclosure~~of ~~percentages~~gains, ~~are calculated~~ on ~~the~~properties ~~basis~~sold ofthrough ~~the~~foreclosure ~~total~~or ~~dollar~~other ~~amount~~default ofmanagement ~~mortgage~~activities ~~loans~~during ~~serviced by~~ the ~~Company and any subservicers as of the end of the~~ periods indicated~~, including loans serviced on an interim basis of $911~~.~~0 million, $991.0 million and $722.0 million at June 30, 2003, 2002 and 2001, respectively.~~

(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 the Company at period end.

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

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

Competition

The Company faces intense competition in the business of originating, purchasing and selling mortgage loans. The Company'’s competitors in the industry include consumer finance companies, mortgage banking companies, investment banks, commercial banks, credit unions, thrift institutions, credit card issuers ~~and~~ , insurance companies and mortgage REITs. Many of these competitors are substantially larger and have considerably greater financial, technical and marketing resources than the ~~Company. In addition, the current level of gains realized by~~ ~~the~~ Company ~~and its competitors on the sale of non-conforming loans could attract additional competitors into this market~~. ~~Competition~~ ~~among~~In ~~industry participants can take many forms~~addition, ~~including convenience in obtaining a loan, customer service, marketing and distribution channels, amount and term of~~ the ~~loan, loan origination fees~~current ~~and~~level interest rates. Additional competition may lower the rates the Company can charge borrowers and increase the price paid for purchased loans, thereby potentially lowering gain on future loan sales and securitizations. To the extent any of ~~these~~gains ~~competitors significantly expand their~~ activities in the Company's market, the Company's operations could be materially adversely affected. Fluctuations in interest rates and general economic conditions may also affect competition. During periods of rising rates, competitors that have locked in lower rates to potential borrowers may have a competitive advantage. During periods of declining rates, competitors may solicit the Company's customers with loans in its servicing portfolio to refinance their loans.

realized by the Company and its competitors on the sale of non-conforming loans could attract additional competitors into this market. Competition among industry participants can take many forms, including convenience in obtaining a loan, customer service, marketing and distribution channels, amount and term of the loan, loan origination fees and interest rates. Additional competition may lower the rates the Company can charge borrowers and increase the price paid for purchased loans, thereby potentially lowering gain on future loan sales and securitizations. To the extent any of these competitors significantly expand their activities in the Company’s market, the Company’s operations could be materially adversely affected. Fluctuations in interest rates and general economic conditions may also affect competition. During periods of rising rates, competitors that have locked in lower rates to potential borrowers may have a competitive advantage. During periods of declining rates, competitors may solicit the Company’s customers with loans in its servicing portfolio to refinance their loans.

The Company believes that it has the following competitive advantages:

•

Large Scale Originations Through Multiple Loan Origination Channels. The Company originates mortgage loans through both its retail and wholesale channels, which provide it with a more diverse origination platform than many of its competitors. The Company originated approximately $7.0 billion in the fiscal year ended June 30, 2004. The Company was the eighth largest retail subprime originator and the thirteenth largest wholesale subprime originator in the United States according to the Quarterly Data Report of The National Mortgage News for the first quarter of 2004. The Company’s retail channel, a 50 year old franchise with 99 branches and National Loan Centers across the United States operating under the name “Aames Home Loan,” puts it in direct contact with many of its customers. This enables the Company to generate loan origination fee income and gives it the ability to establish a relationship that it believes drives future business and the opportunity to create customer loyalty that it believes makes its retail customers less interest-rate sensitive. In addition, originating loans through both its retail and wholesale channels gives it the stability of a retail franchise, together with the ability of wholesale to respond more quickly to changes in the marketplace.

•

Disciplined Underwriting Guidelines and Efficient Supporting Processes and Technology. The Company’s use of technology to integrate sophisticated risk management models, maintain credit decision consistency and drive loss mitigation efforts has increased underwriting efficiency and lowered its costs. Combined with its results-oriented compensation program based on a combination of volume, profitability, efficiency and quality, the Company believes it is able to efficiently produce profitable loans.

•

Quality Customer Service. The Company’s highly trained loan officers and account executives work closely with its customers and customer-focused processing and underwriting teams to provide quick loan approvals, quality service and to be responsive to borrowers’ and brokers’ needs, including funding to meet its customer’s timeline. The Company believes its focus on service, quality and efficiency results in increased originations through referrals from borrowers and repeat business from brokers that are highly satisfied with the Company’s underwriting and funding process.

•

A Developed and Scalable Servicing Platform and Experienced Servicing Personnel. The Company currently has in place an experienced subprime residential mortgage loan servicing team and a highly scalable servicing platform. The Company believes that its current servicing platform, which features experienced managers leading a team of over 80 employees who collectively service a portfolio of approximately $2.3 billion, can be quickly grown to service an expanded portfolio.

•

Seasoned Management Team. The Company hired an experienced CEO and a new senior management team beginning in 1999, who have successfully increased loan production, decreased unit costs of production and increased profits over the past four years. The Company’s management team includes executives with significant experience with large commercial banks (including 20 years for our CEO and 15 years for our CFO), and experienced mortgage banks and other financial services industry professionals with experience investing in and managing portfolios of residential mortgage loans and residential mortgage-backed securities.

The Company believes its competitive strengths include: (i) emphasizing customer service to attract borrowers; (ii) providing a high level of service to brokers and their customers; (iii) offering competitive loan programs for borrowers whose needs are not met by conventional mortgage lenders; (iv) providing convenience to the customer through the Company's nationwide network of retail branch offices, broker account executives and the Internet; (v) emphasizing customer service in its loan servicing division; and, (vi) responding quickly to changes and developments in the mortgage marketplace.

Regulation

The Company~~'s operations~~ ~~are~~is ~~subject~~regulated ~~to extensive regulation, supervision and licensing~~ by federal, state and local ~~governmental authorities and~~ ~~are subject~~government toauthorities ~~various laws~~ and ~~judicial and administrative decisions imposing requirements~~ ~~and restrictions~~is ~~on part or all of its operations. The Company's consumer lending activities are~~ subject to ~~the~~ ~~Federal Truth-in-Lending Act~~extensive ~~and Regulation Z (including the Home Ownership and Equity Protection Act of 1994)~~federal, ~~the Federal~~state ~~Equal Credit Opportunity Act, as amended,~~ and ~~Regulation~~ ~~B, the~~local ~~Fair Credit Reporting Act of 1970~~laws, asrules ~~amended, the Federal Real Estate Settlement Procedures Act~~ and ~~Regulation~~ ~~X, the Home Mortgage Disclosure Act, the Federal Debt Collection Practices Act and the National Housing Act of 1934, as well as other federal and state statutes and~~ regulations ~~affecting the Company's activities~~. The Company is also subject to ~~the~~judicial ~~rules~~ and ~~regulations of,~~ ~~and examinations by, state regulatory authorities with respect to originating, processing, underwriting, selling, securitizing~~administrative ~~and servicing loans. These~~decisions ~~rules~~that ~~and~~impose ~~regulations, among~~requirements ~~other~~and ~~things, impose~~restrictions ~~licensing obligations~~ on ~~the Company, establish~~its ~~eligibility~~business. ~~criteria~~These ~~for~~regulations ~~mortgage~~could ~~loans,~~impose ~~prohibit discrimination, govern~~additional ~~inspections~~regulatory and ~~appraisals~~compliance ~~of properties~~costs and ~~credit reports~~materially ~~on loan applicants, regulate assessment, collection, foreclosure and~~impact ~~claims handling,~~the ~~investment~~Company’s ~~and~~business. ~~interest payments~~At onthe ~~escrow balances~~federal ~~and payment features~~level, ~~mandate certain disclosures and~~ ~~notices~~these ~~to borrowers~~laws and, inregulations ~~some~~include ~~cases,~~the: ~~fix maximum interest rates, fees and mortgage loan amounts.~~

~~A significant~~• ~~portion~~Equal ofCredit ~~mortgage~~Opportunity loans in the Company's portfolio of mortgage loans in securitization trusts are so-called "high cost mortgage loans" where the borrower is charged points and fees or interest rates above certain levels because of higher credit risk. Such high cost mortgage loans are subject to special disclosure requirements and certain substantive prohibitions under the Home Ownership and Equity Protection Act ~~of 1994~~ and ~~regulations thereunder, and certain~~ ~~state~~Regulation laws. The federal regulations governing high cost mortgage loans establish guidelines for determination of whether an individual loan is a high cost mortgage loan. Federal regulations on high cost mortgage loans make assignees of such mortgage loans liable for violations of the regulations. As a result of the increased regulation and scrutiny of high cost mortgage loans, the Company no longer originates high cost mortgage loans. In addition, there has been recent class action litigation and regulatory actions by certain state agencies against lenders for violations of high cost mortgage regulations. The Company has not to date been subject to any material class action litigation or regulatory action for violations of such high cost mortgage regulations. B;

~~The Company conducts extensive telemarketing sales through which~~• a significant portion of its retail loan business is generated. The Company expects that as early as October 1, 2003, a national do-not-call registry which a consumer can join to prevent unwanted telemarketing calls may become operational pursuant to recent rules promulgated by the Federal ~~Communications Commission as~~ ~~required~~Truth byand ~~the~~Lending ~~Telephone Consumer Protection~~ Act ~~of 1991. In addition, a number of states have enacted laws regulating telemarketing sales activities some of which establish do-not-call registries~~ and ~~will~~ beRegulation ~~required to comply with this new national registry and will be prohibited from placing unsolicited marketing calls to any consumer who has placed their name in the registry.~~ Z;

•

Home Ownership and Equity Protection Act;

•

Real Estate Settlement Procedures Act and Regulation X;

•

Fair Credit Reporting Act;

•

Fair Debt Collection Practices Act;

•

Home Mortgage Disclosure Act;

•

Fair Housing Act;

•

Telephone Consumer Protection Act;

•

Gramm-Leach-Bliley Act;

•

Fair and Accurate Credit Transactions Act; and

•

USA PATRIOT Act.

Extensive federal, state and local laws, rules and regulations which govern the Company’s business:

•

impose licensing obligations and financial requirements on the Company;

•

limit the interest rates, finance charges, and other fees that the Company may charge;

•

prohibit discrimination;

•

impose underwriting requirements;

•

mandate disclosures and notices to consumers;

•

mandate the collection and reporting of statistical data regarding the Company’s customers;

•

regulate the Company’s marketing techniques and practices;

•

require the Company to safeguard non-public information about its customers;

•

regulate the Company’s collection practices; and

•

require the Company to prevent money-laundering or doing business with suspected terrorists.

The Company’s failure to comply with these laws can lead to:

•

civil and criminal liability;

•

loss of mortgage lending licenses or exemptions;

•

demands for indemnification or loan repurchases from buyers of the Company’s loans;

•

class action lawsuits; and

•

administrative enforcement actions.

~~Failure to comply with mortgage banking rules and regulations can lead to loss of approved status~~Compliance, ~~certain~~ ~~rights of~~Quality ~~rescission~~Control ~~for mortgage loans, individual~~ and ~~class~~Quality ~~action lawsuits~~Assurance and administrative enforcement action. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Risk Factors--Our business is subject to extensive federal and state regulation which may limit our ability to operate or decrease our earnings.

In The Company regularly monitors the ~~course~~laws, ofrules and regulations that apply to its business~~, the~~ ~~Company~~and ~~may~~analyzes ~~acquire properties~~any aschanges ato ~~result of foreclosure~~them. ~~There~~ The isCompany aintegrates ~~risk that~~many ~~hazardous~~legal orand ~~toxic~~regulatory ~~waste~~requirements ~~could~~into beits ~~found~~automated onloan ~~such properties. In~~origination ~~such~~system ~~event,~~to reduce the ~~Company~~prospect ~~could~~of beinadvertent ~~held~~non-compliance ~~responsible~~due ~~for the~~to ~~cost~~human ~~of cleaning~~error. upThe orCompany ~~removing~~also ~~such~~maintains ~~waste~~policies and procedures, and ~~such~~summaries ~~cost~~and checklists ~~could~~to ~~exceed~~help ~~the~~its ~~value~~origination ofpersonnel ~~the underlying~~comply ~~properties~~with these laws.

The Company is ~~also subject~~ maintains a variety of pre-funding quality control procedures designed to ~~various other federal and~~detect ~~state~~compliance ~~laws regulating~~ errors prior to funding. In addition, the Company subjects a statistical sampling of its loans to post-funding quality assurance reviews ~~issuance~~ and ~~sale~~analyses. The Company tracks the results of ~~securities, relationships~~ ~~with~~the ~~entities~~quality ~~regulated~~assurance byreviews and reports them back to the ~~Employee Retirement~~responsible ~~Income~~origination ~~Security~~units. ~~Act~~The ofCompany’s ~~1974,~~loans asand ~~amended,~~ practices are reviewed regularly in connection with the due diligence that its loan buyers and ~~other~~ ~~aspects~~lenders ofperform. The Company’s state regulators also review its ~~business~~practices and loan files regularly and report the results back to the Company.

Predatory Lending Legislation

The Home Ownership and Equity Protection Act of 1994 (“HOEPA”) identifies a category of mortgage loans and subjects them to more stringent restrictions and disclosure requirements. In addition, liability for violations of applicable law for loans covered by HOEPA extends not only to the originator, but also to the purchaser of the loans. HOEPA generally covers loans with either (i) total points and fees upon origination in excess of the greater of eight percent of the loan amount or $499 (an annually adjusted dollar amount), or (ii) an annual percentage rate (APR) of more than eight percentage points higher than United States Treasury securities of comparable maturity on first mortgage loans, and ten percentage points above Treasuries of comparable maturity for junior mortgage loans. The Company does not originate loans covered by HOEPA.

Several federal, state and local laws and regulations have been adopted or are under consideration that place limitations on interest rates and charges, identify certain categories of mortgage loans as “high cost” and subject them to more stringent restrictions and disclosure requirements. In addition, some of these laws impose liability on assignees of mortgage loans such as loan buyers, lenders and securitization trusts. Such provisions deter loan buyers from purchasing loans covered by the applicable law. For example, the Georgia Fair Lending Act that took effect in October 2002 resulted in our withdrawal from the Georgia market, until the law was amended in early 2003, because our lenders and loan buyers refused to finance or purchase loans covered by that law. The recent enactment of similar laws late in 2003 in New Jersey and New Mexico has resulted in significant interruption in the secondary market, with some participants no longer purchasing home loans originated in those states, and some not purchasing just those loans covered by these new laws. The Company has eliminated making loans that are deemed high cost under these laws, and remains able to finance or sell those loans it does make. However, a significant portion of mortgage loans in the Company’s portfolio of mortgage loans in securitization trusts are high cost mortgage loans made in 1999 or prior where the borrower was charged points and fees or interest rates above certain levels because of higher credit risk.

There can be no assurance that other similar laws, rules or regulations, won’t be adopted in the future. Adoption of these laws and regulations could have a material adverse impact on the Company’s business by restricting its ability to charge rates and fees adequate to compensate it for the risk associated with certain loans and by substantially increasing the costs of compliance with a variety of inconsistent federal, state and local rules. Adoption of these laws could also have a material adverse effect on the Company’s loan origination volume, especially if its lenders and secondary market buyers elect not to finance or purchase loans covered by the new laws.

Efforts to Avoid Abusive Lending Practices

In an effort to prevent the origination of loans containing unfair terms or involving predatory practices, the Company has adopted many policies and procedures, including the following:

Product Policies

•

The Company does not make “high cost loans” as defined by HOEPA or any state legislation or regulations.

•

The Company does not make loans containing single premium credit life, disability or accident insurance.

•

The Company does not make loans containing negative amortization, mandatory arbitration clauses or interest rate increases triggered by borrower default.

•

The Company offers loans with and without prepayment charges. When a borrower opts for a loan with a prepayment charge, the borrower benefits from a lower interest rate or pays lower upfront fees.

•

The Company’s prepayment charges do not extend beyond three years from the origination date.

•

The Company does not originate loans that pay off zero interest rate mortgages provided by charitable organizations or the government.

Loan Processing Policies

•

The Company only approves loan applications that evidence a borrower’s ability to repay the loan.

•

The Company considers whether the loan terms are in the borrower’s best interests and documents its belief that the loan represents a tangible benefit to the borrower.

•

The Company does not solicit its loan portfolio within twelve months of loan origination.

•

The Company prices loans commensurate with risk.

•

The Company uses an electronic credit grading system to help ensure consistency.

•

The Company does not ask appraisers to report a predetermined value or withhold disclosure of adverse features. Appraisers are paid for their work regardless of whether or not the loans are closed.

Customer Interaction and Education

•

The Company markets its loans with a view to encouraging a wide range of applicants strongly representative of racial, ethnic and economic diversity of the markets it serves throughout the nation.

•

The Company provides a brochure to all its loan applicants to educate them on the loan origination process, explain basic loan terms, help them obtain a loan that suits their needs and advise them on how to find a HUD-approved loan counselor.

•

The Company distributes its fair lending and consumer “best practices” guidelines to all newly-hired employees and brokers and requires them to acknowledge they are knowledgeable about and will abide by fair lending laws.

•

When appropriate, the Company also offers loss mitigation counseling to borrowers in default and provides opportunities to enter into mutually acceptable reasonable repayment plans.

•

The Company reports borrower monthly payment performance to major credit repositories.

Evaluation and Compliance

•

The Company subjects a statistical sampling of its loans to a rigorous quality assurance of borrower qualification, validity of information, and verified property value determination.

•

The Company has an internal audit department that reviews its internal controls and operations to help ensure compliance with accepted federal and state lending regulations and practices.

•

The Company adheres to high origination standards in order to sell its loan products in the secondary mortgage market.

•

The Company treats all customer information as confidential and considers it to be nonpublic information. The Company maintains systems and procedures to ensure that access to nonpublic consumer information is granted only to legitimate and valid users.

•

The Company believes that its commitment to responsible lending is good business.

•

The Company puts its commitment into action and will continue to look for ways to promote highly ethical standards throughout its industry.

Licensing

As of June 30, 2004, the Company had licenses or was exempt from the licensing requirements by the relevant state banking or consumer credit agencies to originate mortgages in 47 states and the District of Columbia.

Privacy

The federal Gramm-Leach-Bliley Act obligates the Company to safeguard the information it maintains on its borrowers. California has passed legislation known as the California Financial Information Privacy Act and the California On-Line Privacy Protection Act. Both pieces of legislation were effective July 1, 2004, and impose additional notification obligations on the Company that are not pre-empted by existing federal law. Regulations have been proposed by several agencies and states that may affect the Company’s obligations to safeguard information. If other states or federal agencies adopt additional privacy legislation, the Company’s compliance costs could substantially increase.

Fair Credit Reporting Act

The Fair Credit Reporting Act provides federal preemption for lenders to share information with affiliates and certain third parties and to provide pre-approved offers of credit to consumers. Congress also amended the Fair Credit Reporting Act to place further restrictions on the use of information shared between affiliates, to provide new disclosures to consumers when risk based pricing is used in the credit decision, and to help protect consumers from identity theft. All of these new provisions impose additional regulatory and compliance costs on the Company and reduce the effectiveness of its marketing programs.

Home Mortgage Disclosure Act

In 2002, the Federal Reserve Board adopted changes to Regulation C promulgated under the Home Mortgage Disclosure Act. Among other things, the new regulations require lenders to report pricing data on loans with annual percentage rates that exceed the yield on treasury bills with comparable maturities by 3%. The expanded reporting takes effect in 2004 for reports filed in 2005. The Company anticipates that a majority of its loans would be subject to the expanded reporting requirements.

The expanded reporting does not provide for additional loan information such as credit risk, debt-to-income ratio, loan-to-value ratio, documentation level or other salient loan features. As a result, the Company is concerned that the reported information may lead to increased litigation as the information could be misinterpreted by third parties.

Telephone Consumer Protection Act and Telemarketing Consumer Fraud and Abuse Prevention Act

The Federal Communications Commission and the Federal Trade Commission adopted ‘do-not-call’ registry requirements, which, in part, mandate that the Company maintain and regularly update lists of consumers who have chosen not to be called. These requirements also mandate that the Company not call consumers who have chosen to be on the list. Several states have also adopted similar laws, with which the Company also complies.

Employees

At June 30, ~~2003~~2004, the Company employed 12,~~707~~063 persons. The Company has satisfactory relations with its employees.

Item 2. Properties

The Company’s executive and administrative offices ~~of the Company~~ are located at 350 S. Grand Avenue, Los Angeles, California 90071, and consist of approximately 178,000 square feet of which approximately 44,800 square feet are sublet. The ~~Company~~lease isand ~~attempting to~~the ~~sublet~~sublease ~~additional~~on ~~space in~~ these premises~~. See~~ ~~"Item~~extend 7through March 2012. ~~Management's Discussion~~The monthly rental ~~and~~payment, ~~Analysis of~~including ~~Financial Condition~~common ~~and~~area ~~Results~~fees ~~of Operations--Results of Operations--Fiscal Years~~and ~~2003~~charges, ~~2002~~is ~~and~~currently ~~2001--Expenses~~$0."4 ~~The lease~~million ~~and~~per ~~the sublease~~month, onor ~~these~~approximately ~~premises~~$4.8 ~~extend~~million ~~through March 2012~~annually. ~~The~~ ~~Company~~Monthly ~~also~~sublease ~~leases approximately 39,000~~payments ~~square feet~~received offrom ~~office~~the ~~space~~sublessee, atincluding ~~its~~common ~~former headquarters location at~~area ~~3731~~fees ~~Wilshire~~and ~~Boulevard, Los~~charges ~~Angeles, California~~received ~~90010~~from the sublessee, are ~~all of~~currently ~~which~~$0.1 ismillion ~~sublet through March~~per ~~2006. The~~month, ~~master~~or ~~lease expires~~approximately ~~in December~~$1.2 ~~2008~~million annually. The ~~administrative offices~~ ~~of the~~ Company'’s ~~Irvine office~~ administrative offices are located at 3347 and 3351 Michelson Drive, Irvine, California 92612, and consist of approximately 93,000 square feet under a lease which extends through November 30, 2008. The monthly rental payment, including common area fees and charges, is currently $0.2 million per month, or approximately $2.4 million annually.

