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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

(Mark one)

AAMES FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)

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

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

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

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

        Indicate by check mark if 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 is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes/ / No/X/

        At September 22, 2003, 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 Report.

PART I

Item 1. Business

General

         Aames Financial Corporation (the “Company”) is a consumer finance company primarily engaged, through its subsidiaries, in the business of originating, selling and servicing mortgage loans collateralized by single family residences. Upon its formation in 1991, the Company acquired Aames Home Loan, a home equity lender making loans in California since it was founded in 1954. In 1995, the Company expanded its retail presence outside of California and began purchasing loans from correspondents. In August 1996, the Company acquired its broker production channel through the acquisition of One Stop Mortgage, Inc. In 1999, the Company consolidated its loan production channels into one company, and the retail and broker production channels 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 through its retail and broker production channels. The Company’s retail channel produces loans through its retail branch network and through the National Loan Centers, which produce loans primarily through affiliations with sites on the Internet. The Company’s broker 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, 2002 and 2001, the Company originated $4.4 billion, $3.2 billion and $2.4 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 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, 2002 and 2001, the Company sold $4.5 billion, $3.2 billion and $2.3 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 ended June 30, 2003, 2002 and 2001, 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 June 30, 2003, 2002 and 2001, the Company’s total servicing portfolio was $1.7 billion, $2.3 billion and $2.7 billion, respectively. The Company’s portfolio of mortgage loans in securitization trusts serviced in-house was $0.7 billion, $1.2 billion and $1.8 billion at June 30, 2003, 2002 and 2001, respectively.

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

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

        The recent increases in mortgage rates and the resulting less favorable mortgage interest rate environment has reduced the overall demand for mortgage loans generally. While the Company has not to date experienced a reduced demand for its mortgage loan products specifically, and while no assurances can be made, should that event occur the Company expects to be responsive to such changes in market conditions by reducing its loan origination costs in light of reduced loan origination levels.

        Maintaining Adequate Liquidity and Access to the Capital Markets. The Company intends to continue to increase and diversify its funding sources by expanding its current funding relationships and identifying new funding sources. The Company intends to continue to fund its operations by disposing of a majority of its loan production for cash in the whole loan market, monetizing residual interests, mortgage servicing rights (“MSRs”) and the rights to prepayment fees on the mortgage loans in its new securitizations, if any, monetizing servicing advances and developing new sources for working capital.

        The strategies discussed above contain forward-looking statements. Such statements are based on current expectations and are subject to risks, uncertainties and assumptions, including those discussed under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors.” 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 reported net income of $29.2 million for the year ended June 30, 2003 compared to a net income of $4.5 million during the year ended June 30, 2002. Net income during the year ended June 30, 2003 includes a $6.0 million reversal of deferred tax credits. Total revenue during the year ended June 30, 2003 was $263.6 million, an increase of $43.5 million over the $220.1 million reported for the year ended June 30, 2002. Included in total revenue during the year ended June 30, 2003 was $31.7 million of debt extinguishment income. Included in total revenue during the years ended June 30, 2003 and 2002 were residual interest write-downs of $34.9 million and $27.0 million, respectively. Excluding debt extinguishment income during the year ended June 30, 2003 and the write-downs of residual interests during the years ended June 30, 2003 and 2002, operating revenue during the year ended June 30, 2003 was $266.9 million, an increase of $19.8 million over the $247.1 million during the year ended June 30, 2002. The Company’s total expenses increased by $23.8 million to $236.3 million during the year ended June 30, 2003 over the $212.5 million during the year ended June 30, 2002.

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        As previously announced, on June 30, 2003, the Company redeemed $127.9 million principal balance of its 9.125% Senior Notes due November 2003 (the “Senior Notes”) representing all remaining outstanding Senior Notes, at par plus accrued and unpaid interest. The Company funded the redemption of its Senior Notes by borrowing $74.1 million through a financing facility secured by its residual interests and certain of its servicing advances (the “Financing Facility”) and paying the remaining $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 cash flows generated from the Company’s residual interests and at least 70.0% of cash flows from recoveries of servicing advances securing the Financing Facility will be paid to the lender to reduce the outstanding balance. Subject to certain limitations, the Company may prepay, without penalty, the amount outstanding under the Financing Facility at any time. Capital Z Financial Services Fund II, L.P., a Bermuda partnership (“Capital Z”), an affiliate of Specialty Finance Partners, the Company's largest stockholder (“SFP”), is the limited guarantor on the Financing Facility.

        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.

