10-K

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark one)

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

For the Fiscal Year Ended December 31, 2005

Or

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

For the transition period from              to             

Commission file number 1-32340

AAMES INVESTMENT CORPORATION

(Exact name of Registrant as specified in its charter)

Maryland	34-1981408
(State or other jurisdiction of incorporation)	(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
Common stock, par value $.01 per share	New York Stock Exchange

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

None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o  No x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

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 o

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. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Act).

Large accelerated filer o Accelerated filer x Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x

Based on the closing price for shares of common stock as of June 30, 2005, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of common stock held by non-affiliates was $459,164,762.

At March 24, 2006 there were 61,877,547 shares of the common stock of Registrant outstanding.

Documents Incorporated by Reference

None

AAMES INVESTMENT CORPORATION
DECEMBER 31, 2005 FORM 10-K
TABLE OF CONTENTS

Item No.		Page No.
	PART I
Item 1	Business		1
	Recent Events		1
	General		1
	Business Strategy		2
	Competitive Advantages		3
	Mortgage Loan Portfolio Management		3
	Investment and Operational Policies		5
	Mortgage Loan Originations		6
	Underwriting Standards		14
	Loan Production by Borrower Risk Classification		18
	Mortgage Loan Sales to Third Parties and Securitizations		21
	Mortgage Loan Servicing		23
	Competition		30
	Regulation		30
	Compliance, Quality Control and Quality Assurance		31
	Regulatory Developments		31
	Employees		34
Item 1A	Risk Factors		34
Item 1B	Unresolved Staff Comments		34
Item 2	Properties		34
Item 3	Legal Proceedings		35
Item 4	Submission of Matters to a Vote of Security Holders		35
	PART II
Item 5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		36
Item 6	Selected Financial Data.		37
Item 7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		42
Item 7A	Quantitative and Qualitative Disclosures About Market Risk		42
Item 8	Financial Statements and Supplementary Data		82
Item 9	Changes in and Disagreements with Registered Public Accounting Firm on Accounting and Financial Disclosure		83

Item 9A	Controls and Procedures	83
Item 9B	Other Information	83
	PART III
Item 10	Directors and Executive Officer of Registrant	85
Item 11	Executive Compensation	90
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	104
Item 13	Certain Relationships and Related Transactions	107
Item 14	Principal Independent Registered Public Accounting Firm and Fees and Services	108
	PART IV
Item 15	Exhibits	110
	Signatures	111

PART I

Item 1.Business

RECENT EVENTS

On March 15, 2006, Aames Investment Corporation (“Aames Investment”), which elected to qualify as a mortgage real estate investment trust, or REIT, for U.S. federal income tax purposes for the six months ended December 31, 2004 and for the year ended December 31, 2005, announced that it intends to alter its structure so that it would no longer be required to pay out at least 90% of its taxable earnings to its stockholders as dividends, but rather, would retain its capital for internal growth. On March 24, 2006, Aames Investment’s Board of Directors approved a corporate reorganization to achieve that goal. In the reorganization, the following would occur:

1.      Aames Financial Corporation (“Aames Financial”), Aames Investment’s current taxable REIT subsidiary or TRS, would form a wholly owned REIT subsidiary, to acquire, hold and service mortgage loans.

2.      If approved by the stockholders, Aames Investment would merge with the REIT subsidiary, which would result in: (i) Aames Financial becoming the new parent of Aames Investment, (ii) common stockholders of Aames Investment exchanging their shares for common shares of Aames Financial, and (iii) Aames Investment becoming a subsidiary of Aames Financial.

3.      Since Aames Investment, the REIT, would be a subsidiary of Aames Financial, it would distribute its taxable income, including income from the REIT portfolio, to Aames Financial, rather than to public stockholders. This would enable Aames Financial to retain the earnings on the REIT portfolio for internal capital growth. In addition, by reorganizing Aames Investment as a subsidiary of Aames Financial, Aames Investment’s taxable earnings, including the earnings from the REIT portfolio, would be subject to shelter from taxation through utilization of Aames Financial’s historical net operating loss carryforwards (“NOLs”) until fully utilized. The taxable income generated by Aames Financial is subject to regular corporate income tax. However, as of December 31, 2005, Aames Financial had approximately $304.1 million of NOLs for U.S. federal income tax purposes that expire from 2017 through 2025. We believe that Aames Financial will be able to use these NOLs to offset its future income, subject to annual limitations and, as a result, Aames Financial will have substantially lower effective tax rates than statutory rates.

On March 27, 2006, the Company announced that it is in the process of closing two of its five wholesale operations centers, in Deerfield, Florida and Parsippany, New Jersey, and consolidating the functions previously performed in those centers into its centers located in Irvine, California, Jacksonville, Florida and Dallas, Texas. The Company has also eliminated 100 positions in the wholesale channel. The Company expects to record a charge to income of from $2.0 million to $3.0 million during the three months ended March 31, 2006 in connection with these steps. The combined annual savings from these actions are currently estimated at $10.0 million.

GENERAL

Aames Investment was formed in February 2004 to build and manage a portfolio of high yielding, subprime residential mortgage loans to offer its stockholders the opportunity for attractive dividend yields and earnings growth. In November 2004, we completed an initial public offering, and, concurrently with that offering, a reorganization with Aames Financial, formerly our parent company. As a result of the reorganization, Aames Financial became a wholly owned subsidiary of ours.

Aames Financial is a national mortgage banking company, founded in 1954, which focuses primarily on originating, selling and servicing residential mortgage loans through both wholesale and retail channels

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under the name “Aames Home Loan.” Our strategy is to use our equity capital and funds borrowed under revolving warehouse and repurchase facilities to finance our mortgage loan originations, and to use those financing sources, together with on-balance sheet securitizations, to finance our REIT portfolio of mortgage loans. We retain in our REIT portfolio a portion of our mortgage loan originations, largely hybrid/adjustable rate mortgage loans. We sell the remainder, including a majority of the fixed-rate mortgage loans that we originate, on a whole loan servicing-released basis to third parties.

As a REIT, we generally are not subject to U.S. federal income tax on the REIT income that we distribute to our stockholders. During the six months ended December 31, 2004 and the year ended December 31, 2005 we distributed at least 90% of the earnings from our REIT portfolio of mortgage loans to our stockholders, while retaining a portion of Aames Financial’s earnings.

BUSINESS STRATEGY

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

·Generating internal capital through the retention of earningsfrom both our REIT portfolio and mortgage loan originations, sales and servicing;

·Managing our portfolio of high yielding subprime residential mortgage loansand our equity leverage to maximize the return on our REIT portfolio of mortgage loans and our returns, while at the same time managing our financing costs and the increased risk of loss associated with our leverage. Under the reorganization, the REIT portfolio would be held by a REIT subsidiary of Aames Financial;

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

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

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

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

The strategies discussed above contain forward-looking statements. Such statements are based on current expectations and are subject to risks, uncertainties and assumptions, including those discussed under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Factors.” Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Thus, no assurance can be given that we will be able to accomplish the above strategies.

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COMPETITIVE ADVANTAGES

We believe that we have the following competitive advantages:

·Large Scale Originations Through Multiple Loan Origination Channels.   Aames Financial originates mortgage loans through both retail and wholesale channels, which provides us with a more diverse origination platform than many of our competitors. Aames Financial’s retail channel, with 76 branches across the United States, puts us in direct contact with many of our customers. This enables us to generate loan origination fee income and provides us with the opportunity to create customer loyalty that we believe makes our retail customers less interest-rate sensitive than our wholesale customers. In addition, originating loans through both retail and wholesale channels gives us the stability of a retail franchise, together with the ability of a wholesale operations channel to respond more quickly to changes in the marketplace.

·Aames Financial Has $304.1 Million of Historical NOLs Available to Offset Future Income.   As a result of these NOLs, subject to certain annual limitations, Aames Financial will have substantially lower effective tax rates than statutory rates. Under the reorganization, the earnings of the REIT portfolio would be subject to shelter from taxation through the use of these NOLs.

·Disciplined Underwriting Guidelines and Efficient Supporting Processes and Technology.   Our use of technology to integrate sophisticated risk management models, maintain credit decision consistency and drive loss mitigation efforts has increased underwriting efficiency and lowered our costs. Combined with our results-oriented compensation program based on a combination of volume, profitability, efficiency and quality, we believe we are able to efficiently produce profitable loans.

·Quality Customer Service.   Our loan officers and account executives work closely with our customers and customer-focused processing and underwriting teams to provide quick loan approvals and quality service, and to be responsive to borrowers’ and brokers’ needs, including funding to meet our customers’ timelines. We believe this focus on service, quality, and efficiency results in increased originations through referrals from borrowers and repeat business from brokers that are highly satisfied with our underwriting and funding process.

·A Developed and Scalable Servicing Platform and Experienced Servicing Personnel.   We currently have in place a subprime residential mortgage loan servicing team with over 100 servicing employees at December 31, 2005 and a scalable servicing platform. Aames Financial’s servicing platform has received a SQ3 rating from Moody’s and an RPS3- rating from Fitch. Additionally, S&P has included us on their list of approved servicers. We had a servicing portfolio, including loans held for investment and loans held for sale, of approximately $6.1 billion at December 31, 2005.

·Seasoned Management Team.   Our CEO and most of our senior management team have been with us for over five years and our CEO and most of our senior executives had significant prior experience with large commercial banks and mortgage banks and other financial service industry professionals with experience investing in and managing portfolios of residential mortgage loans and residential mortgage-backed securities.

MORTGAGE LOAN PORTFOLIO MANAGEMENT

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

To provide us with long-term financing for our REIT portfolio of mortgage loans, we securitize substantially all of those loans through on-balance sheet securitization transactions structured as financings, rather than sales, for both tax and financial accounting purposes. Accordingly, these loans will

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remain on our consolidated balance sheet as an asset and reported as “Loans held for investment, net,” while the underlying bonds issued through the securitization will be reported as a liability as “Financings on loans held for investment.” During the year ended December 31, 2005, we securitized $3.7 billion of mortgage loans through the completion of four on-balance sheet transactions, and during the year ended December 31, 2004, we securitized $1.2 billion of mortgage loans through the completion of one on-balance sheet transaction.

We record interest income on the mortgage loans and interest expense on the bonds issued in the securitization over the life of the securitization and do not recognize gain or loss upon the completion of the securitization for financial reporting purposes. This accounting treatment more closely matches the recognition of income with our actual receipt of cash payments, which we believe provides us with more stable results of operations compared to companies that structure their securitizations as sales. We expect net interest income from our portfolio of mortgage loans to generate a substantial portion of our earnings.

We generate taxable earnings from the loans that we securitize or retain in our REIT portfolio primarily through:

·net interest income, which is the difference between the:

·interest income received from the mortgage loans; and

·interest paid to the holders of the mortgage-backed bonds issued in securitizations,

·net of:

·losses due to defaults and delinquencies on the loans; and

·servicing fees and expenses.

During the year ended December 31, 2005, we purchased a majority of Aames Financial’s mortgage loan originations to build our REIT portfolio. We have not established a limit on the amount of leverage we may incur, but we generally intend to maintain a REIT portfolio that is approximately 12 to 15 times the amount of our consolidated stockholders’ equity. Going forward, we anticipate purchasing a smaller portion of Aames Financial’s originations to maintain our target leverage ratio. Aames Financial will then sell the remainder of its loan originations, including a portion of its hybrid/adjustable rate mortgage loans, to third parties in the secondary market.

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

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

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better matching our interest-earning hybrid/adjustable rate mortgage loans during the initial fixed rate period.

Another significant risk to our net interest income is the risk that the net interest income we receive from securitizations will be reduced if there are a significant amount of loan defaults or loan prepayments, especially on loans with interest rates that are high relative to the rest of the securitized mortgage loan pool.

INVESTMENT AND OPERATIONAL POLICIES

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

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

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

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

Mortgage Loans

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

Mortgage-backed Securities

Our current REIT portfolio generally consists of mortgage loans originated by Aames Financial that collateralize mortgage-backed bonds and that will collateralize future mortgage-backed securitizations. From time to time, we may acquire and hold mortgage-backed securities issued by third parties to satisfy certain asset and income tests applicable to REITs. The mortgage-backed securities are expected to be backed primarily by first mortgages on one- to four-family dwellings and are expected to be rated by S&P or Moody’s. We have not previously acquired or held any third-party mortgage-backed securities in our investment portfolio.

Leverage Policy

We employ a leverage strategy by securitizing existing mortgages in transactions that we believe will be treated as borrowings for accounting and tax purposes. We generally intend to maintain a REIT portfolio that is approximately 12 to 15 times the amount of our consolidated stockholders’ equity.

Hedging Policy

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

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

Financing Policy

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

On November 4, 2005, our Form S-3 shelf registration statement, filed for the purpose of selling our common stock, preferred stock, debt securities or other securities in one or more offerings up to an aggregate dollar amount of $500.0 million, was declared effective by the Securities and Exchange Commission (“SEC”). Depending on our liquidity needs and market conditions, we may issue one or more of these securities in different amounts and at different times. We intend to use the proceeds from any sale of these securities for general corporate purposes, which includes continuing to build a portfolio of self-originated mortgage loans, for general working capital purposes and to reduce short-term indebtedness. As part of the Form S-3 filing, we also registered 5.0 million shares of common stock to be issued in connection with our Dividend Reinvestment and Direct Stock Purchase Plan.

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

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

MORTGAGE LOAN ORIGINATIONS

We purchase subprime, one-to-four family residential mortgage loans that Aames Financial originates. These loan originations are significant to our financial results because they are the primary source of the loans that we hold in our on-balance sheet REIT portfolio of loans held for investment, and of the loans that we sell to the secondary markets. The loans originated that are not retained in our REIT portfolio are sold to the secondary markets. From time to time, depending on market conditions and attractiveness of terms, we may supplement our loan production by purchasing mortgage loans from secondary market sellers.

Our principal market is borrowers whose financing needs are not being met by traditional mortgage lenders for a variety of reasons, including the need for specialized loan products or credit histories that may limit such borrowers’ access to credit. These types of borrowers generally pay higher mortgage loan

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

As of December 31, 2005, Aames Financial originated loans in 47 states through its retail and wholesale channels. Its retail channel had a network of 76 retail branch offices directly serving borrowers throughout the United States. Its wholesale channel operated five regional wholesale operations centers throughout the United States and originated loans through a nationwide network of approximately 3,700 independent mortgage brokers who submit mortgage loans to it.

The following table shows our total originations by retail and wholesale channels for the periods indicated (dollars in thousands):

	Years Ended December 31,						Six Months Ended December 31,						Years Ended June 30,
	2005			2004			2004			2003			2004			2003
Loans Funded:
Retail	$	2,746,321		$	2,421,525		$	1,189,707		$	1,168,675		$	2,400,493		$	1,795,447
Wholesale	4,008,207			4,998,120			2,397,841			1,988,222			4,588,501			2,650,733
Total	$	6,754,528		$	7,419,645		$	3,587,548		$	3,156,897		$	6,988,994		$	4,446,180
% of Total:
Retail	40.7		%	32.6		%	33.2		%	37.0		%	34.3		%	40.4		%
Wholesale	59.3		%	67.4		%	66.8		%	63.0		%	65.7		%	59.6		%
Total	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%

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

Our Retail Channel

We generate applications for loans through our retail loan office network principally through a direct response marketing program, which relies primarily on the use of direct mailings to homeowners, telemarketing and Internet generated leads, and through referrals from our customers, real estate agents and others. We generate customer leads for the retail network based upon models that we have derived and commercially developed customer lists. Our direct mail invites prospective borrowers to call us to apply for a loan. We also generate leads through several commercially available Internet sites as well as through our own retail Internet web site “Aames.com.” We believe that our marketing efforts establish name recognition and serve to distinguish us from our competitors. We continually monitor the source of our applications to determine the most effective methods and manner of marketing. Whether generated through direct mail or the Internet, leads are generally followed up with telephone calls to potential customers. Our loan officers at the local retail loan office pre-qualify a potential customer and if the customer is interested, take an application over the telephone or schedule an appointment with the customer at the retail loan office most conveniently located to the customer or in the customer’s home, depending on the customer’s needs.

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

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

Our Wholesale Channel

During the year ended December 31, 2005, we originated loans through our network of approximately 3,700 independent wholesale mortgage brokers throughout the United States, none of which accounted for more than 5.0% of total wholesale originations.

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

Because mortgage brokers generally submit loan files to several prospective lenders simultaneously, competitive pricing, consistent underwriting, quick response times, and personal service are critical to successfully producing loans through independent mortgage brokers. To meet these requirements, we strive to respond to the loan application 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.

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Total Loan Production

The following table presents certain information about our mortgage loan production at or during the periods indicated:

	Years Ended December 31,						Six Months Ended December 31,						Years Ended June 30,
	2005			2004			2004			2003			2004			2003
Retail:
Total dollar amount (in thousands)	$	2,746,321		$	2,421,525		$	1,189,707		$	1,168,675		$	2,400,493		$	1,795,447
Number of loans	18,496			19,088			9,324			9,077			18,841			15,325
Average loan amount	$	148,482		$	126,861		$	127,596		$	128,751		$	127,408		$	117,158
Average initial LTV	75.63		%	76.77		%	76.15		%	76.56		%	76.93		%	77.21		%
Weighted average interest rate(1)	7.42		%	7.38		%	7.47		%	7.27		%	7.27		%	7.67		%
Retail branch offices at period end	76			96			96			95			99			93
Wholesale(2):
Total dollar amount (in thousands)	$	4,008,207		$	4,998,120		$	2,397,841		$	1,988,222		$	4,588,501		$	2,650,733
Number of loans	28,023			34,140			16,563			13,977			31,554			19,009
Average loan amount	$	143,033		$	146,401		$	144,771		$	142,250		$	145,417		$	139,446
Average initial LTV	81.37		%	81.42		%	81.18		%	82.00		%	81.59		%	80.10		%
Weighted average interest rate(1)	7.70		%	7.37		%	7.52		%	7.69		%	7.43		%	7.96		%
Regional wholesale operations centers at period end	5		(3)	5			5			5			5			4
Total:
Total dollar amount (in thousands)	$	6,754,528		$	7,419,645		$	3,587,548		$	3,156,897		$	6,988,994		$	4,446,180
Number of loans	46,519			53,228			25,887			23,054			50,395			34,334
Average loan amount	$	145,199		$	139,394		$	138,585		$	136,935		$	138,684		$	129,498
Average initial LTV	79.03		%	79.90		%	79.51		%	79.99		%	79.99		%	78.93		%
Weighted average interest rate(1)	7.59		%	7.37		%	7.50		%	7.53		%	7.38		%	7.84		%

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

(2)Wholesale originations include the purchases of closed loans from correspondents of $51.7 million, $4.1 million, $4.2 million, and $19.3 million during the year ended December 31, 2005, six months ended December 31, 2003, and the years ended June 30, 2004 and 2003, respectively. No such loans were purchased during the year ended December 31, 2004 and the six months ended December 31, 2004.

(3)    On March 27, 2006, the Company announced the closure of two regional wholesale operations centers and the consolidation of their operations into the remaining three centers.

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The following tables show the changes in our total production, number of loans and average loan amount for the periods indicated:

	Years Ended December 31, 2005 vs. 2004					Six Months Ended December 31, 2004 vs. 2003					Years Ended June 30, 2004 vs. 2003
	Amount			%		Amount			%		Amount		%
Increase (Decrease) in Total Production:
(in thousands)
Retail	$	324,796		13.4	%	$	21,032		1.8	%	$	605,046	33.7	%
Wholesale	(989,913		)	(19.8	)%	409,619			20.6	%	1,937,768		73.1	%
Total	$	(665,117	)	(9.0	)%	$	430,651		13.6	%	$	2,542,814	57.2	%
Increase (Decrease) in Number of Loans:
Retail	(592		)	(3.1	)%	247			2.7	%	3,516		22.9	%
Wholesale	(6,117		)	(17.9	)%	2,586			18.5	%	12,545		66.0	%
Total	(6,709		)	(12.6	)%	2,833			12.3	%	16,061		46.8	%
Increase (Decrease) in Average Loan Amount:
Retail	$	21,621		17.0	%	$	(1,155	)	(0.9	)%	$	10,250	8.7	%
Wholesale	(3,368		)	(2.3	)%	2,521			1.8	%	5,971		4.3	%
Total	5,805			4.2	%	1,650			1.2	%	9,186		7.1	%

Total loan production declined by $665.1 million, or 9.0%, to $6.8 billion during the year ended December 31, 2005 compared to $7.4 billion during the year ended December 31, 2004. The decrease was primarily due to competitive and interest rate pressures in the marketplace due to increases in short-term interest rates. Many subprime lenders responded to these increases in short-term interest rates by offering interest-only loans and negative amortization loans in an attempt to minimize increases in borrowers’ monthly payments. We did not originate negative amortization loans and limited our production of interest-only loans, which negatively impacted our originations, especially in wholesale, for the year ended December 31, 2005.

Total loan production during the six months ended December 31, 2004 grew by $430.7 million, or 13.6%, to $3.6 billion over the $3.2 billion of loan production during the six months ended December 31, 2003. This growth was primarily due to continued demand for subprime products and improved geographic diversification in the wholesale and retail channels despite a generally increasing mortgage interest rate environment prevailing in the marketplace.

Total loan production during the year ended June 30, 2004 grew by $2.5 billion, or 57.2%, to $7.0 billion from $4.4 billion for the year ended June 30, 2003. This growth was due to a combination of our adoption of new mortgage loan product guidelines, continued strong demand for subprime products in the generally favorable mortgage interest 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.

Total retail loan production increased by $324.8 million, or 13.4%, to $2.7 billion during the year ended December 31, 2005 compared to $2.4 billion during the year ended December 31, 2004. This growth was primarily due to an increase in average loan size of $21,621, or 17.0%, partially offset by a 3.1% decrease in the number of loans.  This reflected the retail channel’s reduction of 20 branches to 76 branches at December 31, 2005, compared to 96 branches at December 31, 2004, pursuant to our retail strategy of closing branches in smaller markets with smaller average loan amounts, focusing its loan origination efforts in larger markets with larger average loan amounts, and expanding staffing and loan origination capacity in certain larger retail branches, which we refer to as “Super Branches,” in those areas.

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Total retail production was $1.2 billion during the six months ended December 31, 2004, an increase of $21.0 million, or 1.8%, over total retail production during the comparable six-month period in 2003. Retail production grew slightly during the six months ended December 31, 2004 over the comparable period in 2003, primarily due to a 2.7% increase in the number of loans originated, partially offset by a 0.9% decline in average loan size. The growth in the number of loans was primarily due to our decision to expand larger “Super Branches” during the six months ended December 31, 2004, partially offset by increased competitive pressures in the December 2004 quarter due to the increased interest rate environment.

Total retail loan production increased by $605.0 million, or 33.7%, to $2.4 billion during the year ended June 30, 2004 over the $1.8 billion during the year ended June 30, 2003.

Total wholesale loan production decreased by $989.9 million, or 19.8%, to $4.0 billion during the year ended December 31, 2005 compared to $5.0 billion during the year ended December 31, 2004. This decline was primarily due to a 17.9% decrease in the number of loans originated, as well as a decrease in average loan size of $3,368, or 2.3%. This decrease was due in part to management’s decision not to offer negative amortization loans and to limit the production of interest-only loans in a rising short-term interest rate environment, where consumer demand increased for these products. In addition, during 2005, our wholesale pricing was at times higher than several other subprime lenders, which negatively affected wholesale loan production.

Total wholesale production grew by $409.6 million, or 20.6%, to $2.4 billion during the six months ended December 31, 2004 over $2.0 billion of total wholesale production during the six months ended December 31, 2003. The increase was due primarily to an 18.5% increase in the number of loans originated coupled with a 1.8% increase in average loan size.

Total wholesale production increased by $1.9 billion, or 73.1%, during the year ended June 30, 2004 over the $2.7 billion during the year ended June 30, 2003. In November 2003, we added a regional wholesale operations center in the Northeastern United States, which enabled us to increase our production in that region.

The following table summarizes certain information about our mortgage loan production by purpose for the periods indicated (dollars in thousands):

	Years Ended						Six Months Ended						Years Ended
	December 31,						December 31,						June 30,
Purpose	2005			2004			2004			2003			2004			2003
Loans Funded:
Cash-out refinance	$	3,906,641		$	4,423,226		$	2,104,690		$	1,907,737		$	4,222,127		$	2,822,770
Purchase money	2,618,182			2,674,084			1,354,148			994,513			2,326,930			1,044,557
Rate/term refinance	229,705			322,335			128,710			254,647			439,937			578,853
Total	$	6,754,528		$	7,419,645		$	3,587,548		$	3,156,897		$	6,988,994		$	4,446,180
% of Total:
Cash-out refinance	57.8		%	59.6		%	58.7		%	60.4		%	60.4		%	63.5		%
Purchase money	38.8		%	36.0		%	37.7		%	31.5		%	33.3		%	23.5		%
Rate/term refinance	3.4		%	4.4		%	3.6		%	8.1		%	6.3		%	13.0		%
Total	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%

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The following table summarizes certain information about our mortgage loan production by property type for the periods indicated (dollars in thousands):

	Years Ended						Six Months Ended						Years Ended
	December 31,						December 31,						June 30,
Property Type	2005			2004			2004			2003			2004			2003
Loans Funded:
Single-family residence	$	5,883,238		$	6,498,417		$	3,156,159		$	2,789,292		$	6,131,440		$	3,943,157
Multi-family residence	494,107			507,426			233,770			198,728			472,405			262,968
Condominiums	377,183			413,802			197,539			168,767			385,039			230,994
All other	—			—			80			110			110			9,061
Total	$	6,754,528		$	7,419,645		$	3,587,548		$	3,156,897		$	6,988,994		$	4,446,180
% of Total:
Single-family residence	87.1		%	87.6		%	88.0		%	88.4		%	87.7		%	88.7		%
Multi-family residence	7.3		%	6.8		%	6.5		%	6.3		%	6.8		%	5.9		%
Condominiums	5.6		%	5.6		%	5.5		%	5.3		%	5.5		%	5.2		%
All other	NM			NM			NM			NM			NM			0.2		%
Total	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%

NM= Not meaningful

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The following table shows our loan originations by geographic region (i.e. state of mortgage property) for the periods indicated (dollars in thousands):

	Years Ended						Six Months Ended						Years Ended
	December 31,						December 31,						June 30,
	2005			2004			2004			2003			2004			2003
Loans Funded:
California	$	1,592,215		$	2,393,732		$	1,108,837		$	1,182,972		$	2,414,835		$	1,529,113
Florida	1,623,052			1,444,562			710,630			526,703			1,208,872			571,078
New York	493,117			529,251			234,692			171,029			511,642			281,167
Texas	535,525			505,165			262,508			219,096			473,088			340,896
Other Western States (AZ, CO, HI, ID, MT, NV, NM, OR, UT, WA, WY)	594,704			749,268			359,223			335,406			734,040			538,699
Midwestern States (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI)	413,789			638,506			307,090			280,019			621,881			504,786
Other Northeastern States (CT, DE, ME, MD, MA, NH, NJ, PA, RI)	890,394			683,193			356,107			259,839			604,197			378,363
Other Southeastern States (AR, GA, KY, LA, MS, NC, OK, TN, VA, WV)	611,732			475,968			248,461			181,833			420,439			302,078
Total	$	6,754,528		$	7,419,645		$	3,587,548		$	3,156,897		$	6,988,994		$	4,446,180
% of Total:
California	23.6		%	32.3		%	30.9		%	37.5		%	34.6		%	34.4		%
Florida	24.0		%	19.5		%	19.8		%	16.7		%	17.3		%	12.8		%
New York	7.3		%	7.1		%	6.6		%	5.4		%	7.3		%	6.3		%
Texas	7.9		%	6.8		%	7.3		%	6.9		%	6.8		%	7.7		%
Other Western States (AZ, CO, HI, ID, MT, NV, NM, OR, UT, WA, WY)	8.8		%	10.1		%	10.0		%	10.6		%	10.5		%	12.1		%
Midwestern States (IL, IN, IA, KS, MI, MN, MO, NE, ND, OH, SD, WI)	6.1		%	8.6		%	8.6		%	8.9		%	8.9		%	11.4		%
Other Northeastern States (CT, DE, ME, MD, MA, NH, NJ, PA, RI)	13.2		%	9.2		%	9.9		%	8.2		%	8.6		%	8.5		%
Other Southeastern States (AR, GA, KY, LA, MS, NC, OK, TN, VA, WV)	9.1		%	6.4		%	6.9		%	5.8		%	6.0		%	6.8		%
Total.	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%

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The following table summarizes certain information by interest rate about our mortgage loan production for the periods indicated (dollars in thousands):

	Years Ended						Six Months Ended						Years Ended
	December 31,						December 31,						June 30,
	2005			2004			2004			2003			2004			2003
Loans Funded:
Hybrid:
Traditional	$	3,878,815		$	5,382,666		$	2,598,326		$	2,147,990		$	4,932,500		$	2,531,580
Interest Only	763,666			274,180			180,870			N/A			93,308			N/A
40/30	553,830			N/A			N/A			N/A			N/A			N/A
	5,196,311			5,656,846			2,779,196			2,147,990			5,025,808			2,531,580
Fixed rate:
Traditional	1,511,773			1,762,799			808,352			1,008,907			1,963,186			1,914,600
40/30	46,444			N/A			N/A			N/A			N/A			N/A
	1,558,217			1,762,799			808,352			1,008,907			1,963,186			1,914,600
Total	$	6,754,528		$	7,419,645		$	3,587,548		$	3,156,897		$	6,988,994		$	4,446,180
% of Total:
Hybrid:
Traditional	57.4		%	72.5		%	72.4		%	68.0		%	70.6		%	56.9		%
Interest Only	11.3		%	3.7		%	5.1		%	—			1.3		%	—
40/30	8.2		%	—			—			—			—			—
	76.9		%	76.2		%	77.5		%	68.0		%	71.9		%	56.9		%
Fixed rate:
Traditional	22.4		%	23.8		%	22.5		%	32.0		%	28.1		%	43.1		%
40/30	0.7		%	—			—			—			—			—
	23.1		%	23.8		%	22.5		%	32.0		%	28.1		%	43.1		%
Total	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%

N/A= Not Applicable

UNDERWRITING STANDARDS

We underwrite each mortgage loan that we originate in both our wholesale and retail channels in accordance with our underwriting guidelines or the guidelines of specific third party purchasers of our loans. We have developed underwriting processes and criteria that we believe generate quality loans and give us the ability to approve and fund loans quickly. Our underwriting guidelines are designed to help us evaluate a borrower’s history of payments on his prior mortgage credit history, capacity, willingness, and ability to repay the loan, and the value and adequacy of the collateral. We review the borrower’s credit history from all three nationally recognized credit bureaus. In addition, we review credit scores derived from the borrower’s credit history by one or more nationally recognized credit scoring models.

Our underwriting policy is to analyze the overall situation of the borrower and to take into account compensating factors that may be used to offset certain areas of weakness. These compensating factors include proposed reductions in the borrower’s debt service expense, employment stability, number of years in residence and net disposable income. Based upon this analysis, we can determine loan terms and conditions to produce loans that we believe are appropriately priced, meet our quality standards, and are profitable. Our underwriting process and guidelines require a rigorous application review and documentation designed to determine the borrower’s ability to repay the loan and maximize the value of our mortgage loans. We also evaluate each loan that we originate to ensure that it provides a benefit to the borrower in accordance with regulatory requirements.

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Underwriting Personnel

Our on-staff underwriting personnel underwrite all of our loans. We do not delegate underwriting authority to any broker or third party. We regularly train our underwriters on emerging trends in production, and believe that our originators and underwriters are highly qualified and experienced and are familiar with our underwriting guidelines. We believe that our regionalized underwriting process in wholesale provides us with the ability to fund loans quickly and that the experience of our loan originators and branch managers, our information systems, and our rigorous quality control process ensure the continued quality of our loans.

Underwriting Guidelines

A critical function of our underwriting process is to identify the level of credit risk associated with each applicant for a mortgage loan. We have established six principal classifications with respect to the credit profile of potential borrowers, and have assigned a rating to each loan based upon these classifications. We assign credit grades and pricing by analyzing mortgage payment history, consumer credit history, credit score, and bankruptcy history. Debt-to-income ratios are evaluated to ascertain borrower’s ability to repay their obligation. If an individual loan application does not meet our formal written underwriting guidelines, our underwriters can make underwriting exceptions up to certain limits within our formal exception policies and approval authorities. We may, from time to time, apply underwriting criteria that are either more stringent or more flexible depending upon the economic conditions of a particular geographic market.

Credit History

We obtain credit scores in connection with mortgage loan applications to help assess a borrower’s creditworthiness. Credit scores are obtained from credit reports provided by various reputable 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 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 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 on a loan 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.

Collateral Review

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, or LTV, of the loan applied for and of all mortgages existing on the property, including the loan applied for (the combined loan-to-value

15

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.

We require title insurance coverage issued on an American Land Title Association (or similar) form of title insurance on all residential properties securing mortgage loans we originate. 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 us 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, we make 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. Our 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 by us 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 us for purchase must be approved by us in accordance with our underwriting criteria. We regularly review our underwriting guidelines and make changes when appropriate to respond to market conditions, the performance of loans representing a particular loan product, or changes in laws or regulations.

Underwriting Requirements

Our current underwriting guidelines, called Super Aim, became effective October 1, 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.

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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 (580 for interest-only loans)	500 (580 for interest-only loans)	500 (580 for interest-only loans)	500 (interest-only not available)	500 (interest-only  and 40/30 not available)	500 (interest-only  and 40/30 not available)
BK/NOD/FC(1) Seasoning	24 months	24 months	24 months	18 months	12 months	No current BK/NOD
Full Documentation Plus, Owner Occupied Max LTV	80% (100% for credit score of 620 or above)	80% (95% for credit score of 580 or above)	80% (95% for credit score of 580 or above)	80% (90% for credit score of 550 or above)	75% (85% for credit score of 550 or above)	70%
Full Documentation, Owner Occupied Max LTV	80% (95% for credit score of 550 or above)	80% (95% for credit score of 580 or above)	80% (95% for credit score of 580 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 or above)	80% (90% for credit score of 550 or above)	80% (85% for credit score of 550 or above)	80% (85% for credit score of 550 or above)	75% (80% for credit score of 550 or above)	70%
Stated Income, Owner Occupied Max LTV	80% (90% for credit score of 580 or above)	80% (90% for credit score of 620 or above)	75% (80% for credit score of 525 or above)	75% (80% for credit score of 550 or above)	70% (75% for credit score of 550 or above)	Not available

(1)Bankruptcy, notice of default and foreclosure

Income Documentation

Our underwriting guidelines include several levels of documentation used to verify the borrower’s income:

·Full Documentation Plus: The highest level of income documentation based upon S&P’s full income documentation guidelines. Generally, a stable, two-year history of income is required. A wage-earner may document income by a verification of employment together with either of the following: the borrower’s most recent two years of W-2 forms and a current pay-stub reflecting year-to-date income; or the borrower’s most recent two years of IRS Form 1040 and a current pay-stub reflecting year-to-date income. A self-employed borrower may document income with the most recent two years of IRS Form 1040 and current year-to-date statement of profit and loss if the loan application is dated more than 120 days after the end of the business’s fiscal year.

·Full Documentation: Generally, a stable, one-year history of income is required. A wage-earner may document income by a verification of employment together with any of the following: the borrower’s most recent W-2 form and a current pay-stub reflecting year-to-date income; the borrower’s most recent IRS Form 1040 and a current pay-stub reflecting year-to-date income; or the borrower’s most recent 12-month personal (or 12-months multiple account holder personal) bank statements showing average monthly deposits sufficient to support the qualifying income. A

17

self-employed borrower may document income with either the most recent two years of IRS Form 1040 and current year-to-date statement of profit and loss if the loan application is dated more than 120 days after the end of the business’s fiscal year; or the borrower’s most recent 12 months of personal or business (or 24 months of commingled personal and business) bank statements showing average monthly deposits sufficient to support the qualifying income.

·Limited Documentation: For borrowers who have less than a one-year history of stable income or who otherwise cannot meet the requirements of the full documentation program. This program generally requires a two-year history in the same profession, together with last year’s IRS Form 1099(s), plus year-to-date bank statements, business bank statements, corporate, partnership, or multiple account holder business bank statements.

·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 two years of employment in the same profession on the loan application. In some cases, but not in all, the assets of the borrower will be verified.

LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION

The following tables set forth our loan production under the Super Aim guidelines for the periods indicated (dollars in thousands):

	Year Ended December 31, 2005
	Loans Funded		% of Total			Average Credit Score		Weighted Average Interest Rate(1)			Weighted Average Loan-to-Value Ratio
Credit Grade:
A+	5,261,418			78	%		631		7.5	%		80	%
A	718,788			11	%		599		7.5	%		76	%
A-	274,979			4	%		565		8.0	%		75	%
B	324,318			5	%		559		8.5	%		75	%
C	140,722			2	%		551		9.0	%		70	%
C-	34,303			0	%		543		10.4	%		65	%
Total	$	6,754,528		100	%		619		7.6	%		79	%

	Year Ended December 31, 2004
	Loans Funded		% of Total			Average Credit Score		Weighted Average Interest Rate(1)			Weighted Average Loan-to-Value Ratio
Credit Grade:
A+	$	5,471,092		74	%		625		7.2	%		81	%
A	882,050			12	%		589		7.4	%		79	%
A-	372,543			5	%		561		7.8	%		77	%
B	450,979			6	%		560		8.1	%		76	%
C	197,075			3	%		550		8.8	%		71	%
C-	45,906			0	%		541		9.9	%		66	%
Total	$	7,419,645		100	%		611		7.4	%		80	%

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	Six Months Ended December 31, 2004
	Loans Funded		% of Total			Average Credit Score		Weighted Average Interest Rate(1)			Weighted Average Loan-to-Value Ratio
Credit Grade:
A+	$	2,660,434		74	%		624		7.4	%		81	%
A	410,211			11	%		588		7.5	%		79	%
A-	172,076			5	%		559		8.0	%		77	%
B	218,169			6	%		559		8.2	%		75	%
C	101,717			3	%		549		8.8	%		70	%
C-	24,941			1	%		540		10.0	%		64	%
Total	$	3,587,548		100	%		610		7.5	%		80	%

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

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

The following tables present certain information about our loan production by credit score range for the periods indicated (dollars in thousands):

	Year Ended December 31, 2005
	Loans Funded		% of Total			Weighted Average Interest Rate(1)			Weighted Average Loan-to-Value Ratio
Credit Score Range:
Above 700	527,453			8	%		6.9	%		78	%
661-700	960,676			14	%		7.0	%		80	%
621-660	1,863,080			28	%		7.3	%		81	%
581-620	1,785,509			26	%		7.6	%		80	%
541-580	931,290			14	%		8.1	%		78	%
540 and below	674,675			10	%		8.7	%		74	%
Not available	11,845			NM			8.0	%		78	%
Total	$	6,754,528		100	%		7.6	%		79	%

	Year Ended December 31, 2004
	Loans Funded		% of Total			Weighted Average Interest Rate(1)			Weighted Average Loan-to-Value Ratio
Credit Score Range:
Above 700	$	471,953		6	%		6.8	%		79	%
661-700	921,235			12	%		7.0	%		81	%
621-660	1,912,280			26	%		7.2	%		81	%
581-620	1,760,427			24	%		7.2	%		81	%
541-580	1,387,968			19	%		7.7	%		80	%
540 and below	956,187			13	%		8.2	%		75	%
Not available	9,595			NM			7.6	%		81	%
Total	$	7,419,645		100	%		7.4	%		80	%

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	Six Months Ended December 31, 2004
	Loans Funded		% of Total			Weighted Average Interest Rate(1)			Weighted Average Loan-to-Value Ratio
Credit Score Range:
Above 700	$	212,504		6	%		7.0	%		79	%
661-700	434,801			12	%		7.1	%		81	%
621-660	954,240			27	%		7.3	%		81	%
581-620	860,504			24	%		7.3	%		80	%
541-580	651,915			18	%		7.8	%		80	%
540 and below	470,431			13	%		8.4	%		74	%
Not available	3,153			NM			7.9	%		79	%
Total	$	3,587,548		100	%		7.5	%		80	%

	Six Months Ended December 31, 2003
	Loans Funded		% of Total			Weighted Average Interest Rate(1)			Weighted Average Loan-to-Value Ratio
Credit Score Range:
Above 700	$	250,462		8	%		6.8	%		77	%
661-700	429,278			14	%		7.0	%		80	%
621-660	798,133			25	%		7.4	%		81	%
581-620	712,781			23	%		7.5	%		81	%
541-580	551,302			17	%		8.0	%		81	%
540 and below	406,234			13	%		8.4	%		75	%
Not available	8,707			NM			9.4	%		88	%
Total	$	3,156,897		100	%		7.5	%		80	%

	Year Ended June 30, 2004
	Loans Funded		% of Total			Weighted Average Interest Rate(1)			Weighted Average Loan-to-Value Ratio
Credit Score Range:
Above 700	$	509,928		7	%		6.7	%		78	%
661-700	915,757			13	%		6.9	%		81	%
621-660	1,756,147			25	%		7.2	%		81	%
581-620	1,612,768			23	%		7.3	%		81	%
541-580	1,287,346			18	%		7.8	%		81	%
540 and below	891,898			13	%		8.2	%		75	%
Not available	15,150			NM			8.6	%		86	%
Total	$	6,988,994		100	%		7.4	%		80	%

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	Year Ended June 30, 2003
	Loans Funded		% of Total			Weighted Average Interest Rate(1)			Weighted Average Loan-to-Value Ratio
Credit Score Range:
Above 700	$	371,272		8	%		7.1	%		77	%
661-700	574,698			13	%		7.4	%		80	%
621-660	1,153,490			26	%		7.7	%		81	%
581-620	1,020,023			23	%		8.0	%		81	%
541-580	776,959			18	%		8.5	%		78	%
540 and below	543,670			12	%		8.7	%		74	%
Not available	6,068			NM			9.2	%		74	%
Total	$	4,446,180		100	%		7.9	%		79	%

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

NM = Not Meaningful

Quality Control

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

·the accuracy of all credit and legal information;

·a collateral analysis;

·employment and/or income verification; and

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

MORTGAGE LOAN SALES TO THIRD PARTIES AND SECURITIZATIONS

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

·gain on sale income, which includes the premiums received on the sale of the loans;

·net interest income earned on its loans held prior to sale;

·points and fees charged to borrowers, less yield spread premiums paid to wholesale brokers, during the loan origination process; and

·loan servicing income earned on its loans held prior to sale, loans retained in our REIT portfolio, and loans owned by others.

Aames Financial uses the majority of the net proceeds of its loan sales to pay down its warehouse and repurchase facilities in order to increase capacity under these facilities for future fundings of mortgage

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loans. Proceeds we receive from financings on loans held for investment are also used to pay down our warehouse and repurchase facilities.

During the fiscal years ended June 30, 2003 and prior, Aames Financial also sold loans to third parties in off-balance sheet securitizations. Historically, Aames Financial’s off-balance sheet securitizations were structured as sales for both tax and financial accounting purposes. In these securitizations, Aames Financial would sell a pool of mortgage loans into a trust, which would then issue securities or bonds collateralized by the mortgage loans. Aames Financial might retain or sell the servicing rights to the securitized mortgages, as well as retain an interest in the pool of mortgages, called a residual interest, that entitled it to the remaining interests in the loans, if any, after all of the obligations on the issued securities or bonds had been paid in full. Currently, Aames Financial sells us loans that we use to maintain our REIT portfolio of loans held for investment through the use of on-balance sheet securitizations.

The following table sets forth information regarding our whole loan sales to third parties and off-balance sheet securitizations for the periods indicated (in thousands):

	Years Ended December 31,				Six Months Ended December 31,				Years Ended June 30,
	2005		2004		2004		2003		2004		2003
Whole loan sales	$	2,812,696	$	5,924,743	$	2,391,671	$	2,900,798	$	6,433,871	$	4,188,678
Loans pooled and sold in off-balance sheet securitizations	—		—		—		—		—		314,958
Total loans sold	$	2,812,696	$	5,924,743	$	2,391,671	$	2,900,798	$	6,433,871	$	4,503,636

Our whole loan sales decreased by $3.1 billion, or 52.5%, to $2.8 billion during the year ended December 31, 2005 from $5.9 billion during the comparable period a year ago. This decline was due to our retaining a significant portion of our loan production to build a REIT portfolio of loans held for investment.

Our whole loan sales  decreased by $509.1 million, or 17.6%, to $2.4 billion during the six months ended December 31, 2004 from $2.9 billion during the comparable six-month period in 2003. This decline was due to our retaining a significant portion of our loan production to build a REIT portfolio of loans held for investment.

During the fiscal years ended June 30, 2003 and prior, Aames Financial maximized opportunities in loan sale transactions by selling its loan production through a combination of off-balance sheet securitizations and whole loan sales, depending on market conditions, taking under consideration relative profitability and cash flows. Aames Financial generally realized higher gain on sale in off-balance sheet securitizations than in whole loan sales for cash. The higher gain on sale in off-balance sheet securitizations is attributable to the excess 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 an off-balance sheet securitization, we generally overcollateralize the underlying pass-through certificates or bonds by depositing mortgage loans with a principal balance exceeding the principal balance of the pass-through certificates or bonds. The up-front overcollateralization required in securitizations is generally cash flow negative to us 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 we receive the gain in the form of cash.

Our total loan dispositions grew by $1.9 billion, or 42.9%, to $6.4 billion during the year ended June 30, 2004 from $4.5 billion during the year ended June 30, 2003. During the year ended June 30, 2004, we relied solely on whole loan sales to third parties as our loan disposition strategy due to attractive pricing conditions prevailing in the whole loan markets. During the year ended June 30, 2003, we also relied

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predominantly on whole loan sales as our loan disposition strategy due primarily to favorable conditions in the whole loan market. In the off-balance sheet securitizations which closed during the year ended June 30, 2003, we sold for cash of $8.7 million the residual interests created in the securitizations through utilization of the Forward Residual Sale Facility (“Residual Facility”). We used the Residual Facility, which expired on March 31, 2003, to include off-balance sheet securitizations in our loan disposition strategy by reducing the negative cash flow aspects of securitization and by providing us with another source of cash through periodic sales of residual interests for cash. The Residual Facility was made available through Capital Z Investments, L.P., a Bermuda partnership (“CZI”), an affiliate of Specialty Finance Partners, our majority stockholder prior to our REIT reorganization.

Changes in the secondary mortgage markets, the current interest rate environment, and the current economic climate could affect our current strategy of selling loans to third parties in whole loan sales. Going forward, our evaluation of loan disposition strategies 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.

MORTGAGE LOAN SERVICING

Aames Financial services residential mortgage loans held in its portfolio prior to sale, those held in our REIT portfolio, and to a much lesser extent, for others. Loan servicing remains an integral part of our business operation. We believe that maintaining contact with our borrowers is critical in managing credit risk and in borrower retention. Subprime borrowers are more likely to default on their obligations than conventional borrowers. By servicing our loans, we strive to identify problems with borrowers early and take quick action to address these problems. Borrowers may be more motivated to refinance their mortgage loans either by improving their personal credit or due to a decrease in interest rates. By keeping in close touch with borrowers, we can provide them with information about our loan products to encourage them to refinance with us. Mortgage servicing provides fee income for Aames Financial in the form of normal customer service and processing fees.

We currently have in place a subprime residential mortgage loan servicing team with over 100 servicing employees and a scalable servicing platform. Aames Financial’s servicing platform has received a SQ3 rating from Moody’s and a RPS3- rating from Fitch. Additionally, S&P has included us on their list of approved servicers. We have a servicing portfolio, including loans held for investment and loans held for sale, of approximately $6.1 billion at December 31, 2005.

In addition to our REIT portfolio, our servicing portfolio consists of loans serviced on an interim basis, including loans held for sale and loans sold to others and subserviced on an interim basis, and to a lesser extent, mortgage loans 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. In order to maximize profitability and cash flow, we do not retain servicing on loans we sell to third parties in whole loan sales for cash.

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

	December 31,						June 30,
	2005			2004			2004			2003
Mortgage loans serviced:
Loans held for investment	$	4,077,448		$	1,718,696		$	—		$	—
Loans serviced on an interim basis	1,926,876			771,830			1,897,464			910,671
Loans subserviced for others on a long-term basis	92,213			129,016			160,371			—
Loans in off-balance sheet securitization trusts	—			224,345			229,308			741,132
Total serviced in-house	6,096,537			2,843,887			2,287,143			1,651,803
Loans held for investment subserviced by others	50,202			—			—			—
Loans in off-balance sheet securitization trusts subserviced by others	—			—			53,885			87,829
Total servicing portfolio	$	6,146,739		$	2,843,887		$	2,341,028		$	1,739,632
Percentage serviced in-house	99.2		%	100.0		%	97.7		%	94.9		%

Our total loan servicing portfolio at December 31, 2005 grew by $3.3 billion, to $6.1 billion, from $2.8 billion at December 31, 2004, due primarily to an increase of $2.4 billion in our REIT portfolio of loans held for investment, together with increases of  $1.2 billion and $50.2 million in loans serviced on an interim basis and loans held for investment subserviced by others, respectively. Partially offsetting these increases were the elimination of $224.3 million in loans serviced in off-balance sheet securitization trusts due to our calling the seven remaining off-balance sheet securitization trusts in 2005 and a decrease of $36.8 million in loans subserviced for others on a long-term basis. The $1.2 billion increase in loans serviced on an interim basis reflects the increase in loans sold but not yet transferred to new servicers by whole loan buyers, and to a lesser extent, the increase in loans held for sale at December 31, 2005 from December 31, 2004. The $50.2 million increase in loans held for investment subserviced for others resulted from the purchase and subsequent on-balance sheet securitization of loans collateralized by single-family residences from a California-based, commercial bank. The decline in loans subserviced for others on a long-term basis was due to loan portfolio run-off. The servicing of these loans resulted from our sale of loans from older off-balance sheet securitization trusts called during the fiscal year ended June 30, 2004 for which we agreed to continue servicing on a long-term basis.

Our total loan servicing portfolio at December 31, 2004 increased by $502.9 million, to $2.8 billion, from $2.3 billion at June 30, 2004, reflecting a $1.7 billion increase in servicing of loans held for investment due to our conversion to a REIT in November 2004, partially offset by declines in loans serviced on an interim basis, loans subserviced for others on a long-term basis, and loans serviced in off-balance sheet securitization trusts, all of which decreased due to loan portfolio run-off. Our portfolio of mortgage loans serviced on an interim basis decreased by $1.1 billion to $771.8 million at December 31, 2004 from $1.9 billion at June 30, 2004, primarily due to the $1.2 billion transfer to servicing of loans held for investment resulting from the consummation of our on-balance sheet securitization in early December 2004.

On November 30, 2004, we assumed servicing of $45.3 million of mortgage loans in certain off-balance sheet securitization trusts that had previously been subserviced by others. As a result of assuming servicing on these mortgage loans, we remitted $5.9 million to the former subservicer for outstanding servicing advances and, in our role of servicer, re-assumed responsibility to make future servicing advances on loans in these off-balance sheet securitization trusts. At December 31, 2004, the servicing on such loans is included in “loans in off-balance sheet securitization trusts.”

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Our portfolio of mortgage loans in off-balance sheet securitization trusts serviced in-house declined by $511.8 million, to $229.3 million at June 30, 2004 from $741.1 million at June 30, 2003 due primarily to our call of 10 off-balance sheet securitization trusts, which caused the portfolio of mortgage loans in securitization trusts to decline by $304.1 million and, to a lesser extent, portfolio run-off.

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

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

In 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. Realized losses on the loans are paid out of the related credit loss estimates established by us 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 our 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 our senior/subordinated securitizations.

In addition, the agreements governing securitizations credit-enhanced by monoline insurance typically provide that we may be terminated as servicer by the monoline insurance company (or by the trustee with the consent of the monoline insurance company) upon certain events of default, including our failure to perform our obligations under the servicing agreement, the rate of over 90-day delinquent loans (including properties acquired by foreclosure and not sold) exceeding specified limits, losses on liquidation of collateral exceeding certain limits, any payment being made by the monoline insurance company under its policy, and events of bankruptcy or insolvency. None of our servicing rights have been terminated.

Collections, Delinquencies and Foreclosures

We send borrowers a monthly billing statement approximately 10 days prior to the monthly payment due date. Although borrowers generally make loan payments within 10 to 15 days after the due date (the “grace period”), if a borrower fails to pay the monthly payment within this grace period, we begin collection efforts by notifying the borrower of the delinquency. In the case of borrowers with certain credit characteristics or with a poor payment history with us, collection efforts begin immediately after the due date. We continue to make contact with the borrower to determine the cause of the delinquency and to obtain a commitment to cure the delinquency at the earliest possible time.

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

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

The following table illustrates the mix of credit scores in our servicing portfolio at December 31, 2005 based upon loan characteristics at the time of origination (dollars in thousands):

	December 31, 2005
	Dollar Amount of Loans		% of Total			Weighted Average Initial Loan-to-Value Ratio			Weighted Average Interest Rate(1)
Credit Score Range:
Above 700	$	427,669		7	%		77.3	%		6.8	%
661-700	794,950			13	%		79.8	%		6.9	%
621-660	1,608,279			26	%		80.3	%		7.2	%
581-620	1,591,255			26	%		79.4	%		7.5	%
541-580	904,151			15	%		79.5	%		8.1	%
540 and below	653,791			10	%		74.3	%		8.7	%
Not available	166,644			3	%		71.1	%		10.3	%
Total	$	6,146,739		100	%		78.8	%		7.6	%

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

Subprime mortgage loans generally have higher delinquency rates than those prevailing in the mortgage industry. As a subprime mortgage lender, we have historically experienced delinquency rates that are higher than those prevailing in the mortgage industry due to the origination of lower credit grade mortgage loans. Delinquent loans are loans for which more than one payment is due.

Set forth below are our delinquency rates compared to delinquency rates for subprime mortgage loans (seasonally adjusted) and all mortgage loans (seasonally adjusted) according to the National Delinquency Survey of the Mortgage Bankers Association of America as of the dates indicated:

	December 31,					June 30,
	2005		2004			2004		2003
Aames Investment	5.4	%		2.5	%	3.2	%	9.0	%
Subprime Mortgage Loans	NYA			9.9	%	10.0	%	18.0	%
All Mortgage Loans	NYA			4.2	%	4.4	%	5.0	%

NYA = Not yet announced

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The following table sets forth delinquency information relating to our servicing portfolio as of the dates indicated:

	December 31,				June 30,
	2005		2004		2004		2003
Percentage of dollar amount of delinquent loans serviced (period end)(1)(2):
One month	1.9	%	0.3	%	0.3	%	0.7	%
Two months	0.9	%	0.2	%	0.2	%	0.3	%
Three or more months
Not foreclosed(3)	2.5	%	1.8	%	2.4	%	7.2	%
Foreclosed(4)	0.1	%	0.2	%	0.3	%	0.8	%
	5.4	%	2.5	%	3.2	%	9.0	%
Percentage of total dollar amount of delinquent loans in:
Loans held for investment	7.0	%	0.2	%	N/A		N/A
Loans serviced on an interim basis	2.0	%	1.5	%	0.6	%	1.3	%
Loans subserviced for others on a long-term basis	8.9	%	4.8	%	2.7	%	N/A
Loans in off-balance sheet securitization trusts serviced:
In-house	N/A		22.5	%	13.0	%	12.9	%
By others	N/A		N/A		7.7	%	4.5	%

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

(2)The delinquency and foreclosure percentages are calculated on the basis of the total dollar amount of mortgage loans serviced by us including loans serviced on an interim basis.

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

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

N/A = Not Applicable

The following table summarizes the unpaid principal balance of delinquent loans in the total servicing portfolio as of the dates indicated (in thousands):

	December 31,				June 30,
	2005		2004		2004		2003
Loans held for investment	$	287,348	$	2,856	N/A		N/A
Loans serviced on an interim basis	38,437		11,459		11,937		12,151
Loans subserviced for others on a long-term basis	8,225		6,229		4,316		—
Loans in off-balance sheet securitization trusts serviced:
In-house	N/A		50,408		36,938		107,089
By others	N/A		N/A		21,725		37,214
Total	$	334,010	$	70,952	$	74,916	$	156,454

N/A = Not Applicable

Delinquent loans, by unpaid principal balance of the total servicing portfolio, increased to $334.0 million at December 31, 2005 from $71.0 million at December 31, 2004 due largely to the $2.4 billion growth in the principal balance of our REIT portfolio of loans held for investment. The delinquency rate grew to 5.4% at December 31, 2005 from 2.5% at December 31, 2004 and was primarily due to an increase in delinquencies in our on-balance sheet REIT portfolio of mortgage loans, which was attributable to seasoning of these loans. We expect the delinquency rate to increase in future periods due to these factors. The delinquency rate at December 31, 2005 was further negatively affected by the occurrence of hurricanes

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Katrina, Rita, and Wilma during August, September and October of 2005, respectively, and their impact on the Southeastern United States.

Delinquent loans, by unpaid principal balance of the total servicing portfolio, decreased to $71.0 million at December 31, 2004 from $74.9 million at June 30, 2004 despite an increase of $502.9 million in the total servicing portfolio during the six months ended December 31, 2004. The delinquency rate declined to 2.5% at December 31, 2004 from 3.2% at June 30, 2004 due to the fact that the seasoned loans in our off-balance sheet securitization trusts, which contains the majority of delinquent loans, became a smaller part of our total servicing portfolio. The loans in our on-balance sheet REIT portfolio, together with loans serviced on an interim basis, consisting largely of newly originated loans, became the largest part of our servicing portfolio at December 31, 2004. A decline in delinquencies generally reduces our servicing advance obligations.

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

	Years Ended December 31,						Six Months Ended December 31,						Years Ended June 30,
	2005			2004			2004			2003			2004			2003
Percentage of dollar amount of loans foreclosed during the period to loans serviced (period end)(1)(2)	0.3		%	0.4		%	0.1		%	0.3		%	0.5		%	1.3		%
Number of loans foreclosed during the period	147			152			68			91			180			417
Principal amount of loans foreclosed during the period	$	16,317		$	10,928		$	3,585		$	5,524		$	11,667		$	27,703
Number of loans liquidated during the period	226			397			163			269			503			1,033
Net losses on liquidations during the period from(3):
Loans held for investment	$	161		$	—		$	—		$	—		$	—		$	—
Loans serviced on an interim basis	5,494			2,960			1,224			1,970			3,707			4,558
Loans subserviced for others on a long-term basis	38			—			—			—			—			—
Loans in off-balance sheet securitization trusts serviced:
In-house	2,850			12,009			5,554			5,286			9,884			25,991
By others	—			—			—			2,924			4,780			5,120
Total net losses	$	8,543		$	14,969		$	6,778		$	10,180		$	18,371		$	35,669
Percentage of annualized losses to servicing portfolio(1)(2)	0.2		%	0.5		%	0.4		%	1.0		%	0.8		%	1.6		%
Servicing portfolio at period end	$	6,147,000		$	2,844,000		$	2,844,000		$	2,334,000		$	2,341,000		$	1,740,000

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

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

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

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Loans serviced by us 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, we often purchase 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 our investment in the property.

As alternatives to foreclosure, we may make special repayment arrangements, 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. We believe 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 December 31, 2005, net losses on loan liquidations decreased to $8.5 million from $15.0 million during the year ended December 31, 2004. A majority of the foreclosures handled occurred in connection with delinquent mortgage loans in former off-balance sheet securitization trusts serviced by us. Of the $8.5 million of net losses on loan liquidations during the year ended December 31, 2005, $5.5 million and $2.9 million related to mortgage loans held for sale and mortgage loans in the off-balance sheet securitization trusts, respectively. We expect net losses on loan liquidations to increase in future periods once our on-balance sheet REIT portfolio of mortgage loans becomes more seasoned and fewer new loans are added to the REIT portfolio. Moreover, we expect net losses on loan liquidations in the Southeastern United States to increase in future periods due to the recent hurricanes.

Net losses on loan liquidations decreased by $17.3 million to $18.4 million during the year ended June 30, 2004 from $35.7 million during the year ended June 30, 2003, primarily due to the decrease in number of liquidated loans which corresponded to the decline in the size of our portfolio of mortgage loans in off-balance sheet securitization trusts. A majority of the foreclosures handled occurred in connection with delinquent mortgage loans in off-balance sheet securitization trusts serviced by us. 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 off-balance sheet 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 $4.6 million related to mortgage loans in the off-balance sheet securitization trusts and to mortgage loans held for sale, respectively.

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.

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COMPETITION

We face intense competition in the business of originating, purchasing and selling mortgage loans. Our competitors in the industry include consumer finance companies, mortgage banking companies, commercial banks, credit unions, thrift institutions, credit card issuers, insurance companies and mortgage REITs. Many of these competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Competition among industry participants takes 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. Additionally, competition may lower the rates we can charge borrowers and increase the price we pay to purchase loans, which would potentially lower gain on future sales. If any of our competitors significantly expand their activities into our market, our 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 customers with loans in our servicing portfolio to refinance their loans.

REGULATION

Our business is regulated by federal, state and local government authorities and is subject to extensive federal, state and local laws, rules and regulations. We are also subject to judicial and administrative decisions that impose requirements and restrictions on our business. At the federal level, these laws and regulations include the:

·Equal Credit Opportunity Act and Regulation B;

·Federal Truth and Lending Act and Regulation 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;

·Sarbanes-Oxley Act of 2002;

·Fair and Accurate Credit Transactions Act; and

·USA PATRIOT Act.

These laws, rules and regulations, among other things:

·impose licensing obligations and financial requirements on us;

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

·prohibit discrimination;

·impose underwriting requirements;

·mandate disclosures and notices to consumers;

·mandate the collection and reporting of statistical data regarding our customers;

·regulate our marketing techniques and practices;

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·require us to safeguard non-public information about our customers;

·regulate our collection practices;

·require us to prevent money-laundering or doing business with suspected terrorists; and

·impose corporate governance, internal control and financial reporting obligations and standards.

Our 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 our loans;

·class action lawsuits; and

·administrative enforcement actions.

COMPLIANCE, QUALITY CONTROL AND QUALITY ASSURANCE

We regularly monitor the laws, rules and regulations that apply to our business and analyze any changes to them. We integrate many legal and regulatory requirements into our automated loan origination system to reduce the potential of inadvertent non-compliance due to human error and to prevent fraud. We also maintain policies and procedures, and summaries and checklists to help our origination personnel comply with these laws.

We maintain a variety of pre-funding quality control procedures designed to detect compliance errors prior to funding. In addition, we subject a statistical sampling of our loans to post-funding quality assurance reviews and analyses. We track the results of the quality assurance reviews and report them back to the responsible origination units. Our loans and practices are reviewed regularly in connection with the due diligence that our loan buyers and lenders perform. Our state regulators also review our practices and loan files regularly and report their results back to us.

REGULATORY DEVELOPMENTS

Federal and state legislators have adopted a variety of new or expanded regulations, particularly in the areas of privacy and consumer protection. These regulations are summarized below.

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.

We do not originate loans covered by HOEPA because of the higher legal risks as well as the potential negative perception of originating loans that are considered to be “high cost” under federal law.

Numerous state and local laws and regulations also 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 may deter loan buyers from

31

purchasing loans covered by the applicable law. We have eliminated making loans that are deemed high cost under these laws, and remain able to finance or sell those loans we make.

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 our business by restricting our ability to charge rates and fees adequate to compensate us 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 our loan origination volume, especially if our 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, we have adopted many policies and procedures, including the following:

Product Policies

·We do not make “high cost loans” as defined by HOEPA or any state legislation or regulations.

·We do not make loans containing single premium credit life, disability or accident insurance.

·We do not make loans containing negative amortization, mandatory arbitration clauses or interest rate increases triggered by borrower default.

·We offer 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.

·Our prepayment charges do not extend beyond three years from the origination date.

·We do not originate loans that pay off zero interest rate mortgages provided by charitable organizations or the government.

Loan Processing Policies

·We only approve loan applications that evidence a borrower’s ability to repay the loan.

·We consider whether the loan terms are in the borrower’s best interests.

·We price loans commensurate with risk.

·We use an electronic credit grading system to help ensure consistency.

·We do 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

·We market our loans with a view to encouraging a wide range of applicants strongly representative of racial, ethnic and economic diversity of the markets we serve throughout the nation.

·We provide a brochure to all 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.

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·We distribute our fair lending and consumer “best practices” guidelines to all newly-hired employees and brokers and require them to acknowledge that they are knowledgeable about and will abide by fair lending laws.

·When appropriate, we also offer loss mitigation counseling to borrowers in default and provide opportunities to enter into mutually acceptable reasonable repayment plans.

·We report borrower monthly payment performance to major credit repositories.

Evaluation and Compliance

·We subject a statistical sampling of our loans to a rigorous quality assurance of borrower qualification and validity of information.

·We have an internal audit department that reviews our internal controls and operations to help ensure compliance with accepted federal and state lending regulations and practices.

·We adhere to high origination standards in order to sell our loan products in the secondary mortgage market.

·We treat all customer information as confidential and consider it to be nonpublic information. We maintain systems and procedures to ensure that access to nonpublic consumer information is granted only to legitimate and valid users.

·We believe that our commitment to responsible lending is good business.

·We put our commitment into action and will continue to look for ways to promote highly ethical standards throughout our industry.

Licensing

As of December 31, 2005, we had licenses or were 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 us to safeguard the information we maintain on our 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 us that are not pre-empted by existing federal law. Similar regulations have been adopted by numerous states that affect our obligations to safeguard information and notify consumers of breaches of such safeguards. Such regulations increase our costs of compliance.

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 us and reduce the effectiveness of our marketing programs.

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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 took effect in 2004 for reports filed in 2005. We anticipate that a majority of our loans will 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, we are 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 we maintain and regularly update lists of consumers who have chosen not to be called. These requirements also mandate that we not call consumers who have chosen to be on the list. Several states have also adopted similar laws, with which we also comply.

EMPLOYEES

At December 31, 2005, we employed 2,240 persons. We believe we have satisfactory relations with our employees.

Item 1A.Risk Factors

We have discussed the most significant factors that may adversely affect our business and operations in “Item 7A. Quantitative and Qualitative Disclosures About Market Risks Related To Our Business.”

Item 1B.Unresolved Staff Comments

None.

Item 2.Properties

Our executive and administrative offices are located at 350 S. Grand Avenue, Los Angeles, California 90071, and consist of approximately 152,000 square feet, of which approximately 44,800 square feet are sublet. The lease and the sublease on these premises extend through March 2012. The monthly rental payment, including common area fees and charges, is currently $0.4 million per month, or approximately $4.8 million annually. Monthly sublease payments received from the sublessee, including common area fees and charges received from the sublessee, are currently $0.1 million per month, or approximately $1.2 million annually. We also lease approximately 39,000 square feet of office space at our former headquarters location at 3731 Wilshire Boulevard, Los Angeles, California, approximately 37,000 square feet of which is sublet through March 2006. As of April 1, 2006, approximately 18,000 square feet of office space will be sublet through December 2008. The master lease expires in December 2008.

We also have administrative offices located at 3347 and 3351 Michelson Drive, Irvine, California 92612, which consist of approximately 93,000 square feet under a lease that 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.

We also lease space for retail branch and wholesale regional operations centers. These facilities aggregate approximately 403,000 square feet and are leased under terms that vary as to duration. In general, the leases expire between 2006 and 2012, and provide for rent escalations tied to either increases

34

in the lessors’ operating expenses or fluctuations in the consumer price index in the relevant geographical areas.

Item 3.Legal Proceedings

In July 2005, we were served with a putative class action complaint entitled Webb v. Aames Investment Corporation, et. al. brought in the United States District Court, Central District of California. In December 2005, we were served with a putative class action complaint entitled Cooper v. Aames Investment Corporation, et. al. brought in the United States District Court, Eastern District of Wisconsin. These complaints allege violations of the Fair Credit Reporting Act (“FCRA”) in connection with prescreened offers of credit, which we made to plaintiffs. Webb also alleges that our direct mail pieces failed to comply with the requirements of FCRA that the required notice be clear and conspicuous. The plaintiffs seek to recover on behalf of themselves and others similarly situated compensatory and punitive damages and attorneys’ fees. We filed a motion to dismiss the clear and conspicuous claims in connection with Webb and while we believe that a motion with leave to amend will be granted, an order has not yet been entered. We also filed a motion to transfer Cooper to the Central District of California where Webb is pending. There have been no rulings on the merits of the plaintiffs’ claims or the claims of the putative class in either matter, and no class has been certified. We intend to vigorously defend these matters but if a class is certified and prevails on the merits, the potential liability could have a material adverse affect on our business. The outcome of these cases and the amount of liability, if any, cannot be determined at this time.

In September 2004, we received a Civil Investigative Demand and Notice to Proceed from the Office of the Attorney General of Iowa, that, although not alleging any wrongdoing, sought documents and data relating to our business and lending practices in Iowa. We have cooperated and intend to continue to cooperate fully with the Office of the Attorney General of Iowa in this investigation. Because the investigation is at an early stage, we cannot predict the outcome of the investigation and its effect, if any, on our business in Iowa, which approximated 0.02% and 0.24% of total mortgage loan production during the years ended December 31, 2005 and 2004, respectively.

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

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

Since our initial public offering on November 5, 2004, our common stock has been quoted on the New York Stock Exchange under the symbol “AIC”.

The following table sets forth the range of high and low closing sales prices on the New York Stock Exchange for our common stock and cash dividends per share declared during the periods indicated:

	Stock Price				Cash Dividends
	High		Low		Declared(1)
Year Ended December 31, 2005
Quarter Ended:
December 31, 2005(2)	$	6.75	$	5.65		$	0.69
September 30, 2005	10.20		6.02			0.34
June 30, 2005	9.90		7.75			0.27
March 31, 2005	11.30		8.01			N/A
Year Ended December 31, 2004
Quarter Ended:
December 31, 2004 (from November 5, 2004)	$	11.95	$	8.50		$	0.06

(1)Represents cash dividends per share declared during the quarter.

(2)Includes dividends of $0.35 and $0.34 announced on October 18, 2005 and December 20, 2005, respectively.

N/A = Not Applicable

As of March 24, 2006, we had approximately 232 stockholders of record, which amount does not include stockholders whose shares are held in the name of their broker.

Our dividend policy during the six months ended December 31, 2004 and the year ended December 31, 2005, the period during which we elected to qualify as REIT, was to distribute all or substantially all of our REIT taxable earnings through quarterly cash dividends. Although the timing of the dividend distributions was at the discretion of the Board, we intended to have all quarterly dividends, including the fourth quarter dividend, declared and distributed to reflect a distribution of our taxable income in the relevant calendar year for tax purposes. On March 15, 2006, Aames Investment announced that it intends to alter its structure so that it would no longer be required to pay out at least 90% of its taxable earnings to its stockholders as dividends, but rather, would retain its capital for internal growth. As a result, all future dividend distributions will be at the discretion of our Board of Directors.

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Item 6.Selected Financial Data

The selected consolidated financial data set forth below have been derived from our 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 (in thousands, except per share data).

	December 31,						June 30,
	2005			2004			2004			2003			2002			2001
Balance Sheet Data:
Cash and cash equivalents	$	123,172		$	37,780		$	22,867		$	23,860		$	17,391		$	27,583
Loans held for investment, net	4,085,536			1,725,046			—			—			—			—
Loans held for sale, at lower of cost or market	951,177			484,963			1,012,165			406,877			462,068			417,164
Derivative financial instruments, at estimated fair value	58,147			31,947			6,316			—			—			—
Residual interests, at estimated fair value	—			39,082			44,120			129,232			197,297			237,838
Other	109,603			82,057			65,704			67,919			89,842			102,812
Total assets	$	5,327,635		$	2,400,875		$	1,151,172		$	627,888		$	766,598		$	785,397
Financing on loans held for investment	$	3,623,188		$	1,157,470		$	—		$	—		$	—		$	—
Revolving warehouse and repurchase facilities	1,341,683			809,213			886,433			343,675			383,119			393,301
Borrowings:
Short-term collateralized financing facility	16,487			—			—			—			—			—
Financing Facility due March 2005	—			7,680			13,887			74,116			—			—
5.5% Convertible Subordinated Debentures due March 2006	—			—			64,396			64,396			113,970			113,970
9.125% Senior Notes due November 2003	—			—			—			—			150,000			150,000
10.5% Senior Notes due February 2002	—			—			—			—			—			5,750
Total borrowings	16,487			7,680			78,283			138,512			263,970			269,720
Other	76,773			68,886			55,845			92,727			82,324			76,491
Total liabilities	$	5,058,131		$	2,043,249		$	1,020,561		$	574,914		$	729,413		$	739,512
Preferred stock, Series B	$	—		$	—		$	27		$	27		$	27		$	27
Preferred stock, Series C	—			—			20			20			20			20
Preferred stock, Series D	—			—			60			60			60			59
Common stock	618			614			7			7			6			6
Additional paid-in capital	656,041			655,437			418,095			418,118			418,027			417,486
Retained deficit	(387,155		)	(298,425		)	(287,598		)	(365,258		)	(380,955		)	(371,713		)
Total stockholders’ equity	$	269,504		$	357,626		$	130,611		$	52,974		$	37,185		$	45,885

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							Six Months
	Years Ended						Ended				Years Ended
	December 31,						December 31,				June 30,
	2005			2004			2004				2004			2003			2002		2001
				(unaudited)
Statement of Operations Data:
Interest income	$	340,515			$	93,181		$	56,103		$	69,446		$	69,186		$	83,161	$	86,477
Interest expense	170,942				32,396			18,490			26,227			35,119			41,895		57,180
Net interest income	169,573				60,785			37,613			43,219			34,067			41,266		29,297
Provision for losses on loans held for investment	40,294				1,900			1,900			—			—			—		—
Net interest income after provision for loan losses	129,279				58,885			35,713			43,219			34,067			41,266		29,297
Noninterest income:
Gain on sale of loans	30,277				177,607			59,960			261,801			174,710			139,167		120,865
Loan servicing	6,330				6,634			3,070			7,829			8,896			12,462		14,989
Total noninterest income	36,607				184,241			63,030			269,630			183,606			151,629		135,854
Net interest income after provision for loan losses and noninterest income	165,886				243,126			98,743			312,849			217,673			192,895		165,151
Noninterest expense:
Personnel	91,217				120,608			62,660			160,169			117,547			102,451		98,404
Production	35,351				36,504			17,165			35,113			25,849			21,322		19,034
General and administrative	44,707				49,162			27,238			44,527			43,738			34,489		42,748
Write-down of residual interests	—				—			—			—			34,923			27,000		33,600
Total noninterest expense	171,275				206,274			107,063			239,809			222,057			185,262		193,786
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	(5,389		)		36,852			(8,320		)	73,040			27,327			7,633		(28,635		)
Income tax provision (benefit)	842				(4,933			(5,235		)	(17,674		)	(1,839		)	3,087		1,889
Net income (loss)	$	(6,231			$	41,785		$	(3,085	)	$	90,714		$	29,166		$	4,546	$	(30,524	)

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	Years Ended December 31,						Six Months Ended December 31,				Years Ended June 30,
	2005			2004			2004				2004			2003			2002			2001
				(unaudited)
Statement of Operations Data:
Net income (loss) to common stockholders:
Basic	$	(6,231	)	$	32,085			$	(3,085	)	$	77,660		$	15,697		$	(9,242	)	$	(44,445	)
Diluted	$	(6,231	)	$	41,785			$	(3,085	)	$	92,804		$	29,166		$	(9,242	)	$	(44,445	)
Net income (loss) per common share:
Basic	$	(0.10	)	$	0.52			$	(0.05	)	$	11.02		$	2.39		$	(1.45	)	$	(7.11	)
Diluted	$	(0.10	)	$	0.68			$	(0.05	)	$	0.89		$	0.30		$	(1.45	)	$	(7.11	)
Dividends per common share—declared	$	1.30		$	0.06			$	0.06		—			—			—			—
Weighted average number of common shares outstanding:
Basic	62,517			61,316				61,322			7,049			6,558			6,394			6,251
Diluted	62,517			61,348				61,322			104,364			96,053			6,394			9,251
Cash Flow Data:
Net cash provided by (used in) operating activities	$	(450,756	)	$	255,422			$	511,246		$	(415,458	)	$	141,692		$	9,390		$	(5,936	)
Net cash used in investing activities	(2,406,124		)	(1,730,704		)		(1,728,958		)	(3,905		)	(2,124		)	(4,192		)	(5,048		)
Net cash provided by (used in) financing activities	2,942,272			1,501,451				1,232,625			418,370			(133,099		)	(15,390		)	28,388
Net increase (decrease) in cash and cash equivalents	$	85,392		$	26,169			$	14,913		$	(993	)	$	6,469		$	(10,192	)	$	17,404

39

	Years Ended December 31,							Six Months Ended December 31,				Years Ended June 30,
	2005			2004				2004				2004			2003			2002			2001
				(unaudited)
Loan Activity:
Loans originated or purchased:
Retail	$	2,746,321			$	2,421,525			$	1,189,707		$	2,400,493		$	1,795,447		$	1,609,875		$	1,180,551
Wholesale(1)	4,008,207				4,998,120				2,397,841			4,588,501			2,650,733			1,632,634			1,191,079
Total	$	6,754,528			$	7,419,645			$	3,587,548		$	6,988,994		$	4,446,180		$	3,242,509		$	2,371,630
Loans originated by interest rate type:
Retail:
Fixed rate	$	697,013			$	678,858			$	343,291		$	832,425		$	1,186,373		$	996,191		$	837,451
Hybrid/adjustable rate	2,049,308				1,742,667				846,416			1,568,068			609,074			613,684			343,100
Total	$	2,746,321			$	2,421,525			$	1,189,707		$	2,400,493		$	1,795,447		$	1,609,875		$	1,180,551
Wholesale:
Fixed rate	$	861,204			$	1,083,941			$	465,061		$	1,130,761		$	728,227		$	226,585		$	149,575
Hybrid/adjustable rate	3,147,003				3,914,179				1,932,780			3,457,740			1,922,506			1,406,049			1,041,504
Total	$	4,008,207			$	4,998,120			$	2,397,841		$	4,588,501		$	2,650,733		$	1,632,634		$	1,191,079
Total:
Fixed rate	$	1,558,217			$	1,762,799			$	808,352		$	1,963,186		$	1,914,600		$	1,222,776		$	987,026
Hybrid/adjustable rate	5,196,311				5,656,846				2,779,196			5,025,808			2,531,580			2,019,733			1,384,604
Total	$	6,754,528			$	7,419,645			$	3,587,548		$	6,988,994		$	4,446,180		$	3,242,509		$	2,371,630
Loan originations by purpose:
Cash-out refinance	57.8		%		59.6		%		58.7		%	60.4		%	63.5		%	61.7		%	58.8		%
Purchase money	38.8		%		36.0		%		37.7		%	33.3		%	23.5		%	18.1		%	23.9		%
Rate/term refinance	3.4		%		4.4		%		3.6		%	6.3		%	13.0		%	20.2		%	17.3		%
Total	100.0		%		100.0		%		100.0		%	100.0		%	100.0		%	100.0		%	100.0		%
Loan dispositions:
Whole loan sales	$	2,812,696			$	5,924,743			$	2,391,671		$	6,433,871		$	4,188,678		$	2,610,041		$	1,102,465
Loans pooled and sold in securitizations	—				—				—			—			314,958			584,964			1,231,464
Total	$	2,812,696			$	5,924,743			$	2,391,671		$	6,433,871		$	4,503,636		$	3,195,005		$	2,333,929
Total servicing portfolio at period end	$	6,146,739			$	2,843,887			$	2,843,887		$	2,341,028		$	1,739,632		$	2,308,170		$	2,716,781

40

	Years Ended December 31,					Six Months Ended December 31,			Years Ended June 30,
	2005		2004			2004			2004		2003		2002		2001
			(unaudited)
Other Data:
Weighted average points on retail loan originations(2)	3.9	%		3.6	%		3.6	%	3.2	%	3.6	%	3.7	%	4.0	%
Weighted average yield spread premium, net, on wholesale loan originations(2)	(0.4	)%		(0.5	)%		(0.5	)%	(0.5	)%	(0.4	)%	(0.3	)%	(0.1	)%
Weighted average interest rate on loans produced(2)	7.6	%		7.4	%		7.5	%	7.4	%	7.8	%	9.0	%	10.3	%
Weighted average initial combined loan-to-value ratio(2)(3):
Retail	76	%		77	%		76	%	77	%	77	%	76	%	75	%
Wholesale	81	%		81	%		81	%	82	%	80	%	79	%	79	%
Weighted average credit score(2):
Retail	607			604			605		607		623		630		619
Wholesale	628			614			613		615		611		600		598
Average gain on sale of loans	1.2	%		3.0	%		2.5	%	3.2	%	3.0	%	3.0	%	3.2	%
At period end:
Number of:
Retail branches	76			96			96		99		93		100		101
Regional wholesale operations centers	5			5			5		5		4		4		5
Employees:
Loan origination	1,975			1,824			1,824		1,822		1,449		1,523		1,230
Loan servicing	101			89			89		81		104		118		118
All other	164			158			158		160		154		160		152
	2,240			2,071			2,071		2,063		1,707		1,801		1,500

(1)Wholesale originations include the purchases of closed loans from correspondents of $51.7 million, $4.2 million, $19.3 million, $24.2 million and $40.4 million during the years ended December 31, 2005, June 30, 2004, 2003, 2002, and 2001, respectively.  No such loans were purchased during the year ended December 31, 2004 and the six months ended December 31, 2004.