The Company also leases space for ~~its~~ retail branch and ~~broker~~ wholesale regional ~~offices~~ operations centers. These facilities aggregate approximately ~~257~~ 286,000 square feet and are leased under terms which vary as to duration. In general, the leases expire between 2003 and ~~2008~~2009, and provide for rent escalations tied to either increases in the lessors' ’ operating expenses or fluctuations in the consumer price index in the relevant geographical areas.

Item 3. Legal Proceedings

~~The~~ On April 27, 2004, the Company ~~and~~received ~~certain~~a ofcivil ~~its~~investigative ~~subsidiaries were~~demand ~~defendants~~from inthe ~~Aslami~~Federal ~~et.~~Trade ~~al.~~Commission, v.or ~~Aames~~the ~~Home Loan~~FTC, ~~Aames~~that, ~~Financial Corporation~~although not alleging any wrongdoing, ~~et.~~ alsought documents and data relating to the Company’s business and lending practices. aThe ~~putative class~~demand ~~action~~was ~~filed~~issued onpursuant to an April 118, 2004 resolution of the FTC authorizing non-public investigations of various unnamed subprime lenders ~~2000, in~~and ~~Los~~loan ~~Angeles County Superior Court, case~~brokers noto determine whether there have been violations of certain consumer protection laws. ~~BC228027. On~~ ~~June~~The ~~27,~~Company ~~2003, the~~has ~~court~~cooperated ~~approved~~and aintends ~~settlement between~~to ~~the~~continue ~~parties regarding~~to ~~this~~cooperate ~~litigation, in which~~fully with the ~~Company~~ ~~did~~FTC ~~not~~in ~~admit liability~~this investigation. ~~This settlement~~ ~~did~~Because ~~not~~the ~~have~~investigation ais ~~material~~at an early ~~adverse~~stage, ~~effect~~the onCompany ~~its consolidated financial position~~cannot ~~and~~predict ~~results~~the outcome of the investigation and its ~~operations~~effect, if any, on the Company’s business.

The Company was a defendant in Wilmington Trust Company v. Aames Financial Corporation, an action by the trustee on behalf of the holders of the Company's Senior Notes seeking to prevent the Company from consummating its offer to exchange all outstanding 5.5% Convertible Subordinated Debentures due 2006 (the "2006 Debentures") for newly issued 2012 Debentures (the "Exchange Offer"). On June 24, 2003, the New York Supreme Court Appellate Division affirmed the October 25, 2002 decision of the Supreme Court of the State of New York granting the Company's motion to dismiss Wilmington Trust Company's amended complaint and issued a declaratory judgment in favor of the Company that the Exchange Offer, if consummated, would not (i) violate the terms of the indenture governing the Senior Notes, or give rise to an event of default thereunder, or (ii) constitute a breach of an implied covenant of good faith and fair dealing. On June 30, 2003, the Company redeemed all outstanding Senior Notes.

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

Item 4. Submission of Matters to Vote of Security Holders

None.

24 26

PART II

Item 5. Market for Registrant'’s Common Equity, ~~and~~ Related Stockholder Matters and Issuer Purchases of Equity Securities

Since November 28, 2001, the Company'’s common stock has been quoted on the Over-the-Counter Bulletin Board under the symbol "“AMSF"”. ~~Prior~~ thereto and from November 1995, the Company's common stock had traded under the symbol "AAM" on the New York Stock Exchange (the "NYSE"). As previously reported, the NYSE delisted the Company's common stock on November 15, 2001.

The following ~~table~~ ~~sets~~tables set forth the range of certain high and low closing bid quotations on the Over-the-Counter Bulletin Board for the Company'’s ~~Common~~common ~~Stock~~stock for the periods indicated during the year ended June 30, 2004 and 2003.

	High*		Low*
Year Ended June 30, 2005:	High*		Low*
First Quarter	$	$0.63	$	$0.36
First Quarter (through August 17, 2004)	$	3.03	$	2.20
Year Ended June 30, 2004:	High*		Low*
First Quarter	$	3.01	$	1.90
Second Quarter		3.25		2.15
Third Quarter		5.15		2.50
Fourth Quarter		4.04		2.20
Year Ended June 30, 2003:	High*		Low*
First Quarter	$	0.63	$	0.36
Second Quarter		1.78		0.43
Third Quarter		1.85		1.10
Fourth Quarter		3.10		1.11

The following table sets forth the high and low sale prices of the Company’s common stock on the NYSE and the range of certain high and low closing bid quotations on the Over-the-Counter Bulletin Board for the periods indicated during the year ended June 30, 2002.

	High*		Low*
First Quarter	$	1.40	$	0.79
Second Quarter (through November 14, 2001)		0.92		0.46
Second Quarter (from November 28, 2001 to December 31, 2001)		0.38		0.25
Third Quarter		0.75		0.34
Fourth Quarter		0.80		0.47

_________________

*	As reported by Bloomberg

As of ~~September~~August 2217, ~~2003~~2004, the Company had approximately ~~365~~234 stockholders of record, which amount does not include stockholders whose shares are held in the name of their broker. No common stock dividends were accrued or paid in the years ended June 30, ~~2003~~2004, ~~2002~~2003 and ~~2001~~2002. The Board of Directors of the Company reviews the Company’s dividend policy at least annually in light of the earnings, cash position and capital needs of the Company, general business conditions and other relevant factors. The Financing Facility and certain of the Company’s revolving warehouse facilities ~~restrict~~impose certain restrictions on the Company’s ~~from~~ability ~~paying~~to pay dividends during the terms of such facilities.

Item 6. Selected Financial Data

The selected consolidated financial data set forth below with respect to the Company for the five years ended June 30, 2003 have been derived from the audited consolidated financial statements. The selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and other financial information included herein.

	Year Ended June 30,
	2003		2002		2001		2000		1999
Statement of Operations Data:
Revenue:
Gain on sale of loans	$ 135,573		$ 95,530		$ 73,435		$ 48,098		$ 44,855
Write-down of retained residual
interests and mortgage servicing rights .	(34,923	)	(27,000	)	(33,600	)	(82,490	)	(194,551	)
Origination fees	53,198		55,986		47,430		37,951		39,689
Loan servicing	8,896		12,462		14,989		15,654		23,329
Debt extinguishment income	31,711		--		--		--		--
Interest	69,186		83,161		86,477		94,569		70,525
Total revenue, including write-down of
residual interests and mortgage
servicing rights	263,641		220,139		188,731		113,782		(16,153	)
Total expense	236,314		212,506		217,366		232,785		261,996
Income (loss) before income taxes	27,327		7,633		(28,635	)	(119,003	)	(278,149	)
Provision (benefit) for income taxes	(1,839	)	3,087		1,889		3,369		(30,182	)
Net income (loss)	$ 29,166		$ 4,546		$(30,524	)	$(122,372	)	$(247,967	)
Net income (loss) to common
stockholders:
Basic	$ 15,697		$ (9,242	)	$(44,445	)	$(130,498	)	$(249,917	)
Diluted	$ 29,166		$ (9,242	)	$(44,445	)	$(130,498	)	$(249,917	)
Net income (loss) per common share:
Basic	$ 2.39		$ (1.45	)	$ (7.11	)	$ (21.02	)	$ (40.31	)
Diluted	$ 0.30		$ (1.45	)	$ (7.11	)	$ (21.02	)	$ (40.31	)
Weighted average number of common
Shares outstanding:
Basic	6,558		6,394		6,251		6,209		6,200
Diluted	96,053		6,394		6,251		6,209		6,200
Cash dividends paid per common share	$ -		$ -		$ -		$ -		$ 0.17
Cash Flow Data:
Cash provided by (used in) operating
activities	$ 141,692		$ 9,390		$ (5,936	)	$ 99,391		$(466,966	)
Cash used in investing activities	(2,124	)	(4,192	)	(5,048	)	(2,664	)	(5,229	)
Cash provided by (used in) financing activities .	(133,099	)	(15,390	)	28,388		(107,312	)	480,637
Net increase (decrease) in cash and cash
equivalents	$ 6,469		$(10,192	)	$ 17,404		$(10,585	)	$ 8,442

	At or During the Year Ended June 30,
	2003		2002		2001		2000		1999
	(dollars in thousands)
Loan Production, Disposition and
Servicing:
Loans originated or purchased:
Retail	$1,795,447		$1,609,875		$1,180,551		$ 783,700		$ 770,000
Broker(1)	2,650,733		1,632,634		1,191,079		1,295,600		1,182,100
Correspondent(1)	--		--		--		--		241,500
Total	$4,446,180		$3,242,509		$2,371,630		$2,079,300		$2,193,600
Loan dispositions:
Whole loans sold	$4,188,678		$2,610,041		$1,102,465		$1,419,199		$1,236,050
Loans pooled and sold in securitizations	314,958		584,964		1,231,464		803,557		649,999
Total	$4,503,636		$3,195,005		$2,333,929		$2,222,756		$1,886,049
Total servicing portfolio at period end	$1,740,000		$2,308,000		$2,717,000		$3,560,000		$3,841,000
Other Data:
Weighted average points on retail loan
originations(2)	3.6	%	3.7	%	4.0	%	4.7	%	4.8	%
Weighted average interest rate(2)	7.8		8.9		10.3		10.2		9.8
Weighted average initial combined
Loan-to-value ratio(2)(3):
Retail	77		76		75		73		72
Broker(1)	80		79		79		78		76
Correspondent(1)	--		--		--		--		80
Number of:
Retail branches	91		98		100		100		101
Regional broker offices	4		4		5		7		35
National Loan Centers	2		2		1		1		--

	At or During the Year Ended June 30,
	2003	2002	2001	2000	1999
	(dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents	$ 23,860	$ 17,391	$ 27,583	$ 10,179	$ 20,764
Residual interests and mortgage servicing rights	129,452	200,217	244,383	303,302	353,255
Total assets	622,012	766,598	785,397	790,364	1,021,097
Revolving warehouse and repurchase facilities	343,675	383,119	393,301	375,015	535,997
Borrowings:
Financing Facility	74,116	--	--	--	--
5.5% Convertible Subordinated Debentures due March
2006	64,396	113,970	113,970	113,970	113,970
10.5% Senior Notes due February 2002	--	--	5,750	11,500	17,250
9.125% Senior Notes due November 2003	--	150,000	150,000	150,000	150,000
Total borrowings	$138,512	$263,970	$269,720	$275,470	$ 281,220
Stockholders' equity	$ 52,974	$ 37,185	$ 45,885	$ 74,478	$ 145,556

_________________

~~(1)~~Item ~~Includes the purchase of closed loans on a continuous or "flow" basis from correspondents of $19~~6.3 Selected ~~million,~~Financial ~~$24.2~~Data million and $40.4 million during the years ended June 30, 2003, 2002 and 2001, respectively. The Company ceased purchasing mortgage loans from correspondents in bulk during the year ended June 30, 1999.

~~(2)~~The ~~Computed~~selected onconsolidated ~~loan~~financial ~~production~~data ~~during~~set forth below with respect to the Company ~~fiscal~~for ~~year~~the ~~presented~~five years ended June 30, 2004 have been derived from the audited consolidated financial statements. The selected consolidated financial data should be read in conjunction with the consolidated financial statements and notes thereto and other financial information included herein.

(3) The weighted average initial combined loan-to-value ratio is determined by dividing the sum of all loans secured by the junior and/or senior mortgages on the property by the appraised value at origination.


	Year Ended June 30,
	2004			2003			2002			2001			2000
	(in thousands, except per share data)
Statement of Operations Data:
Interest income	$	69,446		$	69,186		$	83,161		$	86,477		$	94,569
Interest expense		26,227			35,119			41,895			57,180			55,023

Net interest income		43,219			34,067			41,266			29,297			39,546
Other Income:
Gain on sale of loans		208,447			135,573			95,530			73,435			48,098
Origination fees, net		53,354			53,198			55,986			47,430			37,951
Loan servicing		7,829			8,896			12,462			14,989			15,654

Total other income		269,630			197,667			163,978			135,854			101,703

Net interest income and other income		312,849			231,734			205,244			165,151			141,249
Operating expenses:
Personnel		160,169			131,608			114,800			98,404			93,239
Production		35,113			25,849			21,322			19,034			26,718
General and administrative		44,527			43,738			34,489			42,748			57,805
Write-down of residual interests		—			34,923			27,000			33,600			82,490

Total operating expenses		239,809			236,118			197,611			193,786			260,252
Nonoperating income:
Debt extinguishment income — Capital Z		—			24,970			—			—			—
Debt extinguishment income — others		—			6,741			—			—			—

Total nonoperating income		—			31,711			—			—			—

Income (loss) before income taxes		73,040			27,327			7,633			(28,635	)		(119,003	)
Provision (benefit) for income taxes		(17,674	)		(1,839	)		3,087			1,889			3,369

Net income (loss)	$	90,714		$	29,166		$	4,546		$	(30,524	)	$	(122,372	)

Net income (loss) to common stockholders:
Basic	$	77,660		$	15,697		$	(9,242	)	$	(44,445	)	$	(130,498	)

Diluted	$	92,804		$	29,166		$	(9,242	)	$	(44,445	)	$	(130,498	)

Net income (loss) per common share:
Basic	$	11.02		$	2.39		$	(1.45	)	$	(7.11	)	$	(21.02	)

Diluted	$	0.89		$	0.30		$	(1.45	)	$	(7.11	)	$	(21.02	)

Cash dividends paid per common share	$	—		$	—		$	—		$	—		$	—

Weighted average number of common shares outstanding:
Basic		7,049			6,558			6,394			6,251			6,209

Diluted		104,364			96,053			6,394			6,251			6,209

Cash Flow Data:
Cash provided by (used in) operating activities	$	(415,458	)	$	141,692		$	9,390		$	(5,936	)	$	99,391
Cash used in investing activities		(3,905	)		(2,124	)		(4,192	)		(5,048	)		(2,664	)
Cash provided by (used in) financing activities		418,370			(133,099	)		(15,390	)		28,388			(107,312	)

Net increase (decrease) in cash and cash equivalents	$	(993	)	$	6,469		$	(10,192	)	$	17,404		$	(10,585	)

~~Item 7.~~28 ~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~


	At June 30,
	2004		2003		2002		2001		2000
	(dollars in thousands)
Balance Sheet Data:
Cash and cash equivalents	$	22,867	$	23,860	$	17,391	$	27,583	$	10,179
Loans held for sale, at lower of cost or market		1,012,165		406,877		462,068		417,164		398,921
Residual interests and mortgage servicing rights		44,120		129,452		200,217		244,383		303,302
Total assets		1,151,172		627,888		766,598		785,397		790,364
Revolving warehouse and repurchase facilities		886,433		343,675		383,119		393,301		375,015
Borrowings:
Financing Facility		13,887		74,116		—		—		—
5.5% Convertible Subordinated Debentures due March 2006		64,396		64,396		113,970		113,970		113,970
5.5% Convertible Subordinated Debentures due March 2012		—		—		—		—		—
10.5% Senior Notes due February 2002		—		—		—		5,750		11,500
9.125% Senior Notes due November 2003		—		—		150,000		150,000		150,000

Total borrowings	$	78,283	$	138,512	$	263,970	$	269,720	$	275,470

Total liabilities	$	1,020,561	$	574,914	$	729,413	$	739,512	$	715,886
Stockholders’ equity	$	130,611	$	52,974	$	37,185	$	45,885	$	74,478


	At or During the Year Ended June 30,
	2004			2003			2002			2001			2000
	(dollars in thousands)
Loan Production, Disposition and Servicing:
Loans originated or purchased:
Retail	$	2,400,493		$	1,795,447		$	1,609,875		$	1,180,551		$	783,700
Wholesale(1)		4,588,501			2,650,733			1,632,634			1,191,079			1,295,600

Total	$	6,988,994		$	4,446,180		$	3,242,509		$	2,371,630		$	2,079,300

Loans originated by interest rate type:
Retail:
Fixed rate	$	832,425		$	1,186,373		$	996,191		$	837,451			N/A
Hybrid/adjustable rate		1,568,068			609,074			613,684			343,100			N/A

Total retail	$	2,400,493		$	1,795,447		$	1,609,875		$	1,180,551			N/A

Wholesale:
Fixed rate	$	1,130,761		$	728,227		$	226,585		$	149,575			N/A
Hybrid/adjustable rate		3,457,740			1,922,506			1,406,049			1,041,504			N/A

Total wholesale	$	4,588,501		$	2,650,733		$	1,632,634		$	1,191,079			N/A

Total:
Fixed rate	$	1,963,186		$	1,914,600		$	1,222,776		$	987,026			N/A
Hybrid/adjustable rate		5,025,808			2,531,580			2,019,733			1,384,604			N/A

Total	$	6,988,994		$	4,446,180		$	3,242,509		$	2,371,630			N/A

Percentage of loan originations by broad purpose:
Cash-out refinance		60.4	%		63.5	%		61.7	%		58.8	%		N/A
Purchase money		33.3			23.5			18.1			23.9			N/A
Rate/term refinance		6.3			13.0			20.2			17.3			N/A

		100.0	%		100.0	%		100.0	%		100.0	%		N/A


	At or During the Year Ended June 30,
	2004			2003			2002			2001			2000
	(dollars in thousands)
Loan dispositions:
Whole loans sold	$	6,433,871		$	4,188,678		$	2,610,041		$	1,102,465		$	1,419,199
Loans pooled and sold in securitizations		—			314,958			584,964			1,231,464			803,557

Total	$	6,433,871		$	4,503,636		$	3,195,005		$	2,333,929		$	2,222,756

Total servicing portfolio at period end	$	2,341,028		$	1,739,632		$	2,308,170		$	2,716,781		$	3,561,454

Other Data:
Ratio of net operating expenses to originations(2)		2.7	%		3.3	%		3.5	%		4.8	%		6.7	%
Ratio of total operating expenses to originations(2)		3.4	%		5.3	%		6.1	%		8.2	%		12.5	%
Weighted average points on retail loan originations(3)		3.2	%		3.6	%		3.7	%		4.0	%		4.7	%
Weighted average yield spread premium, net, on wholesale loan originations(3)		(0.5	)%		(0.4	)%		(0.3	)%		(0.1	)%		(0.1	)%
Weighted average interest rate on loans produced(3)		7.4	%		7.8	%		9.0	%		10.3	%		10.2	%
Weighted average initial combined Loan-to-value ratio(3)(4):
Retail		77	%		77	%		76	%		75	%		73	%
Wholesale		82	%		80	%		79	%		79	%		78	%
Correspondent		—			—			—			—			—
Weighted average credit score(3):
Retail		607			623			630			619			N/A
Wholesale		615			611			600			598			N/A
Number of:
Retail branches and National Loan Centers		99			93			100			101			101
Regional wholesale operating centers		5			4			4			5			7
Employees:
Loan origination		1,822			1,449			1,523			1,230			1,171
Loan servicing		81			104			118			118			150
All other		160			154			160			152			155

		2,063			1,707			1,801			1,500			1,476

Net yield:
Yield earned on loans held for sale		8.0	%		7.7	%		8.9	%		9.9	%		10.6	%
Rate paid on amounts outstanding under revolving warehouse and repurchase agreements		(2.5	)		(2.5	)		(2.9	)		(5.1	)		N/A

Net yield		5.5	%		5.2	%		6.0	%		4.8	%		N/A

Average gain on sale of loans		3.2	%		3.0	%		3.0	%		3.2	%		2.2	%

N/A	Information not prepared on this basis for these periods.

(1)	Includes the purchase of closed loans on a continuous or “flow” basis from correspondents of $4.2 million, $19.3 million, $24.2 million and $40.4 million during the years ended June 30, 2004, 2003, 2002 and 2001, respectively.

(2)

Management believes that the ratio of net operating expenses to originations is a useful supplemental performance measure because it provides insight into the Company’s per unit cost of loan production and the efficiency of its operations. Management uses net operating expenses instead of total operating expenses because a significant part of the Company’s loan originations are retail originations which have higher expenses than wholesale originations, but which expenses are partially offset by origination fees collected by the retail channel. In addition, the cost of loan production is not affected by residual interest write-downs. Because other mortgage originators may measure their ratios of expenses to originations differently, their ratios may not be comparable to other companies.

The following table reconciles total operating expenses in conformity with GAAP to net operating expenses for the periods presented as discussed herein (dollars in thousands):


	Years ended June 30,
	2004			2003			2002			2001			2000

Total operating expenses	$	239,809		$	236,118		$	197,611		$	193,786		$	260,252
Origination fees, net		(53,354	)		(53,198	)		(55,986	)		(47,430	)		(37,951	)
Write-down of residual interests		—			(34,923	)		(27,000	)		(33,600	)		(82,490	)

Net operating expenses	$	186,455		$	147,997		$	114,625		$	112,756		$	139,811

Total originations	$	6,988,994		$	4,446,180		$	3,242,509		$	2,371,630		$	2,079,300

(3)	Computed on loan production during the period presented.

(4)	The weighted average initial combined loan-to-value ratio is determined by dividing the sum of all loans secured by the junior and/or senior mortgages on the property by the appraised value at origination.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The following discussion includes Management'’s Discussion and Analysis of Financial Condition and Results of ~~Operations~~ Operations and Quantitative and Qualitative Disclosures ~~About~~ about Market Risk. This section should be read in conjunction with “Item 6. Selected Financial Data” and “Item 8. Financial Statements and Supplementary Data.”