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        On September 16, 2003, the Company amended and restated its certificate of incorporation permitting the Company to issue up to 26.7 million shares of a new series of preferred stock, Series E Preferred Stock, par value $0.001 per share. The Series E Preferred Stock is not convertible into any other Company security, is not entitled to receive dividends, ranks pari passu with the Company’s other series of Preferred Stock and has a stated value of $1.00 per share. Subsequently, on September 18, 2003 the Company adopted its 2003 Series E Preferred Stock Option Plan, pursuant to which the Company plans to issue to certain directors and executive officers options to purchase shares of Series E Preferred Stock.

Mortgage Loan Production

        The Company’s principal loan product 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’s residence with either a fixed or adjustable interest rate. Non-conforming 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, 2003, the Company originated its 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 Loan Centers, which produce loans primarily through affiliations with sites on the Internet. The Company’s broker 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.

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

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__________________

Production Channels

        Total Loan Production. Total loan production during the year ended June 30, 2003 increased $1.2 billion, or 37.5%, to $4.4 billion over $3.2 billion of total loan production during the year ended June 30, 2002 which, 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 the comparable periods in 2002 and 2001 was 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.

        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 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 total retail production was $1.8 billion during the year ended June 30, 2003, an increase of $185.6 million, or 11.5%, from the $1.6 billion of total retail production reported during the year ended June 30, 2002 which, in turn, was a $429.3 million, or 36.4%, increase over the $1.2 billion of total retail production reported during the year ended June 30, 2001.

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        Retail Branch Network

        During the year ended June 30, 2003, loan production through the Company's retail 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 Loan Centers

        The Company's National Loan Centers obtain leads through several commercially available Internet sites as well as through its own Internet web site "Aames.net". On the basis of information provided by the customer through the Internet, a preliminary determination is made as to whether the customer and the property meet the Company's lending criteria. Once the Company receives the lead, a loan officer contacts the prospective customer by telephone and the customer completes the application by telephone or mail.

        Mortgage loan production from the Company's National Loan Centers, which primarily originate loans through affiliations with certain Internet sites, increased $132.2 million, or 40.1%, to $461.9 million during the year ended June 30, 2003 over $329.7 million during the year ended June 30, 2002. National Loan Center mortgage loan production during the year ended June 30, 2001 was $75.9 million. As previously reported, on November 1, 2001 the Company acquired certain assets and the operating platform of another mortgage lender which became the Company's second National Loan Center and only partially contributed loan production during the year ended June 30, 2002.

        Whether in the retail branches or in the National Loan Centers, the loan officer assists the applicant in completing the loan application, arranges for an appraisal, orders a credit report from an independent, nationally recognized credit reporting agency and performs various other tasks in connection with the completion of the loan package. The loan package is underwritten for loan approval on a centralized basis. If the loan package is approved, the loan is funded by the Company. The Company's loan officers are trained to structure loans that meet the applicant's needs while satisfying the Company's lending guidelines.

        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. Effective October 1, 2003, a 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 as required by the 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 the Company has operated in compliance with these state laws and do-not-call registries and will be 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.

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        Independent Mortgage Broker Channel. During the year ended June 30, 2003, the Company originated loans through 2,970 brokers, no one of which accounted for more than 5.0% of total broker originations.

        The broker's role is to identify the applicant, assist in completing the loan application, gather necessary information and documents, submit the application requesting the interest rate and terms of the loan, and serve as the Company's liaison with the borrower through the lending process. The Company reviews and underwrites the applications submitted by the broker in accordance with the Company's underwriting guidelines, approves or denies the application. If approved, the Company approves or counter offers the requested interest rate and other terms of the loan and, upon acceptance by the borrower and satisfaction of all conditions imposed by the Company, funds the loan. Because brokers conduct their own marketing and employ their own personnel to complete loan applications and maintain contact with borrowers, originating loans through the Company's broker network allows the Company to increase its loan volume without incurring the higher marketing and employee costs associated with retail originations.

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

        Broker Production. The Company's total broker loan production increased $1.1 billion, or 62.4%, to $2.7 billion during the year ended June 30, 2003 over $1.6 billion of total broker loan production during the year ended June 30, 2002 which, in turn, was an increase of $441.6 million, or 37.1%, over the $1.2 billion reported during the year ended June 30, 2001.

        Broker Office Network

        During the year ended June 30, 2003, mortgage loan production from the Company's regional broker office network increased $815.5 million, or 54.0%, to $2.3 billion over the $1.5 billion reported during the year ended June 30, 2002 which, in turn, was an increase of $374.5 million, or 33.0%, from the $1.1 billion of regional broker office network production reported during the year ended June 30, 2001.

