1282552--3/27/2006--AAMES_INVESTMENT

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{loan, real, estate}

{tax, income, asset}

{provision, law, control}

{control, financial, internal}

{investment, property, distribution}

{loss, insurance, financial}

{interest, director, officer}

{financial, litigation, operation}

{debt, indebtedness, cash}

{stock, price, share}

{regulation, government, change}

{regulation, change, law}

{system, service, information}

Owning a Portfolio of Hybrid/Adjustable Rate Mortgage Loans. Allowance for Losses on Mortgage Loans Held for Investment. Gain on Sale of Loans Held for Sale and Secondary Market Related Allowances. Accounting for Off-Balance Sheet Securitizations. Interest Income and Interest Expense Gain on Sale of Loans. Loans Held for Investment, Net. Financings on Loans Held for Investment. Revolving Warehouse and Repurchase Facilities. Revolving Warehouse and Repurchase Facilities. Fundings from Financings on Loans Held for Investment. Proceeds from the Sale of Mortgage Loans. Monetization of Retained Mortgage-Backed Bonds from Our On-Balance Sheet Securitizations. Proceeds from the Issuance of Debt and Equity Securities. Sale of Loans Interest Rate Risk. Fair Value of Financial Instruments. 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. Our earnings may decrease because of increases in interest rates. 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. 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. Our inability to realize cash proceeds from loan sales and securitizations in excess of the loan acquisition cost could hurt our financial performance. A downturn in the residential mortgage origination business, which is a cyclical industry, may harm our operations. If loan prepayment rates are higher than expected, yields on our planned investments will be reduced. Declining real estate values could harm our operations. Our hedging transactions may limit our gains or result in losses. 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. The leverage in our REIT portfolio may adversely affect the return on our planned investments. 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 are required to repurchase mortgage loans or indemnify investors if we breach representations and warranties, which would hurt our earnings. 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. Our business is subject to extensive federal and state regulation which may limit our ability to operate and could decrease our earnings. 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. We may be subject to fines or other penalties based upon the conduct of our independent brokers. Our interest-only loans may have a higher risk of default than our fully-amortizing loans. We may change our investment strategy without your consent, which may result in our investing in riskier investments than our currently planned investments. 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. Failure to maintain our Investment Company Act exemption may harm our operations and our market price. 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. 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. 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. 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. 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 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 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. 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. 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. 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. We may be required to allocate excess inclusion income to our stockholders, which could result in adverse tax consequences for our stockholders. Evaluation of Disclosure Controls and Procedures Management s Report on Internal Control Over Financial Reporting Changes in Internal Control Over Financial Reporting REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING Certain Information Concerning Our Directors Certain Information Concerning Our Audit Committee Certain Information Concerning Our Executive Officers Section 16(a) Beneficial Ownership Reporting Compliance Summary of Cash and Certain Other Compensation Option/SAR Grants In Last Fiscal Year and Aggregate Option/SAR Exercises In Last Fiscal Year and Fiscal Year-End Option/SAR Values Aggregate Unvested RSAs and Outstanding RSUs at Fiscal-Year End and Fiscal Year-End RSA/RSU Values Employment Contracts, Termination of Employment and Change in Control Agreements Summary of Compensation Paid to Our Directors Compensation Committee Interlocks and Insider Participation Report of the Compensation Committee

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1282552--3/27/2006--AAMES_INVESTMENT_CORP