Special Note Regarding Forward-looking Information

This report contains statements that constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. The words “expect,” “estimate,” “anticipate,” “predict,” “believe,” and similar expressions and variations thereof are intended to identify forward-looking statements. ~~Such~~The ~~statements appear~~Private inSecurities aLitigation ~~number~~Reform Act of ~~places~~1995 inprovides ~~this~~a ~~filing~~safe ~~and~~harbor ~~include~~for forward-looking statements. ~~regarding~~In ~~the intent,~~order ~~belief~~to orcomply with ~~current~~the ~~expectations~~terms of the ~~Company~~safe harbor, ~~its~~the ~~directors~~Company ornotes ~~officers with~~that ~~respect~~a ~~to,~~variety ~~among~~of ~~other~~factors ~~things~~could ~~(a) market~~cause ~~conditions in~~ the ~~securitization,~~ ~~capital,~~Company’s ~~credit~~actual ~~and~~results ~~whole~~to ~~loan~~differ ~~markets~~materially ~~and~~from ~~their~~the ~~future~~anticipated ~~impact on~~results ~~the~~or ~~Company’s~~other ~~operations,~~expectations ~~(b) trends~~expressed ~~affecting~~in the Company’s forward-looking ~~liquidity~~statements. ~~position,~~The ~~including,~~risks ~~but~~and ~~not~~uncertainties ~~limited~~that ~~to,~~may ~~its~~affect ~~access~~the ~~to warehouse~~operations, ~~working~~ ~~capital~~performance and ~~other~~results ~~credit~~of ~~facilities~~the ~~and~~Company’s ~~its~~business ~~ability~~include tothe ~~effect securitizations~~following: ~~and~~increases ~~whole~~in ~~loan~~mortgage ~~sales,~~lending ~~(c) the~~interest ~~impact~~rates; ofadverse changes in the ~~various~~secondary ~~cash~~market for mortgage ~~savings~~loans; ~~plans~~decline ~~and~~in ~~other~~real ~~restructuring~~estate ~~strategies~~values; ~~being~~decreases ~~considered~~in byearnings ~~the Company,~~from ~~(d)~~ the Company’s ~~on-going~~calling ~~efforts~~securitization intrusts; ~~improving~~limited ~~its~~cash ~~equity position,~~flow ~~(e) trends~~to ~~affecting~~fund ~~the~~operations; ~~Company’s~~dependence ~~financial~~on ~~condition~~short-term ~~and results~~financing offacilities; ~~operations,~~obligations ~~and~~to ~~(f) the~~repurchase ~~Company’s~~mortgage ~~business~~loans and ~~liquidity~~indemnify ~~strategies.~~investors; ~~The~~concentration ~~stockholders~~ of ~~the~~operations ~~Company~~in ~~are~~California, ~~cautioned~~Florida, ~~not~~New toYork ~~put~~and ~~undue reliance~~Texas; onextensive ~~such~~government ~~forward-looking~~regulation; ~~statements.~~concentrated ~~Such~~ownership ~~forward-looking~~of ~~statements~~the ~~are not~~Company ~~guarantees~~by ofa ~~future~~single ~~performance~~stockholder; ~~and~~losses ~~involve~~in ~~risks~~securitization trusts; and ~~uncertainties~~intense competition in the mortgage lending industry. Actual results may differ materially from those projected in this report, for the reasons, among others, discussed under the captions “Item 1. Business and Risk Factors.” Readers should carefully review the factors referred to above and the other documents the Company files from time to time with the United States Securities and Exchange Commission, including the quarterly reports on Form 10-Q and any current reports on Form 8-K filed by the ~~Company~~ Company during fiscal ~~2004~~2005.

Critical Accounting Policies

~~The~~During the year ended June 30, 2004, the Company did not dispose of any of its mortgage loans in securitization transactions. The Company did not retain residual interests created in any of the $315.0 million, and $585.0 million ~~and $1.2 billion~~ of securitizations which closed during the years ended June 30, 2003, ~~2002~~ and ~~2001~~2002, respectively, as as all such residual interests were sold to an affiliate for cash under the Residual Facility. The Company retained the residual interests created in all of the $7.0 billion of securitizations which closed prior to and during the year ended June 30, 2000.

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

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

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

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

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

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

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

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

The Company previously disclosed that if actual credit losses and actual prepayments exceeded its credit loss and prepayment rate assumptions, the Company would be required to take a charge to earnings to reflect changes in estimates for credit loss and prepayment rate assumptions. The actual performance of the Company’s retained residual interests as compared to the key assumptions and estimates used to evaluate their carrying value did not result in a write-down during the year ended June 30, 2004, but resulted in write-downs to the residual interests of $34.9 million, and $27.0 ~~million~~ ~~and $33.6~~ million during the years ended June 30, 2003, ~~2002~~ and ~~2001~~2002, respectively.

AsThe $34.9 million write-down to the ~~previously~~Company’s ~~reported~~retained residual interests during the year ended June 30, 2003 consisted of a $31.9 million write-down during the three months ended December 31, 2002, ~~quarter~~plus ~~and~~a $3.0 million write-down recorded at June 30, 2003. During the December 2002 quarter, despite lower net credit losses on liquidations of mortgage loans in the securitization trusts, the Company experienced higher than expected loss severity on such liquidations. During the same time, the Company also experienced higher than estimated prepayment speed activity for mortgage loans in the securitization trusts due to the low mortgage interest rate environment prevailing in the United States. Therefore, the Company increased its credit loss assumptions and changed its annual prepayment rate assumptions used to estimate the fair value of its retained residual interests. In addition, the Company also adjusted the underlying forward interest rate curve assumptions used to estimate the fair value of the retained residual interests. The effect of these changes in estimates resulted in a $31.9 million write-down to the carrying value of the Company’s retained residual interests. Additionally, as master servicer of the mortgage loans in the securitization trusts, the Company has the right to call the securitization trusts when the remaining balance of the mortgage loans sold in the securitization trusts falls below 10.0% of the original mortgage loan balance. During the year ended June 30, ~~2003~~2004, the ~~Company called seven of~~ ~~the securitization trusts which did not materially affect the carrying value of the~~ Company’s ~~retained residual interests. On August 15, 2003, the Company~~ called ~~four~~ten ~~additional~~ securitization trusts. In estimating the effects on the carrying value of the residual interests of calling four of those securitization trusts on August 15, 2003, the Company wrote down by $3.0 million the retained residual interests related to those four securitization trusts at June 30, 2003. ~~If the Company calls any of its remaining securitization trusts, it might be required to write down the value of the residual interests relating to the called securitization trusts.~~

The ~~$27.0 million~~ ~~write-down~~Company toclosely ~~the~~monitors ~~Company’s~~its ~~retained~~ residual interests ~~during~~. ~~the~~If ~~year ended June 30, 2002 was due primarily to~~ the ~~change~~actual inrate ~~the cumulative~~of ~~loss~~prepayment ~~estimate assumption~~ and ~~the~~credit ~~Company’s~~loss ~~evaluation~~performance of ~~higher than~~loans ~~anticipated~~in ~~delinquency~~its ~~trends.~~securitized ~~The~~pools ~~$33.6~~vary ~~million~~adversely ~~write-down during the year ended June 30, 2001 was recorded~~ in ~~light~~relation ofto ~~higher~~the ~~than~~estimates ~~expected actual~~and ~~credit~~assumptions ~~loss~~used ~~expenses~~by ~~compared~~the ~~to credit loss assumptions. The~~ Company ~~closely~~ ~~monitors~~to ~~its residual interests and, should higher than expected actual~~estimate ~~credit~~fair ~~losses or prepayments occur~~value, itthe Company will ~~incorporate~~adjust ~~these~~the ~~factor~~fair ~~into~~value ~~its normal quarterly evaluation~~ of the ~~estimated~~retained ~~fair~~residual ~~value~~interests ofthrough ~~its~~a ~~residual interests~~charge to earnings.

~~The following~~If ~~table~~the ~~summarizes~~Company ~~certain~~calls ~~information~~any ~~about~~of the seven remaining securitization trusts in, ~~which~~it might be required to write down the value of the residual interests relating to the called securitization trusts. The Company ~~has~~expects ~~retained~~to acall ~~residual~~six ~~interest~~of atthese ~~June 30,~~seven ~~2003~~securitization ~~and 2002~~trusts ~~(dollars~~before inthe ~~thousands):~~end of calendar year 2004.

		June 30,
		2003		2002
Aggregate principal balance of securitized loans at the time of the securitizations		$	7,016,205	$	7,016,205
Outstanding principal balance of securitized loans		$	828,939	$	1,316,956
Outstanding principal balance of pass through certificates or bonds of the securitization trusts		$	683,277	$	1,141,805
Weighted average coupon rates of outstanding:
	Securitized loans		10.23%		10.26%
	Pass through certificates or bonds		5.51%		5.53%

The $27.0 million write-down to the Company’s retained residual interests during the year ended June 30, 2002 was due primarily to the change in the cumulative loss estimate assumption and the Company’s evaluation of higher than anticipated delinquency trends.

Certain historical data and key assumptions and estimates used by the Company in its June 30, 2003 and 2002 reviews of the residual interests retained by the Company were the following:

			June 30,
			2003	2002
Prepayments:
	Actual weighted average annual prepayment rate, as a percentage of outstanding principal balances of securitized loans:
		Fixed rate loans	32.5%	29.4%
		Adjustable rate loans	34.4%	37.6%
	Estimated annual prepayment rates, as a percentage of outstanding principal balances of securitized loans:
		Fixed rate loans	30.9% to 48.8%	22.3% to 34.4%
		Adjustable rate loans	18.4% to 52.9%	13.8% to 41.0%
	Estimated weighted average life of securitized loans		1.9 years	3.7 years
Credit losses:
	Actual credit losses to date, as a percentage of original principal balances of securitized loans		5.4%	4.7%
	Future estimated prospective credit losses, as a percentage of original principal balances of securitized loans		0.5%	0.8%
	Total actual and estimated credit losses, as a percentage of original principal balances of securitized loans		5.9%	5.5%
	Total actual credit losses to date and estimated prospective credit losses (dollars in thousands)		$392,592	$385,372
Weighted average discount rate			13.5%	13.4%

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

The total actual and estimated credit losses, as a percentage of original principal balance of securitized loans, in each securitization trust, ranged from 3.9% to 9.3% at June 30, 2003 and ranged from 2.0% to 9.3% at June 30, 2002. Actual and estimated credit losses vary between securitization trusts due to differing credit quality i.e., credit grade, production channel and other factors considered by the Company when evaluating credit loss estimates.

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

During the years ended June 30, 2003, 2002 and 2001, the Company sold $315.0 million, $585.0 million and $1.2 billion, respectively, of mortgage loans in securitization transactions. During the years ended June 30, 2003, 2002 and 2001, all of the residual interests created in the securitization transactions which closed during those years were sold to CZI for $8.7 million, $16.4 million and $45.1 million of cash, respectively, under the Residual Facility. The Company retained the residual interests created in the securitizations which closed during the year ended June 30, 2000 and prior thereto.

Key assumptions and estimates used by the Company in measuring the residual interests at the date of securitization resulting from securitizations completed during the years ended June 30, 2003 and 2002 were as follows:

			June 30,
			2003	2002
Prepayments:
	Estimated annual prepayment rates, as a percentage of outstanding principal balance of securitized loans:
		Fixed rate loans	24.3%	25.2% to 31.5%
		Adjustable rate loans	45.4%	40.1% to 55.5%
	Estimated weighted average life of securitized loans		4.0 years	3.4 years
Credit losses:
	Future estimated prospective credit losses, as a percentage of original principal balances of securitized loans		3.6%	3.7%
	Total estimated prospective credit losses (dollars in thousands)		$11,370	$21,736
Weighted average discount rate			15.0%	15.0%

During the year ended June 30, 2003, the Company used a prospective credit loss factor of 3.6% of the original principal balance of mortgage loans securitized. This estimate varies from prior years’ credit loss factors and were based primarily upon the expected positive effects of credit and underwriting changes made by the Company in the loan origination process, the use of private mortgage insurance on certain loans to mitigate credit loss, the Company’s decreased reliance on purchasing loans from correspondents and the Company’s abandonment of certain lower credit grade loan programs.

Results of Operations--Fiscal Years 2003, 2002 and 2001

The following table sets forth information regarding the components of the Company’s revenue and expenses during the years ended June 30, 2003, 2002 and 2001:

		2003				2002				2001
		$		%		$		%		$		%
		(Dollars in thousands)
Revenue:
	Gain on sale of loans	$	135,573	51.4	%	$	95,530	43.4%		$	73,435	38.93	%
	Write down of residual interests		(34,923)	(13.2)			(27,000)	(12.3)			(33,600)	(17.8)
	Origination fees		53,198	20.2			55,986	25.4			47,430	25.1
	Loan servicing		8,896	3.4			12,462	5.7			14,989	8.0
	Debt extinguishment income		31,711	12.0			-	-			-	-
	Interest		69,186	26.2			83,161	37.8			86,477	45.8
	Total revenue, including write down of residual interests		263,641	100.0			220,139	100.0			188,731	100.0
Expenses:
	Personnel		131,608	49.9			114,800	52.1			98,404	52.1
	Production		25,849	9.8			21,322	9.7			19,034	10.1
	General and administrative		48,668	18.5			38,995	17.7			49,044	26.0
	Interest		30,189	11.4			37,389	17.0			50,884	27.0
	Total expenses		236,314	89.6			212,506	96.5			217,366	115.2
Income (loss) before income taxes			27,327	10.4			7,633	3.5			(28,635)	(15.2)
Provision (benefit) for income taxes			(1,839)	(0.7)			3,087	1.4			1,889	1.0
	Net income (loss)	$	29,166	11.1	%	$	4,546	2.1	%	$	(30,524)	(16.2	)%

Revenue

General. Total revenue during the year ended June 30, 2003 was $263.6 million, an increase of $43.5 million over the $220.1 million during the year ended June 30, 2003 which, in turn, was a $31.4 million increase over the $188.7 million during the year ended June 30, 2001. Included in total revenue during the years ended June 30, 2003, 2002 and 2001 were write-downs of $34.9 million, $27.0 million and $33.6 million, respectively, to the Company's residual interests. Included in total revenue during the year ended June 30, 2003 was debt extinguishment income of $31.7 million. Excluding the residual interests write-downs and debt extinguishment income, operating revenue during the year ended June 30, 2003 increased $19.8 million to $266.9 million from $247.1 million for the year ended June 30, 2002. The $19.8 million increase in operating revenue was attributable primarily to a $40.1 million increase in gain on sale of loans, partially offset by declines of $14.0 million, $3.6 million and $2.8 million in interest income, loan servicing and origination fees, respectively. Excluding the $27.0 million and $33.6 million of write-downs of residual interests during the years ended June 30, 2002 and 2001, respectively, operating revenue during the year ended June 30, 2002 increased $24.8 million to $247.1 million from $222.3 million for the year ended June 30, 2001. The $24.8 million increase in operating revenue is attributable primarily to increases in gain on sale of loans and origination fees of $22.1 million and $8.6 million, respectively, partially offset by declines in loan servicing and interest income of $2.5 million and $3.3 million, respectively.

The following table ~~reconciles~~summarizes ~~total~~certain ~~revenue~~information inabout ~~conformity~~the ~~with~~securitization ~~generally~~trusts ~~accepted~~in ~~accounting principles~~which ~~("GAAP") to~~the ~~operating~~Company has ~~revenue~~retained asa ~~discussed~~residual ~~herein~~interest ~~and~~at ~~elsewhere. See~~June ~~“Item~~30, 12004 -and ~~Business~~2003 -(dollars ~~Recent~~in ~~Events.”~~thousands):

		At or During the Year Ended June 30,
		June 30,
		2003			2002			2001
		2004				2003
	(in thousands)
Number of securitization trusts			7				17
GAAP revenue		$	263,641		$	220,139		$	188,731
Aggregate principal balance of securitized loans at the time of the securitizations		$	3,304,181			$	6,642,357
Add: Write-down of residual interests			34,923			27,000			33,600
Outstanding principal balance of securitized loans		$	283,193			$	828,939
Less: Debt extinguishment income			(31,711)			-			-
Outstanding principal balance of pass-through certificates or bonds of the securitization trusts		$	227,232			$	683,277
Operating revenue		$	266,853		$	247,139		$	222,331
Weighted average coupon rates of outstanding:
Securitized loans			10.13	%			10.23	%
Pass-through certificates or bonds			5.65	%			5.51	%

~~Gain on~~Certain ~~Sale of Loans. Gain on sale of loans during the year ended June 30, 2003~~historical ~~increased~~data $40.1 million, or 42.0%, to $135.6 million from $95.5 million during the year ended June 30, 2002. The increase in gain on sale of loans resulted primarily from the $1.3 billion, or 40.6%, increase in the Company’s volume of total loan dispositions to $4.5 billion during the year ended June 30, 2003 over the $3.2 billion of total loan dispositions during the year ended June 30, 2002 due primarily to increased loan production during the year ended June 30, 2003 and, tokey aassumptions lesser extent to quicker disposition by the Company of its loan production. While the Company’s gain on sale rates recognized on its whole loan sales were higher during the year ended June 30, 2003 than the gain on sale rates recognized on such sales during the year ended June 30, 2002 due primarily to improved market conditions in the whole loan markets during fiscal 2003 compared to fiscal 2002, the Company’s overall gain on sale rates recognized during the year ended June 30, 2003 were down from the gain on sale rates recognized during the year ended June 30, 2002. The decline was due primarily to the lower dollar amount of its fiscal 2003 securitization coupled with less favorable market conditions at the time of its consummation during the quarter ended December 2002 when compared to the higher dollar amount of securitizations and ~~improved~~estimates ~~market~~used conditions prevailing in the secondary markets when the securitizations closed during the year ended June 30, 2002. The mix in the composition of securitizations and whole loan sales for cash differed during the years ended June 30, 2003 and 2002 based upon the Company’s review of market conditions, profitability and cash flow needs. When expressed as a percentage of the $4.5 billion of total loan dispositions during the year ended June 30, 2003, whole loan sales for cash and loans sold in securitizations comprised 93.0% and 7.0%, respectively. In comparison, of the $3.2 billion of total loan dispositions for the year ended June 30, 2002, whole loan sales for cash and loans sold in securitizations comprised 81.7% and 18.3%, respectively. Whole loan sales were $4.2 billion during the year ended June 30, 2003, an increase of $1.6 billion over the $2.6 billion of whole loan sales during the year ended June 30, 2002. During the year ended June 30, 2003, loans sold in securitizations declined by ~~$270.0 million to $315.0 million from $585.0 million of securitizations during~~ the ~~year ended June 30, 2002. The~~ Company’s ~~higher reliance on whole loan sales for cash as a mortgage loan disposition strategy during the year ended June 30, 2003 was primarily due to the generally more favorable conditions~~ in the whole loan sale markets and, to a lesser extent, due to the limited capacity in and the expiration of the Residual Facility on March 31, 2003. During the year ended June 30, 2003, the Company, as it has from time to time, entered into forward interest rate swap agreements designed to mitigate interest rate exposure to mortgage loans in its ~~inventory and pipeline in anticipation of closing loan disposition transactions during the year. Gain on sale of loans during the year ended~~ June 30, ~~2003~~2004 includes charges of $10.9 million, all of which relates to losses on hedge positions which closed during that period. Gain on sale of loans during the year ended June 30, 2003 includes $4.1 million of gain on sale of mortgage servicing rights and ~~the rights to prepayment fee income sold for cash to unaffiliated independent mortgage servicing companies relating to all of the mortgage loans in the Company’s~~ 2003 ~~securitizations.~~reviews ~~Of the $135.6 million in gain on sale~~ of ~~loans~~ ~~during~~ the ~~year ended June 30, 2003, $8.7 million was attributable to sales of~~ residual interests ~~for~~retained ~~cash to CZI under the Residual Facility. Gain on sale of loans during the year ended June 30, 2003 was reduced~~ by ~~$0.8 million of amortization of costs related to obtaining~~ the ~~Residual~~Company ~~Facility,~~were ~~substantially all of which related to amortization of~~ the ~~remaining~~following: ~~capitalized facility fee paid to CZI.~~


	June 30,
	2004	2003
Prepayments:
Actual weighted average annual prepayment rate, as a percentage of outstanding principal balances of securitized loans:
Fixed rate loans	36.1%	32.5%
Adjustable rate loans	35.6%	34.4%
Estimated annual prepayment rates, as a percentage of outstanding principal balances of securitized loans:
Fixed rate loans	34.1% to 51.0%	30.9% to 48.8%
Adjustable rate loans	28.8% to 46.6%	18.4% to 52.9%
Estimated weighted average life of securitized loans	2.2 years	1.9 years
Credit losses:
Actual credit losses to date, as a percentage of original principal balances of securitized loans	5.4%	5.4%
Future estimated prospective credit losses, as a percentage of original principal balances of securitized loans	0.5%	0.5%
Total actual and estimated credit losses, as a percentage of original principal balances of securitized loans	5.9%	5.9%
Total actual credit losses to date and estimated prospective credit losses (dollars in thousands)	$176,424	$392,592
Weighted average discount rate	13.7%	13.5%

The total actual and estimated credit losses, as a percentage of original principal balance of securitized loans, in each securitization trust, ranged from 4.2% to 6.0% at June 30, 2004 and ranged from 3.9% to 9.3% at June 30, 2003. Actual and estimated credit losses vary between securitization trusts due to differing credit quality i.e., credit grade, production channel and other factors considered by the Company when evaluating credit loss estimates.