        Broker Telemarketing and Internet

        The Company 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 loan production through telemarketing and the Internet was $325.0 million during the year ended June 30, 2003, an increase of $202.6 million, over the $122.4 million of broker telemarketing and Internet production reported during the year ended June 30, 2002. Broker mortgage loan production through telemarketing and the Internet was $55.3 million during the year ended June 30, 2001. The Company expects "Broker Direct" to continue to generate an increasing dollar amount and percentage of broker 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.

        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.

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        Credit scores are obtained by the Company in connection with mortgage loan applications to help assess a borrower's creditworthiness. Credit scores 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, level of outstanding indebtedness, length of credit history, types of credit, and bankruptcy experience. Credit scores 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 measurement of the relative degree of 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 default probability over the 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 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.

        An assessment of the adequacy of the real property as collateral for the loan is primarily based upon an appraisal of the property and a calculation of the loan-to-value ratios of the loan applied for (the "LTV") and of all mortgages existing on the property, including the loan applied for, (the "combined loan-to-value ratio" or "CLTV") to the appraised value of the property at the time of origination. Appraisers determine a property's value by reference to the sales prices of comparable properties recently sold, adjusted to reflect the condition of the property as determined through inspection. 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.

        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 it 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.

        Set forth below is a general description of the different underwriting guidelines designed to provide an overview of the general credit considerations utilized by the Company and is not intended to be a detailed explanation of all credit considerations analyzed by the Company in underwriting loans.

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        ‘Super Aim’ Underwriting Guidelines. Subsequent to June 30, 2003, the Company has adopted new guidelines, which it is in the process of implementing in its wholesale and retail channels. The Super Aim guidelines are intended to replace the Traditional, Credit Score and Mortgage Only guidelines into a single set of uniform guidelines that more appropriately price for the credit risk. These guidelines 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 Company's Super Aim underwriting guidelines.

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        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.

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        “Traditional” Underwriting Guidelines. Under the traditional underwriting guidelines, the Company assigns a credit grade (A, A-, B, C and C-) to each loan it originates depending on the risk profile of the loan, 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 and carry a lower interest rate. The following chart generally outlines the parameters of the credit grades of the Company’s traditional underwriting program.

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        “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:

        “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.

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

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        The following tables present certain information about the Company’s total loan production during the years ended June 30, 2003, 2002 and 2001:

LOAN ORIGINATIONS DURING THE YEAR ENDED JUNE 30, 2003

All Underwriting Programs Combined

LOAN ORIGINATIONS DURING THE YEAR ENDED JUNE 30, 2002

All Underwriting Programs Combined

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LOAN ORIGINATIONS DURING THE YEAR ENDED JUNE 30, 2001

All Underwriting Programs Combined

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        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 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.

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.

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        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.

Loan Servicing

        The Company’s servicing portfolio consists mainly of loans serviced on an interim basis, including loans held for sale and loans subserviced for others 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. 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 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.

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

        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 loans serviced on an interim basis declined by $80.0 million, or 8.1%, despite an increase in production of $1.2 billion, or 37.1%, due to quicker disposition of loans due to mortgage loan sale process improvements and servicing transfer during the year ended June 30, 2003 than during the year ended June 30, 2002.

        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 ($88.0 million at June 30, 2003) in principal amount of mortgage loans in securitization trusts.

        The Company's servicing portfolio will continue to be impacted in the future by the Company's disposition strategy of its loan production through whole loan sales and securitizations on a servicing released basis.

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        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--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 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 securitizations credit-enhanced by monoline insurance, the agreements also 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. 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.

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        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-” and “D” credit grades, 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 “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 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 45 to 100 days delinquent, depending upon credit grade, other credit considerations or borrower bankruptcy status.

        Servicing and collection practices change over time in accordance with, among other things, the Company’s business judgment, changes in portfolio performance and applicable laws and regulations.

        The Company 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.

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

_________________

        Delinquent loans, by principal balance of the total servicing portfolio, decreased to $156.5 million at June 30, 2003 from $222.1 million at June 30, 2002. The delinquency rate at June 30, 2003 was 9.0% compared to 9.6% at June 30, 2002. The delinquency rate at June 30, 2003 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.

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

        Total delinquent loans in the Company’s portfolio of securitization trusts (serviced in-house and by others) were $144.3 million and $207.1 million at June 30, 2003 and 2002, respectively. Total delinquent loans in the Company’s portfolio of loans serviced on an interim basis were $12.2 million and $15.0 million at June 30, 2003 and 2002, 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.

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        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):

__________________

        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. 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 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.