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

(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.

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

The information required by this item relating to Management’s Discussion and Analysis of Financial Condition and Results of Operations for the years ended December 31, 2005 and 2004, six months ended December 31, 2004 and 2003, and years ended June 30, 2004 and 2003 is discussed below in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.”

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.”

Forward-looking Information

This report contains statements that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements relating to our ability to ramp up our loan portfolio and our ability to pay dividends. These statements are based on management’s current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. We can give no assurance that our expectations will be attained. Such forward-looking statements speak only as of the date of this report. We expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

In addition, we note that a variety of factors could cause our actual results and experiences to differ materially from the anticipated results or other expectations expressed in the forward-looking statements. The risks and uncertainties that may cause our performance to vary include (1) limited cash flow to fund operations, dependence on short-term financing facilities; (2) changes in overall economic conditions and interest rates; (3) increased delinquency rates in our portfolio; (4) inability to originate subprime hybrid/adjustable mortgage loans; (5) adverse changes in the securitization and whole loan market for mortgage loans; (6) decline in real estate values; (7) decreases in earnings from Aames Investment calling securitization trusts; (8) obligations to repurchase mortgage loans and indemnify investors; (9) concentration of operations in California, Florida, New York and Texas; (10) the occurrence of natural disasters, including the adverse impact of hurricanes Katrina, Rita and Wilma; (11) extensive government regulation; and an inability to comply with the federal tax requirements applicable to REITs and effectively operate within limitations imposed on REITs by federal tax rules. For a more complete discussion of these risks and uncertainties and information relating to the company, see “Risk Factors.” You should carefully review these factors and other documents we file from time to time with the SEC.

REIT Compliance

We elected to qualify as a REIT for U.S. federal income tax purposes for the six months ended December 31, 2004 and for the year ended December 31, 2005. Aames Financial has continued its operations as our primary mortgage origination and servicing subsidiary. To meet some of the REIT qualification requirements, we conduct our loan sales, as well as other servicing and origination functions, through Aames Financial, our taxable REIT subsidiary. All loans are sourced, underwritten and processed by Aames Financial. We purchase from Aames Financial the loans that we anticipate holding on our balance sheet in our REIT portfolio, largely hybrid/adjustable rate mortgage loans, and Aames Financial sells the remainder of the loans it originates, including a majority of its fixed-rate mortgage loans, to third

42

parties. We are required to purchase loans from Aames Financial at fair market value and Aames Financial is subject to corporate income tax on any taxable gain it recognizes on the sale.

U.S. federal income tax law requires that a REIT distribute annually to its stockholders at least 90% of its taxable income, excluding the retained earnings of any taxable REIT subsidiary it owns. During the six months ended December 31, 2004 and the year ended December 31, 2005, we distributed at least 90% of our taxable income to our stockholders, and were not  subject to U.S. federal income tax and will not record an income tax provision with respect to the income we distributed. To qualify as a REIT, at least 75% or our assets must be qualified real estate assets, government securities, and cash and cash items, and no more than 20% of the value may be comprised of stock and other securities of Aames Financial or other taxable REIT subsidiaries.

Any taxable income generated by Aames Financial will be subject to regular corporate income tax and Aames Financial will continue to record an income tax provision. However, we anticipate that Aames Financial will have substantially lower effective income tax rates due to historical net operating loss carryforwards for U.S. federal income tax purposes. Subject to annual limitations, these losses are available to offset future income. Aames Financial may retain any income it generates, net of any tax liability it incurs on that income, without affecting the REIT distribution requirements. If Aames Financial chooses to pay a dividend to us, the dividend could be included in the REIT distribution. Any distributions that Aames Financial makes in the future will be at the discretion of its board of directors and will depend on, among other things, its actual results of operations and liquidity levels.

On March 15, 2006, Aames Investment announced that it intends to alter its structure so that it would no longer be required to pay out at least 90% of its taxable earnings to its stockholders as dividends, but rather, would retain its capital for internal growth. As a result, all future dividends distributions will be at the discretion of our Board of Directors.

Managing Interest Rate Risk

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

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

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

Critical Accounting Policies

Several of the critical accounting policies that are very important to the portrayal of our financial condition and results of operations require management to make difficult and complex judgments that rely on estimates about the effect of matters that are inherently uncertain due generally to the impact of

43

changing market conditions and/or borrower behavior. We believe our most critical accounting policies relate to (1) owning a portfolio of loans held for investment which is separate and distinct from a portfolio of loans held for sale, (2) our allowance for losses on mortgage loans held for investment, (3) gain on sale of loans held for sale and our secondary market related allowances and (4) income taxes.

Owning a Portfolio of Hybrid/Adjustable Rate Mortgage Loans.   We have a portfolio of loans held for investment in addition to Aames Financial’s portfolio of loans held for sale. Accordingly, the presentation of interest income and expense on these two portfolios has been modified from that which Aames Financial shows in its historical consolidated financial statements. We differentiate our interest income and expense into two components: “Interest income—loans held for sale” and “Interest income—loans held for investment.” Interest expense is also differentiated between “Interest expense—loans held for sale” and “Interest expense—loans held for investment.” We also record a provision for loan losses on loans held for investment, which increases our allowance for loan losses, based on an estimate of probable and inherent losses in our portfolio of loans held for investment.

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

Our portfolio of loans held for investment was created through on-balance sheet securitizations and must comply with the provisions of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”). SFAS 140 sets forth the criteria applicable to determining whether a transfer of financial assets is to be treated as a sale or a secured financing under generally accepted accounting principles, or GAAP. We intend for our on-balance sheet securitizations to be treated as secured financings and, accordingly, one of our critical accounting policies is compliance with the SFAS 140 requirements necessary to obtain secured financing treatment for our securitizations. In addition, our strategy of retaining mortgage loans in our securitization pools on our balance sheet reduced the number of loans we sold during the year ended December 31, 2005, when we built our REIT portfolio, which reduced the total gain on sale of loans during the period. Our strategy of maintaining our leverage in our portfolio and growing our portfolio over time will continue to reduce the number of loans sold to third parties compared to periods prior to our REIT conversion.

Allowance for Losses on Mortgage Loans Held for Investment.   For mortgage loans held for investment, we maintain an allowance for loan losses based on our estimate of losses inherent and probable as of the balance sheet date. We view our mortgage loans held for investment as a homogenous pool of loans which exhibit similar characteristics, including default probabilities and loss severities. When we evaluate the adequacy of this allowance, which is done quarterly, we give consideration to factors such as the current performance of the loans, delinquency status of the loans, historical performance of similar loans, credit characteristics of the portfolio, the value of the underlying collateral, and the general economic environment.

In order to estimate an appropriate allowance for losses on loans held for investment, we estimate losses using “static pooling,” which stratifies the loans held for investment into separately identified vintage pools. Using historic experience and taking into consideration the factors above, we estimate an allowance for loan losses, which we believe is adequate for probable and inherent losses in the portfolio of mortgage loans held for investment. Provisions for losses are charged to our consolidated statement of operations. Charge-offs of mortgage loans held for investment are charged to the allowance. While we use available

44

information to estimate losses on loans held for investment, future additions to the allowance may be necessary based on changes in estimates resulting from economic and other conditions.

Gain on Sale of Loans Held for Sale and Secondary Market Related Allowances.Our current loan disposition strategy relies on whole loan sales. We sell our loans in whole loan sale transactions on a cash basis. In whole loan sale transactions, the buyer acquires all future rights (including mortgage servicing rights) to the loans, without recourse, except for standard representations and warranties. Gains and losses on whole loan sales are recognized when we surrender control over the loans (generally on the settlement date) based upon the difference between the proceeds received and the net carrying amount of the loans, less the provision for representation, warranty, and other miscellaneous losses recorded on the settlement date to cover repurchases, if any, of loans that have a first or early payment default to the purchaser or otherwise breach representations and warranties.

As part of the normal course of business involving loans sold to the secondary market, we are occasionally required to repurchase loans or make payments to settle breaches of the standard representations and warranties made as part of our loan sales. The secondary market allowances include (1) a representation and warranty allowance for probable losses on repurchases arising from representation and warranty claims, and probable obligations related to disputes with investors and (2) a lower of cost or market valuation allowance for certain loans held for sale.

The level of the representation and warranty allowance is a function of expected losses based on actual pending claims and repurchase requests, historical experience, loan sales and the assessment of probable investor claims. An increase to this allowance is recorded as a reduction of the gain on sale of loans in our consolidated statements of operations and the corresponding allowance is recorded in accounts payable and accrued expenses in our consolidated balance sheets. At the time we repurchase a loan, the estimated loss on the loan is charged against this allowance and recorded as a reduction of the basis of the loan.

The lower of cost or market valuation allowance is maintained for loans held for sale that are severely delinquent, have suffered declines in market value, had credit deterioration, have significant collateral deficiencies or other attributes that reduce their sale potential. An increase to this valuation allowance is recorded as a reduction of gain on sale of loans in our consolidated statement of operations and the valuation allowance is recorded as an offset to loans held for sale in our consolidated balance sheets. At the time we sell a loan having the aforementioned attributes, the estimated loss on the loan is charged against this allowance.

The following discusses critical accounting policies which arise only in the context of off-balance sheet seuritization transactions in which we did not engage during the years ended December 31, 2005 and 2004 and June 30, 2004.

Accounting for Off-Balance Sheet Securitizations.During the years ended December 31, 2005 and 2004,  and June 30, 2004, we did not dispose of any of our mortgage loans in off-balance sheet securitization transactions. During the year ended June 30, 2003, we sold $315.0 million of mortgage loans in off-balance sheet securitization transactions. The residual interests created in the2003 securitization were sold to an affiliate, CZI, for $8.7 million of cash under the Residual Facility. We retained the residual interests created in all of the $7.0 billion of off-balance sheet securitizations that closed prior to and during the year ended June 30, 2000.

We called the seven remaining securitization trusts in which we retained residual interests during the year ended December 31, 2005, with the last five securitization trusts having been called on June 15, 2005. No adjustments to the carrying values of the retained residual interests were deemed necessary as a result of calling these securitization trusts. In addition, during the period of January 1, 2005 through June 15, 2005, the actual performance of our retained residual interests as compared to the key assumptions and

45

estimates used to evaluate their carrying value (i.e., credit losses, rate of prepayment and discount rate) did not result in write-downs. Performing mortgage loan collateral received in the calls was placed into the portfolio of loans held for investment for inclusion in the securitizations that closed during the three months ended September 30, 2005.

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

We determine the present value of the cash flows at the time each securitization transaction closes using certain estimates made by management at the time the loans are sold. These estimates include: (i) future rate of prepayment; (ii) credit losses; and (iii) discount rate used to calculate present value. The future cash flows represent management’s best estimate. Management monitors the performance of the loans, and any changes in the estimates are reflected in earnings.

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

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

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

Our retained residual interests are recorded at estimated fair value and are marked to market through a charge (or credit) to earnings. On a quarterly basis, we review the fair value of our retained residual interests by analyzing our prepayment, credit loss and discount rate assumptions in relation to our actual experience and current rates of prepayment and credit loss prevalent in the industry. Additionally, on a quarterly basis we evaluate the effects, if any, that increasing or decreasing interest rates may have on the retained residual interests. We may adjust the value of our retained residual interests or take a charge to earnings related to the retained residual interests, as appropriate, to reflect a valuation or write-down,

46

respectively, of our retained residual interests based upon the actual performance of the retained residual interests as compared to our key assumptions and estimates used to determine fair value.

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

We previously disclosed that if actual credit losses and actual prepayments exceeded the credit loss and prepayment rate assumptions, we 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 our retained residual interests as compared to the key assumptions and estimates used to evaluate their carrying value did not result in write-downs during the years ended December 31, 2005, December 31, 2004, and June 30, 2004, but resulted in a write-down to the residual interests of $34.9 million during the year ended June 30, 2003.

Since January 1, 2000, all of our loan dispositions have been on a servicing released basis. However, upon sale or off-balance sheet securitization of servicing retained mortgages, we capitalize the fair value of mortgage servicing rights (“MSRs”) assets separate from the loans. We determine 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.

Accounting for Income Taxes.We elected to qualify as a REIT for U.S. federal income tax purposes for the six months ended December 31, 2004 and for the year ended December 31, 2005. This means that generally we were not subject to U.S. federal income taxes on the REIT income that we distributed to our stockholders.

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

Deferred income tax assets and liabilities are recognized by Aames Financial to reflect the future tax consequences of net operating loss carry forwards and differences between the tax basis and financial reporting basis of assets and liabilities. We have established a valuation allowance to reflect management’s determination that it is not more likely than not that certain deferred tax assets will be realized.

In determining the realization of deferred tax assets, we consider future taxable income from the following sources:  (a) the reversal of taxable temporary differences, (b) future operations exclusive of reversing temporary differences, and (c) tax planning strategies that, if necessary, would be implemented to accelerate taxable income into periods in which net operating losses might otherwise expire. The realization of deferred tax assets is evaluated by management quarterly and changes in realizability are reflected in the income tax provision.

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Results of Operations

The following table sets forth information regarding our results of operations for the periods indicated (in thousands):

	Years Ended December 31,							Six Months Ended December 31,							Years Ended June 30,
	2005			2004				2004			2003				2004			2003
				(unaudited)							(unaudited)
Interest income	$	340,515			$	93,181		$	56,103			$	32,596		$	69,446		$	69,186
Interest expense	170,942				32,396			18,490				12,460			26,227			35,119
Net interest income	169,573				60,785			37,613				20,136			43,219			34,067
Provision for loan losses	40,294				1,900			1,900				—			—			—
Net interest income after provision for loan losses	129,279				58,885			35,713				20,136			43,219			34,067
Noninterest income:
Gain on sale of loans	30,277				177,607			59,960				102,737			261,801			174,710
Loan servicing	6,330				6,634			3,070				4,177			7,829			8,896
Total noninterest income	36,607				184,241			63,030				106,914			269,630			183,606
Net interest income after provision for loan losses and noninterest income	165,886				243,126			98,743				127,050			312,849			217,673
Noninterest expense:
Personnel	91,217				120,608			62,660				61,049			160,169			117,547
Production	35,351				36,504			17,165				15,774			35,113			25,849
General and administrative	44,707				49,162			27,238				22,360			44,527			43,738
Write-down of residual interests	—				—			—				—			—			34,923
Total noninterest expense	171,275				206,274			107,063				99,183			239,809			222,057
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	(5,389		)		36,852			(8,320		)		27,867			73,040			27,327
Income tax provision (benefit)	842				(4,933		)	(5,235		)		(17,976		)	(17,674		)	(1,839		)
Net income (loss)	$	(6,231	)		$	41,785		$	(3,085	)		$	45,843		$	90,714		$	29,166

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Interest Income and Interest Expense

Interest income.   Interest income includes interest earned on loans held for investment and loans held for sale. To a lesser extent, interest income also includes interest on short-term overnight investments, prepayment penalty fees earned on loans held for investment, interest income on in-the-money interest rate cap agreements, amortization of net deferred loan origination costs on mortgage loans held for investment and, in prior periods when we held residual interests in off-balance sheet securitizations, discount accretion income recognized on our residual interests.

Pursuant to FASB Statement of Financial Accounting Standards No. 91, “Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases” (“SFAS 91”), net loan origination fees and costs related to mortgage loans originated and held for investment are deferred and amortized to interest income.

The following table summarizes the components of interest income for the periods indicated (in thousands):

	Years Ended December 31,							Six Months Ended December 31,						Years Ended June 30,
	2005			2004				2004			2003			2004		2003
				(unaudited)							(unaudited)
Interest earned on:
Loans held for investment	$	246,887			$	15,957		$	15,957			$	—	$	—	$	—
Loans held for sale	44,208				75,288			39,435				28,970		64,824		52,411
Overnight investments	2,673				281			281				—		—		—
Income from derivative financial instruments	27,424				488			488				—		—		—
Prepayment penalty fees on loans held for investment	23,701				88			—				—		—		—
Amortization of net deferred loan origination costs	(4,737		)		(200		)	(200		)		—		—		—
Discount accretion on residual interests	—				972			—				3,385		4,357		16,558
Other	359				307			142				241		265		217
Total interest income	$	340,515			$	93,181		$	56,103			$	32,596	$	69,446	$	69,186

In connection with our formation as a mortgage REIT in November of 2004, we began to build a portfolio of loans held for investment which, at December 31, 2005, was comprised of mortgage loans with an unpaid principal balance of $4.1 billion. We did not have a portfolio of loans held for investment prior to our REIT formation.

During the year ended December 31, 2005, our interest income grew by $247.3 million, to $340.5 million, from $93.2 million during the year ended December 31, 2004. This was primarily due to the increase of $230.9 million in interest income earned on the portfolio of loans held for investment. To a lesser extent, the growth in interest income was due to increases of $26.9 million, $23.6 million and $2.4 million in income from derivative financial instruments, prepayment penalty fees, and interest earned on overnight investments, respectively. The income from derivative financial instruments related to remittances to us from counterparties on in-the-money interest rate cap agreements used to hedge interest rate exposure on our REIT portfolio and related financings. Prepayment penalty fees were earned on early loan pay-offs in our portfolio of mortgage loans held for investment, which was not in place during most of the year ended December 31, 2004.

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Partially offsetting the growth in interest income during the year ended December 31, 2005 over the year ended December 31, 2004 was a decline of $31.1 million in interest income on loans held for sale. Interest income earned on loans held for sale declined due to our strategy of building a portfolio of loans held for investment, which resulted in our holding a lower average balance of loans held for sale during the year ended December 31, 2005 when compared to the year ended December 31, 2004. This was partially offset by higher weighted average coupon rates on loans held for sale during the year ended December 31, 2005 compared to rates during the year ended December 31, 2004. We discontinued discount accretion on our residual interests during the second half of the year ended December 31, 2004 in light of our intention to call the remaining securitization trusts which was consummated during the year ended December 31, 2005.

During the year ended December 31, 2005, the amortization of net deferred loan origination costs was $4.7 million. There was only $0.2 million of such amortization during the previous year because we did not have a portfolio of loans held for investment for most of 2004.

Interest income grew by $23.5 million to $56.1 million during the six months ended December 31, 2004 over $32.6 million during the six months ended December 31, 2003. This was primarily due to increases of  $16.0 million and $10.3 million in interest income on loans held for investment and interest income on loans held for sale, respectively. These increases were partially offset by a $3.4 million decline in discount accretion income during the six months ended December 31, 2004 when compared to the same six-month period in 2003. The $16.0 million growth in interest income on loans held for investment is attributable to our REIT portfolio of loans held for investment consisting of a $1.2 billion on-balance sheet securitization that closed during the three months ended December 31, 2004 and $0.5 billion of loans held for investment that were not yet securitized at December 31, 2004. During the comparable period in 2003, we did not have a portfolio of loans held for investment. Interest income on loans held for sale grew by $10.3 million, to $39.2 million, during the six months ended December 31, 2004 over $29.0 million during the six months ended December 31, 2003. This resulted from having higher average balances of loans held for sale outstanding coupled with higher weighted average coupon rates during the six months ended December 31, 2004 when compared to such balances and rates during the six months ended December 31, 2003.

Interest income grew by $0.2 million, to $69.4 million, during the year ended June 30, 2004 from $69.2 million during the year ended June 30, 2003. This was primarily due to a $12.4 million increase in interest income earned on loans held for sale, which resulted from higher average outstanding balances of loans held for sale, despite such loans having lower weighted average coupon rates. This was partially 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.

Interest expense.Interest expense includes interest incurred on the outstanding balances of financings on loans held for investment, revolving warehouse and repurchase facilities, and borrowings. Interest expense also includes fair value adjustments to derivative financial instruments used to hedge interest rate risk on our financings of mortgage loans held for investment, amortization of debt issuance costs and debt discount on financings on mortgage loans held for investment and the amortization of commitment fees on revolving warehouse and repurchase facilities.

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The following table summarizes the components of interest expense for the periods indicated (in thousands):

	Years Ended December 31,						Six Months Ended December 31,						Years Ended June 30,
	2005		2004				2004			2003			2004		2003
			(unaudited)							(unaudited)
Interest incurred on:
Financings on loans held for investment	$	112,809		$	2,912		$	2,912			$	—	$	—	$	—
Revolving warehouse and repurchase facilities	47,246			24,753			15,777				6,846		15,823		13,796
Borrowings	128			4,135			2,011				2,862		4,986		16,190
Amortization of commitment fees, debt issuance costs, and debt discount	10,002			5,618			3,137				2,614		5,095		4,930
Mark to market (gain) loss on interest rate cap agreements designed to hedge interest rate risk on financings of loans held for investment	143			(6,344		)	(6,344		)		—		—		—
Bank charges and other	614			1,322			997				138		323		203
Total interest expense	$	170,942		$	32,396		$	18,490			$	12,460	$	26,227	$	35,119

During the year ended December 31, 2005, our interest expense grew by $138.5 million, to $170.9 million, from $32.4 million during the year ended December 31, 2004. This was primarily due to increases of $109.9 million, $22.5 million, and $4.4 million in interest expense on financing on loans held for investment, revolving warehouse and repurchase facilities, and amortization of commitment fees, debt issuance costs and debt discount, respectively. During the year ended December 31, 2005, we continued to fund the securitized portfolio of loans held for investment through financings which were not in place for most of the year ended December 31, 2004. Accordingly, interest expense on financings on loans held for investment increased during the year ended December 31, 2005 over the previous year. During the year ended December 31, 2005, average borrowings and interest rates associated with our revolving warehouse and repurchase facilities to fund our loans held for sale and loans held for investment not yet securitized were higher than such average balances and interest rates during the prior year. The increase in amortization of commitment fees, debt issuance costs and debt discount for the year ended December 31, 2005 compared to the year ended December 31, 2004 was primarily due to the growth in debt issuance costs and debt discount recorded in connection with our 2005 financings on loans held for investment. Additionally, the negative mark to fair value during the year ended December 31, 2005 on open interest rate cap agreements in place to hedge interest rate risk exposure on our financings on loans held for investment resulted in a charge to interest expense of $0.1 million, compared to a credit to interest expense of  $6.3 million resulting from a positive mark to fair value during the year ended December 31, 2004.

Partially offsetting the growth in interest expense was a $4.0 million decrease in interest expense on borrowings primarily due to the Aames Financial residual financing facility being fully redeemed during the March 2005 quarter. Therefore, during the year ended December 31, 2005, borrowings outstanding were at lower levels than during the same period last year.  Finally, bank charges and other decreased by $0.7 million during the year ended December 31, 2005 from the amount reported during the year ended December 31, 2004.

Interest expense grew by $6.0 million to $18.5 million during the six months ended December 31, 2004 over $12.5 million during the six months ended December 31, 2003. This was primarily due to higher

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average borrowings and rates associated with our revolving warehouse and repurchase facilities used to fund the origination of mortgage loans prior to their disposition. To a lesser extent, the increase was due to the $1.2 billion of financing on loans held for investment created in the on-balance sheet securitization that closed during the three months ended December 31, 2004. These increases were partially offset by a $6.3 million positive mark to fair value at December 31, 2004 on open interest rate cap agreements, in place to hedge our financings on loans held for investment. In addition, interest expense declined due to lower average amounts outstanding under a nonrevolving financing facility secured by certain residual interests from off-balance sheet securitizations and certain servicing advances (the “Financing Facility”) at December 31, 2004 when compared to the average amount outstanding at December 31, 2003. Interest expense also includes the amortization of capitalized financing costs for revolving committed warehouse facilities we have entered into, and the amortization of debt issuance costs and debt discount. Such amortization was $3.1 million and $2.6 million during the six months ended December 31, 2004 and 2003, respectively.

Interest expense declined by $8.9 million, to $26.2 million, during the year ended June 30, 2004 from $35.1 million during the year ended June 30, 2003. The decrease resulted primarily from lower interest rates associated with our revolving warehouse and repurchase facilities used to fund the origination of mortgage loans prior to their disposition, despite increased average borrowings under the facilities during fiscal 2004 when compared to such rates and average borrowings during fiscal 2003. To a lesser extent, the decline in interest expense resulted from the full redemption of $150.0 million of our 9.125% Senior Notes due November 2003 (the “Senior Notes”) and a $49.6 million decrease in the 5.5% Convertible Subordinated Debentures due March 2006 (the “2006 Debentures”), during the year ended June 30, 2003. Our revolving warehouse and repurchase agreements bear interest rates that are indexed to the one-month LIBOR which, during the year ended June 30, 2004, was lower on average than levels during the year ended June 30, 2003. Amortization of commitment fees, debt issuance costs, and debt discount increased by $0.2 million during the year ended June 30, 2004 over the amount reported during the year ended June 30, 2003.

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

Provision for Loan Losses.The amounts provided for loan losses are determined based upon quarterly evaluations of the portfolio of loans held for investment. In our evaluation, we apply various judgments, assumptions and estimates concerning the impact certain factors might have on the amounts provided. Such factors include actual and past loan loss experience, loan portfolio composition and risk, delinquencies, underlying collateral value and current economic conditions that may affect a borrower’s ability to pay.

During the year ended December 31, 2005, the provision for loan losses was $40.3 million compared to $1.9 million during the year ended December 31, 2004 due to the increase in the portfolio of loans held for investment and to the seasoning of the portfolio since its inception in December 2004. The unpaid principal balance of the portfolio of loans held for investment was $4.1 billion at December 31, 2005, an increase of $2.4 billion from December 31, 2004.

Noninterest Income

Gain on Sale of Loans.Gain on sale of loans includes gain from whole loan sale transactions, realized loan origination fees and costs, provisions for representation, warranty and other miscellaneous losses, gains and losses on derivative financial instruments related to hedging interest rate risk on our inventory and pipeline of loans held for sale and miscellaneous costs related to loan sale activities. Gain on sale of

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loans is impacted by the timing and mix of loan origination and sales as pursuant to SFAS 91. Net loan origination fees and costs related to mortgage loans originated and held for sale are deferred and recognized as a charge or credit to gain on sale of loans at the time the mortgage loans are sold. The deferral of net loan origination fees and costs was not material to our consolidated financial statements at and during the six months ended December 31, 2003 and year ended June 30, 2003.

The components of gain on sale of loans are summarized in the following table for the periods indicated (in thousands):

	Years Ended December 31,							Six Months Ended December 31,							Years Ended June 30,
	2005			2004				2004			2003				2004			2003
				(unaudited)							(unaudited)
Gain on whole loan sales	$	47,568			$	212,495		$	77,272			$	101,122		$	236,346		$	153,556
Loan origination fees (costs), net	6,601				(6,214		)	(5,559		)		12,592			53,354			39,137
Provision for representation, warranty and other miscellaneous losses	(22,444		)		(24,641		)	(8,140		)		(10,577		)	(27,078		)	(6,536		)
Gains (losses) on interest rate cap agreements designed to hedge interest rate risk on loans held for sale	—				(3,293		)	(3,294		)		—			1			(10,871		)
Other	(1,448		)		(740		)	(319		)		(400		)	(822		)	(576		)
Total gain on sale of loans	$	30,277			$	177,607		$	59,960			$	102,737		$	261,801		$	174,710

During the year ended December 31, 2005, gain on sale of loans decreased by $147.3 million, to $30.3 million, from $177.6 million during the year ended December 31, 2004.  This was primarily due to a $164.9 million decline in gain on whole loan sales, which resulted from our strategy of retaining the majority of our hybrid/adjustable rate mortgage loan production in our REIT portfolio. This resulted in a 52.5% decrease, or $3.1 billion, to $2.8 billion in mortgage loan sales to third parties during the year ended December 31, 2005 from the same period last year. Gain on whole loan sales also declined due to lower gain on sale rates realized on loan sales during the year ended December 31, 2005 compared to such rates during the comparable 2004 period due to the fact that increases in interest rates on the mortgage loans we originated and sold during the period did not keep pace with increases in interest rates generally in a rising interest rate environment. In addition, because we retained a majority of our hybrid/adjustable rate mortgage loan production to build our REIT portfolio during the year ended December 31, 2005, many of the loans we sold during the period were fixed-rate, first lien and second lien loans which generally have lower gain rates than our hybrid/adjustable rate mortgage loan products.

Partially offsetting the decline in gain on whole loan sales during the year ended December 31, 2005 over the year ended December 31, 2004 was an increase of $12.8 million in loan origination fees and decreases of $2.2 million and $3.3 million in the provision for representation, warranty, and other miscellaneous losses and losses on interest rate cap agreements that were in place to hedge interest rate risk on loans held for sale, respectively. Due to a higher percentage of retail loans originated and sold during the year ended December 31, 2005 over the same period a year ago, realized net loan origination fees were $6.6 million during the year ended December 31, 2005 compared to realized net loan origination costs of $6.2 million during the year ended December 31, 2004.

During the year ended December 31, 2005, we charged $22.4 million to gain on sale of loans for estimated contractual representation and warranty obligations on loans previously sold and for loans held for sale that were delinquent, had collateral deficiencies, or other attributes that affected their sale

53

potential. This was $2.2 million lower than the $24.6 million provision for representation, warranty and other miscellaneous losses during the year ended December 31, 2004, and was due primarily to fewer loans having been sold in whole loan sales during the year ended December 31, 2005 when compared to the same period a year ago.

The $3.3 million of losses on loans held for sale hedges recorded during the year ended December 31, 2004 primarily resulted from losses on interest rate cap agreements which closed during the second half of the year.  We had no such derivative financial instruments in place during the year ended December 31, 2005 to hedge interest rate risk exposure on our inventory and pipeline of loans held for sale, as we try to manage our interest rate risk exposure on loans held for sale through whole loan sale forward commitments.

Gain on sale of loans declined by $42.8 million, to $60.0 million, during the six months ended December 31, 2004 from the comparable six-month period in 2003. This was principally due to a $23.8 million decrease in gain on sale from whole loan sale transactions, a reduction of $18.1 million in net loan origination fees, and a $3.3 million increase in hedge losses, partially offset by a $2.4 million decrease in the provision for representation, warranty and other miscellaneous losses.

The $23.8 million decline in gain on whole loan sales was due primarily to the $509.1 million, or 17.6%, reduction in mortgage loan sales during the six months ended December 31, 2004 from mortgage loan sales during the comparable six-month period in 2003. To a lesser extent, gain on whole loan sales declined due to lower gain on sale rates realized on whole loan sales during the six months ended December 31, 2004 compared to such rates during the comparable 2003 period. During the six months ended December 31, 2004, net loan origination fees decreased by $18.1 million from amounts reported during the six months ended December 31, 2003 due to a higher percentage of wholesale loans originated and sold during the six months ended December 31, 2004. During the six months ended December 31, 2004, we recorded a $3.3 million charge to gain on sale of loans for losses on interest rate cap agreements that were in place during the six months ended December 31, 2004 to hedge interest rate risks to our loans held for sale. Substantially all of the $3.3 million charge related to realized losses recorded on interest rate cap agreements which closed during the first half of the six months ended December 31, 2004. Finally, during the six months ended December 31, 2004, we charged $8.1 million to gain on sale of loans for estimated contractual representation and warranty obligations on loans previously sold and for loans held for sale that are delinquent, have collateral deficiencies or have other attributes that effect their sale potential. This $2.4 million reduction from the $10.5 million provided during the six months ended December 31, 2003, was due principally to fewer loans having been sold in whole loan sales during the six months ended December 31, 2004 when compared to the same six- month period in 2003.

Gain on sale of loans during the year ended June 30, 2004 grew by $87.1 million, to $261.8 million, from $174.7 million during the year ended June 30, 2003. This resulted primarily from the $1.9 billion, or 42.9%, increase in total mortgage loan dispositions during the year ended June 30, 2004 over the year ended June 30, 2003, partially offset by the lower gain on sale rates we realized on whole loan sales during the year ended June 30, 2004, compared to the gain on sale rates realized on our mix of whole loan and off-balance sheet securitization dispositions during the year ended June 30, 2003. During the year ended June 30, 2004, we relied solely on whole loan sales for cash as our loan disposition strategy. In comparison, during the year ended June 30, 2003, we relied on a combination of off-balance sheet securitizations and whole loan sales for cash as our loan disposition strategy, which was based on our review of market conditions, profitability, and cash flow needs, and our ability to sell the residual interest created in the off-balance sheet securitizations to CZI under the Residual Facility.

At June 30, 2004, we had $550.0 million notional amount of interest rate cap agreements in place to hedge interest rate risk on loans held for sale. During the year ended June 30, 2004, there were no material adjustments to mark the interest rate cap agreements to market. At June 30, 2003, we had no derivative

54

financial instruments in place. 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 company related to the securitization which closed during the period. During the year ended June 30, 2004, net loan fees increased by $14.2 million over amounts reported during the year ended June 30, 2003. 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.

Loan Servicing.Loan servicing revenue consists of late charges and other fees we earn in connection with our loan servicing activities. Loan servicing revenue also includes prepayment penalty fees on loans held for sale.

Loan servicing revenue declined by $0.3 million, to $6.3 million, during the year ended December 31, 2005 from $6.6 million during the year ended December 31, 2004. This was primarily due to a decrease of $2.0 million in servicing and beneficiary demand fees, partially offset by an increase of $1.8 million in net late and prepayment penalty fees earned on loans in off-balance sheet securitizations.

Loan servicing revenue declined by $1.1 million, to $3.1 million, during the six months ended December 31, 2004 from $4.2 million during the six months ended December 31, 2003. This was primarily due to a $0.6 million reduction in beneficiary demand fees coupled with a decrease in servicing, late and prepayment fees aggregating $0.7 million. These were partially offset by a $0.2 million reduction in MSR amortization and subservicing related expenses.

Loan servicing revenue declined by $1.1 million, to $7.8 million, during the year ended June 30, 2004 as compared to $8.9 million during the year ended June 30, 2003. This was primarily due to reductions in servicing, late, and prepayment penalty fees aggregating $3.7 million, partially offset by declines in subservicing related expenses and amortization of mortgage servicing rights in the aggregate amount of $2.6 million. The reductions in servicing, late, and prepayment penalty fees during the year ended June 30, 2004 were due to the $511.8 million decrease in mortgage loans in off-balance sheet securitization trusts serviced in-house during the year ended June 30, 2004, compared to such loans serviced in-house during the year ended June 30, 2003, together with a decline in prepayment penalty fees due to the aging of loans in the portfolio beyond the term of prepayment penalty fees. Subservicing expenses and related resolution, set-up, and reperformance expenses during the year ended June 30, 2004 were $0.2 million, down $0.2 million from the $0.4 million of such expenses during the year ended June 30, 2003. Amortization of mortgage servicing rights declined by $2.5 million to $0.2 million during the year ended June 30, 2004 from the $2.7 million during the year ended June 30, 2003. Our mortgage servicing rights were fully amortized at June 30, 2004.

We previously had in place two arrangements designed to reduce our servicing advance obligations. In the first arrangement, which expired on November 30, 2004, but which was in place during the years ended June 30, 2004 and 2003, a loan servicing company purchased certain advances and agreed to make future advances with respect to an original aggregate $388.0 million in principal amount of loans. In the second arrangement, which expired during the year ended June 30, 2003, an investment bank purchased certain servicing related advances and agreed to undertake the obligation to make a substantial portion of our advance obligations.

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Noninterest Expense

Personnel.Personnel expense includes salaries, payroll taxes and medical and other employee benefits. Personnel expense also includes commissions that are generally related to our loan origination volume, as retail and broker account executives earn incentives on funded loans. Pursuant to SFAS 91, direct personnel costs incurred on mortgage loans originated but not yet sold are deferred and amortized to interest income over the estimated economic life of the loans. When the loans are sold, the deferred costs are recognized as a charge to gain on sale.

The following table summarizes the components of personnel expense for the periods indicated (in thousands):

	Years Ended							Six Months Ended							Years Ended
	December 31,							December 31,							June 30,
	2005			2004				2004			2003				2004			2003
				(unaudited)							(unaudited)
Compensation	$	165,033			$	184,136		$	98,222			$	76,211		$	162,126		$	123,480
Deferred loan origination costs	(84,678		)		(75,878		)	(41,785		)		(19,844		)	(12,764		)	(14,061		)
Medical and other benefits	8,954				10,857			5,595				3,804			9,065			7,005
Other	1,908				1,493			628				878			1,742			1,123
Total personnel expense	$	91,217			$	120,608		$	62,660			$	61,049		$	160,169		$	117,547

Personnel expense declined by $29.4 million, to $91.2 million, during the year ended December 31, 2005 compared to $120.6 million during the year ended December 31, 2004. This was due to reductions of $19.1 million and $1.9 million in compensation and medical and other benefits, respectively, as well as an $8.8 million increase in deferred loan origination costs. These were partially offset by an increase of $0.4 million in other personnel costs.

The $19.1 million reduction in compensation was primarily due to $17.3 million of one-time compensation expense paid during the quarter ended December 31, 2004 in connection with the REIT reorganization that was not paid in 2005, a $3.7 million decline in REIT reorganization related incentives, a decrease of $0.4 million in commissions, bonuses, and incentives, a $0.3 million decline in temporary help costs, and a $0.2 million decrease in contract services expense. These reductions in compensation were partially offset by $2.3 million of compensation costs recorded in the year ended December 31, 2005 related to the issuance of restricted stock awards, as well as increases of $0.2 million and $0.5 million in salaries and payroll tax expense, respectively. The $17.3 million of REIT reorganization related compensation expense was comprised of a $10.9 million charge related to the issuance of restricted stock units and a $6.4 million charge related to the conversion of Series E Preferred Stock Options, both of which occurred as a result of the REIT reorganization. The $0.4 million decline in commissions, bonuses and incentives was primarily due to the $665.1 million, or 9.0%, decrease in total loan originations during the year ended December 31, 2005 compared to the same period last year.

The $1.9 million decrease in medical and other benefit costs was principally attributable to reductions of $0.7 million, $0.6 million, and $0.6 million in workers compensation and group insurance costs, employee relocation expenses, and the 401(k) company match, respectively. The $8.8 million increase in deferred personnel costs on mortgage loans originated was due primarily to a change in the mix in the composition of loans originated during 2005 to a higher percentage of retail production which has a higher incremental cost when compared to the mix in the composition of mortgage production during 2004 which was comprised of more wholesale production.

Personnel expense grew by $1.6 million, to $62.7 million, during the six months ended December 31, 2004 over the comparable six-month period in 2003. This was comprised of increases of $22.0 million and $1.8 million in compensation and medical and other benefits, respectively, partially offset by a

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$21.9 million increase in deferred loan origination costs and a $0.3 million decline in other personnel costs. The $22.0 million growth in compensation was comprised of $17.3 million of compensation paid in connection with the REIT reorganization, as described above, and $5.3 million of increased compensation, partially offset by a $0.7 million decline in commissions, bonuses and incentives. The $5.3 million increase in compensation resulted from higher staffing levels, principally in the retail branches and wholesale operations centers, during the six months ended December 31, 2004 over those during the comparable six-month period in 2003. The $0.7 million decline in commissions, bonuses and incentives was due to a decrease in management incentives. The $21.9 million growth in deferred personnel costs on mortgage loans originated but not yet sold was due primarily to the mix in the composition of loans originated and sold during the 2004 period when compared to those originated and sold during the 2003 period. The $1.8 million increase in medical and other benefit costs was attributable to increased costs for such benefits and higher staff levels.

Personnel expense grew by $42.6 million, to $160.2 million, during the year ended June 30, 2004 compared to the year ended June 30, 2003. This growth was comprised of increases of $38.6 million, $2.1 million, and $0.6 million in compensation, medical and other benefits, and other personnel costs, respectively, coupled with a $1.3 million decrease in deferred loan origination costs. The $38.6 million growth in compensation expense was attributable primarily to a $25.6 million increase in commissions, bonus, and incentives, and, to a lesser extent, a $13.0 million increase in salaries, temporary and overtime expenses, and payroll taxes. The $25.6 million growth in commissions, bonus, and incentives was due primarily to a $22.7 million increase in commissions 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 the year ended June 30, 2003. To a lesser extent, commissions, bonus, and incentives grew due to a $2.9 million increase in incentive compensation related to senior management during the year ended June 30, 2004 over the year ended June 30, 2003. The $13.0 million growth in salary related expense resulted from higher staffing levels due primarily to the impact on head count caused by the increase in retail branches and wholesale operations centers during the year ended June 30, 2004 over the year ended June 30, 2003.

The $2.1 million growth in 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. Deferred personnel costs on mortgage loans originated but not yet sold decreased by $1.3 million during the year ended June 30, 2004 from those reported a year earlier due primarily to the mix in the composition of loans originated and sold during the 2004 period when compared to those originated and sold during the 2003 period.

Production.Production expense declined by $1.2 million, to $35.4 million, during the year ended December 31, 2005 compared to the year ended December 31, 2004. This was primarily due to decreases of $1.2 million, $0.7 million, $0.2 million, and $0.1 million in appraisal costs, sales incentives, credit investigation expenses, and travel and entertainment expenses, respectively, partially offset by a $1.2 million increase in advertising costs. The overall decline in production expense was primarily due to the $665.1 million, or 9.0%, decrease in total loan originations during the year ended December 31, 2005 compared to the same period last year.

Production expense, when expressed as a percentage of total loan origination volume, remained constant at 0.5% for the year ended December 31, 2005 compared to the year ended December 31, 2004,  primarily due to the decrease in loan production tracking the decrease in production expense during the year ended December 31, 2005 compared to the year ended December 31, 2004.

Production expense grew by $1.4 million, to $17.2 million during the six months ended December 31, 2004 compared to the six months ended December 31, 2003. This was due primarily to a $1.0 million increase in advertising expense, coupled with a $0.4 million increase in sales incentives relative to the

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$430.7 million, or 13.6%, increase in our loan production volumes during the six months ended December 31, 2004 over production volumes during the six months ended December 31, 2003.

Production expense, when expressed as a percentage of total loan origination volume, remained constant at 0.5% for the six months ended December 31, 2004 and 2003 primarily due to the increases in loan production and production expense during the six months ended December 31, 2004 over amounts reported during the six months ended December 31, 2003.

Production expense grew by $9.3 million, to $35.1 million during the year ended June 30, 2004 compared to the year ended June 30, 2003. This was primarily due to increased advertising expenses relative to the $2.5 billion, or 57.2%, increase in our loan production volumes during the year ended June 30, 2004 over production volumes during the year ended June 30, 2003.

Production expense, when expressed as a percentage of total loan origination volume, was 0.5% and 0.6% for the years ended June 30, 2004 and 2003, respectively. The decrease in the percentage during the year ended June 30, 2004 from the percentage during the year ended June 30, 2003 is attributable to the $2.5 billion, or 57.2%, growth 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 35.8% increase in production expense during the year ended June 30, 2004 over the year ended June 30, 2003.

General and Administrative.General and administrative expense declined by $4.5 million, to $44.7 million, during the year  ended December 31, 2005 from $49.2 million during the year ended December 31, 2004. This was primarily due to decreases of $3.9 million, $3.5 million, $0.6 million, and $0.4 million in professional expense, provision for estimated uncollectible advances, depreciation and other, and communication expenses, respectively. In addition, we received a $1.6 million monoline insurance settlement received in connection with two off-balance sheet trusts that were called during 2005, which was recorded as a credit to our general and administrative expense.

From time to time, we are unable to fully realize advance receivables related to nonperforming mortgage collateral that is sold in the secondary markets. In connection with the pool calls we consummated during 2005, we received approximately $8.2 million of proceeds that we credited to our advance receivable allowance pending the disposition of the related nonperforming mortgage collateral. By December 31, 2005, substantially all of the nonperforming mortgage collateral acquired in our pool call transactions had been sold resulting in either the write-off or collection of the advance receivables. Based on our assessment of reduced future advance loss exposure related to remaining called collateral, we reduced our advance receivable allowance by $3.5 million through a credit to income.

The aforementioned declines in general and administrative expense were partially offset by increases of $3.7 million and $1.9 million in legal and occupancy costs, respectively. The $3.7 million growth in legal expense was primarily due to a $3.0 million mediated settlement on a litigation matter to which we agreed in the second quarter of 2005. Contributing to the $1.9 million increase in occupancy expense were $0.6 million of charges for terminations of branch operating leases and a corporate office operating lease. During the years ended December 31, 2005 and 2004, our rent payments totaled $12.0 million and $10.1 million, respectively, and we received total sublease payments of $1.5 million in each year.

General and administrative expense grew by $4.9 million, to $27.2 million, during the six months ended December 31, 2004 compared tothe six months ended December 31, 2003. This was due primarily to increases of $4.6 million, $0.8 million and $0.4 million in professional and legal fees, occupancy, and corporate related insurance expenses, respectively. These increases were partially offset by decreases of $0.7 million and $0.2 million in miscellaneous and communications expenses, respectively. The growth in professional and legal fees was due primarily to $4.1 million of costs incurred related to the REIT reorganization. The increase in occupancy is related to the growth in retail branches from 95 at December 31, 2003 to 96 at December 31, 2004 and to rental rate increases during the six months ended

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December 31, 2004. The growth in corporate related insurance was attributable to premium increases passed through to us by carriers. The decline in miscellaneous expenses was primarily due to a $0.8 million decrease in the provision for estimated uncollectible servicing advances.

General and administrative expense grew by $0.8 million, to $44.5 million, during the year ended June 30, 2004 compared to the year ended June 30, 2003. This was primarily due to increases of $1.6 million, $1.2 million, $1.0 million and $0.8 million in occupancy, communication, corporate related insurance, and professional expenses, partially offset by decreases of $1.2 million and $2.7 million in legal and miscellaneous expenses, respectively. The growth in occupancy, communication and corporate related insurance costs was primarily due to the increase in the number of retail branches from 93 at June 30, 2003 to 99 at June 30, 2004. The $1.2 million decline in legal expense was primarily due to legal fees we incurred during the year ended June 30, 2003 in resolving certain litigation matters and in closing the exchange offer pursuant to which we exchanged $49.6 million of the outstanding 2006 Debentures that were tendered and issued in an equal amount of 5.5% Convertible Subordinated Debentures due March 2012 (the “2012 Debentures”). The $2.7 million decrease in miscellaneous expense was primarily due to the write-off in fiscal 2003 of $2.8 million of aged late fees receivable.

During the years ended June 30, 2004 and 2003, we paid total rental payments of $9.4 million and $8.1 million, respectively, and received total sublease payments of $1.4 million in each year.

Write-down of residual interests.During the years ended December 31, 2005 and 2004, the six months ended December 31, 2004 and 2003, and the year ended June 30, 2004, we did not record a write-down to our residual interests. However, during the year ended June 30, 2003, we recorded a write-down to our residual interests of $34.9 million.

The $34.9 million write-down consisted of a $31.9 million write-down during the three months ended December 31, 2002, plus a $3.0 million write-down recorded at June 30, 2003. During the quarter ended December 31, 2002, despite lower net credit losses on liquidations of mortgage loans in the off-balance sheet securitization trusts, we experienced higher than expected loss severities on such liquidations. During the same time, we also experienced higher than estimated prepayment speed activity for mortgage loans in the off-balance sheet securitization trusts due to the low mortgage interest rate environment prevailing in the United States. Therefore, we increased our credit loss assumptions, changed our annual prepayment rate assumptions and adjusted the underlying forward interest rate curve assumption used to estimate the fair value of our retained residual interests. The effect of these changes in estimates resulted in a $31.9 million write-down to the carrying value of our retained residual interests.

In August 2003, we notified the trustee of the securitization trusts of our intent to call four off-balance sheet securitization trusts. In estimating the effects on the carrying value of the retained residual interests of calling the mortgage loans in those off-balance sheet securitization trusts, we wrote down by $3.0 million the retained residual interests.

Nonoperating Income

Debt Extinguishment Income.During the years ended December 31, 2005 and 2004, the six months ended December 31, 2004 and 2003, and the year ended June 30, 2004, we did not record any debt extinguishment income. During the year ended June 30, 2003, we recorded debt extinguishment income of $31.7 million. This was comprised of $25.0 million on forgiveness of 2012 Debentures owned by Specialty Finance Partners, $4.5 million on redemption of 2012 Debentures held by third parties, and $2.2 million on redemption of Senior Notes held by third parties.

On December 13, 2002, we consummated an exchange offer (the “Exchange Offer”), pursuant to which we exchanged $49.6 million of the outstanding 2006 Debentures and issued an equal amount of 2012 Debentures. In connection with the Exchange Offer, Specialty Finance Partners became the owner of

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$41.6 million of 2012 Debentures, as it exchanged an equal amount of 2006 Debentures which it had previously acquired in open market purchase transactions. On December 23, 2002, we redeemed $19.8 million of the principal amount outstanding on the 2012 Debentures through a scheduled mandatory sinking fund payment, of which $16.6 million was paid to Specialty Finance Partners. On March 31, 2003, Specialty Finance Partners forgave its remaining $25.0 million principal balance of 2012 Debentures, which we recorded as debt extinguishment income. The remaining $4.7 million of our outstanding 2012 Debentures were 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 year ended June 30, 2003, in a series of transactions that were all with unrelated parties, we purchased $22.1 million of the total $150.0 million principal balance of our Senior Notes at a discount from par for $19.9 million and recognized debt extinguishment income of $2.2 million. At June 30, 2003, we redeemed the remaining $127.9 million principal balance of our Senior Notes at par plus accrued and unpaid interest.

Income Tax Provision (Benefit)

During the years ended December 31, 2005 and 2004, we recorded an income tax provision (benefit) of $0.8 million and $(4.9) million, respectively. Our $0.8 million income tax provision for the year ended December 31, 2005 differed from an expected federal income tax benefit of $(1.9) million calculated at the federal marginal tax rate of 35.0% primarily due to the $28.4 million provision resulting from the increase in the tax valuation allowance, partially offset by the $22.5 million benefit related to the non-taxability of the REIT earnings and the $2.9 million state tax benefit. Our $(4.9) million income tax benefit for the year ended December 31, 2004 differed from an expected federal income tax provision of $12.9 million calculated at the federal marginal tax rate of 35.0% primarily due to the $21.6 million decrease in the tax valuation allowance and the $3.3 million income tax benefit related to the non-taxability of the REIT earnings, partially offset by a $6.9 million state tax provision and $1.1 million of non-deductible reorganization costs.

During the six months ended December 31, 2004 and 2003, we recorded an income tax provision (benefit) of $(5.2) million and $(18.0) million, respectively, which reflect effective tax (benefit) rates of (62.9)% and (64.5)%, respectively. Our $5.2 million tax benefit for the six months ended December 31, 2004 differed from an expected federal benefit of $2.9 million calculated at the marginal federal tax rate of 35.0% due to the $3.3 million benefit related to the non-taxability of the REIT earnings plus the $2.9 million benefit resulting from the decrease in the tax valuation allowance, partially offset by the $2.8 million state tax provision and $1.1 million of non-deductible reorganization costs. Our $18.0 million tax benefit for the six months ended December 31, 2003 differed from an expected federal tax expense of $9.8 million calculated at the federal marginal rate of 35.0% due to the $28.7 million decrease in valuation allowance, partially offset by $0.9 million of other items.

During the years ended June 30, 2004 and 2003, we recorded income tax benefits of $(17.7) million and $(1.8) million, respectively, which reflect effective tax rates of (24.2)% and (6.7)%, respectively. Our $(17.7) million tax benefit recorded during the year ended June 30, 2004 differed from the expected federal provision of $25.6 million calculated at the effective federal tax rate of 35.0% due to the $47.4 million federal benefit resulting from the decrease in the tax valuation allowance, partially offset by $6.3 million state tax provision which related to various state tax obligations. We determined that it was  more likely than not that certain future tax benefits would be realized as a result of future income. Therefore, during the year ended June 30, 2004, our tax valuation account was decreased to recognize both anticipated future income and the current realization of deferred tax assets. We periodically undergo federal and state tax return examinations and may provide for additional liabilities for identified exposure items. During the three months ended June 30, 2003, a number of pending tax return audits were finalized and related tax liabilities were adjusted to the actual amounts due. This resolution resulted in an income

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tax benefit of approximately $(6.0) million being recognized during the year ended June 30, 2003. Our REIT reorganization in November 2004 and Specialty Finance Partners’ investment during the year ended June 30, 1999 both resulted in a change in control for income tax purposes, thereby limiting our ability to use net operating loss carryforwards and certain other future deductions.

Financial Condition

The following table presents changes in balance sheet account balances between December 31, 2005 and 2004 (in thousands):

	December 31,				Increase (Decrease)
	2005		2004		$			%
Loans held for sale, at lower of cost or market	$	951,177	$	484,963	$	466,214		96	%
Loans held for investment, net	4,085,536		1,725,046		2,360,490			137	%
Advances and other receivables, net	39,591		22,740		16,851			74	%
Residual interests, at estimated fair value	—		39,082		(39,082		)	(100	)%
Equipment and improvements, net	10,810		8,840		1,970			22	%
Prepaid expenses and other	30,713		22,076		8,637			39	%
Derivative financial instruments, at estimated fair value	58,147		31,947		26,200			82	%
Financings on loans held for investment	3,623,188		1,157,470		2,465,718			213	%
Revolving warehouse and repurchase facilities	1,341,683		809,213		532,470			66	%
Borrowings	16,487		7,680		8,807			115	%

Loans Held for Sale.Our portfolio of loans held for sale increased to $951.2 million at December 31, 2005 from $485.0 million at December 31, 2004 due primarily to total loan originations exceeding total loan sales and transfers of mortgage loans held for sale to loans held for investment during the year ended December 31, 2005.

Loans Held for Investment, Net.   At December 31, 2005, our portfolio of loans held for investment, net was $4.1 billion, an increase of $2.4 billion over the $1.7 billion portfolio of loans held for investment at December 31, 2004. This increase was primarily due to our completion of $3.7 billion of four on-balance sheet securitizations during the year ended December 31, 2005, partially offset by mortgage loan runoff.

The portfolio of loans held for investment at December 31, 2005 and December 31, 2004 was net of a $43.4 million and $1.9 million allowance for loan losses, respectively. At December 31, 2005 and 2004, the allowance for loan losses when expressed as a percentage of the unpaid principal balance of loans held for investment was 1.05% and .11%, respectively. During the year ended December 31, 2005, we recorded a provision for loan losses of $40.3 million, transfer of $2.6 million from our servicing advance allowance, and net charge-offs of $1.4 million. The $2.6 million transfer was made in light of the Company’s assessment of credit risk to the portfolio of loans held for investment built in part with mortgage collateral from called off-balance sheet securitizations having aged servicing advances. We expect net charge-offs to increase in future periods as the loans in this portfolio become more seasoned, and fewer new loans are added.

Advances and Other Receivables.   Advances and other receivables are comprised of interest and servicing advances, servicing and miscellaneous fees, accrued interest receivable and other miscellaneous receivables. Prior to June 30, 2005, advances and other receivables also included cash due from the off-balance sheet securitization trusts. The level of servicing advances, in any given period, depends upon portfolio delinquencies, the level of real estate owned and loans in the process of foreclosure, and the timing and remittance of cash collections on mortgage loans in the portfolio. We fund advances on a recurring basis not otherwise covered by financing arrangements, that we have in place from time to time, and recover those advances on a periodic basis.

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Advances and other receivables increased by $16.9 million to $39.6 million at December 31, 2005 from $22.7 million at December 31, 2004. At December 31, 2005 and 2004, advances and other receivables was net of an advance receivable allowance of $1.9 million and $4.2 million, respectively. The increase was due primarily to an increase of $22.0 million in accrued interest and other receivables, partially offset by decreases of $4.3 million and $0.8 million in principal, interest, and servicing advances and cash due from securitization trusts, respectively.

The $22.0 million increase in accrued interest and other receivables at December 31, 2005 over the balance at December 31, 2004 is due primarily to an $18.7 million increase in accrued interest receivable relative to the increase in the balance of loans held for investment together with a $3.3 million increase in amounts due from counterparties. The $4.3 million decrease in principal, interest, and servicing advances was primarily due to recoveries of prior advances as a result of the call of our remaining off-balance sheet securitization trusts for which we serviced the loans. The $0.8 million decline in cash due from securitization trusts was due to having no residual balances at December 31, 2005.

Residual Interests.   We did not have any residual interests at December 31, 2005 compared to $39.1 million at December 31, 2004. During the year ended December 31, 2005, we called the remaining off-balance sheet securitization trusts in which we retained residual interests and applied $39.1 million of cash received from these trusts to our outstanding balance of residual interests.

Equipment and Improvements, Net.   Equipment and improvements, net, increased by $2.0 million, to $10.8 million at December 31, 2005 from $8.8 million at December 31, 2004 reflecting capital expenditures on new equipment and improvement acquisitions outpacing depreciation and amortization during the year ended December 31, 2005.

Prepaid Expenses and Other.Prepaid expenses and other increased by $8.6 million to $30.7 million at December 31, 2005 from $22.1 million at December 31, 2004. The increase was due to increases of $6.1 million and $7.1 million in unamortized debt issuance costs and real estate owned, respectively, partially offset by decreases of $2.3 million, $1.2 million, $0.9 million, and $0.2 million in licensing, permit and performance bond deposits; defunded loans; unamortized commitment fees; and, prepaid expenses, security deposits, and other deferred charges, respectively.

Derivative Financial Instruments.Derivative financial instruments increased by $26.2 million to $58.1 million at December 31, 2005 from $31.9 million at December 31, 2004. At December 31, 2005, we had notional amounts of $5.9 billion of interest rate cap agreements compared to $2.5 billion at December 31, 2004 in place to hedge rate risk exposure to our portfolio of mortgage loans held for investment and related financings. We carry our derivative financial instruments at estimated fair value. Included in interest expense during the year ended December 31, 2005, was a $0.1 million charge related to the negative mark to fair value of our interest rate cap agreements at December 31, 2005.

Financings on Loans Held for Investment.   Amounts outstanding under our financings on loans held for investment increased by $2.5 billion to $3.6 billion at December 31, 2005 from $1.2 billion at December 31, 2004, primarily resulting from the four on-balance sheet securitizations that closed during the year ended December 31, 2005, partially offset by principal reductions during the year.

Revolving Warehouse and Repurchase Facilities.   Amounts outstanding under revolving warehouse and repurchase facilities increased by $532.5 million to $1.3 billion at December 31, 2005 over $809.2 million at December 31, 2004, primarily as a result of increased reliance on the facilities to fund loans held for sale and loans held for investment prior to their securitization. Proceeds from whole loan sales and securitizations are used first to reduce balances outstanding under our revolving warehouse and repurchase facilities, and then used to satisfy corporate operating requirements.

Borrowings.At December 31, 2005, we had $16.5 million of borrowings outstanding under short-term collateral financings compared to $7.7 million at December 31, 2004. The increase in borrowing

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resulted from increased advances under a facility at December 31, 2005 that was not in place at December 31, 2004.

Liquidity and Capital Resources

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

Our primary sources of liquidity are expected to be

·fundings under revolving warehouse and repurchase facilities;

·fundings from financings on loans held for investment;

·the proceeds from the sale of mortgage loans;

·the proceeds from monetization of retained mortgage-backed bonds from our on-balance sheet securitizations; and

·the proceeds from the issuance of debt and equity securities.

Our primary operating cash requirements include:

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

·interest and principal payments on financings on loans held for investment;

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

·advances in connection with our servicing portfolio;

·overcollateralization requirements in connection with on-balance sheet securitizations;

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

·ongoing administrative, operating, and tax expenses.

Revolving Warehouse and Repurchase Facilities.   We borrow substantial sums of cash on a regular basis to originate mortgage loans and to hold loans in our REIT portfolio prior to securitization. Therefore, we rely on revolving warehouse and repurchase facilities to finance the origination and holding of mortgage loans prior to securitization or sale.

At December 31, 2005, we had total revolving warehouse and repurchase facilities in the amount of $2.8 billion, of which $2.7 billion and $0.1 billion were committed and uncommitted, respectively. At December 31, 2005, amounts outstanding under our facilities totaled $1.3 billion, leaving us with $1.5 billion of available committed borrowing capacity under the facilities. Of the $2.8 billion of revolving warehouse and repurchase facilities available at December 31, 2005, $300.0 million, $700.0 million, $500.0 million, $300.0 million, $500.0 million and $500.0 million are scheduled to mature on March 24, 2006, April 3, 2006, August 4, 2006, September 29, 2006, December 1, 2006 and January 17, 2007, respectively. While no assurance can be made, we expect to renew our warehouse facilities on the same or similar terms at or prior to their maturity.

At December 31, 2004, we had total revolving warehouse and repurchase facilities in the amount of $2.6 billion, of which $2.5 billion and $0.1 billion were committed and uncommitted, respectively. At December 31, 2004, amounts outstanding under our facilities totaled $809.2 million, leaving us with approximately $1.8 billion of available borrowing capacity under the facilities.

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

Although our actual debt to equity ratio may vary from time to time depending on market conditions and other factors that our management and board of directors deem relevant, in general, our credit facilities limit our total debt-to-equity ratio to a level of 20.0 to 1.0. However, each of our credit facility lenders disregards nonrecourse financing, including the bonds underlying our on-balance sheet securitizations, in computing our adjusted leverage ratio, which is limited to 7.0 to 1.0. We were in compliance with these ratios at December 31, 2005.

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

During the year ended December 31, 2005, our financings on loans held for investment increased by $2.5 billion, to $3.6 billion at December 31, 2005, primarily resulting from four on-balance sheet securitizations that closed during the period.

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

During the years ended December 31, 2005 and 2004, we sold $2.8 billion and $5.9 billion of mortgage loans through whole loan sales for cash to the secondary market, respectively. The $3.1 billion decline in whole loan sales during the year ended December 31, 2005 from the comparable period a year ago is due to our retention of a significant portion of our mortgage loan production to build our REIT portfolio of loans held for investment.

During the six months ended December 31, 2004 and 2003, we sold $2.4 billion and $2.9 billion of mortgage loans through whole loan sales for cash to the secondary market, respectively. The $509.1million decline in whole loan sales during the six months ended December 31, 2004 from the comparable six-month period in 2003 is due to our retaining a significant portion of our mortgage loan production to build our portfolio of loans held for investment.

During the year ended June 30, 2004, we sold $6.4 billion of mortgage loans through whole loan sales for cash to the secondary market. No loans were sold through off-balance sheet securitizations. During the year ended June 30, 2003, we sold $4.2 billion and $315.0 million through whole loan sales and off-balance sheet securitizations, respectively. The gain on sale we recognized on off-balance sheet securitizations and whole loan sales is affected by, among other things, market conditions at the time of the loan disposition, and our assumptions used in off-balance sheet securitizations. See “Results of Operations—Noninterest Income.” In connection with off-balance sheet securitization transactions, we are 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, we subordinate 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.

Monetization of Retained Mortgage-Backed Bonds from Our On-Balance Sheet Securitizations.At December 31, 2005, we were party to a revolving short-term collateralized financing facility pursuant to

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which $35.6 million at par value of retained bonds was pledged as collateral. Amounts outstanding under the facility at December 31, 2005 of $16.5 million were subject to interest at one-month or one-week LIBOR, plus 65 to 150 basis points, depending on the term of the requested advance.

During January 2006, we elected to issue the retained bonds and the proceeds from the issuance were used to fully repay amounts outstanding under the facility.

Proceeds from the Issuance of Debt and Equity Securities.On November 4, 2005, our Form S-3 shelf registration statement, filed for the purpose of selling our common stock, preferred stock, debt securities or other securities in one or more offerings up to an aggregate dollar amount of $500.0 million, was declared effective by the Securities and Exchange Commission (“SEC”). Depending on our liquidity needs and market conditions, we may issue one or more of these securities in different amounts and at different times. We intend to use the proceeds from any sale of these securities for general corporate purposes, which includes continuing to build a portfolio of self-originated mortgage loans, for general working capital purposes and to reduce short-term indebtedness.

Cash Flow.The following summarizes our material cash flow activities during the years ended December 31, 2005 and 2004, the six months ended December 31, 2004 and 2003, and the years ended June 30, 2004 and 2003:

The principal operating activities which effect our net cash provided by or used in such activities in any period are (i) the increase or decrease in loan production, and the mix of that production between wholesale and retail, which causes an increase or decrease in the use of cash, respectively; (ii) the increase or decrease in the level of loan sales, which causes an increase or decrease in cash provided, respectively; and (iii) net income.

During the year ended December 31, 2005, our net cash used in operating activities grew by $706.2 million, to $450.8 million, from the $255.4 million of net cash provided by operating activities during the year ended December 31, 2004.  This was primarily due to a $672.1 million increase in cash used to fund originations of loans held for sale, net of proceeds from loan sales, as well as to a $48.0 million decline in net income, partially offset by a $13.9 million change in other operating items.

During the year ended December 31, 2005, our net cash used in investing activities increased by $675.4 million, to $2.4 billion, over the $1.7 billion for the same period last year and was attributable to our strategy of building a REIT portfolio of loans held for investment. If we increase our REIT portfolio of loans held for investment, we will continue to use cash in that investing activity. However, our REIT portfolio of loans held for investment is currently stabilized at a level we deem appropriate.

During the year ended December 31, 2005, our net cash provided by financing activities grew by $1.4 billion, to $2.9 billion, over the $1.5 billion for the year ended December 31, 2004. This was primarily attributable to a $1.3 billion increase in financings on loans held for investment, coupled with a $326.3 million increase in revolving warehouse and repurchase facilities. These were partially offset by $226.5 million of net capital raised during 2004 in connection with the recapitalization and reorganization, as well as a $55.0 million increase in cash used for dividend payments during the year ended December 31, 2005 over the prior year. The primary activities affecting our cash flows from financing activities are increases and decreases in the levels of financings of loans held for investment and borrowings under our revolving warehouse and repurchase facilities. In addition, cash flows from financing activities include capital related cash flows.

During the six months ended December 31, 2004, our net cash provided by operating activities grew by $670.9 million, to $511.2 million, over the $159.6 million of net cash used in operating activities during the six months ended December 31, 2003. This was primarily due to a $817.1million increase in proceeds from sales of loans held for sale, net of cash used to fund loan originations, partially offset by $48.9 million decline in net income and a $97.3 million change in other operating items.

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During the six months ended December 31, 2004, our net cash used in investing activities increased by $1.7 billion, to $1.7 billion, over the comparable six-month period during 2003 and was attributable to our strategy of building our REIT portfolio of loans held for investment.

During the six months ended December 31, 2004, our net cash provided by financing activities grew by $1.1 billion, to $1.2 billion, over the $149.5 million for the six months ended December 31, 2003. This was primarily attributable to a $1.2 billion increase in financing on loans held for investment, as well as $226.5 million in net capital raised during the 2004 period and a $54.6 million decline in dividend payments on preferred stock. Partially offsetting these factors were uses of cash to fund reductions of $336.6 million and $19.3 million in revolving warehouse and repurchase facilities and borrowings, respectively.

During the year ended June 30, 2004, our net cash used in operating activities grew by $557.2 million, to  $415.5 million, over the $141.7 million of net cash provided by operating activities during the year ended June 30, 2003. This was primarily due to a $660.5 million increase in cash used to fund originations or loans held for sale, net of proceeds from loan sales, partially offset by a $61.5 million increase in net income and a $41.8 million change in other operating items.

During the year ended June 30, 2004, our net cash provided by financing activities grew by $551.4 million, to $418.4 million, over the $133.1 million of net cash used in financing activities during the year ended June 30, 2003. This was primarily attributable to a $582.2 million increase in our revolving warehouse and repurchase facilities used to fund the growth in the origination of loans held for sale during fiscal 2004 over such levels in fiscal 2003. To a lesser extent, net cash provided by financing activities grew due to a $33.5 million decline in the use of cash to reduce borrowings. These factors were partially offset by a $64.3 million increase in the payment of preferred stock dividends.

As a financial institution, our lending and borrowing functions are integral parts of our business. When evaluating sources and uses of cash, we consider cash used to increase our assets and borrowings used to finance those assets separately from our operating cash flows. Our most significant use of cash is for the acquisition of loans held for sale, which is funded primarily through borrowings under our revolving warehouse and repurchase facilities. In accordance with U.S. GAAP, originations of loans held for sale, net of sales of such loans, are required to be included in our consolidated statements of cash flows as a component of cash flows from operating activities. However, borrowings used to fund such loans, and repayment of such borrowings, are required to be included in the consolidated statements of cash flows as a component of cash flows from financing activities.

The amount of net originations of loans held for sale included as a component of cash flows used in operating activities was $466.2 million during the year ended December 31, 2005 compared to $205.9 million as a component of cash provided by operating activities for the year ended December 31, 2004. Excluding the origination and sale activity of loans held for sale, our operating activities provided $18.0 million and $38.6 million of cash during the years ended December 31, 2005 and 2004, respectively.

The amount of net originations of loans held for sale included as a component of cash flows provided by  operating activities was $527.2 million during the six months ended December 31, 2004 compared to $289.9  million as a component of cash used in operating activities for the same period in 2003. Excluding the origination and sale activity of loans held for sale, our operating activities used $26.9 million and provided $130.2 million of cash during the six months ended December 31, 2004 and 2003, respectively.

The amount of net originations of loans held for sale included as a component of cash flows used in   operating activities was $605.3 million during the year ended June 30, 2004 compared to $55.2  million as a component of cash provided by operating activities for the year ended June 30, 2003. Excluding the origination and sale activity of loans held for sale, our operating activities provided $189.8 million and $86.5 million of cash during the years ended June 30, 2004 and 2003, respectively.

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At December 31, 2005, we had net operating liquidity of $51.9 million, which consisted of $36.1 million of unrestricted cash and cash equivalents, $9.2 million of drawing capacity under a short-term collateralized financing facility, and approximately $6.6 million of cash that could be immediately raised through the pledging of unencumbered and eligible loans held for sale as collateral pursuant to committed revolving warehouse and repurchase facilities. We currently believe that our net operating liquidity level is sufficient to satisfy our operating requirements.

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

Contractual Obligations

The following table summarizes our material contractual obligations as of the date indicated (in millions):

	December 31, 2005
	Total		Less Than 1 year			1-3 Years		3-5 Years		More Than 5 years
Financing on loans held for investment	$	3,638.4		$	1,498.4	$	1,528.5	$	385.1		$	226.4
Revolving warehouse and repurchase agreements	1,341.7			1,341.7		—		—			—
Borrowings	16.5			16.5		—		—			—
Operating leases, net	49.6			12.3		21.8		10.3			5.2
Purchase and other obligations	0.5			0.4		0.1		—			—
Total	$	5,046.7		$	2,869.3	$	1,550.4	$	395.4		$	231.6

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

Risk Management

At December 31, 2005 and 2004, we had notional amounts of $5.9 billion and $2.5 billion, respectively, of interest rate cap agreements in place to hedge interest rate risk exposure to our portfolio of mortgage loans held for investment and related financings. Interest expense during the year ended December 31, 2005 included a charge of $0.1 million related to the negative mark to market of these interest rate cap agreements at December 31, 2005. During the year ended December 31, 2004, interest expense  included a credit of $6.3 million related to the positive mark to market of interest rate cap agreements at December 31, 2004. Interest income during the years ended December 31, 2005 and 2004 included $27.4 million and $0.5 million of income related to remittances to us from counterparties on in-the-money interest rate cap agreements.

During the year ended December 31, 2004, we entered into agreements to hedge interest rate risk exposure to our inventory and pipeline of mortgage loans held for sale. Gain on sale of loans during the

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year ended December 31, 2004 included a charge of $3.3 million, which primarily related to hedge losses recorded on interest rate cap agreements that closed during the period related to hedging interest rate risk on loans held for sale.

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

Interest Rate Sensitivity

Sale of Loans—Interest Rate Risk.We are exposed to rising interest rates for loans originated or purchased which are held pending sale in the whole loan market. Currently, we mitigate exposure to interest rate changes through whole loan sale forward contracts. From time to time, we mitigate exposure to rising interest rates through the use of interest rate cap agreements, forward interest rate swap agreements, or other hedging activities. These hedging activities help mitigate the risk of absolute movements in interest rates.

Interest Rate Sensitive Assets

Residual Interests.We had no residual interests at December 31, 2005 and $39.1 million at December 31, 2004. These instruments were recorded at estimated fair value at December 31, 2004. We valued these assets based on the present value of future revenue streams, net of expenses, using various assumptions. The weighted average discount rate used to calculate the present value of the residual interests was 13.7% at December 31, 2004. The weighted average life of the mortgage loans used for valuation at December 31, 2004 was 2.0 years.

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

Interest Rate Risk.We are exposed to on-balance sheet interest rate risk related to our loans held for investment and loans held for sale.

Warehouse Facilities Exposure.We utilize warehouse and repurchase financing facilities to facilitate the holding of mortgage loans prior to sale and securitization. At December 31, 2005 and 2004, we had total revolving warehouse and repurchase facilities available in the amount of $2.8 billion and $2.6 billion, respectively. At December 31, 2005 and 2004, amounts committed under such facilities were $2.7 billion and $2.5 billion, respectively. The total amount outstanding related to these facilities was $1.3 billion and $809.2 million at December 31, 2005 and 2004, respectively. Drawings available to us under the facilities were $1.5 billion and $1.8 billion at December 31, 2005 and 2004, respectively. Revolving warehouse and repurchase facilities are typically for a term of one year or less and are designated to fund mortgages originated within specified underwriting guidelines. The majority of the assets remain in the facilities for a period of up to 90 days at which point they are securitized or sold to institutional investors. As these amounts are short term in nature and/or generally bear market rates of interest, the contractual amounts of these instruments are reasonable estimates of their fair values.

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The following tables illustrate the timing of the maturities of our interest rate sensitive assets and liabilities as of the dates indicated (in thousands):

	Maturity Range
December 31, 2005	Zero to 6 Months			6 Months to 1 Year			1-2 Years		3-4 Years		5-6 Years		Thereafter			Total
Interest rate sensitive assets:
Cash and cash equivalents	$	123,172		$	—		$	—	$	—	$	—	$	—		$	123,172
Loans held for sale,  net	951,177			—			—		—		—		—			951,177
Loans held for investment, net	856,993			816,289			1,221,175		855,266		143,890		191,923			4,085,536
Interest rate cap agreements	58,147			—			—		—		—		—			58,147
Total interest rate sensitive assets	$	1,989,489		$	816,289		$	1,221,175	$	855,266	$	143,890	$	191,923		$	5,218,032
Interest rate sensitive  liabilities:
Short-term collateralized financing facility	$	16,487		$	—		$	—	$	—	$	—	$	—		$	16,487
Revolving warehouse and repurchase facilities	1,341,683			—			—		—		—		—			1,341,683
Financings on loans held for investment	768,926			729,479			1,057,794		720,561		135,214		226,428			3,638,402
Total interest  rate sensitive liabilities	$	2,127,096		$	729,479		$	1,057,794	$	720,561	$	135,214	$	226,428		$	4,996,572
Excess of interest rate sensitive assets over interest rate sensitive liabilities	$	(137,607	)	$	86,810		$	163,381	$	134,705	$	8,676	$	(34,505	)	$	221,460
Cumulative net interest rate sensitivity gap	$	(137,607	)	$	(50,797	)	$	112,584	$	247,289	$	255,965	$	221,460		$	221,460

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	Maturity Range
December 31, 2004	Zero to 6 Months			6 Months to 1 Year			1-2 Years		3-4 Years		5-6 Years		Thereafter		Total
Interest rate sensitive assets:
Cash and cashequivalents	$	37,780		$	—		$	—	$	—	$	—	$	—	$	37,780
Loans held for sale, net	484,963			—			—		—		—		—		484,963
Loans held for investment, net	150,567			223,516			608,267		341,716		138,475		262,505		1,725,046
Interest rate cap agreements	31,947			—			—		—		—		—		31,947
Total interest rate sensitive assets	$	705,257		$	223,516		$	608,267	$	341,716	$	138,475	$	262,505	$	2,279,736
Interest rate sensitive  liabilities:
Financing facility	$	7,680		$	—		$	—	$	—	$	—	$	—	$	7,680
Revolving warehouse and repurchase facilities	809,213			—			—		—		—		—		809,213
Financings on loans held for investment	104,942			155,785			423,947		225,845		78,897		170,320		1,159,736
Total interest rate sensitive liabilities	$	921,835		$	155,785		$	423,947	$	225,845	$	78,897	$	170,320	$	1,976,629
Excess of interest rate sensitive assets over interest rate sensitive liabilities	$	(216,578	)	$	67,731		$	184,320	$	115,871	$	59,578	$	92,185	$	303,107
Cumulative net interest rate sensitivity gap	$	(216,578	)	$	(148,847	)	$	35,473	$	151,344	$	210,922	$	303,107	$	303,107

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RISKS RELATED TO OUR BUSINESS

Our business requires a significant amount of cash, and if it is not available, our business and financial performance will be significantly harmed.

We require substantial amounts of cash to fund our loan originations and to pay loan origination expenses. We finance the majority of the loans we make by borrowing from our revolving warehouse and repurchase facilities and pledging the loans made as collateral. While holding our loans pending sale or securitization, we may also require cash, as our warehouse lines may not fully fund the entire principal balance of our loans financed with the facility. In addition, if our loans are financed past the permitted term under our warehouse lines, or if they decline in value, we will need cash to reduce our borrowing under the warehouse lines to the permitted level. We may also need cash for working capital to satisfy our financial covenants in our warehouse and repurchase facilities, and other needs.

Our earnings may decrease because of increases in interest rates.

Our profitability may be directly affected by changes in interest rates. Any such changes in interest rates could harm our results of operations, financial condition and business prospects. The following are some of the risks we face related to an increase in interest rates:

·Our net interest income depends in large part on differences between interest earned on our mortgage loans, net of provisions for loan losses and our financing costs. The interest on our mortgage loans is generally fixed for the first two or three years from origination, while our on-balance sheet financings generally pay an adjustable LIBOR-based yield. Therefore, an increase in LIBOR reduces the net interest income we receive from these mortgage loans. Consequently, increases in interest rates, particularly short-term interest rates, may decrease our net income. Interest rate fluctuations resulting in our interest expense exceeding our interest income would result in operating losses for us.

·The value of our loans is determined in part by the difference between interest earned on our mortgage loans and short-term interest rates on treasuries and other securities. Therefore, if interest rates rise between the date of origination and the date we sell or securitize the loans, the value of our loans may decline.

·Interest rate increases may harm our earnings by increasing our costs of funding and securitizing our loans and if we do not increase the interest rate we receive on our mortgage loans by the amount of the increase in our funding costs, the spread between the interest we receive on our mortgage loans and our funding costs is reduced.

·Our adjustable-rate mortgage loans have periodic and lifetime interest rate caps above which the interest rate on the loans may not rise. If general interest rates increase, the rate of interest on these mortgage loans could be limited, while the rate payable on the senior certificates representing interests in a securitization trust into which these loans are sold may be uncapped. This would reduce the amount of cash we receive over the life of the loans in on-balance sheet securitizations.

·An increase in interest rates could reduce our loan origination volume because refinancings of existing loans, including cash-out refinancings, would be less attractive, and qualifying for a purchase loan or refinancing may be more difficult. Lower origination volume may reduce our earnings by reducing gain on sale of loans, net interest income and loan origination income.

·An increase in interest rates could increase the delinquency and default rates on the adjustable-rate mortgage loans that we originate and hold because the borrowers’ monthly payments under such loans may increase beyond the borrowers’ ability to pay. A substantial portion of our portfolio

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consists of hybrid/adjustable rate loans which may adjust up to three percent at the first adjustment date and could cause a monthly payment increase of up to one third. Higher than anticipated delinquencies or losses may decrease our cash flows or impair our ability to sell or securitize loans in the future, which could harm our results of operations, financial condition and business prospects.

The delinquency and default rates in our portfolio may be higher than those prevailing in the mortgage banking industry due to the origination of lower credit grade mortgage loans, which may cause us losses.

Residential mortgage loans are secured by residential properties and are subject to risks of delinquency and foreclosure, and risks of loss. Our principal market includes subprime borrowers who have credit histories that may limit their access to credit. Subprime borrowers typically have higher rates of delinquency and default than prime borrowers. Delinquency interrupts the flow of interest income from a mortgage loan, and default can ultimately lead to a loss if the net realizable value of the real property securing the mortgage loan is insufficient to cover the principal and interest due on the loan. If the delinquency and defaults in the loans in our portfolio exceed our projections, our income will decrease.

We bear the risk of delinquency and default on loans beginning when we originate them. In whole loan sales, our risk of delinquency typically extends to the first few payments after sale, and we may be obligated to repurchase loans that become delinquent during that period. When we securitize our loans, we are exposed to delinquencies and losses through the life of the loans underlying our on-balance sheet securitizations structured as financings. We attempt to manage these risks with risk-based loan pricing and appropriate underwriting policies and loan collection methods. However, we cannot be certain that such policies and methods will control our delinquency and default risks and, if such policies and methods are insufficient to control our delinquency and default risks, our business, financial condition, liquidity and results of operations could be harmed. Moreover, we establish an allowance for credit losses on our portfolio based on our anticipated delinquencies and losses in our portfolio. However, if our actual delinquency and credit losses exceed our estimates, our business, financial condition and results of operations could be harmed.

We face intense competition in the business of originating, purchasing and selling mortgage loans, which may make it difficult for us to compete successfully, and decrease our market share and our earnings.

We face intense competition in the business of originating, purchasing and selling mortgage loans. Many of our competitors are substantially larger and have considerably greater financial resources and lower costs of capital than we do. In addition, certain government-sponsored entities, such as Fannie Mae and Freddie Mac, are also expanding their participation in the subprime mortgage industry. These government-sponsored entities have a size and cost-of-funds advantage that allows them to purchase loans with lower rates or fees than we are willing to offer. In addition, establishing a wholesale lending operation such as ours requires a relatively small commitment of capital and human resources. This low barrier to entry permits new competitors to enter our markets quickly and compete with our wholesale lending business. Additional competition may lower the rates we can charge borrowers and increase the cost to originate mortgage loans. Increased competition may also reduce the volume of our mortgage loan originations and mortgage loan sales. As a result, we may not be able to acquire sufficient mortgage-related assets with favorable yields over our borrowing costs, which could harm our results of operations, financial condition and business prospects. Moreover, the increased competition may increase the demand for our experienced personnel and the potential that such personnel will leave for competitors. If our competitors are able to attract some of our key employees and disrupt our broker relationships, it could harm our results of operations, financial condition and business prospects.

The intense competition in the subprime mortgage industry has also led to rapid technological developments, evolving industry standards and frequent releases of new products and enhancements. As mortgage products are offered more widely through alternative distribution channels, such as the Internet,

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we may be required to make significant changes to our current wholesale and retail structures and information systems to compete effectively. Our inability to continue enhancing our current Internet capabilities, or to adapt to other technological changes in the industry, could harm our results of operations, financial condition and business prospects.

Our inability to realize cash proceeds from loan sales and securitizations in excess of the loan acquisition cost could hurt our financial performance.

To continue our mortgage loan origination and purchase operations, we must be able to sell our mortgage loans in the whole loan sale and securitization markets on at least a quarterly basis. The net cash proceeds received from loan sales and securitizations consist of the proceeds received from such sales and securitizations, plus the premiums we receive on sale of loans in excess of the outstanding principal balance, minus the securitizations and the discounts on loans that we have to sell for less than the outstanding principal balance. We use the cash proceeds from these sales to pay down warehouse and repurchase facilities and make new mortgage loans. The value of the mortgage loans depends on a number of factors, including general economic conditions, interest rates and governmental regulations. In addition, we rely on institutional purchasers, such as investment banks, financial institutions and other mortgage lenders, to purchase bonds issued in securitization transactions and mortgage loans in the whole loan market. If we are unable to originate loans at a cost lower than the cash proceeds realized from loan sales, that inability could harm our results of operations, financial condition and business prospects. In addition, adverse changes in the securitization and whole loan markets may affect our ability to securitize or sell our mortgage loans for acceptable prices within a reasonable period of time, which would hurt our earnings, financial condition and business prospects.

A downturn in the residential mortgage origination business, which is a cyclical industry, may harm our operations.

The mortgage origination business has historically been a cyclical industry, enjoying periods of strong growth and profitability followed by periods of shrinking volumes and industry-wide losses. The residential mortgage industry experienced rapid growth through 2004 due to declining interest rates. However, short-term interest rates have risen recently and during periods of rising interest rates, refinancing originations decrease, as higher interest rates provide reduced economic incentives for borrowers to refinance their existing mortgages. Our mortgage originations decreased in 2005 from 2004. We expect this to result in a decreased volume of originations in the foreseeable future. Due to stable and decreasing interest rates over recent years, our historical performance may not be indicative of results in a rising interest rate environment, and our results of operations may be materially adversely affected if interest rates rise.

If loan prepayment rates are higher than expected, yields on our planned investments will be reduced.

The value of the mortgage loans in our portfolio may be affected by prepayment rates on those mortgage loans. Prepayment rates on mortgage loans are influenced by changes in current interest rates, the introduction of new loan products that may offer lower monthly payments, and a variety of economic, geographic and other factors beyond our control, and consequently, such prepayment rates cannot be predicted with certainty. In periods of declining mortgage loan interest rates, prepayments on mortgage loans generally increase and the proceeds of such prepayments are likely to be reinvested by us in assets with lower yields than the yields on the assets that were prepaid. Higher than expected mortgage loan prepayments require us to accelerate the amortization of our loan acquisition costs and reduce our earnings.

Declining real estate values could harm our operations.

We believe the risks associated with our business will be more acute during periods of declining real estate values. Declining real estate values will likely reduce our level of new mortgage loan originations, since borrowers often use increases in the value of their existing home to support the refinancing of their

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existing mortgage loans or the purchase of new homes at higher levels of borrowings. Further, declining real estate values significantly increase the likelihood that we will incur increased payment delinquencies, foreclosures and losses on our loans if there is a default. Therefore, any sustained period of declining real estate values could adversely affect both our net interest income from loans in our portfolio as well as our ability to originate, sell and securitize loans, which would significantly harm our revenues, results of operations, financial condition, business prospects and our ability to make distributions to you.

Our hedging transactions may limit our gains or result in losses.

We use derivatives, primarily interest rate cap agreements, to hedge the interest rate risk relative to our loans held for investment and the financings related thereto. Our board of directors has adopted a general policy regarding the use of derivatives, which generally allows us to use derivatives when we deem appropriate for risk management purposes. We may use derivatives, including interest rate swaps and caps, options, term repurchase contracts, forward contracts and futures contracts, in our risk management strategy to limit the effects of changes in interest rates on our operations. We cannot assure you that our use of derivatives will offset the risks related to changes in interest rates. There have been periods, and it is likely that there will be periods in the future, during which we will incur losses after accounting for our derivative financial instruments. The derivative financial instruments we select may not have the effect of reducing our interest rate risk. In addition, the nature and timing of hedging transactions may influence the effectiveness of these strategies. Poorly designed strategies or improperly executed transactions could actually increase our risk and losses. In addition, hedging strategies involve transaction and other costs. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or that our hedging transactions will not result in losses, and such losses could harm our results of operations, financial condition and business prospects.

We have a limited operating history managing a loan portfolio and failure to properly manage our loan portfolio could impair our growth prospects and harm our results of operations and financial condition.

Prior to our initial public offering in November 2004, we had no history managing a portfolio of mortgage-backed securities. Our failure to properly manage our loan portfolio could harm our results of operations or financial condition.

The leverage in our REIT portfolio may adversely affect the return on our planned investments.

We leverage our REIT portfolio through borrowings, generally through the use of revolving warehouse and repurchase credit facilities, and on-balance sheet securitizations, including the issuance of collateralized mortgage-backed debt securities. The amount of leverage we incur will vary depending on our ability to securitize loans in our REIT portfolio to obtain credit facilities and our lenders’ estimates of the value of our REIT portfolio’s cash flow. We may not be able to meet our debt service obligations and, to the extent that we cannot, we risk the loss of some or all of our assets to foreclosure or sale to satisfy our debt obligations. We have a target overall leverage amount of 12 to 15 times our stockholders’ equity, but there is no limitation on our leverage ratio or on the aggregate amount of our borrowings.

If we are unable to maintain our targeted leverage on our equity the returns on our REIT portfolio could be diminished, which may limit our earnings.

We intend to maintain our leverage on our stockholders’ equity 12 to 15 times through the use of on-balance sheet securitizations. At December 31, 2005, our portfolio leverage was approximately 15 times. A key element of our strategy is our intention to use leverage to increase the size of our portfolio in an attempt to enhance our returns. If our leverage decreases due to prepayment of loans in our portfolio or an increase in our equity without a commensurate increase in the size of our portfolio, the returns on our REIT portfolio may be harmed.

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

We are required under agreements governing our securitization transactions and whole loan sales to repurchase or replace mortgage loans that do not conform to representations and warranties we make at the time of sale. In addition, we may be obligated, in certain whole loan sales, to buy back mortgage loans if the borrower defaults on the first few payments of principal and interest due after the loan is sold. Our repurchase obligations could hurt our earnings and have a material adverse effect on our financial position because we would likely take a loss on any repurchased loans.

We make a significant amount of our mortgage loans in California, Florida, New York and Texas, and our operations could be hurt by economic downturns or natural disasters in these states.

Like many of our competitors, our production is concentrated in certain states, namely California, Florida, Texas and New York, where we believe conditions in the mortgage markets are most favorable. During the year ended December 31, 2005, we originated 23.6%, 24.0%, 7.3%, and 7.9% of our mortgage loans in California, Florida, New York and Texas, respectively, for a total of 62.8%. At December 31, 2005, 22.2%, 23.1%, 7.0%, and 8.3% of our servicing portfolio consisted of mortgage loans secured by real estate in California, Florida, New York and Texas, respectively, for a total of 60.6%. Declines in the economy generally or residential real estate markets in any of these states may reduce the demand for mortgage loans, reduce the values of the properties collateralizing our mortgages, increase the frequency of delinquency, foreclosure or bankruptcy and increase losses in the event of foreclosure, any of which would hurt our earnings.

The occurrence of a natural disaster may cause a sudden decrease in the value of real estate in any of these states and would likely reduce the value of the properties collateralizing the mortgage loans we made. Historically, California has been vulnerable to earthquakes, erosion-caused mudslides and wildfires, and Florida and Texas have been vulnerable to tropical storms, hurricanes and tornadoes. Recently parts of Texas, Louisiana, Mississippi and Alabama have been damaged by Hurricane Katrina and Hurricane Rita. We do not know for certain how many properties securing our mortgage loans in those states have been damaged by these hurricanes and continue to investigate the status of impacted properties. At December 31, 2005, 0.4%, 0.2%, and 0.0% of our servicing portfolio consisted of mortgage loans secured by real estate in Louisiana, Mississippi and Alabama, respectively, for a total of 0.6%. Since such natural disasters are not typically covered by the standard hazard insurance policies maintained by borrowers, the borrowers have to pay for repairs due to such disasters. Uninsured borrowers may not repair the property or may stop paying their mortgage loans if the property is damaged. This would cause the number of foreclosures to increase and decrease our ability to recover losses on properties affected by the disasters.

Our business is subject to extensive federal and state regulation which may limit our ability to operate and could decrease our earnings.

Our operations are subject to extensive rules and regulations by federal, state and local governmental authorities. Federal and numerous state and local laws, rules and regulations have been adopted in recent years, or are under consideration, that are intended to eliminate certain lending practices, often referred to as “predatory” lending practices, that are considered to be abusive. These laws, rules and regulations impose certain limitations on points and fees charged by the lender, on the annual percentage rate, or APR, of the loan, or on prepayment fees, and may expose a lender to risks of litigation and regulatory sanction no matter how carefully a loan is underwritten. These laws, rules and regulations have increased our cost of doing business as we have been required to develop systems and procedures to comply with these requirements. Our policy is to avoid originating loans that meet or exceed the APR or “points and fees” thresholds of these laws, rules and regulations, which reduces our fee income and origination volume, all of which could harm our results of operations, financial condition and business prospects. Many of these laws, rules and regulations also seek to impose liability for violations on purchasers of loans,

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regardless of whether a purchaser knew of or participated in the violation. Accordingly, the companies that buy our loans or provide financing for our loan originations generally will not purchase or finance any loans subject to these types of laws, rules and regulations. This precludes us from continuing to originate loans that exceed the state and local limitations or thresholds and have impacted our ability to originate loans in states with limitations and thresholds. Moreover, some of our competitors who are, or are owned by, national banks or federally chartered thrifts may not be subject to these laws and may, therefore, be able to capture market share from us and other lenders.

We service loans on a nationwide basis. Therefore, we must comply with the federal, state and local laws and regulations, as well as judicial and administrative decisions, pertaining to loan servicing. As our servicing operations continue to grow, it may be more difficult to effectively train our personnel with respect to all of these laws and regulations, thereby potentially increasing our exposure to the risks of noncompliance with the laws and regulations pertaining to loan servicing.

Recently, the federal government created the national “Do Not Call Registry” which prohibits companies from telemarketing to those individuals who signed the registry. A significant part of our retail marketing consists of telemarketing, and the registry has reduced our ability to telemarket to retail customers which could reduce our retail loan production. In addition, a number of states have enacted similar laws restricting telemarketing sales which could further reduce our retail production.

Our failure to comply with the laws, rules and regulations discussed above can lead to liabilities and other burdens on us, including, but not limited to, criminal liability (including the trebling of fines or damages under some laws in certain circumstances), civil liability (including class action lawsuits) administrative enforcement actions, an inability to sell or securitize mortgage loans, an inability to renew our current warehouse financing facilities or secure alternate or additional warehouse facilities, the loss of state licenses or permits required for continued lending and servicing operations and legal defenses that adversely affect our ability to enforce loans, or give the borrower the right to rescind or cancel the loan transaction. Accordingly, if we are found to have failed to comply with these laws, rules and regulations, we could be subject to fines or damages that could materially adversely affect our business, financial condition and results of operations.

We are the subject of current putative class action litigation and investigations by governmental agencies, which could adversely affect our business and attract class action litigation against us.

In July 2005, we were served with a putative class action complaint entitled Webb v. Aames Investment Corporation, et. al. brought in the United States District Court, Central District of California. In December 2005, we were served with a putative class action complaint entitled Cooper v. Aames Investment Corporation, et. al. brought in the United States District Court, Eastern District of Wisconsin. These complaints allege violations of the Fair Credit Reporting Act (“FCRA”) in connection with prescreened offers of credit, which we made to plaintiffs. Webb also alleges that our direct mail pieces failed to comply with the requirements of FCRA that the required notice be clear and conspicuous. The plaintiffs seek to recover on behalf of themselves and others similarly situated compensatory and punitive damages and attorneys’ fees. We filed a motion to dismiss the clear and conspicuous claims in connection with Webb and while we believe that a motion with leave to amend will be granted, an order has not yet been entered. We also filed a motion to transfer Cooper to the Central District of California where Webb is pending. There have been no rulings on the merits of the plaintiffs’ claims or the claims of the putative class in either matter, and no class has been certified. We intend to vigorously defend these matters but if a class is certified and prevails on the merits, the potential liability could have a material adverse affect on our business. The outcome of these cases and the amount of liability, if any, cannot be determined at this time.

On September 7, 2004, we received a Civil Investigative Demand and Notice to Proceed from the Office of the Attorney General of Iowa, that, although not alleging any wrongdoing, sought documents and data relating to our business and lending practices in Iowa. We have cooperated and intend to continue to

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cooperate fully with the Office of the Attorney General of Iowa in this investigation. Because the investigation is at an early stage, we cannot predict the outcome of the investigation and its effect, if any on our business in Iowa, which approximated 0.02% of total mortgage loan production during the year ended December 31, 2005.

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

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

Our failure to comply with the laws, rules and regulations governing mortgage lending can lead to liabilities and other burdens on us, including, but not limited to, civil and criminal liability (including the trebling of fines or damages under some laws in certain circumstances), administrative enforcement actions, an inability to renew our current warehouse financing facilities or secure alternate or additional warehouse facilities, or the loss of state licenses or permits required for continued lending and servicing operations. Regulatory fines and damage awards levied against other subprime lenders in several recent highly publicized cases have been significant and in certain circumstances severe. Accordingly, if we are found to have failed to comply with these laws, rules and regulations, we could be subject to fines or damages that could materially adversely affect our business, financial condition and results of operations.

We may be subject to fines or other penalties based upon the conduct of our independent brokers.

The mortgage brokers from whom we obtain loans are subject to parallel and separate legal obligations. While these laws may not explicitly hold the originating lenders responsible for the legal violations of mortgage brokers, increasingly federal and state agencies have sought to impose liability on parties that take assignments of such loans. Recently, for example, the FTC entered into a settlement agreement with a mortgage lender where the FTC characterized a broker that had placed all of its loan production with a single lender as the “agent” of the lender. The FTC imposed a fine on the lender in part because, as “principal,” the lender was legally responsible for the mortgage broker’s unfair and deceptive acts and practices. The United States Department of Justice in the past has sought to hold a subprime mortgage lender responsible for the pricing practices of its mortgage brokers, alleging that the mortgage lender was directly responsible for the total fees and charges paid by the borrower under the Fair Housing Act even if the lender neither dictated what the mortgage broker could charge nor kept the money for its own account. Accordingly, although we have not incurred any such fines or penalties, we may be subject to fines or other penalties based upon the conduct of our independent mortgage brokers.

Our interest-only loans may have a higher risk of default than our fully-amortizing loans.

During the year ended December 31, 2005, originations of interest-only loans totaled $0.8 billion, or 11.3%, of total originations. These interest-only loans generally require the borrowers to make monthly payments only of accrued interest for the first 60 months following origination. After such interest-only period, the borrower’s monthly payment is recalculated to cover both interest and principal so that the

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mortgage loan will amortize fully prior to its final payment date. When the monthly payment increases, the related borrower may not be able to pay the increased amount and may default or may refinance the related mortgage loan to avoid the higher payment. Because no principal payments may be made on such mortgage loans for an extended period following origination, if the borrower defaults, the unpaid principal balance of the related mortgage loan will be greater than had the loans had an amortizing feature.

We may change our investment strategy without your consent, which may result in our investing in riskier investments than our currently planned investments.

We may change our investment strategy at any time without the consent of our stockholders, which could result in our making investments that are different from, and possibly riskier than, the investments described in this prospectus. A change in our investment strategy may increase our exposure to, among other things, credit risk, interest rate risk and real estate market fluctuations.

An interruption in service or breach in security of our information systems could impair our ability to originate loans on a timely basis and may result in lost business.

We rely heavily upon communications and information systems to conduct our business. Any failure or interruption in service or breach in security of our information systems or the third-party information systems on which we rely could cause underwriting or other delays and could result in fewer loan applications being received and processed and reduced efficiency in loan servicing. Any such failure, interruption or compromise of our systems or security measures could affect our flow of business and harm our reputation. We cannot assure you that no material failures or interruptions will occur or, if they do occur, that we or the third parties on whom we rely will adequately address them. The occurrence of any failures or interruptions could significantly harm our business.

Failure to maintain our Investment Company Act exemption may harm our operations and our market price.

We are not currently regulated as an investment company under the Investment Company Act of 1940, as amended, or the Investment Company Act, and we intend to operate so as to not become regulated as an investment company under the Investment Company Act. We believe that there are a number of exemptions under the Investment Company Act that may be applicable to us. To maintain our exemption, the assets that we may acquire will be limited by the provisions of the Investment Company Act and the rules and regulations promulgated under the Investment Company Act. In addition, we could, among other things, be required either to change the manner in which we conduct our operations to avoid being required to register as an investment company or to register as an investment company, either of which could have an adverse effect on our operations and the market price of our common stock.

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Our charter permits our board of directors to increase the authorized shares and to issue additional stock with terms that may discourage a third party from acquiring us in a transaction that might otherwise have involved a premium over the then-prevailing price of our stock.

Our charter authorizes us to issue additional authorized but unissued shares of common stock or preferred stock and our board, without any action by our stockholders, may amend our charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class we have the authority to issue. In addition, our board of directors may classify or reclassify any unissued shares of common stock or preferred stock and may set the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications, or terms or conditions of redemption as determined by our board. Thus, our board could authorize the issuance of common stock or preferred stock with terms and conditions that could have the effect of discouraging a takeover or other transaction in which holders of some or a majority of our shares might receive a premium for their shares over the then-prevailing market price of our shares.

Provisions of our charter and bylaws may limit the ability of a third party to acquire control of our company in a transaction that might otherwise have involved a premium over the then-prevailing price of our stock.

Our charter permits the removal of a director only upon cause and the affirmative vote of a majority of the votes entitled to be cast generally in the election of directors and provides that vacancies may be filled only by a majority of the remaining directors, even if the remaining directors do not constitute a quorum. Our bylaws require advance notice of a stockholder’s intention to nominate directors or present business for consideration by stockholders at an annual meeting of our stockholders. Our charter and bylaws also contain other provisions that may delay, defer, or prevent a transaction or change in control that involves a premium price for our common stock or that for other reasons may be desired by our stockholders.

Risks Related to Our Organization and Structure

Our charter contains ownership limits and restrictions on transferability of our stock, which may inhibit potential acquisition bids and limit the market price of our stock.

For a company to maintain its status as a REIT, not more than 50% of the value of its outstanding shares, including any outstanding preferred shares, after taking into account options to acquire shares, may be owned, actually or constructively, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities), and the shares must be beneficially owned by 100 or more persons (which generally refers to entities as well as individuals) during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year, other than the first year such company elects to qualify as a REIT. As we elected to qualify as a REIT for the six months ended December 31, 2004 and the year ended December 31, 2005, our charter contains restrictions designed to assist us in satisfying those REIT-related requirements and generally prohibits, subject to specific waivers or exceptions approved by our board of directors, any person from actually or constructively owning more than 9.8% (in value or number, whichever is more restrictive) of our outstanding common stock or more than 9.8% of the value of the aggregate of our outstanding stock. Based on certain representations and covenants we received from Specialty Finance Partners and Hotchkis & Wiley Capital Management, our board of directors waived the ownership limits for Specialty Finance Partners and Hotchkis & Wiley Capital Management and their direct and indirect owners.

With respect to Specialty Finance Partners, the ownership limit is waived solely with respect to (a) stock received by Specialty Finance Partners in the REIT reorganization and (b) stock held or beneficially owned by Specialty Finance Partners thereafter as a result of (i) the exercise of its rights pursuant to an award of options, restricted stock or restricted stock units granted by the Board of

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Directors, or a committee thereof, to certain of our directors affiliated with Specialty Finance Partners under any incentive stock or option plan approved by the Board of Directors or our stockholders or (ii) receipt of stock or options to acquire stock pursuant to such an incentive plan. However, when an individual or entity acquires or owns our stock both indirectly through a direct or indirect ownership interest in Specialty Finance Partners and also by another means (e.g., through a direct investment in our stock), then the individual’s or entity’s ownership of our stock will be subject to the 9.8% ownership limits in the charter, which would also take into account the amount of our common stock held by Specialty Finance Partners attributed to the individual or entity.

Our charter prohibits certain entities from owning our shares which might reduce the demand for our shares by limiting the potential purchasers of our shares.

Although the law on the matter is unclear, if a REIT owns an interest in a taxable mortgage pool and certain types of entities are stockholders of the REIT, a tax might be imposed on the REIT. As we elected to qualify as a REIT for the six months ended December 31, 2004 and for the year ended December 31, 2005 in order to ensure we were not subject to that tax in the event it could have been imposed, our charter prohibits our shares from being held directly by those entities, which include: the United States, any State or political subdivision thereof, any foreign government, any international organization, any agency or instrumentality of any of the foregoing, any other tax-exempt organization, other than a farmer’s cooperative described in section 521 of the Internal Revenue Code, that is both exempt from income taxation and exempt from taxation under the unrelated business taxable income provisions of the Internal Revenue Code, and any rural electrical or telephone cooperative.

Tax Risks

If we fail to remain qualified as a REIT, our distributions will not be deductible by us, and our income will be subject to taxation, reducing our earnings available for distributions.

We elected to qualify as a REIT for U.S. federal income tax purposes when we filed our December 31, 2004 federal income tax return. The requirements for this qualification, however, are highly technical and complex and even a technical or inadvertent mistake could jeopardize our REIT status. If we fail to meet these requirements, our distributions will not be deductible to us, and we will have to pay a corporate level tax on our income. This would substantially reduce our earnings, our cash available to pay distributions and your yield on your investment in our shares. In addition, such a tax liability might cause us to borrow funds, liquidate some of our investments or take other steps which could negatively affect our operating results. Moreover, if our REIT status is terminated because of our failure to meet a technical REIT requirement or if we voluntarily revoke our election, we would generally be disqualified from electing treatment as a REIT for the four taxable years following the year in which REIT status is lost. As a result, the amount of funds available for distribution to our stockholders would be reduced for the year or years involved.

We may be unable to comply with the strict income distribution requirements applicable to REITs, or compliance with such requirements could adversely affect our financial condition.

To obtain the favorable treatment associated with qualifying as a REIT, we must distribute to our stockholders with respect to each year at least 90% of our net taxable income excluding capital gains. In addition, we are subject to a tax on the undistributed portion of our income at regular corporate rates and also may be subject to a non-deductible 4% excise tax on the amount by which certain distributions considered as paid by us with respect to any calendar year are less than the sum of: (1) 85% of our ordinary income for the calendar year, (2) 95% of our capital gains net income for the calendar year, other than capital gains we elect to retain and pay tax on, and (3) 100% of undistributed taxable income from prior periods. We could be required to borrow funds on a short-term basis to meet the distribution requirements

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that are necessary to achieve the tax benefits associated with qualifying as a REIT, even if conditions are not favorable for borrowing.

To comply with the REIT income and asset tests, we may have to acquire qualifying real estate assets that are not part of our overall business strategy and that might not be the best alternative.

As a REIT, 75% of the value of our total assets must consist of specified real estate related assets and certain other specified types of investments, and 75% of our gross income must be earned from specified real estate related sources and certain other specified types of income. If the value of the real estate securing each of our loans, determined at the date the loans are acquired (and possibly certain other times), is less than the highest outstanding balance of the loan for a particular taxable year, then a portion of that loan will not be a qualifying real estate asset and a portion of the interest income will not be qualifying real estate income. Accordingly, to determine which of our loans constitute qualifying assets for purposes of the REIT asset tests and the extent to which the interest earned on our loans constitute qualifying income for purposes of the REIT income tests, we must determine the value of the real estate at the time we acquire each loan and possibly certain other times. There can be no assurance that the IRS will not disagree with our determinations and assert that a lower value is applicable, which could negatively impact our ability to qualify as a REIT. These considerations also might restrict the types of loans that we can make in the future. In addition, we may have to acquire other assets that qualify as real estate (for example, interests in other mortgage loan portfolios or mortgage-backed securities) that are not part of our overall business strategy and might not otherwise be the best investment alternative for us.

The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of securitizing loans, that would be treated as sales for U.S. federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held primarily for sale to customers in the ordinary course of business. We might be subject to this tax if we were to sell or securitize loans in a manner that was treated as a sale of the loans for federal income tax purposes. Therefore, in order to avoid the 100% prohibited transactions tax, we may choose not to engage in certain sales of loans and not to securitize loans in a manner that would be treated as a sale of the loans for federal income tax purposes (except for sales of loans made by our taxable REIT subsidiary), even though such sales or securitization transactions might otherwise be beneficial for us.

The REIT qualification rules impose limitations on the types of investments and activities that we may undertake which may preclude us from pursuing the most economically beneficial investment alternatives.

In order to qualify as a REIT, we must satisfy certain income and asset tests, which require that a certain specified percentage of our income and assets be comprised of certain types of income and assets. Satisfying these requirements might limit our ability to undertake investments and activities that would otherwise be beneficial to us. For example, from time to time, we enter into hedging transactions with respect to one or more of our assets or liabilities. Our hedging activities may include entering into interest rate swaps, caps, and floors, options to purchase these items, and futures and forward contracts. To the extent that we enter into an interest rate swap or cap contract, option, futures contract, forward rate agreement, or any similar financial instrument to hedge our indebtedness incurred or to be incurred to acquire mortgage loans, any periodic income or gain from the disposition of that contract attributable to the carrying or acquisition of the real estate assets should be disregarded—that is, treated as neither qualifying nor non-qualifying income—for purposes of the 95% gross income test, but should not be treated as qualifying income for purposes of the 75% gross income test. To the extent that we hedge with other types of financial instruments or for other purposes, or to the extent that a portion of our mortgage loans is not secured by real estate assets or in other situations, the income from those transactions is not

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likely to be treated as qualifying income for purposes of either of the gross income tests. Although we intend to structure any hedging transactions in a manner that does not jeopardize our status as a REIT, we may choose not to engage in certain hedging transactions of the type we have undertaken in the past (except through our taxable REIT subsidiaries), even though such transactions might otherwise be beneficial for us.

The “taxable mortgage pool” rules may limit the manner in which we effect future securitizations and limit our returns on these transactions, making them less profitable.

There is a significant likelihood that our future securitizations would be considered to result in the creation of taxable mortgage pools. As a REIT, so long as we own 100% of the equity interests in the taxable mortgage pool, we would not be adversely affected by the characterization of our securitizations as taxable mortgage pools (assuming that we do not have any stockholders who might cause a corporate income tax to be imposed upon us by reason of our owning a taxable mortgage pool). We would be precluded, however, from selling to outside investors equity interests in our securitizations, as we have done in the past, or from selling any debt securities issued in connection with the securitization that might be considered to be equity interests for tax purposes. These limitations will preclude us from engaging in the types of sales that we have used with respect to our prior securitizations to maximize our returns from securitization transactions.

We may be required to allocate “excess inclusion income” to our stockholders, which could result in adverse tax consequences for our stockholders.

Our future securitization transactions likely will result in the creation of taxable mortgage pools, with the result that a portion of our income from that arrangement could be treated as “excess inclusion income.” Excess inclusion income is an amount, with respect to any calendar quarter, equal to the excess, if any, of (a) income allocable to the holder of a residual interest in a REMIC or, under Treasury regulations that have not been issued, an equity interest in a taxable mortgage pool over (b) the sum of an amount for each day in the calendar quarter equal to the product of (i) the adjusted issue price of such interests at the beginning of the quarter multiplied by (ii) 120% of the long-term Federal rate (determined on the basis of compounding at the close of each calendar quarter and properly adjusted for the length of such quarter). Excess inclusion income would be allocated among our stockholders. A stockholder’s share of excess inclusion income (i) would not be allowed to be offset by any net operating losses otherwise available to the stockholder, (ii) would be subject to tax as unrelated business taxable income in the hands of most types of stockholders that are otherwise generally exempt from federal income tax, and (iii) would result in the application of U.S. federal income tax withholding at the maximum rate (30%), without reduction for any otherwise applicable income tax treaty, to the extent allocable to most types of foreign stockholders.

Item 8.Financial Statements and Supplementary Data

The following financial statements are attached to this report:

·Report of Independent Registered Public Accounting Firm

·Consolidated Balance Sheets as of December 31, 2005 and 2004

·Consolidated Statements of Operations for the Years Ended December 31, 2005 and 2004 (Unaudited), Six Months Ended December 31, 2004, and Years Ended June 30, 2004 and 2003

·Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2005 and 2004 (Unaudited), Six Months Ended December 31, 2004, and Years Ended June 30, 2004 and 2003

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·Consolidated Statements of Cash Flows for the Years Ended December 31, 2005 and 2004 (Unaudited), Six Months Ended December 31, 2004, and Years Ended June 30, 2004 and 2003

·Notes to Consolidated Financial Statements

Item 9.Changes In and Disagreements With Registered Public Accounting Firm on Accounting and Financial Disclosure

None.

Item 9A.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Management’s Report on Internal Control Over Financial Reporting

The management of Aames Investment is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, Aames Investment conducted an evaluation of the effectiveness of internal control over financial reporting as of December 31, 2005 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that evaluation, Aames Investment’s management concluded that its internal control over financial reporting was effective as of December 31, 2005.

Aames Investment’s independent registered public accounting firm, Ernst & Young LLP, has issued an audit report on management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005, which is included herein.

Changes in Internal Control Over Financial Reporting

No change in Aames Investment’s internal control over financial reporting occurred during the fourth quarter of the year ended December 31, 2005, that has materially affected, or is reasonably likely to affect, Aames Investment’s control over financial reporting.

Item 9B.Other Information

None.

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Stockholders
Aames Investment Corporation

We have audited management’s assessment, included in the accompanying management’s report on Internal Control Over Financial Reporting, that Aames Investment Corporation (the Company) maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Aames Investment Corporation’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that Aames Investment Corporation maintained effective internal control over financial reporting as of December 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Aames Investment Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2005, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Aames Investment Corporation as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year ended December 31, 2005, the six month period ended December 31, 2004 and for each of the two years in the period ended June 30, 2004, and our report dated March 14, 2006 expressed an unqualified opinion thereon.

/s/ ERNST & YOUNG LLP

Los Angeles, California
March 14, 2006

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PART III

Item 10.Directors and Executive Officers of Registrant

Certain Information Concerning Our Directors

The following table presents certain biographical information about our directors as of March 24, 2006.

Name	Age		Position
Jenne K. Britell, Ph.D.		63	Lead Independent Director
David H. Elliott		64	Director
John F. Farrell, Jr.		68	Director
A. Jay Meyerson		59	Chairman of the Board and Chief Executive Officer
Mani A. Sadeghi		42	Director
Robert A. Spass		50	Director
Stephen E. Wall		63	Director

Each of our directors is serving for a one-year term which expires at the next annual meeting of our stockholders and holds office until his successor is duly elected and qualified or until his earlier death, resignation, disqualification or removal. Set forth below is a brief description of the business experience of each of our directors.

JENNE K. BRITELL, Ph.D. has served as a director since October 2004 and served as a director of Aames Financial from June 2001 until our corporate reorganization in November 2004. Dr. Britell has also served as Chairman and Chief Executive Officer of Structured Ventures, Inc., advisors to private equity and venture capital firms, since February 2001. From January 2003 to July 2004, she also served as the Senior Advisor for Financial Services to eBay and PayPal. From August 1996 to March 2000, Dr. Britell held several senior positions at GE Capital, the financial services group of General Electric, including serving as: President, Global Commercial and Mortgage Banking and Executive Vice President, Global Consumer Finance from July 1999 to March 2000; President and Chief Executive Officer, Central and Eastern Europe from January 1998 to July 1999; and President and Chief Executive Officer, GE Mortgage Services from August 1996 to January 1998. Dr. Britell serves as a director of each of Crown Holdings, Inc., where she also serves as the Chair of the Audit Committee, Quest Diagnostics Incorporated, where she also serves as a member of the Audit and Finance Committee, Lincoln National Corporation, where she also serves as a member of the Audit Committee and the Corporate Governance Committee, and West Pharmaceutical Services, Inc. She received a bachelor’s degree, with honors, and a master’s degree from Harvard University and a master’s degree in Business Administration and Ph.D. from Columbia University.

DAVID H. ELLIOTT has served as a director since October 2004 and served as a director of Aames Financial from December 1999 until our corporate reorganization in November 2004. Mr. Elliott served as Chairman of the Board of Directors of MBIA Inc. from 1994 until his retirement in 1999 and as Chief Executive Officer of MBIA Inc. and MBIA Insurance Corporation from 1992 until his retirement in 1999. Mr. Elliott received a bachelor’s degree from Yale University and a J.D. degree from Boston University Law School. He also served in the United States Army, including a tour in Vietnam.

JOHN F. FARRELL, JR. has served as a director since October 2004. Mr. Farrell has also served as a director of Fidelity National Financial, Inc. since 2000 and as Chair of its Audit Committee since 2003, and as a director and Chair of the Audit Committee of Fidelity National Title Group, Inc. since 2005. He was Chairman of the Board and Chief Executive Officer of North American Mortgage Company, a public mortgage-banking company, from 1985 to 1997, and was Chairman of Integrated Acquisition Corporation, a private equity firm, from 1984 through 1989. From 1972 to 1981, Mr. Farrell was a partner at Oppenheimer & Co., an investment banking firm, where he focused on private equity investments.

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Mr. Farrell has served as a member of the Boston College Audit and Finance Committee since 1994 and served as a trustee to Boston College from 1992 to 2000. Mr. Farrell received B.S. and M.S. degrees in Engineering and J.D. and LL.M. degrees from New York University. Mr. Farrell is a member of the New York Bar.

A. JAY MEYERSON has served as our Chairman of the Board since October 2004 and as our Chief Executive Officer since our inception in February 2004, and has served as the Chief Executive Officer and President of Aames Financial since October 1999. Mr. Meyerson also served as a director of Aames Financial from November 1999 until our corporate reorganization in November 2004. From January 1997 to October 1999, Mr. Meyerson was a managing director with KPMG, LLP’s national financial services consulting practice. From 1994 to 1997 Mr. Meyerson served as the Chief Executive Officer and Chairman of the Board of KeyBank USA, the national consumer finance business subsidiary of KeyCorp. Prior to his employment with KeyCorp, Mr. Meyerson held executive level management positions with Society Bank and Ameritrust Bank from 1987 to 1994 and, prior to that, senior management level positions with Wells Fargo Bank from 1975 until 1987. Mr. Meyerson received a bachelor’s degree in Management from Pepperdine University.

MANI A. SADEGHI has served as a director since October 2004 and served as a director of Aames Financial from February 1999 until our corporate reorganization in November 2004, serving as its Chairman of the Board from December 2000 until such reorganization. Mr. Sadeghi also served as interim Chief Executive Officer of Aames Financial from May 1999 until October 1999. He has acted as the Chief Executive Officer of Equifin Capital Management LLC, an investment management company affiliated with Capital Z Management, LLC, since founding the company in 1998, and has been a Managing Partner of Equifin Capital Management II, LLC, an investment management company, since its formation in 2005. Additionally, Mr. Sadeghi was a Partner and Vice President of Capital Z Management from July 2001 until November 2004. Prior to 1998, Mr. Sadeghi served in various executive positions at AT&T Capital Corporation, culminating in his role as Group President. Mr. Sadeghi also serves as Chairman of the Board of NewStar Financial, Inc. Mr. Sadeghi received bachelor’s and master’s degrees from Stanford University and a master of business administration, with distinction, from University of Pennsylvania’s Wharton School of Business.

ROBERT A. SPASShas served as a director since October 2004 and served as a director of Aames Financial from July 2000 until our corporate reorganization in November 2004. Mr. Spass has also served as the Chairmanof the Board and a Partner of Capital Z Management since July 1998. Prior to co-founding Capital Z Management in 1998, Mr. Spass was the President and Chief Executive Officer of International Insurance Advisors, Inc., the management company of International Insurance Investors, L.P. Mr. Spass serves as a director of each of Universal American Financial Corp., where he also serves as a member of the Executive Committee and the Nominating and Governance Committee, Ceres Group, Inc., where he also serves as a member of the Executive Committee and the Nominating and Governance Committee, USI Holdings Corporation, where he also serves as a member of the Compensation Committee, Endurance Specialty Insurance Ltd., where he also serves as a member of the Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee, and Lancashire Holdings Limited, where he also serves as Chairman of the Board, Chair of the Audit Committee and Chair of the Nominating and Governance Committee. Mr. Spass received a B.A. degree in Business from the State University of New York at Buffalo.

STEPHEN E. WALL has served as a director since October 2004 and served as a director of Aames Financial from February 2001 until our corporate reorganization in November 2004. Mr. Wall served in various capacities with KeyCorp and its predecessors from August 1970 until his retirement in January 1999; at the time of his retirement, Mr. Wall was Executive Vice President of KeyCorp and the Chairman of the Board, President and Chief Executive Officer of Key Bank National Association. Mr. Wall received a B.A. degree in Political Science from California State University, Long Beach.

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No arrangement or understanding exists between any director and any other person or persons pursuant to which any director was or is to be selected as a director or nominee, except for Messrs. Sadeghi and Spass. Messrs. Sadeghi and Spass were each appointed to our Board under the terms of the Registration Rights and Governance Agreement dated November 1, 2004 among us, our largest stockholder—Specialty Finance Partners—and one of its affiliates—Capital Z Management, LLC. Under the terms of the agreement, for so long as they collectively own at least 12.5% of our outstanding shares, Specialty Finance Partners and Capital Z Management have the right to designate two nominees to our Board, and if Specialty Finance Partners and Capital Z Management collectively own less than 12.5%, but at least 5%, of our outstanding shares, they will have the right to designate one such nominee. The agreement also requires us to support the nomination of each such individual for election to our Board and to use our best efforts to cause him to be so elected.

The directors do not have any family relationship among themselves or with any of our executive officers.

Certain Information Concerning Our Audit Committee

Our Board has established a standing audit committee in accordance with section 3(a)(58)(A) of the Exchange Act. The current members of our Audit Committee are David H. Elliott, John F. Farrell, Jr. and Stephen E. Wall. Our Board has determined that each member of our Audit Committee is independent within the meaning of the applicable New York Stock Exchange listing standards and meets the other requirements for audit committee membership set forth therein.In addition, our Board has determined that all of the members of our Audit Committee are “audit committee financial experts” within the meaning of Item 401(h) of Regulation S-K.

Certain Information Concerning Our Executive Officers

The following table presents certain biographical information about our executive officers as of March 10, 2006.

Name	Age		Position
Mark A. Bragg		43	Senior Vice President and Director of National Loan Servicing
H. James Fullen		53	Executive Vice President and Chief Operations Officer for Retail and Wholesale
John P. Kim		44	Executive Vice President—Capital Markets and Chief Investment Officer
Barry M. Levine		44	Executive Vice President and Chief Credit/Risk Officer
John F. Madden, Jr.		45	Executive Vice President, General Counsel and Secretary
Michael J. Matthews		46	Executive Vice President and Chief Production Officer
A. Jay Meyerson		59	Chairman of the Board and Chief Executive Officer
Jon D. Van Deuren		53	Executive Vice President and Chief Financial Officer

Our executive officers are elected by, and serve at the discretion of, our Board of Directors. Set forth below is a brief description of the business experience of all executive officers other than A. Jay Meyerson, who is also a director and whose business experience is described under “—Certain Information Concerning Our Directors.”

MARK A. BRAGG has served as a Senior Vice President and the Director of National Loan Servicing of Aames Investment since December 2004 and as a Senior Vice President and the Director of National Loan Servicing of Aames Financial since July 2004. Prior to that, Mr. Bragg served as the Senior Vice

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President—Default Alternatives of Aames Financial from October 1996 until July 2004. Mr. Bragg holds a B.A. degree in Marketing from the University of Utah.

H. JAMES FULLEN has served as an Executive Vice President and the Chief Operations Officer for Retail and Wholesale of Aames Investment since January 2006. Prior to that, Mr. Fullen served as the Senior Vice President—Retail Credit Operationsof both Aames Investment and Aames Financial from November 2002 until January 2006. Prior to joining Aames Financial, Mr. Fullen was the President of Fullen & Company, a privately-held home builder, from 2001 until 2002. Prior to that, he held various management positions at Associates First Capital Corporation (now part of Citigroup Inc.) from 1994 until 2000, most recently serving as the Chief Executive Officer of Associates Capital Bank and the President of Home Equity Loan Offices from 1997 until 2000, where he was responsible for the re-engineering of over 200 offices from full service branches to real estate offices.

JOHN P. KIM has served as the Executive Vice President—Capital Markets of Aames Investment since November 2004 and as the Chief Investment Officer of Aames Investment since May 2005. He has also served as the Executive Vice President—Capital Markets of Aames Financial since February 2004. Prior to that, Mr. Kim served as the Senior Vice President—Capital Markets of Aames Financial from August 2002 until February 2004. Prior to joining Aames Financial, Mr. Kim served as First Vice President, Capital Markets—Secondary Marketing Trading and Securitization of one of the nation’s largest savings and loans, IndyMac Mortgage Holdings, Inc. (now known as IndyMac Bancorp, Inc.), from November 1997 until August 2002, where he oversaw the sale and securitization of the mortgages the company originated. Prior to that, Mr. Kim served as Vice President and Senior Portfolio Manager of California Federal Bank from 1993 until 1997. Mr. Kim holds a B.A. degree in Economics from the University of California, Berkeley.

BARRY M. LEVINE has served as the Chief Credit/Risk Officer of Aames Investment since March 2005 and as an Executive Vice President of Aames Investment since October 2004. He has also served as an Executive Vice President of Aames Financial since May 2000. Prior to being promoted to Chief Credit/Risk Officer, Mr. Levine served as the Chief Information Officer of both Aames Investment and Aames Financial from October 2004 until February 2005. Prior to joining Aames Financial, Mr. Levine served as Vice President and Chief Information Officer of Residential Money Centers, a subsidiary of Residential Funding Corporation, which is part of General Motors' financial services division and is in the business of acquiring loan originated by other financial institutions and packaging such loans as mortgage-backed securities which it sells to institutional investors, from March 2000 to May 2000. From 1998 to 2000, Mr. Levine served as Vice President and Chief Information Officer of ContiFinancial Corporation, a privately-held company in the business of originating, securitizing, servicing and selling loans. From 1994 to 1998, Mr. Levine served as Vice President and Global Manager of Client Implementations and Business Reengineering at Chase Manhattan Bank. Mr. Levine holds a B.S. degree, magna cum laude, in Business Administration from State University of New York at Albany and an M.B.A. in Finance from New York University.

JOHN F. MADDEN, JR. has served as an Executive Vice President, the General Counsel and the Secretary of Aames Investment since our inception in February 2004. Mr. Madden has also served as an Executive Vice President of Aames Financial since his promotion in July 2002 from Senior Vice President (a position he held since October 1999), and as the General Counsel and the Secretary of Aames Financial since October 1999. Prior to that, he served as an Assistant General Counsel and an Associate General Counsel of Aames Financial from 1995 until October 1999. Mr. Madden holds a B.A. degree, magna cum laude, in Political Science from Carleton College and a J.D. degree from the University of Chicago Law School. Mr. Madden is a member of the California Bar.

MICHAEL J. MATTHEWS has served as an Executive Vice President and Chief Production Officer of Aames Investment since January 2006. Mr. Matthews served as Executive Vice President—National

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Retail Sales and Marketing of Aames Investment from October 2004 until January 2006 and as Executive Vice President—National Retail Sales and Marketing of Aames Financial from June 2002 until January 2006. Prior to joining Aames Financial, Mr. Matthews held various senior executive positions at Associates First Capital Corporation (now part of Citigroup Inc.) from 1981 until 2001, most recently serving as the Executive Vice President of Associates Home Equity Services, the largest nation-wide retail operating unit in The Associates home equity organization, from 1998 to 2000. Mr. Matthews holds a B.S. degree in Business Administration from the University of Delaware.

JON D. VAN DEUREN has served as an Executive Vice President and the Chief Financial Officer of Aames Investment since April 2005. Prior to that he served as the Senior Vice President—Finance and the Chief Accounting Officer of Aames Investment from our inception in February 2004 until April 2005, the Chief Accounting Officer of Aames Financial from August 2001 until April 2005 and the Senior Vice President—Finance of Aames Financial from December 1998 until April 2005. Prior to that, Mr. Van Deuren served as Chief Operating Officer of Burke, Williams & Sorensen, LLP. Prior to that, Mr. Van Deuren served as the Chief Financial Officer of Guardian Bancorp and before that was a partner with KPMG, LLP. Mr. Van Deuren holds a B.S. degree, with high honors, in Accounting and Business from California State University, Long Beach and is a Certified Public Accountant.

No arrangement or understanding exists between any of our executive officers and any other person or persons pursuant to which any of executive officers was selected as an officer. Our executive officers do not have any family relationship among themselves or with any of our director nominees.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act requires our executive officers and directors and persons who beneficially own more than 10% of our common stock to file reports of ownership and changes in beneficial ownership with the SEC and to furnish us with copies of all Section 16(a) forms they file. Based solely on our review of the copies of such forms furnished to us and written representations provided to us by our executive officers and directors, we believe that all Section 16(a) filing requirements were met during our fiscal year ended December 31, 2005, except that Mark A. Bragg, our Senior Vice President of Loan Servicing, did not file a Form 4 reporting his disposition of 334 shares of our common stock on June 1, 2005 until February 2, 2006.

Code of Ethics

We have adopted a code of ethics entitled “Code of Business Conduct and Ethics,” which is posted on our website. Our website is www.aames.net and the code of ethics can be found through a link to the Corporate Financials section on our website. We intend to satisfy the disclosure requirement under Section 5.05 of Form 8-K for any amendment to, or waiver from a provision of, this code by posting any such information on our website.

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Item 11. Executive Compensation

Executive Compensation

Summary of Cash and Certain Other Compensation

The following table sets forth the compensation paid by us for the fiscal year ended December 31, 2005, the six months ended December 31, 2004 and the fiscal years ended June 30, 2004 and 2003 to our chief executive officer and our four most highly compensated executive officers (other than our chief executive officer) who served in such capacity at the end of our last fiscal year (the “named executive officers”).

										Long Term Compensation Awards
				Annual Compensation			Other Annual			Restricted			Securities Underlying			All Other
Name and Principal Position	Fiscal Year			Salary ($)	Bonus ($)		Compensation ($)			Stock Awards ($)			Options/ SARs (#)			Compensation ($)
A. Jay Meyerson		2005		425,000	600,000	(1)		643,249	(2)		—			—			—
Chairman of the Board and		2004	(3)	186,363	500,000			14,153	(4)		2,501,889	(5)		—			2,001,000	(6)
Chief Executive Officer		2004	(7)	350,000	837,500			63,667	(8)		—			6,900,000	(9)		—
		2003		350,000	562,000			74,507	(10)		—			—			—
John P. Kim		2005		230,481	225,000	(1)		64,801	(11)		147,300	(12)		—			6,300	(13)
Executive Vice President—		2004	(3)	100,000	90,000			—			320,420	(14)		—			290,000	(15)
Capital Markets and Chief		2004	(7)	200,000	260,000			—			—			1,000,000	(16)		6,150	(13)
Investment Officer		2003	(17)	185,416	215,000			—			—			350,000	(18)		2,500	(13)
Barry M. Levine		2005		250,000	275,000	(1)		88,153	(11)		147,300	(19)		—			6,300	(13)
Executive Vice President		2004	(3)	125,000	90,000			—			325,523	(20)		—			377,000	(21)
and Chief Credit/Risk		2004	(7)	250,000	335,000			—			—			1,300,000	(22)		6,150	(13)
Officer		2003		231,250	250,000			—			—			—			6,000	(13)
John F. Madden, Jr.		2005		238,715	225,000	(1)		98,129	(11)		147,300	(23)		—			6,300	(13)
Executive Vice President,		2004	(3)	100,000	250,000			—			325,533	(24)		—			377,000	(21)
General Counsel and		2004	(7)	200,000	268,000			—			—			1,300,000	(22)		6,150	(13)
Secretary		2003		200,000	200,000			—			—			50,000	(25)		6,000	(13)
Jon D. Van Deuren		2005		236,667	225,000	(1)		81,475	(11)		274,500	(26)		—			6,300	(13)
Executive Vice President		2004	(3)	105,000	125,000			—			147,475	(27)		—			203,000	(28)
and Chief Financial Officer		2004	(7)	210,000	250,000			—			—			700,000	(29)		6,150	(13)
		2003		210,000	150,000			—			—			—			6,000	(13)

(1)  The amount paid to executive was based on his performance for the year ended December 31, 2004 but was not determined or paid until March 2005 and, thus, is characterized as compensation for the fiscal year ended December 31, 2005.

(2)  Consists of (A) dividends in the aggregate amount of $633,777 paid on executive’s unvested shares of restricted common stock and outstanding restricted stock units (dividends in the amount of $0.06, $0.27, $0.34 and $0.35 were paid on January 31, 2005, May 9, 2005, August 8, 2005 and November 7, 2005, respectively, on each such share and unit held by executive on the respective date) and (B) a life insurance premium of $9,472 paid for executive’s benefit.

(3)  The information provided is for the six-month period ended December 31, 2004 (e.g., the salary information is for six months rather than 12 months).

(4)  Consists of housing benefits.

(5)  Represents 257,396 shares of restricted stock granted on November 5, 2004 in connection with our corporate reorganization valued at $9.72 per share (the closing price of our common stock on the NYSE on the date of grant). These shares vest in four equal installments beginning on the first anniversary of the date of grant and are entitled to receive dividends. As of the end of our last fiscal year, executive held 193,047 shares of restricted stock valued at $6.46 per share (the closing price of our common stock on the NYSE on December 30, 2005) or $1,662,778 in the aggregate.

(6)  Consists of consideration paid to redeem options to acquire 6,900,000 shares of Aames Financial’s Series E preferred stock, the proceeds of which, net of applicable taxes, were used to purchase our common stock in the initial public offering.

(7)  The information provided is for the 12-month period ended June 30, 2004.

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(8)  Consists of (A) housing benefits of $54,195 and (B) a life insurance premium of $9,472 paid for executive’s benefit.

(9)  Represents options to acquire 6,900,000 shares of Aames Financial’s Series E preferred stock.

(10)  Consists of (A) housing benefits of $65,035 and (B) a life insurance premium of $9,472 paid for executive’s benefit.

(11)  Consists of dividends paid on executive’s unvested shares of restricted common stock and outstanding restricted stock units (dividends in the amount of $0.06, $0.27, $0.34 and $0.35 were paid on January 31, 2005, May 9, 2005, August 8, 2005 and November 7, 2005, respectively, on each such share and unit held by executive on the respective date).

(12)  Represents 15,000 shares of restricted stock granted on July 18, 2005 as compensation for executive’s service as an executive officer valued at $9.82 per share (the closing price of our common stock on the NYSE on the date of grant). These shares vest in four equal installments beginning on the first anniversary of the date of grant and are entitled to receive dividends. As of the end of our last fiscal year, executive held an aggregate of 42,723 shares of restricted stock valued at $6.46 per share (the closing price of our common stock on the NYSE on December 30, 2005) or $275,991 in the aggregate.

(13)  Consists of employer contributions to Aames Financial’s Section 401(k) plan for executive’s benefit.

(14)  Represents 32,965 shares of restricted stock granted on November 5, 2004 in connection with our corporate reorganization valued at $9.72 per share (the closing price of our common stock on the NYSE on the date of grant). These shares vest in four equal installments beginning on the first anniversary of the date of grant and are entitled to receive dividends.

(15)  Consists of consideration paid to redeem options to acquire 1,000,000 shares of Aames Financial’s Series E preferred stock.

(16)  Represents options to acquire 1,000,000 shares of Aames Financial’s Series E preferred stock.

(17)  Aames Financial hired executive on July 29, 2002 and, thus, the information provided is for the period from July 29, 2002 to June 30, 2003.

(18)  Represents options to acquire 350,000 shares of Aames Financial’s common stock.

(19)  Represents 15,000 shares of restricted stock granted on July 18, 2005 as compensation for executive’s service as an executive officer valued at $9.82 per share (the closing price of our common stock on the NYSE on the date of grant). These shares vest in four equal installments beginning on the first anniversary of the date of grant and are entitled to receive dividends. As of the end of our last fiscal year, executive held an aggregate of 40,117 shares of restricted stock valued at $6.46 per share (the closing price of our common stock on the NYSE on December 30, 2005) or $259,156 in the aggregate.

(20)  Represents 33,490 shares of restricted stock granted on November 5, 2004 in connection with our corporate reorganization valued at $9.72 per share (the closing price of our common stock on the NYSE on the date of grant). These shares vest in four equal installments beginning on the first anniversary of the date of grant and are entitled to receive dividends.

(21)  Consists of consideration paid to redeem options to acquire 1,300,000 shares of Aames Financial’s Series E preferred stock, the proceeds of which, net of applicable taxes, were used to purchase our common stock in the initial public offering.

(22)  Represents options to acquire 1,300,000 shares of Aames Financial’s Series E preferred stock.

(23)  Represents 15,000 shares of restricted stock granted on July 18, 2005 as compensation for executive’s service as an executive officer valued at $9.82 per share (the closing price of our common stock on the NYSE on the date of grant). These shares vest in four equal installments beginning on the first anniversary of the date of grant and are entitled to receive dividends. As of the end of our last fiscal year, executive held an aggregate of 40,118 shares of restricted stock valued at $6.46 per share (the closing price of our common stock on the NYSE on December 30, 2005) or $259,162 in the aggregate.

(24)  Represents 33,491 shares of restricted stock granted on November 5, 2004 in connection with our corporate reorganization valued at $9.72 per share (the closing price of our common stock on the NYSE on the date of grant). These shares vest in four equal installments beginning on the first anniversary of the date of grant and are entitled to receive dividends.

(25)  Represents options to acquire 50,000 shares of Aames Financial’s common stock.

(26)  Represents (A) 15,000 shares of restricted stock granted on May 2, 2005 in connection with executive’s promotion to Chief Financial Officer valued at $8.48 per share (the closing price of our common stock on the NYSE on the date of grant) and (B) 15,000 shares of restricted stock granted on July 18, 2005 as compensation for executive’s service as an executive officer valued at $9.82 per share (the closing price of our common stock on the NYSE on the date of grant). These shares vest in four equal installments beginning on the first anniversary of the date of grant and are entitled to receive dividends. As of the end of our last fiscal year, executive held an aggregate of 43,102 shares of restricted stock valued at $6.46 per share (the closing price of our common stock on the NYSE on December 30, 2005) or $277,858 in the aggregate.

(27)  Represents 17,350 shares of restricted stock granted on November 5, 2004 in connection with our corporate reorganization valued at $9.72 per share (the closing price of our common stock on the NYSE on the date of grant). These shares vest in four equal installments beginning on the first anniversary of the date of grant and are entitled to receive dividends.

(28)  Consists of consideration paid to redeem options to acquire 700,000 shares of Aames Financial’s Series E preferred stock, the proceeds of which, net of applicable taxes, were used to purchase our common stock in the initial public offering.

(29)  Represents options to acquire 700,000 shares of Aames Financial’s Series E preferred stock.

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Option/SAR Grants In Last Fiscal Year and Aggregate Option/SAR Exercises In Last Fiscal Year and Fiscal Year-End Option/SAR Values

We have not granted any options or stock appreciation rights (i.e. SARs) to any of our executive officers, or otherwise, since our initial public offering. Thus, there were no options or stock appreciation rights exercised by the named executive officers during the fiscal year ended December 31, 2005, nor were there any unexercised options or SARs held by such officers at the end of such year.

Aggregate Unvested RSAs and Outstanding RSUs at Fiscal-Year End and Fiscal Year-End RSA/RSU Values

We currently have two types of equity-based awards outstanding—restricted stock awards and restricted stock units. Restricted stock awards are made to our executive officers as compensation for their service. They are common stock awards subject to forfeiture restrictions—the underlying shares vest annually in four equal installments from the date of grant. The awards are entitled to dividends but do not otherwise entitle the holder to the rights of a stockholder prior to vesting. Our executive officers were issued restricted stock units in connection with our corporate reorganization in exchange for certain of their options to purchase the common stock of our corporate predecessor, Aames Financial. Restricted stock units are vested and, thus, not subject to forfeiture. Each holder of those restricted stock units will receive the shares of our common stock underlying the units on a future date or dates selected by the holder at the time of grant. The units are entitled to dividends but do not otherwise entitle the holder to the rights of a stockholder prior to vesting.

The following table sets forth certain information regarding the unvested restricted stock awards and outstanding restricted stock units held by our named executive officers as of the fiscal year ended December 31, 2005.

	Restricted Stock Awards				Restricted Stock Units
Name	Number of Shares Underlying Unvested RSAs (#)		Value of Unvested RSAs ($)(1)		Number of Shares Underlying Outstanding RSUs (#)		Value of Outstanding RSUs ($)(1)
A. Jay Meyerson		193,044		1,247,064		363,954		2,351,143
John P. Kim		39,723		256,611		—		—
Barry M. Levine		40,117		259,156		25,825		166,893
John F. Madden, Jr.		40,118		259,162		52,567		339,583
Jon D. Van Deuren		42,962		277,535		38,263		247,179

(1)Stock valued at $6.46 per share (the closing price of our common stock on the NYSE on December 30, 2005).

Long-Term Incentive Plans

We did not make any long-term incentive awards to any of our executive officers, or otherwise, during the fiscal year ended December 31, 2005.

Pension Plans

We did not have any defined benefit or actuarial plan in place during the fiscal year ended December 31, 2005.

Employment Contracts, Termination of Employment and Change in Control Agreements

Employment Agreement with our Chief Executive Officer

In connection with the REIT reorganization, we and Aames Financial entered into an employment agreement with Mr. Meyerson pursuant to which he serves as a member of our Board, our chief executive officer and the chief executive officer of Aames Financial. The agreement was subsequently amended on

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July 1, 2005. The agreement has an initial term of 3 years, which began on the day our initial public offering closed and expires on November 5, 2007. After the expiration of the initial term, the agreement will automatically renew for successive one-year terms unless we, Aames Financial or Mr. Meyerson provide each other party with notice of non-renewal at least 90 days before the agreement is scheduled to so renew.

During the term of agreement, Mr. Meyerson is entitled to the following compensation while employed by Aames Financial:

·An annual base salary of at least $425,000, which will be reviewed annually by our Compensation Committee to determine whether it should be increased.

·A target performance-based bonus of at least $650,000, which will be reviewed annually by our Compensation Committee to determine whether it should be increased. The amount of the bonus actually paid to Mr. Meyerson with respect to any year will depend on our profitability and his actual performance during that year; it may be less than targeted if we are not as profitable as targeted or he does not meet his performance goals or more than targeted if we are more profitable than targeted and he meets or exceeds his performance goals.

·The annual payment of up to $25,000 in premiums on a $1,000,000 insurance policy and any other fringe benefits provided to our other senior officers, reimbursement of reasonable business expenses, indemnification against claims arising out of his employment or service as a director, and coverage under our directors and officers liability insurance policy.

Mr. Meyerson also received 257,396 shares of restricted stock which vest annually in four equal installments beginning on the first anniversary of the date our initial public offering closed. In addition, in exchange for the surrender and cancellation of his options to acquire Aames Financial’s common stock, Mr. Meyerson received 413,954 restricted stock units underlying shares of our common stock which shares will be distributed on dates he selected at the time of grant.

Mr. Meyerson’s employment agreement may be terminated by Aames Financial for “cause” or for reasons other than cause, by Mr. Meyerson for “good reason” or for reasons other than good reason, or by reason of Mr. Meyerson’s death or “permanent disability” (in each case, as defined in the employment agreement), and the reason for any such termination will determine the severance to which he is entitled. If Mr. Meyerson’s employment with Aames Financial is terminated during the term of his employment agreement, he is entitled to:

·If the termination is by Aames Financial for cause or by Mr. Meyerson for reasons other than good reason, (1) his base salary through the final date of his active employment, (2) payment for any accrued but unused vacation days, and (3) if the date of termination occurs after the end of a performance period but prior to the payment of the performance bonus for such period, the performance bonus to which he would otherwise be entitled in accordance with Aames Financial’s performance bonus plan.

·If the termination is due to Mr. Meyerson’s death or permanent disability, (1) the payments described in the immediately preceding bullet and (2) in lieu of a performance bonus for the year in which the termination occurs, a payment of $650,000 subject to a pro-rata reduction for the portion of the bonus performance period following the date of termination.

·If the termination is by Aames Financial for reasons other than cause or by Mr. Meyerson for good reason, (1) the payments described in the immediately preceding bullet, (2) continued payment of his annual base salary in effect at the time of termination for the 36 months following his termination, (3) continued payment of the annual premiums of his life insurance policy by Aames Financial for the 36 months following his termination, and (4) the immediate vesting of any

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outstanding shares of restricted stock and restricted stock units and all stock options (which will be exercisable for up to 180 days after the date of termination).

In addition, if the termination is by Mr. Meyerson for good reason or by Aames Financial for reasons other than cause, is due to Mr. Meyerson’s death or permanent disability, or occurs after the expiration of the initial term of the agreement (regardless of the reason for such termination), Aames Financial will continue to provide health and dental insurance to Mr. Meyerson until his 65th birthday and to the woman to whom he was married as of the closing date of our initial public offering until her 65th birthday, and will pay all premiums for such coverage.

Mr. Meyerson may be entitled to compensation from Aames Financial following the expiration of the employment period for assisting with the successful transition of our management. If (1) his employment is terminated following the expiration of his term of employment, (2) during his employment he devoted reasonable efforts to the implementation of a program for the succession of our leadership following his termination and, pursuant to such succession program, he made best efforts to present one or more qualified candidates to our Board for such leadership position or positions, (3) he agrees to provide reasonable consultation services to us or Aames Financial for the three years following his termination, and (4) he is not entitled to severance under his employment agreement for the reason that he terminated his employment for good reason or was terminated by Aames Financial without cause, then:

·Mr. Meyerson will receive payments for a period of 36 months following the date of his termination at the rate of $350,000 per year.

·For purposes of determining the vesting of any outstanding restricted stock, restricted stock units and stock options, Mr. Meyerson will be treated as though he continued to be employed by Aames Financial during the period he provides such consultation services.

·Aames Financial will continue to pay the annual premiums on his life insurance policy for the 36 months following his termination.

If there is a “change in control” (as defined in the Amended and Restated Aames Investment Corporation 2004 Equity Incentive Plan) and Mr. Meyerson is required to pay an excise tax on any amounts payable to him as a result of that change in control pursuant to the “golden parachute” rules of Section 4999 of the Internal Revenue Code, we will provide him with additional payments such that he will receive on an after-tax basis an amount equal to the amount he would have received in the absence of the imposition of the tax.

Compensation for Executives other than our Chief Executive Officer

Employment Contracts

None of our executive officers other than our chief executive officer is party to an employment contract with us or any of our subsidiaries.

Executive Severance Plan

Each of our executive officers other than Mr. Meyerson is a participant in Aames Financial’s executive severance plan. The plan entitles each participant to severance if his employment is terminated by Aames Financial without “cause” or by him with “good reason” (in each case, as defined in such plan). The type of severance benefits to which a participant is entitled depends on whether or not he is a member of Aames’ Financial’s “corporate management committee” (a committee comprised of certain of our senior executive officers who periodically review and evaluate our operations and performance, which includes, among others, each of the named executive officers participating in the plan) or a “designated executive officer” (currently, Michael J. Matthews, our Chief Production Officer).

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Generally, each participant is entitled to continued payment of his annual base salary in effect at the time of termination for the six months following his termination (unless he has been employed by Aames Financial for less than six months, in which case he is entitled to receive one month’s salary for each month he has been employed). However, if the participant is a member of Aames Financial’s corporate management committee, he is entitled to (1) (a) continued payment of his annual base salary in effect at the time of termination for the 12 months following his termination (unless he has been employed by Aames Financial for less than 12 months, in which case he is entitled to receive one month’s salary for each month he has been employed) and (b) if he is also an Executive Vice President (as is each of our named executive officers participating in the plan) and the termination occurs within 90 days following a “change in control” (as defined in the plan), payment of an additional 12 months’ salary, and (2) payment of a performance bonus for the year in which the termination occurs, the amount of which will be determined and paid in accordance with Aames Financial’s executive bonus plan subject to a pro-rata reduction for the portion of the bonus performance period following the date of termination. Additionally, if the participant is a designated executive officer, he is entitled to the benefits an Executive Vice President would receive, except that he is entitled to continued payment of his annual base salary in effect at the time of termination for the 24 months following his termination instead of 12 months (unless he has been employed by Aames Financial for less than 12 months, in which case he is entitled to receive one month’s salary for each month he has been employed).

Compensation of Directors

Director Compensation Plan

In March 2005, our Compensation Committee recommended, and our Board approved, a plan for director compensation, which was retroactively effective as of January 1, 2005 with two exceptions—the amount of the annual cash retainer and the form of payment of those fees for which the compensation plan then in place already provided, each of which continued to be governed by the terms of that former plan until March 31, 2005.

Pursuant to our director compensation plan, each of our non-employee directors is entitled to an annual retainer consisting of (1) $20,000 in cash and (2) an award of restricted common stock valued at $70,000 (as determined by reference to the closing price of our common stock on the date of grant) which vests in full on the first anniversary of the date of grant. The chair of our Audit Committee is entitled to an additional annual cash retainer of $10,000, and each other member of our Audit Committee is entitled to $5,000. The chair of each of our Compensation Committee and our Nominating and Governance Committee is entitled to an additional annual cash retainer of $5,000. Our Lead Independent Director is entitled to an additional annual fee of $10,000 (but is not be eligible to receive any additional fees for service as the chair of a committee). In addition, each of the non-employee directors receives a fee of $1,000 for each Board meeting he or she attends and, if he or she serves on a Board committee, a fee of $1,000 for each meeting of that committee he or she attends. All compensation is paid on a quarterly basis other than the grant of stock, which is made annually following the election of our directors. In addition to the foregoing compensation, we also pay all reasonable out-of-pocket expenses incurred by the directors in connection with their attendance at meetings.

As noted above, the portion of the annual retainer to which each of our non-employee directors was entitled for his or her service on our Board during the first quarter of our last fiscal year was not determined in accordance with our current director compensation plan. Rather, those directors were compensated pursuant to the terms of the compensation plan adopted at the time of our initial public offering, which provided for an annual retainer in the amount of $30,000 (and, thus, each received $7,500 for that quarter, rather than the $5,000 in cash he or she received in the three remaining quarters of that year). As also noted above, certain fees to which each non-employee director was entitled for his or her services as such during that quarter continued to be paid in the form prescribed by our former plan, which

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provided that all fees relating to Board or committee service were payable half in cash and half in restricted shares of our common stock (the value of which was determined by reference to the closing price of our common stock on the date of grant). To the extent the current plan provides for fees not contemplated by our former plan (i.e., fees for meeting attendance, for service as a non-chair member of our Audit Committee and for service as our Lead Independent Director), each non-employee director was generally paid all such fees earned in our last fiscal year, whether prior to or after the adoption of the current plan, in cash in accordance with the current plan. However, because at the time our current compensation plan was adopted our directors had already received the compensation to which they were entitled under our former plan for their service during the first quarter of our last fiscal year, to the extent the fees to which they were entitled did not differ between the plans (i.e., the retainers for service as the chair of one of our committees), the payment of those fees was in a mix of stock and cash, as provided by our former plan.

Summary of Compensation Paid to Our Directors

The following table sets forth the compensation paid by us to each non-management director for his service during the fiscal year ended December 31, 2005.

	Cash-Based Compensation ($)
Name	Annual Retainer			Board Meeting Fees(1)		Committee Meeting Fees(2)		All Other			Equity-Based Compensation ($)			Total Compensation ($)
Jenne K. Britell, Ph.D.		18,750	(3)		13,000		9,000		50,666	(4)		74,363	(5)		165,779
David H. Elliott		18,750	(3)		14,000		16,000		63,823	(6)		74,363	(7)		186,936
John F. Farrell, Jr.		18,750	(3)		14,000		20,000		25,567	(8)		73,736	(9)		152,053
Mani A. Sadeghi(10)		18,750	(3)		14,000		—		16,817	(11)		73,736	(12)		123,303
Robert A. Spass(13)		18,750	(3)		10,000		—		20,457	(14)		73,736	(15)		122,943
Stephen E. Wall		18,750	(3)		14,000		14,000		48,036	(16)		74,990	(17)		169,776

(1)  During our 2005 fiscal year, our Board held 14 meetings; each non-employee director received $1,000 for each of the meetings that he attended.

(2)  During our 2005 fiscal year, our Audit Committee held 11 meetings, our Compensation Committee held five meetings and our Nominating and Governance Committee held four meetings; each non-employee director received $1,000 for each of the meetings held by a committee of which he was a member that he attended.

(3)  Consists of (A) $3,750 received in accordance with our former compensation plan as payment for service on our Board during the first quarter of our 2005 fiscal year, and (B) $15,000 received in accordance with our current compensation plan as payment for service on our Board during the remainder of that year.

(4)  Consists of:  (A) $625 that Dr. Britell received in accordance with our former compensation plan as payment of 50% of the fee to which she was entitled for her service as the chair of our Nominating and Governance Committee during the first quarter of our 2005 fiscal year; (B) $5 that Dr. Britell received in lieu of the fractional shares she would otherwise have received in accordance with our former compensation plan as payment for her services during that quarter; (C) $8,750 that Dr. Britell received in accordance with our current compensation plan as payment for her service as our Lead Independent Director during that year (which represents the $10,000 annual fee to which the Lead Independent Director is entitled under our current compensation plan less the aggregate amount Dr. Britell received for her service as the chair of our Nominating and Governance Committee during the first quarter of the year pursuant to our former compensation plan, as the Lead Independent Director is not entitled to receive additional fees for service as the chair of a committee under our current compensation plan); and (D) $41,286 in dividends paid on Dr. Britell’s unvested shares of restricted common stock and outstanding restricted stock units (dividends in the amount of $0.06, $0.27, $0.34 and $0.35 were paid on January 31, 2005, May 9, 2005, August 8, 2005 and November 7, 2005, respectively, on each such share and unit held by Dr. Britell on the respective date).

(5)  Consists of:  (A) 460 shares of restricted common stock granted on March 7, 2005 valued at $9.50 per share (the closing price on the date of grant), which vested in full on the first anniversary of the date of grant, that Dr. Britell received in accordance with our former compensation plan as payment of 50% of the fee to which she was entitled for her service on our Board during the first quarter of our 2005 fiscal year and 50% of the fee to which she was entitled for her service as the chair of our Nominating and Governance Committee during that quarter; and (B) 8,484 shares of restricted common stock granted on May 4, 2005 valued at $8.25 per share (the closing price on the date of grant), which will vest in full on the first anniversary of the date of

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grant, that Dr. Britell received in accordance with our current compensation plan as payment for her service on our Board during our 2005 fiscal year. Such shares are entitled to receive dividends.

(6)  Consists of:  (A) $625 that Mr. Elliott received in accordance with our former compensation plan as payment of 50% of the fee to which he was entitled for his service as the chair of our Compensation Committee during the first quarter of our 2005 fiscal year; (B) $5 that Mr. Elliott received in lieu of the fractional shares he would otherwise have received in accordance with our former compensation plan as payment for his services during that quarter; (C) $3,750 that Mr. Elliott received in accordance with our current compensation plan as payment for his service as the chair of our Compensation Committee during the remainder of that year; (D) $5,000 that Mr. Elliott received in accordance with our current compensation plan as payment for his service as a member of our Audit Committee during that year; and (E) $54,443 in dividends paid on Mr. Elliott’s unvested shares of restricted common stock and outstanding restricted stock units (dividends in the amount of $0.06, $0.27, $0.34 and $0.35 were paid on January 31, 2005, May 9, 2005, August 8, 2005 and November 7, 2005, respectively, on each such share and unit held by Mr. Elliott on the respective date).

(7)  Consists of:  (A) 460 shares of restricted common stock granted on March 7, 2005 valued at $9.50 per share (the closing price on the date of grant), which vested in full on the first anniversary of the date of grant, that Mr. Elliott received in accordance with our former compensation plan as payment of 50% of the fee to which he was entitled for his service on our Board during the first quarter of our 2005 fiscal year and 50% of the fee to which he was entitled for his service as the chair of our Compensation Committee during that quarter; and (B) 8,484 shares of restricted common stock granted on May 4, 2005 valued at $8.25 per share (the closing price on the date of grant), which will vest in full on the first anniversary of the date of grant, that Mr. Elliott received in accordance with our current compensation plan as payment for his service on our Board during our 2005 fiscal year. Such shares are entitled to receive dividends.

(8)  Consists of:  (A) $1,250 that Mr. Farrell received in accordance with our current compensation plan as payment of the fee to which he was entitled for his service as a member of our Audit Committee during the first quarter of our 2005 fiscal year; (B) $7 that Mr. Farrell received in lieu of the fractional shares he would otherwise have received in accordance with our former compensation plan as payment for his services during that quarter; (C) $7,500 that Mr. Farrell received in accordance with our current compensation plan as payment for his service as the chair of our Audit Committee during the remainder of that year; and (D) $16,810 in dividends paid on Mr. Farrell’s unvested shares of restricted common stock (dividends in the amount of $0.06, $0.27, $0.34 and $0.35 were paid on January 31, 2005, May 9, 2005, August 8, 2005 and November 7, 2005, respectively, on each such share and unit held by Mr. Farrell on the respective date).

(9)  Consists of:  (A) 394 shares of restricted common stock granted on March 7, 2005 valued at $9.50 per share (the closing price on the date of grant), which vested in full on the first anniversary of the date of grant, that Mr. Farrell received in accordance with our former compensation plan as payment of 50% of the fee to which he was entitled for his service on our Board during the first quarter of our 2005 fiscal; and (B) 8,484 shares of restricted common stock granted on May 4, 2005 valued at $8.25 per share (the closing price on the date of grant), which will vest in full on the first anniversary of the date of grant, that Mr. Farrell received in accordance with our current compensation plan as payment for his service on our Board during our 2005 fiscal year. Such shares are entitled to receive dividends.

(10)  At the request of Mr. Sadeghi, all compensation to which he is entitled for serving as a director is paid to Equifin Capital Management, LLC. Mr. Sadeghi disclaims beneficial ownership of all such compensation which is equity-based.

(11)  Consists of:  (A) $7 that Equifin Capital Management, LLC received in lieu of the fractional shares it would otherwise have received in accordance with our former compensation plan as payment for Mr. Sadeghi’s services during the first quarter of our 2005 fiscal year; and (B) $16,810 in dividends paid on Equifin’s unvested shares of restricted common stock (dividends in the amount of $0.06, $0.27, $0.34 and $0.35 were paid on January 31, 2005, May 9, 2005, August 8, 2005 and November 7, 2005, respectively, on each such share and unit held by Equifin on the respective date).

(12)  Consists of:  (A) 394 shares of restricted common stock granted on March 7, 2005 valued at $9.50 per share (the closing price on the date of grant), which vested in full on the first anniversary of the date of grant, that Equifin Capital Management, LLC received in accordance with our former compensation plan as payment of 50% of the fee to which Mr. Sadeghi was entitled for his service on our Board during the first quarter of our 2005 fiscal; and (B) 8,484 shares of restricted common stock granted on May 4, 2005 valued at $8.25 per share (the closing price on the date of grant), which will vest in full on the first anniversary of the date of grant, that Equifin received in accordance with our current compensation plan as payment for Mr. Sadeghi’s service on our Board during our 2005 fiscal year. Such shares are entitled to receive dividends.

(13)  At the request of Mr. Spass, all compensation to which he is entitled for serving as a director is paid to Capital Z Management, LLC. Mr. Spass disclaims beneficial ownership of all such compensation which is equity-based.

(14)  Consists of:  (A) $7 that Capital Z Management, LLC received in lieu of the fractional shares it would otherwise have received in accordance with our former compensation plan as payment for Mr. Spass’ services during the first quarter of our 2005 fiscal year; and (B) $20,450 in dividends paid on Capital Z’s unvested shares of restricted common stock (dividends in the amount of $0.06, $0.27, $0.34 and $0.35 were paid on January 31, 2005, May 9, 2005, August 8, 2005 and November 7, 2005, respectively, on each such share and unit held by Capital Z on the respective date).

(15)  Consists of:  (A) 394 shares of restricted common stock granted on March 7, 2005 valued at $9.50 per share (the closing price on the date of grant), which vested in full on the first anniversary of the date of grant, that Capital Z Management, LLC received in

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accordance with our former compensation plan as payment of 50% of the fee to which Mr. Spass was entitled for his service on our Board during the first quarter of our 2005 fiscal; and (B) 8,484 shares of restricted common stock granted on May 4, 2005 valued at $8.25 per share (the closing price on the date of grant), which will vest in full on the first anniversary of the date of grant, that Capital Z received in accordance with our current compensation plan as payment for Mr. Spass’ service on our Board during our 2005 fiscal year. Such shares are entitled to receive dividends.

(16)  Consists of:  (A) $1,250 that Mr. Wall received in accordance with our former compensation plan as payment of 50% of the fee to which he was entitled for his service as the chair of our Audit Committee during the first quarter of our 2005 fiscal year; (B) $3 that Mr. Wall received in lieu of the fractional shares he would otherwise have received in accordance with our former compensation plan as payment for his services during that quarter; (C) $3,750 that Mr. Wall received in accordance with our current compensation plan as payment for his service as a member of our Audit Committee during the remainder of that year; and (D) $43,033 in dividends paid on Mr. Wall’s unvested shares of restricted common stock and outstanding restricted stock units (dividends in the amount of $0.06, $0.27, $0.34 and $0.35 were paid on January 31, 2005, May 9, 2005, August 8, 2005 and November 7, 2005, respectively, on each such share and unit held by Mr. Wall on the respective date).

(17)  Consists of:  (A) 526 shares of restricted common stock granted on March 7, 2005 valued at $9.50 per share (the closing price on the date of grant), which vested in full on the first anniversary of the date of grant, that Mr. Wall received in accordance with our former compensation plan as payment of 50% of the fee to which he was entitled for his service on our Board during the first quarter of our 2005 fiscal year and 50% of the fee to which he was entitled for his service as the chair of our Audit Committee during that quarter; and (B) 8,484 shares of restricted common stock granted on May 4, 2005 valued at $8.25 per share (the closing price on the date of grant), which will vest in full on the first anniversary of the date of grant, that Mr. Wall received in accordance with our current compensation plan as payment for his service on our Board during our 2005 fiscal year. Such shares are entitled to receive dividends.

As an executive of the company, Mr. Meyerson did not receive any fees in accordance with our director compensation plan. Instead, Mr. Meyerson was compensated for his services as a member of our Board pursuant to his employment agreement with us and Aames Financial (which is described below under “Executive Compensation—Employment Contracts, Termination of Employment and Change in Control Agreements”).

Compensation Committee Interlocks and Insider Participation

No one who was a member of our Compensation Committee during our fiscal year ended December 31, 2005 (namely, Jenne K. Britell, John F. Farrell, Jr. and David H. Elliott) has ever been an officer or employee of ours, of our corporate predecessor Aames Financial, or of any of their respective subsidiaries. Nor did any of those persons have any relationship during that year which we would be required to disclose under Item 404 of Regulation S-K.

None of our executive officers served as a member of the board of directors or compensation committee (or other board committee performing equivalent functions) of any other entity, one of whose executive officers served as a member of our Board or our Compensation Committee during our last fiscal year.

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Report of the Compensation Committee

The information contained in this report should not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the Securities and Exchange Commission, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that Aames Investment specifically incorporates such information by reference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934.

Compensation Committee Responsibilities

Aames Investment’s Compensation Committee is responsible for, among other things:

·Reviewing and approving corporate goals and objectives relative to the chief executive officer’s compensation;

·Evaluating the chief executive officer’s performance in light of such goals and objectives;

·Establishing the chief executive officer’s compensation based upon such evaluation;

·Making recommendations to our Board with respect to the compensation of our other executive officers (including the named executive officers) based on the recommendations of our chief executive officer; and

·Administering incentive compensation and equity-based plans, including approving all awards under any such plans.

Compensation Policy and Programs

The Compensation Committee’s responsibility is to align the values of Aames Investment’s stockholders, Aames Investment’s financial performance and the compensation of the Company’s executives by overseeing the design and implementation of a sound compensation program that will attract and retain highly qualified personnel. The compensation programs the Compensation Committee develops are intended to complement Aames Investment’s short- and long-term business objectives and to focus the efforts of the Company’s executives on realizing these objectives.

Each year, aided by information provided by independent consultants with expertise in executive compensation, the Compensation Committee conducts a review of Aames Investment’s executive compensation program, which takes into consideration (1) all compensation previously paid to each of the Company’s executives, whether in the form of cash or equity, any severance and other contingent payments to which each executive might be entitled and the value of any fringe benefits to which the executives might be entitled, (2) the performance of each of the executives during the term of his employment, including his satisfaction of the objective performance goals established by the Board, in the case of the chief executive officer, and the chief executive officer, in the case of the other executive officers and subjective criteria such as his initiative and leadership ability, and (3) all forms of compensation paid by companies in the same industry as the Company or which are otherwise similar to the Company. The Compensation Committee then considers the results of its review of the compensation program and the performance objectives established for the Company’s executive officers for the upcoming year and approves base salaries and target bonus levels of compensation for each executive for such year. The Compensation Committee may also make equity-based awards to our executives at that time, or from time to time throughout any year. The aggregate amount of compensation actually paid to each of the Company’s executives for any year is dependent upon the Company’s overall performance for such year, the executive’s efforts during that year as measured by reference to his achievement of his performance objectives, the amount of equity-based awards made to such executive in past years, any contingent

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payments to which such executive might be entitled and the value of any fringe benefits provided to such executive.

Aames Investment’s executive officers (including the named executive officers) were eligible for three types of compensation for their service during the Company’s 2005 fiscal year—base salary, near-term incentive compensation in the form of cash bonuses and long-term incentive compensation in the form of stock options or stock awards.

Base Salary

In establishing the base salary for Aames Investment’s chief executive officer and formulating its recommendation with respect to the base salary for the Company’s other executive officers, the Compensation Committee considers: (1) all forms ofcompensation paid by comparable companies, (2) the degree of responsibility generally given by the Company to the officers in such positions, and (3) internal issues of consistency and fairness. The Compensation Committee also considers the recommendations of Aames Investment’s chief executive officer when preparing the committee’s proposal with respect to the base salaries of the Company’s other executive officers.

In connection with the REIT reorganization, Aames Investment and its corporate predecessor, Aames Financial, entered into an employment agreement with Aames Investment’s chief executive officer, A. Jay Meyerson, the terms and conditions of which are discussed above under “Executive Compensation—Employment Contracts, Termination of Employment and Change in Control Agreements.”  Pursuant to his employment agreement, Mr. Meyerson is entitled to a base salary of at least $425,000 per year during the term of the agreement, the amount of which is based upon:

·The financial performance and results of Aames Financial prior to the REIT reorganization, as measured by reference to the level of achievement of objectives established by Aames Financial’s Board, which included (1) increasing the Company’s net income, (2) strengthening the Company’s balance sheet, (3) improving or maintaining the Company’s market share, (4) positively differentiating the Aames brand, and (5) completing the REIT reorganization;

·The contributions Mr. Meyerson’s made to Aames Financial’s overall corporate performance and realization of such objectives, including the initiative and leadership Mr. Meyerson displayed prior to and during the REIT reorganization; and

·The payments received by the chief executive officers of Aames Investment’s competitors around the time the agreement was entered into.

In accordance with Mr. Meyerson’s employment agreement, the Compensation Committee reviews the minimum annual base salary to which he is entitled at the same time and in the same manner as the committee reviews the compensation paid to Aames Investment’s other executive officers to determine whether any increase in Mr. Meyerson’s base salary is appropriate. In accordance with the agreement, Mr. Meyerson received a base salary of $425,000 for his service during the Company’s 2005 fiscal year.

None of our other executive officers is party to an employment agreement with Aames Investment or Aames Financial.

Bonuses

The Compensation Committee believes that, to encourage the attainment of Aames Investment’s goals, a substantial portion of the annual compensation of each executive officer should be in the form of variable incentive pay.

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As such, on February 10, 2004, the Board of Directors of our corporate predecessor, Aames Financial,approved an incentive compensation plan pursuant to which each of the Company’s executive officers was eligible to receive a cash bonus in 2005, the amount of which was based upon:

·The Company’s profitability during the year ended December 31, 2004, as measured by reference to the Company’s loan production and operating income as determined by the Board; and

·The assessment of the Compensation Committee, in the case of the chief executive officer, and the chief executive officer together with the Compensation Committee, in the case of each other executive officer, of such executive’s contribution to the Company’s overall financial performance, as measured by reference to such executive’s performance of his job duties, including the satisfaction of the responsibilities associated with his position, the completion of any special project given to him and his achievement of the personal performance objectives for that year to which the Board and the chief executive officer, in the case of the CEO, and the chief executive officer and the executive, in the case of each other executive, agreed prior to the beginning of the year.

Mr. Meyerson’s target bonus for such year was $625,000. In March 2005, he was awarded a bonus equal to 96% of that target (i.e., $600,000). In accordance with the incentive compensation plan, the amount Mr. Meyerson’s bonus payment was based on:

·the Board’s determination of the Company’s profitability for the year ended December 31, 2004, as measured by reference to both the Company’s performance as if the REIT reorganization did not occur—which showed an overall achievement of 93% of the loan production and operating income objectives—and the Company’s performance including the REIT reorganization—which showed on overall achievement of 124% of the loan production and operating income objectives; and

·the Compensation Committee’s assessment of his performance, as measured by reference to his personal performance objectives—which he was found to have satisfied.

The Compensation Committee determined that, as Mr. Meyerson satisfied his performance objectives and the Company’s profitability was at or near the stated goal, the amount of his bonus should approximate his target.

The bonus targets for the executive officers other than Mr. Meyerson for the year ended December 31, 2004 ranged from 83% to 120% of the officers’ respective salaries, and the payments to such officers ranged from 75% to 114%of their respective targets.

Equity-Based Awards

The Compensation Committee believes that equity-based incentive awards align the interests of the executive officers with those of the stockholders, thereby providing each executive officer with a significant incentive to manage the Company from the perspective of an owner of the business. The Compensation Committee also believes that time-vested awards, such as restricted stock awards, encourage executive retention.

As such, in 2004 Aames Investment adopted an omnibus equity incentive plan in order to make equity-based awards to its employees, directors and consultants (i.e., the Amended and Restated Aames Investment Corporation 2004 Equity Incentive Plan). In determining whether to make grants under the Amended and Restated Aames Investment Corporation 2004 Equity Incentive Plan, the Compensation Committee considers the aggregate number of shares available for grant under such plan, the performance of Aames Investment, the practices of companies comparable to Aames Investment and prior awards made to the Company’s executives. If the Compensation Committee determines to make equity-based awards to Aames Investment’s executive officers, the committee considers the degree of responsibility generally given by the Company to officers in each rank of the Company’s management and the size of award

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necessary to create a meaningful opportunity for officers of such rank for reward predicated on increasing value for the Company’s stockholders, and establishes guidelines for the size and terms of grants to officers in each rank. In determining the actual award for any individual officer the Compensation Committee will consider, in addition to such officer’s rank, his performance history, his potential for future responsibility and promotion and any past grants made to him, and the relative weight given to any particular factor may vary among the individuals eligible for grant at the Compensation Committee’s discretion. The  Compensation Committee may decide not to make any equity-based grants in a given year, or may decide to make grants to certain officers but not others, whether or not of the same rank, in its discretion.

Internal Revenue Code Section 162(m)

Section 162(m) of the Internal Revenue Code limits the federal income tax deduction publicly held companies may take for compensation in excess of $1,000,000 paid in a given fiscal year to certain of the named executive officers, if the compensation is not “performance based” within the meaning of the Section 162(m) rules. In order to qualify as performance based, the compensation must, among other things, be based on performance goals set by a committee of at least two “outside directors.”  In addition, compensation paid in the form of equity must be granted pursuant to a plan approved by the company’s stockholders. The Board has determined that each of us is an outside director and the Amended and Restated Aames Investment Corporation 2004 Equity Incentive Plan has been designed so that we may make awards thereunder which are performance-based compensation. It is the Compensation Committee’s policy to maximize Aames Investment’s ability to obtain a corporate tax deduction for compensation paid to the Company’s executive officers to the extent doing so is consistent with the interests of the Company and its stockholders in retaining and motivating key executives. Aames Investment believes that it will be able to deduct the amount of all of the compensation paid to each named executive officer for 2005.

COMPENSATION COMMITTEE

David H. Elliott, Chair

Jenne K. Britell

John F. Farrell, Jr.

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Performance Graph

The following graph compares the cumulative total shareholder return on our common stock with that of the NYSE Composite Index and a grouping of issuers in the subprime mortgage lending business consisting of Accredited Home Lenders Holding Co., New Century Financial Corporation, NovaStar Financial, Inc. and Saxon Capital, Inc. for the period beginning November 2, 2004—the date our common stock began trading on the New York Stock Exchange—and ending on December 31, 2005, assuming in each case that all dividends were reinvested.

The comparison in the following graph is based on historical data and is not intended to forecast the possible future performance of our common stock. Our common stock was first offered at $8.50 per share. The graph reflects the closing price of $9.30 per share on November 2, 2004, our first day of trading on the New York Stock Exchange. The graph assumes that the value of an investment in our common stock and each index was $100 on November 2, 2004.

	Period Ending
Index	11/02/04		12/31/04		03/31/05		06/30/05		09/30/05		12/31/05
Aames Investment Corporation		100.00		115.71		88.68		108.42		72.50		82.92
NYSE Composite Index		100.00		108.58		107.91		109.45		116.34		118.81
Aames Peer Group		100.00		117.99		87.02		98.30		75.48		83.88

The information contained in the Performance Graph section should not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, except to the extent that we specifically incorporate such information by reference into a document filed under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Security Ownership

The following table sets forth information known to us with respect to beneficial ownership of our common stock as of March 24, 2006 by:

·each person known by us to beneficially own more than 5% of our common stock;

·each our of directors and nominees;

·each of our named executive officers; and

·all of our directors and executive officers as a group.

The following table is based upon information supplied to us by our officers, directors and principal stockholders and any Schedules 13D and 13G filed with the SEC. Beneficial ownership is determined under the rules of the SEC and generally includes voting or investment power with respect to securities. We know of no agreements among our stockholders that relate to the voting of, or dispositive power over, our common stock and, unless otherwise indicated and subject to community property laws where applicable, we believe that each of the stockholders named in the following table has sole voting and investment power with respect to the shares indicated as beneficially owned by such. The number of shares beneficially owned by each person or group as of March 24, 2006 includes shares of common stock such person had the right to acquire on or within 60 days of that date (i.e., May 23, 2006), including upon the distribution of common stock pursuant to the terms of any restricted stock unit agreement or restricted stock award agreement to which he is a party.

Name and Address of Beneficial Owner(1)	Number of Shares Beneficially Owned		Percentage Owned(2)
Specialty Finance Partners (and affiliates)(3) 54 Thompson Street New York, New York 10012	13,944,742	(4)		22.54	%
Friedman, Billings, Ramsey Group, Inc.(5) 1001 19th Street North Arlington, Virginia 22209	4,707,900			7.61
AMVESCAP PLC (and affiliates)(6) 30 Finsbury Square London EC2A 1AG United Kingdom	4,317,100	(7)		6.98
Hotchkis and Wiley Capital Management, LLC(8) 725 South Figueroa Street, 39th Floor Los Angeles, California 90017	5,915,840	(9)		9.56
Wellington Management Company, LLP(10) 75 State Street Boston, Massachusetts 02109	3,928,950	(11)		6.35
Dr. Jenne K. Britell Ph.D.	17,874	(12)		*
David H. Elliott	18,014	(13)		*
John F. Farrell, Jr.	18,772	(14)		*
John P. Kim	5,110			*

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Barry M. Levine	59,389		*
John F. Madden, Jr.	38,231		*
A. Jay Meyerson	328,516		*
Mani A. Sadeghi	19,772	(15)	*
Robert A. Spass	14,123,510	(16)	22.82
Jon D. Van Deuren	26,644	(17)	*
Stephen E. Wall	28,006	(18)	*
All executive officers and directors as a group (14 persons)	14,734,554	(19)	23.81

*Less than 1%

(1)  Unless otherwise stated, the business address of each person included in the table is c/o Aames Investment Corporation, 350 South Grand Avenue, 43rd Floor, Los Angeles, California 90071.

(2)  For each person included in the table, percentage ownership is calculated by dividing the number of shares beneficially owned by such person or group as described above by 61,877,547—the number of shares outstanding on March 24, 2006—and the number of shares of common stock that such person had the right to acquire on or within 60 days of that date, including the distribution of common stock under the terms of the individual’s restricted stock unit agreement or any restricted stock award agreement to which he is a party.

(3)  Based on solely the information contained in the Schedule 13D filed with the SEC by Specialty Finance Partners and certain of its affiliates on November 15, 2004 and information supplied to us by certain of members of our Board.

(4)  Consists of (A) 13,932,970shares owned by Specialty Finance Partners, a Bermuda general partnership, and(B) 11,772 shares owned by Capital Z Management, LLC, 3,288 of which it held as of March 24, 2006 and 8,484 it has the right to acquire as of May 5, 2006. Specialty Finance Partners is ultimately controlled by Capital Z Partners, Ltd., a Bermuda corporation owned by 13 individuals, none of whom own more than 10% or more of its voting securities. Capital Z Management, a Delaware limited liability company, performs investment management services for Capital Z Partners and its portfolio companies and, as such, is an affiliate of Specialty Finance Partners. Mr. Spass is amember of the board of Capital Z Partners and the chairman of the board and a partner of Capital Z Management.

(5)  Based solely on the information contained in the Schedule 13G/A filed with the SEC by Friedman, Billings, Ramsey Group, Inc. on February 14, 2006.

(6)  Based solely on the information contained in the Schedule 13G filed with the SEC by AMVESCAP PLC and certain of its affiliates on February 14, 2005.

(7)  The shares are held by subsidiaries of AMVESCAP PLC as follows: AIM Advisors, Inc. owns 4,027,800 shares, AIM Capital Management, Inc owns 251,600 shares and INVESCO Institutional (N.A)., Inc. owns 37,700 shares.

(8)  Based solely on the information contained in the Schedule 13G/A filed with the SEC by Hotchkis & Wiley Capital Management, LLC on February 14, 2006.

(9)  Hotchkis and Wiley Capital Management, LLC has sole voting power with respect to 4,658,640 shares and sole dispositive power with respect to 5,915,840 shares. The shares are owned of record by clients of HWCM who have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such shares and HWCM disclaims beneficial ownership of all such shares.

(10)  Based solely on the information contained in the Schedule 13G filed with the SEC by Wellington Management Company, LLC on February 14, 2006.

(11)  Wellington Management Company, LLP has shared voting power with respect to 2,902,150 shares and shared dispositive power with respect to 3,928,950 shares. The shares are owned by record by clients of Wellington Management who have the right to receive, or the power to direct the receipt of, dividends from, or the proceeds from the sale of, such shares.

(12)  Consists of 9,390 shares Dr. Britell held as March 24, 2006 and 8,484 shares she has the right to acquire as of May 5, 2006, when restricted common stock she received on May 5, 2005 as compensation for her service as a director vests.

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(13)  Consists of 9,530 shares Mr. Elliott held as March 24, 2006 and 8,484 shares he has the right to acquire as of May 5, 2006, when restricted common stock he received on May 5, 2005 as compensation for his service as a director vests. Mr. Elliott shares voting and investment power with respect to all such shares with his wife, Jeanne M. Elliott.

(14)  Consists of 10,288 shares Mr. Farrell held as March 24, 2006 and 8,484 shares he has the right to acquire as of May 5, 2006, when restricted common stock he received on May 5, 2005 as compensation for his service as a director vests.

(15)  Consists of (A) 8,000 shares Mr. Sadeghi directly owns, all of which he held as of March 24, 2006, and (B) 11,772 shares owned by Equifin Capital Management LLC, 3,288 of which it held as of March 24 2006 and 8,484it has the right to acquire as of May 5, 2006, when restricted common stock the company received on May 5, 2005 as compensation for Mr. Sadeghi’s service as a director vests. Mr. Sadeghi is the chief executive officer of Equifin Capital Management and, as such, may be deemed to beneficially own the shares of common stock it owns. Mr. Sadeghi disclaims beneficial ownership of the shares directly owned by Equifin Capital Management.

(16)  Consists of (A) 178,768shares Mr. Spass directly owns, all of which he held as of March 24, 2006, (B) 11,772 shares owned by Capital Z Management, LLC, 3,288 of which it held as of March 24, 2006 and 8,484 it has the right to acquire as of May 5, 2006, when restricted common stock the company received on May 5, 2005 as compensation for Mr. Spass’ service as a director vestsand, (C) 13,932,970 shares owned by Specialty Finance Partners, all of which it held as of March 24, 2006. Mr. Spass is the chairman of the board and a partner of Capital Z Management and, as such, may be deemed to beneficially own the shares of common stock it owns. Capital Z Management is an affiliate of, and Mr. Spass is a director of, Capital Z Partners, Ltd., the entity which ultimately controls Specialty Finance Partners, and, as such, Mr., Spass may be deemed to beneficially own the shares of common stock Specialty Finance Partners owns. Mr. Spass disclaims beneficial ownership of the shares directly owned by both Capital Z Management and Specialty Finance Partners.

(17)  Consists of (A) 14,631 shares Mr. Van Deuren held as of March 24, 2006, (B) 8,263 shares he has the right to receive on March 31, 2006 pursuant to the terms of his restricted stock unit agreement, and (C) 3,750 he has the right to acquire as of May 5, 2006, when restricted common stock he received on May 5, 2005 in connection with his promotion to chief financial officer vests.

(18)  Consists of 19,522 shares Mr. Wall held as March 24, 2006 and 8,484 shares he has the right to acquire as of May 5, 2006, when restricted common stock he received on May 5, 2005 as compensation for his service as a director vests.

(19)  Includes the aggregate of 14,671,637 shares the members of the group held as of March 24, 2006 and the aggregate of 62,917 shares the members of the group had the right to acquire on or prior to May 23, 2006.

Changes in Control

We know of no arrangement the operation of which may, at a later date, result in a change of control of us.

Equity Compensation Plan Information

The Amended and Restated Aames Investment Corporation 2004 Equity Incentive Plan is our only compensation plan under which our equity securities are authorized for issuance, and it allows us to make awards to our officers and other employees, directors and all other persons who provide us services. Those awards may be stock options, SARs or “full value awards” (including shares of restricted stock and restricted stock units). Currently, a maximum of 5,550,000 shares of our common stock may be issued upon the exercise of stock options or SARs, in connection with the vesting of shares of restricted common stock or upon the distribution of shares underlying restricted stock units. To date, all awards made under the Plan have been full value awards and each share of our common stock underlying a full value award reduces the number of shares available for future issuance by 2.5 shares.

The Plan was adopted by our Board on July 21, 2004, approved by the stockholders of our former parent corporation, Aames Financial, on October 6, 2004 and became effective in connection with our reorganization as a REIT and our initial public offering in November 2004. On March 7, 2005, our Board approved an amendment and restatement of the Plan; because of the nature of the amendment, we were not required pursuant to the terms of the Plan or the applicable governance rules of the New York State Exchange to seek, and we did not obtain, stockholder approval of it.

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The following table provides information as of December 31, 2005 with respect to the shares of our common stock that may be issued under that plan.

	(a)			(b)		(c)
	Number of securities to be issued upon exercise of outstanding options, warrants and rights			Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a))
Amended and Restated Aames Investment Corporation 2004 Equity Incentive Plan		—	(1)		—		122,160	(2)

(1)The table does not include the 716,551 restricted stock units granted in connection with our reorganization or the 936,516 shares of restricted stock granted as compensation which were outstanding as of December 31, 2005 that do not have an exercise price.

(2)Each share of our common stock granted as a restricted stock unit or restricted stock award reduces the number of shares available for future issuance under the plan by 2.5 shares.

Item 13. Certain Relationships and Related Transactions

Robert A. Spass, one of our directors and director nominees, is a director of Capital Z Partners, Ltd., the entity which ultimately controls Specialty Finance Partners, and is chairman of the board and a partner of Capital Z Management, LLC. In connection with our REIT reorganization, Specialty Finance Partners and Capital Z Management received an aggregate of 13,986,556 shares of our common stock, 61,486 restricted stock units and $118,885,755 in cash in exchange for their ownership interest in our corporate predecessor, Aames Financial. In connection with that reorganization and the simultaneous initial public offering of our common stock, we entered into a registration rights and governance agreement with Specialty Finance Partners and Capital Z Management. This agreement provides Specialty Finance Partners and Capital Z Management with certain rights with respect to the registration of the shares of our common stock that they hold. In addition, for so long as they collectively own at least 12.5% of our outstanding shares, Specialty Finance Partners and Capital Z Management have the right to designate two nominees to our Board, and if Specialty Finance Partners and Capital Z Management collectively own less than 12.5%, but at least 5%, of our outstanding shares, they will have the right to designate one such nominee. The agreement also requires us to support the nomination of each such individual for election to our Board and to use our best efforts to cause him to be so elected. Specialty Finance Partners and Capital Z Management collectively owned more than 12.5% of our outstanding common stock as of March 10, 2006 and have nominated Mr. Spass and Mani A. Sadeghi to serve on our Board.

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Item 14. Principal Independent Registered Public Accounting Firm Fees and Services

Principal Accountant Fees and Services

The following is a summary of the fees billed to us by Ernst & Young LLP for professional services the firm rendered for the fiscal year ended December 31, 2005 and the six months ended December 31, 2004 and the fees billed to Aames Financial for services the firm rendered for the fiscal year ended June 30, 2004:

	Fiscal 2005		Six Months Ended December 31, 2004			Fiscal 2004
Audit fees	$	1,290,500		$	465,000	$	612,000
Audit related fees	$	145,443		$	295,500	$	258,000
Tax fees	$	399,395		$	117,000	$	530,000
All other fees	—			—		—
Total	$	1,835,338		$	877,000	$	1,400,000

Audit Fees.Audit fees are those fees billed for professional services rendered for the audit of our consolidated financial statements for the fiscal year ended December 31, 2005 and the six months ended December 31, 2004 and Aames Financial’s consolidated financial statements for the fiscal year ended June 30, 2004, review of the interim consolidated financial statements included in our and Aames Financial’s quarterly reports and services that are normally provided by Ernst & Young in connection with statutory and regulatory filings or engagements.

Audit-Related Fees.Audit-related fees are those fees billed for assurance and related services that reasonably related to the performance of the audit or review of our and Aames Financial’s consolidated financial statements and are not reported under “Audit Fees.” These services include professional services regarding accounting consultations in connection with audits of employee benefit plans, preparation of registration statements on Forms S-11 and S-4 in the six-month period ended December 31, 2004 and in the fiscal year ended June 30, 2004, professional services related to securitization due diligence, professional services related to our compliance with the requirements of the Sarbanes-Oxley Act of 2002 and accounting consultations in connection with our issuance of restricted stock units.

Tax Fees.   Tax fees are those fees billed for professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal and state tax compliance and assistance with tax reporting requirements and audit compliance. They also include tax consulting services in connection with our conversion into a real estate investment trust in the six-month period ended December 31, 2004 and in the fiscal year ended June 30, 2004.

Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent Auditors

Consistent with the policies of the SEC regarding auditor independence, our Audit Committee is directly responsible for the appointment, compensation and oversight of our independent registered public accounting firm. In recognition of this responsibility, our Audit Committee has established the following procedures for the pre-approval of all audit and permissible non-audit services provided by such firm. Prior to the engagement of the independent registered accounting firm for the next year’s audit, our management submits to the Audit Committee a detailed list of each of the audit, audit-related, tax and other services expected to be provided by the firm during that year, an estimate of cost of such services and, where necessary to ensure our Audit Committee has a sufficient understanding of the services, detailed documentation regarding such services. The Audit Committee reviews the list and any related documentation, considers the impact that each proposed service may have on the independent registered accounting firm’s independence from us and then approves a detailed list of the services the firm may

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provide which includes a budget for each service. Our independent registered public accounting firm and management periodically report to our Audit Committee regarding the services provided by the firm in accordance with this pre-approval and the fees for such services. Where the fee for a pre-approved service is materially in excess of the amount budgeted for such service at the time of its pre-approval, the excess amount will not be paid without the approval of our Audit Committee or its Chair. Similarly, if our management desires to engage the firm for a service that has not be pre-approved by our Audit Committee, whether because it was not contemplated at the time of our Audit Committee’s initial pre-approval or otherwise, the firm may not be engaged to provide such service until the specific pre-approval of our Audit Committee or its Chair has been obtained. If the Chair of our Audit Committee so pre-approves any fee or service, he will report his pre-approval decision to the Audit Committee at its next meeting.

In accordance with the foregoing procedures, all professional services provided by Ernst & Young LLP to us during our fiscal year ended December 31, 2005 and the six months ended December 31, 2004 were pre-approved by our Audit Committee, and all professional services provided by Ernst & Young LLP to Aames Financial during its fiscal year ended June 30, 2004 were pre-approved by Aames Financial’s Audit Committee, without any reliance on the de minimis exception to the requirement that all such services be pre-approved by the Audit Committee set forth in Section 2.01(c)(7)(i)(C) of Regulation S-X.

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PART IV

Item 15.Exhibits and Financial Statement Schedules

(a)The following documents are filed as part of this report:

(1)Consolidated Financial Statements: Financial Statements listed as part of “Item 8. Financial Statements and Supplementary Data.”

(2)Exhibits: All exhibits listed in the “Exhibit Index” are filed with this report or are incorporated by reference into this report.

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SIGNATURES

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

		AAMES INVESTMENT CORPORATION
Dated: March 27, 2006	By:	/S/ A. JAY MEYERSON
		A. Jay Meyerson Chairman of the Board and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

	Signature		Title		Date
/s/  JENNE K. BRITELL		Lead Independent Director		March 27, 2006
Jenne K. Britell
/s/  DAVID H. ELLIOTT		Director		March 27, 2006
David H. Elliott
/s/  JOHN F. FARRELL		Director		March 27, 2006
John F. Farrell
/s/  A. JAY MEYERSON		Chairman of the Board and Chief Executive Officer		March 27, 2006
A. Jay Meyerson		(Principal Executive Officer)
/s/  MANI A. SADEGHI		Director		March 27, 2006
Mani A. Sadeghi
/s/  ROBERT A. SPASS		Director		March 27, 2006
Robert A. Spass
/s/  JON D. VAN DEUREN		Executive Vice President—Finance and Chief		March 27, 2006
Jon D. Van Deuren		Financial Officer (Principal Financial Officer)
/s/  STEPHEN E. WALL		Director		March 27, 2006
Stephen E. Wall

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EXHIBIT INDEX

Exhibit No.	Description
2.1	Form of Agreement and Plan of Merger (incorporated by reference to Exhibit 2.1 to Amendment No. 3 to the registration statement on Form S-11 (333-113890) filed with the SEC on September 7, 2004 (“Amendment No. 3 to S-11”)).
3.1	Articles of Amendment and Restatement (incorporated by reference to Exhibit 3.1 to the Aames Investment Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 2004 (the “2004 10-K”)).
3.2	Amended and Restated Bylaws.
4.1	Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 3 to S-11).
10.1	Amended and Restated Aames Investment Equity Incentive Plan (incorporated by reference to Exhibit 10.1 to the 2004 10-K).
10.2	Registration Rights and Governance Agreement dated November 1, 2004 among Specialty Finance Partners, Capital Z Management LLC and Aames Investment (incorporated by reference to Exhibit 10.2 to the 2004 10-K).
10.3	Employment Agreement dated November 3, 2004 among Aames Investment Corporation, Aames Financial Corporation and A. Jay Meyerson (incorporated by reference to Exhibit 10.3 to the 2004 10-K).*
10.4	Form of Aames Investment Corporation Indemnification Agreement with directors and executive officers (incorporated by reference to Exhibit 10.4 to the 2004 10-K).*
10.5(b)	Amendment No. 1 dated March 18, 2005 to Master Repurchase Agreement dated August 5, 2004 among Bear Stearns Mortgage Capital Corporation, Aames Capital Corporation, Aames Investment Corporation, and Aames Funding Corporation (incorporated by reference to Exhibit 10.5(b) to the 2004 10-K).
10.5(c)	Extension Letter to the Master Repurchase Agreement dated as of July 29, 2005 by and among Bear Stearns Mortgage Capital Corporation, Aames Capital Corporation, Aames Investment Corporation and Aames Funding Corporation (incorporated by reference to Exhibit 10.5(d) to the June 2005 10-Q).
10.5(d)	Amendment No. 3 to the Master Repurchase Agreement dated as of October 31, 2005 by and among Bear Stearns Mortgage Capital Corporation, Aames Capital Corporation, Aames Investment Corporation and Aames Funding Corporation (incorporated by reference to Exhibit 10.5(e) to the September 30, 2005 10-Q (the “September 2005 10-Q”)).
10.5(e)	Amendment No. 4 to the Master Repurchase Agreement dated as of March 1, 2006 by and among Bear Stearns Mortgage Capital Corporation, Aames Capital Corporation, Aames Investment Corporation and Aames Funding Corporation.
10.6	Stock Purchase Agreement dated November 1, 2004 by and among Aames Investment Corporation, Friedman, Billings, Ramsey Group, Inc., Aames Financial Corporation, Aames TRS, Inc. and Aames Newco, Inc. (incorporated by reference to Exhibit 10.6 to Amendment No. 10 to the registration statement on Form S-11 333-113890 filed with the SEC on October 29, 2004).

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10.7	Registration Rights Agreement dated November 1, 2004 by and between Aames Investment Corporation, Inc. and Friedman, Billings, Ramsey Group, Inc. (incorporated by reference to Exhibit 10.7 to the 2004 10-K).
10.8(a)	Master Repurchase Agreement among Aames Capital Corporation, Aames Funding Corporation, Aames Investment Corporation and Morgan Stanley Bank dated December 2, 2005.
10.8(b)	Amendment No. 1 dated as of January 5, 2006 to the Master Repurchase Agreement among Aames Capital Corporation, Aames Funding Corporation and Morgan Stanley Bank dated December 2, 2005.
10.8(c)	Amendment No. 2 dated as of March 3, 2006 to the Master Repurchase Agreement among Aames Capital Corporation, Aames Funding Corporation and Morgan Stanley Bank dated December 2, 2005.
10.9(a)	Amended and Restated Master Loan and Security Agreement dated as of April 28, 2005 among Aames Capital Corporation, Aames Investment Corporation and Citigroup Global Markets Realty Corp. (incorporated by reference to Exhibit 10.9 to the June 2005 10-Q).
10.9(b)	Amendment Number One dated as of September 30, 2005 to the Amended and Restated Master Loan and Security Agreement dated as of April 28, 2005 among Aames Capital Corporation, Aames Investment Corporation and Citigroup Global Markets Realty Corp. (incorporated by reference to Exhibit 10.9(b) to the September 2005 10-Q).
10.9(c)	Amendment Number Two dated as of November 3, 2005 to the Amended and Restated Master Loan and Security Agreement dated as of April 28, 2005 among Aames Capital Corporation, Aames Investment Corporation and Citigroup Global Markets Realty Corp. (incorporated by reference to Exhibit 10.9(c) to the September 2005 10-Q).
10.9(d)	Amendment Number Three dated as of March 1, 2006 to the Amended and Restated Master Loan and Security Agreement dated as of April 28, 2005 among Aames Capital Corporation, Aames Investment Corporation and Citigroup Global Markets Realty.
10.10(a)	Warehouse Loan and Security Agreement dated as of February 10, 2000 as Amended and Restated to and including February 4, 2005 among Aames Investment Corporation, Aames Capital Corporation, Aames Funding Corporation and Greenwich Capital Financial Products, Inc. (incorporated by reference to Exhibit 10.10 to the 2004 10-K).
10.10(b)	Amendment Number One dated May 25, 2005 to the Warehouse and Loan Security Agreement among Aames Investment Corporation, Aames Capital Corporation, Aames Funding Corporation and Greenwich Capital Financial Products, Inc. (incorporated by reference to Exhibit 10.10(b) to the June 2005 10-Q).
10.10(c)	Amendment Number Three dated July 29, 2005 to the Warehouse and Loan Security Agreement among Aames Investment Corporation, Aames Capital Corporation, Aames Funding Corporation and Greenwich Capital Financial Products, Inc. (incorporated by reference to Exhibit 10.10(d) to the September 2005 10-Q).
10.10(d)	Amendment Number Four dated August 15, 2005 to the Warehouse and Loan Security Agreement among Aames Investment Corporation, Aames Capital Corporation, Aames Funding Corporation and Greenwich Capital Financial Products, Inc. (incorporated by reference to Exhibit 10.10(e) to the September 2005 10-Q).

113

10.10(e)	Amendment Number Five dated October 31, 2005 to the Warehouse and Loan Security Agreement among Aames Investment Corporation, Aames Capital Corporation, Aames Funding Corporation and Greenwich Capital Financial Products, Inc. (incorporated by reference to Exhibit 10.10(f) to the September 2005 10-Q).
10.10(f)	Amendment Number Six dated January 18, 2006 to the Warehouse Loan and Security Agreement among Aames Investment Corporation, Aames Capital Corporation, Aames Funding Corporation and Greenwich Capital Financial Products, Inc.
10.10(g)	Amendment Number Eight dated March 1, 2006 to the Warehouse Loan and Security Agreement among Aames Investment Corporation, Aames Capital Corporation, Aames Funding Corporation and Greenwich Capital Financial Products, Inc.
10.11(a)	Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans dated as of January 18, 2005 among Lehman Brothers Bank, FSB, Aames Capital Corporation and Aames Investment Corporation (incorporated by reference to Exhibit 10.11 to the 2004 10-K).
10.11(b)	Second Amendment dated October 28, 2005 to Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans among Lehman Brothers Bank, FSB, Aames Capital Corporation and Aames Investment Corporation (incorporated by reference to Exhibit 10.11(c)  to the September 2005 10-Q).
1011(c)	Third Amendment dated as of January 17, 2006 to the Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans among Lehman Brothers Bank, FSB, Aames Capital Corporation and Aames Investment Corporation (incorporated by reference to Exhibit 10.11(d) to the September 2005 10-Q).
10.11(d)	Fourth Amendment dated as of March 3, 2006 to the Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans among Lehman Brothers Bank, FSB, Aames Capital Corporation and Aames Investment Corporation.
10.12(a)	Revolving Credit and Security Agreement dated as of July 1, 2003 among Aames Capital Corporation, Aames Funding Corporation and Countrywide Warehouse Lending (incorporated by reference to Exhibit 10.35(a) to the Aames Financial Corporation Form 10-K for the year ended June 30, 2003).
10.12(b)	Amendment No. 3 to Revolving Credit and Security Agreement dated as of November 4, 2004 among Aames Capital Corporation, Aames Funding Corporation and Countrywide Warehouse Lending (incorporated by reference to Exhibit 10.12(b) to the 2004 10-K).
10.12(c)	Commitment Letter for the Revolving Credit and Security Agreement dated March 25, 2005 among Aames Capital Corporation, Aames Funding Corporation, Aames Investment Corporation, Aames Financial Corporation and Countrywide Warehouse Lending (incorporated by reference to Exhibit 10.12(c) to the June 2005 10-Q).
10.12(d)	Amendment No. 4 to Revolving Credit and Security Agreement dated as of March 25, 2005 among Aames Capital Corporation, Aames Funding Corporation and Countrywide Warehouse Lending (incorporated by reference to Exhibit 10.12(e) to the Aames Investment Corporation Quarterly Report on Form 10-Q for the quarter ended March 31, 2005).
10.12(e)	Amendment No. 2 to the Countrywide Commitment Letter dated as of November 4, 2005 (incorporated by reference to Exhibit 10.12(f) to the September 2005 10-Q).

114

10.12(f)	Amendment No. 3 to the Countrywide Commitment Letter dated March 9, 2006.
10.13	Office Lease dated as of September 15, 1998, between Colonnade Wilshire Corp. and Aames Financial Corporation for the premises located at 3731 Wilshire Boulevard, Los Angeles, California (incorporated by reference to Exhibit 10.12 to the Aames Financial Corporation Form 10-K for the year ended June 30, 1999).
10.14(a)	Office Building Lease dated as of August 7, 1996 between Aames Financial Corporation and California Plaza IIA, LLC for the premises located at 350 S. Grand Avenue, Los Angeles, California (incorporated by reference to Exhibit 10.17(a) to the Aames Financial Corporation Form 10-K for the year ended June 30, 1997 (the “Aames Financial 1997 10-K”)).
10.14(b)	First Amendment to Office Building Lease dated as of August 15, 1997 between Aames Financial Corporation and California Plaza IIA, LLC (incorporated by reference to Exhibit 10.17(b) to the Aames Financial 1997 10-K).
10.14(c)	Second Amendment to Office Building Lease dated as of July 29, 2005 by and between EOP-TWO California Plaza, LLC and Aames Financial Corporation (incorporated by reference to Exhibit 10.14(c) to the June 2005 10-Q).
10.15	Office Building Lease dated as of September 13, 2002 between Aames Financial Corporation and Jamboree LLC for the premises located at 3347 and 3351 Michelson Drive, Irvine, California (incorporated by reference to Exhibit 10.18 to the Aames Financial Corporation Form 10-K for the fiscal year ended June 30, 2002).
10.16	Director Compensation Plan Summary (incorporated by reference to Exhibit 99.1 to the Aames Investment Corporation Current Report on Form 8-K/A dated March 23, 2005 filed with the SEC on March 31, 2005).*
10.17	2005 Executive Management Incentive Compensation Plan Summary (incorporated by reference to the Exhibit 10.17 to the 2004 10-K).*
10.18	Aames Financial Corporation Executive Severance Plan, amended and released dated as of August 4, 2005. * (incorporated by reference to Exhibit 10.18 to the September 2005 10-Q).
10.19	Amendment No. 1 dated July 1, 2005 to the Employment Agreement among Aames Investment Corporation, Aames Financial Corporation and A. Jay Meyerson.*
21.1	Subsidiaries of Aames Investment Corporation.
23.1	Consent of Independent Registered Public Accounting Firm.
31.1	Certification of A. Jay Meyerson pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Jon D. Van Deuren pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Indicates a management contract or compensatory arrangement.

115

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and StockholdersAames Investment Corporation

We have audited the accompanying consolidated balance sheets of Aames Investment Corporation and subsidiaries (the Company) as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for the year ended December 31, 2005, the six-month period ended December 31, 2004, and for each of the two years in the period ended June 30, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aames Investment Corporation and subsidiaries at December 31, 2005 and 2004, and the consolidated results of their operations and their cash flows for the year ended December 31, 2005, the six-month period ended December 31, 2004, and for each of the two years in the period ended June 30, 2004, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Aames Investment Corporation’s internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2006, expressed an unqualified opinion thereon.

/s/    ERNST & YOUNG LLP

Los Angeles, California

March 14, 2006

F-1

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	December 31,
	2005			2004
ASSETS
Cash and cash equivalents:
Unrestricted	$	36,078		$	31,641
Restricted	87,094			6,139
Loans held for sale, at lower of cost or market	951,177			484,963
Loans held for investment, net	4,085,536			1,725,046
Advances and other receivables, net	39,591			22,740
Residual interests, at estimated fair value	—			39,082
Deferred income taxes	28,489			28,401
Equipment and improvements, net	10,810			8,840
Prepaid expenses and other	30,713			22,076
Derivative financial instruments, at estimated fair value	58,147			31,947
Total assets	$	5,327,635		$	2,400,875
LIABILITIES
Financings on loans held for investment	$	3,623,188		$	1,157,470
Revolving warehouse and repurchase facilities	1,341,683			809,213
Borrowings	16,487			7,680
Accounts payable and accrued expenses	54,300			63,242
Accrued dividends	21,584			3,780
Income taxes payable	889			1,864
Total liabilities	5,058,131			2,043,249
Commitments and contingencies (Note 17)
STOCKHOLDERS’ EQUITY
Preferred stock, par value $0.01 per share; 160,000,000 shares authorized; none outstanding	—			—
Common stock, par value $0.01 per share; 500,000,000 shares authorized; 61,828,340 shares and 61,360,271 shares issued and outstanding at December 31, 2005 and 2004, respectively	618			614
Additional paid-in capital	656,041			655,437
Retained deficit	(387,155		)	(298,425		)
Total stockholders’ equity	269,504			357,626
Total liabilities and stockholders’ equity	$	5,327,635		$	2,400,875

See accompanying notes to consolidated financial statements.

F-2

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

	Years Ended December 31,							Six Months Ended December 31,				Years Ended June 30,
	2005			2004				2004				2004			2003
				(unaudited)
Interest income	$	340,515			$	93,181			$	56,103		$	69,446		$	69,186
Interest expense	170,942				32,396				18,490			26,227			35,119
Net interest income	169,573				60,785				37,613			43,219			34,067
Provision for losses on loans held for investment	40,294				1,900				1,900			—			—
Net interest income after provision for loan losses	129,279				58,885				35,713			43,219			34,067
Noninterest income:
Gain on sale of loans	30,277				177,607				59,960			261,801			174,710
Loan servicing	6,330				6,634				3,070			7,829			8,896
Total noninterest income	36,607				184,241				63,030			269,630			183,606
Net interest income after provision for loan losses and noninterest income	165,886				243,126				98,743			312,849			217,673
Noninterest expense:
Personnel	91,217				120,608				62,660			160,169			117,547
Production	35,351				36,504				17,165			35,113			25,849
General and administrative	44,707				49,162				27,238			44,527			43,738
Write-down of residual interests	—				—				—			—			34,923
Total noninterest expense	171,275				206,274				107,063			239,809			222,057
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	(5,389		)		36,852				(8,320		)	73,040			27,327
Income tax provision (benefit)	842				(4,933		)		(5,235		)	(17,674		)	(1,839		)
Net income (loss)	$	(6,231	)		$	41,785			$	(3,085	)	$	90,714		$	29,166
Net income (loss) to common stockholders:
Basic	$	(6,231	)		$	32,085			$	(3,085	)	$	77,660		$	15,697
Diluted	$	(6,231	)		$	41,785			$	(3,085	)	$	92,804		$	29,166
Net income (loss) per common share:
Basic	$	(0.10	)		$	0.52			$	(0.05	)	$	11.02		$	2.39
Diluted	$	(0.10	)		$	0.68			$	(0.05	)	$	0.89		$	0.30
Dividends per common share — declared	$	1.30			$	0.06			$	0.06		$	—		$	—
Weighted average number of common shares outstanding:
Basic	62,517				61,316				61,322			7,049			6,558
Diluted	62,517				61,348				61,322			104,364			96,053

See accompanying notes to consolidated financial statements.

F-3

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands)

																	Additional
	Convertible Preferred Stock												Common				Paid-in				Retained
	Series B				Series C				Series D				Stock				Capital				Deficit			Total
Balance, June 30, 2002		$	27			$	20			$	60			$	6			$	418,027		$	(380,955	)	$	37,185
Net income		—				—				—				—				—			29,166			29,166
Stock options exercised		—				—				—				1				91			—			92
Dividends accrued on preferred stock		—				—				—				—				—			(13,469		)	(13,469		)
Balance, June 30, 2003		27				20				60				7				418,118			(365,258		)	52,974
Net income		—				—				—				—				—			90,714			90,714
Stock options exercised		—				—				—				—				123			—			123
Cancellation of stock		—				—				—				—				(146		)	—			(146		)
Dividends accrued on preferred stock		—				—				—				—				—			(13,054		)	(13,054		)
Balance, June 30, 2004		27				20				60				7				418,095			(287,598		)	130,611
Net loss		—				—				—				—				—			(3,085		)	(3,085		)
Redemption of stock in connection with recapitalization		(27		)		(20		)		(60		)		(7		)		—			—			(114		)
Issuance of common stock in initial public offering and concurrent private placement, net		—				—				—				614				226,033			—			226,647
Stock-based compensation related to restricted stock units		—				—				—				—				10,902			—			10,902
Stock options exercised		—				—				—				—				407			—			407
Dividends accrued on preferred stock		—				—				—				—				—			(3,962		)	(3,962		)
Dividends declared on common stock		—				—				—				—				—			(3,780		)	(3,780		)
Balance, December 31, 2004		—				—				—				614				655,437			(298,425		)	357,626
Net loss		—				—				—				—				—			(6,231		)	(6,231		)
Conversions and cancellations of restricted stock units and awards		—				—				—				4				(1,632		)	—			(1,628		)
Stock-based compensation related to restricted stock awards		—				—				—				—				2,264			—			2,264
Equity issuance expenses		—				—				—				—				(28		)	—			(28		)
Dividends on common stock		—				—				—				—				—			(82,499		)	(82,499		)
Balance, December 31, 2005		$	—			$	—			$	—			$	618			$	656,041		$	(387,155	)	$	269,504

See accompanying notes to consolidated financial statements.

F-4

AAMES INVESTMENT CORRATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

							Six Months
	Years Ended						Ended			Years Ended
	December 31,						December 31,			June 30,
	2005			2004			2004			2004			2003
				(unaudited)
Cash Flows from Operating Activities:
Net income (loss)	$	(6,231	)	$	41,785		$	(3,085	)	$	90,714		$	29,166
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Provision for losses on loans held for investment	40,294			1,900			1,900			—			—
Depreciation and amortization	3,370			3,981			1,880			4,125			4,132
Stock-based compensation	2,264			10,902			10,902			—			—
Mark-to-market (gain) loss on derivatives	143			(6,344		)	(6,344		)	—			—
Deferred income taxes	(88		)	(12,195		)	(6,516		)	(21,885		)	—
Mortgage servicing rights amortization	—			—			—			220			2,700
Residual interests discount accretion	—			(972		)	—			(4,357		)	(16,558		)
Write-down of residual interests	—			—			—			—			34,923
Debt extinguishment income	—			—			—			—			(31,711		)
Loans held for sale:
Originations and purchases	(6,754,528		)	(7,419,645		)	(3,587,548		)	(6,988,994		)	(4,446,180		)
Proceeds from sales	6,288,314			7,625,550			4,114,750			6,383,706			4,501,371
Net (increase) decrease in loans held for sale	(466,214		)	205,905			527,202			(605,288		)	55,191
(Increase) decrease in:
Advances and other receivables, net	(16,851		)	(1,557		)	(5,289		)	17,398			19,961
Residual interests	39,082			13,869			5,038			89,469			49,700
Prepaid expenses and other	(8,637		)	(6,802		)	(4,416		)	(204		)	(2,746		)
Derivative financial instruments	(26,343		)	(25,603		)	(19,287		)	—			—
Increase (decrease) in:
Accounts payable and accrued expenses	(10,570		)	28,689			9,204			15,618			2,415
Income taxes payable	(975		)	1,864			57			(1,268		)	(5,481		)
Net cash provided by (used in) operating activities	(450,756		)	255,422			511,246			(415,458		)	141,692
Cash Flows from Investing Activities:
Increase in loans held for investment, net	(2,400,784		)	(1,726,946		)	(1,726,946		)	—			—
Purchase of equipment and improvements	(5,340		)	(3,758		)	(2,012		)	(3,905		)	(2,124		)
Net cash used in investing activities	(2,406,124		)	(1,730,704		)	(1,728,958		)	(3,905		)	(2,124		)

F-5

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(in thousands)

							Six Months
	Years Ended						Ended				Years Ended
	December 31,						December 31,				June 30,
	2005			2004			2004				2004			2003
				(unaudited)
Cash Flows from Financing Activities:
Financings on loans held for investment	2,465,718			1,157,470				1,157,470			—			—
Net increase (decrease) in revolving warehouse and repurchase facilities	532,470			206,162				(77,220		)	542,758			(39,444		)
Proceeds from (reduction) in borrowings	8,807			(79,537		)		(70,603		)	(60,229		)	(93,747		)
Net proceeds from issuance of common stock, net of recapitalization/merger of entities under common control	—			226,533				226,533			—			—
Proceeds from stock options exercised	—			523				407			127			92
Payment of common stock dividends	(64,695		)	—				—			—			—
Payment of preferred stock dividends	—			(9,700		)		(3,962		)	(64,286		)	—
Payment of equity issuance expenses	(28		)	—				—			—			—
Net cash provided by (used in) financing activities	2,942,272			1,501,451				1,232,625			418,370			(133,099		)
Net increase (decrease) in cash and cash equivalents	85,392			26,169				14,913			(993		)	6,469
Cash and cash equivalents, beginning of period	37,780			11,611				22,867			23,860			17,391
Cash and cash equivalents, end of period	$	123,172		$	37,780			$	37,780		$	22,867		$	23,860
Supplemental disclosures:
Interest paid	$	159,765		$	25,786			$	14,841		$	20,463		$	33,491
Income taxes paid	$	2,666		$	5,706			$	1,325		$	6,309		$	3,645

See accompanying notes to consolidated financial statements.

F-6

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.Recent Events (unaudited)

On March 15, 2006, Aames Investment Corporation (“Aames Investment”), which elected to qualify as a mortgage real estate investment trust, or REIT, for U.S. federal income tax purposes for the six months ended December 31, 2004 and for the year ended December 31, 2005, announced that it intends to alter its structure so that it would no longer be required to pay out at least 90% of its taxable earnings to its stockholders as dividends, but rather, would retain its capital for internal growth. On March 24, 2006, Aames Investment’s Board of Directors approved a corporate reorganization to achieve that goal. In the reorganization, the following would occur:

1.      Aames Financial Corporation (“Aames Financial’’), Aames Investment’s current taxable REIT subsidiary or TRS, would form a wholly owned REIT subsidiary, to acquire, hold and service mortgage loans.

2.      If approved by the stockholders, Aames Investment would merge with the REIT subsidiary, which would result in: (i) Aames Financial becoming the new parent of Aames Investment, (ii) common stockholders of Aames Investment exchanging their shares for common shares of Aames Financial, and (iii) Aames Investment becoming a subsidiary of Aames Financial.

3.      Since Aames Investment, the REIT, would be a subsidiary of Aames Financial, it would distribute its taxable income, including income from the REIT portfolio, to Aames Financial, rather than to public stockholders. This would enable Aames Financial to retain the earnings on the REIT portfolio for internal capital growth. In addition, by reorganizing Aames Investment as a subsidiary of Aames Financial, Aames Investment’s taxable earnings, including the earnings from the REIT portfolio, would be subject to shelter from taxation through utilization of Aames Financial’s historical net operating loss carryforwards (“NOLs”) until fully utilized. The taxable income generated by Aames Financial is subject to regular corporate income tax. However, as of December 31, 2005, Aames Financial had approximately $304.1 million of NOLs for U.S. federal income tax purposes that expire from 2017 through 2025. We believe that Aames Financial will be able to use these NOLs to offset its future income, subject to annual limitations and, as a result, Aames Financial will have substantially lower effective tax rates than statutory rates.

On March 27, 2006, the Company announced that it is in the process of closing two of its five wholesale operations centers, in Deerfield, Florida and Parsippany, New Jersey, and consolidating the functions previously performed in those centers into its centers located in Irvine, California, Jacksonville, Florida and Dallas, Texas. The Company has also eliminated 100 positions in the wholesale channel. The Company expects to record a charge to income of from $2.0 million to $3.0 million during the three months ended March 31, 2006 in connection with these steps. The combined annual savings from these actions are currently estimated at $10.0 million.

Note 2. Summary of Significant Accounting Policies

General

Aames Investment is a mortgage real estate investment trust, or REIT, which manages a portfolio of subprime residential mortgage loans.  Its principal subsidiary, Aames Financial, is a national mortgage banking company that commenced operations  in 1954 and focuses primarily on originating, selling and servicing residential mortgage loans through both wholesale and retail channels under the name “Aames

F-7

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Home Loan.”  Aames Investment, together with its subsidiaries, is collectively referred to as the “Company.”

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

On November 9, 2004, Aames Investment completed its reorganization with Aames Financial Corporation, formerly Aames Investment’s parent company. The reorganization transaction was accounted for as a recapitalization-restructuring of entities under common control with no change in accounting basis. The common shares of Aames Financial and the Series B, C and D Convertible Preferred Stock were exchanged in connection with the reorganization.

At December 31, 2005, Specialty Finance Partners (“SFP”), a partnership controlled by Capital Z Financial Services Fund, II, L.P., a Bermuda partnership (together with SFP, “Capital Z”) and others affiliated with Capital Z together owned approximately 14.0 million shares, or approximately 23% of the Company’s common shares outstanding. Representatives of Capital Z currently have two seats on the Company’s seven member Board of Directors.

Aames Investment elected to qualify as a REIT for U.S. federal income tax purposes. Aames Financial Corporation is the taxable REIT subsidiary (“TRS”) of Aames Investment.

Aames Investment’s strategy is to use its equity capital and funds borrowed under revolving warehouse and repurchase facilities to finance mortgage loan originations, and to use those financing sources together with on-balance sheet securitizations to finance its REIT portfolio of mortgage loans. Aames Investment will retain in its REIT portfolio a portion of these loans, largely hybrid/adjustable rate mortgage loans. Aames Investment will sell the remainder, including a majority of the fixed-rate mortgage loans originated, on a whole loan servicing-released basis to third parties.

The Company’s principal market is borrowers whose financing needs are not being met by traditional mortgage lenders for a variety of reasons, including the need for specialized loan products or credit histories that may limit such borrowers’ access to credit. Mortgage loans originated are extended on the basis of equity in the borrower’s property and the creditworthiness of the borrower.

Principles of Accounting and Consolidation

The consolidated financial statements of the Company include the accounts of Aames Investment and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expense during the reporting period. Actual results could differ from those estimates.

F-8

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments with an original maturity of no more than three months to be cash equivalents.

Loans Held for Sale

Loans held for sale are mortgage loans the Company plans to securitize or sell as whole loans and are carried at the lower of aggregate cost or estimated market value. Market value is determined by current investor yield requirements. Aggregate cost includes the unpaid principal balance, net of deferred loan origination fees and costs.  Loan origination fees, as well as discount points and direct origination costs, are initially deferred and recorded as an adjustment to the cost of the loan and are reflected in earnings when the loan is sold. The Company maintains a lower of cost or market valuation allowance for loans held for sale that are severely delinquent, have suffered declines in market value, had credit deterioration, have significant collateral deficiencies, or have other attributes that reduce their sale potential.

Loans Held for Investment and Allowance for Loan Losses

Loans held for investment represent either mortgage loans securitized through transactions structured as financings or mortgage loans designated as held for investment for future on-balance sheet securitization. Loans held for investment are carried at amortized cost less the allowance for loan losses. Amortized cost includes the unpaid principal balance, net of deferred loan origination fees and costs, which are amortized to interest income using the interest method over the estimated economic life of the loans. The financing related to the securitizations of loans held for investment is included in the Company’s consolidated balance sheet as financings on loans held for investment.

The allowance for loan losses is maintained at a level deemed adequate by management to provide for probable and inherent losses in the portfolio. The allowance is based upon a quarterly review of past loan loss experience, loan portfolio composition and risk, current economic conditions that may affect the borrower’s ability to pay, delinquencies and the underlying collateral value. While management uses available information to estimate losses on loans held for investment, future additions to the allowance may be necessary based on changes in estimates resulting from economic and other conditions. Loans that are deemed to be uncollectible are charged off and deducted from the allowance. The provision for loan losses and recoveries on loans previously charged off are added to the allowance.

Interest income is accrued as earned. Loans are placed on non-accrual status when any portion of principal or interest is past due 59 days, or earlier when concern exists as to the ultimate collectibility of principal or interest. When a loan is placed on non-accrual status, the accrued and unpaid interest is reversed as a reduction of interest income and accrued interest receivable. Interest income is subsequently recognized on a cash basis if and when remitted by the borrower. Loans return to accrual status when principal and interest become current.

Real Estate Owned

Real estate owned (“REO”) is comprised of properties acquired through or in lieu of foreclosure in satisfaction of unpaid mortgage loans. REO is recorded in prepaid expenses and other assets in the consolidated financial statements at the lower of cost or estimated net realizable value, after estimated disposition costs. Estimated realizable values are based on an evaluation of various factors, including appraisals, sales of comparable assets and estimated market conditions. Properties that become REO are

F-9

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

marked to market, if necessary, upon transfer, with any loss being reflected as a charge-off to the allowance for loan losses. Gains and losses on the subsequent sales of REO, periodic revaluation of REO, and the net costs of maintaining REO are included in noninterest expense on the consolidated statements of operations.

Advances and Other Receivables

Advances and other receivables consist primarily of principal and interest advances to bondholders of financings on loans held for investment, and, to a lesser extent, include servicing advances, servicing and miscellaneous fees receivable, accrued interest, and other miscellaneous receivables. Prior to June 30, 2005, advances and other receivables also included cash distributions receivable from the off-balance sheet securitization trusts.

In its capacity as servicer of loans in the securitization trusts, the Company is required to advance the principal and interest due to the bondholders of the securitization trusts when delinquent borrowers fail to make timely payments on their mortgage loans. The Company is also required to fund foreclosure-related expenses, delinquent real estate taxes and property insurance on mortgage loans. In its capacity as servicer of the loans in the securitization trusts, the Company is not required to make advances which would not be expected to be recoverable. The Company records principal and interest advances and servicing advances as accounts receivable on its consolidated balance sheets at the time the cash advance is made and until recovered. The Company, as servicer, is entitled to recover these advances from regular monthly cash flows from the mortgage loans including monthly payments, loan pay-offs, and liquidation proceeds from the sale of real estate collateral underlying the mortgage loan if the properties are foreclosed upon and sold. The Company periodically evaluates the realizability of its advance receivables, and charges income for amounts deemed uncollectible. As a means of improving its liquidity, the Company has, from time to time, entered into agreements with unaffiliated third parties pursuant to which the third parties have made certain, but not all, of the servicing advances. Additionally, as a means of recovering outstanding advances prior to the time borrowers remit their payments or the mortgaged property is foreclosed upon and sold, from time to time, the Company may sell its advances.

Equipment and Improvements, Net

Equipment and improvements, net, are stated at cost less accumulated depreciation and amortization. Depreciation on furniture, fixtures and equipment is computed on the straight-line method over the estimated useful lives of the related assets, which range from three to seven years. Leasehold improvements are amortized on a straight-line basis over the lesser of the term of the lease or the estimated lives of the improvements.

Revenue Recognition

The Company depends on its ability to sell mortgage loans in the secondary markets, as market conditions allow, to generate cash proceeds to pay down its revolving warehouse and repurchase facilities and fund loan originations and purchases. The ability of the Company to sell loans in the secondary market on acceptable terms is essential for the continuation of the Company’s loan origination and purchase operations.

The Company records a sale of mortgage loans and the resulting gain on sale of loans when it surrenders control over the loans to a buyer (the “transferee”). Control is surrendered when (i) the loans

F-10

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

are isolated from the Company, put presumptively beyond the reach of the Company and its creditors, even in a bankruptcy or other receivership, (ii) either the transferee has the unconstrained right to pledge or exchange the loans or the transferee is a qualifying special purpose entity and the beneficial interest holders in the qualifying special purpose entity have the unconstrained right to pledge or exchange the beneficial interests, and (iii) the Company does not maintain effective control over the loans through an agreement that entitles and obligates the Company to repurchase or redeem the loans before their maturity or through an agreement that unilaterally entitles the Company to repurchase or redeem the loans.

The Company sells its mortgage 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. The Company charges gain on sale for estimated representation and warranty provisions related to probable losses on representation and warranty claims by investors.

At December 31, 2005, the Company had no retained residual interests. During the year ended December 31, 2005, the Company called the seven remaining securitization trusts in which it retained residual interests. No adjustments to the carrying values of the retained residual interests were deemed necessary as a result of calling these residual trusts.

When the Company consummated an off-balance sheet securitization structured as a sale, it conveyed loans to a separate entity (such as a trust) in exchange for cash proceeds and a residual interest in the trust. The cash proceeds were raised through an offering of pass-through certificates or bonds evidencing the right to receive principal payments and interest on the certificate balance or bonds. The non-cash gain on sale of loans represented 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 was determined by allocating the original cost basis amount of loans (including premiums paid on loans originated) between the portion sold and any retained interests (residual interests), based on their relative fair values at the date of transfer. The residual interests represented, over the estimated life of the loans, the present value of the estimated future cash flows based upon the expected timing that the estimated future cash flows would be released from the securitization trusts to the Company, i.e., the “cash out” method for residual interest valuation. These cash flows were 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 entered into in connection with its securitizations required the overcollateralization of the trust. The amount and timing of the cash flows expected to be released from the securitization trusts considered the impact of the applicable delinquency and credit loss limits specified in the securitization agreements.

The Company determined the present value of the cash flows at the time each securitization transaction closed using certain estimates made by management at the time the mortgage loans were sold. These estimates included: (i) a future rate of prepayment; (ii) credit losses; and (iii) a discount rate used to calculate present value. The future cash flows represented management’s best estimate. Management monitored performance of the loans and changes in the estimates were reflected in earnings.

F-11

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At December 31, 2005 and 2004, the Company did not have any mortgage servicing rights. Prior to June 30, 2000 and in connection with off-balance sheet securitizations, the Company capitalized mortgage servicing rights based on an allocation of the carrying amount of the loans securitized on a servicing retained basis. Mortgage servicing rights were amortized in proportion to and over the period of estimated future servicing income. Subsequent to June 30, 2000, the Company sold or securitized mortgages on a servicing released basis; therefore, the Company did not capitalize mortgage servicing rights.

Stock-Based Compensation

Through June 30, 2004, the Company compensated employees through the issuance of common stock options in accordance with the Aames Financial Corporation Stock Option Plan dated February 10, 1999, as amended (the “1999 Plan”). The 1999 Plan provided for the issuance of options to purchase shares of the Company’s common stock to officers, key executives and consultants of the Company. The 1999 Plan was replaced by the 2004 Aames Investment Corporation Equity Incentive Plan (the “2004 EIP”) on November 5, 2004. Pursuant to the 2004 EIP, both restricted stock units and restricted stock awards were issued. Since November 5, 2004, no stock options are outstanding.

As permitted by Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” the Company recognized compensation expense using the intrinsic value method specified in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”. Had compensation been recorded in accordance with SFAS 123, the Company’s net income (loss) and net income (loss) per common share data would have reflected the pro forma amounts indicated below (in thousands, except per share data):

	Years Ended December 31,			Six Months Ended December 31,		Years Ended June 30,
	2005	2004		2004		2004		2003
		(unaudited)
Net income (loss):
As reported	N/A		N/A		N/A	$	90,714	$	29,166
Pro forma(1)	N/A		N/A		N/A	88,927		27,993
Basic income (loss) to common stockholders:
As reported	N/A		N/A		N/A	$	77,660	$	15,697
Pro forma(1)	N/A		N/A		N/A	75,873		14,524
Diluted income (loss) to common stockholders:
As reported	N/A		N/A		N/A	$	92,804	$	29,166
Pro forma(1)	N/A		N/A		N/A	91,017		27,993
Basic income (loss) per common share:
As reported	N/A		N/A		N/A	$	11.02	$	2.39
Pro forma	N/A		N/A		N/A	10.76		2.21
Diluted (loss) per common share:
As reported	N/A		N/A		N/A	$	0.89	$	0.30
Pro forma	N/A		N/A		N/A	0.87		0.29

(1)The pro forma stock-based compensation cost, net of tax effects, was $1.8 million and $1.2 million for the years ended June 30, 2004 and 2003.

F-12

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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

	Years Ended December 31,			Six Months Ended December 31,		Years Ended June 30,
	2005	2004		2004		2004		2003
		(unaudited)
Dividend yield	N/A		N/A		N/A	0.00	%	0.00	%
Expected volatility	N/A		N/A		N/A	107.00	%	118.00	%
Risk-free interest rate	N/A		N/A		N/A	3.00	%	2.97	%
Expected life of option	N/A		N/A		N/A	4.5 years		4.5 years

The weighted average fair values of options granted during the years ended June 30, 2004 and 2003 were $2.08 and $0.75, respectively.

Advertising Expense

The Company’s policy is to charge advertising costs to expense when incurred.

Income Taxes

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

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

Earnings (Loss) Per Common Share

Basic earnings (loss) per share excludes dilution and is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted from issuance of common stock that then shared in earnings, except when their effect is antidilutive.

F-13

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Risk Management, Derivative Instruments, and Hedging Activities

The Company’s earnings may be directly affected by the level of and fluctuation in interest rates in the on-balance sheet securitization trusts.

The Company uses hedge products to mitigate interest rate exposure to its financings on loans held for investment that are indexed to one-month LIBOR. The Company has utilized hedge products that included interest rate cap agreements, forward interest rate swap agreements, and other hedging products. From time to time, the Company uses hedge products to mitigate interest rate exposure on its inventory and pipeline of mortgage loans held for sale. The use, amount, and term of derivative financial instruments are determined by members of the Company’s senior management.

Derivative financial instruments are recorded at fair value on the Company’s consolidated balance sheets. The Company records the fair value of any derivatives in a separate asset or liability line item, as the case may be, depending on materiality considerations. The Company’s derivative financial instruments are not designated, and do not qualify, as accounting hedges. Therefore, changes in the fair value of the derivative financial instruments are recorded currently in operations as realized or incurred.

Reclassifications

Certain amounts related to December 31, 2004, and June 30, 2004 and 2003 have been reclassified to conform to the December 31, 2005 presentation.

Recently Issued Accounting Standards

In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”), which replaces APB No. 20, “Accounting Changes,” and Statement of Financial Accounting Standards No. 3, “Reporting Changes in Interim Financial Statements.”  SFAS 154  changes the accounting for and reporting of a change in accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so. SFAS 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005 and will only affect the Company’s consolidated financial statements upon adoption of a voluntary change in accounting principle by the Company.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), an amendment of SFAS 123. This Statement requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. SFAS 123R requires measurement of fair value of employee stock options using an option pricing model that takes into account the awarded options’ unique characteristics. SFAS 123R requires charging the recognized cost to expense over the period the employee provides services to earn the award, generally its vesting period. In April of 2005, the Securities and Exchange Commission revised the required adoption date of SFAS 123R. As a result of this change, the Company was required to adopt SFAS 123R effective January 1, 2006. The adoption of SFAS 123R did not have a material impact on the Company’s consolidated financial statements.

F-14

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 3.   Cash and Cash Equivalents and Cash Held in Trust

At December 31, 2005 and 2004, the Company had corporate cash and cash equivalents available of $123.2 million and $37.8 million, respectively, of which $87.1 million and $6.1 million were restricted, respectively. At December 31, 2005 and 2004, the Company had $70.1 million and $7.0 million of overnight investments, respectively.

The Company services mortgage loans in its portfolio of loans held for investment, services mortgage loans  for others on a long-term basis and services mortgage loans on an interim basis, which consist of loans held for sale and loans subserviced for others. In such capacity, certain funds are collected from borrowers and placed in segregated trust accounts which totaled $37.2 million and $29.4 million at December 31, 2005 and 2004, respectively. These accounts and corresponding liabilities are not included in the accompanying consolidated balance sheets.

Note 4.   Loans Held for Sale

The following summarizes the composition of the Company’s loans held for sale by interest rate type at the dates indicated (in thousands):

	December 31,
	2005		2004
Fixed rate mortgages	$ 397,112		$ 234,563
Adjustable rate loans	570,716		253,406
Total unpaid principal balance	967,828		487,969
Net deferred loan origination (fees) costs	(4,547	)	1,228
Valuation allowance	(12,104	)	(4,234	)
Total loans held for sale, at lower of cost or market	$ 951,177		$ 484,963

The Company maintains a lower of cost or market (“LOCOM”) valuation allowance for loans held for sale that are severely delinquent, have suffered declines in market value, had credit deterioration, have significant collateral deficiencies, or have other attributes that reduce their sale potential.

The following table summarizes the activity in the LOCOM valuation allowance for the periods indicated (in thousands):

						Six Months
						Ended
	Years Ended December 31,					December 31,
	2005		2004			2004
			(unaudited)
Balance, beginning of period	$   4,234			$ 7,497			$ 7,029
LOCOM provision	19,897			2,429			781
Transfer from advances receivable allowance(1)	600			—			—
Charge-offs	(12,677	)		(6,460	)		(3,602	)
Recoveries	50			768			26
Net charge-offs	(12,627	)		(5,692	)		(3,576	)
Balance, end of period	$ 12,104			$ 4,234			$ 4,234

(1)See Note 6. Advances and Other Receivables, Net

F-15

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Loans held for sale that were past due 90 days or more were $12.4 million and $6.7 million at December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, the Company had loans held for sale of approximately $14.0 million and $7.7 million, respectively, on which the accrual of interest had been discontinued. Had these loans been current throughout their terms, interest income would have been higher by approximately $1.6 million and $0.7 million during the years ended December 31, 2005 and 2004, respectively.

At December 31, 2005, $934.9 million of the Company’s loans held for sale were pledged as collateral under the Company’s warehouse and repurchase facilities.

Note 5.   Loans Held for Investment, Net

The following table summarizes the components of loans held for investment, net, at the dates indicated (in thousands):

	December 31,
	2005		2004
Securitized	$ 3,659,657		$ 1,187,435
Not yet securitized	461,451		531,261
Total unpaid principal balance	4,121,108		1,718,696
Net deferred loan origination costs	7,787		8,250
Allowance for loan losses	(43,359	)	(1,900	)
Total loans held for investment, net	$ 4,085,536		$ 1,725,046

The following table summarizes the activity in the allowance for losses for loans held for the periods indicated (in thousands):

					Six Months
					Ended
	Years Ended December 31,				December 31,
	2005		2004		2004
			(unaudited)
Balance, beginning of period	$ 1,900			$     —		$     —
Provision for loan losses	40,294			1,900		1,900
Transfer from advances receivable allowance(1)	2,582			—		—
Charge-offs	(1,449	)		—		—
Recoveries	32			—		—
Net charge-offs	(1,417	)		—		—
Balance, end of period	$ 43,359			$ 1,900		$ 1,900

(1)See Note 6. Advances and Other Receivables, Net

Loans held for investment that were past due 90 days or more were $127.0 million and $277,000 at December 31, 2005 and 2004, respectively. At December 31, 2005 and 2004, the Company had loans held for investment of approximately $269.7 million and $0.5 million, respectively, on which the accrual of interest had been discontinued. Had these loans been current throughout their terms, interest income would have been higher by approximately $8.2 million and $18,000 during the years ended December 31, 2005 and 2004, respectively.

F-16

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

At December 31, 2005, all of the securitized loans held for investment collateralized the Company’s financings on loans held for investment, whereas $438.6 million of the not yet securitized loans held for investment were pledged under the Company’s warehouse and repurchase facilities.

Note 6.   Advances and Other Receivables, Net

The following table presents the components of advances and other receivables as of the dates indicated (in thousands):

	December 31,
	2005	2004
Accrued interest and other receivables	$ 33,427	$ 11,380
Principal, interest and servicing advances, net	6,164	10,430
Cash due from securitization trusts	—	859
Servicing and miscellaneous fees	—	71
Total advances and other receivables	$ 39,591	$ 22,740

The following table presents the activity in the advances receivable allowance for the periods indicated (in thousands):

						Six Months
						Ended
	Years Ended December 31,					December 31,
	2005		2004			2004
			(unaudited)
Balance, beginning of period	$ 4,170			$   8,150			$ 4,498
Provision (benefit) for uncollectible advances	(3,456	)		—			—
Transfer to allowance for loan losses	(2,582	)		—			—
Transfer to LOCOM valuation allowance	(600	)		—			—
Addition related to pool calls	8,266			10,390			—
Net charge-offs	(3,897)			(14,370	)		(328	)
Balance, end of period	$ 1,901			$   4,170			$ 4,170

The Company maintains an advance allowance for potentially uncollectible advances. During the year ended December 31, 2005, the Company sold in whole loan sales to third parties substantially all of the subperforming mortgage collateral received in the 2005 calls of off-balance sheet securitizations. In connection with the sales, the Company either wrote-off or collected the advances related to the mortgage collateral. Based on its assessment of lower future advance loss exposure on advances related to called collateral, the Company reduced the advance allowance by $3.5 million through a credit to income.

In addition, during the year ended December 31, 2005, the Company transferred $2.6 million and $0.6 million of the advance allowance to the allowance for loan losses and the LOCOM valuation account, respectively. The $2.6 million transfer was made to combine the Company’s assessment of credit risk related to aged servicing advances on the portfolio of loans held for investment. The $0.6 million transfer was made in light of the Company’s assessment of valuation risk to loans held for sale having aged servicing advances from called off-balance sheet securitizations.

F-17

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 7.   Residual Interests

At December 31, 2005, the Company had no retained residual interests. During the year ended December 31, 2005, the Company called the seven remaining securitization trusts in which it retained residual interests. No adjustments to the carrying values of the retained residual interests were deemed necessary as a result of calling these residual trusts. Residual interests were recorded as a result of the sale of loans through securitizations that the Company structured as sales, referred to as “off-balance sheet securitizations”.

The activity in residual interests during the periods indicated is summarized as follows (in thousands):

						Six Months
	Years Ended					Ended			Years Ended
	December 31,					December 31,			June 30,
	2005		2004			2004			2004		2003
			(unaudited)
Residual interests, beginning of period	$ 39,082			$ 51,979			$ 44,120		$ 129,232		$ 197,297
Accretion	—			972			—		4,357		16,558
Cash received from the trusts	(39,082	)		(13,869	)		(5,038	)	(89,469	)	(49,700	)
Write-down of residual interests	—			—			—		—		(34,923	)
Residual interests, end of year	$         —			$ 39,082			$ 39,082		$ 44,120		$ 129,232

During the years ended December 31, 2005 and 2004, the six months ended December 31, 2004, and the year ended June 30, 2004, the Company did not dispose of any of its mortgage loans in off-balance sheet securitizations. During the year ended June 30, 2003, the Company completed a $315.0 million off-balance sheet securitization. The Company sold to Capital Z Investments, L.P., a Bermuda partnership (“CZI”), an affiliate of Capital Z, for $8.7 million of cash the residual interests created in the $315.0 million off-balance sheet securitization.

During the years ended December 31, 2005 and June 30, 2004 and 2003, the Company received cash from the trusts in the amounts of $47.3 million, $61.8 million, and $4.4 million, respectively, in connection with finalizing calls of off-balance sheet securitization trusts.

During the years ended December 31, 2005 and June 30, 2004 and 2003, the Company paid cash to the trusts in the amounts of $201.7 million, $320.7 million, and $17.6 million, respectively, in connection with calls of off-balance sheet securitization trusts and the related buy-out of the remaining mortgage loans held in the trusts.

During the year ended June 30, 2003, the Company experienced higher than expected loss severities and higher than estimated prepayment speed activity for mortgage loans in the securitization trusts. Therefore, the Company increased its credit loss assumptions and changed its annual prepayment rate assumptions and 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. On August 15, 2003, the Company called four 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 at June 30, 2003.

F-18

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The table below summarizes cash flows received from (paid to) off-balance sheet securitization trusts during the periods indicated (in thousands):

				Six Months
	Years Ended			Ended		Years Ended
	December 31,			December 31,		June 30,
	2005	2004		2004		2004	2003
		(unaudited)
Servicing fees collected	$  2,001		$    3,761		$    1,613	$    4,131	$    5,310
Purchases of delinquent and foreclosed loans	(40)		(1,357)		(1,357)	(1,452)	(7,322)
Interest and servicing advances made	(8,943)		(19,852)		(11,978)	(21,809)	(31,190)
Interest and servicing advances collected	15,961		20,071		9,577	41,716	45,769
Cash received from CZI on sales of residual interests	—		—		—	—	8,695
Proceeds from off-balance sheet securitizations	—		—		—	—	314,958

Included in net losses on liquidations of mortgage loans in off-balance sheet securitization trusts are net losses of $2.9 million, $12.0 million, $0.5 million and $1.7 million incurred in purchases of delinquent and foreclosed loans during the years ended December 31, 2005 and 2004 and June 30, 2004 and 2003, respectively. There were no net losses incurred on liquidations of delinquent and foreclosed mortgage loans purchased out of off-balance sheet securitizations during the six months ended December 31, 2004.

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

	Year Ended
	June 30, 2003
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 (in thousands)		$   11,370
Weighted average discount rate		15.0	%

F-19

AAMES INVESTEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 8.   Mortgage Servicing Rights, Net

The Company had no mortgage servicing rights at December 31, 2005 and 2004 and June 30, 2004. The activity in mortgage servicing rights for the periods indicated is summarized as follows (in thousands):

	June 30,
	2004			2003
Mortgage servicing rights, net, beginning of year	$	220		$	2,920
Amortization	(220		)	(2,700		)
Mortgage servicing rights, net, end of year	$	—		$	220

Note 9.   Equipment and Improvements, Net

Equipment and improvements, net, consisted of the following at the dates indicated (in thousands):

	December 31,
	2005			2004
Computer hardware	$	17,525		$	15,471
Furniture and fixtures	12,258			11,309
Computer software	16,559			15,094
Leasehold improvements	4,834			4,190
Subtotal	51,176			46,064
Accumulated depreciation and amortization	(40,366		)	(37,224		)
Total equipment and improvements, net	$	10,810		$	8,840

Depreciation and amortization expense was comprised of the following components for the periods indicated in thousands):

	Years Ended December 31,					Six Months Ended December 31,			Years Ended June 30,
	2005		2004			2004			2004		2003
			(unaudited)
Depreciation	$	2,731		$	3,514		$	1,632	$	3,716	$	3,793
Amortization	639			467			248		409		339
	$	3,370		$	3,981		$	1,880	$	4,125	$	4,132

F-20

AAMES INVESTEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 10.   Prepaid Expenses and Other Assets

Prepaid expenses and other assets consisted of the following at the dates indicated (in thousands):

	December 31,
	2005		2004
Licensing, permit and performance bond deposits	$	4,049	$	6,338
Unamortized debt issuance costs	12,364		6,228
Unamortized commitment fees	1,463		2,402
Prepaids, security deposits and other deferred charges	2,935		3,071
Real estate owned	7,100		—
Other assets	2,802		4,037
Total prepaid expenses and other	$	30,713	$	22,076

Note 11.   Derivative Financial Instruments

Hedging Interest Rate Risk

In the interim period between loan origination or purchase and securitization of loans, the Company is exposed to interest rate risk. The majority of loans are sold or securitized within 90 days of origination or purchase. However, a portion of the loans are held for sale or securitization for as long as twelve months (or longer, in very limited circumstances) prior to securitization. If interest rates rise during the period that the mortgage loans are held, the spread between the weighted average interest rate on the loans to be sold or to be securitized and the pass-through interest rates on the securities to be sold (the latter having increased as a result of market interest rate movements) may narrow. From time to time, the Company mitigates this exposure to rising interest rates through interest rate cap agreements, forward interest rate swap agreements or other hedging activities. These hedging activities help mitigate the risk of absolute movements in interest rates.

A significant risk to the Company’s operations that relates to its REIT portfolio management is the risk that interest rates on its assets will not adjust at the same time or amount as the rates on its liabilities adjust. This  is because the interest on the underlying hybrid/adjustable rate mortgage loans is based on fixed rates payable on the underlying loans for the first two or three years from origination, while the holders of the applicable bonds issued in securitization are generally paid based on an adjustable one-month LIBOR-based yield. Moreover, even after the initial fixed period, the Company’s loans generally adjust every six months and are subject to periodic rate caps, whereas the bonds adjust monthly based primarily on LIBOR. Therefore, an increase in one-month LIBOR generally reduces the net interest income the Company receives from its securitized loan portfolio. The Company attempts to mitigate a portion of this net interest margin variability during the first two years after loan origination by purchasing derivative financial instruments referred to as interest rate cap agreements.

At December 31, 2005 and 2004, the Company was party to $5.9 billion and $2.5 billion, respectively, of notional amounts of interest rate cap agreements designed to mitigate interest rate exposure on its financings of loans held for investment that were indexed to one-month LIBOR. The fair value of the Company’s position in the interest rate caps was $58.1 million and $31.9 million at December 31, 2005 and 2004. Included in interest expense during the years ended December 31, 2005 and 2004 and the six months ended December 31, 2004 were losses (gains) of $0.1 million, $(6.3) million, and $(6.3) million, respectively, to mark open hedge positions to their fair value.

F-21

AAMES INVESTEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The activity in derivative financial instruments related to loans held for investment is summarized as follows for the periods indicated (in thousands):

	Years Ended December 31,
	2005			2004
				(unaudited)
Balance, beginning of period	$	31,947			$	—
Premium	26,343				25,603
Mark-to-market (loss) gain	(143		)		6,344
Balance, end of period	$	58,147			$	31,947

The Company, as it has from time to time, entered into interest rate contracts designed to mitigate interest rate exposure to the Company’s inventory and pipeline of loans held for sale in anticipation of closing loan dispositions transactions during the period. Gain on sale of loans during the year and six months ended December 31, 2004 included charges of $2.9 million of derivative related losses on interest rate cap agreements which closed during the period.

At June 30, 2004, the Company was a party to $550.0 million (notional) of interest rate cap agreements that were indexed to one-month LIBOR. The fair value of the Company’s position in the interest rate caps was $6.3 million at June 30, 2004. Gain on sale of loans during the year ended June 30, 2004 includes a diminimis credit to income to mark the interest rate caps to market at June 30, 2004. At June 30, 2003, the Company had no hedge instruments in place. Gain on sale of loans during the year ended June 30, 2003 includes $10.9 million of derivative related losses. All of the $10.9 million of hedge losses relate to losses on forward interest swap agreements which closed during the year ended June 30, 2003.

Credit Risk

The Company is exposed to on-balance sheet credit risk related to its loans held for investment and loans held for sale. The Company is exposed to off-balance sheet credit risk related to loans which the Company has committed to originate.

Note 12.   Financings on Loans Held for Investment

Financings on loans held for investment consisted of the following as of the dates indicated (in thousands):

	December 31,
	2005			2004
Securitized bonds	$	3,638,402		$	1,159,736
Unamortized debt discount	(15,214		)	(2,266		)
Total financings on loans held for investment	$	3,623,188		$	1,157,470

The interest rates on the securitized bonds reset monthly and are indexed to one-month LIBOR.

At December 31, 2005 and 2004, the Company had $12.4 million and $6.2 million, respectively, of unamortized debt issuance costs related to the issuance of the financings on loans held for investment which are included in prepaid expenses and other assets in the accompanying consolidated balance sheets.

F-22

AAMES INVESTEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Unamortized debt discount and debt issuance costs are amortized to interest expense over the expected economic life of the bonds.

The Company’s maturity of financings on loans held for investment is based on certain prepayment assumptions. The Company currently estimates the average life of the financings to be approximately 1.8 to 4.0 years.

The following table summarizes the Company’s current estimate of the maturity of the financings (dollar in thousands):

2006	$	1,498,405
2007	1,057,794
2008	470,684
2009	249,877
2010	135,214
Thereafter	226,428
	$	3,638,402

Note 13.   Revolving Warehouse and Repurchase Facilities

Amounts outstanding under committed revolving warehouse and repurchase facilities, which are collateralized by loans held for sale, consisted of the following at the dates indicated (in thousands):

	December 31,
	2005			2004
Repurchase facilities at December 31, 2005:
$500.0 million facility, expires January 17, 2007; bearing interest at 0.95% to 1.45% over one-month LIBOR, depending on collateral		$	217,359	$	256,686
$500.0 million facility, expires August 4, 2006; generally bearing interest at 0.85% to 1.0% over one-month LIBOR, depending on collateral		187,587		93,078
$500.0 million facility expires December 1, 2006, generally bearing interest at 0.85% to 1.50% over one-month LIBOR, depending on collateral		416,679		95,962
Warehouse facilities at December 31, 2005:
$700.0 million facility expires April 3, 2006; bearing interest at 0.95% to 2.00% over one-month LIBOR, depending on collateral		220,381		191,327
$300.0 million facility expires September 29, 2006; generally bearing interest at 0.95% to 1.65% over one-month LIBOR, depending on collateral		76,045		6,303
$300.0 million facility, expires March 24, 2006; generally bearing interest at 0.95% to 2.75% over one-month LIBOR, depending on collateral		223,632		165,857
Total amounts outstanding under revolving warehouse and repurchase facilities		$	1,341,683	$	809,213

While no assurance can be made, the Company expects to renew on terms at or similar to those currently in place, the aforementioned revolving warehouse facilities.

F-23

AAMES INVESTEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following table summarizes certain information related to the Company’s revolving warehouse and repurchase facilities at the dates indicated (in thousands):

	December 31,
	2005			2004
Total revolving warehouse and repurchase facilities:
Committed	$	2,700,000		$	2,450,000
Uncommitted	100,000			100,000
Total	$	2,800,000		$	2,550,000
Borrowing availability	$	1,458,317		$	1,740,787
One-month LIBOR	4.39		%	2.40		%

The following table summarizes certain information related to the Company’s revolving warehouse and repurchase facilities during the periods indicated (in thousands):

	Years Ended December 31,						Six Months Ended December 31,				Years Ended June 30,
	2005			2004			2004				2004			2003
				(unaudited)
Borrowings under revolving warehouse and repurchase facilities:
Average amount outstanding during the period	$	1,061,766		$	939,514			$	1,216,129		$	755,638		$	550,521
Maximum amount outstanding at any month-end during the period	$	1,706,334		$	1,377,227			$	1,377,227		$	1,257,905		$	901,176
Weighted average interest rate during the period	4.34		%	2.71		%		2.82		%	2.06		%	2.22		%

The Company and certain of its subsidiaries are parties to the revolving warehouse and repurchase facilities which are utilized to finance the origination of mortgage loans prior to sale or securitization. Revolving warehouse and repurchase facilities typically have a 364-day term and are designated to fund mortgage loans originated within specified underwriting guidelines. The revolving warehouse and repurchase facilities contain provisions requiring the Company to meet certain periodic financial covenants, including, among other things, minimum liquidity, stockholders’ equity, leverage and net income levels. The Company was in compliance with these covenants at December 31, 2005. Additionally, some of the revolving warehouse and repurchase facilities fund less than 100% of the principal balance of the mortgage loans originated, requiring the use of working capital to fund the remaining portion. The majority of the mortgage loans originated under the facilities remain in the facilities for a period generally of up to 90 days, at which point they are securitized or sold to institutional investors.

At December 31, 2005 and 2004, included in prepaid expenses and other assets in the accompanying consolidated balance sheets were $1.5 million and $2.4 million, respectively, of deferred commitment fees relating to the revolving warehouse and repurchase facilities remaining to be amortized to interest expense over their respective remaining terms.

F-24

AAMES INVESTEMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 14.   Borrowings

Amounts outstanding under borrowings consisted of the following at the dates indicated (in thousands):

	December 31,
	2005		2004
Short-term collateralized financing facility	$	16,487	$	—
Financing Facility due March 2005	—		7,680
Total borrowings	$	16,487	$	7,680

At December 31, 2005, the Company was party to a revolving facility pursuant to which $35.6 million at par value of retained bonds (resulting from the Company’s securitization of loans) was pledged as collateral. Amounts outstanding under the facility were subject to interest at one-month or one-week LIBOR, plus 65 to 150 basis points, depending the term of the requested advance.

During January 2006, the Company elected to issue certain of these retained bonds and the proceeds from the issuance were used to fully repay the related amounts outstanding under the facility.

Note 15.   Accounts Payable and Accrued Expenses

The Company maintains a representation and warranty allowance for exposure to losses that arise in connection with loans that it is required to repurchase from whole loan buyers. The allowance is included in accounts payable and accrued expenses in the consolidated balance sheets. The allowance, which totaled $9.0 million at December 31, 2005, is carried to address repurchase obligations arising from representations and warranty claims, and obligations for other contractual disputes with investors with respect to mortgage loan sales. Allowance levels are a function of expected losses based on expected and actual pending claims and repurchase requests, historical experience, loan volume and loan sales distribution channels and the assessment of probability related to such claims. While the ultimate amount of repurchases and warranty claims is uncertain, the Company believes that the allowance is adequate. The Company will continue to evaluate the adequacy of its representation and warranty reserve and may continue to allocate a portion of its gain on sale proceeds for these exposures going forward. Changes in the level of provision to this allowance impacts the overall gain on sale margin from quarter to quarter.

The following table presents activity in the representation and warranty allowance for the periods indicated (in thousands):

								Six Months
								Ended
	Years Ended December 31,							December 31,
	2005			2004				2004
				(unaudited)
Balance, beginning of period	$	13,137			$	6,528			$	11,636
Provision for representation, warranty and other miscellaneous losses	2,547				22,212				7,359
Charge-offs	(6,710		)		(15,827		)		(5,871		)
Recoveries	40				224				13
Net charge-offs	(6,670		)		(15,603		)		(5,858		)
Balance, end of period	$	9,014			$	13,137			$	13,137

F-25

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 16. Income Taxes

The income tax provision (benefit) consisted of the following for the periods indicated (in thousands):

	Years Ended December 31,							Six Months Ended December 31,				Years Ended June 30,
	2005			2004				2004				2004			2003
				(unaudited)
Current taxes:
Federal	$	763			$	2,525			$	700		$	2,450		$	3,509
State	167				(152		)		581			1,761			652
	930				2,373				1,281			4,211			4,161
Deferred taxes:
Federal	(239		)		(11,761		)		(2,388		)	(26,405		)	(6,000		)
State	151				4,455				(4,128		)	4,520			—
	(88		)		(7,306		)		(6,516		)	(21,885		)	(6,000		)
Total income tax provision (benefit)	$	842			$	(4,933	)		$	(5,235	)	$	(17,674	)	$	(1,839	)

The following table summarizes the tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities at the dates indicated (in thousands):

	December 31,
	2005			2004
Deferred tax assets:
Net operating loss carry forward	$	120,429		$	68,825
Residual interests	—			25,668
Mark-to-market	6,615			2,600
Compensation	4,523			5,638
Other	—			322
Total gross deferred tax assets	131,567			103,053
Tax valuation allowance	(95,454		)	(71,024		)
Deferred tax liabilities:
State taxes	(5,319		)	(3,628		)
Other	(2,305		)	—
Total gross deferred tax liabilities	(7,624		)	(3,628		)
Deferred tax asset, net	$	28,489		$	28,401

F-26

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The following tables reconcile the statutory federal income tax rate to the effective income tax rate for the periods presented (dollars in thousands):

	Year Ended December 31, 2005
	Permanent Differences				Tax Effected Permanent Differences				Effective Tax Rate Calculation
Income tax provision (benefit)										$	842
Income (loss) before income taxes										(5,389		)
Effective tax rate										(15.6		)%
Federal statutory rate										35.0		%
Tax valuation allowance		$	81,213			$	28,425			(527.5		)%
State taxes		(4,400		)		(2,860		)		53.1		%
Non-taxable REIT income		(64,192		)		(22,467		)		416.9		%
Other		(1,010		)		(370		)		6.9		%
										(15.6		)%

	Year Ended December 31, 2004 (unaudited)
	Permanent Differences				Tax Effected Permanent Differences				Effective Tax Rate Calculation
Income tax provision (benefit)										$	(4,933	)
Income (loss) before income taxes										36,852
Effective tax rate										(13.4		)%
Federal statutory rate										35.0		%
Tax valuation allowance		$	(74,065	)		$	(21,597	)		(58.6		)%
State taxes		10,564				6,947				18.9		%
Non-taxable REIT income		(9,465		)		(3,313		)		(9.0		)%
Non-deductible reorganization expense		3,000				1,050				2.8		%
Other		(2,261		)		(919		)		(2.5		)%
										(13.4		)%

	Six Months Ended December 31, 2004
	Permanent Differences				Tax Effected Permanent Differences				Effective Tax Rate Calculation
Income tax provision (benefit)										$	(5,235	)
Income (loss) before income taxes										(8,320		)
Effective tax rate										62.9		%
Federal statutory rate										35.0		%
Tax valuation allowance		$	(8,301	)		$	(2,905	)		34.9		%
State taxes		4,283				2,784				(33.5		)%
Non-taxable REIT income		(9,465		)		(3,313		)		39.8		%
Non-deductible reorganization expense		3,000				1,050				(12.6		)%
Other		174				61				(0.7		)%
										62.9		%

F-27

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Year Ended June 30, 2004
	Permanent Differences			Tax Effected Permanent Differences				Effective Tax Rate Calculation
Income tax provision (benefit)									$	(17,674	)
Income (loss) before income taxes									73,040
Effective tax rate									(24.2		)%
Federal statutory rate									35.0		%
Tax valuation allowance	$	(135,526	)		$	(47,434	)		(64.9		)%
State taxes	6,281				4,163				5.7		%
									(24.2		)%

	Year Ended June 30, 2003
	Permanent Differences				Tax Effected Permanent Differences				Effective Tax Rate Calculation
Income tax provision (benefit)										$	(1,839	)
Income (loss) before income taxes										27,327
Effective tax rate										(6.7		)%
Federal statutory rate										35.0		%
Tax valuation allowance		$	(28,058	)		$	(11,750	)		(43.0		)%
Other, net		848				355				1.3		%
										(6.7		)%

The REIT reorganization of the Company in November 2004 and the investment in the Company by Capital Z in February 1999 resulted in a change of control for income tax purposes thereby potentially limiting the Company’s ability to utilize net operating loss carry forwards and certain other future deductions.

The Company’s residual interest in real estate mortgage investment conduits (“REMIC”) creates excess inclusion income for tax purposes which may give rise to a current income tax liability. Available net loss carryforwards and current operating losses may not reduce taxable income below excess inclusion income earned from the REMICs.

The Company’s estimated federal net operating loss carryforward at December 31, 2005 and related expiration dates are as follows (dollars in thousands):

Year of Expiration	Amount
2017		$	40.0
2018		76.3
2019		47.0
2020		8.2
2021		6.4
2022		7.1
2023		1.3
2024		12.9
2025		104.9
Total federal tax net operating losses		$	304.1

F-28

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 17. Commitments and Contingencies

Operating Leases

The Company leases office space under operating leases expiring at various dates through March 2012. Certain leases have provisions for renewal options and/or rental increases at specified increments or in relation to increases in the Consumer Price Index.

The following table summarizes rent expense, sublease receipts and sublease related discount authorization related to such operating leases during the periods presented (in thousands):

	Rent Expense		Sublease Receipts			Sublease Discount Amortization
Years ended:
December 31, 2005	$	12,029		$	1,537		$	266
December 31, 2004 (unaudited)	10,108			1,476			276
Six months ended:
December 31, 2004	$	5,225		$	740		$	137
Years ended:
June 30, 2004	$	9,383		$	1,445		$	280
June 30, 2003	8,160			1,426			289

At December 31, 2005, future minimum rental payments required under non-cancelable operating leases and minimum receipts under subleases that have initial or remaining terms in excess of one year are as follows (in thousands):

	December 31, 2005
	Minimum Rental Payments			Minimum Sublease Receipts			Net Minimum Rental Payments
2006		$	13,465		$	1,172		$	12,293
2007		12,959			1,087			11,872
2008		11,001			1,087			9,914
2009		6,469			878			5,591
2010		5,570			878			4,692
Thereafter		6,345			1,097			5,248
		$	55,809		$	6,199		$	49,610

Litigation

In July 2005, the Company was served with a putative class action complaint entitled Webb v. Aames Investment Corporation, et. al. brought in the United States District Court, Central District of California. In December 2005, the Company was served with a putative class action complaint entitled Cooper v. Aames Investment Corporation, et. al. brought in the United States District Court, Eastern District of Wisconsin. These complaints allege violations of the Fair Credit Reporting Act (“FCRA”) in connection with prescreened offers of credit, which the Company made to plaintiffs. Webb also alleges that the Company’s direct mail pieces failed to comply with the requirements of FCRA that the required notice be clear and

F-29

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

conspicuous. The plaintiffs seek to recover on behalf of themselves and others similarly situated compensatory and punitive damages and attorneys’ fees. The Company filed a motion to dismiss the clear and conspicuous claims in connection with Webb and while the Company believes that a motion with leave to amend will be granted, an order has not yet been entered. The Company also filed a motion to transfer Cooper to the Central District of California where Webb is pending. There have been no rulings on the merits of the plaintiffs’ claims or the claims of the putative class in either matter and no class has been certified. The Company intends to vigorously defend these matters but if a class is certified and prevails on the merits, the potential liability could have a material adverse affect on the Company’s business. The outcome of these cases and the amount of liability, if any, cannot be determined at this time.

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

On September 7, 2004, Aames Financial received a Civil Investigative Demand and Notice to Proceed from the Office of the Attorney General of Iowa, that, although not alleging any wrongdoing, sought documents and data relating to its business and lending practices in Iowa. Aames Financial has cooperated and intends to cooperate fully with the Office of the Attorney General of Iowa in this investigation. Because the investigation is at an early stage, Aames Financial cannot predict the outcome of the investigation and its effect, if any on its business in Iowa.

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

Note 18. Fair Value of Financial Instruments

The following disclosures of the estimated fair value of financial instruments at December 31, 2005 and 2004 are made by the Company using available market information, historical data, and appropriate valuation methodologies. However, considerable judgment is required to interpret market and historical data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange.

F-30

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts (in thousands).

	December 31, 2005				December 31, 2004
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Cash and cash equivalents	$	123,172	$	123,172	$	37,780	$	37,780
Loans held for sale	951,177		962,243		484,963		491,194
Loans held for investment, net	4,085,536		4,105,351		1,725,046		1,758,951
Advances and other receivables	39,591		39,591		22,740		22,740
Interest rate cap agreements	58,147		58,147		31,947		31,947
Residual interests	—		—		39,082		39,082
Financings on loans held for investment	3,623,188		3,623,188		1,157,470		1,157,470
Revolving warehouse and repurchase facilities	1,341,683		1,341,683		809,213		809,213
Borrowings	16,487		16,487		7,680		7,680

The fair value estimates at December 31, 2005 and 2004, are based on pertinent information available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value amounts, such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

The following describes the methods and assumptions used by the Company in estimating fair values:

·Cash and cash equivalents are based on the carrying amount which is a reasonable estimate of the fair value.

·Loans held for sale are based on outstanding whole loan commitments or current investor yield requirements.

·Loans held for investment are based on the estimated value of the portfolio of loans held for investment at current market prices for similar loans using current investor yield requirements.

·Advances and other receivables are generally short term in nature, therefore the carrying value approximates fair value.

·Interest rate caps are based on quoted market prices.

·Residual interests and mortgage servicing rights are based on the present value of expected future cash flows using assumptions based on the Company’s historical experience, industry information and estimated rates of future prepayment and credit loss.

·Amounts outstanding under financings on loans held for investment and borrowings generally bear market rates of interest and, therefore, are based on the carrying amount which is a reasonable estimate of fair value.

·Amounts outstanding under revolving warehouse and repurchase facilities are short term in nature and generally bear market rates of interest and, therefore, are based on the carrying amount which is a reasonable estimate of fair value.

F-31

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Further, the Company has identified the following loan products that are included in our loans held for investment whose contractual terms may give rise to a concentration of credit risk and increase our exposure to risk of nonpayment or realization:

1)Traditional hybrid ARM loans that are subject to future payment increases when the loans become subject to an adjustable interest rate after the lapse of the initial fixed rate period,

2)Loans with initial interest-only payment features that are subject to (i) future payment increases due to interest rate resets and, (ii) after the lapse of the interest-only period, conversion to amortizing  principal and interest payment increases, and

3)Mortgage loans with combined loan-to-value ratios above 80.0%.

The table below details the unpaid principal balance of the identified loan products and their percentage composition of the unpaid principal balance of the Company’s loans held for investment at December 31, 2005 (dollars in thousands):

Loan Product or Characteristic	Unpaid  Principal Balance		Percentage of Loans Held for Investment
Traditional hybrid:
Hybrid ARM 2/28	$	2,870,672		69.7	%
Hybrid ARM 3/27	99,468			2.4	%
Hybrid ARM 5/25	144,983			3.5	%
Hybrid ARM 6 month adjustable	227,465			5.5	%
	$	3,342,588		81.1	%
Interest-only hybrid:
Hybrid ARM 2/28	$	395,990		9.6	%
Hybrid ARM 3/27	14,284			0.3	%
Hybrid ARM 5/25	27,633			0.7	%
Hybrid ARM 6 month adjustable	40,537			1.0	%
	$	478,444		11.6	%
Loans with loan-to-value
ratios above 80%:
> 80.0% to < / = 90.0%	$	2,746,423		66.6	%
> 90.0% to < / = 100.0%	252,093			6.1	%
	$	2,998,516		72.7	%
Total unpaid principal balance of loans held for investment	$	4,121,108

Note 19. Employee Benefit Plans

401(k) Retirement Savings Plan

The Company sponsors a 401(k) Retirement Savings Plan, a defined contribution plan. Substantially all employees are eligible to participate in the plan after reaching the age of 21 and completion of six months of service. Contributions are made from employees’ elected salary deferrals. Effective January 1, 2001, the Company began contributing to the plan on a matching basis, however, the Company’s

F-32

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

contribution remains at its option. Under the match, for every dollar the employee contributes to the Plan up to 6% of his eligible pay, the Company contributes $0.50 to his account. Prior thereto, employer contributions were determined at the beginning of the plan year at the option of the Company. Contributions made to the Plan by the Company during the years ended December 31, 2005 and 2004 (unaudited) and six months ended December 31, 2004 were $1.5 million, $1.5 million, and $0.6 million, respectively, and during the years ended June 30, 2004 and 2003 were $1.4 million and $1.1 million, respectively.

Stock-Based Compensation

Prior to the corporate reorganization that was consummated on November 5, 2004, Aames Financial Corporation issued to employees options to purchase Aames Financial common stock pursuant to the Aames Financial Corporation 1999 Amended and Restated Stock Option Plan (the “1999 Plan”). Immediately prior to the reorganization, each option to purchase Aames Financial Corporation common stock with an option exercise price below $2.383, the per share consideration received in the reorganization by Aames Financial common stockholders, which did not vest at November 5, 2004, was converted immediately prior to the reorganization into vested Aames Financial restricted common stock units, pursuant to the 2004 Aames Financial Corporation Equity Incentive Plan (the “Aames Financial EIP”). At that time, 1,282,553 Aames Financial restricted stock units were issued and personnel expense was charged for $10.9 million. Upon consummation of the reorganization, all restricted stock units issued under the Aames Financial EIP were exchanged for Aames Investment Corporation restricted common stock units. In addition, all options to purchase Aames Financial common stock with an exercise price above $2.383 were terminated and the 1999 Plan was cancelled. The Aames Investment restricted common stock units were issued pursuant to the Aames Investment Corporation 2004 Equity Incentive Plan, (the “Aames Investment EIP”) along with the issuance of 861,000 restricted stock awards which vest 25.0% per year commencing on the first anniversary date from the date of grant.

In addition, due to the change in control resulting from the corporate reorganization, 22.2 million Series E Preferred Stock Options became exercisable by their holders resulting in a $6.4 million charge to personnel expense in November 2004. There are no longer any Series E Preferred Stock Options issued and outstanding.

The following tables present activity in Restricted Stock Units (“RSUs”) and Restricted Stock Awards (“RSAs”) for the periods presented.

	Number of Shares		Grant Price Range
RSU’s
Balance outstanding, December 31, 2004	1,232,520		$	8.50
Granted	—		—
Cancelled(1)	(176,424	)	8.50
Converted	(339,545	)	8.50
Balance outstanding, December 31, 2005	716,551		$	8.50

F-33

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Number of Shares		Grant Price Range
RSA’s
Balance outstanding, December 31, 2004	800,000		$	8.50
Granted	434,160		6.05-9.82
Expired	—		—
Cancelled(1)	(169,120	)	8.50-9.43
Vested and converted	(128,524	)	8.50
Balance outstanding, December 31, 2005	936,516		6.05-9.82

(1)Cancellations of RSUs/RSAs include those arising from employee terminations as well as RSUs/RSAs that were returned to the Company to settle payroll tax obligations upon conversion of RSUs/RSAs to common stock.

During the year ended December 31, 2005, 128,524 RSA’s vested and compensation expense of $2.3 million was recorded.

A summary of the Company’s former stock option plans and arrangements that were in effect as of June 30, 2004 and 2003 and changes during the years then ended are as follows:

	Number of Shares		Exercise Price Range
Balance outstanding, June 30, 2002	14,296,666		$	0.73-147.90
Granted	2,191,611		0.85-1.68
Exercised	(108,138	)	0.85-1.00
Cancelled/Expired	(2,294,769	)	0.85-137.10
Balance outstanding, June 30, 2003	14,085,370		$	0.73-147.90
Granted	905,056		2.05-3.69
Exercised	(110,068	)	0.85-1.14
Cancelled/Expired	(1,146,549	)	0.85-119.60
Balance outstanding, June 30, 2004	13,733,809		$	0.73-147.90

Note 20. Stockholders’ Equity

Year ended December 31, 2005

During the year ended December 31, 2005, the Company declared a cash dividend of $1.30 per common share, all of which represented ordinary taxable income, and is comprised of the following quarterly dividends:

Cash Dividend	Quarter Ended	Announcement Date	Ex-Dividend Date	Record Date	Payable Date
$0.34	December 31, 2005	December 20, 2005	December 28, 2005	December 30, 2005	January 9, 2006
$0.35	September 30, 2005	October 18, 2005	October 26, 2005	October 28, 2005	November 7, 2005
$0.34	June 30, 2005	July 19, 2005	July 26, 2005	July 28, 2005	August 8, 2005
$0.27	March 31, 2005	April 19, 2005	April 27, 2005	April 29, 2005	May 9, 2005

F-34

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Six Months ended December 31, 2004

The following table summarizes the capital raising transactions consummated by Aames Investment during the six months ended December 31, 2004 (in thousands):

	Common Shares Issued		Price at Issue		Proceeds
Initial public offering		35,000	$	8.50	$	297,500
Concurrent private placement		5,000	8.50		42,500
Overallotment		5,250	8.50		44,625
					384,625
Underwriters' discount and expenses					(31,072		)
Proceeds					353,553
Cash component of merger consideration paid to former Aames Financial stockholders					(116,004		)
Net proceeds for general corporate purposes					$	237,549

On December 21, 2004, the Company declared a cash dividend of $0.06 per common share, payable on January 31, 2005 to stockholders of record at December 31, 2004. The dividend represented ordinary taxable income of approximately $0.052 per share and return of capital of approximately $0.008 per share.

Year ended June 30, 2004

During the year ended June 30, 2004, Aames Financial issued 123,000 shares of its Common Stock through the exercise of common stock options and received $0.2 million. During the year ended June 30, 2004 pursuant to a separation agreement, Aames Financial forgave $0.2 million principal balance outstanding on a note receivable from a former executive officer and cancelled the 30,000 Series C Convertible Preferred Shares which previously collateralized the obligation to Aames Financial.

On September 16, 2003, Aames Financial amended and restated its certificate of incorporation permitting it 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. At the same time, Aames Financial amended and restated its certificate of incorporation pursuant to which the number of authorized shares of Series C Convertible Preferred Stock was reduced to 34.5 million shares from 61.2 million shares. The Series E Preferred Stock was not convertible into any other security, was not entitled to receive dividends, ranked pari passu with Aames Financial’s other series of Preferred Stock and had a liquidation preference of $1.00 per share. Subsequently, on September 18, 2003, Aames Financial adopted its 2003 Series E Preferred Stock Option Plan, pursuant to which it issued to certain directors and executive officers options to purchase up to 22.2 million shares of Series E Preferred Stock.

During the year ended June 30, 2004, Aames Financial paid $64.3 million of dividends to holders of its Series B, C and D Convertible Preferred Stock, of which $62.2 million was paid to Capital Z.

Note 21.   Transactions Involving Directors, Officers and Affiliates

During the year ended December 31, 2005, the Company paid $14.2 million in dividends to Specialty Finance Partners. During the year ended December 31, 2005, the Company paid dividends of $20,500 and $16,800 to Capital Z and Equifin, respectively, that related to unvested and unconverted RSAs and RSUs.

F-35

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Aames Financial had a management advisory agreement with Equifin Capital Management, LLC (“Equifin”), a company whose three principal officers previously served as directors of Aames Financial and of which one has continued as a director of Aames Investment. Terms of the agreement called for quarterly remittances of $250,000, plus out of pocket expenses, and expired at the earlier of February 10, 2009 or when either Aames Financial or Equifin mutually agreed to terminate the agreement. During the six months ended December 31, 2004, Aames Financial paid $1.4 million to Equifin pursuant to the agreement, of which $1.0 million was paid in November 2004 representing Aames Financial’s and Equifin’s agreement to sever the management services agreement at a mutually agreed upon discounted annual amount. During the years ended June 30, 2004 and 2003, the Company incurred management fees and out-of-pocket expenses in the amount of $1.1 million and $1.4 million, respectively, relating to advisory services rendered by Equifin.

Of the $4.0 million and $64.3 million of dividends paid to holders of its Series B, C and D Convertible Preferred Stock during the six months ended December 31, 2004 and the year ended June 30, 2004, respectively, $3.8 million and $62.2 million, respectively, were paid to Capital Z.

During the year ended June 30, 2003, the Company paid a $500,000 fee to Capital Z for Capital Z’s agreement to act as the limited guarantor on the Company’s Financing Facility. Commencing July 1, 2003 and until November 17, 2003, when the limited guaranty amount was fully reduced and Capital Z’s limited guarantee was extinguished, the Company paid Capital Z an additional $0.6 million to Capital Z based upon a percentage applied to the outstanding limited guaranty amount. During the six months ended December 31, 2004, the Company reimbursed Capital Z $66,000 for out-of-pocket expenses. The Company did not reimburse Capital Z for any out-of-pocket expenses during the year ended June 30, 2004. During the year ended June 30, 2003, the Company reimbursed Capital Z $40,000 for out-of-pocket expenses.

On March 31, 2003, the Residual Forward Sale Facility (the “Residual Facility”) with CZI expired. In connection with obtaining the Residual Facility, the Company paid and capitalized a facility fee of $3.0 million to CZI. Other costs capitalized in connection with obtaining the Residual Facility were $300,000. These capitalized costs were amortized to gain on sale of loans based upon the ratio of the dollar amount of the residual interests sold to CZI under the Residual Facility to the total Residual Facility amount. During the year ended June 30, 2003, amortization charged to gain on sale of loans was $0.8 million, of which $0.7 million related to the facility fee paid to CZI. At June 30, 2003, there were no remaining unamortized costs relating to the Residual Facility.

During the year ended June 30, 2003, SFP received $16.6 million from Aames Financial for SFP’s portion of the mandatory sinking fund payment made on the 5.5% Convertible Subordinated Debentures due March 2012 (the “2012 Debentures”), and SFP forgave $25.0 million of the 2012 Debentures due from Aames Financial.

F-36

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 22.   Basic and Diluted Net (Loss) Per Common Share

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

								Six Months
	Years Ended							Ended				Years Ended
	December 31,							December 31,				June 30,
	2005			2004				2004				2004			2003
				(unaudited)
Basic net income (loss) per common share:
Net income (loss)	$	(6,231	)		$	41,785			$	(3,085	)	$	90,714		$	29,166
Less: Accrued dividends on Series B, C, and D Convertible Preferred Stock	—				(9,700		)		—			(13,054		)	(13,469		)
Basic net income (loss) to common stockholders	$	(6,231	)		$	32,085			$	(3,085	)	$	77,660		$	15,697
Basic weighted average number of common shares outstanding	62,517				61,316				61,322			7,049			6,558
Basic net income (loss) per common share	$	(0.10	)		$	0.52			$	(0.05	)	$	11.02		$	2.39
Diluted net income (loss) per common share:
Basic net income (loss) to common stockholders	$	(6,231	)		$	32,085			$	(3,085	)	$	77,660		$	15,697
Plus: Accrued dividends on Series B, C, and D Convertible Preferred Stock	—				9,700				—			13,054			13,469
Plus: Interest on 5.5% Convertible Subordinated Debentures	—				—				—			2,090			—
Diluted net income (loss) to common stockholders	$	(6,231	)		$	41,785			$	(3,085	)	$	92,804		$	29,166
Basic weighted average number of common shares outstanding	62,517				61,316				61,322			7,049			6,558
Plus: Incremental shares from assumed conversions of:
Series B, C and D Convertible Preferred Stock	—				—				—			85,439			85,547
5.5% Convertible Subordinated Debentures	—				—				—			824			—
Restricted Stock Awards	—				32				—			—			—
Plus: Incremental shares from assumed exercises of:
Warrants	—				—				—			3,495			1,288
Common stock options	—				—				—			7,557			2,660
Diluted weighted average number of common shares outstanding	62,517				61,348				61,322			104,364			96,053
Diluted net income (loss) per common share	$	(0.10	)		$	0.68			$	(0.05	)	$	0.89		$	0.30

F-37

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 23.   Interest Income

The following table presents the components of interest income during the periods presented (in thousands):

								Six Months
	Years Ended							Ended				Years Ended
	December 31,							December 31,				June 30,
	2005			2004				2004				2004		2003
				(unaudited)
Interest earned on:
Loans held for investment	$	246,887			$	15,957			$	15,957		$	—	$	—
Loans held for sale	44,208				75,288				39,435			64,824		52,411
Overnight investments	2,673				281				281			—		—
Income from derivative financial instruments	27,424				488				488			—		—
Prepayment penalty fees on loans held for investment	23,701				88				—			—		—
Amortization of net deferred loan origination costs	(4,737		)		(200		)		(200		)	—		—
Discount accretion on residual interests	—				972				—			4,357		16,558
Other	359				307				142			265		217
Total interest income	$	340,515			$	93,181			$	56,103		$	69,446	$	69,186

Note 24.   Interest Expense

The following table presents the components of interest expense during the periods presented (in thousands):

							Six Months
	Years Ended						Ended				Years Ended
	December 31,						December 31,				June 30,
	2005		2004				2004				2004		2003
			(unaudited)
Interest incurred on:
Financings on loans held for investment	$	112,809		$	2,912			$	2,912		$	—	$	—
Revolving warehouse and repurchase facilities	47,246			24,753				15,777			15,823		13,796
Borrowings	128			4,135				2,011			4,986		16,190
Amortization of commitment fees, debt issuance costs, and debt discount	10,002			5,618				3,137			5,095		4,930
Mark to market (gain) loss on interest rate cap agreements designed to hedge interest rate risk on financings of loans held for investment	143			(6,344		)		(6,344		)	—		—
Bank charges and other	614			1,322				997			323		203
Total interest expense	$	170,942		$	32,396			$	18,490		$	26,227	$	35,119

Note 25.   Advertising Expense

Production expense during the years ended December 31, 2005 and 2004 (unaudited), the six months ended December 31, 2004, and the years ended June 30, 2004 and 2003 included charges of $21.0 million, $19.8 million,  $9.6 million, $18.8 million, and $14.2 million, respectively, of advertising expense.

F-38

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 26.   Quarterly Financial Data (Unaudited)

The following tables present summaries of unaudited quarterly operating results for the periods indicated (in thousands, except per share amounts):

	Three Months Ended
	March 31			June 30			September 30				December 31
Year Ended December 31, 2005
Net interest income after provision for loan losses and noninterest income	$	41,959		$	22,662			$	63,977			$	37,288
Noninterest expense	(41,960		)	(44,572		)		(43,353		)		(41,390		)
Income (loss) before income taxes	(1		)	(21,910		)		20,624				(4,102		)
Income tax provision (benefit)	765			665				(661		)		73
Net income (loss)	$	(766	)	$	(22,575	)		$	21,285			$	(4,175	)
Diluted net income (loss) per common share	$	(0.01	)	$	(0.37	)		$	0.34			$	(0.07	)

	Three Months Ended
	March 31			June 30			September 30				December 31
Year Ended December 31, 2004
Net interest income after provision for loan losses and noninterest income	$	67,853		$	76,774			$	65,820			$	32,679
Noninterest expense	(47,056		)	(52,398		)		(42,675		)		(64,145		)
Income (loss) before income taxes	20,797			24,376				23,145				(31,466		)
Income tax provision (benefit)	(93		)	395				(5,272		)		37
Net income (loss)	$	20,890		$	23,981			$	28,417			$	(31,503	)
Diluted net income (loss) per common share	$	0.20		$	0.24			$	0.28			$	(0.51	)

F-39

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 27.   Parent Company Only Condensed Financial Statements

The following tables present the parent company only condensed financial statements of Aames Investment Corporation for the periods indicated (in thousands):

	December 31,
Condensed Balance Sheets	2005			2004
Cash and cash equivalents:
Unrestricted	$	13,042		$	7,206
Restricted	87,094			6,139
Loans held for investment, net:
Securitized	3,659,657			1,187,435
Not yet securitized	461,451			531,261
Net deferred loan origination costs	7,787			8,250
Deferred loan acquisition premium	41,132			29,226
Allowance for loan losses	(43,359		)	(1,900		)
Total loans held for investment, net	4,126,668			1,754,272
Investment in subsidiaries	78,697			149,028
Accrued interest and other	57,480			24,208
Derivative finanancial instruments, at estimated fair value	58,147			31,947
Total assets	$	4,421,128		$	1,972,800
Financings on loans held for investment	$	3,623,188		$	1,157,470
Revolving warehouse and repurchase facilities	433,241			409,199
Retained bond financing	16,487			—
Other liabilities	37,577			19,279
Total liabilities	4,110,493			1,585,948
Stockholders’ equity	310,635			386,852
Total liabilities and stockholders’ equity	$	4,421,128		$	1,972,800

                                                                                                                                                       &# 160;  

	Year Ended
	December 31,
Condensed Statement of Operations	2005
Net interest income		$	113,270
Provision for losses on loans held for investment		(40,294		)
Net interest income after provision for loan losses		72,976
Noninterest expense		(8,784		)
Income before equity in net loss of subsidiary		64,192
Equity in net loss of subsidiary		(58,518		)
Net income		$	5,674

F-40

AAMES INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

	Year Ended
	December 31,
Statement of Cash Flows	2005
Cash flows from operating activities:
Net income	$	5,674
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Equity in net loss of subsidiary	58,518
Provision for losses on loans held for investment	40,294
Stock-based compensation	2,264
Mark-to-market loss on derivative financial instruments	143
Increase in:
Accrued interest and other	(24,272		)
Derivative financial instruments	(26,343		)
Increase in:
Accounts payable and accrued expenses	(1,132		)
Net cash provided by operating activities	55,146
Cash flows from investing activities:
Loans held for investment	(2,412,690		)
Net change in investment in subsidiaries	11,812
Net change in intercompany receivables and payables	(9,000		)
Net cash used in investing activities	(2,409,878		)
Cash flows from financing activities:
Financing on loans held for investment	2,465,718
Net increase in revolving warehouse and repurchase facilities	24,042
Proceeds from borrowings	16,487
Payment of common stock dividends	(64,696		)
Payment of equity issuance expenses	(28		)
Net cash provided by financing activities	2,441,523
Net increase in cash and cash equivalents	86,791
Cash and cash equivalents, beginning of period	13,345
Cash and cash equivalents, end of period	$	100,136
Supplemental disclosure:
Interest paid	$	219,747

F-41

EX-3.2

Exhibit 3.2

AAMES INVESTMENT CORPORATION

AMENDED AND RESTATED BYLAWS

ARTICLE I

OFFICES

Section 1.PRINCIPAL OFFICE. The principal office of the Corporation in the State of Maryland shall be located at such place as the Board of Directors may designate.

Section 2.ADDITIONAL OFFICES. The Corporation may have additional offices, including a principal executive office, at such places as the Board of Directors may from time to time determine or the business of the Corporation may require.

ARTICLE II

MEETINGS OF STOCKHOLDERS

Section 1.PLACE. All meetings of stockholders shall be held at the principal executive office of the Corporation or at such other place as shall be set by the Board of Directors and stated in the notice of the meeting.

Section 2.ANNUAL MEETING. An annual meeting of the stockholders for the election of directors and the transaction of any business within the powers of the Corporation shall be held on a date and at the time set by the Board of Directors.

Section 3.SPECIAL MEETINGS.

(a) General. The chairman of the board, president, chief executive officer or Board of Directors may call a special meeting of the stockholders. Subject to subsection (b) of this Section 3, a special meeting of stockholders shall also be called by the secretary of the Corporation upon the written request of stockholders entitled to cast not less than a majority of all the votes entitled to be cast at such meeting.

(b) Stockholder Requested Special Meetings. (1) Any stockholder of record seeking to have stockholders request a special meeting shall, by sending written notice to the secretary (the “Record Date Request Notice”) by registered mail, return receipt requested, request the Board of Directors to fix a record date to determine the stockholders entitled to request a special meeting (the “Request Record Date”). The Record Date Request Notice shall set forth the purpose of the meeting

and the matters proposed to be acted on at it, shall be signed by one or more stockholders of record as of the date of signature (or their agents duly authorized in a writing accompanying the Record Date Request Notice), shall bear the date of signature of each such stockholder (or such agent) and shall set forth all information relating to each such stockholder that must be disclosed in solicitations of proxies for election of directors in an election contest (even if an election contest is not involved), or is otherwise required, in each case pursuant to Regulation 14A (or any successor provision) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Upon receiving the Record Date Request Notice, the Board of Directors may fix a Request Record Date. The Request Record Date shall not precede and shall not be more than ten days after the close of business on the date on which the resolution fixing the Request Record Date is adopted by the Board of Directors. If the Board of Directors, within ten days after the date on which a valid Record Date Request Notice is received, fails to adopt a resolution fixing the Request Record Date, the Request Record Date shall be the close of business on the tenth day after the first date on which the Record Date Request Notice is received by the secretary.

(2)  In order for any stockholder to request a special meeting, one or more written requests for a special meeting signed by stockholders of record (or their agents duly authorized in a writing accompanying the request) as of the Request Record Date entitled to cast not less than a majority (the “Special Meeting Percentage”) of all of the votes entitled to be cast at such meeting (the “Special Meeting Request”) shall be delivered to the secretary. In addition, the Special Meeting Request shall (a) set forth the purpose of the meeting and the matters proposed to be acted on at it (which shall be limited to those lawful matters set forth in the Record Date Request Notice received by the secretary), (b) shall bear the date of signature of each such stockholder (or such agent) signing the Special Meeting Request, (c) shall set forth the name and address, as they appear in the Corporation’s books, of each stockholder signing such request (or on whose behalf the Special Meeting Request is signed), the class, series and number of all shares of stock of the Corporation which are owned by each such stockholder, and the nominee holder for, and number of, shares owned by such stockholder beneficially but not of record, (d) shall be sent to the secretary by registered mail, return receipt requested, and (e) shall be received by the secretary within 60 days after the Request Record Date. Any requesting stockholder(or agent duly authorized in a writing accompanying the revocation or the Special Meeting Request) may revoke his, her or its request for a special meeting at any time by written revocation delivered to the secretary.

(3)  The secretary shall inform the requesting stockholders of the reasonably estimated cost of preparing and mailing the notice of meeting (including the Corporation’s proxy materials). The secretary shall not be required to call a special meeting upon stockholder request and such meeting shall not be held unless, in addition to the documents required by paragraph (2) of this Section 3(b), the secretary receives payment of such reasonably estimated cost prior to the mailing of any notice of the meeting.

(4)  Except as provided in the next sentence, any special meeting shall be held at such place, date and time as may be designated by the chairman of the board, chief executive officer, president or Board of Directors, whoever has called the meeting. In the case of any special meeting called by the secretary upon the request of stockholders (a “Stockholder Requested Meeting”), such meeting shall be held at such place, date and time as may be designated by the Board of Directors;

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provided, however, that the date of any Stockholder Requested Meeting shall be not more than 90 days after the record date for such meeting (the “Meeting Record Date”); and provided further that if the Board of Directors fails to designate, within ten days after the date that a valid Special Meeting Request is actually received by the secretary (the “Delivery Date”), a date and time for a Stockholder Requested Meeting, then such meeting shall be held at 2:00 p.m. local time on the 90^th day after the Meeting Record Date or, if such 90^th day is not a Business Day (as defined below), on the first preceding Business Day; and provided further that in the event that the Board of Directors fails to designate a place for a Stockholder Requested Meeting within ten days after the Delivery Date, then such meeting shall be held at the principal executive office of the Corporation. In fixing a date for any special meeting, the chairman of the board, chief executive officer, president or Board of Directors may consider such factors as he, she or they deems relevant within the good faith exercise of business judgment, including, without limitation, the nature of the matters to be considered, the facts and circumstances surrounding any request for the meeting and any plan of the Board of Directors to call an annual meeting or a special meeting. In the case of any Stockholder Requested Meeting, if the Board of Directors fails to fix a Meeting Record Date that is a date within 30 days after the Delivery Date, then the close of business on the 30^th day after the Delivery Date shall be the Meeting Record Date. The Board of Directors may revoke the notice for any Stockholder Requested Meeting in the event that the requesting stockholders fail to comply with the provisions of paragraph (3) of this Section 3(b).

(5)  If written revocations of requests for the special meeting have been delivered to the secretary and the result is that stockholders of record (or their agents duly authorized in writing) as of the Request Record Date, entitled to cast less than the Special Meeting Percentage have delivered, and not revoked, requests for a special meeting to the secretary, the secretary shall: (i) if the notice of meeting has not already been mailed, refrain from mailing the notice of the meeting and send to all requesting stockholders who have not revoked such requests written notice of any revocation of a request for the special meeting, or (ii) if the notice of meeting has been mailed and if the secretary first sends to all requesting stockholders who have not revoked requests for a special meeting (a) written notice of any revocation of a request for the special meeting and written notice of the secretary’s intention to revoke the notice of the meeting, revoke the notice of the meeting at any time before ten days before the commencement of the meeting. Any request for a special meeting received after a revocation by the secretary of a notice of a meeting shall be considered a request for a new special meeting.

(6)  The chairman of the board, chief executive officer, president or Board of Directors may appoint regionally or nationally recognized independent inspectors of elections to act as the agent of the Corporation for the purpose of promptly performing a ministerial review of the validity of any purported Special Meeting Request received by the secretary. For the purpose of permitting the inspectors to perform such review, no such purported request shall be deemed to have been delivered to the secretary until the earlier of (i) five Business Days after receipt by the secretary of such purported request and (ii) such date as the independent inspectors certify to the Corporation that the valid requests received by the secretary represent at least a majority of the issued and outstanding shares of stock that would be entitled to vote at such meeting. Nothing contained in this paragraph (6) shall in any way be construed to suggest or imply that the Corporation or any stockholder shall not be entitled to contest the validity of any request, whether during or after such five Business Day

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period, or to take any other action (including, without limitation, the commencement, prosecution or defense of any litigation with respect thereto, and the seeking of injunctive relief in such litigation).

(7)  For purposes of these Bylaws, “Business Day” shall mean any day other than a Saturday, a Sunday or a day on which banking institutions in the State of California are authorized or obligated by law or executive order to close.

Section 4.NOTICE. Not less than ten nor more than 90 days before each meeting of stockholders, the secretary shall give to each stockholder entitled to vote at such meeting and to each stockholder not entitled to vote who is entitled to notice of the meeting written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by any statute, the purpose for which the meeting is called, either by mail, by presenting it to such stockholder personally, by leaving it at the stockholder’s residence or usual place of business or by any other means permitted by Maryland law. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at the stockholder’s address as it appears on the records of the Corporation, with postage thereon prepaid.

Subject to Section 11(a) of this Article II, any business of the Corporation may be transacted at an annual meeting of stockholders without being specifically designated in the notice, except such business as is required by any statute to be stated in such notice. No business shall be transacted at a special meeting of stockholders except as specifically designated in the notice.

Section 5.ORGANIZATION AND CONDUCT. Every meeting of stockholders shall be conducted by an individual appointed by the Board of Directors to be chairman of the meeting or, in the absence of such appointment, by the chairman of the board or, in the case of a vacancy in the office or absence of the chairman of the board, by one of the following officers present at the meeting:  the vice chairman of the board, if there be one, the president, the vice presidents in their order of rank and seniority, or, in the absence of such officers, a chairman chosen by the stockholders by the vote of a majority of the votes cast by stockholders present in person or by proxy. The secretary, or, in the secretary’s absence, an assistant secretary, or in the absence of both the secretary and assistant secretaries, a person appointed by the Board of Directors or, in the absence of such appointment, a person appointed by the chairman of the meeting shall act as secretary. In the event that the secretary presides at a meeting of the stockholders, an assistant secretary, or in the absence of assistant secretaries, an individual appointed by the Board of Directors or the chairman of the meeting, shall record the minutes of the meeting. The order of business and all other matters of procedure at any meeting of stockholders shall be determined by the chairman of the meeting. The chairman of the meeting may prescribe such rules, regulations and procedures and take such action as, in the discretion of such chairman, are appropriate for the proper conduct of the meeting, including, without limitation, (a) restricting admission to the time set for the commencement of the meeting; (b) limiting attendance at the meeting to stockholders of record of the Corporation, their duly authorized proxies and other such individuals as the chairman of the meeting may determine; (c) limiting participation at the meeting on any matter to stockholders of record of the Corporation entitled to vote on such matter, their duly authorized proxies and other such individuals as the chairman of the meeting may determine; (d) limiting the time allotted to questions or comments by participants; (e) determining when the polls should be opened and closed; (f) maintaining order and

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security at the meeting; (g) removing any stockholder or any other individual who refuses to comply with meeting procedures, rules or guidelines as set forth by the chairman of the meeting; and (h) concluding a meeting or recessing or adjourning the meeting to a later date and time and at a place announced at the meeting. Unless otherwise determined by the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.

Section 6.QUORUM. At any meeting of stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at such meeting on any matter shall constitute a quorum; but this section shall not affect any requirement under any statute or the charter of the Corporation for the vote necessary for the adoption of any measure. If, however, such quorum shall not be present at any meeting of the stockholders, the chairman of the meeting shall have the power to adjourn the meeting from time to time to a date not more than 120 days after the original record date without notice other than announcement at the meeting. At such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified.

The stockholders present either in person or by proxy, at a meeting which has been duly called and convened, may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.

Section 7.VOTING. A plurality of all the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to elect a director. Each share may be voted for as many individuals as there are directors to be elected and for whose election the share is entitled to be voted. A majority of the votes cast at a meeting of stockholders duly called and at which a quorum is present shall be sufficient to approve any other matter which may properly come before the meeting, unless more than a majority of the votes cast is required by statute or by the charter of the Corporation. Unless otherwise provided by statute or by the charter, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. Voting on any question or in any election may be viva voce unless the chairman of the meeting shall order that voting be by ballot.

Section 8.PROXIES. A stockholder may cast the votes entitled to be cast by the shares of stock owned of record by the stockholder in person or by proxy executed by the stockholder or by the stockholder’s duly authorized agent in any manner permitted by law. Such proxy or evidence of authorization of such proxy shall be filed with the secretary of the Corporation before or at the meeting. No proxy shall be valid more than eleven months after its date unless otherwise provided in the proxy.

Section 9.VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the Corporation registered in the name of a corporation, partnership, trust or other entity, if entitled to be voted, may be voted by the president or a vice president, a general partner or trustee thereof, as the case may be, or a proxy appointed by any of the foregoing individuals, unless some other person who has been appointed to vote such stock pursuant to a bylaw or a resolution of the governing body of such corporation or other entity or agreement of the partners of a partnership presents a certified copy of such bylaw, resolution or agreement, in which case such person may vote such stock. Any director

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or other fiduciary may vote stock registered in his or her name as such fiduciary, either in person or by proxy.

Shares of stock of the Corporation directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time.

The Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board of Directors considers necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the stockholder of record of the specified stock in place of the stockholder who makes the certification.

Section 10.INSPECTORS. The Board of Directors, in advance of any meeting, may, but need not, appoint one or more individual inspectors or one or more entities that designate individuals as inspectors to act at the meeting or any adjournment thereof. If an inspector or inspectors are not appointed, the person presiding at the meeting may, but need not, appoint one or more inspectors. In case any person who may be appointed as an inspector fails to appear or act, the vacancy may be filled by appointment made by the Board of Directors in advance of the meeting or at the meeting by the chairman of the meeting. The inspectors, if any, shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, the validity and effect of proxies, and shall receive votes, ballots or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots or consents, determine the result, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. Each such report shall be in writing and signed by him or her or by a majority of them if there is more than one inspector acting at such meeting. If there is more than one inspector, the report of a majority shall be the report of the inspectors. The report of the inspector or inspectors on the number of shares represented at the meeting and the results of the voting shall be prima facie evidence thereof.

Section 11.ADVANCE NOTICE OF STOCKHOLDER NOMINEES FOR DIRECTOR AND OTHER STOCKHOLDER PROPOSALS.

(a)  Annual Meetings of Stockholders. (1) Nominations of individuals for election to the Board of Directors and the proposal of other business to be considered by the stockholders may be made at an annual meeting of stockholders (i) pursuant to the Corporation’s notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) by any stockholder of the Corporation who was

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a stockholder of record both at the time of giving of notice by the stockholder as provided for in this Section 11(a) and at the time of the annual meeting, who is entitled to vote at the meeting and who has complied with this Section 11(a).

(2)For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 11, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation and such other business must otherwise be a proper matter for action by the stockholders. To be timely, a stockholder’s notice shall set forth all information required under this Section 11 and shall be delivered to the secretary at the principal executive office of the Corporation not earlier than the 120^th day nor later than 5:00 p.m.,  Pacific Time, on the 90^th day prior to the first anniversary of the date of mailing of the notice for the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is advanced or delayed by more than 30 days from the first anniversary of the date of the preceding year’s annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the 120th day prior to the date of such annual meeting and not later than 5:00 p.m., Pacific Time, on the later of the 90th day prior to the date of mailing of the notice for such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. The public announcement of a postponement or adjournment of an annual meeting shall not commence a new time period for the giving of a stockholder’s notice as described above. Such stockholder’s notice shall set forth (i) as to each individual whom the stockholder proposes to nominate for election or reelection as a director, (A) the name, age, business address and residence address of such individual, (B) the class, series and number of any shares of stock of the Corporation that are beneficially owned by such individual, (C) the date such shares were acquired and the investment intent of such acquisition and (D) all other information relating to such individual that is required to be disclosed in solicitations of proxies for election of directors in an election contest (even if an election contest is not involved), or is otherwise required, in each case pursuant to Regulation 14A (or any successor provision) under the Exchange Act and the rules thereunder (including such individual’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a description of such business, the reasons for proposing such business at the meeting and any material interest in such business of such stockholder and any Stockholder Associated Person (as defined below), individually or in the aggregate, including any anticipated benefit to the stockholder and the Stockholder Associated Person therefrom; (iii) as to the stockholder giving the notice and any Stockholder Associated Person, the class, series and number of all shares of stock of the Corporation which are owned by such stockholder and by such Stockholder Associated Person, if any, and the nominee holder for, and number of, shares owned beneficially but not of record by such stockholder and by any such Stockholder Associated Person; (iv) as to the stockholder giving the notice and any Stockholder Associated Person covered by clauses (ii) or (iii) of this paragraph (2) of this Section 11(a), the name and address of such stockholder, as they appear on the Corporation’s stock ledger and current name and address, if different, and of such Stockholder Associated Person; and (v) to the extent known by the stockholder giving the notice, the name and address of any other stockholder supporting the nominee for election or reelection as a director or the proposal of other business on the date of such stockholder’s notice.

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(3)Notwithstanding anything in this subsection (a) of this Section 11 to the contrary, in the event the Board of Directors increases or decreases the maximum or minimum number of directors in accordance with Article III, Section 2 of these Bylaws, and there is no public announcement of such action at least 100 days prior to the first anniversary of the date of mailing of the notice of the preceding year’s annual meeting, a stockholder’s notice required by this Section 11(a) shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary at the principal executive office of the Corporation not later than 5:00 p.m., Pacific Time, on the tenth day following the day on which such public announcement is first made by the Corporation.

(4)For purposes of this Section 11, “Stockholder Associated Person” of any stockholder shall mean (i) any person controlling, directly or indirectly, or acting in concert with, such stockholder, (ii) any beneficial owner of shares of stock of the Corporation owned of record or beneficially by such stockholder and (iii) any person controlling, controlled by or under common control with such Stockholder Associated Person.

(b)Special Meetings of Stockholders. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of individuals for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected (i) pursuant to the Corporation’s notice of meeting, (ii) by or at the direction of the Board of Directors or (iii) provided that the Board of Directors has determined that directors shall be elected at such special meeting, by any stockholder of the Corporation who is a stockholder of record both at the time of giving of notice provided for in this Section 11 and at the time of the special meeting, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Section 11. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more individuals to the Board of Directors, any such stockholder may nominate an individual or individuals (as the case may be) for election as a director as specified in the Corporation’s notice of meeting, if the stockholder’s notice required by paragraph (2) of this Section 11(a) shall be delivered to the secretary at the principal executive office of the Corporation not earlier than the 120^th day prior to such special meeting and not later than 5:00 p.m. Pacific Time on the later of the 90^th day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. The public announcement of a postponement or adjournment of a special meeting shall not commence a new time period for the giving of a stockholder’s notice as described above.

(c)General. (1)  Upon written request by the secretary or the Board of Directors or any committee thereof, any stockholder proposing a nominee for election as a director or any proposal for other business at a meeting of stockholders shall provide, within five Business Days of delivery of such request (or such other period as may be specified in such request), written verification, satisfactory, in the discretion of the Board of Directors or any committee thereof or any authorized officer of the Corporation, to demonstrate the accuracy of any information submitted by the stockholder pursuant to this Section 11. If a stockholder fails to provide such written verification within such period, the information as to which written verification was requested may be deemed not to have been provided in accordance with this Section 11.

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(2)Only such individuals who are nominated in accordance with this Section 11 shall be eligible for election by stockholders as directors, and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with this Section 11. The chairman of the meeting shall have the power to determine whether a nomination or any other business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with this Section 11.

(3)For purposes of this Section 11, (a) the “date of mailing of the notice” shall mean the date of the proxy statement for the solicitation of proxies for election of directors and (b) “public announcement” shall mean disclosure (i) in a press release reported by the Dow Jones News Service, Associated Press, Business Wire, PR Newswire or comparable news service or (ii) in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to the Exchange Act.

(4)Notwithstanding the foregoing provisions of this Section 11, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 11. Nothing in this Section 11 shall be deemed to affect any right of a stockholder to request inclusion of a proposal in, nor the right of the Corporation to omit a proposal from, the Corporation’s proxy statement pursuant to Rule 14a-8 (or any successor provision) under the Exchange Act.

Section 12.CONSENT BY STOCKHOLDERS WITHOUT A MEETING. Any action required or permitted to be taken at a meeting of the stockholders may be taken without a meeting if a unanimous consent which sets forth the action is (1) given in writing or by electronic transmission by each stockholder entitled to vote on the matter, and (2) filed in paper or electronic form with the records of the stockholders meetings.

Section 13.TELEPHONE MEETINGS. The Board of Directors or chairman of the meeting may permit stockholders to participate in meetings of the stockholders by means of a conference telephone or other communications equipment by which all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means constitutes presence in person at the meeting.

Section 14.CONTROL SHARE ACQUISITION ACT. Notwithstanding any other provision of the charter of the Corporation or these Bylaws, Title 3, Subtitle 7 of the Maryland General Corporation Law (or any successor statute) shall not apply to any acquisition by any person of shares of stock of the Corporation. This section may be repealed, in whole or in part, at any time, whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any prior or subsequent control share acquisition.

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ARTICLE III

DIRECTORS

Section 1.GENERAL POWERS. The business and affairs of the Corporation shall be managed under the direction of its Board of Directors.

Section 2.NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting or at any special meeting called for that purpose, a majority of the entire Board of Directors may establish, increase or decrease the number of directors, provided that the number thereof shall never be less than the minimum number required by the Maryland General Corporation Law, nor more than 15, and further provided that the tenure of office of a director shall not be affected by any decrease in the number of directors.

Section 3.ANNUAL AND REGULAR MEETINGS. An annual meeting of the Board of Directors shall be held immediately after and at the same place as the annual meeting of stockholders, no notice other than this Bylaw being necessary. In the event such meeting is not so held, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors. The Board of Directors may provide, by resolution, the time and place for the holding of regular meetings of the Board of Directors without other notice than such resolution.

Section 4.SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the chairman of the board, the chief executive officer, the president or by a majority of the directors then in office. The person or persons authorized to call special meetings of the Board of Directors may fix any place as the place for holding any special meeting of the Board of Directors called by them. The Board of Directors may provide, by resolution, the time and place for the holding of special meetings of the Board of Directors without other notice than such resolution.

Section 5.NOTICE. Notice of any special meeting of the Board of Directors shall be delivered personally or by telephone, electronic mail, facsimile transmission, United States mail or courier to each director at his or her business or residence address. Notice by personal delivery, telephone, electronic mail or facsimile transmission shall be given at least 24 hours prior to the meeting. Notice by United States mail shall be given at least three days prior to the meeting. Notice by courier shall be given at least two days prior to the meeting. Telephone notice shall be deemed to be given when the director or his or her agent is personally given such notice in a telephone call to which the director or his or her agent is a party. Electronic mail notice shall be deemed to be given upon transmission of the message to the electronic mail address given to the Corporation by the director. Facsimile transmission notice shall be deemed to be given upon completion of the transmission of the message to the number given to the Corporation by the director and receipt of a completed answer-back indicating receipt. Notice by United States mail shall be deemed to be given when deposited in the United States mail properly addressed, with postage thereon prepaid. Notice by courier shall be deemed to be given when deposited with or delivered to a courier properly addressed. Neither the business to be transacted at, nor the purpose of, any annual, regular or special

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meeting of the Board of Directors need be stated in the notice, unless specifically required by statute or these Bylaws.

Section 6.QUORUM. A majority of the directors shall constitute a quorum for transaction of business at any meeting of the Board of Directors, provided that, if less than a majority of such directors are present at said meeting, a majority of the directors present may adjourn the meeting from time to time without further notice, and provided further that if, pursuant to applicable law, the charter of the Corporation or these Bylaws, the vote of a majority of a particular group of directors is required for action, a quorum must also include a majority of such group.

The directors present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum.

Section 7.VOTING. The action of the majority of the directors present at a meeting at which a quorum is present shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable law, the charter or these Bylaws. If enough directors have withdrawn from a meeting to leave less than a quorum but the meeting is not adjourned, the action of the majority of that number of directors necessary to constitute a quorum at such meeting shall be the action of the Board of Directors, unless the concurrence of a greater proportion is required for such action by applicable law, the charter or these Bylaws.

Section 8.ORGANIZATION. At each meeting of the Board of Directors, the chairman of the board or, in the absence of the chairman, the vice chairman of the board, if any, shall act as chairman of the meeting. In the absence of both the chairman and vice chairman of the board, the chief executive officer or in the absence of the chief executive officer, the president or in the absence of the president, a director chosen by a majority of the directors present, shall act as chairman of the meeting. The secretary or, in his or her absence, an assistant secretary of the Corporation, or in the absence of the secretary and all assistant secretaries, a person appointed by the Chairman, shall act as secretary of the meeting.

Section 9.TELEPHONE MEETINGS. Directors may participate in a meeting by means of a conference telephone or other communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.

Section 10.CONSENT BY DIRECTORS WITHOUT A MEETING. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting, if a consent in writing or by electronic transmission to such action is given by each director and is filed with the minutes of proceedings of the Board of Directors.

Section 11.VACANCIES. If for any reason any or all the directors cease to be directors, such event shall not terminate the Corporation or affect these Bylaws or the powers of the remaining directors hereunder (even if fewer than three directors remain). Except as may be provided by the Board of Directors in setting the terms of any class or series of preferred stock, any

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vacancy on the Board of Directors may be filled only by a majority of the remaining directors, even if the remaining directors do not constitute a quorum. Any director elected to fill a vacancy shall serve for the remainder of the full term of the class in which the vacancy occurred and until a successor is elected and qualifies.

Section 12.COMPENSATION. Directors shall not receive any stated salary for their services as directors but, by resolution of the Board of Directors, may receive compensation per year and/or per meeting and/or per visit to real property or other facilities owned or leased by the Corporation and for any service or activity they performed or engaged in as directors. Directors may be reimbursed for expenses of attendance, if any, at each annual, regular or special meeting of the Board of Directors or of any committee thereof and for their expenses, if any, in connection with each property visit and any other service or activity they performed or engaged in as directors; but nothing herein contained shall be construed to preclude any directors from serving the Corporation in any other capacity and receiving compensation therefor.

Section 13.LOSS OF DEPOSITS. No director shall be liable for any loss which may occur by reason of the failure of the bank, trust company, savings and loan association, or other institution with whom moneys or stock have been deposited.

Section 14.SURETY BONDS. Unless required by law, no director shall be obligated to give any bond or surety or other security for the performance of any of his or her duties.

Section 15.RELIANCE. Each director, officer, employee and agent of the Corporation shall, in the performance of his or her duties with respect to the Corporation, be fully justified and protected with regard to any act or failure to act in reliance in good faith upon the books of account or other records of the Corporation, upon an opinion of counsel or upon reports made to the Corporation by any of its officers or employees or by the adviser, accountants, appraisers or other experts or consultants selected by the Board of Directors or officers of the Corporation, regardless of whether such counsel or expert may also be a director.

Section 16.CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. The directors shall have no responsibility to devote their full time to the business and affairs of the Corporation. Any director or officer, employee or agent of the Corporation, in his or her personal capacity or in a capacity as an affiliate, employee, or agent of any other person, or otherwise, may have business interests and engage in business activities similar to, in addition to or in competition with those of or relating to the Corporation.

ARTICLE IV

COMMITTEES

Section 1.NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors may appoint from among its members an Executive Committee, an Audit Committee,a Compensation Committee, a Nominating and Corporate Governance Committee and other committees, composed of one or more directors, to serve at the pleasure of the Board of Directors.

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Section 2.POWERS. The Board of Directors may delegate to committees appointed under Section 1 of this Article any of the powers of the Board of Directors, except as prohibited by law.

Section 3.MEETINGS. Notice of committee meetings shall be given in the same manner as notice for special meetings of the Board of Directors. A majority of the members of the committee shall constitute a quorum for the transaction of business at any meeting of the committee. The act of a majority of the committee members present at a meeting shall be the act of such committee. The Board of Directors may designate a chairman of any committee, and such chairman or, in the absence of a chairman, any two members of any committee (if there are at least two members of the Committee) may fix the time and place of its meeting unless the Board shall otherwise provide. In the absence of any member of any such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint another director to act in the place of such absent member. Each committee shall keep minutes of its proceedings.

Section 4.TELEPHONE MEETINGS. Members of a committee of the Board of Directors may participate in a meeting by means of a conference telephone or other communications equipment if all persons participating in the meeting can hear each other at the same time. Participation in a meeting by these means shall constitute presence in person at the meeting.

Section 5.CONSENT BY COMMITTEES WITHOUT A MEETING. . Any action required or permitted to be taken at any meeting of a committee of the Board of Directors may be taken without a meeting, if a consent in writing or by electronic transmission to such action is given by each member of the committee and is filed with the minutes of proceedings of such committee.

Section 6.VACANCIES. Subject to the provisions hereof, the Board of Directors shall have the power at any time to change the membership of any committee, to fill all vacancies, to designate alternate members to replace any absent or disqualified member or to dissolve any such committee.

ARTICLE V

OFFICERS

Section 1.GENERAL PROVISIONS. The officers of the Corporation shall includea president, a secretary and a treasurer and may include a chairman of the board, a vice chairman of the board, a chief executive officer, one or more vice presidents, a chief operating officer, a chief financial officer, one or more assistant secretaries and one or more assistant treasurers. In addition, the Board of Directors may from time to time elect such other officers with such powers and duties as they shall deem necessary or desirable. The officers of the Corporation shall be elected annually by the Board of Directors, except that the chief executive officer or president may from time to time appoint one or more vice presidents, assistant secretaries and assistant treasurers or other officers. Each officer shall hold office until his or her successor is elected and qualifies or until his or her death, or his or her resignation or removal in the manner hereinafter provided. Any two or more

13

offices except president and vice president may be held by the same person. Election of an officer or agent shall not of itself create contract rights between the Corporation and such officer or agent.

Section 2.REMOVAL AND RESIGNATION. Any officer or agent of the Corporation may be removed, with or without cause, by the Board of Directors if in its judgment the best interests of the Corporation would be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Any officer of the Corporation may resign at any time by giving written notice of his or her resignation to the Board of Directors, the chairman of the board, the president or the secretary. Any resignation shall take effect immediately upon its receipt or at such later time specified in the notice of resignation. The acceptance of a resignation shall not be necessary to make it effective unless otherwise stated in the resignation. Such resignation shall be without prejudice to the contract rights, if any, of the Corporation.

Section 3.VACANCIES. A vacancy in any office may be filled by the Board of Directors for the balance of the term.

Section 4.CHIEF EXECUTIVE OFFICER. The Board of Directors may designate a chief executive officer. In the absence of such designation, the chairman of the board shall be the chief executive officer of the Corporation. The chief executive officer shall have general responsibility for implementation of the policies of the Corporation, as determined by the Board of Directors, and for the management of the business and affairs of the Corporation. He or she may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Board of Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of chief executive officer and such other duties as may be prescribed by the Board of Directors from time to time.

Section 5.CHIEF OPERATING OFFICER. The Board of Directors may designate a chief operating officer. The chief operating officer shall have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer.

Section 6.CHIEF FINANCIAL OFFICER. The Board of Directors may designate a chief financial officer. The chief financial officer shall have the responsibilities and duties as set forth by the Board of Directors or the chief executive officer.

Section 7.CHAIRMAN OF THE BOARD. The Board of Directors shall designate a chairman of the board. The chairman of the board shall preside over the meetings of the Board of Directors and of the stockholders at which he shall be present. The chairman of the board shall perform such other duties as may be assigned to him or her by the Board of Directors.

Section 8.PRESIDENT. In the absence of a chief executive officer, the president shall in general supervise and control all of the business and affairs of the Corporation. In the absence of a designation of a chief operating officer by the Board of Directors, the president shall be the chief operating officer. He or she may execute any deed, mortgage, bond, contract or other instrument, except in cases where the execution thereof shall be expressly delegated by the Board of

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Directors or by these Bylaws to some other officer or agent of the Corporation or shall be required by law to be otherwise executed; and in general shall perform all duties incident to the office of president and such other duties as may be prescribed by the Board of Directors from time to time.

Section 9.VICE PRESIDENTS. In the absence of the president or in the event of a vacancy in such office, the vice president (or in the event there be more than one vice president, the vice presidents in the order designated at the time of their election or, in the absence of any designation, then in the order of their election) shall perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president; and shall perform such other duties as from time to time may be assigned to such vice president by the president or by the Board of Directors. The Board of Directors may designate one or more vice presidents as executive vice president, senior vice president, or as vice president for particular areas of responsibility.

Section 10.SECRETARY. The secretary shall (a) keep the minutes of the proceedings of the stockholders, the Board of Directors and committees of the Board of Directors in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these Bylaws or as required by law; (c) be custodian of the corporate records and of the seal of the Corporation; (d) keep a register of the post office address of each stockholder which shall be furnished to the secretary by such stockholder; (e) have general charge of the stock transfer books of the Corporation; and (f) in general perform such other duties as from time to time may be assigned to him by the chief executive officer, the president or by the Board of Directors.

Section 11.TREASURER. The treasurer shall have the custody of the funds and securities of the Corporation and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. In the absence of a designation of a chief financial officer by the Board of Directors, the treasurer shall be the chief financial officer of the Corporation.

The treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the president and Board of Directors, at the regular meetings of the Board of Directors or whenever it may so require, an account of all his or her transactions as treasurer and of the financial condition of the Corporation.

If required by the Board of Directors, the treasurer shall give the Corporation a bond in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of his or her office and for the restoration to the Corporation, in case of his or her death, resignation, retirement or removal from office, of all books, papers, vouchers, moneys and other property of whatever kind in his or her possession or under his or her control belonging to the Corporation.

Section 12.ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. The assistant secretaries and assistant treasurers, in general, shall perform such duties as shall be

15

assigned to them by the secretary or treasurer, respectively, or by the president or the Board of Directors. The assistant treasurers shall, if required by the Board of Directors, give bonds for the faithful performance of their duties in such sums and with such surety or sureties as shall be satisfactory to the Board of Directors.

Section 13.SALARIES. The salaries and other compensation of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary or other compensation by reason of the fact that he is also a director.

ARTICLE VI

CONTRACTS, LOANS, CHECKS AND DEPOSITS

Section 1.CONTRACTS. The Board of Directors, the Executive Committee or another committee of the Board of Directors within the scope of its delegated authority may authorize any officer or agent to enter into any contract or to execute and deliver any instrument in the name of and on behalf of the Corporation and such authority may be general or confined to specific instances. Any agreement, deed, mortgage, lease or other document shall be valid and binding upon the Corporation when duly authorized or ratified by action of the Board of Directorsor the Executive Committee or such other committee and executed by an authorized person.

Section 2.CHECKS AND DRAFTS. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officer or agent of the Corporation in such manner as shall from time to time be determined by the Board of Directors.

Section 3.DEPOSITS. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board of Directors may designate.

ARTICLE VII

STOCK

Section 1.CERTIFICATES. Except as otherwise provided in these Bylaws, this Section shall not be interpreted to limit the authority of the Board of Directors to issue some or all of the shares of any or all of the Corporation’s classes or series without certificates. Each stockholder, upon written request to the secretary of the Corporation, shall be entitled to a certificate or certificates which shall represent and certify the number of shares of each class of stock held by him in the Corporation. Each certificate shall be signed by the chairman of the board, the president or a vice president or other officer authorized by law and countersigned by the secretary or an assistant secretary or the treasurer or an assistant treasurer and may be sealed with the seal, if any, of the Corporation. The signatures may be either manual or facsimile. Certificates shall be consecutively numbered; and if the Corporation shall, from time to time, issue several classes of stock, each class may have its own number series. A certificate is valid and may be issued whether or not an officer

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who signed it is still an officer when it is issued. Each certificate representing shares which are restricted as to their transferability or voting powers, which are preferred or limited as to their dividends or as to their allocable portion of the assets upon liquidation or which are redeemable at the option of the Corporation, shall have a statement of such restriction, limitation, preference or redemption provision, or a summary thereof, plainly stated on the certificate. If the Corporation has authority to issue stock of more than one class, the certificate shall contain on the face or back a full statement or summary of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of each class of stock and, if the Corporation is authorized to issue any preferred or special class in series, the differences in the relative rights and preferences between the shares of each series to the extent they have been set and the authority of the Board of Directors to set the relative rights and preferences of subsequent series. In lieu of such statement or summary, the certificate may state that the Corporation will furnish a full statement of such information to any stockholder upon request and without charge. If any class of stock is restricted by the Corporation as to transferability, the certificate shall contain a full statement of the restriction or state that the Corporation will furnish information about the restrictions to the stockholder on request and without charge.

Section 2.TRANSFERS. Upon surrender to the Corporation or the transfer agent of the Corporation of a stock certificate duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.

The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland.

Notwithstanding the foregoing, transfers of shares of any class of stock will be subject in all respects to the charter of the Corporation and all of the terms and conditions contained therein.

Section 3.REPLACEMENT CERTIFICATE. Any officer designated by the Board of Directors may direct a new certificate to be issued in place of any certificate previously issued by the Corporation alleged to have been lost, stolen or destroyed upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen or destroyed. When authorizing the issuance of a new certificate, an officer designated by the Board of Directors may, in his or her discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or the owner’s legal representative to advertise the same in such manner as he shall require and/or to give bond, with sufficient surety, to the Corporation to indemnify it against any loss or claim which may arise as a result of the issuance of a new certificate.

Section 4.CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The Board of Directors may set, in advance, a record date for the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or determining stockholders entitled to receive payment of any dividend or the allotment of any other rights, or in

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order to make a determination of stockholders for any other proper purpose. Such date, in any case, shall not be prior to the close of business on the day the record date is fixed and shall be not more than 90 days and, in the case of a meeting of stockholders, not less than ten days, before the date on which the meeting or particular action requiring such determination of stockholders of record is to be held or taken.

In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not longer than 20 days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten days before the date of such meeting.

If no record date is fixed and the stock transfer books are not closed for the determination of stockholders, (a) the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (b) the record date for the determination of stockholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the directors, declaring the dividend or allotment of rights, is adopted.

When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof, except when (i) the determination has been made through the closing of the transfer books and the stated period of closing has expired or (ii) the meeting is adjourned to a date more than 120 days after the record date fixed for the original meeting, in either of which case a new record date shall be determined as set forth herein.

Section 5.STOCK LEDGER. The Corporation shall maintain at its principal office or at the office of its counsel, accountants or transfer agent, an original or duplicate share ledger containing the name and address of each stockholder and the number of shares of each class held by such stockholder.

Section 6.FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of Directors may issue fractional stock or provide for the issuance of scrip, all on such terms and under such conditions as they may determine. Notwithstanding any other provision of the charter or these Bylaws, the Board of Directors may issue units consisting of different securities of the Corporation. Any security issued in a unit shall have the same characteristics as any identical securities issued by the Corporation, except that the Board of Directors may provide that for a specified period securities of the Corporation issued in such unit may be transferred on the books of the Corporation only in such unit.

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ARTICLE VIII

ACCOUNTING YEAR

The Board of Directors shall have the power, from time to time, to fix the fiscal year of the Corporation by a duly adopted resolution.

ARTICLE IX

DISTRIBUTIONS

Section 1.AUTHORIZATION. Dividends and other distributions upon the stock of the Corporation may be authorized by the Board of Directors, subject to the provisions of law and the charter of the Corporation. Dividends and other distributions may be paid in cash, property or stock of the Corporation, subject to the provisions of law and the charter.

Section 2.CONTINGENCIES. Before payment of any dividends or other distributions, there may be set aside out of any assets of the Corporation available for dividends or other distributions such sum or sums as the Board of Directors may from time to time, in its absolute discretion, think proper as a reserve fund for contingencies, for equalizing dividends or other distributions, for repairing or maintaining any property of the Corporation or for such other purpose as the Board of Directors shall determine to be in the best interest of the Corporation, and the Board of Directors may modify or abolish any such reserve.

ARTICLE X

INVESTMENT POLICY

Subject to the provisions of the charter of the Corporation, the Board of Directors may from time to time adopt, amend, revise or terminate any policy or policies with respect to investments by the Corporation as it shall deem appropriate in its sole discretion.

ARTICLE XI

SEAL

Section 1.SEAL. The Board of Directors may authorize the adoption of a seal by the Corporation. The seal shall contain the name of the Corporation and the year of its incorporation and the words “Incorporated Maryland.”  The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof.

Section 2.AFFIXING SEAL. Whenever the Corporation is permitted or required to affix its seal to a document, it shall be sufficient to meet the requirements of any law, rule or regulation relating to a seal to place the word “(SEAL)” adjacent to the signature of the person authorized to execute the document on behalf of the Corporation.

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ARTICLE XII

INDEMNIFICATION AND ADVANCE OF EXPENSES

To the maximum extent permitted by Maryland law in effect from time to time, the Corporation shall indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, shall pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (a) any individual who is a present or former director or officer of the Corporation and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity or (b) any individual who, while a director or officer of the Corporation and at the request of the Corporation, serves or has served as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made or threatened to be made a party to the proceeding by reason of his or her service in that capacity. The Corporation may, with the approval of its Board of Directors or any duly authorized committee thereof, provide such indemnification and advance for expenses to a person who served a predecessor of the Corporation in any of the capacities described in (a) or (b) above and to any employee or agent of the Corporation or a predecessor of the Corporation. The indemnification and payment of expenses provided in these Bylaws shall not be deemed exclusive of or limit in any way other rights to which any person seeking indemnification or payment of expenses may be or may become entitled under any bylaw, regulation, insurance, agreement or otherwise.

Neither the amendment nor repeal of this Article, nor the adoption or amendment of any other provision of the Bylaws or charter of the Corporation inconsistent with this Article, shall apply to or affect in any respect the applicability of the preceding paragraph with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.

ARTICLE XIII

WAIVER OF NOTICE

Whenever any notice is required to be given pursuant to the charter of the Corporation or these Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.

ARTICLE XIV

AMENDMENT OF BYLAWS

The Board of Directors shall have the exclusive power to adopt, alter or repeal any provision of these Bylaws and to make new Bylaws.

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EX-10.5(E)

Exhibit 10.5(e)

AMENDMENT NO. 4

TO

MASTER REPURCHASE AGREEMENT

THIS AMENDMENT NO. 4, made as of March 1, 2006 (“Amendment No. 4”), by and among BEAR STEARNS MORTGAGE CAPITAL CORPORATION (the “Buyer”) and AAMES CAPITAL CORPORATION (“ACC”), AAMES INVESTMENT CORPORATION (“AIC”) and AAMES FUNDING CORPORATION (“AFC”, and together with ACC and AIC, the “Sellers”).

R E C I T A L S

WHEREAS, Buyer and the Sellers have previously entered into a Master Repurchase Agreement dated as of August 5, 2004, as amended by Amendment No. 1 dated as of March 18, 2005, Amendment No. 2 dated as of June 20, 2005 and Amendment No. 3 dated as October 31, 2005 (collectively, the “Agreement”); and

WHEREAS, Buyer and the Sellers desire to modify the terms of the Agreement;

NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

Section 1. Definitions. Capitalized terms used herein and not otherwise defined shall have the meanings assigned in the Agreement.

Section 2. Financial Covenants. Effective as of December 31, 2005, Section 10(d)(xv), (xvi) and (xvii) of the Agreement are hereby deleted in their entirety and replaced by the following:

“(xv)the Leverage Ratio of AIC shall not exceed 20.0 to 1.0 at any time.

(xvi)the Adjusted Leverage Ratio of AIC shall not exceed 7.0 to 1.0 at any time.

(xvii)the aggregate amount of AIC’s cash, Cash Equivalents and available borrowing capacity on unencumbered assets that could be drawn against (taking into account required haircuts) under committed warehouse or working capital facilities, on a consolidated basis and on any given day, shall not be less than $38,000,000.”

Section 3. Waiver. Upon execution of this Amendment No. 4, the Buyer and the Sellers agree that any non-compliance with or the violation of Section 10(d)(xv),(xvi) or (xvi) on or after December 31, 2005 and up to the date of this Amendment No. 4 are hereby waived.

Section 4. Expenses. Each party hereto shall pay its own expenses in connection with this Amendment No. 3.

Section 5. Controlling Law. This Amendment No. 3 shall be governed and construed in accordance with the laws of the State of New York applicable to agreements made and entirely performed therein.

Section 6. Interpretation. The provisions of the Agreement shall be read so as to give effect to the provisions of this Amendment No. 4.

Section 7. Counterparts. This Amendment No. 4 may be executed in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute but one and the same instrument.

Section 8. Ratification and Confirmation. As amended by this Amendment No. 4, the Agreement is hereby in all respects ratified and confirmed, and the Agreement as amended by this Amendment No. 4 shall be read, taken and construed as one and the same instrument.

[Remainder of Page Blank – Signatures Follow]

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IN WITNESS WHEREOF, Buyer and each of the Sellers have caused their names to be signed hereto by their respective officers thereunto duly authorized, all as of the date first above written.

BEAR STEARNS MORTGAGE CAPITAL
CORPORATION
By:			/s/ David S. Marren
Title: Senior Vice President
Date: 3-2-06
AAMES CAPITAL CORPORATION
By:		/s/ Jon D. Van Deuren
Title: EVP/CFO
Date: 2 March 2006
AAMES INVESTMENT CORPORATION
By:	/s/ Jon D. Van Deuren
Title: EVP/CFO
Date: 2 March 2006
AAMES FUNDING CORPORATION
By:	/s/ Jon D. Van Deuren
Title: EVP/CFO
Date: 2 March 2006

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EX-10.8(A)

Exhibit 10.8(a)

Execution Version

MASTER REPURCHASE AGREEMENT

Dated as of December 2, 2005

by and among

AAMES CAPITAL CORPORATION,

AAMES FUNDING CORPORATION,

and

AAMES INVESTMENT CORPORATION,as Sellers

and

MORGAN STANLEY BANK,as Buyer

TABLE OF CONTENTS

			Page
Section	1.	Definitions and Accounting Matters.	1
	1.01	Certain Defined Terms	1
	1.02	Accounting Terms and Determinations	16
	1.03	Other Definitional Provisions	16
Section	2.	Transactions; Repurchases and Margin Maintenance.	17
	2.01	Transactions.	17
	2.02	Transaction Request Procedure.	17
	2.03	Limitation on Types of Transactions; Illegality	18
	2.04	Repurchase of Purchased Loans; Payment of Repurchase Price, Price Differential.	19
	2.05	Margin Maintenance.	19
	2.06	Voluntary Prepayments	20
	2.07	Extension of Termination Date	20
	2.08	Takeout Commitments.	20
Section	3.	Payments; Computations; Etc.	21
	3.01	Payments.	21
	3.02	Computations	21
	3.03	Requirements of Law.	21
	3.04	Fees	23
	3.05	Tax Treatment	23
	3.06	Income Payments	23
Section	4.	Purchased Items; Security Interest.	23
	4.01	Purchased Items; Security Interest.	23
	4.02	Further Documentation	25
	4.03	Changes in Locations, Name, etc	25
	4.04	Buyer’s Appointment as Attorney-in-Fact.	25
	4.05	Performance by Buyer of Sellers’ Obligations	27
	4.06	Proceeds	27
	4.07	Remedies	27
	4.08	Limitation on Duties Regarding Preservation of Purchased Items and Collateral	28
	4.09	Powers Coupled with an Interest	28
	4.10	Reconveyance of Purchased Items; Release of Security Interest	28
	4.11	Interest Rate Protection Agreements	29
Section	5.	Conditions Precedent.	29
	5.01	Initial Transaction	29
	5.02	Initial and Subsequent Transactions	30
Section	6.	Representations and Warranties.	32
	6.01	Legal Name	32
	6.02	Existence	32
	6.03	Financial Condition	32
	6.04	Litigation	33
	6.05	No Breach	33
	6.06	Action	33

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	6.07	Approvals	33
	6.08	Margin Regulations	34
	6.09	Taxes	34
	6.10	Investment Company Act	34
	6.11	Purchased Items; Security Interests.	34
	6.12	Chief Executive Office/Jurisdiction of Organization	35
	6.13	Location of Books and Records	35
	6.14	True and Complete Disclosure	35
	6.15	Tangible Net Worth	35
	6.16	ERISA	35
	6.17	Capitalization	36
	6.18	Hedges	36
	6.19	Regulatory Status	36
	6.20	Real Estate Investment Trust	36
	6.21	Compliance with Anti-Money Laundering Laws	36
	6.22	Solvency	36
Section	7.	Covenants of the Sellers.	37
	7.01	Financial Statements	37
	7.02	Litigation	39
	7.03	Existence, etc	39
	7.04	Prohibition of Fundamental Changes	40
	7.05	Margin Deficiency	40
	7.06	Notices	40
	7.07	Hedging	41
	7.08	Reports	41
	7.09	Underwriting Guidelines	41
	7.10	Transactions with Affiliates	41
	7.11	Limitation on Liens	42
	7.12	Limitation on Guarantees	42
	7.13	Limitation on Distributions	42
	7.14	Financial Covenants.	42
	7.15	[Reserved]	43
	7.16	No Adverse Selection	43
	7.17	Remittance of Prepayments	43
	7.18	Servicer; Servicer Report	43
Section	8.	Events of Default.	43
Section	9.	Remedies Upon Default.	46
Section	10.	No Duty of Buyer.	46
Section	11.	Miscellaneous.	46
	11.01	Waiver	46
	11.02	Notices	47
	11.03	Indemnification and Expenses.	47
	11.04	Amendments	48
	11.05	Assignments and Participations.	48
	11.06	Successors and Assigns	49
	11.07	Survival	49

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11.08	Captions	49
11.09	Counterparts	50
11.10	Repurchase Agreement Constitutes Security Agreement; Governing Law	50
11.11	Submission To Jurisdiction; Waivers	50
11.12	WAIVER OF JURY TRIAL	50
11.13	Acknowledgments	51
11.14	Hypothecation or Pledge of Purchased Items	51
11.15	Servicing.	51
11.16	Periodic Due Diligence Review	52
11.17	Set-Off	53
11.18	Intent.	53
11.19	Disclosure Relating to Certain Federal Protections	54
11.20	Joint and Several Liability	54
11.21	Treatment of Certain Information	54
11.22	Substitution	55

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SCHEDULES
	Schedule 1	Representations and Warranties re: Mortgage Loans
	Schedule 2	Filing Jurisdictions and Offices; Identification Numbers
	Schedule 3	Capitalization
	Schedule 4	Servicing Fields
	Schedule 5	Trade Names
EXHIBITS
	Exhibit A	Form of Custodial Agreement
	Exhibit B	Form of Takeout Proceeds Identification Letter
	Exhibit C	Form of Opinion of Counsel to Sellers
	Exhibit D	Form of Transaction Request
	Exhibit E-1	Form of Seller’s Release Letter
	Exhibit E-2	Form of Warehouse Lender’s Release Letter
	Exhibit F	Underwriting Guidelines
	Exhibit G	Form of Servicer Notice
	Exhibit H	Form of Assignment and Acceptance
	Exhibit I	Form of Notice of Prepayment

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MASTER REPURCHASE AGREEMENT

MASTER REPURCHASE AGREEMENT, dated as of December 2, 2005 (as amended, restated, supplemented or otherwise modified and in effect from time to time, this “Repurchase Agreement”), by and among AAMES CAPITAL CORPORATION, a California corporation (“Aames Capital”), AAMES FUNDING CORPORATION, a California corporation (“Aames Funding”), AAMES INVESTMENT CORPORATION, a Maryland corporation (“Aames Investment”, together with Aames Capital and Aames Funding, collectively, the “Sellers”, each a “Seller”) and MORGAN STANLEY BANK (the “Buyer”).

RECITALS

WHEREAS, the Sellers, as borrowers, and the Buyer, as lender, are parties to that certain Master Loan and Security Agreement, dated as of October 21, 2004 (as amended, supplemented or otherwise modified prior to the date hereof, the “Existing Loan Agreement”).

WHEREAS, in light of recent changes in the Bankruptcy Code (defined below), the parties have agreed to substitute this Repurchase Agreement for the Existing Loan Agreement and to change the nature of their relationship from “borrowers” and “lender” to “sellers” and “buyer” as provided herein.

WHEREAS, in furtherance of the foregoing, the Sellers have each requested that the Buyer from time to time enter into transactions (each, a “Transaction”), pursuant to which a Seller shall sell to the Buyer, and the Buyer shall purchase from such Seller, on the Purchase Date (defined below) for such Transaction, certain Eligible Mortgage Loans (defined below), with a simultaneous agreement by the Buyer to sell to such Seller, and by such Seller to repurchase from the Buyer, Purchased Loans (defined below) on the related Repurchase Date (defined below) against payment by such Seller of an amount equal to the related Repurchase Price (defined below).

WHEREAS, each Seller is engaged in a business that is complimentary to the business of the other Sellers. Each Seller will directly benefit from each Transaction entered into by another Seller, and the proceeds of each Transaction will inure to the benefit of each Seller.

NOW, THEREFORE, in consideration of the premises and mutual obligations set forth herein, each of the Sellers and the Buyer hereby agree that the Existing Loan Agreement is hereby amended, superceded and restated in its entirety as set forth in the heading and recitals hereto and as follows:

Section 1. Definitions and Accounting Matters.

1.01Certain Defined Terms. As used herein, the following terms shall have the following meanings (all terms defined in this Section 1.01 or in other provisions of this Repurchase Agreement in the singular to have the same meanings when used in the plural and vice versa):

“Aames Capital” shall have the meaning provided in the heading hereto.

“Aames Funding” shall have the meaning provided in the heading hereto.

“Aames Investment” shall have the meaning provided in the heading hereto.

“Accepted Servicing Practices” shall mean, with respect to any Purchased Loan, those mortgage servicing practices of prudent mortgage lending institutions which service mortgage loans of the same type as such Purchased Loans in the jurisdiction where the related Mortgaged Property is located.

“Adjusted Indebtedness” shall mean an amount equal to Total Indebtedness less any outstanding non-recourse real estate investment trust portfolio debt.

“Affiliate” shall mean with respect to any Person, any “affiliate” of such Person, as such term is defined in the Bankruptcy Code.

“Anti-Money Laundering Laws” shall have the meaning provided in Section 6.21 hereof.

“Applicable Pricing Spread” shall mean the sum of the weighted averages of the applicable rates per annum for each type of Eligible Mortgage Loan for each day that Transactions are outstanding in respect of such type of Eligible Mortgage Loans, determined by multiplying (a) for each type of Eligible Mortgage Loan set forth in the table below, a fraction equal to the Recognized Value of all Eligible Mortgage Loans of such type divided by the Recognized Value of all Eligible Mortgage Loans subject to Transactions then outstanding, times (b) for each type of Eligible Mortgage Loan set forth in the table below, the percentage set forth in the table below opposite such type of Eligible Mortgage Loan:

Type of Eligible Mortgage Loan	Applicable Pricing Spread
First Lien Loan that is a Performing Loan	0.85	%
Second Lien Loan that is a Performing Loan	0.85	%
First Lien Loan or Second Lien Loan that is a Class A Defaulted Loan	1.20	%
First Lien Loan or Second Lien Loan that is a Class B Defaulted Loan	1.20	%
First Lien Loan or Second Lien Loan that is a Class C Defaulted Loan	1.50	%

“Applicable Purchase Percentage” shall mean, with respect to each Eligible Mortgage Loan, the applicable purchase percentage set forth in the table below opposite the applicable type of Eligible Mortgage Loan:

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Type of Eligible Mortgage Loan	Applicable Purchase Percentage
First Lien Loan that is a Performing Loan	97	%
Second Lien Loan that is a Performing Loan	97	%
First Lien Loan or Second Lien Loan that is a Class A Defaulted Loan	80	%
First Lien Loan or Second Lien Loan that is a Class B Defaulted Loan	75	%
First Lien Loan or Second Lien Loan that is a Class C Defaulted Loan, prior to receipt by the Buyer of a BPO for such Class C Defaulted Loan	50	%
First Lien Loan or Second Lien Loan that is a Class C Defaulted Loan, after receipt by the Buyer of a BPO for such Class C Defaulted Loan	65	%
Kick-Out Mortgage Loans	90	%

“Assignment and Acceptance” shall have the meaning set forth in Section 11.05(a) hereof.

“Assignment of Mortgage” means, with respect to any mortgage, an assignment of the mortgage, notice of transfer or equivalent instrument in recordable form, sufficient under the laws of the jurisdiction wherein the related mortgaged property is located to reflect the assignment and pledge of the mortgage.

“Bankruptcy Code” shall mean the United States Bankruptcy Code of 1978, as amended from time to time.

“BPO” shall mean a broker’s price opinion relating to the Mortgaged Property securing an Eligible Mortgage Loan, in form and substance satisfactory to the Buyer in its sole discretion from a broker chosen by the Buyer.

“Business Day” shall mean any day other than (i) a Saturday or Sunday or (ii) a day on which the New York Stock Exchange, the Federal Reserve Bank of New York or the Custodian is authorized or obligated by law or executive order to be closed.

“Buyer” shall have the meaning provided in the introductory paragraph hereof.

“Calculation Period” shall mean, with respect to any Transaction, (a) initially, the period commencing on the Purchase Date to but excluding the first Payment Date; and (b) thereafter, each period commencing on a Payment Date to but excluding the next Payment Date. Notwithstanding the foregoing, no Calculation Period may end after the Termination Date.

“Capital Stock” shall mean any and all shares, interests, participations or other equivalents (however designated) of capital stock of a corporation, any and all similar ownership interests in a Person (other than a corporation) and any and all warrants or options to purchase any of the foregoing.

“Capital Lease Obligations” shall mean, for any Person, all obligations of such Person to pay rent or other amounts under a lease of (or other agreement conveying the right to

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use) Property to the extent such obligations are required to be classified and accounted for as a capital lease on a balance sheet of such Person under GAAP, and, for purposes of this Repurchase Agreement, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP.

“Cash Equivalents” shall mean (a) securities with maturities of ninety (90) days or less from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency thereof, (b) certificates of deposit and eurodollar time deposits with maturities of ninety (90) days or less from the date of acquisition and overnight bank deposits of any commercial bank having capital, surplus and retained earnings in excess of $750,000,000, (c) repurchase obligations of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than seven days with respect to securities issued or fully guaranteed or insured by the United States Government, (d) commercial paper of a domestic issuer rated at least A-1 or the equivalent thereof by S&P or P-1 or the equivalent thereof by Moody’s and in either case maturing within ninety (90) days after the day of acquisition, (e) securities with maturities of ninety (90) days or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A by Moody’s, (f) securities with maturities of ninety (90) days or less from the date of acquisition backed by standby letters of credit issued by any commercial bank satisfying the requirements of clause (b) of this definition, or (g) shares of money market, mutual or similar funds which invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition or (h) available capacity under committed revolving facilities, other than the Buyer’s revolving facility.

“Class” shall mean, as to any Defaulted Loan, its status as a Class A Defaulted, Loan, Class B Defaulted Loan or a Class C Defaulted Loan.

“Class A Defaulted Loan” shall mean an Eligible Mortgage Loan for which the related Mortgagor is thirty (30) to fifty-nine (59) days delinquent in scheduled payments of principal and interest as at the end of the preceding calendar month.

“Class B Defaulted Loan” shall mean an Eligible Mortgage Loan for which the related Mortgagor is sixty (60) to eighty-nine (89) days delinquent in scheduled payments of principal and interest as at the end of the preceding calendar month.

“Class C Defaulted Loan” shall mean an Eligible Mortgage Loan for which the related Mortgagor is ninety (90) days or more delinquent in scheduled payments of principal and interest or which is subject to foreclosure proceedings as at the end of the preceding calendar month.

“Code” shall mean the Internal Revenue Code of 1986, as amended from time to time.

“Collateral” shall have the meaning provided in Section 4.01(d) hereof.

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“Custodial Agreement” shall mean the Custodial Agreement, dated as of December 2, 2005, among the Sellers, the Custodian and the Buyer, attached as Exhibit A hereto, as the same may be amended, restated, supplemented or otherwise modified and in effect from time to time.

“Custodian” shall mean Deutsche Bank National Trust Company, formerly known as Bankers Trust Company, as custodian under the Custodial Agreement, and its successors and permitted assigns thereunder.

“Default” shall mean an Event of Default or an event that with notice or lapse of time or both would become an Event of Default.

“Defaulted Loan” shall mean a Class A Defaulted Loan, a Class B Defaulted Loan or a Class C Defaulted Loan.

“Dollars” and “$” shall mean lawful money of the United States of America.

“Due Diligence Review” shall mean the performance by the Buyer of any or all of the reviews permitted under Section 11.16 hereof with respect to any or all of the Mortgage Loans, as desired by the Buyer from time to time.

“Effective Date” shall mean the date upon which the conditions precedent set forth in Section 5.01 shall have been satisfied.

“Eligible Mortgage Loan” shall mean a Mortgage Loan secured by a first mortgage lien or a second mortgage lien on a one-to-four family residential property, as to which the representations and warranties in Section 6.11 and Part I of Schedule 1 hereof are correct; provided that, in no event shall any Eligible Mortgage Loan be a security for purposes of any securities or blue-sky laws.

“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time.

“ERISA Affiliate” shall mean any corporation or trade or business that is a member of any group of organizations (i) described in Section 414(b) or (c) of the Code of which any Seller is a member and (ii) solely for purposes of potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of which any Seller is a member.

“Eurocurrency Liabilities” shall have the meaning specified in Regulation D of the Board of Governors of the Federal Reserve System, as in effect from time to time

“Eurodollar Base Rate” shall mean, with respect to each day any Transaction is outstanding, the rate per annum equal to the rate appearing at page 5 of the Telerate Screen as one-month LIBOR on such date (and if such date is not a Business Day, the rate quoted as one-month LIBOR on the Business Day immediately preceding such date), and if such rate shall not be so quoted, the rate per annum at which the Agent is offered Dollar deposits at or about 10:00 a.m.,

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New York City time, on such date by prime banks in the interbank eurodollar market where the eurodollar and foreign currency exchange operations in respect of the Transactions are then being conducted for delivery on such day for a period of thirty (30) days and in an amount comparable to the aggregate Purchase Price of all Transactions outstanding on such day.

“Eurodollar Rate” shall mean with respect to each day during each Calculation Period pertaining to a Eurodollar Transaction, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%):

Eurodollar Base Rate

1.00 – Eurodollar Rate Reserve Percentage

“Eurodollar Rate Reserve Percentage” shall mean, for any Calculation Period pertaining to a Eurodollar Transaction, the reserve percentage applicable two (2) Business Days before the first day of such Calculation Period under regulations issued from time to time by the Board of Governors of the Federal Reserve System (or any successor thereto) for determining the maximum reserve requirement (including, without limitation, any emergency, supplemental or other marginal reserve requirement) for a member bank of the Federal Reserve System in New York, New York with respect to liabilities or assets consisting of or including Eurocurrency Liabilities (or with respect to any other category of liabilities that includes deposits by reference to which the interest rate on Eurodollar Transactions is determined) having a term comparable to such Calculation Period.

“Eurodollar Transaction”  shall mean a Transaction with respect to which the related Pricing Rate is determined by reference to the Eurodollar Rate.

“Event of Default” shall have the meaning provided in Section 8 hereof.

“Excess Proceeds” shall have the meaning provided in Section 2.08 hereof.

“Executive Order” shall have the meaning provided in Section 6.21 hereof.

“Existing Loan Agreement” shall have the meaning provided in the first Recitals paragraph hereof.

“Federal Funds Rate” shall mean, for any day, the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Buyer from three federal funds brokers of recognized standing selected by it.

“Fee Letter” shall mean the letter dated the date hereof among the Sellers, the Buyer and Morgan Stanley Mortgage Capital Inc.

“First Lien Loan” shall mean an Eligible Mortgage Loan for which the related Mortgage constitutes a first priority lien on the related Mortgaged Property.

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“GAAP” shall mean generally accepted accounting principles as in effect from time to time in the United States.

“Governmental Authority” shall mean any nation or government, any state or other political subdivision, agency or instrumentality thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any court or arbitrator having jurisdiction over any Seller, any of its Subsidiaries or any of its properties.

“Guarantee” shall mean, as to any Person, any obligation of such Person directly or indirectly guaranteeing any Indebtedness of any other Person or in any manner providing for the payment of any Indebtedness of any other Person or otherwise protecting the holder of such Indebtedness against loss (whether by virtue of partnership arrangements, by agreement to keep-well, to purchase assets, goods, securities or services, or to take-or-pay or otherwise); provided that the term “Guarantee” shall not include (i) endorsements for collection or deposit in the ordinary course of business, or (ii) obligations to make servicing advances for delinquent taxes and insurance or other obligations in respect of a Mortgaged Property, to the extent required by the Buyer. The amount of any Guarantee of a Person shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith. The terms “Guarantee” and “Guaranteed” used as verbs shall have correlative meanings.

“Income” shall mean, with respect to any Purchased Loan at any time, any principal and/or interest thereon and all dividends, sale proceeds (including, without limitation, any proceeds from the securitization of such Purchased Loan or other disposition thereof) and other collections and distributions thereon (including, without limitation, any proceeds received in respect of mortgage insurance) in respect of periods on or after the initial Purchase Date with respect to such Purchased Loan.

“Indebtedness” shall mean, for any Person without duplication:  (a) obligations created, issued or incurred by such Person for borrowed money (whether by loan, the issuance and sale of debt securities or the sale of Property to another Person subject to an understanding or agreement, contingent or otherwise, to repurchase such Property from such Person); (b) obligations of such Person to pay the deferred purchase or acquisition price of Property or services, other than trade accounts payable (other than for borrowed money) arising, and accrued expenses incurred, in the ordinary course of business so long as such trade accounts payable are payable within ninety (90) days from the date the respective goods are delivered or the respective services are rendered; (c) Indebtedness of others secured by a Lien on the Property of such Person, whether or not the respective Indebtedness so secured has been assumed by such Person; (d) obligations (contingent or otherwise) of such Person in respect of letters of credit or similar instruments issued or accepted by banks and other financial institutions for account of such Person; (e) Capital Lease Obligations of such Person; (f) obligations of such Person under repurchase agreements, sale/buy-back agreements or like arrangements; (g) Indebtedness of others Guaranteed by such Person; (h) all obligations of such Person incurred in connection with the acquisition or carrying of fixed assets by such Person; and (i) Indebtedness of general partnerships of which such Person is a general partner.

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“Interest-Only Mortgage Loan” shall mean a Mortgage Loan which, for the period of time specified in the related Mortgage Note, requires only the payment of interest.

“Interest Rate Protection Agreement” shall mean, with respect to any or all of the Purchased Loans, any short sale of US Treasury Securities, or futures contract, or mortgage related security, or Eurodollar futures contract, or options related contract, or interest rate swap, cap or collar agreement or similar arrangement providing for protection against fluctuations in interest rates or the exchange of nominal interest obligations, either generally or under specific contingencies, entered into by any Seller and an Affiliate of the Buyer, and acceptable to the Buyer.

“Kick-Out Mortgage Loans” shall mean any Purchased Loan (including any proposed Purchased Loan) which has been rejected from purchase by a buyer of mortgage loans for any reason.

“Leverage Ratio” shall mean, at any time, the ratio of (i) the aggregate principal amount of all Indebtedness of Parent and its respective Subsidiaries at such time which on a consolidated basis, in accordance with GAAP, would be required to be reflected on a consolidated balance sheet of Parent and its respective Subsidiaries as a liability to (ii) the sum of (1) the Tangible Net Worth of Parent and its respective Subsidiaries plus (2) with respect to Parent and its Subsidiaries only, accrued but unpaid dividends on preferred stock at such time.

“Lien” shall mean any mortgage, lien, pledge, charge, security interest or similar encumbrance.

“Margin Base” shall mean the aggregate Recognized Value of all Purchased Loans subject to Transactions from time to time outstanding hereunder; provided, that the following limitations shall apply at all times:

(i)the aggregate Recognized Value of all Second Lien Loans that are Performing Loans shall not exceed $50,000,000;

(ii)the aggregate Recognized Value of all First Lien Loans or Second Lien Loans that are Class A Defaulted Loans shall not exceed $10,000,000;

(iii)the aggregate Recognized Value of all First Lien Loans or Second Lien Loans that are Class B Defaulted Loans shall not exceed $10,000,000;

(iv)the aggregate Recognized Value of all First Lien Loans or Second Lien Loans that are Class C Defaulted Loans shall not exceed $5,000,000;

(v)the aggregate Recognized Value of all Non-Owner Occupied Mortgage Loans shall not exceed $25,000,000;

(vi)the aggregate Recognized Value of all Interest-Only Mortgage Loans shall not exceed $125,000,000;

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(vii)the aggregate Recognized Value of all Stated Documentation Mortgage Loans shall not exceed $225,000,000;

(viii)the aggregate Recognized Value of all Purchased Loans with respect to which the related Mortgagor has a FICO less than 550 shall not exceed $50,000,000; and

(ix)the Recognized Value shall be deemed to be zero with respect to each Purchased Loan:

(1)in respect of which there is a breach of a representation and warranty set forth on Schedule 1 (assuming each representation and warranty is made as of any date the Margin Base is determined);

(2)except with respect to Kick-Out Mortgage Loans, which remains subject to a Transaction outstanding hereunder later than 150 days after the initial Purchase Date therefor;

(3)which is a Kick-Out Mortgage Loan that remains subject to a Transaction outstanding hereunder later than ninety (90) days after the initial Purchase Date therefor (without regard to whether such Purchased Loan was identified as a Kick-Out Mortgage Loan on or after such initial Purchase Date);

(4)which has been released from the possession of the Custodian under the Custodial Agreement to a Seller for a period in excess of fourteen (14) days;

(5)which is a Kick-Out Mortgage Loan that has been rejected for purchase by any buyer of mortgage loans more than once or by more than one buyer of mortgage loans;

(6)which exceed the limitations on Recognized Value set forth in (i) through (vi) above; or

(7)which is a Class C Defaulted Loan for which a BPO is unable to be obtained following reasonable efforts to obtain the same, determined in the sole discretion of the Buyer.

“Margin Deficiency” shall have the meaning provided in Section 2.05 hereof.

“Market Value” shall mean, (a) with respect to any Eligible Mortgage Loan other than a Class C Defaulted Loan, as of any date in respect of such Eligible Mortgage Loan, the price at which such Eligible Mortgage Loan could readily be sold, as determined in good faith by the Buyer in its sole discretion, which price may be determined to be zero, and (b) with respect to any Eligible Mortgage Loan that is a Class C Defaulted Loan, the market value thereof determined as follows (the Buyer’s determination of Market Value shall, with respect to both clause (a) and (b), in all cases be conclusive upon the parties absent manifest error on the part of the Buyer). Promptly following the inclusion of an Eligible Mortgage Loan in the Margin Base

9

as a Class C Defaulted Loan, the Buyer shall seek to obtain a BPO for the related Mortgaged Property at the expense of the Sellers. The Buyer shall determine the market value of such Class C Defaulted Loan based upon the net proceeds that the Buyer, in its sole discretion, determines are reasonably likely to be obtained upon a sale of such Mortgaged Property in light of the results of the most recently obtained related BPO and the Buyer’s determination of all ancillary and related costs to be paid prior to or in connection with the maintenance and disposition of such Mortgaged Property.

“Material Adverse Effect” shall mean a material adverse effect on (a) the Property, business, operations, financial condition or prospects of any Seller, (b) the ability of any Seller to perform its obligations under any of the Repurchase Documents to which it is a party, (c) the validity or enforceability of any of the Repurchase Documents, (d) the rights and remedies of the Buyer under any of the Repurchase Documents, (e) the timely payment of the principal of or interest on the Loans or other amounts payable in connection therewith or (f) the Purchased Items or the Collateral.

“Maximum Amount” shall mean $500,000,000; provided, that at any time the aggregate outstanding Purchase Price of all Transactions entered into by Aames Investment and Aames Capital shall not exceed $499,000,000 and $1,000,000 will be for the exclusive use of Aames Funding.

“Moody’s” shall mean Moody’s Investors Service, Inc.

“Mortgage” shall mean the mortgage, deed of trust or other instrument securing a Mortgage Note, which creates a first or second lien on the fee in real property securing the Mortgage Note.

“Mortgage File” shall have the meaning assigned thereto in the Custodial Agreement.

“Mortgage Loan” shall mean a mortgage loan which the Custodian has been instructed to hold for the Buyer pursuant to the Custodial Agreement, and which Mortgage Loan includes, without limitation, a (i) Mortgage Note and related Mortgage and (ii) all right, title and interest of the applicable Seller in and to the Mortgaged Property covered by such Mortgage.

“Mortgage Loan Data File” shall mean a computer-readable file containing information with respect to each Mortgage Loan, to be delivered by the Seller to the Buyer pursuant to Section 2.02(a) hereof, which electronic file fields are identified on Annex I to the Custodial Agreement.

“Mortgage Loan Documents” shall mean, with respect to a Mortgage Loan, the documents comprising the Mortgage File for such Mortgage Loan.

“Mortgage Loan Schedule” shall have the meaning assigned to such term in the Custodial Agreement.

“Mortgage Loan Schedule and Exception Report” shall have the meaning assigned to such term in the Custodial Agreement.

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“Mortgage Note” shall mean the original executed promissory note or other evidence of the indebtedness of a mortgagor/borrower with respect to a Mortgage Loan.

“Mortgaged Property” shall mean the real property (including all improvements, buildings, fixtures, building equipment and personal property thereon and all additions, alterations and replacements made at any time with respect to the foregoing) and all other collateral securing repayment of the debt evidenced by a Mortgage Note.

“Mortgagor” shall mean the obligor on a Mortgage Note.

“MS & Co.” shall mean Morgan Stanley & Co. Incorporated, a registered broker-dealer.

“MS Indebtedness” shall mean any indebtedness of the Sellers hereunder and under any other arrangement between any Seller on the one hand and the Buyer or an Affiliate of the Buyer on the other hand.

“Multiemployer Plan” shall mean a multiemployer plan defined as such in Section 3(37) of ERISA to which contributions have been or are required to be made by any Seller or any ERISA Affiliate and that is covered by Title IV of ERISA.

“Net Income” shall mean, for any period, the net income of Aames Investment for such period as determined in accordance with GAAP.

“1934 Act” shall mean the Securities and Exchange Act of 1934, as amended.

“Non-Owner Occupied Mortgage Loan” shall mean a Mortgage Loan with respect to which the Mortgagor does not occupy the related Mortgaged property, based on the representation made by the Mortgagor at the time of the related Mortgage Loan origination.

“OFAC Regulations” shall have the meaning provided in Section 6.21 hereof.

“Parent” shall mean Aames Investment Corporation.

“Payment Date” shall have the meaning provided in Section 2.04(b) hereof.

“PBGC” shall mean the Pension Benefit Guaranty Corporation or any entity succeeding to any or all of its functions under ERISA.

“Performing Loan” shall mean an Eligible Mortgage Loan for which the related Mortgagor is current or fewer than thirty (30) days delinquent in scheduled payments of principal and interest as at the end of the preceding calendar month.

“Person” shall mean any individual, corporation, company, voluntary association, partnership, joint venture, limited liability company, trust, unincorporated association or government (or any agency, instrumentality or political subdivision thereof).

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“Plan” shall mean an employee benefit or other plan established or maintained by any Seller or any ERISA Affiliate and covered by Title IV of ERISA, other than a Multiemployer Plan.

“Post-Default Rate” shall mean, with respect to any amount of Repurchase Price or any other amount owing by any Seller under this Repurchase Agreement or any other Repurchase Document that is not paid in full when due (whether at stated maturity, by acceleration, by mandatory prepayment or otherwise, but not including by optional prepayment), a rate per annum during the period from and including the due date to but excluding the date on which such amount is paid in full equal to four percent (4%) per annum plus the Prime Rate and in no event shall such rate exceed the maximum rate permitted by law.

“Predatory Lending Practices” shall mean any and all underwriting and lending policies, procedures and practices defined or enumerated in any local or municipal ordinance or regulation or any state or federal regulation or statute prohibiting, limiting or otherwise relating to the protection of consumers from such policies, procedures and practices. Such policies, practices and procedures may include, without limitation, charging excessive loan, broker, and closing fees, charging excessive rates of loan interest, making loans without regard to a consumer’s ability to re-pay the loan, refinancing loans with no material benefit to the consumer, charging fees for services not actually performed, discriminating against consumers on the basis of race, gender, or age, failing to make proper disclosures to the consumer of the consumer’s rights under federal and state law, and any other predatory lending policy, practice or procedure as defined by ordinance, regulation or statute.

“Prescribed Laws” shall mean, collectively, (a) the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law 107-56) (The USA PATRIOT Act), (b) Executive Order No. 13224 on Terrorist Financing, effective September 24, 2001, and relating to Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism, (c) the International Emergency Economic Power Act, 50 U.S.C. §1701 et. seq. and (d) all other Requirements of Law relating to money laundering or terrorism.

“Price Differential” means, with respect to any Transaction hereunder as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for the Purchased Loans subject to such Transaction during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the applicable Repurchase Date (reduced by any amount of such Price Differential previously paid by any Seller to the Buyer, with respect to such Transaction).

“Pricing Rate” shall mean a rate per annum equal to the sum of (a) the Eurodollar Rate plus (b) the Applicable Pricing Spread; provided, that Pricing Rate shall be the applicable Post-Default Rate for any Transaction and on any other amount payable by the applicable Seller hereunder that shall not be paid in full when due (whether at stated maturity, by acceleration or by mandatory repurchase or otherwise) for the period from and including the due date thereof to but excluding the date the same is paid in full; provided further, that in no event shall such rate exceed the maximum rate permitted by law.

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“Prime Rate” shall mean the prime rate announced to be in effect from time to time, as published as the average rate in The Wall Street Journal.

“Property” shall mean any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible.

“Purchase Advice” shall have the meaning provided in Section 2.08 hereof.

“Purchase Advice Deficiency” shall have the meaning provided in Section 2.08 hereof.

“Purchase Date” shall mean the date on which a Transaction is entered into hereunder.

“Purchase Price” shall mean, with respect to each Purchased Loan, (i) on each Purchase Date therefor, an amount equal to the Recognized Value of such Purchased Loan on such Purchase Date and (ii) thereafter, such amount decreased by the amount of any payments made by any Seller hereunder that are applied in reduction of such amount.

“Purchased Items” shall have the meaning provided in Section 4.01(c) hereof.

“Purchased Loans” shall mean the Eligible Mortgage Loans sold by any Seller to the Buyer in Transactions hereunder (together with any additional Eligible Mortgage Loans transferred pursuant to Section 2.05 hereof).

“Recognized Value” shall mean, with respect to each Eligible Mortgage Loan, the lesser of (a) (i) the Applicable Purchase Percentage of the Market Value of such Eligible Mortgage Loan or (ii) in the case of any Class C Defaulted Loan prior to the receipt by the Buyer of a BPO relating thereto, the Applicable Purchase Percentage of the outstanding principal balance of such Class C Defaulted Loan, and (b) 100% of the outstanding principal balance of such Eligible Mortgage Loan.

“Reg AB” shall have the meaning provided in Section 7.18 hereof.

“Regulations T, U and X” shall mean Regulations T, U and X of the Board of Governors of the Federal Reserve System (or any successor), as the same may be modified and supplemented and in effect from time to time.

“REIT Distribution Requirement” shall mean distributions reasonably necessary for each REIT Seller to maintain its REIT Status or not be subject to corporate level tax based on income or to excise tax under Section 4981 of the Code.

“REIT Seller” shall mean any Seller which has REIT Status.

“REIT Status” shall mean with respect to any Person, such Person’s status as a real estate investment trust, as defined in Section 856(a) of the Code, that satisfies the conditions and limitations set forth in Section 856(b) and 856(c) of the Code.

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“Remittance Amount” shall have the meaning provided in Section 2.08 hereof.

“Reportable Event” shall mean a reportable event as defined in Title IV of ERISA, except actions of general applicability by the Secretary of Labor under Section 110 of ERISA.

“Repurchase Agreement” shall have the meaning provided in the introductory paragraph hereof.

“Repurchase Date” shall mean, with respect to any Transaction and each Purchased Loan, the earlier of (a) the Termination Date and (b) the date on which such Purchased Loan shall be repurchased by a Seller hereunder, which shall not be later than the date that is 150 calendar days (or, with respect to any Kick-Out Mortgage Loan, 90 calendar days) after the initial Purchase Date therefor.

“Repurchase Documents” shall mean, collectively, this Repurchase Agreement, the Custodial Agreement and the Fee Letter.

“Repurchase Obligations” shall have the meaning provided in Section 4.01(b) hereof.

“Repurchase Price” shall mean, with respect to each Purchased Loan, the price at which such Purchased Loan is to be transferred from the Buyer or its designee (including the Custodian) to a Seller upon termination of the related Transaction, which price will be determined in each case as the sum of the outstanding Purchase Price related to such Purchased Loan and the amount of unpaid Price Differential that has accrued with respect to such Transaction.

“Requirement of Law” shall mean as to any Person, the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law (including, without limitation, Prescribed Laws), treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.

“Responsible Officer” shall mean, as to any Person, the chief executive officer, the chief financial officer, Senior Vice President or Treasurer of such Person.

“S&P” shall mean Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc.

“Second Lien Loan” shall mean a Mortgage Loan for which the related Mortgage constitutes a second priority lien on the related Mortgaged Property and which has a CLTV less than or equal to 100%.

“Seller” and “Sellers” shall have the meaning provided in the introductory paragraph hereof.

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“Servicer” shall mean Aames Capital Corporation or another Person acceptable to the Buyer.

“Servicer Notice” shall have the meaning provided in Section 11.15(c) hereof.

“Servicer Report” shall mean, as to any Servicer, a list (in computer readable form) of the Purchased Loans serviced by such Servicer, providing as to each such Purchased Loan the applicable information specified on Schedule 4 to this Repurchase Agreement.

“Servicing Agreement” shall have the meaning provided in Section 11.15(c) hereof.

“Servicing Records” shall have the meaning provided in Section 11.15(b) hereof.

“Settlement Date” shall mean, with respect to any Purchased Loan subject to a Takeout Commitment, the Business Day on which the Takeout Price for such Purchased Loan is received by the Buyer or the Sellers pursuant to the applicable Takeout Commitment.

“Stated Documentation Mortgage Loan” shall mean an Eligible Mortgage Loan originated in accordance with the criteria specified in the Underwriting Guidelines for “stated documentation” loans.

“Subsidiary” shall mean, with respect to any Person, any corporation, partnership or other entity of which at least a majority of the securities or other ownership interests having by the terms thereof ordinary voting power to elect a majority of the board of directors or other persons performing similar functions of such corporation, partnership or other entity (irrespective of whether or not at the time securities or other ownership interests of any other class or classes of such corporation, partnership or other entity shall have or might have voting power by reason of the happening of any contingency) is at the time directly or indirectly owned or controlled by such Person or one or more Subsidiaries of such Person or by such Person and one or more Subsidiaries of such Person.

“Takeout Commitment” shall mean a trade confirmation from a Takeout Investor to the applicable Seller confirming the details of a forward trade between the Takeout Investor (as buyer) and such Seller (as seller) constituting a valid, binding and enforceable mandatory delivery commitment by such Takeout Investor to purchase on the Settlement Date and at a given Takeout Price the Purchased Loans described therein.

“Takeout Investor” shall mean a Person which has made a Takeout Commitment.

“Takeout Price” shall mean as to each Takeout Commitment the purchase price (expressed as a percentage of par) set forth therein.

“Takeout Proceeds” shall mean as to each Settlement Date, the actual amount of proceeds delivered to the Buyer by the applicable Takeout Investor for the purchase by such Takeout Investor of Purchased Loans on such Settlement Date.

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“Takeout Proceeds Identification Letter” shall mean a Takeout Proceeds Identification Letter in the form of Exhibit B hereto.

“Tangible Net Worth” shall mean, with respect to any Person, as of any date of determination, the amounts which would be included under equity on a consolidated balance sheet of such Person and its Subsidiaries at such date in accordance with GAAP, less the consolidated net book value of all assets of such person and its Subsidiaries (to the extent reflected as an asset in the balance sheet of such Person or any Subsidiary at such date) which will be treated as intangibles under GAAP; provided, that residual securities issued by such person or its Subsidiaries shall not be treated as intangibles for purposes of this definition.

“Termination Date” shall mean December 1, 2006, or such earlier date on which this Repurchase Agreement shall terminate in accordance with the provisions hereof or by operation of law.

“Total Indebtedness” shall mean, for any period, the aggregate Indebtedness of Aames Investment, as applicable, during such period.

“Transaction” shall have the meaning provided in the Recitals hereof.

“Transaction Request” shall mean a Transaction Request substantially in the form of Exhibit D attached hereto.

“Trust Receipt” shall have the meaning provided in the Custodial Agreement.

“Underwriting Guidelines” shall mean the relevant Seller’s underwriting guidelines attached as Exhibit F hereto, as modified from time to time in accordance with Section 7.09.

“Uniform Commercial Code” shall mean the Uniform Commercial Code as in effect from time to time in the State of New York; provided that if by reason of mandatory provisions of law, the perfection or the effect of perfection or non-perfection of the security interest or the renewal or enforcement thereof in any Purchased Items or Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than New York, “Uniform Commercial Code” shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions hereof relating to such perfection or effect of perfection or non-perfection.

1.02Accounting Terms and Determinations. Except as otherwise expressly provided herein, all accounting terms used herein shall be interpreted, and all financial statements and certificates and reports as to financial matters required to be delivered to the Buyer hereunder shall be prepared, in accordance with GAAP.

1.03Other Definitional Provisions. Unless otherwise required by the context, all references herein, or in any other Repurchase Document, to “the Seller” shall refer to the applicable Seller of a Purchased Asset in connection with a Transaction hereunder.

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Section 2. Transactions; Repurchases and Margin Maintenance.

2.01Transactions.

(a)  Subject to the fulfillment of the conditions precedent set forth in Sections 5.01 and 5.02 hereof, and provided that no Default or Event of Default shall have occurred and be continuing hereunder, the Buyer agrees to enter into, on the terms and subject to the conditions of this Repurchase Agreement, Transactions to purchase Eligible Mortgage Loans from the applicable Seller on a Purchase Date in an aggregate Purchase Price (which Purchase Price shall be paid in Dollars) not to exceed the lesser of (x) the Maximum Amount then in effect and (y) the Margin Base at such time (after giving effect to the Recognized Value of any Eligible Mortgage Loans to be purchased by the Buyer on such Purchase Date).

(b)  Subject to the terms and conditions of this Repurchase Agreement, during such period the Sellers may (i) request Transactions, (ii) repay the outstanding Repurchase Price, in full or in part, without penalty, and (iii) request additional Transactions hereunder; provided, that, notwithstanding the foregoing, the Buyer shall have no obligation to enter into any Transaction to the extent that the aggregate Repurchase Price then outstanding would be in excess of the Maximum Amount and, in the event the obligation of the Buyer to enter into Transactions is terminated as permitted hereunder, the Buyer shall have no further obligation to enter into any additional Transactions hereunder.

(c)  In no event shall any Transaction be entered into when any Default or Event of Default has occurred and is continuing.

2.02Transaction Request Procedure.

(a)  Any Seller may request a Transaction hereunder, on any Business Day during the period from and including the Effective Date to and including the Termination Date, by delivering to the Buyer, with a copy to the Custodian, a Transaction Request, which Transaction Request must be received by the Buyer prior to 4:00 p.m., New York City time, one (l) Business Day prior to the requested Purchase Date. Such request for borrowing shall (i) attach a schedule identifying the Eligible Mortgage Loans that the Seller proposes to sell to the Buyer and to be included in the Margin Base in connection with such Transaction, (ii) specify the requested Purchase Date, (iii) be accompanied by a Mortgage Loan Data File containing information with respect to the Eligible Mortgage Loans that the Seller proposes to sell to the Buyer and to be included in the Margin Base in connection with such Transaction and (iv) attach an officer’s certificate signed by a Responsible Officer of each Seller as required by Section 5.02(b) hereof.

(b)  The Seller shall release to the Custodian no later than 4:00 p.m., New York City time, two (2) Business Days prior to the requested Purchase Date, the Mortgage File pertaining to each Eligible Mortgage Loan to be sold to the Buyer and included in the Margin Base on such requested Purchase Date, in accordance with the terms and conditions of the Custodial Agreement.

(c)  Pursuant to the Custodial Agreement, the Custodian shall deliver to the Buyer and the Seller, no later than 12:00 noon, New York City time, on each Purchase Date, the Trust

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Receipt (as defined in the Custodial Agreement) and a Mortgage Loan Schedule and Exception Report in respect of all Eligible Mortgage Loans sold to the Buyer on such Purchase Date.

(d)  Upon any Seller’s request for a Transaction pursuant to Section 2.02(a), and upon satisfaction of all conditions precedent set forth in Section 5.01 and 5.02 with respect thereto, subject to Section 2.02(f) below, the Buyer shall enter into a Transaction with the Seller on the requested Purchase Date.

(e)  Subject to Section 5 hereof, the amount of Purchase Price to be paid by the Buyer in connection with any Transaction will be made available to the Seller by the Buyer transferring such amount in funds immediately available to the Seller, via wire transfer, to the following account of the Sellers: Bank of the West, for the A/C of Aames Capital Corporation, Account#: 751005844, ABA# 1211-0078-2, Attn: Aames Capital Corporation, or to such other account as the Sellers may direct in writing to the Buyer.

(f)  In the case of any Transaction entered into with respect to any Class C Defaulted Loan for which a BPO has not been delivered to the Buyer on or prior to the related Purchase Date or with respect to any Purchased Loan that at any time becomes a Class C Defaulted Loan, the Buyer shall transmit an invoice to the Sellers on a monthly basis in the amount of $100 for each such Class C Defaulted Loan to be applied to the cost of obtaining a BPO for each such Class C Defaulted Loan (any excess remaining after payment of the cost of such BPO to be remitted to the Sellers, and any shortfall towards payment of the BPO to be paid by the Sellers to the Buyer promptly following demand therefor). Any amounts so invoiced by the Buyer to the Sellers shall be payable promptly (and in any event no later than ten (10) Business Days following receipt thereof).

2.03Limitation on Types of Transactions; Illegality. Anything herein to the contrary notwithstanding, if, on or prior to the determination of any Eurodollar Rate:

(a)  the Buyer determines in good faith, which determination shall be conclusive, that quotations of interest rates for the relevant deposits referred to in the definition of “Eurodollar Rate” in Section 1.01 hereof are not being provided in the relevant amounts or for the relevant maturities for purposes of determining the Price Differential for Transactions as provided herein; or

(b)  the Buyer determines, which determination shall be conclusive, that the relevant rate referred to in the definition of “Eurodollar Rate” in Section 1.01 hereof upon the basis of which the Price Differential for Transactions is to be determined is not likely adequately to cover the cost to the Buyer of entering into or maintaining Transactions; or

(c)  it becomes unlawful for the Buyer to honor its obligation to enter into or maintain Transactions hereunder using a Eurodollar Rate;

then the Buyer shall give the Sellers prompt notice thereof and, so long as such condition remains in effect, the Buyer shall be under no obligation to enter into any additional Transactions, and the Sellers shall, either prepay the aggregate Repurchase Price of all Transactions then outstanding or pay Price Differential on such Transactions at a rate per annum equal to the Federal Funds Rate plus 0.50% plus the Applicable Pricing Spread.

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2.04Repurchase of Purchased Loans; Payment of Repurchase Price, Price Differential.

(a)  The Sellers hereby promise, jointly and severally, to repay in full on the Termination Date the then aggregate Repurchase Price then outstanding in respect of each Transaction.

(b)  The Sellers hereby promise, jointly and severally, to pay Price Differential to the Buyer for the period from and including the Purchase Date of each Transaction to but excluding the date on which the related Repurchase Price shall be paid in full, at a rate per annum equal to the Pricing Rate. Notwithstanding the foregoing, the Sellers hereby promise, jointly and severally, to pay to the Buyer interest at the applicable Post-Default Rate on any amount of Repurchase Price, and on any other amount payable by the Sellers hereunder, that shall not be paid in full when due (whether at stated maturity, by acceleration or by mandatory prepayment or otherwise) for the period from and including the due date thereof to but excluding the date the same is paid in full. Accrued Price Differential on each Transaction shall be payable monthly on the fifth (5^th) Business Day of each month and, for the last month of this Repurchase Agreement, on the fifth (5^th) Business Day of such last month and on the Termination Date (each such date, a “Payment Date”); provided, that (i) the Buyer may, in its sole discretion, require any accrued and unpaid Price Differential to be paid simultaneously with any prepayment of the Repurchase Price by any Seller on account of any Transaction outstanding hereunder and (ii) any accrued and unpaid Price Differential that is not required by the Buyer to be paid simultaneously with any prepayment of Repurchase Price shall be paid in full on the next Payment Date. Price Differential payable at the Post-Default Rate shall accrue daily and shall be payable upon such accrual.

(c)  It is understood and agreed that, unless and until a Default or Event of Default shall have occurred and be continuing, the Sellers shall be entitled to the proceeds of the Purchased Loans subject to Transactions outstanding hereunder. At any time while a Default has occurred and is continuing, upon notice from the Buyer, the Sellers shall promptly deliver to the Buyer all proceeds of Purchased Loans subject to Transactions outstanding hereunder.

2.05Margin Maintenance.

(a)  If at any time the aggregate Repurchase Price of all Transactions then outstanding exceeds the Margin Base (a “Margin Deficiency”), as determined by the Buyer and notified to the Sellers on any Business Day, the Sellers shall no later than one (1) Business Day after receipt of such notice, either make a payment to the Buyer in respect of the aggregate outstanding Repurchase Price or transfer to the Buyer additional Eligible Mortgage Loans that are in all respects acceptable to the Buyer in its sole discretion (which additional Eligible Mortgage Loans shall be deemed to be Purchased Loans under the Repurchase Documents) such that after giving effect to such payment or transfer no Margin Deficiency shall then exist.

(b)  The Sellers shall prepay the Transactions in the amounts of prepayments remitted to the Buyer in accordance with Section 7.17 hereof.

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(c)  If at any time MS & Co.’s corporate bond rating has been lowered or downgraded to a rating below A- by S&P or A3 by Moody’s and the Sellers shall repay all amounts owing to the Buyer under this Repurchase Agreement and the other Repurchase Documents within ninety (90) days following such downgrade.

(d)  If at any time the aggregate Repurchase Price of all Transactions then outstanding under this Repurchase Agreement exceeds the Maximum Amount, the Sellers shall at such time make a payment to the Buyer in respect of the aggregate outstanding Repurchase Price such that, after giving effect to such payment, the aggregate Repurchase Price of all Transactions then outstanding under this Repurchase Agreement does not exceed the Maximum Amount.

2.06Voluntary Prepayments. The Sellers may at any time and from time to time make a prepayment, in whole or in part, without premium or penalty, in respect of any outstanding Repurchase Price upon irrevocable notice delivered to the Buyer (in the form of Exhibit I) prior to 1:00 p.m., New York City time, on the requested date thereof, in the case of the first 500 Purchased Loans requested to be released by the Buyer on such date, or upon irrevocable notice delivered to the Buyer (in the form of Exhibit I), prior to 1:00 p.m., New York City time, at least one (1) Business Day prior thereto, in the case of any Purchased Loans in excess of 500 requested to be released by the Buyer, specifying the date and amount of prepayment and attaching a schedule of the Purchased Loans to be released by the Buyer in connection with such prepayment. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with any accrued interest to such date on the amount prepaid.

2.07Extension of Termination Date. At the request of the Sellers made at least thirty (30) days, but in no event earlier than ninety (90) calendar days, prior to the then current Termination Date, the Buyer may in its sole discretion extend the Termination Date for a period to be determined by the Buyer in its sole discretion by giving written notice of such extension to the Sellers no later than twenty (20) calendar days, but in no event earlier than thirty (30) calendar days, prior to the then current Termination Date. Any failure by the Buyer to deliver such notice of extension shall be deemed to be the Buyer’s determination not to extend the then current Termination Date.

2.08Takeout Commitments.

The Sellers shall instruct each Takeout Investor to remit all Takeout Proceeds directly to the Buyer at the account designated in Section 3.01 hereof no later than 3:00 p.m., New York City time, on a Business Day. No later than 3:00 p.m., New York City time, on the applicable Settlement Date, the Seller shall deliver a purchase advice (“Purchase Advice”) to the Buyer via facsimile or electronic mail and shall indicate on such Purchase Advice the mortgage loan identification number which identified each applicable Purchased Loan on the related Purchase Date hereunder. The Takeout Proceeds shall be applied by the Buyer against the aggregate Repurchase Price for the applicable Purchased Loans and, on the related Settlement Date, the Buyer shall release and remit to the Seller the amount of Takeout Proceeds in excess of such aggregate Repurchase Price (the “Remittance Amount”); provided, that on the Settlement Date (i) there is no Default or Event of Default under this Repurchase Agreement or any other

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Repurchase Document, (ii) there is no Margin Deficiency and (iii) the release to such Seller of the Remittance Amount will not cause a Margin Deficiency. If a Margin Deficiency exists or would be created by the release of the Remittance Amount or if a Default or Event of Default has occurred or is continuing, the Buyer shall be entitled to retain the Remittance Amount and the Sellers shall thereupon have no further right, title, or interest in, to or under the Remittance Amount. In the event that any Purchase Advice indicates that some of the proceeds forwarded to the Buyer do not belong to the Buyer hereunder (such amount, the “Excess Proceeds”), then (i) the Seller shall provide the Buyer with a Takeout Proceeds Identification Letter, and (ii) upon confirmation by the Buyer that the information set forth in the Purchase Advice matches the information that the Buyer has in its possession with respect to the related Purchased Loans, the Buyer shall promptly remit such Excess Proceeds by wire transfer in accordance with the Seller’s instructions. If funds are received by the Buyer before 3:00 p.m., New York City time on a Business Day, but either (A) no Purchase Advice is received by the Buyer or (B) such funds are not properly identified on the related Purchase Advice (a “Purchase Advice Deficiency”), then such funds shall be retained by the Buyer in a non-interest bearing account until such Purchase Advice Deficiency is remedied, and no Purchased Loan subject to such Purchase Advice shall be released until such Purchase Advice Deficiency is remedied. In no event shall any Purchase Advice be back-dated to the date of its issuance. The Buyer shall not be liable to the Seller or any other Person to the extent that the Buyer follows the instructions given to it by the Seller in a Takeout Proceeds Identification Letter.

Section 3. Payments; Computations; Etc.

3.01Payments.

(a)  Except to the extent otherwise provided herein, all payments of Repurchase Price, including Price Differential, and all other amounts to be paid by the Sellers under this Repurchase Agreement shall be made in Dollars, in immediately available funds, without deduction, set-off or counterclaim, to the Buyer at the following account maintained by the Buyer: Account No. 30463591, for the account of the Buyer, Citibank, N.A., ABA No. 021000089, Attn: Whole Loan Operations, not later than 5:00 p.m., New York City time, on the date on which such payment shall become due (and each such payment made after such time on such due date shall be deemed to have been made on the next succeeding Business Day). Each Seller acknowledges that it has no rights of withdrawal from the foregoing account.

(b)  Except to the extent otherwise expressly provided herein, if the due date of any payment under this Repurchase Agreement would otherwise fall on a day that is not a Business Day, such date shall be extended to the next succeeding Business Day, and Price Differential on outstanding Purchase Price and interest on other unpaid amounts shall accrue with respect to such Purchase Price or other unpaid amounts for the period of such extension.

3.02Computations. Price Differential on the Transactions and interest on any other unpaid amounts shall be computed on the basis of a 360-day year for the actual days elapsed (including the first day but excluding the last day) occurring in the period for which payable.

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3.03Requirements of Law.

(a)  If the introduction or adoption of or any change (other than any change by way of the imposition of an increase in reserve requirements included in the Eurodollar Rate Reserve Percentage) in any Requirement of Law (other than with respect to any amendment made to the Buyer’s certificate of incorporation and by-laws or other organizational or governing documents) or any change in the interpretation or application thereof or compliance by the Buyer with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof:

(i)shall subject the Buyer to any tax of any kind whatsoever with respect to this Repurchase Agreement or any Transaction entered into by it (excluding net income or franchise taxes) or change the basis of taxation of payments to the Buyer in respect thereof;

(ii)shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans, Transactions or other extensions of credit by, or any other acquisition of funds by, any office of the Buyer which is not otherwise included in the determination of the Eurodollar Rate hereunder;

(iii)shall impose on the Buyer any other condition;

and the result of any of the foregoing is to increase the cost to the Buyer, by an amount which the Buyer deems to be material, of entering into, participating in, continuing or maintaining any Transaction or to reduce any amount due or owing hereunder in respect thereof, then, in any such case, the Sellers, jointly and severally, shall promptly pay the Buyer such additional amount or amounts as will compensate the Buyer for such increased cost or reduced amount receivable.

(b)  If the Buyer shall have determined that the adoption of or any change in any Requirement of Law (other than with respect to any amendment made to the Buyer’s certificate of incorporation and by-laws or other organizational or governing documents) regarding capital adequacy or in the interpretation or application thereof or compliance by the Buyer or any corporation controlling the Buyer with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on the Buyer’s or such corporation’s capital as a consequence of its obligations hereunder to a level below that which the Buyer or such corporation could have achieved but for such adoption, change or compliance (taking into consideration the Buyer’s or such corporation’s policies with respect to capital adequacy) by an amount deemed by the Buyer to be material, then from time to time, the Sellers, jointly and severally, shall promptly pay to the Buyer such additional amount or amounts as will compensate the Buyer for such reduction.

(c)  If the Buyer becomes entitled to claim any additional amounts pursuant to this Section 3.03, it shall promptly notify the Sellers of the event by reason of which it has become so entitled. A certificate as to any additional amounts payable pursuant to this Section submitted by the Buyer to the Sellers shall be conclusive in the absence of manifest error.

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3.04Fees. The Sellers agree to pay to the Buyer the fees set forth in the Fee Letter.

3.05Tax Treatment. Each of the Sellers and the Buyer intend that for United States federal income tax purposes, each Transaction will be considered a secured financing.

3.06Income Payments. All Income, if any, that is paid in respect of any Purchased Loan during the term of a Transaction hereunder shall be the property of the Buyer. Notwithstanding the foregoing, (i) provided that no Event of Default shall have occurred and be continuing, the Buyer agrees that the Seller shall be permitted to receive all Income paid or distributed on or in respect of the Purchased Loans to the full extent it would be so entitled if the Purchased Loans had not been sold to the Buyer and (ii) in the event that any Event of Default shall have occurred and be continuing, the Seller shall remit to the Buyer all Income received with respect to each Purchased Loan on the related Payment Date or on such other date or dates as the Buyer notifies the Seller in writing.

Section 4. Purchased Items; Security Interest.

4.01Purchased Items; Security Interest.

(a)  Pursuant to the Custodial Agreement, the Custodian shall hold the Mortgage Loan Documents as exclusive bailee and agent for the benefit of the Buyer pursuant to terms of the Custodial Agreement and shall deliver to the Buyer a Trust Receipt and Mortgage Loan Schedule and Exception Report, each to the effect that it has reviewed such Mortgage Loan Documents in the manner and to the extent required by the Custodial Agreement and identifying any deficiencies in such Mortgage Loan Documents so reviewed.

(b)  Each of the Sellers and the Buyer intend that, for other than United States federal income tax purposes, the Transactions hereunder be sales to the Buyer of the Purchased Items and not loans from the Buyer to the applicable Seller secured by the Purchased Items. However, in order to preserve the Buyer’s rights under this Repurchase Agreement in the event that a court or other forum re-characterizes the Transactions hereunder as loans and as security for the performance by each Seller of all of such Seller’s obligations to the Buyer hereunder and the Transactions entered into hereunder, or in the event that a transfer of a Purchased Item is otherwise ineffective to effect an outright transfer of such Purchased Item to the Buyer, each Seller hereby assigns, pledges and grants a security interest in all of its right, title and interest in, to and under the Purchased Items to the Buyer to secure the payment of the Repurchase Price and Price Differential on all Transactions and all other amounts owing to the Buyer hereunder, including, without limitation, amounts owing to the Buyer pursuant to Section 11.03, and under the other Repurchase Documents (collectively, the “Repurchase Obligations”).

(c)  All of each Seller’s right, title and interest in, to and under each of the following items of property, whether now owned or hereafter acquired, now existing or hereafter created and wherever located, is hereinafter referred to as the “Purchased Items”:

(i)all Purchased Loans;

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(ii)all Mortgage Loan Documents, including without limitation all promissory notes and any other collateral pledged to secure, or otherwise relating to, the Purchased Loans, together with all files, documents, instruments, surveys, certificates, correspondence, appraisals, computer programs (subject to any restrictions on transfer under any related licensing agreement), computer storage media, accounting records and other books and records relating thereto;

(iii)all mortgage guaranties and insurance (issued by governmental agencies or otherwise) and any mortgage insurance certificate or other document evidencing such mortgage guaranties or insurance relating to any Purchased Loan and all claims and payments thereunder;

(iv)all other insurance policies and insurance proceeds relating to any Purchased Loan or the related Mortgaged Property;

(v)all rights of any Seller to service any Purchased Loan;

(vi)all collateral, however defined, under any other agreement between any Seller or any of its Affiliates on the one hand and the Buyer or any Affiliates of the Buyer on the other hand;

(vii)all “general intangibles”, “accounts,” “instruments”, “investment property,” deposit accounts” and “chattel paper” as defined in the Uniform Commercial Code relating to or constituting any and all of the foregoing; and

(viii)any and all replacements, substitutions, distributions on or proceeds of any and all of the foregoing.

(d)  Without limiting Section 4.01(b) hereto, to secure payment of the Repurchase Obligations, each Seller hereby grants to the Buyer a security interest in all of such Seller’s right, title and interest in, to and under each of the following items of property, whether now owned or hereafter acquired, now existing or hereafter created and wherever located (collectively, the “Collateral”):

(i)all Interest Rate Protection Agreements, if any, relating to or constituting any or all of the Purchased Items;

(ii)all Servicing Agreements, Servicing Records and servicing accounts relating to the Purchased Loans;

(iii)all Takeout Commitments now existing or hereafter arising with respect to any of the Purchased Loans, all rights to deliver Purchased Loans to the applicable Takeout Investors or to permanent investors and other purchasers pursuant thereto and all proceeds resulting from the disposition of such Purchased Loans pursuant thereto, including such Seller’s right and entitlement to receive the entire Takeout Price specified in each Takeout Commitment; and

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(iv)any and all replacements, substitutions, distributions on, income relating to or proceeds of any and all of the foregoing.

(e)  Each Seller agrees to mark its computer records and files to evidence the security interests granted to the Buyer hereunder.

4.02Further Documentation. At any time and from time to time, upon the written request of the Buyer, and at the sole expense of the Sellers, each Seller will promptly and duly execute and deliver, or will promptly cause to be executed and delivered, such further instruments and documents and take such further action as the Buyer may reasonably request for the purpose of obtaining or preserving the full benefits of this Repurchase Agreement and of the rights and powers herein granted, including, without limitation, the filing of any financing or continuation statements under the Uniform Commercial Code in effect in any jurisdiction with respect to the Liens created hereby. Each Seller also hereby authorizes the Buyer to file any such financing or continuation statement without the signature of such Seller to the extent permitted by applicable law. A carbon, photostatic or other reproduction of this Repurchase Agreement shall be sufficient as a financing statement for filing in any jurisdiction.

4.03Changes in Locations, Name, etc. No Seller shall (i) change the location of its chief executive office/chief place of business from that specified in Section 6.12 hereof or (ii) change its name, identity or corporate structure (or the equivalent) or (iii) change the location where it maintains its records with respect to the Purchased Items or the Collateral or (iv) reincorporate or reorganize under the laws of another jurisdiction unless it shall have given the Buyer at least thirty (30) calendar days prior written notice thereof and shall have delivered to the Buyer all Uniform Commercial Code financing statements and amendments thereto as the Buyer shall request and taken all other actions deemed necessary by the Buyer to continue its perfected status in the Purchased Items and the Collateral with the same or better priority. Each Seller’s federal tax identification number and organizational identification number is as set forth on Schedule 2. Each Seller shall promptly notify the Buyer of any change in such organizational identification number.

4.04Buyer’s Appointment as Attorney-in-Fact.

(a)  Each Seller hereby irrevocably constitutes and appoints the Buyer and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Seller and in the name of such Seller or in its own name, from time to time in the Buyer’s discretion, for the purpose of carrying out the terms of this Repurchase Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Repurchase Agreement, and, without limiting the generality of the foregoing, each Seller hereby gives the Buyer the power and right, on behalf of such Seller, without assent by, but with notice to, such Seller, if an Event of Default shall have occurred and be continuing, to do the following:

(i)in the name of each Seller or its own name, or otherwise, to take possession of and endorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any mortgage insurance or payable on

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or with respect to any Purchased Items or Collateral and to file any claim or to take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Buyer for the purpose of collecting any and all such moneys due under any such mortgage insurance or with respect to any Purchased Items or Collateral whenever payable;

(ii)to pay or discharge taxes and Liens levied or placed on or threatened against any Purchased Items or Collateral; and

(iii)(A) to direct any party liable for any payment under any Purchased Items or Collateral to make payment of any and all moneys due or to become due thereunder directly to the Buyer or as the Buyer shall direct; (B) to ask or demand for, collect, receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Purchased Items or Collateral; (C) to sign and endorse any invoices, assignments, verifications, notices and other documents in connection with any of the Purchased Items or Collateral; (D) to commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect any Purchased Items or Collateral or any portion thereof and to enforce any other right in respect of any Purchased Items or Collateral; (E) to defend any suit, action or proceeding brought against any Seller with respect to any Purchased Items or Collateral; (F) to settle, compromise or adjust any suit, action or proceeding described in clause (E) above and, in connection therewith, to give such discharges or releases as the Buyer may deem appropriate; and (G) generally, to sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Purchased Items or Collateral as fully and completely as though the Buyer were the absolute owner thereof for all purposes, and to do, at the Buyer’s option and the Sellers’ expense, at any time, and from time to time, all acts and things which the Buyer deems necessary to protect, preserve or realize upon the Purchased Items or Collateral and the Buyer’s Liens thereon and to effect the intent of this Repurchase Agreement, all as fully and effectively as the Sellers might do;

(iv)to effectuate the transfer of servicing to the designee of the Buyer.

Each Seller hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof. This power of attorney is a power coupled with an interest and shall be irrevocable.

(b)  Each Seller also authorizes the Buyer, at any time and from time to time, to execute, in connection with any sale provided for in Section 4.07 hereof, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Purchased Items or Collateral and to file any initial financing statements, amendments thereto and continuation statements with or without the signature of any Seller as authorized by applicable law, as applicable to all or any part of the Purchased Items or Collateral.

(c)  The powers conferred on the Buyer pursuant to this Section 4.04 are solely to protect the Buyer’s interests in the Purchased Items and the Collateral and shall not impose any duty upon the Buyer to exercise any such powers. The Buyer shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither the Buyer

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nor any of its officers, directors, or employees shall be responsible to the Sellers for any act or failure to act hereunder, except for its own gross negligence or willful misconduct.

4.05Performance by Buyer of Sellers’ Obligations. If any Seller fails to perform or comply with any of its agreements contained in the Repurchase Documents and the Buyer itself performs or complies, or otherwise causes performance or compliance, with such agreement, the expenses of the Buyer incurred in connection with such performance or compliance, together with interest thereon at a rate per annum equal to the Post-Default Rate, shall be payable by the Sellers to the Buyer on demand and shall constitute Repurchase Obligations.

4.06Proceeds. If an Event of Default shall occur and be continuing, (a) all proceeds of Purchased Items and Collateral received by the Sellers consisting of cash, checks and other near-cash items shall be held by the Sellers in trust for the Buyer, segregated from other funds of the Sellers, and shall forthwith upon receipt by any Seller be turned over to the Buyer in the exact form received by such Seller (duly endorsed by such Seller to the Buyer, if required) and (b) any and all such proceeds received by the Buyer (whether from a Seller or otherwise) may, in the sole discretion of the Buyer, be held by the Buyer as collateral security for, and/or then or at any time thereafter may be applied by the Buyer against, the Repurchase Obligations (whether matured or unmatured), such application to be in such order as the Buyer shall elect. Any balance of such proceeds remaining after the Repurchase Obligations shall have been paid in full and this Repurchase Agreement shall have been terminated shall be paid over to the Sellers or to whomsoever may be lawfully entitled to receive the same. For purposes hereof, proceeds shall include, but not be limited to, all principal and interest payments, all prepayments and payoffs, insurance claims, condemnation awards, sale proceeds, real estate owned rents and any other income and all other amounts received with respect to any Purchased Items or Collateral.

4.07Remedies. If any Default shall occur and be continuing, the Buyer may, at its option, enter into one or more Interest Rate Protection Agreements covering all or a portion of the Purchased Loans subject to Transactions outstanding hereunder, and the Sellers shall be responsible for all damages, judgments, costs and expenses of any kind which may be imposed on, incurred by or asserted against the Buyer relating to or arising out of such Interest Rate Protection Agreements, including without limitation any losses resulting from such Interest Rate Protection Agreements. If any Event of Default shall occur and be continuing, the Buyer may exercise, in addition to all other rights and remedies granted to it in this Repurchase Agreement and in any other instrument or agreement securing, evidencing or relating to the Repurchase Obligations, all rights and remedies of a secured party under the Uniform Commercial Code. Without limiting the generality of the foregoing, the Buyer without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon the Sellers or any other Person (each and all of which demands, presentments, protests, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Purchased Items and the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Purchased Items and the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels or as an entirety at public or private sale or sales, at any exchange, broker’s board or office of the Buyer

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or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Buyer shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Purchased Items or the Collateral so sold, free of any right or equity of redemption in any Seller, which right or equity is hereby waived or released. The Sellers further agree, at the Buyer’s request, to assemble the Purchased Items and the Collateral and make them available to the Buyer at places which the Buyer shall reasonably select, whether at the Sellers’ premises or elsewhere. The Buyer shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care or safekeeping of any of the Purchased Items or Collateral or in any way relating to the Purchased Items or Collateral or the rights of the Buyer hereunder, including without limitation reasonable attorneys’ fees and disbursements, to the payment in whole or in part of the Repurchase Obligations, in such order as the Buyer may elect, and only after such application and after the payment by the Buyer of any other amount required or permitted by any provision of law, including without limitation Section 9-615(a)(3) of the Uniform Commercial Code, need the Buyer account for the surplus, if any, to the Sellers. To the extent permitted by applicable law, each Seller waives all claims, damages and demands it may acquire against the Buyer arising out of the exercise by the Buyer of any of its rights hereunder, other than those claims, damages and demands arising from the gross negligence or willful misconduct of the Buyer. If any notice of a proposed sale or other disposition of the Purchased Items or Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) calendar days before such sale or other disposition. The Sellers shall remain liable for any deficiency (plus accrued interest thereon as contemplated pursuant to Section 2.04(b) hereof) if the proceeds of any sale or other disposition of the Purchased Items or the Collateral are insufficient to pay the Repurchase Obligations and the fees and disbursements of any attorneys employed by the Buyer to collect such deficiency.

4.08Limitation on Duties Regarding Preservation of Purchased Items and Collateral. The Buyer’s duty with respect to the custody, safekeeping and physical preservation of the Purchased Items and the Collateral in its possession, under Section 9-207 of the Uniform Commercial Code or otherwise, shall be to deal with it in the same manner as the Buyer deals with similar property for its own account. Neither the Buyer nor any of its directors, officers or employees shall be liable for failure to demand, collect or realize upon all or any part of the Purchased Items or the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Purchased Items or Collateral upon the request of the Sellers or otherwise.

4.09Powers Coupled with an Interest. All authorizations and agencies herein contained with respect to the Purchased Items and the Collateral are irrevocable and powers coupled with an interest.

4.10Reconveyance of Purchased Items; Release of Security Interest. Upon termination of this Repurchase Agreement and payment to the Buyer of all Repurchase Obligations and the performance of all obligations under the Transactions and the Repurchase Documents the Buyer shall reconvey all Purchased Items to the Sellers and release its security interest in any remaining Purchased Items and Collateral.

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4.11Interest Rate Protection Agreements. In the event that any Person (other than the Buyer) shall have a Lien on any Interest Rate Protection Agreement that any Seller has entered into with respect to both Purchased Loans subject to Transactions outstanding hereunder and other loans which have not been purchased by the Buyer pursuant to Transactions hereunder, the Buyer agrees that in the event that the Buyer shall receive any proceeds, recoveries or other amounts in respect of such Interest Rate Protection Agreement following the exercise of remedies hereunder after an Event of Default, the Buyer shall remit to any such Person, as to which the Buyer has received notice of such Person’s Lien on such Interest Rate Protection Agreement, any excess proceeds of such Interest Rate Protection Agreement following repayment of all obligations owing to the Buyer hereunder.

Section 5. Conditions Precedent.

5.01Initial Transaction. The obligation of the Buyer to enter into the initial Transaction hereunder is subject to the satisfaction, immediately prior to or concurrently with the entering into of such Transaction, of the condition precedent that the Buyer shall have received all of the following items, each of which shall be satisfactory to the Buyer and its counsel in form and substance:

(a)  Repurchase Documents.

(i)Repurchase Agreement. This Repurchase Agreement, executed and delivered by a duly authorized officer of each of the parties hereto;

(ii)Custodial Agreement. The Custodial Agreement, executed and delivered by a duly authorized officer of each of the parties thereto;

(iii)Fee Letter. The Fee Letter, executed and delivered by a duly authorized officer of each of the parties thereto;

(b)  Organizational Documents. A good standing certificate and certified copies of the charter and by-laws (or equivalent documents) of each Seller and of all corporate or other authority for each Seller with respect to the execution, delivery and performance of the Repurchase Documents and each other document to be delivered by such Seller from time to time in connection herewith (and the Buyer may conclusively rely on such certificate until it receives notice in writing from such Seller to the contrary);

(c)  Legal Opinion. A legal opinion of the in-house counsel, with respect to corporate matters, and outside counsel to the Sellers, with respect to enforceability and certain other matters, substantially in the form(s) attached hereto as Exhibit C;

(d)  Filings, Registrations, Recordings, Lien Searches.

(i)Any documents (including, without limitation, financing statements) required to be filed, registered or recorded in order to create, in favor of the Buyer, a perfected, first-priority security interest in the Purchased Items and the Collateral, subject to no Liens other than those created hereunder, shall have been properly prepared and executed for filing (including the applicable county(ies) if the Buyer determines such

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filings are necessary in its sole discretion), registration or recording in each office in each jurisdiction in which such filings, registrations and recordations are required to perfect such first-priority security interest; provided, that assignments of the Mortgages securing or related to the Purchased Loans shall not be required to be recorded prior to the occurrence of an Event of Default;

(ii)UCC lien searches in such jurisdictions as shall be applicable to the Sellers, the Purchased Items and the Collateral, the results of which shall be satisfactory to the Buyer.

(e)  Fees. The fees as contemplated by Section 3.04;

(f)  Financial Statements. The financial statements referenced in Section 6.03;

(g)  Underwriting Guidelines. A certified copy of the Underwriting Guidelines related to each Seller, which shall be in form and substance satisfactory to the Buyer;

(h)  Consents, Licenses, Approvals, etc. Copies certified by each Seller of all consents, licenses and approvals, if any, required in connection with the execution, delivery and performance by such Seller of, and the validity and enforceability of, the Repurchase Documents, which consents, licenses and approvals shall be in full force and effect; and

(i)  Other Documents. Such other documents as the Buyer may reasonably request.

5.02Initial and Subsequent Transactions. The entering into by the Buyer of each Transaction (including the initial Transaction) on any Business Day is subject to the satisfaction of the following further conditions precedent, both immediately prior to the entering into of such Transaction and also after giving effect thereto and to the intended use thereof:

(a)  No Default. No Default or Event of Default shall have occurred and be continuing;

(b)  Representations and Warranties. Both immediately prior to the making of such Loan and also after giving effect thereto and to the intended use thereof, the representations and warranties made by the Sellers in Section 6 and Schedule 1 hereof (regardless of whether subject to a Transaction at such time), and elsewhere in each of the Repurchase Documents, shall be true, correct and complete on and as of the date of the making of such Loan in all material respects (in the case of the representations and warranties in Section 6.11 and Schedule 1, solely with respect to Purchased Loans included in the Margin Base) with the same force and effect as if made on and as of such date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); and the Buyer shall have received an officer’s certificate signed by a Responsible Officer of each Seller certifying as to the truth, accuracy and completeness of the above, which certificate shall specifically include a statement that such Seller is in compliance with all governmental licenses and authorizations, statutory and regulatory requirements, and is qualified to do business and in good standing in all required jurisdictions.

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The Buyer shall have received an officer’s certificate signed by a Responsible Officer of each Seller certifying as to the truth, accuracy and completeness of the above, which certificate shall specifically include a statement that such Seller is in compliance with all governmental licenses and authorizations and is qualified to do business and in good standing in all required jurisdictions.

(c)  Margin Base. No Margin Deficiency shall exist;

(d)  Due Diligence. Subject to the Buyer’s right to perform one or more Due Diligence Reviews pursuant to Section 11.16 hereof, the Buyer shall have completed its due diligence review of the Mortgage Loan Documents for each proposed Purchased Loan and such other documents, records, agreements, instruments, mortgaged properties or information relating to such proposed Purchased Loans as the Buyer in its sole discretion deems appropriate to review and such review shall be satisfactory to the Buyer in its sole discretion;

(e)  Servicing Agreement(s). The Buyer shall have received all Servicing Agreements related to the Purchased Loans, each certified as a true, correct and complete copy of the original, together with a fully executed Servicer Notice, and, if the Servicer is a Seller or an Affiliate of a Seller, the letter of the applicable Servicer consenting to termination of such Servicing Agreement upon the occurrence of an Event of Default;

(f)  Trust Receipt and Mortgage Loan Schedule and Exception Report. The Buyer shall have received the Trust Receipt, substantially in the form of Annex 2 to the Custodial Agreement, from the Custodian, duly completed, with a Mortgage Loan Schedule and Exception Report attached thereto including only such exceptions as are acceptable to the Buyer in its sole discretion in respect of Eligible Mortgage Loans to be purchased by the Buyer hereunder on such Business Day;

(g)  Release Letter. The Buyer shall have received from each Seller a Warehouse Lender’s Release Letter substantially in the form of Exhibit E-2 hereto (or such other form acceptable to the Buyer) or a Seller’s Release Letter substantially in the form of Exhibit E-1 hereto (or such other form acceptable to the Buyer), as applicable, covering each Eligible Mortgage Loan to be purchased by the Buyer hereunder on such Business Day;

(h)  Fees and Expenses. The Buyer shall have received all fees and expenses of counsel to the Buyer as contemplated by Section 11.03(b), which amount, at the Buyer’s option, may be netted from the amount of Purchase Price to be paid by the Buyer in connection with any Transaction entered into under this Repurchase Agreement;

(i)  No Market Events. None of the following shall have occurred and/or be continuing:

(i)an event or events shall have occurred resulting in the effective absence of a “repo market” or comparable “lending market” for financing debt obligations secured by mortgage loans or securities or an event or events shall have occurred resulting in the Buyer not being able to finance mortgage loans through the “repo market” or “lending market” with traditional counterparties at rates which would have been reasonable prior to the occurrence of such event or events;

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(ii)an event or events shall have occurred resulting in the effective absence of a “securities market” for securities backed by mortgage loans or an event or events shall have occurred resulting in the Buyer not being able to sell securities backed by mortgage loans at prices which would have been reasonable prior to such event or events; or

(iii)there shall have occurred a material adverse change in the financial condition of the Buyer which affects (or can reasonably be expected to affect) materially and adversely the ability of the Buyer to fund its obligations under this Repurchase Agreement;

(j)  No Morgan Stanley Downgrade. MS & Co.’s corporate bond rating as calculated by S&P or Moody’s has not been lowered or downgraded to a rating below A- as indicated by S&P or below A3 as indicated by Moody’s; and

(k)  Maintenance of Tangible Net Worth. The Tangible Net Worth of Aames Investment on a consolidated basis on any given day, shall not be less than $250,000,000.

Each request for a borrowing by the Sellers hereunder shall constitute a certification by the Sellers that all the conditions set forth in this Section 5 (other than Section 5.02(i) and (j)) have been satisfied (both as of the date of such notice, request or confirmation and as of the date of such borrowing).

Section 6. Representations and Warranties.

Each Seller represents and warrants to the Buyer that throughout the term of this Repurchase Agreement:

6.01Legal Name. On the Effective Date, the exact legal name of each Seller is and during the four (4) months immediately preceding the Effective Date, such name has been, respectively, Aames Capital Corporation, Aames Funding Corporation and Aames Investment Corporation and no Seller has used any previous names, assumed names or trade names except as set forth on Schedule 5 attached hereto.

6.02Existence. Each Seller (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite corporate or other power, and has all governmental licenses, authorizations, consents and approvals necessary to own its assets and carry on its business as now being or as proposed to be conducted, except where the lack of such licenses, authorizations, consents and approvals would not be reasonably likely to have a Material Adverse Effect; and (c) is qualified to do business and is in good standing in all other jurisdictions in which the nature of the business conducted by it makes such qualification necessary, except where failure so to qualify would not be reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect.

6.03Financial Condition. Aames Investment has heretofore furnished to the Buyer a copy of its consolidated balance sheet and the consolidated balance sheets of its consolidated Subsidiaries for the fiscal year of Aames Investment ended December 31, 2004 and the related consolidated statements of income and retained earnings and of cash flows for Aames Capital and its consolidated Subsidiaries for such fiscal year, with the opinion thereon of Ernst & Young, LLP.

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All such financial statements are complete and correct and fairly present, in all material respects, the consolidated financial condition of Aames Capital and its Subsidiaries and the consolidated results of their operations as at such dates and for such fiscal periods, all in accordance with GAAP applied on a consistent basis. Since December 31, 2004 there has been no material adverse change in the consolidated business, operations or financial condition of Aames Capital and its consolidated Subsidiaries taken as a whole from that set forth in said financial statements.

6.04Litigation. There are no actions, suits, arbitrations, investigations (including, without limitation, any of the foregoing which are pending or threatened) or other legal or arbitrable proceedings affecting any Seller or any of its Subsidiaries or affecting any of the Property of any of them before any Governmental Authority that (i) questions or challenges the validity or enforceability of any of the Repurchase Documents or any action to be taken in connection with the transactions contemplated hereby, or (ii) except as otherwise disclosed in Aames Investment’s filings with the Securities and Exchange Commission, (a) makes a claim or claims in an aggregate amount greater than $5,000,000, (b) which, individually or in the aggregate, if adversely determined, could reasonably be likely to have a Material Adverse Effect, or (c) requires filing with the Securities and Exchange Commission in accordance with the 1934 Act or any rules thereunder.

6.05No Breach. Neither (a) the execution and delivery of the Repurchase Documents nor (b) the consummation of the transactions therein contemplated in compliance with the terms and provisions thereof will conflict with or result in a breach of the charter or by-laws of any Seller, or any applicable law (including, without limitation, the Prescribed Laws), rule or regulation, or any order, writ, injunction or decree of any Governmental Authority, or any Servicing Agreement or other material agreement or instrument to which any Seller or any of its Subsidiaries is a party or by which any of them or any of their Property is bound or to which any of them is subject, or constitute a default under any such material agreement or instrument or result in the creation or imposition of any Lien (except for the Liens created pursuant to this Repurchase Agreement) upon any Property of any Seller or any of its Subsidiaries pursuant to the terms of any such agreement or instrument.

6.06Action. Each Seller has all necessary corporate or other power, authority and legal right to execute, deliver and perform its obligations under each of the Repurchase Documents; the execution, delivery and performance by each Seller of each of the Repurchase Documents have been duly authorized by all necessary corporate or other action on its part; and each Repurchase Document has been duly and validly executed and delivered by each Seller and constitutes a legal, valid and binding obligation of such Seller, enforceable against such Seller in accordance with its terms.

6.07Approvals. No authorizations, approvals or consents of, and no filings or registrations with, any Governmental Authority or any securities exchange are necessary for the execution, delivery or performance by each Seller of the Repurchase Documents or for the legality, validity or enforceability thereof, except for filings and recordings in respect of the Liens created pursuant to this Repurchase Agreement.

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6.08Margin Regulations. Neither the entering into of any Transaction hereunder, nor the use of the proceeds thereof, will violate or be inconsistent with the provisions of Regulations T, U or X.

6.09Taxes. Each Seller and each of its Subsidiaries has filed all federal income tax returns and all other material tax returns that are required to be filed by them and have paid all taxes due pursuant to such returns or pursuant to any assessment received by any of them, except for any such taxes as are being appropriately contested in good faith by appropriate proceedings diligently conducted and with respect to which adequate reserves have been provided. The charges, accruals and reserves on the books of each Seller and each of its Subsidiaries in respect of taxes and other governmental charges are, in the opinion of such Seller, adequate.

6.10Investment Company Act. No Seller nor any of their Subsidiaries is an “investment company”, or a company “controlled” by an “investment company,” within the meaning of the Investment Company Act of 1940, as amended.

6.11Purchased Items; Security Interests.

(a)  No Seller has assigned, pledged, or otherwise conveyed or encumbered any Purchased Item or Collateral to any other Person, and immediately prior to the purchase of any Eligible Mortgage Loan by the Buyer hereunder, and the purchase and pledge of all related Purchased Items and Collateral, the applicable Seller was the sole owner of such Eligible Mortgage Loan, and all related Purchased Items and Collateral, and had good and marketable title thereto, free and clear of all Liens, in each case except for Liens to be released simultaneously with the sale to, and the granting of the Liens in favor of, the Buyer hereunder. No Purchased Item purchased by, or other Collateral pledged to, the Buyer hereunder was acquired (by purchase or otherwise) by any Seller from an Affiliate of any Seller other than another Seller.

(b)  The provisions of this Repurchase Agreement are intended to transfer the Purchased Items to the Buyer pursuant to a sale, but in the event that any Transaction is deemed to constitute a loan rather than a sale, this Repurchase Agreement and the other Repurchase Documents are effective to create in favor of the Buyer, a valid security interest in all right, title and interest of the Sellers in, to and under the Purchased Items.

(c)  Upon (i) receipt by the Custodian of each Mortgage Note, endorsed in blank by a duly authorized officer of the relevant Seller and (ii) the issuance by the Custodian of a Trust Receipt therefor, the Buyer shall have a fully perfected first priority security interest therein, in the Mortgage Loan evidenced thereby and in the Seller’s interest in the related Mortgaged Property.

(d)  Upon the filing of financing statements on Form UCC-1 naming each Seller as “debtor” and the Buyer, as “secured party” and describing the Purchased Items as the “collateral” in the jurisdictions and recording offices listed on Schedule 2 attached hereto, the security interests granted hereunder in the Purchased Items will constitute a fully perfected first priority security interests under the Uniform Commercial Code in all right, title and interest of

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the Sellers in, to and under such Purchased Items which can be perfected by filing under the Uniform Commercial Code, in the event that any Transaction is construed to constitute a financing rather than a sale.

(e)  This Repurchase Agreement and the other Repurchase Documents are effective to create in favor of the Buyer, a valid security interest in all right, title and interest of each Seller in, to and under the Collateral, and upon the filing of financing statements on Form UCC-1 naming each Seller as “debtor” and the Buyer, as “secured party” and describing the Collateral as the “collateral” in the jurisdictions and recording offices listed on Schedule 2 attached hereto, the security interests granted hereunder in the Collateral will constitute a fully perfected first priority security interests under the Uniform Commercial Code in all right, title and interest of each Seller in, to and under such Collateral which can be perfected by filing under the Uniform Commercial Code.

6.12Chief Executive Office/Jurisdiction of Organization. On the Effective Date, and at all times during the four (4) months preceding the Effective Date, each Seller’s chief executive office is located at 350 South Grand Avenue, 43rd Floor, Los Angeles, California 90071. On the Effective Date, each Seller’s jurisdiction of organization is California.

6.13Location of Books and Records. The location where each Seller keeps its books and records, including all computer files and records relating to the Purchased Items and the Collateral is its chief executive office.

6.14True and Complete Disclosure. The information, reports, financial statements, exhibits and schedules furnished in writing by or on behalf of the Sellers to the Buyer in connection with the negotiation, preparation or delivery of this Repurchase Agreement and the other Repurchase Documents or included herein or therein or delivered pursuant hereto or thereto, when taken as a whole, do not contain any untrue statement of material fact or omit to state any material fact necessary to make the statements herein or therein, in light of the circumstances under which they were made, not misleading. All written information furnished after the date hereof by or on behalf of the Sellers to the Buyer in connection with this Repurchase Agreement and the other Repurchase Documents and the transactions contemplated hereby and thereby will be true, complete and accurate in every material respect, or (in the case of projections) based on reasonable estimates, on the date as of which such information is stated or certified. There is no fact known to a Responsible Officer of any Seller, after due inquiry, that could reasonably be expected to have a Material Adverse Effect that has not been disclosed herein, in the other Repurchase Documents or in a report, financial statement, exhibit, schedule, disclosure letter or other writing furnished to the Buyer for use in connection with the transactions contemplated hereby or thereby.

6.15Tangible Net Worth. On the Effective Date, Aames Investment’s Tangible Net Worth is not less than $250,000,000.

6.16ERISA. Each Plan to which any Seller or its Subsidiaries make direct contributions, and, to the knowledge of such Seller, each other Plan and each Multiemployer Plan, is in compliance in all material respects with, and has been administered in all material respects in compliance with, the applicable provisions of ERISA, the Code and any other federal

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or state law. No event or condition has occurred and is continuing as to which any Seller would be under an obligation to furnish a report to the Buyer under Section 7.01(d) hereof.

6.17Capitalization. Schedule 3 hereto contains a true, complete and correct list of all issued and outstanding shares of capital stock of all Subsidiaries of Aames Investment Corporation and the record owner thereof.

6.18Hedges. As of the Effective Date, the Sellers have not assigned, pledged, granted a security interest in or lien on or otherwise encumbered any of its rights, title or interest in and to any Interest Rate Protection Agreement, other than in favor of the Buyer.

6.19Regulatory Status. No Seller is a “bank holding company” or a direct or indirect subsidiary of a “bank holding company” as defined in the Bank Holding Company Act of 1956, as amended, and Regulation Y thereunder of the Board of Governors of the Federal Reserve System and no Seller will become a “bank holding company” or a direct or indirect subsidiary of a “bank holding company” unless it shall have provided the Buyer written notice thirty (30) days prior to such change.

6.20Real Estate Investment Trust. No REIT Seller has engaged in any material “prohibited transactions” as defined in Section 857(b)(6)(B)(iii) and (C) of the Code. Each REIT Seller for its current “tax year” (as defined in the Code) is and for all prior tax years subsequent to its election to be a real estate investment trust has been entitled to a dividends paid deduction under the requirements of Section 857 of the Code with respect to any dividends paid by it with respect to each such year for which it claims a deduction in its Form 1120-REIT filed with the United States Internal Revenue Service for such year.

6.21Compliance with Anti-Money Laundering Laws. Each Seller has complied with all applicable and Anti-Money Laundering Laws and regulations, including without limitation the USA Patriot Act of 2001 (collectively, the “Anti-Money Laundering Laws”); each Seller has established an anti-money laundering compliance program as required by the Anti-Money Laundering Laws, has conducted the requisite due diligence in connection with the origination of each Mortgage Loan for purposes of the Anti-Money Laundering Laws, including with respect to the legitimacy of the applicable Mortgagor and the origin of the assets used by the said Mortgagor to purchase the property in question, and maintains, and will maintain, sufficient information to identify the applicable Mortgagor for purposes of the Anti-Money Laundering Laws. No Mortgage Loan is subject to nullification pursuant to Executive Order 13224 (the “Executive Order”) or the regulations promulgated by the Office of Foreign Assets Control of the United States Department of the Treasury (the “OFAC Regulations”) or in violation of the Executive Order or the OFAC Regulations, and no Mortgagor is subject to the provisions of such Executive Order or the OFAC Regulations nor listed as a “blocked person” for purposes of the OFAC Regulations.

6.22Solvency. After giving effect to the entering into of each Transaction, (i) the amount of the “present fair saleable value” of the assets of each Seller and of such Seller and its Subsidiaries, taken as a whole, will, as of such date, exceed the amount of all “liabilities of such Seller and of such Seller and its Subsidiaries, taken as a whole, contingent or otherwise”, as of such date, as such quoted terms are determined in accordance with applicable federal and

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state laws governing determinations of the insolvency of debtors, (ii) the present fair saleable value of the assets of each Seller and of such Seller and its Subsidiaries, taken as a whole, will, as of such date, be greater than the amount that will be required to pay the liabilities of such Seller and of such Seller and its Subsidiaries, taken as a whole, on their respective debts as such debts become absolute and matured, (iii) no Seller, nor any Seller and its Subsidiaries, taken as a whole, will have, as of such date, an unreasonably small amount of capital with which to conduct their respective businesses, and (iv) each Seller and such Seller and its Subsidiaries, taken as a whole, will be able to pay their respective debts as they mature. For purposes of this Section 6.22, “debt” means “liability on a claim”, “claim” means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, and (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured.

Section 7. Covenants of the Sellers.

Each Seller covenants and agrees with the Buyer that, so long as any Transaction is outstanding and until payment in full of all Repurchase Obligations:

7.01Financial Statements. Aames Investment shall deliver to the Buyer:

(a)  commencing with respect to the fiscal quarter ending on March 31, 2006, as soon as available and in any event within forty-five (45) days after the end of each of the first three quarterly fiscal periods of each fiscal year, the unaudited consolidated balance sheets of the Aames Investment and its consolidated Subsidiaries, as at the end of such quarter and the related unaudited consolidated statements of income and retained earnings and of cash flows for the Aames Investment and its consolidated Subsidiaries, for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, accompanied by a certificate of a Responsible Officer of Aames Investment, which certificate shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of Aames Investment and its consolidated Subsidiaries, in accordance with GAAP, consistently applied, as at the end of, and for, such quarter (subject to normal year-end audit adjustments);

(b)  commencing with respect to the fiscal year ending on December 31, 2005, as soon as available and in any event within ninety (90) days after the end of each fiscal year of Aames Investment, the consolidated balance sheets of Aames Investment and its consolidated Subsidiaries, as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for Aames Investment and its consolidated Subsidiaries, for such year, setting forth in each case in comparative form the figures for the previous year, accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall not be qualified as to scope of audit or going concern and shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of Aames Investment and its consolidated Subsidiaries, as applicable, as at the end of, and for, such fiscal year in accordance with GAAP, and a certificate

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of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default or Event of Default;

(c)  from time to time such other information regarding the financial condition, operations, or business of the Sellers or the Parent as the Buyer may reasonably request; and

(d)  as soon as reasonably possible, and in any event within thirty (30) days after a Responsible Officer of any Seller or the Parent knows, or with respect to any Plan or Multiemployer Plan to which any Seller or any of its Subsidiaries or the Parent or any of its Subsidiaries makes direct contributions, has reason to believe, that any of the events or conditions specified below with respect to any Plan or Multiemployer Plan has occurred or exists, a statement signed by a senior financial officer of the Sellers or the Parent, as applicable, setting forth details respecting such event or condition and the action, if any, that the Sellers or any ERISA Affiliate or the Parent or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC by the Sellers or an ERISA Affiliate or the Parent or an ERISA Affiliate with respect to such event or condition):

(i)any reportable event, as defined in Section 4043(c) of ERISA and the regulations issued thereunder, with respect to a Plan, as to which PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within thirty (30) calendar days after the occurrence of such event (provided that a failure to meet the minimum funding standard of Section 412 of the Code or Section 302 of ERISA, including without limitation the failure to make on or before its due date a required installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code); and any request for a waiver under Section 412(d) of the Code for any Plan;

(ii)the distribution under Section 4041(c) of ERISA of a notice of intent to terminate any Plan or any action taken by any Seller or an ERISA Affiliate or by the Parent or an ERISA Affiliate to terminate any Plan;

(iii)the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by any Seller or any ERISA Affiliate or the Parent or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken or is proposed to be taken by PBGC with respect to such Multiemployer Plan;

(iv)the complete or partial withdrawal from a Multiemployer Plan by any Seller or any ERISA Affiliate or the Parent or any ERISA Affiliate that results in liability under Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary liability as a result of a purchaser default) or the receipt by any Seller or any ERISA Affiliate or the Parent or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA;

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(v)the institution of a proceeding by a fiduciary of any Multiemployer Plan against any Seller or any ERISA Affiliate or the Parent or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding is not dismissed within thirty (30) calendar days; and

(vi)the adoption of an amendment to any Plan that would result in the loss of tax-exempt status of the Plan and trust of which such Plan is a part if any Seller or an ERISA Affiliate or the Parent or any ERISA Affiliate fails to provide timely security to such Plan if and as required by the provisions of Section 401(a)(29) of the Code or Section 307 of ERISA.

The Sellers and the Parent will furnish to the Buyer, at the time it furnishes each set of financial statements pursuant to paragraphs (a) and (b) above, a certificate of a Responsible Officer of each Seller or the Parent, as applicable, (i) stating that, to the best of such Responsible Officer’s knowledge, such Seller or the Parent, as applicable, during such fiscal period or year has observed or performed all of its covenants and other agreements, and satisfied every condition, contained in this Repurchase Agreement and the other Repurchase Documents to be observed, performed or satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate (and, if any Default or Event of Default has occurred and is continuing, describing the same in reasonable detail and describing the action such Seller or the Parent, as applicable, has taken or proposes to take with respect thereto) and (ii) showing in detail the calculations supporting such Responsible Officer’s certification of such Seller’s or the Parent’s, as applicable, compliance with the requirements of Sections 7.14 and 7.15.

7.02Litigation.  Each Seller will promptly, and in any event within ten (10) calendar days after service of process on any of the following, give to the Buyer notice of all litigation, actions, suits, arbitrations, investigations (including, without limitation, any of the foregoing which are pending or threatened) or other legal or arbitrable proceedings affecting any Sellers or any of its Subsidiaries or affecting any of the Property of any of them before any Governmental Authority that (i) questions or challenges the validity or enforceability of any of the Repurchase Documents or any action to be taken in connection with the transactions contemplated hereby, (ii) makes a claim or claims in an aggregate amount greater than $3,000,000, (iii) which, individually or in the aggregate, if adversely determined, could be reasonably likely to have a Material Adverse Effect, or (iii) requires filing with the Securities and Exchange Commission in accordance with the 1934 Act and any rules thereunder.

7.03Existence, etc.  Each Seller will:

(a)  preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises (provided that nothing in this Section 7.03(a) shall prohibit any transaction expressly permitted under Section 7.04 hereof);

(b)  comply with the requirements of all applicable laws, rules, regulations and orders of Governmental Authorities (including, without limitation, all Prescribed Laws, all environmental laws, all laws with respect to unfair and deceptive lending practices and Predatory

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Lending Practices) if failure to comply with such requirements would be reasonably likely (either individually or in the aggregate) to have a Material Adverse Effect;

(c)  keep adequate records and books of account, in which complete entries will be made in accordance with GAAP consistently applied;

(d)  not move its chief executive office from the address referred to in Section 6.12 or change its jurisdiction of organization from the jurisdiction referred to in Section 6.12 unless it shall have provided the Buyer thirty (30) calendar days’ prior written notice of such change;

(e)  pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves are being maintained; and

(f)  permit representatives of the Buyer, during normal business hours, to examine, copy and make extracts from its books and records, to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by the Buyer.

7.04Prohibition of Fundamental Changes.  No Seller shall enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation, winding up or dissolution) or sell all or substantially all of its assets; provided, that a Seller may merge or consolidate with (a) any wholly owned subsidiary of such Seller, or (b) any other Person if such Seller is the surviving corporation; and provided further, that if after giving effect thereto, no Default would exist hereunder.

7.05Margin Deficiency.  If at any time there exists a Margin Deficiency the Sellers shall cure same in accordance with Section 2.05 hereof.

7.06Notices. The Sellers shall give notice to the Buyer:

(a)  promptly upon receipt of notice or knowledge of the occurrence of any Default or Event of Default;

(b)  with respect to any Mortgage Loan purchased by the Buyer hereunder, a weekly report delivered on each date on which prepayments are to be remitted to the Buyer pursuant to Section 7.17 hereof, with respect to the preceding week, detailing any principal prepayments in full of any such Mortgage Loans received during such preceding week;

(c)  promptly upon receipt of notice or knowledge that the underlying Mortgaged Property related to any Purchased Loan has been damaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty, or otherwise damaged so as to affect adversely the Market Value of such Purchased Loan;

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(d)  promptly upon receipt of notice or knowledge of (i) any default (other than a payment default) related to any Purchased Item or Collateral, (ii) any Lien or security interest (other than security interests created hereby or by the other Repurchase Documents) on, or claim asserted against, any Purchased Item or Collateral or (iii) any event or change in circumstances which could reasonably be expected to have a Material Adverse Effect;

(e)  via Electronic Transmission with respect to any Purchased Loan subject to a Transaction outstanding hereunder, within two (2) calendar days upon receipt of notice that such Purchased Loan has been rejected for purchase by a buyer of mortgage loans (the “Prospective Buyer”) for any reason, which notice shall include (i) the reason for rejection by such buyer and (ii) the LTV based upon an appraisal obtained by the Prospective Buyer (in the event that such LTV is greater than 95%);

(f)  promptly upon any material and adverse change in the market value of all of the Sellers’ assets taken as a whole;

(g)  promptly upon notice or knowledge of the occurrence of any event (other than a Reportable Event) described in Section 8(n) hereof without regard to its materiality; and

(h)  promptly upon notice or knowledge of the occurrence of any material Reportable Event.

Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer of each Seller setting forth details of the occurrence referred to therein and stating what action such Seller has taken or proposes to take with respect thereto.

7.07Hedging. Each Seller shall deliver to the Buyer monthly a written summary of the notional amount of all outstanding Interest Rate Protection Agreements.

7.08Reports. The Sellers shall provide the Buyer with a quarterly report, which report shall include, among other items, a summary of the Sellers’ delinquency and loss experience with respect to mortgage loans serviced by such Seller, any Servicer or any designee of either, plus any such additional reports as the Buyer may reasonably request with respect to the Sellers’ or any Servicer’s servicing portfolio or pending originations of mortgage loans.

7.09Underwriting Guidelines. Each Seller shall provide to the Buyer a copy of any material changes to the Underwriting Guidelines prior to the effectiveness of any such change. The Buyer shall use commercially reasonable efforts to notify the Sellers within seven (7) Business Days following the Buyer’s receipt of such changes if such changes are acceptable. If such changes are not acceptable to the Buyer, in its sole discretion, any proposed Purchased Loan which is originated in accordance with the Underwriting Guidelines as so changed shall not constitute an Eligible Mortgage Loan. Each Seller shall originate Eligible Mortgage Loans in a manner which is consistent with sound underwriting and appraisal practices, and in compliance with applicable federal and state consumer protection laws including, without limitation, all laws with respect to unfair or deceptive practices and all laws relating to Predatory Lending Practices.

7.10Transactions with Affiliates. No Seller will enter into any transaction, including without limitation any purchase, sale, lease or exchange of property or the rendering of

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any service, with any Affiliate unless such transaction is (a) otherwise permitted under this Repurchase Agreement, (b) in the ordinary course of such Seller’s business and (c) upon fair and reasonable terms no less favorable to such Seller than it would obtain in a comparable arm’s length transaction with a Person which is not an Affiliate, or make a payment that is not otherwise permitted by this Section 7.10 to any Affiliate. In no event shall any Seller sell to the Buyer hereunder any Eligible Mortgage Loan acquired by such Seller from an Affiliate of such Seller other than a party to this Repurchase Agreement.

7.11Limitation on Liens. The Sellers will defend the Purchased Items and the Collateral against, and will take such other action as is necessary to remove, any Lien, security interest or claim on or to and Purchased Item or Collateral, other than the security interests created under this Repurchase Agreement, and the Sellers will defend the right, title and interest of the Buyers in and to the Purchased Items and the Collateral against the claims and demands of all persons whomsoever.

7.12Limitation on Guarantees. No Seller shall create, incur, assume or suffer to exist any additional Guarantee at any time when, after giving effect to such Guarantee, such Seller shall have defaulted in any of its obligations under Sections 7.14 or 7.15 hereof.

7.13Limitation on Distributions. After the occurrence and during the continuation of any Default, no Seller shall make any payment on account of, or set apart assets for, a sinking or other analogous fund for the purchase, redemption, defeasance, retirement or other acquisition of any equity or partnership interest of such Seller, whether now or hereafter outstanding, or make any other distribution in respect of any of the foregoing or to any shareholder or equity owner of such Seller, either directly or indirectly, whether in cash or property or in obligations of such Seller or any of such Seller’s consolidated Subsidiaries, except distributions in cash or other property to the extent required to satisfy the REIT Distribution Requirement.

7.14Financial Covenants.

(a)  Maintenance of Tangible Net Worth. Aames Investment shall not permit its Tangible Net Worth at any time to be less than the sum of $250,000,000 plus fifty percent (50%) of any additional equity raised in a public offering by Aames Investment from and after the Effective Date.

(b)  Maintenance of Ratio of Total Indebtedness to Tangible Net Worth. Aames Investment shall not permit the ratio of its Total Indebtedness to Tangible Net Worth at any time, from and after the Effective Date, to be greater than 15.0 to 1.0.

(c)  Maintenance of Ratio of Adjusted Indebtedness to Tangible Net Worth. Aames Investment shall not permit the ratio of its Adjusted Indebtedness to Tangible Net Worth at any time, from and after the Effective Date, to be greater than 5.0 to 1.0.

(d)  Maintenance of Profitability. Aames Investment shall not permit its Net Income before tax, generated over any two consecutive fiscal quarters, measured on the last day of each fiscal quarter, to be less than $1.00, commencing with respect to the two consecutive fiscal quarters ending on December 31, 2005.

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(e)  Maintenance of Liquidity. Aames Investment shall, as of the end of any calendar quarter, have unencumbered Cash Equivalents, cash and available borrowing capacity on unencumbered assets that could be drawn against (taking into account required haircuts) under committed warehouse or working capital facilities, on a consolidated basis in an amount greater than or equal to $65,000,000.

7.15[Reserved]

7.16No Adverse Selection. No Seller has selected any Purchased Items or Collateral in a manner so as to adversely affect the Buyer’s interests.

7.17Remittance of Prepayments. The Sellers shall remit, with sufficient detail to enable the Buyer to appropriately identify the Purchased Loan to which any amount remitted applies, to the Buyer on each Thursday (or the next Business Day if such Thursday is not a Business Day) all principal prepayments in full (but not in part) that the Sellers have received during the previous week that are not paid directly to the Buyer. All principal amounts so remitted shall be applied to the prepayment of the Repurchase Price then outstanding in respect of the related Transaction.

7.18Servicer; Servicer Report. The Sellers shall provide, or shall cause each Servicer to provide, to the Buyer on or before the tenth (10^th) Business Day of each month a Servicer Report with respect to all Purchased Loans related to Transactions outstanding hereunder and, in connection with the effectiveness of Regulation AB promulgated by the Securities and Exchange Commission (as such regulation may be amended or modified from time to time, “Reg AB”), each Seller shall provide, or shall cause each Servicer to cooperate with the Buyer in providing, such statements and reports as are required by and in conformance with Reg AB.

Section 8. Events of Default.

Each of the following events shall constitute an event of default (an “Event of Default”) hereunder:

(a)  any Seller shall default in the payment of any Repurchase Price or Price Differential on any Transaction when due (whether at stated maturity, upon acceleration or at mandatory or optional prepayment or repurchase); or

(b)  any Seller shall fail to cure any Margin Deficiency in accordance with Section 2.05 of this Repurchase Agreement; or

(c)  any Seller shall default in the payment of any other amount payable by it hereunder or under any other Repurchase Document after notification by the Buyer of such default, and such default shall have continued unremedied for five (5) Business Days; or

(d)  any representation, warranty or certification made or deemed made herein or in any other Repurchase Document by any Seller or any certificate furnished to the Buyer pursuant to the provisions hereof or thereof shall prove to have been false or misleading in any material respect as of the time made or furnished (other than the representations and warranties

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set forth in Schedule 1, which shall be considered solely for the purpose of determining the Recognized Value of the Purchased Loans; unless (i) such Seller shall have made any such representations and warranties with knowledge that they were materially false or misleading at the time made or (ii) any such representations and warranties have been determined by the Buyer in its sole discretion to be materially false or misleading on a regular basis); or

(e)  any Seller shall fail to comply with the requirements of Section 7.03(a), Section 7.04, Section 7.06(a) or Sections 7.09 through 7.18 hereof and such default shall continue unremedied for a period of one (1) Business Day; or any Seller shall otherwise fail to comply with the requirements of Section 7.03 hereof and such default shall continue unremedied for a period of five (5) Business Days; or any Seller or the Parent shall fail to observe or perform any other covenant or agreement contained in this Repurchase Agreement or any other Repurchase Document and such failure to observe or perform shall continue unremedied for a period of seven (7) Business Days; or

(f)  a final judgment or judgments for the payment of money in excess of $1,000,000 in the aggregate shall be rendered against any Seller or any of its Affiliates by one or more courts, administrative tribunals or other bodies having jurisdiction and the same shall not be satisfied, discharged (or provision shall not be made for such discharge) or bonded, or a stay of execution thereof shall not be procured, within thirty (30) calendar days from the date of entry thereof, and no Seller or any such Affiliate shall, within said period of thirty (30) calendar days, or such longer period during which execution of the same shall have been stayed or bonded, appeal therefrom and cause the execution thereof to be stayed during such appeal; or

(g)  any Seller shall admit in writing its inability to pay its debts as such debts become due; or

(h)  any Seller or any of its Affiliates shall (i) apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner or liquidator or the like of itself or of all or a substantial part of its property, (ii) make a general assignment for the benefit of its creditors, (iii) commence a voluntary case under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or readjustment of debts, (v) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under the Bankruptcy Code or (vi) take any corporate or other action for the purpose of effecting any of the foregoing; or

(i)  a proceeding or case shall be commenced, without the application or consent of any Seller or any of its Affiliates, in any court of competent jurisdiction, seeking (i) its reorganization, liquidation, dissolution, arrangement or winding-up, or the composition or readjustment of its debts, (ii) the appointment of, or the taking of possession by, a receiver, custodian, trustee, examiner, liquidator or the like of any Seller or any such Affiliate or of all or any substantial part of its property, or (iii) similar relief in respect of any Seller or any such Affiliate under any law relating to bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement or winding-up, or composition or adjustment of debts, and such proceeding or case shall continue undismissed, or an order, judgment or decree approving or ordering any of the foregoing shall be entered and continue unstayed and in effect, for a period of

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thirty (30) or more calendar days; or an order for relief against any Seller or any such Affiliate shall be entered in an involuntary case under the Bankruptcy Code; or

(j)  the Custodial Agreement (without provisions for a replacement custodial agreement acceptable to the Buyer) or any Repurchase Document shall for whatever reason be terminated or cease to be in full force and effect, or the enforceability thereof shall be contested by any Seller; or

(k)  any Seller shall grant, or suffer to exist, any Lien on any Purchased Item or Collateral except the Liens contemplated hereby; or the Liens contemplated hereby shall cease to be first priority perfected Liens on the Purchased Items and the Collateral in favor of the Buyer or shall be Liens in favor of any Person other than the Buyer; or

(l)  any Seller or any of such Seller’s Affiliates shall be in default under any note, indenture, loan agreement, guaranty, swap agreement or any other contract to which it is a party, including, without limitation, any MS Indebtedness, which has an aggregate face or principal amount of $1,000,000 or more, which default (i) involves the failure to pay a matured obligation, or (ii) permits the acceleration of the maturity of obligations by any other party to or beneficiary of such note, indenture, loan agreement, guaranty, swap agreement or other contract; or

(m)  any materially adverse change in the Property, business, financial condition or prospects of any Seller or any of its Affiliates shall occur, in each case as determined by the Buyer in its sole discretion, or any other condition shall exist which, in the Buyer’s sole discretion, constitutes a material impairment of any Seller’s ability to perform its obligations under this Repurchase Agreement or any other Repurchase Document; or

(n)  the discovery by the Buyer of a condition or event which existed at or prior to the execution hereof and which the Buyer, in its sole discretion, determines materially and adversely affects: (i) the condition (financial or otherwise) of any Seller, its Subsidiaries or Affiliates; or (ii) the ability of any Seller to fulfill its respective obligations under this Repurchase Agreement; or

(o)  (i)  Tangible Net Worth on a consolidated basis on any given day shall be less than an amount equal to the sum of $250,000,000 plus fifty percent (50%) of any additional equity raised in a public offering by Aames Investment from and after the Effective Date;

(ii)the Leverage Ratio shall at any time be greater than 15.0 to 1.0;

(iii)the ratio of Adjusted Indebtedness to Tangible Net Worth shall at any time be greater than 5.0 to 1.0;

(iv)Net Income before tax, generated over any two consecutive fiscal quarters, measured on the last day of each fiscal quarter, shall be less than $1.00, commencing with respect to the two consecutive fiscal quarters ending on December 31, 2005; or

(v)Aames Investment shall, as of the end of any calendar month, have unencumbered Cash Equivalents, cash and available borrowing capacity on unencumbered assets that could be drawn against (taking into account required haircuts)

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under committed warehouse or working capital facilities, on a consolidated basis in an amount less than $65,000,000; or

(p)  MS & Co.’s corporate bond rating has been lowered or downgraded to a rating below A- by S&P or A3 by Moody’s and any Seller shall have failed to repay all amounts owing to the Buyer under this Repurchase Agreement and the other Repurchase Documents within ninety (90) calendar days following such downgrade.

Section 9. Remedies Upon Default.

(a)  An Event of Default shall be deemed to be continuing unless expressly waived by the Buyer in writing. Upon the occurrence of one or more Events of Default hereunder, the Buyer’s obligation to enter into additional Transactions hereunder shall automatically terminate without further action by any Person. Upon the occurrence of one or more Events of Default other than those referred to in Section 8(g) or 8(h), the Buyer may immediately declare the aggregate Repurchase Price of all outstanding Transactions to be immediately due and payable, together with all Price Differential thereon and fees and expenses accruing under this Repurchase Agreement. Upon the occurrence and during the continuance of an Event of Default referred to in Section 8(g) or 8(h), such amounts shall immediately and automatically become due and payable without any further action by any Person. Upon such declaration or such automatic acceleration, the balance then outstanding shall become immediately due and payable, without presentment, demand, protest or other formalities of any kind, all of which are hereby expressly waived by each Seller.

(b)  Upon the occurrence of one or more Events of Default, the Buyer shall have the right to obtain physical possession of the Servicing Records and all other files of the Seller relating to the Purchased Items and the Collateral and all documents relating to the Purchased Items and the Collateral which are then or may thereafter come in to the possession of the Sellers or any third party acting for the Sellers and the Sellers shall deliver to the Buyer such assignments as the Buyer shall request. The Buyer shall be entitled to specific performance of all agreements of the Sellers contained in this Repurchase Agreement.

Section 10. No Duty of Buyer.

The powers conferred on the Buyer hereunder are solely to protect the Buyer’s interests in the Purchased Items and the Collateral and shall not impose any duty upon it to exercise any such powers. The Buyer shall be accountable only for amounts that it actually receives as a result of the exercise of such powers, and neither it nor any of its officers, directors, employees or agents shall be responsible to the Sellers for any act or failure to act hereunder, except for its or their own gross negligence or willful misconduct.

Section 11. Miscellaneous.

11.01Waiver. No failure on the part of the Buyer to exercise and no delay in exercising, and no course of dealing with respect to, any right, power or privilege under any Repurchase Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege under any Repurchase Document preclude any other or further

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exercise thereof or the exercise of any other right, power or privilege. The remedies provided herein are cumulative and not exclusive of any remedies provided by law.

11.02Notices.  Except as otherwise expressly permitted by this Repurchase Agreement, all notices, requests and other communications provided for herein and under the Custodial Agreement (including without limitation any modifications of, or waivers, requests or consents under, this Repurchase Agreement) shall be given or made in writing (including without limitation by telex, telecopy or facsimile) delivered to the intended recipient at the “Address for Notices” specified below its name on the signature pages hereof or thereof); or, as to any party, at such other address as shall be designated by such party in a written notice to each other party provided, that a copy of all notices given under Section 7.01 shall simultaneously be delivered to Credit Department, Morgan Stanley, 1221 Avenue of the Americas, 35^th Floor, New York, New York 10036; Attention: Cindy Tse. Except as otherwise provided in this Repurchase Agreement and except for notices given under Section 2 (which shall be effective only on receipt), all such communications shall be deemed to have been duly given when transmitted by telex, telecopy facsimile (with written confirmation of receipt) or personally delivered or, in the case of a mailed notice, upon receipt, in each case given or addressed as aforesaid.

11.03Indemnification and Expenses.

(a)  Each Seller agrees to hold the Buyer, and its Affiliates and their officers, directors, employees, agents and advisors (each an “Indemnified Party”) harmless from and indemnify any Indemnified Party against all liabilities, losses, damages, judgments, costs and expenses of any kind which may be imposed on, incurred by or assessed against such Indemnified Party (collectively, the “Costs”) relating to or arising out of this Repurchase Agreement, any other Repurchase Document or any transaction contemplated hereby or thereby, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Repurchase Agreement, any other Repurchase Document or any transaction contemplated hereby or thereby, that, in each case, results from anything other than any Indemnified Party’s gross negligence or willful misconduct. Without limiting the generality of the foregoing, the Sellers agree to hold any Indemnified Party harmless from and indemnify such Indemnified Party against all Costs with respect to all Purchased Loans relating to or arising out of any violation or alleged violation of any environmental law, rule or regulation or any consumer credit laws, including without limitation, laws with respect to unfair or deceptive lending practices, and Predatory Lending Practices, the Truth in Lending Act and/or the Real Estate Settlement Procedures Act, that, in each case, results from anything other than such Indemnified Party’s gross negligence or willful misconduct. In any suit, proceeding or action brought by an Indemnified Party in connection with any Mortgage Loan for any sum owing thereunder, or to enforce any provisions of any Mortgage Loan, each Seller will save, indemnify and hold such Indemnified Party harmless from and against all expense, loss or damage suffered by reason of any defense, set-off, counterclaim, recoupment or reduction or liability whatsoever of the account debtor or obligor thereunder, arising out of a breach by any Seller of any obligation thereunder or arising out of any other agreement, indebtedness or liability at any time owing to or in favor of such account debtor or obligor or its successors from any Seller. Each Seller also agrees to reimburse an Indemnified Party as and when billed by such Indemnified Party for all such Indemnified Party’s costs and expenses incurred in connection with the enforcement or the preservation of such Indemnified Party’s rights under this Repurchase

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Agreement, any other Repurchase Document or any transaction contemplated hereby or thereby, including without limitation the reasonable fees and disbursements of its counsel. Each Seller hereby acknowledges that the obligations of such Seller under the Repurchase Documents are recourse obligations of such Seller.

(b)  The Sellers agree, jointly and severally, to pay as and when billed by the Buyer all of the out-of-pocket costs and expenses incurred by the Buyer in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Repurchase Agreement, any other Repurchase Document or any other documents prepared in connection herewith or therewith. The Sellers agree, jointly and severally, to pay as and when billed by the Buyer all of the out-of-pocket costs and expenses incurred in connection with the consummation and administration of the transactions contemplated hereby and thereby including without limitation (i) all the reasonable fees, disbursements and expenses of counsel to the Buyer (ii) all the due diligence, inspection, testing and review costs and expenses incurred by the Buyer with respect to the Purchased Items and the Collateral under this Repurchase Agreement, including, but not limited to, those costs and expenses incurred by the Buyer pursuant to Sections 11.03(a), 11.15 and 11.16 hereof and (iii) all reasonable costs and expenses incurred by the Buyer in connection with the underwriting or re-underwriting of any Purchased Loan (including any proposed Purchased Loan) from time to time.

11.04Amendments.  Except as otherwise expressly provided in this Repurchase Agreement, any provision of this Repurchase Agreement may be modified or supplemented only by an instrument in writing signed by the Sellers and the Buyer and any provision of this Repurchase Agreement may be waived by the Buyer.

11.05Assignments and Participations.

(a)  No Seller may assign or delegate any of its rights or obligations under this Repurchase Agreement without the express written consent of the Buyer and any assignment or delegation that is attempted in contravention of this provision shall be null and void, ab initio. The Buyer may assign and delegate to one or more Affiliates of the Buyer all or a portion of its rights and obligations under this Repurchase Agreement; provided, however, that the parties to each such assignment shall execute and deliver an Assignment and Acceptance substantially in the form of Exhibit H, with appropriate completions (an “Assignment and Acceptance”).

(b)  Upon such execution and delivery, from and after the effective date specified in such Assignment and Acceptance, (i) the assignee thereunder shall be a party hereto and, to the extent that rights and obligations hereunder have been assigned and delegated to it pursuant to such Assignment and Acceptance, have the rights and obligations of the Buyer hereunder, and (ii) the Buyer assignor thereunder shall, to the extent that any rights and obligations hereunder have been assigned and delegated by it, and accepted and assumed by the assignee, pursuant to such Assignment and Acceptance, relinquish its rights and be released from its obligations under this Repurchase Agreement.

(c)  The Buyer may sell participations to one or more Persons in or to all or a portion of its rights and obligations under this Repurchase Agreement; provided, however, that (i) the Buyer’s obligations under this Repurchase Agreement shall remain unchanged, (ii) the

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Buyer shall remain solely responsible to the other parties hereto for the performance of such obligations, and (iii) the Seller shall continue to deal solely and directly with the Buyer in connection with the Buyer’s rights and obligations under and in respect of this Repurchase Agreement and the other Repurchase Documents. Notwithstanding the terms of Section 3.03, each participant of the Buyer shall be entitled to the additional compensation and other rights and protections afforded the Buyer under Section 3.03 to the same extent as the Buyer would have been entitled to receive them with respect to the participation sold to such participant.

(d)  The Buyer may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 11.05, disclose to the assignee or participant or proposed assignee or participant, as the case may be, any information relating to any Seller or any of their Subsidiaries or to any aspect of the Loans that has been furnished to the Buyer by or on behalf of any Seller or any of their Subsidiaries.

(e)  The Buyer may at any time create a security interest in all or any portion of its rights under this Repurchase Agreement (including, without limitation, the Repurchase Obligations owing to it) in favor of any Federal Reserve Bank in accordance with Regulation A of the Board of Governors of the Federal Reserve System and any Operating Circular issued by such Federal Reserve Bank. No such assignment shall release the assigning Buyer from its obligations hereunder.

(f)  Notwithstanding the foregoing, upon the occurrence and during the continuance of an Event of Default, the Buyer may assign all or any portion of its rights and obligations hereunder to any Person, provided that upon the effective date of such assignment such Person shall become a party hereto and a Buyer hereunder and shall be (i) entitled to all the rights, benefits and privileges accorded the Buyer under the Repurchase Documents, and (ii) subject to all the duties and obligations of the Buyer under the Repurchase Documents.

11.06Successors and Assigns.  This Repurchase Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns.

11.07Survival.  The obligations of each Seller under Sections 3.03 and 11.03 hereof shall survive the payment of the Repurchase Obligations relating to all Transactions and the termination of this Repurchase Agreement. In addition, each representation and warranty made or deemed to be made by a request for a Transaction, herein or pursuant hereto shall survive the making of such representation and warranty, and the Buyer shall not be deemed to have waived, by reason of entering into any Transaction, any Default that may arise because any such representation or warranty shall have proved to be false or misleading, notwithstanding that the Buyer may have had notice or knowledge or reason to believe that such representation or warranty was false or misleading at the time such Transaction was entered into.

11.08Captions.  The table of contents and captions and section headings appearing herein are included solely for convenience of reference and are not intended to affect the interpretation of any provision of this Repurchase Agreement.

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11.09Counterparts.  This Repurchase Agreement may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Repurchase Agreement by signing any such counterpart. Delivery of an executed counterpart of a signature page of this Repurchase Agreement in Portable Document Format (PDF) or by facsimile transmission shall be effective as delivery of a manually executed original counterpart of this Repurchase Agreement.

11.10Repurchase Agreement Constitutes Security Agreement; Governing Law.  This Repurchase Agreement shall be governed, and construed and interpreted in accordance with, the laws of the State of New York, and shall constitute a security agreement within the meaning of the Uniform Commercial Code.

11.11Submission To Jurisdiction; Waivers.  Each Seller hereby irrevocably and unconditionally:

(A)SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS REPURCHASE AGREEMENT AND THE OTHER REPURCHASE DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF;

(B)CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;

(C)AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF WHICH THE BUYER SHALL HAVE BEEN NOTIFIED; AND

(D)AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION.

11.12WAIVER OF JURY TRIAL. EACH SELLER AND THE BUYER HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS REPURCHASE AGREEMENT,

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ANY OTHER REPURCHASE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.

11.13Acknowledgments. Each Seller hereby acknowledges that:

(a)  it has been advised by counsel in the negotiation, execution and delivery of this Repurchase Agreement and the other Repurchase Documents;

(b)  the Buyer has no fiduciary relationship to any Seller, and the relationship between each Seller and the Buyer is solely that of seller and buyer; and

(c)  no joint venture exists between the Buyer and any Seller.

11.14Hypothecation or Pledge of Purchased Items. The Buyer shall have free and unrestricted use of all Purchased Items and Collateral and nothing in this Repurchase Agreement shall preclude the Buyer from engaging in repurchase transactions with any Purchased Items or Collateral or otherwise pledging, repledging, transferring, hypothecating, or rehypothecating any Purchased Items or Collateral, on terms, and subject to conditions, within the Buyer’s absolute discretion. Nothing contained in this Repurchase Agreement shall obligate the Buyer to segregate any Purchased Items or Collateral delivered to the Buyer by the Sellers.

11.15Servicing.

(a)  Each Seller covenants to maintain or cause to be maintained the servicing of the Purchased Loans in conformity with Accepted Servicing Practices and in a manner at least equal in quality to the servicing such Servicer provides for mortgage loans which it owns. In the event that the preceding language is interpreted as constituting one or more servicing contracts, each such servicing contract shall terminate automatically upon the earliest of (i) an Event of Default, (ii) the date on which all the Repurchase Obligations have been paid in full or (iii) any transfer of such servicing by the Seller.

(b)  Each Seller hereby (i) acknowledges and agrees that the Purchased Loans are being sold to the Buyer hereunder on a servicing released basis, (ii) acknowledges and agrees that the Buyer is the collateral assignee of all servicing records, including but not limited to any and all servicing agreements, files, documents, records, data bases, computer files, copies of computer files, proof of insurance coverage, insurance policies, appraisals, other closing documentation, payment history records, and any other records relating to or evidencing the servicing of Purchased Loans (the “Servicing Records”) and (iii) grants the Buyer, to secure the obligation of each Seller or its designee to service in conformity with this Section and any other obligation of the Sellers to the Buyer, a security interest in all Servicing Records and all servicing fees and rights relating to the Purchased Loans. The Sellers covenant to safeguard all Servicing Records and to deliver them or arrange for the relevant Servicer to deliver them promptly to the Buyer or its designee (including the Custodian) at the Buyer’s request.

(c)  The Sellers shall provide the Buyer with a copy of all servicing agreements, if any, applicable to the Purchased Loans (each, a “Servicing Agreement”), which Servicing Agreements shall be in form and substance acceptable to the Buyer, and with respect to each Servicing Agreement, the Sellers shall provide the Buyer with a properly completed and fully

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executed Servicer Notice and Agreement substantially in the form of Exhibit G hereto (a “Servicer Notice”). Each Seller hereby irrevocably assigns to the Buyer, and the Buyer’s successors and assigns, all right, title and interest, if any, of such Seller in, to and under, and the benefits of, each Servicing Agreement. Any successor or assignee of a Servicer shall be approved in writing by the Buyer and shall acknowledge and agree to a Servicer Notice prior to such successor’s assumption of servicing obligations with respect to the Purchased Loans.

(d)  After the Purchase Date for any Purchased Loan, until such Purchased Loan is repurchased by the applicable Seller and possession thereof is relinquished by the Custodian, no Seller or Servicer will have any right to modify or alter the terms of such Purchased Loan without notice to the Buyer and no Seller will have any obligation or right to repossess such Purchased Loan or substitute another Purchased Loan, except as provided in the Custodial Agreement. Each Seller acknowledges that after the terms of a Purchased Loan are modified or altered, the Buyer may reduce the Recognized Value of such Purchased Loan as a result of such modification.

(e)  In the event that a Seller or an Affiliate of a Seller is servicing any Purchased Loans, the Buyer shall be permitted from time to time to inspect the servicing facilities of such Seller or its Affiliate, as applicable, for the purpose of satisfying the Buyer that such Seller or its Affiliate, as the case may be, has the ability to service the Purchased Loans as required under this Repurchase Agreement.

(f)  Upon the occurrence of any Event of Default, the Buyer may terminate any Servicing Agreement and in any event transfer servicing to the Buyer’s designee, at no cost or expense to the Buyer, it being agreed that the Sellers will pay any and all fees required to terminate the Servicing Agreement and to effectuate the transfer of servicing to the designee of the Buyer.

11.16Periodic Due Diligence Review. Each Seller acknowledges that the Buyer has the right to perform continuing due diligence reviews with respect to the Purchased Loans (including a review of the Mortgage Loan Documents and such other documents, records, agreements, instruments, mortgaged properties or information relating to the Purchased Loans as the Buyer in its sole discretion deems appropriate to review) and the manner in which they were originated, for purposes of verifying compliance with the representations, warranties and specifications made hereunder, or otherwise, and each Seller agrees that, unless a Default has occurred (in which case no notice is required), upon reasonable (but no less than one (1) Business Day’s) prior notice to the Sellers, the Buyer or its authorized representatives will be permitted during normal business hours to examine, inspect, and make copies and extracts of, the Mortgage Files and any and all documents, records, agreements, instruments or information relating to such Purchased Loans, including, without limitation, any related internal credit analyses, in the possession or under the control of the Sellers and/or, pursuant to the Custodial Agreement, the Custodian. The Sellers also shall make available to the Buyer a knowledgeable financial or accounting officer for the purpose of answering questions respecting the Mortgage Files and the Purchased Loans. Without limiting the generality of the foregoing, the Sellers acknowledge that the Buyer may enter into Transactions based solely upon the information provided by the Sellers to the Buyer in the Mortgage Loan Data File and the representations, warranties and covenants contained herein, and that the Buyer, at its option, has the right at any

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time to conduct a partial or complete due diligence review on some or all of the Purchased Loans related to Transactions from time to time outstanding hereunder, including without limitation ordering new credit reports and new appraisals on the related Mortgaged Properties and otherwise re-generating the information used to originate such Purchased Loan. The Buyer may underwrite such Purchased Loans itself or engage a mutually agreed upon third party underwriter to perform such underwriting. The Sellers agree to cooperate with the Buyer and any third party underwriter in connection with such underwriting, including, but not limited to, providing the Buyer and any third party underwriter with access to any and all documents, records, agreements, instruments or information relating to such Purchased Loans in the possession, or under the control, of the Sellers. Each Seller further agrees that such Seller shall reimburse the Buyer for any and all out-of-pocket costs and expenses incurred by the Buyer in connection with the Buyer’s activities pursuant to this Section 11.16; provided, that so long as no Default or Event of Default shall have occurred and be continuing, the Sellers shall not be obligated to reimburse the Buyer for such out-of-pocket costs and expenses solely to the extent that the aggregate amount of such costs and expenses incurred by the Buyer during any calendar year exceeds $25,000.

11.17Set-Off.  In addition to any rights and remedies of the Buyer provided by this Repurchase Agreement and by law, the Buyer shall have the right, without prior notice to the Sellers, any such notice being expressly waived by the Sellers to the extent permitted by applicable law, upon any amount becoming due and payable by the Sellers hereunder (whether at the stated maturity, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by the Buyer or any Affiliate thereof to or for the credit or the account of the Sellers. The Buyer agrees promptly to notify the Sellers after any such set-off and application made by the Buyer; provided, that the failure to give such notice shall not affect the validity of such set-off and application.

11.18Intent.

(a)  The parties intend and acknowledge that each Transaction is a “repurchase agreement” and a “master netting agreement” as each such term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Eligible Mortgage Loans subject to such Transaction or the term of such Transaction would render such definition inapplicable), and a “securities contract” as that term is defined in Section 741 of Title 11 of the United States Code, as amended (except insofar as the type of assets subject to such Transaction would render such definition inapplicable).

(b)  It is understood that any party’s right to liquidate Purchased Loans delivered to it in connection with any Transaction entered into hereunder or to exercise any other remedies pursuant to the terms of this Repurchase Agreement, is a contractual right, to liquidate, terminate or accelerate such Transaction as described in Sections 555, 559 and 561 of Title 11 of the United States Code, as amended.

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(c)  The parties agree and acknowledge that, if a party hereto is an “insured depository institution,” as such term is defined in the Federal Deposit Insurance Act, as amended (“FDIA”), then each Transaction hereunder is a “qualified financial contract,” as that term is defined in FDIA and any rules, orders or policy statements thereunder (except insofar as the type of assets subject to such Transaction would render such definition inapplicable).

(d)  It is understood that this agreement constitutes a “netting contract” as defined in and subject to Title IV of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) and each payment entitlement and payment obligation under any Transaction hereunder shall constitute a “covered contractual payment entitlement” or “covered contractual payment obligation”, respectively, as defined in and subject to FDICIA (except insofar as one or both of the parties is not a “financial institution” as that term is defined in FDICIA).

11.19Disclosure Relating to Certain Federal Protections.  The parties acknowledge that they have been advised that:

(a)  in the case of Transactions in which one of the parties is a broker or dealer registered with the Securities and Exchange Commission (“SEC”) under Section 15 of the Securities Exchange Act of 1934 (“1934 Act”), the Securities Investor Protection Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 (“SIPA”) do not protect the other party with respect to any Transaction hereunder;

(b)  in the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to the other party with respect to any Transaction hereunder; and

(c)  in the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable.

11.20Joint and Several Liability.  Each Seller hereby acknowledges and agrees that such Seller shall be jointly and severally liable to the Buyer to the maximum extent permitted by the applicable law for all representations, warranties, covenants, obligations and indemnities of the Sellers hereunder.

11.21Treatment of Certain Information.  Notwithstanding anything to the contrary contained herein or in any other Repurchase Document, all Persons may disclose to any and all Persons, without limitation of any kind, the federal income tax treatment of the Transactions contemplated by this Repurchase Agreement or any other Repurchase Document, any fact relevant to understanding the federal tax treatment thereof and all materials of any kind (including opinions or other tax analyses) relating to such federal income tax treatment; provided, that except as otherwise required by law, rule or regulation, no Person may disclose the name of or identifying information with respect to any party identified herein or in any other Repurchase Document or any pricing terms (including, without limitation, the Applicable Pricing

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Spread and any commitment or other fees) or other nonpublic business or financial information (including Recognized Value and financial covenants) that is unrelated to the purported or claimed federal income tax treatment of the Contemplated Actions and is not relevant to understanding the purported or claimed federal income tax treatment of the transaction, without the prior consent of the Buyer.

11.22Substitution.  This Repurchase Agreement substitutes and replaces in its entirety the Existing Loan Agreement. All Loans, as defined in and outstanding under the Existing Loan Agreement shall, as of the Effective Date hereof, be deemed, mutatis mutandis, to be Transactions outstanding under this Repurchase Agreement and upon the Effective Date hereof, without limiting the scope of any other conforming changes necessary to be made, (i) the aggregate unpaid principal amount of all such Loans shall be deemed to be Purchase Price outstanding hereunder, (ii) all amounts of accrued and unpaid interest shall be deemed to be accrued and unpaid Price Differential hereunder, (iii) all other amounts owing by the Sellers who are borrowers under the Existing Loan Agreement shall be included in the aggregate Repurchase Price outstanding hereunder and (iv) all Collateral (as defined in and pledged under the Existing Loan Agreement) shall be deemed to be Purchased Items or Collateral hereunder, as applicable.

[SIGNATURE PAGES FOLLOW]

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IN WITNESS WHEREOF, the parties hereto have caused this Repurchase Agreement to be duly executed and delivered as of the day and year first above written.

SELLERS
AAMES CAPITAL CORPORATION
	By:		/s/ Jon D. Van Deuren
	Name: Jon D. Van Deuren
	Title: Executive Vice President and Chief Financial Officer
Address for Notices:
350 South Grand Avenue
43rd Floor
Los Angeles, California 90071
Attention:				Jon Van Deuren
				Executive Vice President-Finance & Chief Financial Officer
Telecopier No.: 323-210-5036
Telephone No: 323-210-4855
With a copy to:
General Counsel
AAMES FUNDING CORPORATION
	By	/s/ Jon D. Van Deuren
	Name: Jon D. Van Deuren
	Title: Executive Vice President and Chief Financial Officer
Address for Notices:
350 South Grand Avenue
43rd Floor
Los Angeles, California 90071
Attention: Jon Van Deuren
Executive Vice President-Finance & Chief Financial Officer

Telecopier No.: 323-210-5036

Telephone No: 323-210-4855

With a copy to:

General Counsel

AAMES INVESTMENT CORPORATION
	By:	/s/ Jon D. Van Deuren
	Name: Jon D. Van Deuren
	Title: Executive Vice President and Chief Financial Officer
Address for Notices:
350 South Grand Avenue
43rd Floor
Los Angeles, California 90071
Attention: Jon Van Deuren
Executive Vice President-Finance &
Chief Financial Officer
Telecopier No.: 323-210-5036
Telephone No: 323-210-4855
With a copy to:
General Counsel

BUYER
MORGAN STANLEY BANK
By	/s/ Andrew B. Neuberger
	Name: Andrew B. Neuberger
	Title: VP
Address for Notices:
2500 Lake Park Boulevard
West Valley City, Utah 84120
Attention: Richard Felix
with a copy to:
1221 Avenue of the Americas, 27th Floor
New York, New York 10020
Attention: Paul Najarian
Telecopier No.: 212-762-9495
Telephone No.: 212-762-6401

Schedule 1

REPRESENTATIONS AND WARRANTIES RE:  MORTGAGE LOANS

Part 1.Eligible Residential Mortgage Loans

As to each residential Mortgage Loan included in the Margin Base on a Purchase Date (and the related Mortgage, Mortgage Note, Assignment of Mortgage and Mortgaged Property), each Seller shall be deemed to make the following representations and warranties to the Buyer as of such date and as of each date the Margin Base is determined (certain defined terms used herein and not otherwise defined in the Repurchase Agreement appearing in Part II to this Schedule 1):

(a)Mortgage Loans as Described.  The information set forth in the Mortgage Loan Schedule with respect to the Mortgage Loan is complete, true and correct in all material respects.

(b)Payments Current.  Except in the case of a Defaulted Loan and to the extent contemplated by the definition of the applicable Class of Defaulted Loan, not more than one payment required under the Mortgage Loan is delinquent. The first Monthly Payment shall be made, or shall have been made, with respect to the Mortgage Loan on its Due Date or within any applicable grace period, all in accordance with the terms of the related Mortgage Note.

(c)No Outstanding Charges.  Except in the case of a Defaulted Loan, there are no defaults in complying with the terms of the Mortgage securing the Mortgage Loan, and all taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents which previously became due and owing have been paid, or an escrow of funds has been established in an amount sufficient to pay for every such item which remains unpaid and which has been assessed but is not yet due and payable. Neither any Seller nor the originator from which such Seller acquired the Mortgage Loan has advanced funds, or induced, solicited or knowingly received any advance of funds by a party other than the Mortgagor, directly or indirectly, for the payment of any amount required under the Mortgage Loan, except for interest accruing from the date of the Mortgage Note or date of disbursement of the proceeds of the Mortgage Loan, whichever is earlier, to the day which precedes by one month the Due Date of the first installment of principal and interest thereunder.

(d)Original Terms Unmodified.  The terms of the Mortgage Note and Mortgage have not been impaired, waived, altered or modified in any respect, from the date of origination; except by a written instrument which has been recorded, if necessary to protect the interests of the Buyer, and which has been delivered to the Custodian and the terms of which are reflected in the Mortgage Loan Schedule. The substance of any such waiver, alteration or modification has been approved by the title insurer, to the extent required, and its terms are reflected on the Mortgage Loan Schedule. No Mortgagor in respect of the Mortgage Loan has been released, in whole or in part, except in connection with an assumption agreement approved by the title insurer, to the extent required by such policy, and which assumption agreement is part of the Mortgage File delivered to the Custodian and the terms of which are reflected in the Mortgage Loan Schedule.

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(e)No Defenses.  The Mortgage Loan is not subject to any right of rescission, set-off, counterclaim or defense, including without limitation the defense of usury, nor will the operation of any of the terms of the Mortgage Note or the Mortgage, or the exercise of any right thereunder, render either the Mortgage Note or the Mortgage unenforceable in whole or in part and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto, and, except as permitted by the Underwriting Guidelines, no Mortgagor in respect of the Mortgage Loan was a debtor in any state or federal bankruptcy or insolvency proceeding at the time the Mortgage Loan was originated. No Seller has any knowledge nor has any Seller received any notice that any Mortgagor in respect of the Mortgage Loan is a debtor in any state or federal bankruptcy or insolvency proceeding.

(f)Hazard Insurance.  The Mortgaged Property is insured by a fire and extended perils insurance policy, issued by a generally acceptable insurance carrier, and such other hazards as are customary in the area where the Mortgaged Property is located, and to the extent required by the Sellers as of the date of origination consistent with the Underwriting Guidelines, against earthquake and other risks insured against by Persons operating like properties in the locality of the Mortgaged Property, in an amount not less than the greatest of (i) 100% of the replacement cost of all improvements to the Mortgaged Property, (ii) the outstanding principal balance of the Mortgage Loan, or (iii) the amount necessary to avoid the operation of any co-insurance provisions with respect to the Mortgaged Property, and consistent with the amount that would have been required as of the date of origination in accordance with the Underwriting Guidelines. If any portion of the Mortgaged Property is in an area identified by any federal Governmental Authority as having special flood hazards, and flood insurance is available, a flood insurance policy meeting the current guidelines of the Federal Emergency Management Agency is in effect with a generally acceptable insurance carrier, in an amount representing coverage not less than the least of (1) the outstanding principal balance of the Mortgage Loan, (2) the full insurable value of the Mortgaged Property, and (3) the maximum amount of insurance available under the National Flood Insurance Act of 1968, as amended by the Flood Disaster Protection Act of 1974. All such insurance policies (collectively, the “hazard insurance policy”) contain a standard mortgagee clause naming the relevant Seller, its successors and assigns (including without limitation, subsequent owners of the Mortgage Loan), as mortgagee, and may not be reduced, terminated or canceled without thirty (30) days’ prior written notice to the mortgagee. No such notice has been received by any Seller. All premiums on such insurance policy have been paid. The related Mortgage obligates the Mortgagor to maintain all such insurance and, at such Mortgagor’s failure to do so, authorizes the mortgagee to maintain such insurance at the Mortgagor’s cost and expense and to seek reimbursement therefor from such Mortgagor. Where required by state law or regulation, the Mortgagor has been given an opportunity to choose the carrier of the required hazard insurance, provided the policy is not a “master” or “blanket” hazard insurance policy covering a condominium, or any hazard insurance policy covering the common facilities of a planned unit development. The hazard insurance policy is the valid and binding obligation of the insurer and is in full force and effect. No Seller has engaged in, and no Seller has any knowledge of the Mortgagor’s having engaged in, any act or omission which would impair the coverage of any such policy, the benefits of the endorsement provided for herein, or the validity and binding effect of either including, without limitation, no unlawful fee, commission, kickback or other unlawful compensation or value of any kind has been or will be received, retained or realized by any

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attorney, firm or other Person, and no such unlawful items have been received, retained or realized by any Seller.

(g)Compliance with Applicable Laws.  Any and all material requirements of any federal, state or local law including, without limitation, usury, laws with respect to unfair and deceptive lending practices and Predatory Lending Practices, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws applicable to the Mortgage Loan have been complied with, the consummation of the transactions contemplated hereby will not involve the violation of any such laws or regulations, and each Seller shall maintain or shall cause its agent to maintain in its possession, available for the inspection of the Buyer, and shall deliver to the Buyer, upon demand, evidence of compliance with all such requirements.

(h)No Satisfaction of Mortgage.  The Mortgage has not been satisfied, canceled, subordinated (except with respect to the senior mortgage in the case of a second priority Mortgage) or rescinded, in whole or in part, and the Mortgaged Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such release, cancellation, subordination or rescission (except to the senior mortgage in the case of a second priority Mortgage). Such Seller has not waived the performance by the Mortgagor of any action, if the Mortgagor’s failure to perform such action would cause the Mortgage Loan to be in default, nor has such Seller waived any default resulting from any action or inaction by the Mortgagor.

(i)Location and Type of Mortgaged Property.  The Mortgaged Property is located in an Acceptable State as identified in the Mortgage Loan Schedule and consists of a single parcel of real property with a detached single family residence erected thereon, or a two- to four-family dwelling, or an individual condominium unit in a condominium project of not more than four stories or such greater number of stories as shall be common for condominium projects in the location of such Mortgaged Property, or an individual unit in a planned unit development or a de minimis planned unit development, provided, however, that any condominium unit or planned unit development shall conform with the applicable Fannie Mae and Freddie Mac requirements regarding such dwellings and that no residence or dwelling is a mobile home or a manufactured dwelling. No portion of the Mortgaged Property is used for commercial purposes.

(j)Valid First or Second Lien.  The Mortgage is a valid, subsisting, enforceable and perfected first lien, in the case of a First Lien Loan, or second lien, in the case of a Second Lien Loan, on the real property included in the Mortgaged Property, including all buildings on the Mortgaged Property and all installations and mechanical, electrical, plumbing, heating and air conditioning systems located in or annexed to such buildings, and all additions, alterations and replacements made at any time with respect to the foregoing. The lien of the Mortgage is subject only to:

(1)the lien of current real property taxes and assessments not yet due and payable;

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(2)covenants, conditions and restrictions, rights of way, easements and other matters of the public record as of the date of recording acceptable to prudent mortgage lending institutions generally and specifically referred to in the lender’s title insurance policy delivered to the originator of the Mortgage Loan and (a) referred to or otherwise considered in the appraisal made for the originator of the Mortgage Loan or (b) which do not adversely affect the Appraised Value of the Mortgaged Property set forth in such appraisal;

(3)other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of the related Mortgaged Property; and

(4)in the case of any Second Lien Loan, the lien of the related primary mortgage.

Any security agreement, chattel mortgage or equivalent document related to and delivered in connection with the Mortgage Loan establishes and creates a valid, subsisting and enforceable first or second lien and first or second priority security interest on the property described therein and such Seller has full right to sell and assign the same to the Buyer. Except with respect to Second Lien Loans, the Mortgaged Property was not, as of the date of origination of the Mortgage Loan, subject to a mortgage, deed of trust, deed to secure debt or other security interest creating a lien subordinate to the lien of the Mortgage.

(k)Validity of Mortgage Documents.  The Mortgage Note and the Mortgage and any other agreement executed and delivered by a Mortgagor or guarantor, if applicable, in connection with a Mortgage Loan are genuine, and each is the legal, valid and binding obligation of the maker thereof enforceable in accordance with its terms. All parties to the Mortgage Note, the Mortgage and any other such related agreement had legal capacity to enter into the Mortgage Loan and to execute and deliver the Mortgage Note, the Mortgage and any such agreement, and the Mortgage Note, the Mortgage and any other such related agreement have been duly and properly executed by such related parties. No fraud, error, omission, misrepresentation, negligence or similar occurrence with respect to a Mortgage Loan has taken place on the part of any Person, including, without limitation, the Mortgagor, any appraiser, any builder or developer, or any other party involved in the origination of the Mortgage Loan. Each Seller has reviewed all of the documents constituting the Servicing File and has made such inquiries as it deems necessary to make and confirm the accuracy of the representations set forth herein.

(l)Full Disbursement of Proceeds.  The Mortgage Loan has been closed and the proceeds of the Mortgage Loan have been fully disbursed and there is no further requirement for future advances thereunder, and any and all requirements as to completion of any on-site or off-site improvement and as to disbursements of any escrow funds therefor have been complied with. All costs, fees and expenses incurred in making or closing the Mortgage Loan and the recording of the Mortgage were paid, and the Mortgagor is not entitled to any refund of any amounts paid or due under the Mortgage Note or Mortgage.

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(m)Ownership.  The relevant Seller is the sole owner and holder of the Mortgage Loan. The Mortgage Loan is not assigned or pledged, and the relevant Seller has good, indefeasible and marketable title thereto, and has full right to transfer, pledge and assign the Mortgage Loan to the Buyer free and clear of any encumbrance, equity, participation interest, lien, pledge, charge, claim or security interest, and has full right and authority subject to no interest or participation of, or agreement with, any other party, to assign, transfer and pledge each Mortgage Loan pursuant to this Repurchase Agreement and following the pledge of each Mortgage Loan, the Buyer will hold such Mortgage Loan free and clear of any encumbrance, equity, participation interest, lien, pledge, charge, claim or security interest except any such security interest created pursuant to the terms of this Repurchase Agreement.

(n)Doing Business.  All parties which have had any interest in the Mortgage Loan, whether as Mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (i) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located, and (ii) either (A) organized under the laws of such state, (B) qualified to do business in such state, (C) a federal savings and loan association, a savings bank or a national bank having a principal office in such state, or (D) not doing business in such state.

(o)LTV; CLTV; PMI.  No Mortgage Loan that is secured by a first mortgage lien on the Mortgaged Property has an LTV greater than 100%. No Mortgage Loan that is secured by a second mortgage lien on the Mortgaged Property has a CLTV greater than 100%.

(p)Title Insurance.  The Mortgage Loan is covered by either (i) an attorney’s opinion of title and abstract of title, the form and substance of which is acceptable to prudent mortgage lending institutions originating the same or similar types of mortgage loans in the jurisdiction wherein the Mortgaged Property is located, or (ii) an ALTA lender’s title insurance policy or other generally acceptable form of policy or insurance acceptable to Fannie Mae or Freddie Mac and each such title insurance policy is issued by a title insurer acceptable to Fannie Mae or Freddie Mac and qualified to do business in the jurisdiction where the Mortgaged Property is located, insuring the relevant Seller, its successors and assigns, as to the first or second priority lien of the Mortgage in the original principal amount of the Mortgage Loan (or to the extent a Mortgage Note provides for negative amortization, the maximum amount of negative amortization in accordance with the Mortgage), subject only to the exceptions contained in clauses (1), (2) and (3) of paragraph (j) of this Part I of Schedule 1, and in the case of adjustable rate Mortgage Loans, against any loss by reason of the invalidity or unenforceability of the lien resulting from the provisions of the Mortgage providing for adjustment to the Mortgage Interest Rate and Monthly Payment. Where required by state law or regulation, the Mortgagor has been given the opportunity to choose the carrier of the required mortgage title insurance. Additionally, such lender’s title insurance policy affirmatively insures ingress and egress and against encroachments by or upon the Mortgaged Property or any interest therein. The title policy does not contain any special exceptions (other than the standard exclusions) for zoning and uses and has been marked to delete the standard survey exception or to replace the standard survey exception with a specific survey reading. The relevant Seller, its successors and assigns, are the sole insureds of such lender’s title insurance policy, and such lender’s title insurance policy is valid and remains in full force and effect and will be in force and effect upon the consummation of the transactions contemplated by this Repurchase Agreement. No claims have

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been made under such lender’s title insurance policy, and no prior holder or servicer of the related Mortgage, including any Seller, has done, by act or omission, anything which would impair the coverage of such lender’s title insurance policy, including, without limitation, no unlawful fee, commission, kickback or other unlawful compensation or value of any kind has been or will be received, retained or realized by any attorney, firm or other Person, and no such unlawful items have been received, retained or realized by any Seller.

(q)No Defaults.  Other than payment delinquencies, there is no default, breach, violation or event of acceleration existing under the Mortgage or the Mortgage Note and no event has occurred which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration, and no Seller nor its predecessors have waived any such default, breach, violation or event of acceleration. With respect to each Mortgage Loan secured by a second lien on the Mortgaged Property, (i) the prior mortgage is in full force and effect, (ii) there is no default, breach, violation or event of acceleration existing under the prior mortgage or the related mortgage note, (iii) no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration thereunder, and (iv) either (A) the prior mortgage contains a provision that allows or (B) applicable law requires, the mortgagee under the second lien Mortgage Loan to receive notice of, and affords such mortgagee an opportunity to cure, any default by payment in full or otherwise under the prior mortgage.

(r)No Mechanics’ Liens.  There are no mechanics’ or similar liens or claims which have been filed for work, labor or material (and no rights are outstanding that under the law could give rise to such liens) affecting the Mortgaged Property which are or may be liens prior to, or equal or coordinate with, the lien of the Mortgage.

(s)Location of Improvements; No Encroachments.  All improvements which were considered in determining the Appraised Value of the Mortgaged Property lie wholly within the boundaries and building restriction lines of the Mortgaged Property, and no improvements on adjoining properties encroach upon the Mortgaged Property. No improvement located on or being part of the Mortgaged Property is in violation of any applicable zoning and building law, ordinance or regulation.

(t)Origination; Payment Terms.  The Mortgage Loan was originated by or in conjunction with a mortgagee approved by the Secretary of Housing and Urban Development pursuant to Sections 203 and 211 of the National Housing Act, a savings and loan association, a savings bank, a commercial bank, credit union, insurance company or similar banking institution which is supervised and examined by a federal or state authority. The Mortgage Interest Rate is adjusted, with respect to adjustable rate Mortgage Loans, on each Interest Rate Adjustment Date to equal the Index plus the Gross Margin (rounded up or down to the nearest 0.125%), subject to the Mortgage Interest Rate Cap. The Mortgage Note is payable on the first day of each month in equal monthly installments of principal and/or interest, which installments of interest, with respect to adjustable rate Mortgage Loans and Interest-Only Mortgage Loans, are subject to change on the Interest Only Adjustment Date and, due to the adjustments to the Mortgage Interest Rate, on each Interest Rate Adjustment Date, with interest calculated and payable in arrears, sufficient to amortize the Mortgage Loan fully by the stated maturity date (and such

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Mortgage Loan shall at no time prior to the stated maturity date be subject to any negative amortization), over an original term of not more than thirty (30) years from commencement of amortization, except that ‘balloon’ Mortgage Loans are subject to a ‘balloon’ payment on the stated maturity date and may have a maturity date of up to forty (40) years. Except with respect to Interest-Only Mortgage Loans the due date of the first principal payment under the Mortgage Note is no more than sixty (60) calendar days after the date of the Mortgage Note.

(u)Customary Provisions.  The Mortgage Note has a stated maturity. The Mortgage and related Mortgage Note contain customary and enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security provided thereby, including, (i) in the case of a Mortgage designated as a deed of trust, by trustee’s sale, and (ii) otherwise by judicial foreclosure. Upon default by a Mortgagor on a Mortgage Loan and foreclosure on, or trustee’s sale of, the Mortgaged Property pursuant to the proper procedures, the holder of the Mortgage Loan will be able to deliver good and merchantable title to the Mortgaged Property. There is no homestead or other exemption (other than under the Servicemembers Civil Relief Act) available to a Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee’s sale or the right to foreclose the Mortgage.

(v)Conformance with Underwriting Guidelines and Agency Standards.  The Mortgage Loan was underwritten in accordance with the Underwriting Guidelines. The Mortgage Note and Mortgage are on forms similar to those used by Freddie Mac or Fannie Mae, except with respect to prepayment penalties, and no Seller has made any representations to a Mortgagor that are inconsistent with the mortgage instruments used.

(w)Occupancy of the Mortgaged Property.  As of the Purchase Date, the Mortgaged Property (other than with respect to Second Lien Loans) is lawfully occupied under applicable law. All inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy and fire underwriting certificates, have been made or obtained from the appropriate authorities. No Seller has received notification from any Governmental Authority that the Mortgaged Property is in material non-compliance with such laws or regulations, is being used, operated or occupied unlawfully or has failed to have or obtain such inspection, licenses or certificates, as the case may be. No Seller has received notice of any violation or failure to conform with any such law, ordinance, regulation, standard, license or certificate. The Mortgagor represented at the time of origination of the Mortgage Loan that the Mortgagor would occupy the Mortgaged Property as the Mortgagor’s primary residence, unless otherwise indicated in the Mortgage File and Mortgage Loan Schedule.

(x)No Additional Collateral.  The Mortgage Note is not and has not been secured by any collateral except the lien of the corresponding Mortgage and the security interest of any applicable security agreement or chattel mortgage referred to in clause (j) above.

(y)Deeds of Trust.  In the event the Mortgage constitutes a deed of trust, a trustee, authorized and duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, and no fees or expenses are or

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will become payable by the Custodian or the Buyer to the trustee under the deed of trust, except in connection with a trustee’s sale after default by the Mortgagor.

(z)Delivery of Mortgage Documents.  The Mortgage Note, the Mortgage, the Assignment of Mortgage and any other documents required to be delivered under the Custodial Agreement for each Mortgage Loan have been delivered to the Custodian. A Seller or its agent is in possession of a complete, true and accurate Mortgage File in compliance with the Custodial Agreement, except for such documents the originals of which have been delivered to the Custodian. With respect to each Mortgage Loan for which a lost note affidavit has been delivered to the Custodian in place of the original Mortgage Note, the related Mortgage Note is no longer in existence, and, if such Mortgage Loan is subsequently in default, the enforcement of such Mortgage Loan or of the related Mortgage by or on behalf of the Buyer will not be affected by the absence of the original Mortgage Note.

(aa)Transfer of Mortgage Loans.  The Assignment of Mortgage is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Mortgaged Property is located.

(bb)Due-On-Sale.  The Mortgage contains an enforceable provision for the acceleration of the payment of the unpaid principal balance of the Mortgage Loan in the event that the Mortgaged Property is sold or transferred without the prior written consent of the Mortgagee thereunder.

(cc)No Buydown Provisions; No Graduated Payments or Contingent Interests.  The Mortgage Loan does not contain provisions pursuant to which Monthly Payments are paid or partially paid with funds deposited in any separate account established by any Seller, the Mortgagor, or anyone on behalf of the Mortgagor, or paid by any source other than the Mortgagor nor does it contain any other similar provisions which may constitute a “buydown” provision. The Mortgage Loan is not a graduated payment mortgage loan and the Mortgage Loan does not have a shared appreciation or other contingent interest feature. No Mortgage Loan provides for interest payable on a simple interest basis.

(dd)Consolidation of Future Advances.  Any future advances made to the Mortgagor prior to the Purchase Date have been consolidated with the outstanding principal amount secured by the Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term. The lien of the Mortgage securing the consolidated principal amount is expressly insured as having first lien priority, in the case of a first Mortgage, or second lien priority, in the case of a second mortgage, by a title insurance policy, an endorsement to the policy insuring the Mortgagee’s consolidated interest or by other title evidence acceptable to Fannie Mae and Freddie Mac. The consolidated principal amount does not exceed the original principal amount of the Mortgage Loan.

(ee)Mortgaged Property Undamaged.  The Mortgaged Property is undamaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty so as to affect adversely the value of the Mortgaged Property as security for the Mortgage Loan or the use for which the premises were intended and each Mortgaged Property is in good repair. There

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have not been any condemnation proceedings with respect to the Mortgaged Property and no Seller has any knowledge of any such proceedings.

(ff)Collection Practices; Escrow Deposits; Interest Rate Adjustments.  The origination and collection practices used by the originator, each servicer of the Mortgage Loan and the relevant Seller with respect to the Mortgage Loan have been in all respects in compliance with Accepted Servicing Practices, applicable laws and regulations, and have been in all respects legal and proper. With respect to escrow deposits and Escrow Payments, all such payments are in the possession of, or under the control of, the Sellers and there exist no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made. All Escrow Payments have been collected in material compliance with state and federal law. An escrow of funds is not prohibited by applicable law and has been established in an amount sufficient to pay for every item that remains unpaid and has been assessed but is not yet due and payable. No escrow deposits or Escrow Payments or other charges or payments due the Sellers have been capitalized under the Mortgage or the Mortgage Note. All Mortgage Interest Rate adjustments have been made in compliance with state and federal law and the terms of the related Mortgage Note. Any interest required to be paid pursuant to state, federal and local law has been properly paid and credited.

(gg)Conversion to Fixed Interest Rate.  With respect to adjustable rate Mortgage Loans, the Mortgage Loan is not convertible to a fixed interest rate Mortgage Loan.

(hh)Other Insurance Policies.  No action, inaction or event has occurred and no state of facts exists or has existed that has resulted or will result in the exclusion from, denial of, or defense to coverage under any applicable special hazard insurance policy, PMI Policy or bankruptcy bond, irrespective of the cause of such failure of coverage. In connection with the placement of any such insurance, no commission, fee, or other compensation has been or will be received by any Seller or by any officer, director, or employee of any Seller or any designee of any Seller or any corporation in which any Seller or any officer, director, or employee had a financial interest at the time of placement of such insurance.

(ii)Servicemembers Civil Relief Act.  The Mortgagor has not notified the related Seller, and such Seller has no knowledge, of any relief requested or allowed to the Mortgagor under the Servicemembers Civil Relief Act of 2003 (formerly known as the Soldiers’ and Sailors’ Civil Relief Act of 1940) or any similar state or local laws.

(jj)Appraisal.  The Mortgage File contains an appraisal of the related Mortgaged Property signed prior to the approval of the Mortgage Loan application by a qualified appraiser, duly appointed by the Sellers, who had no interest, direct or indirect in the Mortgaged Property or in any loan made on the security thereof, and whose compensation is not affected by the approval or disapproval of the Mortgage Loan, and the appraisal and appraiser both satisfy the requirements of Fannie Mae or Freddie Mac and Title XI of the Federal Institutions Reform, Recovery, and Enforcement Act of 1989 as amended and the regulations promulgated thereunder, all as in effect on the date the Mortgage Loan was originated.

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(kk)Disclosure Materials.  The Mortgagor has received all disclosure materials required by applicable law with respect to the making of adjustable rate mortgage loans, and the relevant Seller maintains such statement in the Mortgage File.

(ll)Construction or Rehabilitation of Mortgaged Property.  No Mortgage Loan was made in connection with the construction or rehabilitation of a Mortgaged Property or facilitating the trade-in or exchange of a Mortgaged Property.

(mm)No Defense to Insurance Coverage.  No action has been taken or failed to be taken, no event has occurred and no state of facts exists or has existed on or prior to the Purchase Date (whether or not known to any Seller on or prior to such date) which has resulted or will result in an exclusion from, denial of, or defense to coverage under any private mortgage insurance (including, without limitation, any exclusions, denials or defenses which would limit or reduce the availability of the timely payment of the full amount of the loss otherwise due thereunder to the insured) whether arising out of actions, representations, errors, omissions, negligence, or fraud of any Seller, the related Mortgagor or any party involved in the application for such coverage, including the appraisal, plans and specifications and other exhibits or documents submitted therewith to the insurer under such insurance policy, or for any other reason under such coverage, but not including the failure of such insurer to pay by reason of such insurer’s breach of such insurance policy or such insurer’s financial inability to pay. In connection with the placement of any such insurance, no commission, fee, or other compensation has been or will be received by the Seller or any designee of the Seller or any corporation which the Seller or any officer, director, or employee had a financial interest at the time of placement of such insurance.

(nn)Capitalization of Interest.  The Mortgage Note does not by its terms provide for the capitalization or forbearance of interest.

(oo)No Equity Participation.  No document relating to the Mortgage Loan provides for any contingent or additional interest in the form of participation in the cash flow of the Mortgaged Property or a sharing in the appreciation of the value of the Mortgaged Property. The indebtedness evidenced by the Mortgage Note is not convertible to an ownership interest in the Mortgaged Property or the Mortgagor and no Seller has financed nor does it own directly or indirectly, any equity of any form in the Mortgaged Property or the Mortgagor.

(pp)No Violation of Environmental Laws.  The Mortgaged Property is free from any and all toxic or hazardous substances and there exists no violation of any local, state or federal environmental law, rule or regulation. There is no pending action or proceeding directly involving any Mortgaged Property of which the Seller is aware in which compliance with any environmental law, rule or regulation is an issue; and nothing further remains to be done to satisfy in full all requirements of each such law, rule or regulation constituting a prerequisite to use and enjoyment of said property.

(qq)Withdrawn Mortgage Loans.  If the Mortgage Loan has been released to any Seller pursuant to a Request for Release as permitted under Section 5 of the Custodial Agreement, then the promissory note relating to the Mortgage Loan was returned to the

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Custodian within ten (10) days (or if such tenth (10^th) day was not a Business Day, the next succeeding Business Day).

(rr)Origination Date.  The Origination Date is no earlier than three (3) months prior to the date the Mortgage Loan is first included in the Margin Base.

(ss)No Exception.  The Custodian has not noted any material exceptions on an Exception Report (as defined in the Custodial Agreement) with respect to the Mortgage Loan which would materially adversely affect the Mortgage Loan or the Buyer’s security interest, granted by the Sellers, in the Mortgage Loan.

(tt)The Mortgagor.  The Mortgagor is one or more natural persons and/or an Illinois land trust or a “living trust” and such “living trust” is in compliance with Fannie Mae or Freddie Mac guidelines. In the event the Mortgagor is a trust, the trustee of such trust is a natural person and is an obligor under the Mortgage Note in his or her individual capacity.

(uu)Mortgage Submitted for Recordation.  The Mortgage either has been or will promptly be submitted for recordation in the appropriate governmental recording office of the jurisdiction where the Mortgaged Property is located.

(vv)Homeownership and Equity Protection Act; No High Cost Loans.  No Mortgage Loan is (a) a “high cost” loan under the Home Ownership and Equity Protection Act of 1994 as amended, or (b) a “high cost,” “threshold,” “covered,” “predatory,” “abusive,” or similarly defined loan, including refinance loans, under any other Applicable Law (or a similarly classified loan using different terminology under a law imposing heightened regulatory scrutiny or additional legal liability for residential mortgage loans having high interest rates, points and/or fees), provided that any Mortgage Loan secured by a Mortgaged Property in Illinois characterized as a “threshold” loan shall not be a “high cost” loan unless it is characterized as “predatory” under applicable local law or (c) a “High Cost Loan” or “Covered Loan” as defined in the current S&P LEVELS® Glossary; the Company has implemented and conducted compliance procedures to determine if each Mortgage Loan is “high-cost” home loan under the Applicable Laws and performed a review of the disclosure provided to the related Mortgagor in accordance with such laws and the related Mortgage Note in order to determine that such Mortgage Loan, if subject to any such law, does not violate any such law. Any breach of this representation shall be deemed to materially and adversely affect the interests of the owner of the Mortgage Loan and shall require a repurchase of the affected Mortgage.

(ww)Origination.  Each Mortgage Loan was originated by or purchased by a Seller.

(xx)FICO Score.  The Mortgagor related to such Mortgage Loan does not have a FICO score below 500.

(yy)Adjustments.  All of the terms of the related Mortgage Note pertaining to interest adjustments, payment adjustments and adjustments of the outstanding principal balance, if any, are enforceable and such adjustments on such Mortgage Loan have been made properly and in accordance with the provisions of such Mortgage Loan.

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(zz)Leaseholds.  If the Mortgage Loan is secured by a leasehold estate:   (1) the Mortgagor is the owner of a valid and subsisting leasehold interest under such ground lease; (2) such ground lease is in full force and effect, unmodified and not supplemented by any writing or otherwise; (3) all rent, additional rent and other charges reserved therein have been fully paid to the extent payable as of the related Closing Date; (4) the Mortgagor enjoys the quiet and peaceful possession of the leasehold estate; (5) the Mortgagor is not in default under any of the terms of such ground lease, and there are no circumstances which, with the passage of time or the giving of notice, or both, would result in a default under such ground lease; (6) the lessor under such ground lease is not in default under any of the terms or provisions of such ground lease on the part of the lessor to be observed or performed; (7) the lessor under such ground lease has satisfied any repair or construction obligations due as of the related Closing Date pursuant to the terms of such ground lease; (8) the execution, delivery and performance of the Mortgage do not require the consent (other than those consents which have been obtained and are in full force and effect) under, and will not contravene any provision of or cause a default under, such ground lease; (9) the term of such lease does not terminate earlier than five (5) years after the maturity date of the Mortgage Note; (10) the ground lease is assignable or transferable; (11) the ground lease does not provide for termination of the lease in the event of lessee’s default without the mortgagee being entitled to receive written notice of, and a reasonable opportunity to cure the default; (12) the ground lease permits the mortgaging of the related Mortgaged Property; (13) the ground lease protects the mortgagee’s interests in the event of a property condemnation; and (14) the use of leasehold estates for residential properties is a widely accepted practice in the jurisdiction in which the Mortgaged Property is located.

(aaa)No Litigation Pending.  There is no action, suit, proceeding or investigation pending, or to the Seller’s knowledge threatened, that is related to the Mortgage Loan and likely to affect materially and adversely the servicing of such Mortgage Loan.

(bbb)No Arbitration Provisions.  No Mortgagor agreed to submit to arbitration to resolve any dispute arising out of or relating in any way to the related Mortgage Loan or the origination thereof.

(ccc)Down Payment.  The source of the down payment, if any, with respect to each Mortgage Loan has been fully verified by such Seller as and if required pursuant to the Underwriting Guidelines.

(ddd)Broker Fees.  With respect to any broker fees collected and paid on any of the Mortgage Loans, all broker fees have been properly assessed to the borrower and no claims will arise as to broker fees that are double charged and for which the borrower would be entitled to reimbursement.

(eee)Second Mortgages.  With respect to each Mortgage Loan secured by a second lien on the related Mortgaged Property:

(i)if the Loan-to-Value Ratio is higher than 70%, either the related first lien does not provide for a balloon payment or the maturity date of each Mortgage Loan with respect to which a first lien on the related Mortgaged Property provides for a balloon payment is prior to the maturity date of the mortgage loan relating to such first lien;

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(ii)the related first lien on any Mortgaged Property with respect to which the related Mortgage Loan secured by a second lien does not provide for negative amortization;

(iii)either no consent for the Mortgage Loan secured by a second lien on the related Mortgaged Property is required by the holder of the related first lien or such consent has been obtained and is contained in the Mortgage File; and

(iv)where required or customary in the jurisdiction in which the related Mortgaged Property is located, the original lender has filed for record a request for notice of any action by the senior lienholder under the related First Lien, and the original lender has notified any senior lienholder in writing of the existence of the second lien Mortgage Loan and requested notification of any action to be taken against the Mortgagor by the senior lienholder.

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Part 1.Defined Terms

In addition to terms defined elsewhere in the Repurchase Agreement, the following terms shall have the following meanings when used in this Schedule 1:

“Acceptable State” shall mean any state notified by the Sellers to the Buyer from time to time and approved in writing by the Buyer, which approval has not been revoked by the Buyer in their sole discretion, any such notice of revocation to be given no later than ten (10) Business Days prior to its intended effective date.

“Accepted Servicing Practices” shall mean, with respect to any Mortgage Loan, those mortgage servicing practices of prudent mortgage lending institutions which service mortgage loans of the same type as such Mortgage Loans in the jurisdiction where the related Mortgaged Property is located.

“ALTA” means the American Land Title Association.

“Appraised Value” shall mean the value set forth in an appraisal made in connection with the origination of the related Mortgage Loan as the value of the Mortgaged Property.

“Best’s” means Best’s Key Rating Guide, as the same shall be amended from time to time.

“CLTV” shall mean with respect to any Second Lien Loan, the ratio of the sum of the outstanding principal amount of the Second Lien Loan plus the outstanding principal amount of the first priority mortgage loan secured by the same Mortgaged Property to the lesser of (a) the Appraised Value of the Mortgaged Property at origination or (b) if the Mortgaged Property was purchased within six (6) months of the origination of the Mortgage Loan, the purchase price of the Mortgaged Property, which CLTV shall be calculated in accordance with the Underwriting Guidelines.

“Due Date” means the day of the month on which the Monthly Payment is due on a Mortgage Loan, exclusive of any days of grace.

“Escrow Payments” means with respect to any Mortgage Loan, the amounts constituting ground rents, taxes, assessments, water rates, sewer rents, municipal charges, mortgage insurance premiums, fire and hazard insurance premiums, condominium charges, and any other payments required to be escrowed by the Mortgagor with the mortgagee pursuant to the Mortgage or any other document.

“Fannie Mae” means the Federal National Mortgage Association, or any successor thereto.

“Freddie Mac” means the Federal Home Loan Mortgage Corporation, or any successor thereto.

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“Gross Margin” means with respect to each adjustable rate Mortgage Loan, the fixed percentage amount set forth in the related Mortgage Note.

“Index” means with respect to each adjustable rate Mortgage Loan, the index set forth in the related Mortgage Note for the purpose of calculating the interest rate thereon.

“Insurance Proceeds” means with respect to each Mortgage Loan, proceeds of insurance policies insuring the Mortgage Loan or the related Mortgaged Property.

“Interest Only Adjustment Date” means, with respect to each Interest-Only Mortgage Loan, the date specified in the related Mortgage Note on which the Monthly Payment will be adjusted to include principal as well as interest.

“Interest Rate Adjustment Date” means with respect to each adjustable rate Mortgage Loan, the date, specified in the related Mortgage Note and the Mortgage Loan Schedule, on which the Mortgage Interest Rate is adjusted.

“Loan-to-Value Ratio” or “LTV” means with respect to any Mortgage Loan, the ratio of the original outstanding principal amount of the Mortgage Loan to the lesser of (a) the Appraised Value of the Mortgaged Property at origination or (b) in the case of a purchase money mortgage loan, the purchase price of the Mortgaged Property.

“Monthly Payment” means the scheduled monthly payment of principal and interest on a Mortgage Loan as adjusted in accordance with changes in the Mortgage Interest Rate pursuant to the provisions of the Mortgage Note for an adjustable rate Mortgage Loan.

“Mortgage Interest Rate” means the annual rate of interest borne on a Mortgage Note, which shall be adjusted from time to time with respect to adjustable rate Mortgage Loans.

“Mortgage Interest Rate Cap” means with respect to an adjustable rate Mortgage Loan, the limit on each Mortgage Interest Rate adjustment as set forth in the related Mortgage Note.

“Mortgagee” means the relevant Seller or any subsequent holder of a Mortgage Loan.

“Origination Date” shall mean, with respect to each Mortgage Loan, the date of the Mortgage Note relating to such Mortgage Loan, unless such information is not provided by the relevant Seller with respect to such Mortgage Loan, in which case the Origination Date shall be deemed to be the date that is forty (40) days prior to the date of the first payment under the Mortgage Note relating to such Mortgage Loan.

“PMI Policy” or “Primary Insurance Policy” means a policy of primary mortgage guaranty insurance issued by a Qualified Insurer.

“Qualified Insurer” means an insurance company duly qualified as such under the laws of the states in which the Mortgaged Property is located, duly authorized and licensed in such states to transact the applicable insurance business and to write the insurance provided, and

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approved as an insurer by Fannie Mae and Freddie Mac and whose claims paying ability is rated in the two highest rating categories by any of the rating agencies with respect to primary mortgage insurance and in the two highest rating categories by Best’s with respect to hazard and flood insurance.

“Servicing File” means with respect to each Mortgage Loan, the file retained by the Sellers consisting of originals of all documents in the Mortgage File which are not delivered to a Custodian and copies of the Mortgage Loan Documents set forth in Section 2 of the Custodial Agreement.

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Schedule 2

FILING JURISDICTIONS AND OFFICES; IDENTIFICATION NUMBERS

Seller	Filing Jurisdiction and Office	Federal Tax ID Nbr	Organizational ID Nbr
Aames Capital	Secretary of State, California	95-4438859	C1729815
Aames Funding	Secretary of State, California	95-2622032	C0553091
Aames Investment	Department of Assessments and Taxation, Maryland	34-1981408	D07810567

Schedule 3

CAPITALIZATION

Issuer	Number of Shares	Holder
Aames Capital Corporation	100 shares	Aames Financial Corporation
Aames Funding Corporation	66 2/3 shares	Aames Financial Corporation

Schedule 4

SERVICING FIELDS

•Loan ID

•Name

•Paid To Date

•Current Balance

•P&I

•Rate

Schedule 5

TRADE NAMES

Aames Capital Corporation:	Aames Home Loan
Aames Funding Corporation:	The Center for Loan Servicing Wilshire Reconveyance, Inc. Aames Mortgage, Inc.
Aames Investment Corporation:	[None]

Exhibit A

FORM OF CUSTODIAL AGREEMENT

Exhibit B

FORM OF TAKEOUT PROCEEDS IDENTIFICATION LETTER

[Date]

Morgan Stanley Bank
1221 Avenue of the Americas
27^th Floor
New York, New York 10020

Ladies and Gentlemen:

On [date] the Takeout Investor previously identified to you with respect to the Mortgage Loan(s) referenced on Exhibit A attached hereto wired to your account at                          , [total amount of wire]. Contained within the total amount of the wire was a disbursement amount of                . This amount represents proceeds for one or more Mortgage Loans which were not purchased through Morgan Stanley Bank the details of which are:

Mortgage Loan #:

Obligor’s name:

Mortgage Loan #:

Obligor’s name:

[list additional Mortgage Loans, if necessary]

Please wire these funds to:

[insert wire instructions here]

Very truly yours,
By:
	Name:
	Title:

Exhibit C

FORM OF OPINION OF COUNSEL TO SELLERS

Exhibit D

FORM OF TRANSACTION REQUEST

Master Repurchase Agreement, dated as of December 2, 2005 (the “Repurchase Agreement”), by and among Aames Capital Corporation (“Aames Capital”), Aames Funding Corporation (“Aames Funding”) and Aames Investment Corporation (“Aames Investment” and together with Aames Capital and Aames Funding,  collectively, the “Sellers”, each a “Seller”) and Morgan Stanley Bank (the “Buyer”).

Buyer:	Morgan Stanley Bank
Seller:	[Aames Capital Corporation
	Aames Funding Corporation
	Aames Investment Corporation]

Requested Purchase Date:

Transmission Date:

Transmission Time:

Eligible Mortgage Loans to be Purchased:  (See attached)

UPB:  $

Requested Wire Amount:  $

Wire Instructions:

D-1

Requested by:

AAMES CAPITAL CORPORATION
By:
	Name:
	Title:
AAMES FUNDING CORPORATION
By:
	Name:
	Title:
AAMES INVESTMENT CORPORATION
By:
	Name:
	Title:

D-2

Attachment 1

SCHEDULE OF MORTGAGE LOANS PROPOSED TO BE PLEDGED

D-3

Attachment 2

OFFICER’S CERTIFICATE

The undersigned hereby certifies to the Buyer on behalf of the Seller, as of the requested Purchase Date, that:

a)no Default or Event of Default has occurred and is continuing on the date hereof nor will occur after giving effect to the requested Transaction;

b)each of the representations and warranties made by the Sellers in or pursuant to the Repurchase Documents is true and correct in all material respects on and as of such date (in the case of the representations and warranties in respect of Mortgage Loans, solely with respect to Mortgage Loans being included the Margin Base on such Purchase Date) as if made on and as of the date hereof (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); and

c)each Seller is in compliance with all governmental licenses and authorizations and is qualified to do business and in good standing in all required jurisdictions.

Responsible Officer Certification:
By:
	Name:
	Title:

D-4

Exhibit E-1

FORM OF SELLER’S RELEASE LETTER

[Date]

Morgan Stanley Bank
2500 Lake Park Boulevard
West Valley City, Utah  84120

Re:Master Repurchase Agreement, dated as of December 2, 2005 (the “Repurchase Agreement”), by and among Aames Capital Corporation (“Aames Capital”), Aames Funding Corporation (“Aames Funding”) and Aames Investment Corporation (“Aames Investment” and together with Aames Capital and Aames Funding,  collectively, the “Sellers”, each a “Seller”) and Morgan Stanley Bank (the “Buyer”)

Ladies and Gentlemen:

With respect to the mortgage loans described in the attached Schedule A (the “Mortgage Loans”) we hereby certify to you that the Mortgage Loans are not subject to a lien of any third party and we hereby release all right, interest or claim of any kind with respect to such Mortgage Loans, such release to be effective automatically without further action by any party upon payment from the Buyer of the amount of Purchase Price for the Mortgage Loans contemplated under the Repurchase Agreement (calculated in accordance with the terms thereof) in accordance with the wiring instructions set forth in the Repurchase Agreement.

Very truly yours,
[SELLER]
By:
	Name:
	Title:

E-1

Exhibit E-2

FORM OF WAREHOUSE LENDER’S RELEASE LETTER

(Date)

Morgan Stanley Bank 
2500 Lake Park Boulevard
West Valley City, Utah  84120

Re:Certain Mortgage Loans Identified on Schedule A hereto and owned by [Aames Capital Corporation / Aames Funding Corporation / Aames Investment Corporation]

The undersigned hereby releases all right, interest, lien or claim of any kind with respect to the mortgage loan(s) described in the attached Schedule A, such release to be effective automatically without any further action by any party upon payment in one or more installments, in immediately available funds of $                              , in accordance with the following wire instructions:

Very truly yours,
[WAREHOUSE LENDER]
By:
	Name:
	Title:

E-2

Exhibit F

UNDERWRITING GUIDELINES

[Sellers to Provide]

Exhibit G

FORM OF SERVICER NOTICE AND AGREEMENT

                         , 200   

[SERVICER], as Servicer
[ADDRESS]
Attention:                         

Re:Master Repurchase Agreement, dated as of December 2, 2005 (the “Repurchase Agreement”), by and among Aames Capital Corporation (“Aames Capital”), Aames Funding Corporation (“Aames Funding”) and Aames Investment Corporation (“Aames Investment” and together with Aames Capital and Aames Funding,  collectively, the “Sellers”, each a “Seller”) and Morgan Stanley Bank (the “Buyer”).

Ladies and Gentlemen:

[SERVICER] (the “Servicer”) is servicing certain mortgage loans for the Seller(s) pursuant to certain Servicing Agreements (each, a “Servicing Agreement”) between the Servicer and such Sellers. Pursuant to the Repurchase Agreement between the Buyer and the Sellers, the Servicer is hereby notified that the Sellers have sold to the Buyer certain mortgage loans which are serviced by the Servicer (the “Purchased Loans”) and have granted the Buyer a back up security interest in the Purchase Loans.

Upon receipt from the Buyer of a notice Event of Default (a “Notice of Event of Default”)  in which the Buyer shall identify the Purchased Loans, the Servicer shall segregate all amounts collected on account of such Purchased Loans, hold them in trust for the sole and exclusive benefit of the Buyer, and remit such collections in accordance with the Buyer’s written instructions. Following such Notice of Event of Default, the Servicer shall follow the instructions of the Buyer with respect to the Purchased Loans, and shall deliver to the Buyer any information with respect to the Purchased Loans reasonably requested by the Buyer. The Servicer acknowledges and agrees that it is holding and servicing the Purchased Loans for the benefit of the Buyer and that the Buyer may from time to time inspect such Servicer’s servicing facilities.

Notwithstanding any contrary information or direction which may be delivered to the Servicer by any Seller, the Servicer may conclusively rely on any information, direction or notice of an Event of Default delivered by the Buyer, and the Sellers shall indemnify and hold the Servicer harmless for any and all claims asserted against the Servicer for any actions taken in good faith by the Servicer in connection with the delivery of such information or Notice of Event of Default. Each of the Sellers and the Servicer acknowledges and agrees that the Buyer shall have no duties and shall not assume any obligations of the related Seller or the Servicer with respect to servicing the Purchased Loans, including without limitation, duties owed to the Servicer, payment of any reimbursement or indemnification, or payment of any servicing fees or any other fees due the Servicer.

G-1

Notwithstanding anything to the contrary contained herein or in any Servicing Agreement, the Servicer hereby acknowledges that the Buyer may terminate such Servicing Agreement upon the occurrence of an Event of Default under the Repurchase Agreement at no cost or expense to the Buyer.

No provision of this letter may be amended, countermanded or modified without the prior written consent of the Buyer. The Buyer is an intended third party beneficiary of this letter.

Please acknowledge receipt and your agreement to the terms of this instruction letter by signing in the signature block below and forwarding an executed copy to the Buyer promptly upon receipt. Any notices to the Buyer should be delivered to the following address: 2500 Lake Park Boulevard, West Valley City, Utah, 84120 Attention: Richard Felix; with a copy to 1221 Avenue of the Americas, 27^th Floor, New York, New York 10020 Attention: Mr. Paul Najarian; Telephone: (212)762-6401; Facsimile: (212)762-9495, and to Ms. Su Bai; Telephone:  (212) 762-6789; Facsimile:  (212) 762-8896.

[SIGNATURES FOLLOW]

G-2

Very truly yours,

AAMES CAPITAL CORPORATION

By:
	Name:
	Title:
AAMES FUNDING CORPORATION
By:
	Name:
	Title:
AAMES INVESTMENT CORPORATION
By:
	Name:
	Title:

ACKNOWLEDGED:

as Servicer

By:
	Title:
	Telephone:
	Facsimile:

G-3

Exhibit H

FORM OF ASSIGNMENT AND ACCEPTANCE

Reference is made to the Master Repurchase Agreement dated as of December 2, 2005 (as amended, supplemented or otherwise modified from time to time, the “Repurchase Agreement”), among Aames Capital Corporation (“Aames Capital”), Aames Funding Corporation (“Aames Funding”) and Aames Investment Corporation (“Aames Investment” and together with Aames Capital and Aames Funding,  collectively, the “Sellers”, each a “Seller”) and Morgan Stanley Bank (the “Buyer”). Capitalized terms not otherwise defined herein shall have the same meanings as specified therefor in the Repurchase Agreement.

Each “Assignor” referred to on Schedule I hereto (each, an “Assignor”) and each “Assignee” referred to on Schedule I hereto (each an “Assignee”) hereby agrees severally with respect to all information relating to it and its assignment hereunder and on Schedule I hereto as follows:

Subject to the provisions of Section 11.05 of the Repurchase Agreement, such Assignor hereby sells and assigns, without recourse except as to the representations and warranties made by it herein, to such Assignee, and such Assignee hereby purchases and assumes from such Assignor, an interest in and to such Assignor’s rights and obligations under the Repurchase Agreement as of the Effective Date (as hereinafter defined) equal to the percentage interest specified on Schedule I hereto of all outstanding rights and obligations under the Repurchase Agreement (collectively, the “Assigned Interests”).

Such Assignor:

(a)hereby represents and warrants that its name set forth on Schedule I hereto is its legal name, that it is the legal and beneficial owner of the Assigned Interest and that such Assigned Interest is free and clear of any adverse claim;

(b)other than as provided herein, makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with the Repurchase Agreement or any of the other Repurchase Documents, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of, or the perfection or priority of any lien or security interest created or purported to be created under or in connection with, the Repurchase Agreement or any of the other Repurchase Documents, or any other instrument or document furnished pursuant thereto; and

(c)makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Sellers or the Parent or the performance or observance by the Sellers or the Parent of any of their respective Repurchase Obligations under or in respect of any of the Repurchase Documents, or any other instrument or document furnished pursuant thereto.

H-1

Such Assignee:

(a)confirms that it has received a copy of the Repurchase Agreement, together with copies of the financial statements referred to in Section 7.01 thereof and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into this Assignment and Acceptance;

(b)agrees that it will, independently and without reliance upon the Buyer and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Repurchase Agreement;

(c)represents and warrants that its name set forth on Schedule I hereto is its legal name;

(d)agrees that, from and after the Effective Date, it will be bound by the provisions of the Repurchase Agreement and the other Repurchase Documents and, to the extent of the Assigned Interest, it will perform in accordance with their terms all of the obligations that by the terms of the Repurchase Agreement are required to be performed by it as a Buyer; and

(e)The effective date for this Assignment and Acceptance (the “Effective Date”) shall be the date specified on Schedule I hereto.

As of the Effective Date, (a) such Assignee shall be a party to the Repurchase Agreement and, to the extent that rights and obligations under the Repurchase Agreement have been assigned to it pursuant to this Assignment and Acceptance, have the rights and obligations of a Buyer thereunder and (b) such Assignor shall, to the extent that any rights and obligations under the Repurchase Agreement have been assigned by it pursuant to this Assignment and Acceptance, relinquish its rights (other than provisions of the Repurchase Documents that are specified under the terms of such Repurchase Documents to survive the payment in full of the Repurchase Obligations of the Sellers under or in respect of the Repurchase Documents) and be released from its obligations under the Repurchase Agreement (and, if this Assignment and Acceptance covers all or the remaining rights and obligations of such Assignor under the Repurchase Agreement, such Assignor shall cease to be a party thereto).

From and after the Effective Date, the Sellers shall make all payments under the Repurchase Agreement in respect of the Assigned Interest to such Assignee. Such Assignor and such Assignee shall make all appropriate adjustments in payments under the Repurchase Agreement for periods prior to the Effective Date directly between themselves.

This Assignment and Acceptance shall be governed by, and construed in accordance with, the laws of the State of New York.

This Assignment and Acceptance shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Acceptance may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed

H-2

counterpart of Schedule I hereto by telecopier shall be effective as delivery of an originally executed counterpart of this Assignment and Acceptance.

IN WITNESS WHEREOF, each Assignor and each Assignee have caused Schedule I hereto to be executed by their respective officers thereunto duly authorized, as of the date specified thereon.

H-3

Schedule I
to
ASSIGNMENT AND ACCEPTANCE

Percentage interest assigned	%	%	%	%	%
Amount of Maximum Amount assigned	$	$	$	$	$
Aggregate outstanding Purchase Price of Transactions assigned	$	$	$	$	$

Effective Date:                                      ,             

Assignor
[Type or print legal name of Assignor]
By:
	Name:
	Title:
	Dated:                            ,
Assignee
[Type or print legal name of Assignee]
By:
	Name:
	Title:
	Dated:                            ,

H-4

Exhibit I

FORM OF NOTICE OF PREPAYMENT

[Date]

Morgan Stanley Bank
1221 Avenue of the Americas
27^th Floor
New York, New York 10020

Attention:                                        

Re:Aames Capital Corporation, Aames Funding Corporation and Aames Investment Corporation

Ladies and Gentlemen:

This Notice of Prepayment is delivered to you pursuant to Section 2.06 of the Master Repurchase Agreement, dated as of December 2, 2005 (as amended, supplemented, restated, or otherwise modified from time to time, the “Repurchase Agreement”) among Aames Capital Corporation (“Aames Capital”), Aames Funding Corporation (“Aames Funding”) and Aames Investment Corporation (“Aames Investment” and together with Aames Capital and Aames Funding,  collectively, the “Sellers”, each a “Seller”) and Morgan Stanley Bank (the “Buyer”). Unless otherwise defined herein or the context otherwise requires, terms used herein have the meanings provided in the Repurchase Agreement.

The Sellers hereby irrevocably notify the Buyer that on                       , 20     the Sellers shall make a prepayment against the Repurchase Price outstanding under the Repurchase Agreement in an aggregate amount equal to $[                  ]. Such prepayment shall be applied [to all Transactions pro rata] [against the Repurchase Price for the Purchased Loans identified on Schedule A hereto]. [The Sellers request the release by the Buyer of all right, interest, lien or claim of any kind with respect to the Purchased Loans described in the attached Schedule A.]

[Signature page follows]

I-1

Each Seller has caused this Notice of Prepayment to be executed and delivered, and the certification and warranties contained herein to be made, by its duly authorized officer this     th day of                             , 20    .]

AAMES CAPITAL CORPORATION
By:
		Name:
		Title:
AAMES FUNDING CORPORATION
By:
		Name:
		Title:
AAMES INVESTMENT CORPORATION
By:
	Name:
	Title:

I-2

Schedule A

SCHEDULE OF PURCHASED LOANS TO BE PREPAID [/ RELEASED]

I-3

EX-10.8(B)

Exhibit 10.8(b)

AMENDMENT NO. 1

AMENDMENT NO. 1, dated as of January 5, 2006 (this “Amendment”), to that certain Master Repurchase Agreement, dated as of December 2, 2005 (the “Existing Repurchase Agreement”; as modified hereby and as further amended, restated, supplemented or otherwise modified and in effect from time to time, the “Repurchase Agreement”), among AAMES CAPITAL CORPORATION (“Aames Capital”), AAMES FUNDING CORPORATION (“Aames Funding”), AAMES INVESTMENT CORPORATION (“Aames Investment”, together with Aames Capital and Aames Funding, collectively, the “Sellers”, each a “Seller”) and MORGAN STANLEY BANK (the “Buyer”). Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Existing Repurchase Agreement.

RECITALS

The Sellers and the Buyer are parties to the Existing Repurchase Agreement.

The Sellers and the Buyer have agreed, subject to the terms and conditions of this Amendment, that the Existing Repurchase Agreement shall be modified as set forth in this Amendment.

Therefore, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Sellers and the Buyer hereby agree as follows:

SECTION 1.        Amendment. The representation and warranty set forth in clause (t) of Part I to Schedule 1 of the Existing Repurchase Agreement is hereby deleted in its entirety and the following new representation and warranty is inserted in lieu thereof:

“(t)          Origination; Payment Terms.

The Mortgage Loan was originated by or in conjunction with a mortgagee approved by the Secretary of Housing and Urban Development pursuant to Sections 203 and 211 of the National Housing Act, a savings and loan association, a savings bank, a commercial bank, credit union, insurance company or similar banking institution which is supervised and examined by a federal or state authority. The Mortgage Interest Rate is adjusted, with respect to adjustable rate Mortgage Loans, on each Interest Rate Adjustment Date to equal the Index plus the Gross Margin (rounded up or down to the nearest 0.125%), subject to the Mortgage Interest Rate Cap. The Mortgage Note is payable on the first day of each month in equal monthly installments of principal and/or interest, with installments of interest calculated and payable in arrears, sufficient to amortize the Mortgage Loan fully by the stated maturity date (and such Mortgage Loan shall at no time prior to the stated maturity date be subject to any negative amortization) over an original term of not more than thirty (30) years from the commencement of amortization, except (i) with respect to installments of interest related to adjustable rate Mortgage Loans and Interest-Only Mortgage Loans, which are subject to change due to adjustments to the Mortgage Interest Rate on each Interest Rate Adjustment Date or

Interest Only Adjustment Date, as applicable, and (ii) with respect to “30/40” Mortgage Loans, the Mortgage Note is payable in equal monthly installments of principal and interest based upon a 40-year amortization schedule with a “balloon” payment due on the stated maturity date, which is not more than thirty (30) years after commencement of amortization. Except with respect to Interest-Only Mortgage Loans the due date of the first principal payment under the Mortgage Note is no more than sixty (60) calendar days after the date of the Mortgage Note.”

SECTION 2.        Conditions Precedent. This Amendment and its provisions shall become effective on the first date (the “Amendment Effective Date”) on which all of the following conditions precedent shall have been satisfied:

(a)           Delivered Documents. On or before the Amendment Effective Date, the Buyer shall have received all of the following documents, each of which shall be satisfactory to the Buyer in form and substance:

(i)            Amendment. This Amendment, executed and delivered by a duly authorized officer of each of the Sellers and the Buyer; and

(ii)           Other Documents. Such other documents as the Buyer or counsel to the Buyer may reasonably request.

(b)           No Default. On the Amendment Effective Date, (i) each Seller shall be in compliance with all of the terms and provisions set forth in the Existing Repurchase Agreement and the other Repurchase Documents on its part to be observed or performed, (ii) the representations and warranties made and restated by each Seller pursuant to Section 3 of this Amendment shall be true and complete on and as of such date with the same force and effect as if made on and as of such date, and (iii) no Default or Event of Default shall have occurred and be continuing on such date.

SECTION 3.        Representations and Warranties. Each Seller hereby represents and warrants to the Buyer, as of the date hereof and as of the Amendment Effective Date, that it is in compliance with all of the terms and provisions set forth in the Repurchase Documents on its part to be observed or performed and that no Default or Event of Default has occurred or is continuing and each Seller hereby confirms and reaffirms the representations and warranties contained in Section 6 of the Repurchase Agreement.

SECTION 4.        Limited Effect. Except as expressly modified by this Amendment, the Existing Repurchase Agreement and each of the other Repurchase Documents shall continue to be, and shall remain, in full force and effect in accordance with their respective terms; provided, that upon the Amendment Effective Date, each reference therein and herein to the “Repurchase Documents” shall be deemed to include, in any event, this Amendment and each reference to the “Repurchase Agreement” in any of the Repurchase Documents shall be deemed to be a reference to the Existing Repurchase Agreement as modified hereby.

SECTION 5.        Counterparts. This Amendment may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. Delivery of an executed

2

counterpart of a signature page to this Amendment in Portable Document Format (PDF) or by facsimile transmission shall be effective as delivery of a manually executed original counterpart thereof.

SECTION 6.        GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.

[SIGNATURES FOLLOW]

3

IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written.

SELLERS
AAMES CAPITAL CORPORATION
By:	/s/ Jon D. Van Deuren
	Name: Jon D. Van Deuren
	Title: Executive Vice President – Finance and
		Chief Financial Officer
AAMES FUNDING CORPORATION
By:	/s/ Jon D. Van Deuren
	Name: Jon D. Van Deuren
	Title: Executive Vice President – Finance and
		Chief Financial Officer
AAMES INVESTMENT CORPORATION
By:	/s/ Jon D. Van Deuren
	Name: Jon D. Van Deuren
	Title: Executive Vice President – Finance and
		Chief Financial Officer

BUYER
MORGAN STANLEY BANK
By:	/s/ Deborah P. Goodman
	Name: Deborah P. Goodman
	Title: VP

EX-10.8(C)

Exhibit 10.8(c)

AMENDMENT NO. 2

AMENDMENT NO. 2, dated as of March 3, 2006 (this “Amendment”) to that certain Master Repurchase Agreement dated as of December 2, 2005, (as amended, restated, supplemented or otherwise modified prior to the date hereof, the “Existing Repurchase Agreement”; as modified hereby and as further amended, restated, supplemented or otherwise modified and in effect from time to time, the “Repurchase Agreement”) among AAMES CAPITAL CORPORATION, a California corporation (“Aames Capital”), AAMES FUNDING CORPORATION, a California corporation (“Aames Funding”), AAMES INVESTMENT CORPORATION, a Maryland corporation (“Aames Investment”, together with Aames Capital and Aames Funding, collectively, the “Sellers”, each a “Seller”) and MORGAN STANLEY BANK (the “Buyer”).

RECITALS

The Sellers and the Buyer are parties to the Existing Repurchase Agreement.

The Sellers and the Buyer have agreed, subject to the terms and conditions of this Amendment, that the Existing Repurchase Agreement shall be modified as set forth in this Amendment.

Therefore, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Sellers and the Buyer agree as follows:

SECTION 1.         Amendment. The financial covenants set forth in Sections 7.14(b), (c) and (e) are hereby deleted in their entirety and the following new covenants are inserted in lieu thereof:

“(b)         Maintenance of Ratio of Total Indebtedness to Tangible Net Worth. Aames Investment shall not permit the ratio of its Total Indebtedness to Tangible Net Worth at any time, from and after December 31, 2005, to be greater than 20.0 to 1.0.

(c)          Maintenance of Ratio of Adjusted Indebtedness to Tangible Net Worth. Aames Investment shall not permit the ratio of its Adjusted Indebtedness to Tangible Net Worth at any time, from and after December 31, 2005, to be greater than 7.0 to 1.0.

(e)          Maintenance of Liquidity. Aames Investment shall, as of the end of any calendar quarter, have unencumbered Cash Equivalents, cash and available borrowing capacity on unencumbered assets that could be drawn against (taking into account required haircuts) under committed warehouse or working capital facilities, on a consolidated basis in an amount greater than or equal to $38,000,000.”

SECTION 2. Conditions Precedent. This Amendment and its provisions shall become effective on the first date (the “Amendment Effective Date”) on which all of the following conditions precedent shall have been satisfied:

(a)  Delivered Documents. On or before the Amendment Effective Date, the Buyer shall have received all of the following documents, each of which shall be satisfactory to the Buyer in form and substance:

(i)            Amendment. This Amendment, executed and delivered by a duly authorized officer of each of the Sellers and the Buyer; and

(ii)           Other Documents. Such other documents as the Buyer or counsel to the Buyer may reasonably request.

(b)  No Default. On the Amendment Effective Date, (i) each Seller shall be in compliance with all of the terms and provisions set forth in the Existing Repurchase Agreement and the other Repurchase Documents on its part to be observed or performed, (ii) the representations and warranties made and restated by each Seller pursuant to Section 3 of this Amendment shall be true and complete on and as of such date with the same force and effect as if made on and as of such date, and (iii) no Default or Event of Default shall have occurred and be continuing on such date.

SECTION 3. Waiver. Notwithstanding any other provision of this Amendment, the Buyer hereby expressly waives any non-compliance with or violation of Sections 7.14(b), (c) or (e) of the Existing Repurchase Agreement during the period commencing December 31, 2005 and continuing to but excluding the Amendment Effective Date.

SECTION 3. Limited Effect. Except as expressly modified by this Amendment, the Existing Repurchase Agreement will continue to be, and will remain, in full force and effect in accordance with its terms; provided, that upon the Amendment Effective Date, each reference therein and herein to the “Repurchase Documents” shall be deemed to include this Amendment and to be a reference to the Existing Repurchase Agreement as modified by this Amendment.

SECTION 4. Counterparts. This Amendment may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page of this Amendment in Portable Document Format (PDF) or by facsimile transmission shall be effective as delivery of a manually executed original counterpart of this Amendment.

SECTION 5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

[SIGNATURE PAGES FOLLOW]

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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written.

SELLERS
AAMES CAPITAL CORPORATION
By:	/s/ Jon D. Van Deuren
	Name: Jon D. Van Deuren
	Title: Executive Vice President – Finance
	and Chief Financial Officer
AAMES FUNDING CORPORATION
By:	/s/ Jon D. Van Deuren
	Name: Jon D. Van Deuren
	Title: Executive Vice President – Finance
	and Chief Financial Officer
AAMES INVESTMENT CORPORATION
By:	/s/ Jon D. Van Deuren
	Name: Jon D. Van Deuren
	Title: Executive Vice President – Finance
	and Chief Financial Officer

[signature page to Amendment No. 2]

BUYER
MORGAN STANLEY BANK
By:	/s/ Deborah P. Goodman
	Name: Deborah P. Goodman
	Title: VP

EX-10.9(D)

Exhibit 10.9(d)

AMENDMENT NUMBER THREE

to the

Amended and Restated Master Loan and Security Agreement

Dated as of April 28, 2005

by and between

AAMES CAPITAL CORPORATION,

AAMES INVESTMENT CORPORATION

and

CITIGROUP GLOBAL MARKETS REALTY CORP.

This AMENDMENT NUMBER THREE is made as of March 1, 2006 by and between AAMES CAPITAL CORPORATION, having an address at 350 South Grand Avenue, 43^rd Floor, Los Angeles, California 90071 (a “Borrower”), AAMES INVESTMENT CORPORATION, having an address at 350 South Grand Avenue, 43^rd Floor, Los Angeles, California 90071 (a “Borrower”, and together with Aames Capital Corporation, the “Borrowers”) and CITIGROUP GLOBAL MARKETS REALTY CORP., having an address at 390 Greenwich Street, 6^th Floor, New York, New York 10013 (the “Lender”), to the Amended and Restated Master Loan and Security Agreement, dated as of April 28, 2005, by and between the Borrowers and the Lender, as amended (the “Agreement”). Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Agreement.

RECITALS

WHEREAS, the Borrowers and the Lender have agreed to amend the Agreement as set forth herein.

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and for the mutual covenants herein contained, the parties hereto hereby agree as follows:

SECTION 1.Effective as of December 31, 2005, Section 6.16 of the Agreement is hereby amended by deleting the existing “Tangible Net Worth; Liquidity” representation and replacing it with the following:

“6.16Tangible Net Worth; Liquidity. (a) AIC’s Tangible Net Worth is not less than $250,000,000, plus 50% of any additional capital raised by AIC pursuant to a public or private offering. AIC has cash, Cash Equivalents and unused borrowing capacity on unencumbered assets that could be drawn against (taking into account required haircuts) under committed warehouse and repurchase facilities in an amount equal to not than $38,000,000. The ratio of AIC’s Total Indebtedness to Tangible Net Worth is not greater than 20:1. The ratio of AIC’s Adjusted Indebtedness to Tangible Net Worth is not greater than 7:1.”

SECTION 2.Effective as of December 31, 2005, Section 7.16 of the Agreement is hereby amended by deleting the existing “ Maintenance of Liquidity” covenant and replacing it with the following:

“7.16Maintenance of Liquidity. (a) AIC shall at all times have cash, Cash Equivalents and unused borrowing capacity on unencumbered assets that could be drawn against (taking into account required haircuts) under committed warehouse and repurchase facilities in an amount equal to not less than $38,000,000.”

SECTION 3.Effective as of December 31, 2005, Section 7.18 of the Agreement is hereby amended by deleting the existing “Maintenance of Ratio of Total Indebtedness to Tangible Net Worth” covenant and replacing it with the following:

“7.18Maintenance of Ratio of Total Indebtedness to Tangible Net Worth. AIC shall not permit the ratio of Total Indebtedness to Tangible Net Worth at any time to be greater than 20:1”

SECTION 4.Defined Terms. Any terms capitalized but not otherwise defined herein should have the respective meanings set forth in the Agreement.

SECTION 5.           Limited Effect. Except as amended hereby, the Agreement shall continue in full force and effect in accordance with its terms. Reference to this Amendment need not be made in the Agreement or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to, or with respect to, the Agreement, any reference in any of such items to the Agreement being sufficient to refer to the Agreement as amended hereby.

SECTION 6.           Waiver. Upon execution of this Amendment Number Three, the Borrowers and the Lender agree that any non-compliance or violation of Sections 6.16, 7.16 or 7.18 of the Agreement on or after December 31, 2005 up to the date of this Amendment Number Three are hereby waived.

SECTION 7.           Representations. In order to induce the Lender to execute and deliver this Amendment Number Three, the Borrowers hereby represent to the Lender that as of the date hereof, taking into account the waiver provided pursuant to Section 6, the Borrowers are in full compliance with all of the terms and conditions of the Agreement and no Default or Event of Default has occurred and is continuing under the Agreement.

SECTION 8.           Governing Law. This Amendment Number Three shall be construed in accordance with the laws of the State of New York and the obligations, rights, and remedies of the parties hereunder shall be determined in accordance with such laws without regard to conflict of laws doctrine applied in such state (other than Section 5-1401 of the New York General Obligations Law).

SECTION 9.           Counterparts. This Amendment Number Three may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the Borrowers and the Lender have caused this Amendment Number Three to be executed and delivered by their duly authorized officers as of the day and year first above written.

AAMES CAPITAL CORPORATION
(Borrower)
By:	/s/ Jon D. Van Deuren
Name: Jon D. Van Deuren
Title: Executive Vice President – Finance and Chief Financial Officer
AAMES INVESTMENT CORPORATION
(Borrower)
By:	/s/ Jon D. Van Deuren
Name: Jon D. Van Deuren
Title: Executive Vice President – Finance and Chief Financial Officer
CITIGROUP GLOBAL MARKETS
REALTY CORP.
(Lender)
By:
Name:
Title:

EX-10.10(F)

Exhibit 10.10(f)

AMENDMENT NUMBER SIX

to the

Warehouse Loan and Security Agreement

Dated as of February 10, 2000

as Amended and Restated to and including February 4, 2005

among

AAMES INVESTMENT CORPORATION

AAMES CAPITAL CORPORATION

AAMES FUNDING CORPORATION

and

GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.

This AMENDMENT NUMBER SIX is made this 18^h day of January, 2006, among AAMES INVESTMENT CORPORATION, AAMES CAPITAL CORPORATION, AAMES FUNDING CORPORATION, each having an address at 350 South Grand Avenue, Los Angeles, California 90071 (each, a “Borrower” and collectively, “the Borrowers”) and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., having an address at 600 Steamboat Road, Greenwich, Connecticut 06830 (the “Lender”), to the Warehouse Loan and Security Agreement, dated as of February 10, 2000 as amended and restated to and including February 4, 2005, by and between the Borrowers and the Lender, as amended (the “Agreement”). Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Agreement.

RECITALS

WHEREAS, the Borrowers and the Lender have agreed to amend the Agreement to permit the amount of Second Lien Mortgage Loans that are pledged to the Borrower pursuant to the Agreement during the period from January 18, 2006 to February 17, 2006 to be $25,000,000 instead of the current limit of $15,000,000, as more fully set forth herein; and

WHEREAS, as of the date of this Amendment, the Borrowers represent to the Lender that they are in compliance with all of the representations and warranties and all of the affirmative and negative covenants set forth in the Agreement and are not in default under the Agreement.

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and for the mutual covenants herein contained, the parties hereto hereby agree as follows:

SECTION 1.           Effective as of January 18, 2006, clause (16) to the definition of “Collateral Value” in Section 1 of the Agreement is hereby amended to read in its entirety as follows:

(16)         if such Mortgage Loan is a Second Lien Mortgage Loan and the Collateral Value of such Second Lien Mortgage Loan when added to the aggregate Collateral Value of all other Second Lien Mortgage Loans exceeds (a) $25,000,000 during the period from January 18, 2006 to February 18, 2006, or (b) $15,000,000 at any other time;

SECTION 2.           Defined Terms. Any terms capitalized but not otherwise defined herein shall have the respective meanings set forth in the Agreement.

SECTION 3.           Fees and Expenses. The Borrowers agree to pay to the Lender all fees and out of pocket expenses incurred by the Lender in connection with this Amendment Number Six (including all reasonable fees and out of pocket costs and expenses of the Lender’s legal

counsel incurred in connection with this Amendment Number Six), in accordance with Section 11.03 of the Agreement.

SECTION 4. Limited Effect. Except as amended hereby, the Agreement shall continue in full force and effect in accordance with its terms. Reference to this Amendment need not be made in the Agreement or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to, or with respect to, the Agreement, any reference in any of such items to the Agreement being sufficient to refer to the Agreement as amended hereby.

SECTION 5. Representations. The Borrowers hereby represent to the Lender that as of the date hereof, the Borrowers are in full compliance with all of the terms and conditions of the Agreement and no Default or Event of Default has occurred and is continuing under the Agreement.

SECTION 6. Governing Law. This Amendment Number Six shall be construed in accordance with the laws of the State of New York and the obligations, rights, and remedies of the parties hereunder shall be determined in accordance with such laws without regard to conflict of laws doctrine applied in such state (other than Sections 5-1401 and 5-1402 of the New York General Obligations Law).

SECTION 7. Counterparts. This Amendment Number Six may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument.

[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]

2

IN WITNESS WHEREOF, the Borrowers and the Lender have caused this Amendment Number Six to be executed and delivered by their duly authorized officers as of the day and year first above written.

AAMES CAPITAL CORPORATION
(Borrower)
By:	/s/ Jon D. Van Deuren
Name: Jon D. Van Deuren
Title:			Executive Vice President - Finance and Chief
			Financial Officer
AAMES FUNDING CORPORATION
(Borrower)
By:	/s/ Jon D. Van Deuren
Name: Jon D. Van Deuren
Title:				Executive Vice President - Finance and Chief
				Financial Officer
AAMES INVESTMENT CORPORATION
(Borrower)
By:	/s/ Jon D. Van Deuren
Name: Jon D. Van Deuren
Title:		Executive Vice President - Finance and Chief
		Financial Officer
GREENWICH CAPITAL FINANCIAL
PRODUCTS. INC.
(Lender)
By:	/s/ James T. Raezer
Name: James T. Raezer
Title: Managing Director

EX-10.10(G)

Exhibit 10.10(g)

AMENDMENT NUMBER EIGHT

to the

Warehouse Loan and Security Agreement

Dated as of February 10, 2000

as Amended and Restated to and including February 4, 2005

among

AAMES INVESTMENT CORPORATION

AAMES CAPITAL CORPORATION

AAMES FUNDING CORPORATION

and

GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.

This AMENDMENT NUMBER EIGHT is made this 1st day of March 2006, among AAMES INVESTMENT CORPORATION, AAMES CAPITAL CORPORATION, AAMES FUNDING CORPORATION, each having an address at 350 South Grand Avenue, Los Angeles, California 90071 (each, a “Borrower” and collectively, “the Borrowers”) and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., having an address at 600 Steamboat Road, Greenwich, Connecticut 06830 (the “Lender”), to the Warehouse Loan and Security Agreement, dated as of February 10, 2000 as amended and restated to and including February 4, 2005, by and between the Borrowers and the Lender, as amended (the “Agreement”). Capitalized terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Agreement.

RECITALS

WHEREAS, the Borrowers and the Lender have agreed to amend the Agreement to modify certain certain financial covenants as set forth herein.

NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and for the mutual covenants herein contained, the parties hereto hereby agree as follows:

SECTION 1.           Effective as of the date hereof, Section 1 of the Agreement is hereby amended by deleting the definition of “Termination Date” in its entirely and replacing it with the following:

“Termination Date” shall mean April 3, 2006, or such earlier date on which this Warehouse Agreement shall terminate in accordance with the provisions hereof or by operation of law.

SECTION 2.           Effective as of the date hereof, Section 6.16 of the Agreement is hereby amended by deleting the existing “Tangible Net Worth; Liquidity” representation and replacing it with the following:

:

“6.16       Tangible Net Worth; Liquidity. (a)  Aames Investment’s Tangible Net Worth, on a consolidated basis and on any given day, shall be equal to or greater than $250,000,000 plus 50% of any subsequent additional capital raised in a public or private offering by Aames Investment, and (b) the aggregate amount of Aames Investment’s cash and Cash Equivalents of (1) cash and loans held for sale and investment (excluding securitized mortgage loan) reduced by (2) the sum of amounts outstanding on revolving warehouse and repurchase facilities, margin on loans held for sale and investment (excluding securitized mortgage loans) and loans held for sale and investment which are

ineligible to be pledged by Aames Investment under any of its revolving warehouse and repurchase facilities shall be in an amount equal to not less than $38,000,000.”

SECTION 3.           Effective as of the date hereof, Section 7.14(b) of the Agreement is hereby amended by deleting the existing “Maintenance of Ratio of Total Indebtedness to Tangible Net Worth” covenant and replacing it with the following:

:

“(b)         Maintenance of Ratio of Total Indebtedness to Tangible Net Worth. Aames Investment shall not permit the ratio of Total Indebtedness to Tangible Net Worth at any time, from and after December 31, 2005, to be greater than 20.00 to 1.00.”

SECTION 4.           Effective as of the date hereof, Section 7.14(c) of the Agreement is hereby amended by deleting the existing “Maintenance of Ratio of Adjusted Indebtedness to Tangible Net Worth” covenant and replacing it with the following:

“(c)         Maintenance of Ratio of Adjusted Indebtedness to Tangible Net Worth. Aames Investment shall not permit the ratio of Adjusted Indebtedness to Tangible Net Worth at any time, from and after December 31, 2005, to be greater than 7.0 to 1.00.”

SECTION 5.           Effective as of the date hereof, Section 7.15 of the Agreement is hereby amended by deleting the existing “Maintenance of Liquidity” covenant and replacing it with the following:

“Section 7.15. Maintenance of Liquidity. The aggregate amount of Aames Investment’s cash and Cash Equivalents of (1) cash and loans held for sale and investment (excluding securitized mortgage loans) reduced by (2) the sum of amounts outstanding on revolving warehouse and repurchase facilities, margin on loans held for sale and investment (excluding securitized mortgage loans) and loans held for sale and investment which are ineligible to be pledged by Aames Investment under any of its revolving warehouse and repurchase facilities shall be in an amount equal to not less than $38,000,000.”

SECTION 6.           Defined Terms. Any terms capitalized but not otherwise defined herein shall have the respective meanings set forth in the Agreement.

SECTION 7. Limited Effect. Except as amended hereby, the Agreement shall continue in full force and effect in accordance with its terms. Reference to this Amendment need not be made in the Agreement or any other instrument or document executed in connection therewith, or in any certificate, letter or communication issued or made pursuant to, or with respect to, the Agreement, any reference in any of such items to the Agreement being sufficient to refer to the Agreement as amended hereby.

SECTION 8. Waiver. For the avoidance of doubt, upon execution of this Amendment Number Eight, the Borrowers and Lender agree that any non compliance or violation of Sections 6.16, 7.14(b) or 7.14(c) on or after December 31, 2005 up to the date of this Amendment Number Eight are hereby waived.

SECTION 9. Governing Law. This Amendment Number Eight shall be construed in accordance with the laws of the State of New York and the obligations, rights, and remedies of the parties hereunder shall be determined in accordance with such laws without regard to conflict

2

of laws doctrine applied in such state (other than Sections 5-1401 and 5-1402 of the New York General Obligations Law).

SECTION 10. Counterparts. This Amendment Number Five may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument.

[REMAINDER OF THIS PAGE LEFT INTENTIONALLY BLANK]

3

IN WITNESS WHEREOF, the Borrowers and the Lender have caused this Amendment Number Eight to be executed and delivered by their duly authorized officers as of the day and year first above written.

AAMES CAPITAL CORPORATION
(Borrower)
By:	/s/ Jon D. Van Deuren
Name: Jon D. Van Deuren
Title:			Executive Vice President - Finance and Chief
			Financial Officer
AAMES FUNDING CORPORATION
(Borrower)
By:		/s/ Jon D. Van Deuren
Name: Jon D. Van Deuren
Title:				Executive Vice President - Finance and Chief
				Financial Officer
AAMES INVESTMENT CORPORATION
(Borrower)
By:		/s/ Jon D. Van Deuren
Name: Jon D. Van Deuren
Title:				Executive Vice President - Finance and Chief
				Financial Officer
GREENWICH CAPITAL FINANCIAL
PRODUCTS. INC.
(Lender)
By: James T. Raezer
Name: James T. Raezer
Title: Managing Director

EX-10.11(D)

Exhibit 10.11(d)

FOURTH AMENDMENT TO MASTER REPURCHASE AGREEMENT
GOVERNING PURCHASES AND SALES OF MORTGAGE LOANS

This Fourth Amendment, dated as of March 3, 2006 (this “Amendment”), to the Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans, dated as of January 18, 2005 as amended by the First Amendment dated June 20, 2005, Second Amendment dated October 28, 2005 and Third Amendment dated as of January 17, 2006 (the “Agreement”), is made by and between LEHMAN BROTHERS BANK, FSB (“Buyer”) and AAMES CAPITAL CORPORATION (“ACC”) and AAMES INVESTMENT CORPORATION (“AIC”, collectively with ACC, “Seller” and, together with the Buyer, the “Parties”). Capitalized terms used in this Amendment and not otherwised defined herein shall have the meaning set forth in the Agreement.

RECITALS

WHEREAS, the Seller and the Buyer are parties to the Agreement, pursuant to which the Buyer has agreed, subject to the terms and conditions set forth in the Agreement, to purchase certain Mortgage Loans owned by the Seller, including, without limitation, all rights of Seller to service and administer such Mortgage Loans. Terms used but not defined herein shall have the respective meanings ascribed to such terms in the Agreement, as amended hereby.

WHEREAS, the Parties wish to amend the Agreement to modify certain of the terms and conditions governing the purchase and sale of the Mortgage Loans.

NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows:

Section 1.Amendment.

1.1Sections 13(a)(xiv), (xv) and (xvi) of the Agreement are hereby deleted in their entirety and replaced with the following:

“(xiv)the Leverage Ratio shall exceed 20.0 to 1.0 at any time;

 (xv)the Adjusted Leverage Ratio shall exceed 7.0 to 1.0 at any time;

 (xvi)the aggregate amount of the AIC’s cash, Cash Equivalents and available borrowing capacity on unencumbered assets that could be drawn against (taking into account required haircuts) under committed warehouse or working capital facilities, on a consolidated basis and on any given day (the “Liquidity”), shall be less than $38,000,000 at any time;”

Section 2.Waiver. Upon execution of this Amendment, each of the Parties agree that any non-compliance with or violation of Section 13(a)(xiv), (xv) or (xvi) of the Agreement on or after December 31, 2005 and up to the date of this Amendment are hereby waived.

2.1Each of the Parties hereby represents and warrants to the other that (a) this Amendment constitutes the legal, valid and binding obligation of such Party, enforceable against such Party in accordance with its terms, and (b) the execution and delivery by such Party of this Amendment has been duly authorized by all requisite corporate action on the part of such Party and will not violate any provision of the organizational documents of such Party.

1

Section 3.Covenants, Representations and Warranties of the Parties.

3.1Except as expressly amended by Section 1 hereof, the Agreement remains unaltered and in full force and effect. Each of the Parties hereby reaffirms all terms and covenants made in the Agreement as amended hereby.

Section 4.Effect upon the Agreement.

4.1Except as specifically set forth herein, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. All references to the “Agreement” in the Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans shall mean and refer to the Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans as modified and amended hereby.

4.2The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of any Party under the Agreement, or any other document, instrument or agreement executed and/or delivered in connection therewith.

Section 5.Governing Law.

THIS AMENDMENT SHALL BE CONSTRUED, INTERPRETED AND GOVERNED BY THE LAW OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.

Section 6.Counterparts.

This Amendment may be executed in any number of counterparts, and all such counterparts shall together constitute the same agreement.

[Remainder of Page Intentionally Left Blank]

2

IN WITNESS WHEREOF, the Parties hereto have caused this Amendment to be executed as of the day and year first above written.

SELLER:
AAMES CAPITAL CORPORATION, as Seller
By:	/s/ John D. Van Deuren
	Name: John D. Van Deuren
	Title: Executive Vice President – Finance and
		Chief Financial Officer
AAMES INVESTMENT CORPORATION, as Seller
By:	/s/ John D. Van Deuren
	Name: John D. Van Deuren
	Title: Executive Vice President – Finance and
		Chief Financial Officer
BUYER:
LEHMAN BROTHERS BANK, FSB, as Buyer
By:	/s/ Stephen A. Valentino
	Name: Stephen A. Valentino
	Title: Authorized Signature

3

EX-10.12(F)

Exhibit 10.12(f)

AMENDMENT NO. 3 TO

COMMITMENT LETTER

This AMENDMENT NO. 3 TO COMMITMENT LETTER (the “Amendment”) is made and entered into as of March 9, 2006 by and between Countrywide Warehouse Lending (“Lender”) and Aames Capital Corporation, Aames Funding Corporation, Aames Investment Corporation, and Aames Financial Corporation (jointly, the “Borrower”). This Amendment amends that certain Commitment Letter by and between Lender and Borrower dated as of March 25, 2005 (the “Commitment Letter”), which supplements that certain Revolving Credit and Security Agreement by and between Lender and Borrower dated as of July 1, 2003 (as may be amended from time to time, the “Credit Agreement”).

R E C I T A L S

Lender and Borrower have previously entered into the Commitment Letter and Credit Agreement pursuant to which Lender may, from time to time, provide Borrower credit in the form of a warehouse line secured by residential mortgage loans.  Lender and Borrower hereby agree that the Commitment Letter shall be amended as provided herein.

In consideration of the mutual promises contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Lender and Borrower hereby agree as follows:

1.Financial Covenants.  Section (b). Lender and Borrower agree that effective as of the date of the Amendment Financial Covenants Sections (b), (c) and (d) shall be deleted in their entirety and replaced as follows:

“(b)Adjusted Leverage Ratio: 7:1

(c)Maximum ratio of Total Liabilities (including outstanding balances on warehouse lines, repurchase facilities, off balance sheet financing and outstanding debt related to the REIT) to Tangible Net Worth: 20:1

(d)Minimum Liquidity: Borrower shall maintain at all times cash or Cash Equivalents of $38,000,000.”

2.Waiver. Upon execution of the Amendment, Borrower and Lender agree that any non-compliance or violation of the Adjusted Leverage Ratio (Financial Covenant (b) of the Commitment), the Maximum Ratio of Total Liabilities to Tangible Net Worth (Financial Covenant (c) of the Commitment Letter) or Maximum Liquidity (Financial Covenant (d) of the Commitment Letter) on or after December 31, 2005 and up to the date of the Amendment are hereby waived.

3.No Other Amendments; Conflicts with Previous Amendments. Other than as expressly modified and amended herein, the Commitment Letter shall remain in full force and effect and nothing herein shall affect the rights and remedies of Lender as provided under the Commitment Letter and Credit Agreement. To the extent any amendments to the Commitment Letter contained herein conflict with any previous amendments to the Commitment Letter, the amendments contained herein shall control.

4.Capitalized Terms.  Any capitalized term used herein and not otherwise defined herein shall have the meaning ascribed to such term in the Credit Agreement.

4.             Facsimiles.  Facsimile signatures shall be deemed valid and binding to the same extent as the original.

IN WITNESS WHEREOF, Lender and Borrower have caused their names to be signed hereto by their respective officers thereunto duly authorized as of the date first written above.

COUNTRYWIDE WAREHOUSE LENDING AAMES CAPITAL CORPORATION

By:		By:
	Signature		Signature
Name:	:	Name	Jon D. Van Deuren
Title:		Title:	Executive Vice President — Finance and
		Chief Financial Officer

                                                                (SIGNATURES CONTINUE ON PAGE 2)

AAMES FUNDING CORPORATION AAMES INVESTMENT CORPORATION

By:		By:
	Signature		Signature
Name:	Jon D. Van Deuren	Name:	Jon D. Van Deuren
Title:	Executive Vice President — Finance and	Title:	Executive Vice President — Finance and
Chief Financial Officer		Chief Financial Officer

AAMES FINANCIAL CORPORATION

By:
	Signature
Name:	Jon D. Van Deuren
Title:	Executive Vice President — Finance and
Chief Financial Officer

EX-10.19

Exhibit 10.19

THIS AMENDMENT, made and entered into as of July 1, 2005, by and among A. Jay Meyerson (the “Executive”), Aames Investment Corporation (the “Parent Company”), and Aames Financial Corporation (the “Employer”), hereby amends the employment agreement, dated November 3, 2004, by and among the Executive, the Parent Company and the Employer (the “Employment Agreement”).

WHEREAS, pursuant to the terms of the Employment Agreement, the Executive currently serves as President and Chief Executive Officer of the Parent Company,

WHEREAS, the Parent Company and the Employer recognize the Executive’s substantial contribution to the growth and success of the Parent Company and the Employer, desire to make certain changes in the Executive’s employment arrangement with the Parent Company and the Employer, which the Parent Company’s Board of Directors and the Employer’s Board of Directors has determined will reinforce and encourage the continued attention and dedication to the Parent Company and the Employer of the Executive in the best interests of the Company and its shareholders;

NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS:

1.The Employment Agreement is hereby amended to add a new Section 7, to read in its entirety as follows:

7. Certain Additional Payments by the Employer.

(a)Gross-Up. Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution (or any acceleration of any payment, award, benefit or distribution) by the Employer (or any of its affiliated entities) or any entity which effectuates a Change in Control (as defined in the Amended & Restated Aames Investment Corporation 2004 Equity Incentive Plan) (or any of its affiliated entities) to or for the benefit of the Executive (whether pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 7 (the “Payments”) would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”), or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the “Excise Tax”), then the Parent Employer shall pay to the Executive an additional payment (a “Gross-Up Payment”) in an amount such that after payment by the Executive of all taxes (including, without limitation, any income taxes and any interest and penalties imposed with respect thereto, and any excise tax) imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the sum of (x) the Excise Tax imposed upon the Payments and (y) the product of any deductions disallowed because of the inclusion of the Gross-Up Payment in the

Executive’s adjusted gross income and the highest applicable marginal rate of federal income taxation for the calendar year in which the Gross-Up Payment is to be made. For purposes of determining the amount of the Gross-Up Payment, the Executive shall be deemed to (i) pay federal income taxes at the highest marginal rates of federal income taxation for the calendar year in which the Gross-Up Payment is to be made and (ii) pay applicable state and local income taxes at the highest marginal rate of taxation for the calendar year in which the Gross-Up Payment is to be made, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes.

(b)Determination. Subject to the provisions of Section 7(a), all determinations required to be made under this Section 7, including whether and when a Gross-Up Payment is required, the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determinations, shall be made by the public accounting firm that is retained by the Employer as of the date immediately prior to the Change in Control (the “Accounting Firm”) which shall provide detailed supporting calculations both to the Employer and the Executive within fifteen (15) business days of the receipt of notice from the Employer or the Executive that there has been a Payment, or such earlier time as is requested by the Employer (collectively, the “Determination”). Notwithstanding the foregoing, in the event (i) the Board shall determine prior to the Change in Control that the Accounting Firm is precluded from performing such services under applicable auditor independence rules, (ii) the Audit Committee of the Board determines that it does not want the Accounting Firm to perform such services because of auditor independence concerns or (iii) the Accounting Firm is serving as accountant or auditor for the person(s) effecting the Change in Control, the Board shall appoint another nationally recognized public accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Employer and the Employer shall enter into any agreement requested by the Accounting Firm in connection with the performance of the services hereunder. The Gross-Up Payment under this Section 7 with respect to any Payments shall be made no later than thirty (30) days following such Payment. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Executive with a written opinion to such effect, and to the effect that failure to report the Excise Tax, if any, on the Executive’s applicable federal income tax return will not result in the imposition of a negligence or similar penalty. The Determination by the Accounting Firm shall be binding upon the Employer and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the Determination, it is possible that Gross-Up Payments which will not have been made by the Employer should have been made (“Underpayment”) or Gross-Up Payments are made by the Employer which should not have been made (“Overpayment”), consistent with the calculations required to be made hereunder. In the event the amount of the Gross-Up Payment is less than the amount necessary to reimburse the Executive for hisExcise Tax, the Accounting Firm shall determine the amount of the

Underpayment that has occurred and any such Underpayment (together with interest at the rate provided in Section 1274(b)(2)(B) of the Code) shall be promptly paid by the Employer to or for the benefit of the Executive. In the event the amount of the Gross-Up Payment exceeds the amount necessary to reimburse the Executive for hisExcise Tax, the Accounting Firm shall determine the amount of the Overpayment that has been made and any such Overpayment (together with interest at the rate provided in Section 1274(b)(2) of the Code) shall be promptly paid by the Executive (to the extent he has received a refund if the applicable Excise Tax has been paid to the Internal Revenue Service) to or for the benefit of the Employer. The Executive shall cooperate, to the extent hisexpenses are reimbursed by the Employer, with any reasonable requests by the Employer in connection with any contests or disputes with the Internal Revenue Service in connection with the Excise Tax.

IN WITNESS THEREOF, the Executive has hereunto set his hand, and the Parent Company and the Employer have caused these presents to be executed in their names, all as of the Signing Date.

Executive

/s/ A. Jay Meyerson

Aames Investment Corporation

/s/ Pat Gonyea

Aames Financial Corporation

/s/ Pat Gonyea

EX-21.1

Exhibit 21.1

SUBSIDIARIES OF AAMES INVESTMENT CORPORATION

·Aames Capital Corporation, a California corporation

·Aames Capital Acceptance Corporation, a California corporation

·Aames Financial Corporation, a California corporation

·Aames Funding Corporation, a California corporation

·Aames Investment Acceptance Corporation, a California corporation

·AaRCs, LLC, a Pennsylvania limited liability company

·Aames Holding Corporation, a California corporation

·One Stop Mortgage, Inc., a Wyoming corporation

·Oxford Aviation Corporation, a California corporation

·Rossmore Financial Insurance Services, Inc., a California corporation

·Serrano Insurance Services, a Nevada corporation

·Windsor Management Co., a California corporation

·Windsor Management of Washington, Inc., a Washington corporation

EX-23.1

Exhibit 23.1

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-120554), Form S-4 (No. 333-113891) and Form S-3 (No. 333-124227 and 333-128623) and the related Prospectuses of Aames Investment Corporation of our reports dated March 14, 2006 with respect to the consolidated financial statements of Aames Investment Corporation, Aames Investment Corporation management’s assessment of the effectiveness of internal control over financial reporting, and the effectiveness of internal control over financial reporting of Aames Investment Corporation, included in this Annual Report (Form 10-K) for the year ended December 31, 2005.

/s/ ERNST & YOUNG LLP

Los Angeles, California

March 27, 2006

EX-31.1

Exhibit 31.1

Chief Executive Officer Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, A. Jay Meyerson, Chairman and Chief Executive Officer of Aames Investment Corporation, certify that:

1.I have reviewed this Annual Report on Form 10-K of Aames Investment Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-15(e)) for the company and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made know to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal over financial reporting, or caused such internal control over financial reporting to   be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to affect, the company’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: March 27, 2006:	/s/ A. JAY MEYERSON
	A. Jay Meyerson
	Chairman and Chief Executive Officer

EX-31.2

Exhibit 31.2

Chief Financial Officer Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002

I, Jon D. Van Deuren, Chief Financial Officer of Aames Investment Corporation certify that:

1.I have reviewed this Annual Report on Form 10-K of Aames Investment Corporation;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15-15(e)) for the company and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made know to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal over financial reporting, or caused such internal control over financial reporting to   be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the company’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to affect, the company’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated: March 27, 2006:	/s/ JON D. VAN DEUREN
	Jon D. Van Deuren
	Chief Financial Officer

EX-32.1

Exhibit 32.1

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report on Form 10-K of Aames Investment Corporation (the “Company”) for the year ended December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, A. Jay Meyerson, Chairman and Chief Executive Officer of the Company, and Jon D. Van Deuren., Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1359, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to his knowledge:

1.The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: March  27, 2006:	/s/ A. JAY MEYERSON
	A. Jay Meyerson
	Chairman and Chief Executive Officer
Dated: March  27, 2006:	/s/ JON D. VAN DEUREN
	Jon D. Van Deuren
	Chief Financial Officer

A signed original of this written statement required by Section 906, or other document authenticating, acknowledging or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to Aames Investment Corporation and will be retained by Aames Investment Corporation and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished to the Securities and Exchange Commission as an exhibit to the Form 10-K and will not be considered filed as part of the Form 10-K.