~~Gain on sale of loans during the year ended June 30~~Additionally, ~~2002~~upon ~~increased $22.1 million,~~sale or ~~30.1%,~~securitization toof ~~$95.5 million~~servicing ~~from~~retained ~~$73.4 million during the year ended June 30~~mortgages, ~~2001. The increase in gain on sale of loans resulted primarily from~~ the ~~$861.1 million,~~Company orcapitalizes ~~36.9%, increase in~~ the ~~Company’s~~fair ~~volume~~value of ~~total~~mortgage ~~loan~~servicing ~~dispositions~~rights to(“MSRs”) ~~$3.2 billion~~assets ~~during~~separate ~~the year~~from ~~ended June 30, 2002 over~~ the ~~$2.3 billion of total~~ loan ~~dispositions during the year ended June 30, 2001~~. ~~During~~The ~~the years ended June 30, 2002 and 2001, the~~ Company ~~relied~~determines onfair avalue combination of securitizations and whole loan sales for cash as its loan disposition strategy. The mix in the composition of securitizations and whole loan sales for cash differed during the years ended June 30, 2002 and 2001 based ~~upon~~on the ~~Company’s~~ ~~review~~present ofvalue ~~market conditions, profitability and cash flow needs. When expressed as a percentage~~ of ~~the~~estimated ~~$3.2 billion~~net offuture ~~total loan dispositions during the year ended June 30, 2002, whole loan sales for~~ cash ~~and~~ ~~loans~~flows ~~sold~~related in securitizations comprised 81.7% and 18.3%, respectively. In comparison, of the $2.3 billion of total loan dispositions during the year ended June 30, 2001, whole loan sales for cash and loans sold in securitizations comprised 52.8% and 47.2%, respectively. Whole loan sales were $2.6 billion during the year ended June 30, 2002, an increase of $1.5 billion over $1.1 billion of whole loan sales during the year ended June 30, 2001. During the year ended June 30, 2002, loans sold in securitizations declined by $646.5 million to ~~$585.0 million~~servicing ~~from $1~~income.~~2 billion~~ ~~of securitizations during the year ended June 30, 2001.~~ The ~~Company’s~~cost ~~higher~~allocated ~~reliance on whole loan sales for cash as a mortgage loan disposition strategy during the year ended June 30, 2002 was due primarily~~ to the ~~generally more favorable conditions in the whole loan sale~~ ~~markets~~servicing ~~and,~~rights tois aamortized ~~lesser~~over ~~extent, to~~ the ~~Company’s~~period ~~desire~~of toestimated ~~retain~~net ~~capacity in~~future ~~the~~servicing ~~Residual~~fee ~~Facility~~income. ~~During~~The ~~the year ended June 30, 2002, the~~ Company~~, as~~ itperiodically ~~has~~reviews from to time to time, entered into forward interest rate swap agreements designed to mitigate interest rate exposure to fixed rate mortgage loans in its inventory and pipeline in anticipation of closing loan disposition transactions during the ~~year.~~valuation ~~Gain on sale~~ of ~~loans~~its ~~during the year ended June 30, 2002 includes charges of $10~~MSRs.~~8 million~~ ofThis ~~derivative~~review ~~related losses and~~ is ~~comprised~~performed ~~of $10.4 million of losses~~ on ~~closed~~a ~~hedge positions~~disaggregated ~~and~~basis $0.4 million to mark open hedges at June 30, 2002 to their estimated fair value. Gain on sale of loans during the year ended June 30, 2002 includes $8.2 million of gain on sale of mortgage servicing rights and the rights to prepayment fee income sold for ~~cash to unaffiliated independent mortgage servicing companies relating to all of~~ the ~~mortgage~~ ~~loans~~predominant inrisk ~~the~~characteristics ~~Company’s fiscal 2002 securitizations. Of the $95.5 million in gain on sale~~ of ~~loans during~~ the ~~year ended June 30,~~ ~~2002,~~underlying ~~$16.4 million was attributable to residual interests sales for cash to CZI under the Residual Facility. Gain on sale of~~ loans ~~during the year ended June 30, 2002 includes charges of $0.5 million for amortized expenses related to the Residual Facility, substantially all of~~ which ~~related~~are ~~to amortization~~loan ~~of the fee paid by the Company to CZI to obtain the facility~~type.

~~Origination Fees.~~During ~~Origination~~the ~~fees~~year ~~are~~ended June ~~primarily~~30, ~~comprised of points and other fees~~2004, ~~which include~~the ~~appraisal~~Company ~~and~~did ~~credit~~not ~~investigation~~dispose ~~fees,~~of ~~charged~~any byof ~~the~~its ~~Company on~~ mortgage loans ~~originated~~in bysecuritization ~~the~~transactions. ~~Company’s~~During ~~retail~~the ~~channel,~~years ~~partially~~ended ~~offset by~~June ~~broker compensation~~30, ~~generally~~2003 ~~referred~~and ~~to as yield spread premium~~2002, ~~paid by~~ the Company tosold ~~mortgage~~$315.0 ~~loan~~million ~~brokers~~and in$585.0 ~~connection~~million, ~~with~~respectively, ~~broker~~of ~~loan~~mortgage ~~production.~~loans in ~~Retail~~securitization ~~points~~transactions. ~~and~~During ~~fees~~the ~~are~~years ~~primarily~~ended aJune ~~function~~30, of2003 ~~the~~and ~~volume~~2002, ofthe ~~mortgage~~residual ~~loans originated~~interests bycreated in the ~~Company~~securitization ~~through~~transactions ~~its~~which ~~retail~~closed ~~channel~~during ~~and~~those ~~the~~years ~~points~~were ~~charged~~sold ~~on such~~to ~~loans.~~CZI ~~Yield~~for ~~spread~~$8.7 ~~premiums~~million ~~are~~and ~~generally~~$16.4 amillion ~~function~~ of ~~the~~cash, ~~volume of~~respectively, ~~mortgage~~under ~~loans~~the ~~originated~~Residual byFacility. ~~the~~The Company ~~through~~retained ~~its~~the ~~broker~~residual ~~channel~~interests ~~and~~created in the ~~fee paid~~securitizations onwhich ~~such~~closed ~~loans~~during by the ~~Company~~year toended ~~referring~~June ~~brokers~~30, ~~net~~2000 ~~of points~~ and ~~fees received~~prior ~~at origination~~thereto.

~~Origination fees~~Key ~~during~~assumptions ~~the year ended June 30, 2003 were $53.2 million as compared to $56.0 million~~ and ~~$47.4 million~~estimates ~~during~~used ~~the~~by ~~years ended June 30, 2002 and 2001, respectively. The $2.8 million, or 5.0%, decrease in origination fees during~~ the ~~year~~Company ~~ended June 30, 2003 from the amount reported during the year ended June 30, 2002 was attributable primarily to a $6.8 million increase~~ in ~~yield~~measuring ~~spread premium, net of points and fees, paid by~~ the ~~broker channel,~~residual ~~partially~~interest ~~offset by a $4.0 million increase in the points and fees charged~~ at the ~~time~~date of ~~origination~~securitization ~~in the retail channel. Yield spread premium,~~resulting ~~net of points and fees, increased $6.8 million to $11.5 million during the year ended June 30, 2003~~ from ~~$4.7 million during~~ the ~~year~~securitization ~~ended June 30,~~completed ~~2002. The $6.8 million increase in yield spread premium~~ during the year ended June ~~30,~~ ~~2003 over yield spread premium during the year ended June~~ 30, ~~2002 is attributable primarily to the $1.1 billion, or 62.4%, increase in total broker production during fiscal~~ 2003 ~~over~~were ~~total~~as ~~broker~~follows: production during fiscal 2002 and to a lesser extent, the 48.3% increase in average yield spread premium, net of points and fees, paid during fiscal 2003. The $8.6 million, or 18.1%, increase in origination fee revenue during the year ended June 30, 2002 over the amount reported for the year ended June 30, 2001 was attributable primarily to the $429.3 million, or 36.4%, increase in retail production during the year ended June 30, 2002 over production levels reported during the year ended June 30, 2001, partially offset by a decline during fiscal 2002 from fiscal 2001 in average points and fees charged at the time of origination, and an increase in yield spread premium, net of points and fees.


Prepayments:
Estimated annual prepayment rates, as a percentage of outstanding principal balance of securitized loans:
Fixed rate loans		24.3%
Adjustable rate loans		45.4%
Estimated weighted average life of securitized loans		4.0 years
Credit losses:
Future estimated prospective credit losses, as a percentage of original principal balances of Securitized loans		3.6%
Total estimated prospective credit losses (dollars in thousands)	$	11,370
Weighted average discount rate		15.0%

During the year ended June 30, 2003, the Company used a prospective credit loss factor of 3.6% of the original principal balance of mortgage loans securitized. This estimate varies from prior years’ credit loss factors and was based primarily upon the expected positive effects of credit and underwriting changes made by the Company in the loan origination process, the use of private mortgage insurance on certain loans to mitigate credit loss, the Company’s decreased reliance on purchasing loans from correspondents and the Company’s abandonment of certain lower credit grade loan programs.

~~During the~~Results year ended June 30, 2002, the Company’s yield spread premium payments exceeded points and fees received on the broker origination by $4.7 million. During the year ended June 30, 2001, points and fees on broker production exceeded yield spread premiums paid to brokers by $0.1 million. The $4.6 million increase in net yield spread premium during the year ended June 30, 2002 from the $0.1 million of ~~net~~Operations—Fiscal ~~fees~~Years ~~received during the year ended June 30~~2004, 2001 is attributable to a $441.6 million increase in total broker production during fiscal 2002 over total broker production during fiscal 2001 and, to a lesser extent, the increase in average yield spread premium paid during fiscal 2002. As previously reported, the Company has, primarily in response to competitive factors and, to a lesser extent, recent regulatory changes, reduced points and fees charged to customers in numerous states and for certain loan products. The weighted average points charged by the Company’s retail channel during the years ended June 30, 2003, ~~2002~~ and 2001 were 3.6%, 3.7% and 4.0%, respectively. The Company expects weighted average points charged to decline further in calendar 2003 as the Company expects to continue to reduce points and fees charged in response to increased competition in the current rising interest rate environment. Yield spread premium, net of points and fees, expressed as a percentage of total broker production was 0.43%, 0.29% during the years ended June 30, 2003 and 2002~~, respectively.~~

~~Loan Servicing.~~The ~~Loan~~following ~~servicing~~table ~~revenue~~sets ~~consists~~forth ofinformation ~~prepayment~~regarding ~~fees, late charges and other fees, and servicing fees earned on securitized pools, reduced by subservicing costs and amortization of~~ the Company’s ~~MSRs. See~~ ~~“—Critical~~results ~~Accounting~~of ~~Policies.”~~operations ~~Loan servicing revenue~~ during ~~the~~ ~~year ended June 30, 2003 was $8.9 million as compared to $12.5 million and $15.0 million during~~ the years ended June ~~30, 2002~~ ~~and 2001, respectively. The $3.6 million decrease in loan servicing revenue during the year ended June~~ 30, ~~2003 from June 30~~2004, 2002 was due primarily to declines in servicing, late and prepayment fees aggregating $5.7 million, partially offset by declines in subservicing related expenses and amortization of mortgage servicing rights in the aggregate amount of $2.1 million. The declines in servicing, late and prepayment fees during the year ended June 30, 2003 are due to the $451.0 million, or 37.8%, decrease in mortgage loans in securitization trusts serviced in-house during the year ended June 30, 2003 compared to such loans serviced in-house during the year ended June 30, 2002, together with a decrease in prepayment fees due to the aging of loans in the portfolio beyond the term of prepayment fees. Subservicing expenses and related resolution, set-up and reperformance expenses during the year ended June 30, 2003 were $0.4 million, down $1.3 million from the $1.7 million of such expenses during the year ended June 30, 2002.: Amortization of mortgage servicing rights declined $0.9 million to $2.7 million during the year ended June 30, 2003 from $3.6 million during the year ended June 30, 2002. The Company’s mortgage servicing rights were $0.2 million at June 30, 2003 and will be fully amortized by the three months ended September 30, 2003 as the Company expects to continue to sell all of its loan production on a servicing released basis.

The $2.5 million decrease in loan servicing revenue during the year ended June 30, 2002 from the year ended June 30, 2001 was due primarily to declines in servicing, late and prepayment fees aggregating $7.6 million, partially offset by declines in subservicing related expenses and amortization of mortgage servicing rights in the aggregate amount of $5.0 million. The declines in servicing, late and prepayment fees during the year ended June 30, 2002 from the year ended June 30, 2001 was due to the $619.0 million, or 34.2%, decrease in the size of the Company’s portfolio of mortgage loans in securitization trusts serviced in-house at June 30, 2002 compared to June 30, 2001, together with a decrease in prepayment fees due to the aging of loans in the portfolio beyond the term of prepayment fees. Subservicing expenses and related resolution, set-up and reperformance expenses during the year ended June 30, 2002 were $1.7 million, down $2.8 million from the $4.5 million of such expenses during the year ended June 30, 2001. Amortization of mortgage servicing rights declined $2.2 million to $3.6 million during the year ended June 30, 2002 from $5.8 million during the year ended June 30, 2001.


	2004			2003			2002
Interest income	$	69,446		$	69,186		$	83,161
Interest expense		26,227			35,119			41,895

Net interest income		43,219			34,067			41,266
Other income:
Gain on sale of loans		208,447			135,573			95,530
Origination fees, net		53,354			53,198			55,986
Loan servicing		7,829			8,896			12,462

Total other income		269,630			197,667			163,978

Net interest income and other income		312,849			231,734			205,244
Operating expenses:
Personnel		160,169			131,608			114,800
Production		35,113			25,849			21,322
General and administrative		44,527			43,738			34,489
Write-down of residual interests		—			34,923			27,000

Total operating expenses		239,809			236,118			197,611
Nonoperating income:
Debt extinguishment income — Capital Z		—			24,970			—
Debt extinguishment income — others		—			6,741			—

Total nonoperating income		—			31,711			—

Income (loss) before income taxes		73,040			27,327			7,633
Provision (benefit) for income taxes		(17,674	)		(1,839	)		3,087

Net income (loss)	$	90,714		$	29,166		$	4,546

~~During the~~Interest ~~years~~Income ~~ended June 30, 2003~~ and ~~2002, the Company had in place two~~Interest ~~arrangements~~Expense designed to reduce its servicing advance obligations. In the first arrangement, a loan servicing company purchased certain advances and agreed to make future advances with respect to an aggregate $388.0 million ($88.0 million at June 30, 2003) in principal amount of loans. In the second arrangement, which has expired, an investment bank purchased certain servicing related advances and agreed to undertake the obligation to make a substantial portion of the Company’s advance obligations.

Interest income. Interest income includes interest on loans held for sale, discount accretion income recognized on the Company’s residual interests and, to a lesser extent, interest on short-term overnight investments. Interest income was $69.4 million, $69.2 million and $83.2 million during the years ended June 30, 2004, 2003 and 2002, respectively. The $0.2 million, or 0.4%, increase in interest income during the year ended June 30, 2004 from the year ended June 30, 2003 was primarily due to a $12.5 million increase in interest income earned on loans held for sale resulting from higher average outstanding balances of loans held for sale despite such loans having lower weighted average coupon rates during the year ended June 30, 2004 as compared to such balances and rates during the year ended June 30, 2003. This was offset by a $12.2 million decline in discount accretion income on lower average residual interest balances during the year ended June 30, 2004 when compared to such balances during the year ended June 30, 2003. The $14.0 million, or 16.8%, decrease in interest income during the year ended June 30, 2003 from the year ended June 30, 2002 was due primarily to a $15.8 million decline in discount accretion income on lower average residual interest balances, partially offset by an increase of $1.8 million in interest income earned on loans held for sale resulting from higher average outstanding balances of loans held for sale despite such loans having lower weighted average coupon rates during the year ended June 30, 2003 as compared to such rates and balances during the year ended June 30, 2002.

Interest expense. Interest expense declined $8.9 million, or 25.3%, to $26.2 million during the year ended June 30, 2004 from $35.1 million during the year ended June 30, 2003 which, in turn, was a decrease of $6.8 million, or 16.2%, from the $41.9 million of interest expense reported during the year ended June 30, 2002. The

~~Excluding~~ ~~loans~~decrease ~~serviced~~in oninterest anexpense ~~interim~~reported ~~basis,~~during the ~~Company~~year ~~has~~ended ~~not~~June ~~added~~30, ~~any~~2004 ~~new~~from ~~loans~~levels to reported during the ~~servicing~~year ~~portfolio~~ended ~~since~~June ~~January 1~~30, ~~2000~~2003 ~~due~~resulted toprimarily ~~the Company’s~~from ~~sale~~lower ofinterest ~~all~~rates ofassociated ~~its mortgage loan production in whole loan sales for cash and securitizations~~ with ~~servicing~~the ~~released since that time. The~~ Company’s ~~total~~ ~~loan~~revolving ~~servicing~~warehouse ~~portfolio~~and atrepurchase ~~June 30,~~facilities ~~2003~~used ~~decreased $568.0 million, or 24.6%~~ to ~~$1.7 billion~~fund ~~from~~the ~~$2.3 billion~~origination ~~at June 30,~~of ~~2002,~~mortgage ~~reflecting loan servicing portfolio runoff during the period. Mortgage~~ loans inprior ~~securitization trusts serviced by the Company in-house declined $451.0 million~~ to ~~$741.0 million~~their atdisposition ~~June 30,~~despite ~~2003~~increased ~~from $1.2 billion~~average atborrowings ~~June 30,~~under ~~2002.~~the ~~Moreover,~~facilities ~~subsequent~~during ~~to June 30,~~fiscal ~~2003,~~2004 ~~the~~when ~~Company~~compared ~~transferred~~ to ~~the~~such ~~purchasers~~rates orand ~~their~~average ~~designated~~borrowings ~~servicers approximately $601.0 million of loans, which represented loans sold in whole loan sales~~ during ~~the~~fiscal ~~June~~ 2003. ~~quarter~~To ~~but~~a ~~subserviced~~lesser byextent, the ~~Company~~ atdecrease ~~June 30,~~in ~~2003~~interest onexpense anresulted ~~interim~~from ~~basis.~~the ~~The~~full ~~Company’s~~redemption ~~servicing portfolio~~of ~~will continue to be impacted in~~ the ~~future by the~~ Company’s ~~dispositions~~ ofSenior ~~its~~Notes ~~loan production through whole loan sales~~ and ~~securitizations on~~ a ~~servicing~~$49.6 ~~released~~million ~~basis,~~decrease ~~which has resulted~~ in athe ~~smaller servicing portfolio~~5.5% Convertible ~~See~~Subordinated ~~“Risk~~Debentures ~~Factors.”~~due ~~Future~~2006, ~~loan~~or ~~servicing~~2006 ~~revenue~~Debentures, ~~will be negatively impacted~~ by ~~continued run-off in~~ the Company’s ~~portfolio~~during ~~of mortgage loans in securitization trusts due to~~ the ~~Company’s~~year ~~sale~~ended ~~of mortgage~~June ~~loans~~30, ~~on a servicing released basis~~2003. ~~Run-off~~The ~~in the~~ Company’s ~~portfolio~~ ofrevolving ~~mortgage~~warehouse ~~loans~~and inrepurchase ~~securitization~~agreements ~~trusts~~bear ~~could~~interest berates ~~further exacerbated~~that byare ~~the~~indexed ~~current~~to ~~mortgage~~the ~~interest~~one-month ~~rate~~LIBOR ~~environment~~ which ~~could~~, ~~accelerate~~during ~~prepayment activity of loans, or a decision by~~ the ~~Company~~year toended ~~call any~~June or30, ~~all~~2004, ofwas ~~the~~lower ~~nine~~on ~~securitization~~average ~~trusts~~than ~~callable~~levels byduring the ~~Company~~year atended June 30, ~~2003,~~ ~~with a mortgage loan principal balance of $191~~2003.5 ~~million. See “Item 1. Business—Loan Servicing.”~~

~~Debt Extinguishment~~The ~~Income.~~decrease Asin ~~previously~~interest ~~reported,~~expense onduring ~~December 13, 2002,~~ the ~~Company consummated~~year ~~its~~ended ~~Exchange~~June ~~Offer~~30, ~~pursuant~~2003 tofrom ~~which~~levels itreported ~~exchanged~~during ~~$49.6 million of~~ the ~~outstanding~~year ~~2006~~ended ~~Debentures~~June ~~that~~30, ~~were~~2002 ~~tendered~~resulted ~~and~~primarily ~~issued an equal amount of~~from ~~2012~~lower ~~Debentures.~~interest Onrates ~~December 23,~~associated ~~2002,~~with the Company’s ~~redeemed~~revolving ~~$19.8~~warehouse ~~million, or~~and ~~40.0%,~~repurchase offacilities ~~the~~despite ~~principal~~increased ~~amount~~average ~~outstanding~~borrowings onunder the ~~2012~~facilities ~~Debentures~~during ~~through~~fiscal ~~a scheduled~~2003 ~~mandatory~~when ~~sinking~~compared ~~fund~~to ~~payment.~~such Ofrates ~~the~~and ~~$19.8~~average ~~million~~borrowings ~~sinking~~during ~~fund payment,~~fiscal ~~$16~~2002.6 To ~~million~~a ~~was~~lesser ~~paid~~extent, tothe ~~SFP~~decrease ~~relative~~in tointerest ~~SFP’s~~expense resulted from a $4122.61 million ~~of 2012~~decrease ~~Debentures~~in ~~due from~~ the Company.’s OnSenior ~~December~~Notes ~~31,~~and ~~2002,~~a ~~SFP forgave its remaining~~ $2544.08 million ~~principal~~decrease ~~balance~~in ofthe ~~2012~~5.5% Convertible Subordinated Debentures due ~~from~~2012 (the ~~Company~~ ~~which~~“2012 ~~was~~Debentures”) through ~~recorded~~the ~~as debt~~ extinguishment ~~income.~~of ~~The~~such ~~remaining~~debt ~~$4.7 million~~by of the Company’s ~~outstanding~~during ~~2012~~the ~~Debentures~~year ~~were~~ended ~~fully redeemed on~~ June 30, 2003 ~~at the optional call price of 5~~.~~0%,~~ ~~or $0.2 million, of the outstanding principal balance resulting in $4.5 million of debt extinguishment income.~~

~~During the~~While ~~year ended June 30, 2003, in a series of transactions,~~ the Company’s ~~redeemed $22.1~~interest ~~million~~costs ~~principal~~on ~~balance of~~ its ~~Senior~~revolving ~~Notes~~warehouse ~~at a discount from par for $19.9 million~~ and ~~recognized~~repurchase ~~debt~~facilities ~~extinguishment~~trended ~~income~~down ofduring ~~$2.2~~the ~~million.~~year Atended June 30, ~~2003,~~2004 from the ~~Company~~prior ~~redeemed~~year, ~~the~~such ~~remaining~~interest ~~$127.9~~expense ~~million~~is ~~principal~~expected ~~balance~~to ofincrease in ~~its~~future ~~Senior~~periods ~~Notes~~due ~~representing~~to ~~all of~~ the ~~remaining~~Company’s ~~outstanding~~continued ~~Senior~~reliance ~~Notes,~~on ~~at par~~external ~~plus~~financing ~~accrued~~arrangements ~~and~~to ~~unpaid~~fund ~~interest.~~mortgage ~~The~~loan ~~redemption~~production ofand ~~the~~expected ~~Senior~~continued ~~Notes~~upward ~~was funded~~pressure byon the ~~$74.1~~one-month ~~million~~LIBOR ~~Financing~~in ~~Facility~~coming ~~and $53~~quarters.8 ~~million of cash.~~

Interest~~. Interest~~ ~~income~~expense also includes ~~interest on loans held for sale, accretion income recognized on~~ the ~~Company’s~~amortization ~~residual~~of ~~interests~~capitalized ~~and, to a lesser extent,~~financing ~~interest~~costs onfor ~~short-term~~revolving ~~overnight~~committed ~~investments.~~warehouse ~~Interest~~facilities ~~income~~entered ~~was $69.2 million,~~into ~~$83.2~~by ~~million and $86.5 million during~~ the ~~years ended June 30, 2003, 2002 and 2001, respectively~~Company. ~~The~~Amortization ~~$14.0 million,~~of ~~or 16.8%,~~capitalized ~~decrease~~financing incosts ~~interest~~related ~~income~~to ~~during~~such ~~the~~facilities ~~year ended June 30, 2003 from the year ended June 30, 2002~~ was ~~due primarily to a~~ $155.81 million ~~decline in accretion on lower average residual interest balances~~, ~~partially offset by an increase of~~ $14.89 million in interest income earned on loans held for sale resulting from higher average outstanding balances of loans held for sale despite such loans having lower weighted average coupon rates during the year ended June 30, 2003 when compared to such rates and ~~balances during the year ended June 30, 2002. Interest income decreased~~ $34.~~3 million,~~5 ~~or 3.8% during the year ended June 30, 2002 from the prior year due primarily to an $8.6~~ million ~~decline in discount accretion due to lower average outstanding residual interest balances~~ during the ~~year~~years ended June 30, ~~2002~~2004, ~~partially~~ ~~offset~~2003 ~~by a $5.3 million increase in interest income earned on~~and ~~loans held for sale during the year ended June 30,~~ 2002~~. The increase in interest earned on loans held for sale during the year ended June 30~~, 2002 over the amount reported during the year ended June 30, 2001 was due to higher average interest earning balances of loans held for sale outstanding, partially offset by a decline in the weighted average interest rate on such loans during fiscal 2002 when compared to such rates and balances during fiscal 2001respectively.

Other Income

Gain on Sale of Loans. Gain on sale of loans during the year ended June 30, 2004 increased $72.8 million, or 53.8%, to $208.4 million from $135.6 million during the year ended June 30, 2003. The increase in gain on sale of loans during the year ended June 30, 2004 over gain on sale of loans during the year ended June 30, 2003 resulted primarily from the $1.9 billion, or 42.9%, increase in total mortgage loan dispositions during the year ended June 30, 2004 over mortgage loan disposition levels reported during the year ended June 30, 2003, partially offset by the lower gain on sale rates realized by the Company on whole loan sales during the year ended June 30, 2004, compared to the gain on sale rates realized on its mix of whole loan and securitization dispositions during the year ended June 30, 2003. During the year ended June 30, 2004, the Company relied solely on whole loan sales for cash as its loan disposition strategy. In comparison, during the year ended June 30, 2003, the Company relied on a combination of securitization and whole loan sales for cash as its loan disposition strategy based on the Company’s review of market conditions, profitability and cash flow needs and the Company’s ability to sell the residual interest created in the securitization to CZI under the Residual Facility, which expired on March 31, 2003.

At June 30, 2004, the Company had $550.0 million notional amount of interest rate caps in place. During the year ended June 30, 2004, there were no material adjustments to mark the interest rate caps to market. Gain on sale of loans during the year ended June 30, 2003 was reduced by $10.9 million of hedge losses on closed hedge positions. Gain on sale of loans during the year ended June 30, 2003 includes $8.7 million of cash proceeds from the sale of residual interests to CZI under the Residual Facility. In addition, gain on sale of loans during the year ended June 30, 2003 includes $4.1 million of cash proceeds from the sale of mortgage servicing rights and the rights to prepayment fee income that were sold to an unaffiliated independent mortgage servicing

~~Expenses~~ company related to the securitization which closed during the period. Finally, gain on sale of loans during the year ended June 30, 2003 was reduced by the amortization of $0.7 million of capitalized costs related to obtaining the Residual Facility, substantially all of which related to amortization of the remaining capitalized facility fee paid to CZI. The Residual Facility with CZI expired on March 31, 2003.

~~General.~~The increase in gain on sale of loans during the ~~Total~~year ~~expenses~~ended June 30, 2003 over gain on sale of loans during the year ended June 30, ~~2003~~2002 ~~were~~resulted primarily from the $~~236~~1.3 ~~million compared~~ billion, or 40.6%, increase in the Company’s volume of total loan dispositions to $~~212~~4.5 ~~million~~ billion during the year ended June 30, ~~2002~~2003 ~~and~~ over the $~~217~~3.~~4 million~~2 billion of total loan dispositions during the year ended June 30, ~~2001~~2002. ~~The $23.8 million~~This increase in ~~total~~loan ~~expenses~~dispositions was due primarily to increased loan production during the year ended June 30, 2003 ~~over~~and, to a lesser extent, quicker disposition by the Company of its loan production. While the Company’s gain on sale rates recognized on its whole loan sales were higher during the year ended June 30, 2003 than the gain on sale rates recognized on such sales during the year ended June 30, 2002 isdue ~~attributable~~primarily to improved market conditions in the whole loan markets during fiscal 2003 compared to fiscal 2002, the Company’s overall gain on sale rates recognized during the year ended June 30, 2003 were down from the ~~increases~~gain ofon ~~$16.8 million~~sale rates recognized during the year ended June 30, $42002.~~5 million~~ The decline was due primarily to the lower dollar amount of its fiscal 2003 securitizations coupled with less favorable market conditions at the time of its consummation during the quarter ended December 2002 when compared to the higher dollar amount of securitizations and $9improved market conditions prevailing in the secondary markets when the securitizations closed during the year ended June 30, 2002.~~7 million~~ The mix in the ~~personnel,~~composition ~~production~~of securitizations and ~~general~~whole ~~and~~loan ~~administrative~~sales ~~expense~~for cash differed during the years ended June 30, ~~respectively~~2003 and 2002 based upon the Company’s review of market conditions, ~~partially~~ ~~offset~~profitability byand cash flow needs. When expressed as a ~~decrease~~percentage of the $74.~~2 million~~5 inbillion ~~interest~~of ~~expense~~total loan dispositions during the year ended June 30, 2003, ~~from~~whole ~~such~~loan ~~expenses~~sales ~~during~~for cash and loans sold in securitizations comprised 93.0% and 7.0%, respectively. In comparison, of the $3.2 billion of total loan dispositions for the year ended June 30, 2002, whole loan sales for cash and loans sold in securitizations comprised 81.7% ~~The~~and 18.3%, respectively. Whole loan sales were $4.~~9 million~~2 ~~decrease~~billion induring ~~total~~the ~~expenses~~year ~~during~~ended June 30, 2003, an increase of $1.6 billion over the $2.6 billion of whole loan sales during the year ended June 30, 2002. ~~from~~During the ~~prior~~ year ~~was~~ended ~~attributable~~June to30, ~~declines of~~2003, loans sold in securitizations declined by $10270.0 million ~~and~~to $13315.5 0 million from $585.0 million of securitizations during the year ended June 30, 2002. The Company’s higher reliance on whole loan sales for cash as a mortgage loan disposition strategy during the year ended June 30, 2003 was primarily due to the generally more favorable conditions in ~~general~~the ~~and~~whole ~~administrative~~loan sale markets and, to a lesser ~~interest~~extent, ~~expense~~due to the limited capacity in and the expiration of the Residual Facility on March 31, ~~respectively~~2003. During the year ended June 30, ~~partially~~2003, ~~offset~~the byCompany, ~~increases~~as ofit has from time to time, entered into forward interest rate swap agreements designed to ~~$16.4 million~~mitigate ~~and~~interest ~~$2.3 million~~rate exposure to mortgage loans in ~~personnel~~its inventory and ~~production~~pipeline ~~expenses, respectively,~~in anticipation of closing loan disposition transactions during the year. Gain on sale of loans during the year ended June 30, ~~2002~~2003 ~~from~~included ~~such~~charges ~~expenses~~of $10.9 million, all of which related to losses on hedge positions which closed during that period. Gain on sale of loans during the year ended June 30, ~~2001~~2003 included $4.1 million of gain on sale of mortgage servicing rights and the rights to prepayment fee income sold for cash to unaffiliated independent mortgage servicing companies relating to all of the mortgage loans in the Company’s 2003 securitizations.

~~Personnel. Personnel~~Origination ~~expense includes salaries~~Fees, ~~payroll taxes and medical and other employee benefits~~Net. Origination ~~Personnel~~fees ~~expense also includes commissions that~~ are ~~generally~~ ~~related~~primarily tocomprised ~~the~~of ~~Company’s~~points ~~loan~~and ~~origination~~other ~~volume~~fees, aswhich ~~retail~~include appraisal and credit ~~broker~~investigation ~~account~~fees, ~~executives~~charged ~~earn~~by ~~incentives~~the Company on ~~funded~~mortgage loans. ~~Personnel~~originated ~~expense during~~by the ~~year~~Company’s ~~ended~~retail ~~June 30~~channel, ~~2003~~partially ~~was~~offset ~~$131.6~~by ~~million,~~broker ~~an increase of $16.8 million~~compensation, ~~over~~generally ~~the~~referred ~~$114.8~~to ~~million~~as ~~during~~yield ~~the~~spread ~~year ended June 30~~premium, ~~2002.~~paid Ofby the ~~$16.8~~ ~~million~~Company ~~increase~~to inmortgage ~~personnel~~loan ~~expense,~~brokers ~~salaries, commissions, bonuses and~~in ~~incentives~~connection ~~increased~~with ~~$14.5~~wholesale ~~million,~~loan orproduction ~~14.8%,~~offset ~~during~~by ~~the~~points ~~year~~and ~~ended June 30,~~fees ~~2003~~received ~~over~~at the ~~amounts~~time ~~reported during the year ended June 30, 2002. The increase was comprised primarily~~ of ~~a $7~~origination.1 ~~million~~Retail ~~increase~~points ~~in commission compensation earned by retail~~ and ~~broker~~fees ~~account~~are ~~executives~~primarily ~~during the year ended June 30, 2003 over~~ a ~~year~~function ~~ago~~of ~~due to~~ the ~~$1.2~~volume ~~billion,~~of ~~or 37.5%,~~mortgage ~~increase~~loans inoriginated ~~production~~by ~~during~~ the ~~year~~Company ~~ended~~through ~~June 30,~~its ~~2003~~retail ~~over production~~channel ~~during~~and the points ~~year~~charged ~~ended~~on ~~June~~such ~~30, 2002~~loans. InYield ~~addition,~~spread ~~the~~premiums ~~increase~~are ~~was due~~generally toa ~~$5.2~~function ~~million~~ of ~~increased salaries resulting from increased staffing levels during~~ the ~~year~~volume ~~ended~~of ~~June~~mortgage ~~30,~~loans ~~2003~~originated ~~over~~by ~~staffing levels during~~ the ~~year ended~~Company ~~June~~through ~~30,~~its ~~2002~~wholesale ~~due~~channel ~~primarily~~and tofees ~~the~~paid ~~impact~~ on ~~head~~such ~~count~~loans ~~caused~~ by the ~~acquisition~~ ~~of the~~ Company’s ~~second National Loan Center and,~~ to areferring ~~lesser extent,~~brokers tonet ~~other~~of ~~employee~~points ~~head count growth within the Company driven primarily~~and byfees ~~increased~~received ~~loan~~at ~~production~~origination. ~~Incentive~~Origination ~~compensation relative to senior management increased $2.2 million during the year ended June 30~~fees, ~~2003 over the year ended June 30~~net, ~~2002. To a lesser extent, the increase in personnel expense~~ during the year ended June 30, ~~2003~~2004 ~~over~~were ~~the amount reported a year ago is attributable to a~~ $153.54 million ~~increase~~as incompared ~~contract services utilized in preparing funded mortgage loans for sale~~ to ~~whole loan buyers, and~~ $053.82 million of ~~increased health, medical~~ and ~~other benefit costs. Personnel expense during the year ended June 30, 2002 increased~~ $1656.~~4 million,~~0 ~~or 16.7%, to $114.8~~ million ~~from $98.4 million~~ during the ~~year~~years ended June ~~30, 2001.~~ ~~The increase in personnel expense was comprised primarily of $7.6 million of increased salaries attributable principally to the increased staffing levels in the Company during the year ended June~~ 30, ~~2002~~ ~~over~~2003 ~~the~~and ~~year ended June 30~~2002, ~~2001~~respectively. ~~due~~Origination tofees ~~the~~on ~~acquisition in November~~mortgage ~~2001~~loans oforiginated ~~the~~but ~~Company’s~~not ~~second~~yet ~~National~~sold ~~Loan~~are ~~Center~~deferred ~~and~~ to ~~other~~future ~~employee head~~periods ~~count growth within the Company coupled with a $3.8 million increase in incentive compensation relative to retail~~ and ~~broker~~recognized ~~executives~~as inincome ~~connection with~~at the ~~$870.9 million~~time ~~increase in retail and broker production during~~ the ~~year~~ ~~ended~~mortgage ~~June 30,~~loans ~~2002~~are ~~over such production during the year ended June 30, 2001~~sold. ~~Incentive~~The ~~compensation expense relative to other senior management increased~~ $10.~~1 million~~2 ~~during the year ended June 30, 2002 over the year ended June 30, 2001. Finally, payroll taxes, medical and other benefit costs increased $3.9~~ million ~~during~~increase ~~the~~in ~~year~~net ~~ended~~loan ~~June 30, 2002~~origination ~~over~~fee ~~the~~income ~~amount incurred during the year ended June 30, 2001.~~

Production. Production expense, primarily advertising, outside appraisal costs, travel and entertainment, and credit reporting fees increased $4.5 million, or 21.1%, to $25.8 million during the year ended June 30, 2003 from $21.3 million during the year ended June 30, 2002. The increase in production expense during the year ended June 30, 2003 over a year ago is due primarily to increased advertising expenses relative to the $1.2 billion, or 37.5% increase in the Company’s loan production volumes during the year ended June 30, 2003 over production volumes during the year ended June 30, 2002. Production expense increased $2.3 million, or 12.0%, to $21.3 million during the year ended June 30, 2002 from $19.0 million during the year ended June 30, 2001. The increase in production expense during the year ended June 30, 2002 over the prior year was due primarily to increased advertising and appraisal expenses incurred relative to the Company’s increased total loan production.

~~Production~~ ~~expense~~during ~~when~~the ~~expressed~~year asended aJune ~~percentage~~30, of2004 ~~total~~over ~~loan~~such ~~origination~~income ~~volume~~during ~~for~~ the year ended June 30, 2003, ~~2002~~consisted ~~and~~of ~~2001~~an ~~was 0~~$8.6%9 million increase in origination fee income, substantially 0offset by an $8.7% ~~and~~million 0increase in the deferral of origination fee income related to loans originated but not yet sold. The $8~~%, respectively~~.9 ~~The~~million ~~decrease~~increase in ~~the~~origination ~~percentage~~fees during the year ended June 30, ~~2003~~ ~~from~~2004 over the ~~percentage~~amount reported during the year ended June 30, ~~2002~~2003 ~~is attributable~~was primarily due to ~~the~~a $121.20 ~~billion,~~million ~~or 37.5%~~ increase in ~~total loan production during~~ the ~~year~~points ~~ended~~and ~~June~~fees ~~30,~~charged ~~2003~~at ~~over~~ the ~~origination~~time ~~volume~~of ~~reported~~origination ~~for~~in the ~~year~~ ~~ended~~retail ~~June 30~~channel, ~~2002,~~ partially offset by ~~the~~a 21$12.1% million increase in yield spread premium, net of points ~~production~~and ~~expense~~fees, ~~during~~paid by the ~~year~~wholesale ~~ended~~channel. ~~June~~Points ~~30,~~and ~~2003~~fees ~~over~~charged at the ~~year~~time ~~ended June 30,~~of ~~2002~~origination by the retail channel increased $21.0 ~~The~~million, ~~decrease~~or in33.0%, ~~the~~to ~~percentage~~$84.7 million during the year ended June 30, ~~2002~~2004 from ~~the~~$63.7 ~~percentage~~million during the year ended June 30, ~~2001 is~~2003 ~~attributable~~primarily due to the $~~870~~605.9 0 million, or 3633.7%, increase in total retail loan ~~production~~ originations during the year ended June 30, ~~2002~~2004 over ~~the~~total ~~origination~~retail ~~volume reported~~loan ~~for~~originations during the year ended June 30, ~~2001,~~2003. ~~partially~~The ~~offset by the~~ $12.0% million increase in ~~production~~yield spread ~~expense~~premium, net, during the year ended June 30, ~~2002~~2004 over yield spread premium during the year ended June 30, ~~2001~~2003 is attributable primarily to the $1.9 billion, or 73.1%, increase in total wholesale production during the year ended June 30, 2004, partially offset by a $9.4 million, or 83.0%, increase in income fees collected by the wholesale channel.

~~General and~~The ~~Administrative. General and administrative expense increased~~ $92.78 million, or 245.90%, todecrease ~~$48.7~~in ~~million~~origination fees during the year ended June 30, 2003 from ~~$39.0 million~~the amount reported during the year ended June 30, 2002 was ~~which,~~attributable inprimarily ~~turn,~~to ~~was~~ a $106.08 million~~, or~~ ~~20.5%,~~increase ~~decrease~~in ~~from~~yield ~~$49.0~~spread ~~million during the year ended June 30~~premium, ~~2001.~~net ~~The increase~~of inpoints ~~general~~ and ~~administrative expenses during the year ended June 30~~fees, ~~2003~~ ~~over~~paid ~~such~~by ~~expenses during~~ the ~~year~~wholesale ~~ended June 30~~channel, ~~2002~~partially ~~was~~offset ~~due~~by ~~primarily~~a ~~to increases of~~ $54.80 million, ~~$3.3~~increase ~~million,~~in ~~$1.8~~the ~~million~~points and ~~$0.6~~fees ~~million~~charged ~~in miscellaneous,~~at ~~professional,~~the ~~legal~~time ~~and~~of ~~corporate~~origination ~~related~~in ~~insurance~~the ~~expenses,~~retail ~~respectively,~~channel. ~~partially~~Yield ~~offset~~spread bypremium, ~~declines~~net of ~~$1.0~~points ~~million~~ and fees, increased $06.8 million ~~in occupancy~~to ~~and communication expenses, respectively. The~~ $511.85 million ~~increase in miscellaneous expenses~~ during the year ended June 30, 2003 ~~over~~from ~~such~~$4.7 ~~expenses~~ million during the year ended June 30, 2002. ~~was~~The ~~due principally to a~~ $26.8 million ~~write-off~~ ofincrease ~~aged~~in ~~late~~yield ~~fees~~spread ~~receivable~~premium, ~~and~~net ~~a provision~~ of ~~$1.1 million for~~ ~~estimated~~points ~~uncollectible~~and ~~servicing~~fees, ~~advances. The $3.3 million increase in professional expenses~~ during the year ended June 30, 2003 over ~~professional expenses~~yield ~~during~~spread ~~the year ended June 30~~premium, ~~2002~~net ~~was due primarily to increased use~~ of ~~trust~~points ~~services, outside professional assistance on compliance related matters~~ and ~~the write-off of unamortized debt issuance and Residual Facility costs. The $1.8 million increase in legal expenses during the year ended June 30~~fees, ~~2003 over legal expenses incurred~~ during the year ended June 30, 2002 ~~was~~is ~~due~~attributable primarily to ~~increased~~ ~~legal expenditures incurred by~~ the ~~Company~~$1.1 inbillion, ~~resolving~~or ~~certain litigation~~62.4%, ~~matters~~increase ~~and~~ in ~~closing~~total ~~the~~wholesale ~~Exchange~~production ~~Offer.~~during ~~The $10.0 million decrease~~fiscal in2003 ~~general~~over ~~and~~total ~~administrative~~wholesale ~~expenses~~production during ~~the~~fiscal ~~year ended June 30,~~ 2002 ~~from amounts~~and ~~reported~~to ~~during~~a ~~the~~lesser ~~year ended June 30~~extent, ~~2001~~the ~~was~~48.3% ~~due~~increase ~~to declines~~ in ~~professional,~~ ~~miscellaneous,~~average ~~legal~~yield ~~and~~spread ~~occupancy~~premium, ~~respectively,~~net ~~partially~~of ~~offset by~~points ~~increases~~and infees, ~~corporate~~paid ~~related~~during ~~insurance~~fiscal ~~and communications expenses, respectively~~2003.

~~On September 13,~~Loan ~~2002,~~Servicing. Loan ~~the~~servicing ~~Company~~revenue ~~entered~~consists ~~into~~of aprepayment ~~new~~fees, ~~lease~~late oncharges ~~its~~and ~~Irvine~~other ~~office~~fees ~~space~~retained ~~which~~by ~~extends~~ the ~~lease~~Company and servicing fees earned on 93securitized pools,~~000~~ ~~rentable~~reduced ~~square~~by ~~feet~~subservicing ofcosts ~~space through~~related ~~November 30,~~to ~~2008.~~servicing ~~The~~advance ~~new~~arrangements ~~lease~~and ~~payments~~amortization ~~are~~of ~~not~~the ~~materially different~~Company’s ~~from~~MSRs. ~~those~~See in“Critical ~~place~~Accounting ~~prior~~Policies.” toLoan servicing revenue during the ~~renewal.~~year Onended ~~December 5,~~June ~~2001~~30, ~~the~~ ~~Company~~2004 ~~entered~~was ~~into~~$7.8 amillion ~~sublease~~as ~~involving~~compared ~~approximately~~to ~~39,000~~$8.9 ~~rentable square~~million ~~feet~~and at$12.5 ~~its~~million ~~former~~during ~~headquarters~~the ~~office~~years ~~located~~ended atJune ~~3731 Wilshire Boulevard~~30, ~~Los~~2003 ~~Angeles~~and 2002, ~~California~~respectively. InThe ~~accounting~~$1.1 ~~for~~million ~~the~~decrease ~~sublease~~in ~~transaction, the~~loan ~~Company~~servicing ~~charged~~revenue ~~income~~during ~~for~~the ~~$0.4 million~~year ended ~~representing~~June ~~the~~30, ~~differential between~~2004 ~~the~~from ~~present~~June ~~values~~30, of2003 ~~lease~~was ~~payments~~primarily ~~payable~~due ~~under~~to ~~the~~declines ~~master~~in ~~lease~~servicing, late and ~~the~~ ~~lease~~prepayment ~~payments~~fees ~~receivable~~aggregating ~~under~~$3.7 ~~the sublease~~million, ~~the~~partially ~~unamortized~~offset ~~portion~~by ~~of abandoned~~declines ~~leasehold~~in ~~improvements~~subservicing ~~and~~related expenses ~~associated~~and ~~with~~amortization ~~the~~of ~~transaction. On~~mortgage ~~January 31,~~servicing ~~2001,~~rights in the aggregate ~~Company~~amount ~~entered~~of ~~into~~$2.6 amillion. ~~sublease~~The ~~involving approximately~~declines 44in servicing,~~800~~ ~~rentable~~late ~~square~~and ~~feet~~prepayment atfees ~~its~~during ~~headquarters~~the ~~office~~year ~~located~~ended ~~at 350~~June ~~South~~30, ~~Grand~~2004 ~~Avenue,~~are ~~Los~~due ~~Angeles,~~to ~~California~~the $511.8 Inmillion, ~~accounting~~or ~~for~~69.1%, ~~the~~decrease ~~sublease transaction,~~in ~~the~~mortgage ~~Company~~loans ~~charged~~in ~~income~~securitization ~~for~~trusts ~~the~~serviced ~~differential~~in-house ~~between~~during the ~~present~~year ~~values~~ended ofJune ~~lease~~30, ~~payments~~2004 ~~payable~~compared ~~under~~to ~~the~~such ~~master~~loans ~~lease~~serviced ~~and~~in-house during the ~~lease~~year ~~payments receivable~~ended ~~under~~June ~~the~~30, ~~sublease.~~2003, ~~The~~together ~~Company~~with ~~also~~a ~~charged~~decrease ~~income~~in ~~for~~prepayment ~~the unamortized~~fees ~~portion~~due ofto the ~~leasehold~~aging ~~improvements~~of ~~that~~loans ~~were~~in ~~abandoned~~the ~~and expenses~~portfolio ~~associated~~beyond ~~with~~ the ~~transaction.~~term ~~Additionally,~~of ~~the~~prepayment ~~Company~~fees. ~~reversed certain~~Subservicing ~~accruals~~expenses and related ~~deferred~~resolution, ~~credits~~set-up ~~applicable~~and toreperformance expenses during the ~~sublet~~year ~~space. Consequently~~ended June 30, ~~there~~2004 ~~was~~were no$0.2 ~~net~~million, ~~charge~~down to$0.2 ~~earnings~~million asfrom athe ~~result~~$0.4 million of ~~this~~such ~~sublease transaction.~~expenses ~~The~~during ~~Company~~the ~~was~~year ~~required~~ended byJune ~~the~~30, ~~terms~~2003. Amortization of ~~the~~mortgage ~~sublease~~servicing ~~to pledge~~rights ~~approximately~~declined $12.9 5 million into ~~the~~$0.2 ~~form~~million ofduring athe ~~cash~~year ~~deposit~~ended toJune ~~guarantee~~30, ~~the differential~~2004 ~~between~~from the ~~present~~$2.7 ~~values~~million ofduring the ~~master~~year ~~lease~~ended ~~payment~~June ~~streams~~30, ~~and the sublease receivable streams~~2003. The ~~cash deposit is refundable to the~~ Company ~~over~~’s ~~the~~mortgage ~~term~~servicing ofrights ~~the~~were ~~sublease~~fully ifamortized noat ~~performance~~June ~~default~~30, ~~occurs~~2004.

The $3.6 million decrease in loan servicing revenue during the year ended June 30, 2003 from June 30, 2002 was due primarily to declines in servicing, late and prepayment fees aggregating $5.7 million, partially offset by declines in subservicing related expenses and amortization of mortgage servicing rights in the aggregate amount of $2.1 million. The declines in servicing, late and prepayment fees during the year ended June 30, 2003 were due to the $451.0 million, or 37.8%, decrease in mortgage loans in securitization trusts serviced in-house during the year ended June 30, 2003 compared to such loans serviced in-house during the year ended June 30, 2002, together with a decrease in prepayment fees due to the aging of loans in the portfolio beyond the term of prepayment fees. Subservicing expenses and related resolution, set-up and reperformance expenses during the

~~Interest.~~ ~~Interest expense declined $7.2 million, or 19.3%, to $30.2 million during the~~ year ended June 30, 2003 ~~from~~were $370.4 ~~million~~ ~~during the year ended June 30~~million, ~~2002~~down ~~which, in turn, was a decrease of~~ $131.5 3 million~~, or~~ ~~26.5%,~~ from the $501.9 7 million of ~~interest~~such ~~expense~~expenses ~~reported~~ during the year ended June ~~30,~~ ~~2001. The decrease in interest expense during the year ended June~~ 30, ~~2003 from levels reported during the year ended June 30,~~ 2002. ~~resulted~~Amortization ~~primarily from lower interest rates associated with the Company’s revolving warehouse and repurchase facilities used to fund the origination~~ of mortgage ~~loans~~servicing ~~prior~~rights todeclined their disposition despite increased average borrowings under the facilities during fiscal 2003 when compared to such rates and average borrowings during fiscal 2002. To a lesser extent, the decrease in interest expense resulted from a $220.19 million ~~decrease~~to ~~in the Company’s Senior Notes and a~~ $442.87 million ~~decrease in the 2012 Debentures through the extinguishment of such debt by the Company~~ during the year ended June 30, 2003. ~~The Company’s revolving warehouse and repurchase agreements bear interest rates that are indexed to the one-month LIBOR which, during the year ended June 30, 2003, declined~~ from ~~levels during the year ended June 30, 2002~~$3.6 ~~While~~million ~~the Company’s interest costs on its revolving warehouse and repurchase facilities trended down~~ during the year ended June 30, ~~2003~~ from a year ago, such interest expense is expected to increase in future periods due to the Company’s continued reliance on external financing arrangements to fund mortgage loan production and expected continued upward pressure on one month LIBOR in coming quarters2002.

The ~~decrease~~ Company has in ~~interest~~place ~~expense~~two ~~during~~arrangements ~~the~~designed ~~year~~to ~~ended~~reduce ~~June 30~~its servicing advance obligations. In the first arrangement, ~~2002~~which ~~from~~was in place during the ~~year~~years ended June 30, ~~2001~~2004 ~~resulted~~and ~~primarily~~2003, ~~from~~a ~~lower~~loan ~~interest~~servicing ~~rates associated~~company ~~with~~purchased ~~the~~certain ~~Company’s~~advances ~~revolving~~and ~~warehouse~~agreed ~~and~~to ~~repurchase~~make ~~facilities used~~future advances with respect to ~~fund~~an ~~the~~aggregate ~~origination~~$388.0 ofmillion ~~mortgage~~($53.9 ~~loans~~million ~~prior~~at toJune ~~their~~30, ~~disposition despite~~2004) ~~increased~~in ~~average~~principal ~~borrowings~~amount ~~under~~of loans. In the ~~facilities~~second arrangement, which expired during ~~fiscal~~the ~~2002 when~~year ~~compared~~ended toJune ~~such~~30, ~~rates~~2003, an investment bank purchased certain servicing related advances and ~~average~~agreed ~~borrowings~~to ~~during~~undertake ~~fiscal~~the ~~2001.~~obligation to make a substantial portion of the Company’s advance obligations.

~~As a~~Total ~~result~~Operating ofExpenses extinguishing the remaining $127.9 million of Senior Notes with the $74.1 million Financing Facility which bears interest at a lower interest rate, and the extinguishment of the remaining $4.8 million of 2012 Debentures on June 30, 2003, the Company expects its interest expense on its nonrevolving indebtedness will be lower in fiscal 2004 compared to fiscal 2003.

~~Income Taxes~~General. Total ~~During~~operating ~~the~~expenses ~~years~~during the year ended June 30, ~~2003,~~2004 ~~2002~~were ~~and 2001, the Company recorded an income tax provision (benefit) of (~~$1239.8) million, compared to $3236.1 ~~million and~~ ~~$1.9~~ million, ~~respectively,~~during ~~which~~the ~~reflect~~year ~~effective~~ended ~~tax~~June ~~rates of (6.7)%~~30, ~~40.4%~~2003 and 6$197.6%, ~~respectively.~~million ~~The~~during ~~Company~~the ~~periodically~~year ~~undergoes~~ended ~~federal and~~June ~~state~~30, ~~tax~~2002. ~~return~~The ~~examinations~~$3.7 ~~and~~million ~~may~~increase ~~provide~~in ~~for~~total ~~additional~~operating ~~liabilities~~expenses ~~for identified~~during ~~exposure items. During~~ the ~~three~~year ~~months~~ ended June 30, ~~2003, a number~~ of2004 ~~pending~~over ~~tax~~the ~~return~~year ~~audits~~ended ~~were~~June ~~finalized~~30, ~~and~~2003 ~~related~~was ~~tax~~attributable ~~liabilities were adjusted~~ to ~~the~~increases ~~actual~~of ~~amounts due~~$28.6 ~~This~~million, ~~resolution~~$9.3 ~~resulted~~million inand ~~a tax benefit of approximately~~ $6.0.7 million ~~being recognized~~ in ~~the~~personnel, ~~accompanying~~production ~~consolidated statement~~and ofgeneral ~~operations.~~and ~~The~~administrative ~~provisions~~expense, ~~for income taxes during the years ended June 30~~respectively, ~~2002~~partially ~~and~~offset ~~2001~~by ~~are~~a ~~related~~decline ~~primarily~~of to$34.9 ~~estimated~~million ~~taxes on excess~~in ~~inclusion~~residual ~~income~~interest onwrite-downs. ~~the~~The ~~Company’s~~$38.5 ~~REMIC~~million ~~trusts~~increase ~~and,~~in tototal aoperating ~~lesser~~expenses ~~extent, other~~during ~~miscellaneous~~the ~~state~~year ~~taxes.~~ended ~~The~~June ~~investment~~30, in2003 ~~the~~over ~~Company by Capital Z during~~ the year ended June 30, ~~1999~~2002 ~~resulted~~was inattributable ato ~~change~~increases inof ~~control~~$16.8 ~~for income~~million, ~~tax~~$4.5 ~~purposes~~million, ~~thereby~~$9.2 ~~limiting~~million ~~the~~and ~~Company’s~~$7.9 ~~ability~~million in topersonnel, ~~use~~production, ~~net operating~~general ~~loss~~and ~~carryforwards~~administrative expense and ~~certain~~residual ~~other~~interest ~~future~~write-downs, ~~deductions~~respectively.

Personnel. Personnel expense includes salaries, payroll taxes and medical and other employee benefits. Personnel expense also includes commissions that are generally related to Aames Financial’s loan origination volume, as retail and broker account executives earn incentives on funded loans. Personnel expense during the year ended June 30, 2004 was $160.2 ~~Condition~~million, an increase of $28.6 million, over the $131.6 million during the year ended June 30, 2003. Direct incremental personnel costs incurred on mortgage loans originated but not yet sold are deferred to future periods and recognized as expense at the time the mortgage loans are sold. The $28.6 million increase in personnel expense during the year ended June 30, 2004 over the year ended June 30, 2003 was due primarily to a $25.6 million increase in salaries, commissions, bonuses and incentives, an $11.1 million increase in salaries due to increased staff levels and a $4.6 million increase in medical and other benefit costs, all of which were partially offset by an increase of $12.7 million in the deferral of direct incremental compensatory costs during the year ended June 30, 2004 over the amount reported a year ago. The $25.6 million increase in commissions, bonus and incentives during the year ended June 30, 2004 over amounts reported a year ago was due primarily to a $22.7 million increase in commission compensation earned by retail and wholesale account executives and was attributable to the $2.5 billion, or 57.2%, increase in total loan production during the year ended June 30, 2004 over total loan production during the year ended June 30, 2003. To a lesser extent, the increase was comprised of a $2.9 million increase in incentive compensation relative to senior management during the year ended June 30, 2004 over the year ended June 30, 2003. The $11.1 million of increased salaries resulted from increased staffing levels during the year ended June 30, 2004 over staffing levels during the year ended June 30, 2003 due primarily to the impact on head count caused by the increase in retail branches and wholesale operations centers, over the year ended June 30, 2003. Finally, the $4.6 million increase in health, medical and other benefit costs during the year ended June 30, 2004 over the amount reported the prior year was attributable to increased costs for such benefits and increased staff levels. Of the $16.8 million increase in personnel expense during the year ended June 30, 2003, salaries, commissions, bonuses and incentives increased $14.5 million, or 14.8%, during the year ended June 30, 2003 over the amounts reported during the year ended June 30, 2002. The increase was comprised primarily of a $7.1 million increase in commission compensation earned by retail and wholesale account executives during the year ended June 30, 2003 over the prior year due to the $1.2 billion, or 37.5%, increase in production during the year ended June 30, 2003 over production during the year ended June 30, 2002. In addition, the increase was due to $5.2 million of increased salaries resulting from increased staffing levels during the year ended June 30, 2003 over staffing levels during the year ended June 30, 2002 due primarily to the impact on head count caused by the acquisition of the Company’s second National

Loans Held for Sale. The Company’s portfolio of loans held for sale decreased to $401.0 million at June 30, 2003 from $462.1 million at June 30, 2002. The decrease is primarily attributable to the Company’s $4.5 billion of total loan dispositions in the secondary market exceeding its $4.4 billion of loan production during the year ended June 30, 2003.

Advances and Other Receivables. Advances and other receivables are comprised of interest and servicing advances; servicing and late fees; cash due from the securitization trusts; and accrued interest receivable and other miscellaneous receivables. The level of servicing advances, in any given period, is dependent upon portfolio delinquencies, the level of REO and loans in the process of foreclosure, and the timing and remittance of cash collections on mortgage loans in the securitization trusts. The Company funds advances on a recurring basis not otherwise covered by financing arrangements and recovers those advances on a periodic basis. Advances and other receivables decreased $20.0 million to $41.3 million at June 30, 2003 from $61.3 million at June 30, 2002. The decrease is primarily attributable to a $14.6 million decrease in interest and servicing advances, a $3.7 million decrease in servicing and late fees receivable, and a $1.7 million decrease in accrued interest and other receivables.

~~The~~ ~~$14.6 million~~Loan ~~decrease~~Center inand, ~~servicing~~to ~~advances~~a atlesser ~~June 30~~extent, ~~2003 from June 30, 2002 is attributable~~ to ~~recoveries~~other ofemployee ~~previous~~head ~~advances~~count ~~exceeding new~~growth ~~advances~~within ~~during~~ the ~~year~~Company ~~ended~~driven ~~June~~primarily ~~30,~~by ~~2003.~~increased ~~During~~loan ~~the year ended June 30, 2003, the Company recovered $45~~production.8 ~~million of servicing related~~Incentive ~~advances~~compensation asrelative ~~compared~~ to ~~$31.2 million~~senior ofand ~~servicing~~other ~~related~~management ~~advances~~increased ~~made by the Company in its role of servicer of the mortgage loans in the securitization trusts. The~~ $32.72 million ~~decline~~during inthe ~~servicing~~year ~~and~~ended ~~late fees receivable at~~ June 30, 2003 ~~from~~over ~~June 30, 2002 is due to declining servicing and late fees earned by~~ the ~~Company~~year asended ~~a consequence of the decrease in its portfolio of mortgage loans in securitization trusts serviced in-house to $741.0 million at~~ June ~~30,~~ ~~2003 from $1.2 billion at June~~ 30, 2002,. ~~and~~To to a ~~$2.8~~lesser ~~million~~extent, ~~write-off~~the ofincrease ~~uncollectible~~in ~~late~~personnel ~~fees by~~expense ~~the Company~~ during the year ended June 30, 2003. ~~The~~over ~~decrease in accrued~~the ~~interest~~amount ~~and~~reported ~~other~~the ~~receivables~~prior atyear ~~June 30,~~is ~~2003~~attributable ~~from~~to ~~June 30,~~a ~~2002 resulted~~$1.5 ~~primarily~~million ~~from~~increase ~~interest~~in ~~accruals~~contract ~~based~~services ~~upon~~utilized ~~lower~~in ~~average~~preparing ~~coupon~~funded ~~rates and~~mortgage ~~on lower average balances of~~ loans ~~held~~ for sale ~~at June 30, 2003 from rates and balances a year ago and,~~ to awhole ~~lesser~~loan ~~extent~~buyers, ~~from~~and ~~decreased~~$0.8 ~~swap margins~~million ~~(fair value estimates) as a result~~ of aincreased ~~decrease in open hedge positions at June 30~~health, ~~2003~~medical asand ~~compared~~other tobenefit ~~such positions at June 30, 2002~~costs.

~~Residual Interests~~Production. Production ~~Residual~~expense increased ~~interests decreased~~ $689.1 3 million, or 35.8%, to $~~129~~35.2 1 million atduring the year ended June 30, ~~2003~~2004 from $~~197~~25.3 8 million at during the year ended June 30, ~~2002,~~2003. ~~reflecting~~The ~~$34.9 million~~increase ofin ~~residual~~production ~~interest write-downs~~expense ~~and~~during ~~$49.7 million~~the ofyear ~~cash~~ended ~~received~~June ~~from~~30, 2004 over the ~~securitization~~production expense for the ~~trusts~~year ended June 30, ~~partially~~2003 ~~offset~~is byprimarily due to increased advertising expenses relative to the $162.5 ~~million~~ ofbillion, ~~residual~~or ~~interest~~57.2%, ~~accretion~~ increase in the Company’s loan production volumes during the year ended June 30, 2004 over production volumes during the year ended June 30, 2003. ~~During~~The increase in production expense during the year ended June 30, 2003, over the ~~Company~~prior ~~did~~year ~~not~~is ~~retain~~due ~~any~~primarily ~~residual~~to ~~interests~~increased inadvertising expenses relative to the $~~315~~1.~~0 million~~2 ofbillion, ~~securitizations~~or ~~it consummated~~37.5% ~~All~~increase ofin ~~such~~the ~~residual~~Company’s loan production ~~interests~~volumes ~~were~~during ~~sold~~the toyear ~~CZI~~ended ~~for~~June ~~cash~~30, ~~under~~2003 over production volumes during the ~~Residual~~year ~~Facility~~ended June 30, 2002.

~~On August~~Production 15expense when expressed as a percentage of total loan origination volume for the year ended June 30, 2004, 2003 and 2002 was 0.5%, 0.6% and 0.7%, respectively. The decrease in the ~~Company~~percentage ~~called~~during ~~four~~the ~~securitization~~year, ~~trusts~~ended ~~with~~June an30, ~~unpaid principal~~2004 ~~balance~~from ofthe percentage during the year ended June 30, 2003 is attributable to the $292.35 ~~million~~billion, ofor ~~mortgage~~57.2%, ~~loans~~increase ($in total loan production during the year ended June 30, 2004 over the loan origination volume reported for the year ended June 30, 2003, partially offset by the 35.58% ~~million~~increase atin production expense during the year ended June 30, 2004 over the year ended June 30, 2003). The ~~August~~decrease 15in the percentage during the year ended June 30, 2003 ~~call~~from ~~resulted~~the inpercentage aduring ~~$3.0~~the ~~million~~year ~~write-down~~ended June 30, 2002 is attributable to the ~~carrying~~ ~~value~~$1.2 ofbillion, or 37.5% increase in total loan production during the ~~Company’s~~year ~~retained~~ended ~~residual~~June ~~interests~~30, ~~relating~~2003 toover the origination volume ~~these~~reported ~~securitization~~for ~~trusts~~the year ended June 30, 2002, partially offset by the 21.1% increase in production expense during the year ended June 30, 2003 over the year ended June 30, 2002.

~~As of~~General ~~August~~and 31Administrative. General and administrative expense increased $0.7 million, ~~2003~~or 1.8%, ofto $44.5 million during the ~~Company’s~~year ~~remaining~~ended ~~thirteen~~June ~~securitization trusts~~30, 2004 from $43.7 million during the year ended June 30, 2003 which, ~~had~~in turn, was a ~~mortgage~~$9.2 ~~loan~~million, ~~balance~~or of26.8%, increase from $~~735~~34.95 million ~~($829~~during the year ended June 30, 2002. The $0.7 million at increase in general and administrative expenses during the year ended June 30, 2004 over such expenses during the year ended June 30, 2003) was primarily due to increases of $1.6 million, ~~six~~$1.2 ~~securitization~~million, ~~trusts~~$1.0 ~~with~~million aand ~~mortgage~~$0.8 ~~loan~~million ~~balance~~in ofoccupancy, communication, corporate related insurance and professional expenses, offset by decreases of $~~199~~1.2 million (and $~~214~~2.7 million in legal and miscellaneous expenses, respectively. The increases in occupancy, communication and corporate related insurance costs are primarily due to the increase in the number of retail branches and National Loan Centers from 93 at June 30, 2003) ~~were~~to ~~callable~~99 at June 30, 2004. IfThe $1.2 million decrease in legal costs was primarily due to legal fees incurred by the Company during ~~calls~~the ~~any~~year ofended ~~these~~June ~~securitization trusts~~30, it2003 ~~might~~in beresolving ~~required~~certain litigation matters and in closing the exchange offer pursuant to ~~write~~which it exchanged $49.6 million of the outstanding 2006 Debentures that were tendered and issued in an equal amount of 2012 ~~down~~Debentures. The $2.7 million decrease in miscellaneous expenses was primarily due to the ~~value~~write-off in fiscal 2003 of $2.8 million of aged late fees receivable. The increase in general and administrative expenses during the ~~residual~~year ~~interests~~ended ~~relating~~June to30, 2003 over such expenses during the ~~called~~year ~~securitization~~ended June 30, 2002 was due primarily to increases of $5.8 million, $2.8 million, $1.8 million and $0.6 million in miscellaneous, professional, legal and corporate related insurance expenses, respectively, ~~trusts~~partially offset by declines of $1.0 million and $0.8 million in occupancy and communication expenses, respectively.

~~Mortgage Servicing~~On ~~Rights,~~September ~~net. Mortgage servicing rights~~13, ~~net~~2002, ~~decreased~~the ~~to $0.2 million~~Company atentered ~~June 30,~~into ~~2003~~a ~~from~~new ~~$2.9 million~~lease aton ~~June 30, 2002~~its ~~reflecting~~Irvine ~~$2.7 million~~office ofspace ~~mortgage~~which ~~servicing~~extends ~~rights amortization during~~ the ~~year~~lease ~~ended~~on ~~June 30~~93,000 ~~2003.~~rentable ~~During~~square ~~the~~feet ~~year~~of ~~ended~~space through ~~June~~ November 30, ~~2003,~~ ~~the Company did not capitalize any mortgage servicing rights~~2008. The ~~Company sold~~new ~~for~~lease ~~cash~~payments ~~the~~are ~~servicing~~not ~~rights~~materially ondifferent ~~the~~from ~~mortgage~~those ~~loans~~ in ~~the $315.0 million~~place ofprior ~~securitizations~~to ~~which~~the ~~closed~~renewal. ~~during~~On ~~the~~December ~~year ended June 30~~5, ~~2003~~2001, ~~and all of~~ the Company’s ~~$4.2 billion~~entered ofinto ~~loans sold~~a insublease ~~whole~~involving ~~loan~~approximately ~~sales~~39,000 ~~for~~rentable ~~cash~~square ~~during~~feet ~~the~~at ~~year~~its ~~ended~~former headquarters ~~June 30,~~office ~~2003~~located ~~were sold~~at ~~with~~3731 ~~servicing~~Wilshire ~~released.~~Boulevard, ~~The~~Los ~~Company’s~~Angeles, ~~mortgage~~California. ~~servicing~~In ~~rights~~accounting ~~will be~~for ~~fully~~the ~~amortized~~sublease bytransaction, ~~September~~the ~~30,~~Company ~~2003.~~charged

Equipment and Improvements, net. Equipment and improvements, net, decreased to $8.9 million at June 30, 2003 from $10.9 million at June 30, 2002 due primarily to depreciation and amortization outpacing capital expenditures during the year ended June 30, 2003.

Prepaid and Other Assets. Prepaid and other assets increased to $17.5 million at June 30, 2003 from $14.7 million at June 30, 2002, primarily due to an increase in defunded loans receivable at June 30, 2003 over a year ago and, to a lesser extent, an increase in security deposits, partially offset by a decrease in debt issuance costs during the year ended June 30, 2003.

Borrowings. Amounts outstanding under borrowings at June 30, 2003 declined $125.5 million to $138.5 million from $264.0 million at June 30, 2002. The $125.5 million decrease was comprised of the Company’s refinancing of $127.9 million face amount of its Senior Notes, of which $53.8 million was in the form of cash, the Company’s purchase and extinguishment of $22.1 million face amount of its Senior Notes and the Company’s $49.6 million redemption of its 2006 Debentures, partially offset by the $74.1 million of new borrowings under the Financing Facility.

~~The~~ ~~Financing~~income ~~Facility~~for is$0.4 ~~secured~~million byrepresenting ~~all of~~ the ~~Company’s~~differential ~~residual~~between ~~interests and~~the ~~certain~~present ~~servicing~~values ~~advances,~~of ~~has~~lease apayments ~~term~~payable ofunder 18the ~~months~~master lease and ~~bears~~the ~~interest~~lease ~~at a~~payments ~~rate~~receivable ofunder ~~one-month~~the ~~LIBOR~~sublease, ~~plus~~the ~~2.75%~~unamortized ~~per~~portion ~~annum.~~of ~~Eighty~~abandoned ~~percent~~leasehold ofimprovements ~~the~~and ~~monthly~~expenses ~~cash flows~~associated ~~generated~~with ~~from~~ the ~~Company’s~~transaction. ~~residual~~On ~~interests~~January ~~and~~31, at2001, ~~least~~the ~~70.0%~~Company ~~of cash~~entered ~~flows~~into ~~from~~a ~~recoveries~~sublease ofinvolving ~~servicing~~approximately ~~advances~~44,800 ~~securing~~rentable ~~the~~square ~~Financing~~feet ~~Facility~~at ~~will~~its beheadquarters ~~paid~~office tolocated ~~the~~at ~~lender~~350 toSouth ~~reduce~~Grand ~~the~~Avenue, ~~outstanding~~Los ~~balance~~Angeles, California. ~~The~~In ~~Company~~accounting ~~may, subject~~for tothe ~~certain~~sublease ~~limitations~~transaction, ~~prepay~~the ~~without~~Company ~~penalty~~charged income for the ~~amount~~differential ~~outstanding under~~between the ~~Financing~~present ~~Facility~~values atof ~~any~~lease ~~time.~~payments ~~The~~payable ~~Company~~under ~~paid~~the amaster lease ~~$0.5~~and ~~million~~the ~~fee~~lease ~~to Capital~~payments Zreceivable ~~for~~under ~~Capital~~the ~~Z’s~~sublease. ~~agreement~~The toCompany ~~serve~~also ascharged ~~the~~income ~~limited~~for ~~guarantor under~~ the ~~Financing~~unamortized ~~Facility.~~portion Inof ~~addition,~~the ~~commencing~~leasehold ~~July~~improvements ~~31,~~that ~~2003~~were abandoned and ~~until~~expenses ~~the limited~~associated ~~guaranty~~with ~~amount~~the istransaction. ~~fully reduced~~Additionally, the Company reversed iscertain ~~obligated~~accruals toand ~~make monthly~~deferred ~~payments~~credits applicable to ~~Capital~~the Zsublet ~~based~~space. ~~upon~~Consequently, athere ~~percentage~~was ~~applied~~no net charge to ~~the~~earnings ~~outstanding limited~~as ~~guaranty~~a ~~amount.~~result Ifof ~~the~~this ~~Company~~sublease ~~calls~~transaction. ~~any~~The ofCompany ~~the~~was ~~securitization~~required ~~trusts underlying~~by the ~~residual~~terms ~~interests~~of ~~pledged under~~ the ~~Financing~~sublease ~~Facility,~~to itpledge isapproximately ~~required~~$1.9 tomillion ~~prepay~~in the ~~Financing~~form ~~Facility~~of ina ancash ~~amount~~deposit ~~equal~~ to guarantee the ~~amount ascribed~~differential tobetween the ~~called~~present ~~residual~~values ~~interests~~of ~~and~~ the ~~servicing~~master ~~advances~~lease onpayment ~~mortgage loans~~streams inand the ~~securitization~~sublease ~~trusts~~receivable bystreams. ~~the~~The ~~lender~~cash ~~under~~deposit ~~the~~is ~~Financing~~refundable ~~Facility. As~~to athe ~~result~~Company ofover the ~~August~~term ~~15, 2003 call~~ of ~~such securitization trusts,~~ the sublease ~~Company~~if ~~repaid~~no ~~the~~performance ~~Financing~~default ~~Facility $3~~occurs.4 ~~million.~~

~~Revolving Warehouse~~During ~~and~~the ~~Repurchase~~years ~~Facilities.~~ended ~~Amounts outstanding under revolving warehouse and repurchase facilities decreased to $343.7 million at~~ June 30, 2004, 2003 ~~from~~and ~~$383.1 million at June 30,~~ 2002, ~~due~~the toCompany ~~a decline~~made intotal ~~loans~~rental ~~held~~payments ~~for~~of ~~sale~~$9.4 ~~at June 30~~million, ~~2003~~$8.1 ~~compared~~million toand ~~June 30, 2002~~$8.2 ~~Proceeds~~million, ~~from~~respectively, ~~whole loan sales~~ and ~~securitizations~~received ~~are~~total ~~first~~sublease ~~used~~payments ~~to reduce~~of ~~balances~~$1.4 ~~outstanding~~million, ~~under~~$1.4 ~~the~~million ~~Company’s revolving warehouse~~ and ~~repurchase~~ ~~facilities~~$1.0 ~~and~~million, ~~then used for general corporate purposes~~respectively.

~~Income Taxes~~Write-down ~~Payable. At June 30, 2003 and 2002, the Company had $2.9 million and $2.4 million~~ of ~~taxes~~residual ~~currently payable, respectively~~interests. During ~~The~~the ~~Company’s~~year ~~gross~~ended ~~deferred tax liabilities increased by $6.1 million to $22.8 million at~~ June 30, ~~2003 from $16.7 million at June 30~~2004, ~~2002 due to~~ the ~~change~~Company indid ~~the~~not ~~tax~~record ~~effects~~a ~~of temporary differences relating to mark~~write-~~to-market~~down ~~adjustments and,~~ to aits ~~lesser~~residual ~~extent~~interests; however, ~~miscellaneous~~during ~~other~~the ~~items. The~~years ~~Company’s~~ended ~~gross deferred tax assets at~~ June 30, 2003 ~~of $148.7 million~~and ~~remained substantially unchanged from $148.2 million at June 30~~2002, ~~2002.~~the ~~The~~ Company’s ~~tax~~recorded ~~valuation~~write-downs ~~allowance decreased $11.8 million~~ to ~~$125.8 million~~its atresidual ~~June 30,~~interests ~~2003~~of ~~from~~ $~~137~~34.7 9 million atand ~~June 30, 2002~~$27.0 ~~The decrease in the tax valuation allowance resulted from the utilization of deferred tax assets against deferred tax liabilities that originated during the year ended June 30~~million, ~~2003, and a~~ ~~reduction of deferred tax liabilities associated with tax contingencies that were resolved during the year ended June 30, 2003~~respectively.

~~Liquidity~~During the year ended June 30, 2003, despite lower net credit losses on liquidations of mortgage loans in the securitization trusts, the Company experienced higher than expected loss severities on such liquidations. During the same time, the Company also experienced higher than estimated prepayment speed activity for mortgage loans in the securitization trusts due to the low mortgage interest rate environment prevailing in the United States. Therefore, the Company increased its credit loss assumptions and ~~Capital~~changed ~~Resources~~its annual prepayment rate assumptions used to estimate the fair value of its retained residual interests. During the year ended June 30, 2003, the Company also adjusted the underlying forward interest rate curve assumption used to estimate the fair value of its retained residual interests. The effect of these changes in estimates resulted in a $31.9 million write-down to the carrying value of the Company’s retained residual interests. Additionally, as master servicer of the mortgage loans in the securitization trusts, the Company has the right to call at par the mortgage loans in securitization trusts when the remaining balance of the mortgage loans sold in the securitization trusts falls below 10.0% of the original mortgage loan balance. During the year ended June 30, 2003, the Company called the mortgage loans in seven of the securitization trusts which did not materially effect the carrying value of the Company’s retained residual interests. In August 2003, the Company notified the trustee of the securitization trusts of the Company’s intent to call four additional securitization trusts. In estimating the effects on the carrying value of the retained residual interests of calling the mortgage loans in those four securitization trusts, the Company wrote down by $3.0 million the retained residual interests related to those four securitization trusts.

The ~~Company’s~~ ~~operations~~$27.0 ~~require~~million ~~continued access to short~~write-~~term~~down ~~and~~recorded ~~long-term sources~~during ~~of cash. The Company’s primary operating cash requirements include: (i)~~ the ~~funding~~year ofended ~~mortgage~~June ~~loan originations and purchases prior to their securitization and sale~~30, ~~(ii) fees~~2002, ~~expenses~~primarily ~~and~~reflected ~~hedging costs, if any, incurred in connection with~~ the ~~securitization~~Company’s ~~and~~unfavorable ~~sale~~assessment of ~~loans, (iii) ongoing~~actual ~~administrative, operating, and tax expenses, (iv) interest~~credit ~~and~~loss ~~principal payments~~ and ~~liquidity~~delinquency ~~requirements~~experience ~~under~~of ~~the~~certain ~~Company’s revolving~~loans ~~warehouse and repurchase facilities, and other existing indebtedness, (v) advances~~ in ~~connection with~~ the ~~Company’s~~securitization ~~servicing~~trusts ~~portfolio,~~as ~~and~~compared ~~(vi) overcollateralization~~to ~~requirements~~credit inloss ~~connection~~and ~~with~~delinquency ~~securitizations~~assumptions.

~~The Company’s~~Nonoperating ~~primary~~income sources of liquidity are expected to be (i) fundings under revolving warehouse and repurchase facilities, (ii) securitization and sale of mortgage loans and related servicing rights and (iii) monetization of the overcollateralization in the Company’s portfolio of mortgage loans in securitization trusts. At June 30, 2003, the Company monetized its residual interests and its servicing advances through the Financing Facility. The Company historically had access to working capital financing facilities and the issuance of debt and equity securities to finance its operating cash requirements; however, due to the Company’s operating performance in the three most recent fiscal years, the Company does not expect access to those capital resources in the foreseeable future. See “—Risk Factors—We depend on short-term financing facilities to make mortgage loans and if we are unable to maintain adequate financing sources it could jeopardize our continued operations.

Debt Extinguishment Income. During the year ended June 30, 2004, the Company did not record any debt extinguishment income; however, during the year ended June 30, 2003, the Company recorded debt extinguishment income of $31.7 million. On December 13, 2002, the Company consummated an exchange offer, pursuant to which it exchanged $49.6 million of the outstanding 2006 Debentures that were tendered and issued an equal amount of 2012 Debentures. On December 23, 2002, the Company redeemed $19.8 million, or 40.0%,

~~Warehouse~~ ~~and~~of ~~Repurchase~~the ~~Facilities.~~principal ~~The~~amount ~~Company~~outstanding ~~generally~~on ~~relies~~the on2012 ~~revolving~~Debentures ~~warehouse and~~through ~~repurchase~~a ~~facilities~~scheduled tomandatory ~~finance~~sinking fund payment. Of the ~~origination~~$19.8 ormillion ~~purchase~~sinking offund ~~mortgage~~payment, ~~loans~~$16.6 ~~prior~~million was paid to ~~securitization~~Specialty orFinance ~~sale~~Partners with respect to $41.6 Atmillion ~~June 30,~~of ~~2003,~~2012 ~~the~~Debentures ~~Company~~owned ~~had committed~~by ~~revolving~~Specialty ~~warehouse~~Finance ~~and~~Partners. ~~repurchase~~On ~~facilities~~March in31, ~~the~~2003, ~~amount~~Specialty ofFinance Partners forgave its remaining $~~900~~25.0 million ~~and~~principal ~~amounts~~balance ~~outstanding~~of ~~under~~2012 Debentures, ~~the~~which ~~facilities~~was ~~were~~recorded ~~$343~~as debt extinguishment income.~~7 million.~~ The remaining $~~900~~4.07 million of ~~committed~~the ~~revolving~~Company’s ~~warehouse~~outstanding ~~and~~2012 ~~repurchase~~Debentures ~~facilities available~~were tofully ~~the~~redeemed ~~Company~~on at June 30, 2003 ~~had~~at ~~various~~the ~~maturities~~optional ~~through~~call price of 5.0%, or $0.2 million, of the outstanding ~~September~~principal 30balance, ~~2003~~resulting in $4.5 million of debt extinguishment income.

~~Subsequent to~~During the year ended June 30, 2003, ~~the~~in ~~Company~~a ~~increased~~series ~~its~~of ~~total~~transactions ~~capacity~~that ~~under~~were ~~its~~all ~~revolving warehouse~~with ~~and~~unrelated ~~repurchase~~parities, ~~facilities~~the toCompany ~~$1.2~~redeemed ~~billion of which~~ $122.1 ~~billion and $100.0~~ million ~~was~~principal ~~committed~~balance ~~and~~of ~~uncommitted,~~its ~~respectively.~~Senior ~~The~~Notes ~~Company~~at ~~entered into~~ a ~~new~~discount ~~fully~~from ~~committed~~par for $~~200~~19.09 million ~~revolving warehouse facility,~~ and ~~an additional~~recognized ~~new~~debt ~~revolving~~extinguishment ~~warehouse~~income ~~facility with committed and uncommitted capacity~~ of $~~100~~2.02 million. ~~and~~At ~~$100.0~~June ~~million~~30, ~~respectively. In addition~~2003, the Company ~~renewed~~ anredeemed ~~existing~~the ~~$300.0~~remaining ~~million committed revolving repurchase facility and renewed an existing~~ $~~300~~127.09 million ~~committed~~principal ~~revolving~~balance ~~warehouse~~of ~~facility reducing~~its ~~capacity~~Senior ~~thereunder~~Notes torepresenting ~~$200.0~~all ~~million.~~of Of the ~~Company’s~~remaining ~~current $1.2~~outstanding ~~billion~~Senior ~~of existing revolving warehouse and repurchase facilities~~Notes, ~~$200.0 million~~at ~~expires~~par onplus ~~October~~accrued ~~29, 2003~~ and unpaid ~~$500~~interest.0 ~~million~~The ~~expires~~redemption onof ~~October~~the ~~31,~~Senior ~~2003.~~Notes ~~While~~was nofunded ~~assurances~~by ~~can be made,~~ the ~~Company~~ ~~expects~~$74.1 tomillion ~~renew~~financing ~~these revolving~~facility ~~warehouse~~secured ~~facilities~~by onthe ~~same~~Company’s orresidual ~~similar~~interests ~~terms. Of~~and ~~the~~certain ~~remaining $500.0 million~~ of ~~revolving~~its ~~warehouse~~servicing ~~and repurchase facilities~~advances, ~~$300.00~~or ~~million~~Financing Facility, and $~~200~~53.08 million ~~expire~~of ~~on July 30, 2004 and August 28, 2004, respectively~~cash.

~~Certain of~~Provision ~~the~~(benefit) ~~Company’s~~for ~~warehouse~~income ~~and~~taxes repurchase lenders advance less than 100% of the principal balance of the mortgage loans, requiring the Company to use working capital to fund the remaining portion of the principal balance of the mortgage loans.

~~All~~During the years ended June 30, 2004, 2003 and 2002, the Company recorded an income tax provision (benefit) of ~~the~~$(17.7) million, $(1.8) million and $3.1 million, respectively, which reflect effective tax rates of (24.2)%, (6.7)% and 40.4%, respectively. The Company’s ~~revolving~~$17.7 ~~warehouse~~million ~~and~~tax ~~repurchase~~benefit ~~facilities~~during ~~contain~~the year ended June ~~provisions~~30, ~~requiring~~2004 differed from the ~~Company~~expected federal provision of $25.6 million calculated at the effective federal tax rate of 35.0% due to ~~meet~~the ~~certain~~$47.4 ~~periodic~~million ~~financial~~federal ~~covenants,~~benefit resulting from the decrease in the tax valuation allowance offset partially by $6.3 ~~including~~million ~~among~~state ~~other~~provision ~~things,~~which ~~minimum~~related ~~liquidity~~to various state tax obligations. The Company has determined that it is more likely than not that certain future tax benefits, ~~stockholders’~~primarily ~~equity~~net operating loss carryforwards, will be realized as a result of future ~~leverage~~income. Therefore, ~~and~~during ~~net~~the ~~income~~year ~~levels.~~ended IfJune 30, 2004, the Company’s istax ~~unable~~valuation account was decreased to ~~meet~~recognize ~~these~~both higher than previously anticipated net deferred tax assets and the current realization of deferred tax assets. The ~~financial~~Company ~~covenants~~periodically ~~going~~undergoes ~~forward~~federal and state tax return examinations and may provide for additional liabilities for identified exposure items. During the three months ended June 30, or2003, isa ~~unable~~number of pending tax return audits were finalized and related tax liabilities were adjusted to ~~obtain~~the ~~subsequent~~actual ~~amendments~~amounts due. This resolution resulted in a tax benefit of approximately $6.0 million being recognized in the accompanying income statements. The provision for income taxes during the year ended orJune ~~waivers~~30, if2002 ~~required~~was related primarily to estimated taxes on excess inclusion income on the Company’s real estate mortgage interest conduit, or ~~for~~REMIC, ~~any~~trusts and, to a lesser extent, other ~~reason~~miscellaneous isstate ~~unable~~taxes. toThe ~~maintain~~investment ~~existing~~in the Company ~~warehouse~~by orSpecialty ~~repurchase~~Finance ~~lines~~Partners orduring ~~renew~~the ~~them~~year ~~when~~ended ~~they~~June ~~expire~~30, ~~the~~1999 ~~Company~~resulted ~~would have~~in toa ~~cease~~change ~~loan~~in ~~production~~control ~~operations~~for ~~which~~income ~~would~~tax ~~jeopardize~~purposes, ~~its~~thereby limiting the Company’s ability to ~~continue~~ touse ~~operate~~net asoperating aloss ~~going~~carryforwards ~~concern.~~and certain other future deductions.

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

~~The Securitization~~Loans ~~and~~Held ~~Sale~~for ~~of Mortgage Loans~~Sale. The Company’s portfolio ~~ability~~of ~~to sell~~ loans ~~originated~~held byfor itsale inincreased ~~the secondary market through securitization and whole loan sales is necessary~~ to ~~generate~~$1.0 ~~cash~~billion ~~proceeds~~at toJune ~~pay~~30, ~~down~~2004 ~~its~~from ~~warehouse~~$406.9 ~~and repurchase~~million ~~facilities~~at ~~and~~June ~~fund~~30, ~~new~~2003 ~~originations~~due ~~and~~primarily ~~purchases. The ability of the Company~~ to ~~sell~~total ~~loans~~loan inoriginations ~~the~~exceeding ~~secondary~~total ~~market on acceptable terms is essential for the continuation of the Company’s~~ loan ~~origination operations.~~dispositions ~~See~~during ~~“Risk Factors—An interruption or reduction in~~ the ~~securitization~~ ~~and~~year ~~whole~~ended ~~loan~~June ~~market~~30, ~~would hurt our financial performance~~2004.”

~~The Company~~Advances ~~securitized $315.0 million of loans held for sale during the year ended June 30, 2003 compared to $585.0 million~~ and ~~$1.2~~Other ~~billion of loan securitizations during the years ended June 30, 2002 and 2001, respectively~~Receivables. Advances ~~The gain on sale recognized by the Company on securitizations~~ and ~~whole loan sales is affected by, among~~ other ~~things,~~receivables ~~market~~are ~~conditions~~comprised ~~at the time~~ of ~~the~~interest ~~loan disposition,~~ and ~~the~~servicing ~~Company’s~~advances; ~~assumptions~~servicing ~~used~~and ~~in securitizations.~~miscellaneous ~~See~~fees; ~~“Critical~~cash ~~Accounting~~due ~~Policies—Accounting~~from ~~for Securitizations.”~~the ~~See “Results of Operations—Revenue.” In connection with~~ securitization ~~transactions~~trusts, ~~the~~accrued ~~Company~~interest isreceivable ~~generally~~and ~~required to~~other ~~provide~~miscellaneous ~~credit~~receivables; ~~enhancements~~and in the ~~form~~estimated offair ~~overcollateralization~~value ~~amounts or reserve accounts. In addition, during the life~~ of the ~~related securitization~~ ~~trusts, the~~ Company’s ~~subordinates~~derivative ~~a portion of the excess cash flow otherwise due it to the rights of holders of senior interests as a credit enhancement to support the sale of the senior interests~~instruments. The ~~terms~~level of ~~the~~servicing ~~securitization trusts~~advances, ~~for~~in ~~which~~any ~~the~~given ~~Company~~period, ~~has~~is ~~retained~~dependent aupon ~~residual~~portfolio ~~interest~~delinquencies, ~~generally require that all excess cash flow otherwise payable to~~ the ~~Company~~level ~~during the early months~~ of ~~the~~real ~~trusts~~estate beowned ~~used~~and toloans ~~increase the cash reserve accounts or to repay the senior interests~~ in ~~order to increase overcollateralization to specified maximums. Overcollateralization requirements for certain pools increase up to approximately twice~~ the ~~level~~process ~~otherwise~~of ~~required~~foreclosure, ~~when~~and the ~~delinquency~~ ~~rates~~timing orand ~~realized~~remittance ~~losses for those pools exceed the specified limit. At June 30, 2003, an additional $54.0 million~~ of ~~overcollateralization is~~cash ~~required~~collections toon ~~be maintained due to the level of delinquency rates and realized losses of~~ mortgage loans ~~being~~ in ~~excess~~the ~~of specified delinquency rates and realized losses in certain~~ securitization trusts. AtThe ~~June 30, 2003, the~~ Company ~~was~~funds ~~required~~advances toon ~~maintain~~a ~~overcollateralization~~recurring ~~amounts~~basis ~~of $150.2 million,~~not ~~which~~otherwise ~~includes~~covered ~~the~~by ~~$54.0~~its ~~million,~~financing ofarrangements ~~which $143.1 million~~and ~~was~~recovers ~~maintained.~~those ~~The~~advances ~~remaining~~on ~~$7.1 million~~a isperiodic ~~required to be added to the overcollateralization amounts from future spread income from the mortgage loans in the securitization trusts~~basis.

Advances and other receivables decreased $17.5 million to $23.8 million at June 30, 2004 from $41.3 million at June 30, 2003. The decline is primarily due to decreases of $25.6 million, $2.5 million and $0.3 million in interest and servicing advances, cash due from securitization trusts and servicing and miscellaneous

In ~~the~~fees ~~Company’s~~receivable, ~~securitizations structured as a real estate mortgage investment conduit (“REMIC”)~~respectively, ~~the~~which ~~recognition~~were ofpartially ~~non-cash~~offset ~~gain~~by onincreases ~~sale has a negative impact on the cash flow~~ of ~~the~~$6.3 ~~Company~~million ~~since the Company is required to pay federal~~ and ~~state~~$4.6 ~~taxes~~million ~~on a portion of these amounts~~ in the ~~period~~ ~~recognized~~recorded ~~although~~fair itvalue ~~does~~of ~~not~~interest ~~receive~~rate ~~the cash representing the gain~~cap ~~until~~contracts ~~later~~and ~~periods~~accrued asinterest ~~the~~receivable ~~related service fees are collected~~ and ~~applicable reserve~~other orreceivables, ~~overcollateralization requirements are met~~respectively.

~~Monetization of~~The ~~Overcollateralization~~$25.6 million decrease in servicing and interest advances to the ~~Company's~~securitization ~~Portfolio~~trusts ofat ~~Mortgage~~June ~~Loan~~30, in2004 ~~Securitization Trusts~~from June 30, 2003 is comprised primarily of $21.8 ~~The~~million ~~Company~~of ~~had~~advances ~~retained~~made ~~residual~~by ~~interests~~the Company in 17its ~~securitizations~~role of ~~trusts~~servicer ~~which~~of ~~had~~the ~~overcollateralization~~mortgage ~~balances~~loans in the securitization trusts, net of $~~145~~41.7 million atof recoveries of such advances during the year ended June 30, ~~2003~~ 2004. Of ~~these~~the 17$41.7 ~~securitization~~million ~~trusts,~~of ~~nine~~servicing ~~trusts,~~and ~~with~~advance ~~overcollateralization of~~recoveries, $3415.0 million, ~~were~~was ~~callable~~received byduring the year ~~Company~~ended inJune ~~its~~30, ~~capacity~~2004 asfrom ~~servicer of~~ the ~~mortgage~~Company’s ~~loans~~pool ~~underlying~~calls. During the ~~securitization~~year ~~trusts.~~ended IfJune 30, 2004, the Company ~~calls any~~charged off approximately $5.7 million of ~~the~~aged servicing, interest and escrow advances. Cash due from securitization trusts declined at June 30, 2004 from the ~~Company~~amount ~~receives~~reported aat ~~majority~~June of30, 2003, due to the ~~overcollateralization~~ decrease in the balance ~~from~~outstanding of the ~~called~~residual ~~trusts~~interests. The $0.3 million decline in servicing and miscellaneous fees receivable at June 30, 2004 from June 30, 2003 is due primarily to declining servicing and late fees earned by the Company as a ~~combination~~consequence of the decrease in its portfolio of mortgage loans in securitization trusts during the ~~trust~~year ended June 30, 2004. At June 30, 2004, the fair value of the Company’s derivative financial instruments was $6.3 million. No derivative financial instruments were in place at June 30, 2003. The $4.6 million increase in accrued interest receivable and other receivables at June 30, 2004 when compared to the balance at June 30, 2003 is due primarily to a $3.1 million increase in ~~cash~~amounts due from counter parties on whole loan sales and other transactions, coupled with a $1.5 million increase in accrued interest receivable at June 30, 2004. The Company periodically evaluates its accounts receivable for realizability and charges off amounts deemed uncollectible to an uncollectible receivable allowance.

~~In connection~~Residual ~~with~~Interests. Residual ~~the~~interests ~~May~~decreased ~~15,~~to ~~2003~~$44.1 ~~call~~million ofat ~~seven~~June ~~securitization trusts~~30, ~~the Company~~2004 ~~received~~from ~~cash of approximately~~ $4129.42 million. Onat ~~August~~June 1530, 2003, ~~the~~ ~~Company~~reflecting ~~called~~$89.5 ~~four~~million ~~additional~~of cash received from the securitization trusts, ~~and~~partially ~~received~~offset ~~approximately~~ by $54.14 million of accretion during the year ended June 30, 2004.

~~Other~~Mortgage Servicing Rights, Net. The Company’s mortgage servicing rights were fully amortized at June 30, 2004. During ~~sources~~the ofyear ~~cash~~ended ~~previously~~June ~~used~~30, by2004, the Company todid ~~fund~~not ~~its~~capitalize ~~operations~~any ~~included~~ MSR’s as all of the ~~monetization~~Company’s $7.0 billion of ~~residual~~total ~~interests~~dispositions ~~and~~were ~~servicing~~whole ~~advances~~loan ~~and~~sales ~~debt~~for ~~and equity~~cash ~~securities~~with servicing released.

~~Monetization~~Equipment and Improvements, Net. Equipment and ofimprovements, ~~Residual~~net, ~~Interests~~decreased to $8.7 Onmillion at June 30, 2004 from $8.9 million at June 30, 2003, ~~the~~reflecting ~~Company~~depreciation ~~borrowed~~and ~~$74.1~~amortization ~~million through~~outpacing ~~the~~capitalization ~~Financing~~of ~~Facility~~new ofequipment ~~which~~and ~~$49.2~~improvement ~~million~~acquisitions ~~was~~during ~~secured~~the byyear ~~all~~ended ofJune ~~its~~30, ~~residual interests~~2004.

~~On March~~During ~~31, 2003,~~ the ~~Residual~~year ~~Facility~~ended ~~with~~June ~~CZI~~30, ~~an affiliate of Capital Z~~2004, the Company’s recognized ~~largest shareholder, expired at which time the~~ $021.29 million of ~~remaining~~ ~~unamortized~~deferred ~~facility~~tax ~~costs~~assets ~~were~~based ~~written~~upon ~~off.~~its ~~During~~determination ~~the~~that ~~years~~it ~~ended June 30,~~is ~~2003~~more ~~and~~likely ~~2002,~~than ~~the~~not ~~Company~~that ~~sold~~it ~~$8.7~~will ~~million~~realize ~~and $16.4 million,~~such ~~respectively,~~assets ofin ~~residual~~future ~~interests~~periods. toThere ~~CZI~~were ~~pursuant~~no todeferred ~~the Residual~~tax ~~Facility~~assets ~~for~~at ~~cash~~June 30, 2003.

~~Monetization~~Prepaid and Other Assets. Prepaid and other ofassets ~~Servicing~~increased ~~Advances~~to $17.7 ~~The~~million ~~Company~~at ~~pledged~~June ~~certain~~30, of2004 ~~its~~from ~~existing~~$17.5 ~~servicing advances~~million at June 30, 2003. The increase is due primarily to ~~collateralize~~increases of $242.9 million ofin prepaid corporate related insurance and the ~~Financing~~capitalization ~~Facility~~of $1.2 ~~Future servicing~~million ~~advances~~of capital raising related costs pending consummation of the Company’s conversion to ~~certain~~a REIT and the consummation of the initial public offering by Aames Investment Corporation, the Company’s ~~securitization trusts~~wholly-owned ~~will~~subsidiary. ~~also~~Partially ~~collateralize~~offsetting the ~~Financing~~increase ~~Facility~~were decreases ~~unless~~of $2.2 million, $1.4 million and ~~until~~$0.3 itmillion ~~is fully~~in ~~repaid~~bond deposits, deferred commitment fees and other assets, respectively.

~~The Issuance~~Borrowings. As previously reported, on June 30, 2003, the Company redeemed $127.9 million principal balance of ~~Equity~~its Senior Notes representing all remaining outstanding Senior Notes, at par plus accrued and ~~Debt~~unpaid ~~Securities~~interest. The Company ~~has~~funded ~~historically~~the ~~funded~~redemption of the Senior Notes by borrowing $74.1 million through the Financing Facility and paying the remaining $53.8 ~~negative~~million in cash. ~~flow~~Borrowings, ~~primarily~~which ~~from~~totaled ~~the~~$78.3 ~~sale~~million at June 30, 2004, was comprised of ~~its~~$64.4 ~~equity~~million outstanding under the Company’s 2006 Debentures and ~~debt~~$13.9 ~~securities~~million outstanding under the Financing Facility. In comparison, amounts ~~However~~outstanding under the 2006 Debentures and the Financing Facility were $64.4 million and $74.1 million, ~~current~~respectively, ~~market~~or ~~conditions~~a ~~have~~total ~~restricted~~of $138.5 million, at June 30, 2003. The $60.2 million decline in borrowings at June 30, 2004 from June 30, 2003, represents the Company’s ~~ability~~principal ~~to access~~payments ~~its~~on ~~traditional~~the ~~equity~~Financing ~~and~~Facility ~~debt~~during ~~sources~~the year ended June 30, 2004.

Revolving Warehouse and Repurchase Facilities. Amounts outstanding under revolving warehouse and repurchase facilities increased to $886.4 million at June 30, 2004 from $343.7 million at June 30, 2003 as the result of the increase in loans held for sale due to loan originations during the year ended June 30, 2004, partially offset by the Company’s loan dispositions during the period. Proceeds from whole loan sales and securitizations are used first to reduce balances outstanding under the Company’s revolving warehouse and repurchase facilities, and then used to satisfy corporate operating requirements.

Income Taxes. At June 30, 2004 and 2003, the Company had $1.8 million and $3.1 million of income taxes currently payable, respectively. The Company’s gross deferred tax liabilities decreased by $1.8 million to $4.5 million at June 30, 2004 from $6.3 million at June 30, 2003 due to the change in the tax effects of temporary differences relating to state taxes. The Company’s gross deferred tax assets at June 30, 2004 of $110.5 million decreased by $27.4 million from $137.9 million at June 30, 2003. The Company’s tax valuation allowance decreased $47.4 million to $84.2 million at June 30, 2004 from $131.6 million at June 30, 2003. The decrease in the tax valuation allowance resulted from the utilization of deferred tax assets during the year ended June 30, 2004, and a reduction in the tax valuation allowance to reflect the amount of deferred tax assets more likely than not to be realized in future periods.

Liquidity and Capital Resources

The Company’s primary sources of liquidity are expected to be

•

fundings under revolving warehouse and repurchase facilities;

•

the proceeds from securitization and sale of mortgage loans and related servicing rights; and

•

the proceeds from monetization of the overcollateralization in the Company’s portfolio of mortgage loans in securitization trusts.

The Company’s primary operating cash requirements include:

•

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

•

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

•

ongoing administrative, operating, and tax expenses;

•

interest and principal payments and liquidity requirements under the Company’s revolving warehouse and repurchase facilities, and other existing indebtedness;

•

advances in connection with the Company’s servicing portfolio;

•

overcollateralization requirements in connection with securitizations.

Warehouse and Repurchase Facilities. The Company borrows substantial sums of cash on a regular basis to originate and purchase mortgage loans. Therefore, the Company relies on revolving warehouse and repurchase facilities to finance the origination or purchase of mortgage loans prior to securitization or sale. At June 30, 2004, the Company had total revolving warehouse and repurchase facilities in the amount of $1.9 billion, of which $1.8 billion and $100.0 million were committed and uncommitted, respectively. At June 30, 2004, amounts outstanding under the Company’s facilities were $886.4 million leaving $963.6 million of borrowing capacity available to the Company at that date under the facilities. Of the $1.9 billion of revolving warehouse and repurchase facilities available to the Company at June 30, 2004, $350.0 million, $200.0 million, $400.0 million, $500.0 million and $500.0 million mature on September 27, 2004, September 30, 2004, November 30, 2004, October 30, 2004 and July 30, 2005, respectively. While no assurance can be made, the Company expects to renew these warehouse facilities on the same or similar terms at or prior to their maturity.

Subsequent to June 30, 2004, the Company obtained one additional $500.0 million fully committed warehouse facility which matures on August 4, 2005.

~~The Company~~Certain ~~has~~of ~~previously~~the ~~raised~~warehouse ~~$180.2 million~~and ~~through~~repurchase ~~the~~facility ~~sale~~lenders ofadvance ~~preferred stock~~less inthan ~~several~~100% ~~phases, consisting~~ of ~~$170.8 million~~the toprincipal ~~Capital~~balance of Zthe ~~and~~mortgage ~~its designees~~loans, ~~$4.7 million~~requiring tothe ~~certain~~use ~~members~~ of ~~the~~working ~~Company’s~~capital ~~management and $4.7 million~~ to ~~holders~~fund of the ~~Company’s~~remaining ~~common~~portion ~~stock.~~of ~~Capital~~the ~~Z invested~~principal ~~$75.0 million~~balance inof ~~February 1999,~~the ~~$25.0 million~~mortgage ~~in August 1999, $20~~loans.~~8 million~~ ~~pursuant~~The torevolving ~~their~~warehouse ~~standby~~and ~~commitment~~repurchase infacility ~~a rights~~agreements ~~offering~~contain inprovisions ~~October 1999,~~requiring ~~$34.7 million~~the ~~in June 2000, and $15.3 million in July 2000. The~~ Company ~~also issued $2.9 million of preferred stock~~ to meet certain ~~management~~periodic ~~investors~~financial incovenants, ~~October 1999~~including, ~~and $1.3 million~~among ofother ~~preferred~~things, ~~stock~~minimum toliquidity, ~~certain~~stockholders’ ~~current~~equity, ~~and former management investors~~leverage, and ~~consultants~~net toincome ~~the Company in August 2000~~levels. The ~~Company raised~~facility ~~$4.2 million~~agreements ~~from~~also ~~the~~contain ~~sale~~customary ofrepresentations ~~Series C~~and ~~Convertible~~warranties. ~~Preferred Stock~~In ~~to common stockholders in a rights offering in October~~addition, ~~1999 and $0.5~~certain ~~million~~of ~~from~~ the ~~sale~~facility ofagreements ~~Series~~contain Dprohibitions ~~Convertible~~on ~~Preferred~~the ~~Stock in a rights offering in February 2002. The~~ Company’s ~~also~~payment ~~issued warrants to affiliates and employees~~ of andividends ~~affiliate~~which ofhave ~~Capital~~been Zwaived toin ~~purchase~~connection anwith ~~aggregate~~dividends ofdeclared ~~500,000 shares~~and ofpaid by the Company’s ~~common~~on ~~stock~~the ~~for~~Series ~~$5.00 per share in February 1999~~B, C and ~~warrants to purchase 5.0 million shares of Series~~ D Convertible Preferred Stock atthrough ~~$0.85~~and including ~~per~~September ~~share~~30, ~~in July 2001~~2004.

~~In December 1991,~~Securitization ~~July 1993, June 1995~~ and ~~October 1996,~~Sale ~~the~~of ~~Company~~Mortgage ~~effected~~Loans. The ~~public~~Company’s ~~offerings~~ability ~~and in April 1998 effected a private placement of its common stock with net proceeds~~ to ~~the~~sell ~~Company~~loans ~~aggregating $217.0 million.~~it Inoriginates ~~February 1996,~~in the ~~Company~~secondary ~~completed~~market anthrough ~~offering~~securitizations ~~of its~~and ~~2006~~whole ~~Debentures~~loan ~~with~~sales ~~net~~is ~~proceeds~~necessary to ~~the~~generate ~~Company~~cash ~~of $112.0 million. In October 1996, the Company completed an offering of its Senior Notes with net~~ proceeds to ~~the~~pay ~~Company~~down ~~of $145.0 million. In December 2002, the Company completed~~ its ~~Exchange~~warehouse ~~Offer pursuant to which $49.6 million of 2006 Debentures were tendered~~ and ~~an equal amount of 2012 Debentures were issued.~~repurchase ~~Subsequently~~facilities ~~in December 2002, the $49.6 million of 2012 Debentures were reduced by $19.8 million~~ and ~~$25.0 million through a mandatory sinking~~ fund ~~redemption and~~new ~~the~~mortgage ~~forgiveness~~loan ~~by SFP, respectively, leaving $4~~originations.8 ~~million~~The ofCompany’s ~~2012 Debentures~~ability ~~outstanding~~to ~~that~~sell ~~were~~loans ~~repaid~~in ~~through~~ the ~~exercise~~secondary ofmarket ~~a 5% optional call payment~~ on ~~June~~acceptable ~~30,~~terms ~~2003.~~is Onessential ~~June 30,~~for ~~2003,~~ the ~~Company~~continuation ~~redeemed~~of its ~~Senior~~ ~~Notes~~loan ~~through~~origination ~~a $53~~operations.8 million cash remittance and the $74.1 million amortizing, Financing Facility due December 31, 2004. Under the Financing Facility, the Company is required to comply with various operating and financial covenants including covenants which may restrict the Company’s ability to pay certain distributions, including dividends.

~~The~~ During the year ended June 30, 2004, the Company ~~had~~did ~~cash~~not dispose of any of its loans through securitizations and sold all of its $6.4 billion of loan dispositions in whole loan sales for cash. ~~equivalents~~Of the Company’s $4.5 billion of ~~approximately~~loan dispositions during the year ended June 30, 2003, $234.9 2 billion and $315 million were sold in whole loan sales for cash and securitizations, respectively. The gain on sale recognized by the Company on securitizations and whole loan sales is affected by, among other things, market conditions at the time of the loan disposition, and ~~June 30~~the Company’s assumptions used in securitizations. See “Results of Operations—Revenue.” In connection with securitization transactions, ~~2003~~the Company is generally required to provide credit enhancements in the form of overcollateralization amounts or reserve accounts. In addition, during the life of the related securitization trusts, the Company subordinates a portion of the excess cash flow otherwise due it to the rights of holders of senior interests as a credit enhancement to support the sale of the senior interests. The terms of the securitization trusts, for which the Company has retained a residual interest, generally require that all excess cash flow otherwise payable to the Company during the early months of the trusts be used to increase the cash reserve accounts or to repay the senior interests in order to increase overcollateralization to specified maximums.

If For the Company’s ~~access~~existing tosecuritizations, ~~warehouse~~overcollateralization ~~lines,~~requirements ~~working~~for ~~capital~~certain orpools ~~the~~increase up to ~~securitization~~approximately ortwice ~~whole~~the ~~loan~~level ~~markets~~otherwise isrequired ~~restricted,~~when the ~~Company~~delinquency ~~may~~rates ~~have~~or torealized ~~seek additional~~losses ~~equity~~for those pools exceed the specified limit. ~~There~~At ~~can~~June be30, no2004, ~~assurance~~an ~~that~~additional ~~sufficient~~$28.0 ~~sources~~million of ~~liquidity~~ ~~will~~overcollateralization bewas ~~available~~required to ~~the~~be ~~Company~~maintained atbecause the ~~any~~level ~~given~~of ~~time~~delinquency orrates ~~that~~and ~~favorable terms~~realized ~~will~~losses beof ~~available.~~mortgage Asloans awas ~~result~~in excess of ~~the~~specified ~~limitations~~delinquency ~~described~~rates ~~above,~~and ~~the Company~~realized ~~may~~losses bein ~~restricted~~certain insecuritization ~~the~~trusts. ~~amount~~At ofJune ~~loans~~30

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