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        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 subject to extensive regulation, supervision and licensing by federal, state and local governmental authorities and are subject to various laws and judicial and administrative decisions imposing requirements and restrictions on part or all of its operations. The Company's consumer lending activities are subject to the Federal Truth-in-Lending Act and Regulation Z (including the Home Ownership and Equity Protection Act of 1994), the Federal Equal Credit Opportunity Act, as amended, and Regulation B, the Fair Credit Reporting Act of 1970, as 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 rules and regulations of, and examinations by, state regulatory authorities with respect to originating, processing, underwriting, selling, securitizing and servicing loans. These rules and regulations, among other things, impose licensing obligations on the Company, establish eligibility criteria for mortgage loans, prohibit discrimination, govern inspections and appraisals of properties and credit reports on loan applicants, regulate assessment, collection, foreclosure and claims handling, investment and interest payments on escrow balances and payment features, mandate certain disclosures and notices to borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan amounts.

        A significant portion of mortgage 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 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.

        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 by the 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 be 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.

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        Failure to comply with mortgage banking rules and regulations can lead to loss of approved status, certain rights of rescission for mortgage loans, individual and class action lawsuits 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 course of its business, the Company may acquire properties as a result of foreclosure. There is a risk that hazardous or toxic waste could be found on such properties. In such event, the Company could be held responsible for the cost of cleaning up or removing such waste, and such cost could exceed the value of the underlying properties.

        The Company is also subject to various other federal and state laws regulating the issuance and sale of securities, relationships with entities regulated by the Employee Retirement Income Security Act of 1974, as amended, and other aspects of its business.

Employees

        At June 30, 2003, the Company employed 1,707 persons. The Company has satisfactory relations with its employees.

Item 2. Properties

        The 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 is attempting to sublet additional space in these premises. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Results of Operations--Fiscal Years 2003, 2002 and 2001--Expenses." The lease and the sublease on these premises extend through March 2012. The Company also leases approximately 39,000 square feet of office space at its former headquarters location at 3731 Wilshire Boulevard, Los Angeles, California 90010, all of which is sublet through March 2006. The master lease expires in December 2008. The administrative offices of the Company's Irvine office 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 Company also leases space for its retail branch and broker regional offices. These facilities aggregate approximately 257,000 square feet and are leased under terms which vary as to duration. In general, the leases expire between 2003 and 2008, 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 Company and certain of its subsidiaries were defendants in Aslami et. al. v. Aames Home Loan, Aames Financial Corporation, et. al. a putative class action filed on April 11, 2000, in Los Angeles County Superior Court, case no. BC228027. On June 27, 2003, the court approved a settlement between the parties regarding this litigation, in which the Company did not admit liability. This settlement did not have a material adverse effect on its consolidated financial position and results of its operations.

        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.

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        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.

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PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

        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 forth the range of certain high and low closing bid quotations on the Over-the-Counter Bulletin Board for the Company's Common Stock for the periods indicated during the year ended June 30, 2003.

        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.

_________________

        As of September 22, 2003, the Company had approximately 365 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, 2002 and 2001. 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 the Company from paying dividends during the terms of such facilities.

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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.

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_________________

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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 and Quantitative and Qualitative Disclosures 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 statements appear in a number of places in this filing and include statements regarding the intent, belief or current expectations of the Company, its directors or officers with respect to, among other things (a) market conditions in the securitization, capital, credit and whole loan markets and their future impact on the Company’s operations, (b) trends affecting the Company’s liquidity position, including, but not limited to, its access to warehouse, working capital and other credit facilities and its ability to effect securitizations and whole loan sales, (c) the impact of the various cash savings plans and other restructuring strategies being considered by the Company, (d) the Company’s on-going efforts in improving its equity position, (e) trends affecting the Company’s financial condition and results of operations, and (f) the Company’s business and liquidity strategies. The stockholders of the Company are cautioned not to put undue reliance on such forward-looking statements. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those projected in this report, for the reasons, among others, discussed under the captions “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 during fiscal 2004.

Critical Accounting Policies

        The Company did not retain residual interests created in any of the $315.0 million, $585.0 million and $1.2 billion of securitizations which closed during the years ended June 30, 2003, 2002 and 2001, respectively, 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.

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        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.

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

        The 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 resulted in write-downs to the residual interests of $34.9 million, $27.0 million and $33.6 million during the years ended June 30, 2003, 2002 and 2001, respectively.

        As previously reported, during the December 2002 quarter and 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, 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 additional securitization trusts. In estimating the effects on the carrying value of the residual interests of calling those securitization trusts, 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 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. The $33.6 million write-down during the year ended June 30, 2001 was recorded in light of higher than expected actual credit loss expenses compared to credit loss assumptions. The Company closely monitors its residual interests and, should higher than expected actual credit losses or prepayments occur, it will incorporate these factor into its normal quarterly evaluation of the estimated fair value of its residual interests.

        The following table summarizes certain information about the securitization trusts in which the Company has retained a residual interest at June 30, 2003 and 2002 (dollars in thousands):

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        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: