<PAGE>

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               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                           WASHINGTON, D. C. 20549
                                  FORM 10-K
(MARK ONE)
   X     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-------- EXCHANGE ACT OF 1934

         FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2000

                                     OR

-------  TRANSITION REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         FOR THE TRANSITION PERIOD FROM _____ TO _____

                      COMMISSION FILE NUMBER: 001-13637

                         APEX MORTGAGE CAPITAL, INC.
           (Exact name of Registrant as specified in its Charter)

              MARYLAND                                       95-4650863
   (State or other jurisdiction of                        (I.R.S. Employer
    incorporation or organization)                     Identification Number)

      865 SOUTH FIGUEROA STREET
       LOS ANGELES, CALIFORNIA                                  90017
(Address of principal executive offices)                      (Zip Code)

       Registrant's telephone number, including area code (213) 244-0440

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

       TITLE OF EACH CLASS                   NAME OF EXCHANGE WHICH REGISTERED
       -------------------                   ---------------------------------
 Common Stock ($.01 par value)                     American Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

         Yes    X          No
             -------          -------

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 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. [ X ]

At March 16, 2001, the aggregate market value of the voting stock held by
non-affiliates was $49,001,173 based on the closing price of the Common Stock
on the New York Stock Exchange.

Number of shares of Common Stock outstanding at March 16, 2001:  5,753,000

DOCUMENTS INCORPORATED BY REFERENCE:
         Portions of the Registrant's definitive Proxy Statement to be filed
         pursuant to Regulation 14A within 120 days from December 31, 2000, are
         incorporated by reference into Part III.

===============================================================================

<PAGE>



                           SAFE HARBOR STATEMENT UNDER
              THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995



     CERTAIN INFORMATION CONTAINED IN THIS REPORT CONSTITUTES
"FORWARD-LOOKING STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECT,"
"ANTICIPATE," "ESTIMATE," "INTEND," "CONTINUE," OR "BELIEVES" OR THE
NEGATIVES THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY. SOME
IMPORTANT FACTORS THAT WOULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE IN ANY FORWARD-LOOKING STATEMENTS INCLUDE CHANGES IN INTEREST RATES;
DOMESTIC AND FOREIGN BUSINESS, MARKET, FINANCIAL OR LEGAL CONDITIONS;
DIFFERENCES IN THE ACTUAL ALLOCATION OF THE ASSETS OF THE COMPANY FROM THOSE
ASSUMED; AND THE DEGREE TO WHICH ASSETS ARE HEDGED AND THE EFFECTIVENESS OF
THE HEDGE, AMONG OTHERS. IN ADDITION, THE DEGREE OF RISK IS INCREASED BY THE
COMPANY'S LEVERAGING OF ITS ASSETS.







                                        2

<PAGE>


                           APEX MORTGAGE CAPITAL, INC.
                          2000 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS
<TABLE>
<CAPTION>
                                                                           PAGE
                                                                           ----
<S>       <C>                                                              <C>
ITEM 1.   BUSINESS                                                           4

ITEM 2.   PROPERTIES                                                        20

ITEM 3.   LEGAL PROCEEDINGS                                                 20

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS               20

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
            STOCKHOLDER MATTERS                                             20

ITEM 6.   SELECTED FINANCIAL DATA                                           22

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
            CONDITION AND RESULTS OF OPERATIONS                             23

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
            MARKET RISK                                                     31

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                       34

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE                             34

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                34

ITEM 11.  EXECUTIVE COMPENSATION                                            34

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
            MANAGEMENT                                                      34

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                    34

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
            ON FORM 8-K                                                     35
</TABLE>

                                       3
<PAGE>

              CERTAIN CAPITALIZED AND OTHER TERMS USED HEREIN SHALL
               HAVE THE MEANINGS ASSIGNED TO THEM IN THE GLOSSARY
                          AT THE END OF THIS REPORT.


                                     PART I
ITEM 1.   BUSINESS
                                     GENERAL

     Apex Mortgage Capital, Inc. (the "Company"), a Maryland corporation, was
formed on September 15, 1997, primarily to acquire United States agency and
other highly rated, single-family real estate adjustable and fixed rate
Mortgage Related Assets. The Company commenced operations on December 9, 1997
following the initial public offering of the Company's Common Stock. The
Company's principal executive offices are located at 865 South Figueroa
Street, Suite 1800, Los Angeles, California 90017, and its telephone number
is (213) 244-0440.

     The Company uses its equity capital and borrowed funds to seek to
generate income based on the difference between the yield on its Mortgage
Related Assets and the cost of its borrowings. The Company has elected to be
taxed as a real estate investment trust ("REIT") under the Internal Revenue
Code of 1986, as amended (the "Code"). The Company will not generally be
subject to federal taxes on its income to the extent that it distributes its
net income to its stockholders and maintains its qualification as a REIT.

     The day-to-day operations of the Company are managed by an external
management company, TCW Investment Management Company (the "Manager"),
subject to the direction and oversight of the Company's Board of Directors. A
majority of the Board of Directors are unaffiliated with The TCW Group, Inc.
("TCW" and, together with its subsidiaries and Affiliates, the "TCW Group")
or the Manager. The Manager is a wholly-owned subsidiary of TCW. The Manager
was established in 1992 and the TCW Group began operations in 1971 through
one of its affiliates. The Company's investment management team are selected
members of the TCW Group's Mortgage-Backed Securities Group (the "MBS
Group"), all of whom have over twelve years of experience in raising and
managing mortgage capital. The Company has elected to be externally managed
by the Manager to take advantage of the existing operational systems,
expertise and economies of scale associated with the Manager's current
business operations, among other reasons. The Manager's key officers have
experience in raising and managing mortgage capital, mortgage finance and the
purchase and administration of Mortgage Related Assets.

                                  RECENT EVENTS

         DIVIDEND DECLARATION. On March 20, 2001, the Company's Board of
Directors declared a dividend distribution of $0.35 per share. The dividend is
payable on April 20, 2001, to shareholders of record on March 30, 2001.

         REPORTING PERIOD.  Unless otherwise noted, this report describes the
Company's operations and developments through the date hereof.

         EXCHANGE LISTING. Effective February 8, 2001, the Company was listed
on the American Stock Exchange and began trading its common stock under the
symbol AXM.

                                    STRATEGY

     To achieve its business objective and generate dividend yields that provide
a competitive rate of return for its stockholders, the Company's strategy is to:

-    purchase primarily single-family fixed and adjustable rate Mortgage
     Related Assets;

                                       4

<PAGE>


-    manage the credit risk of its Mortgage Related Assets through, among
     other activities (i) carefully selecting Mortgage Related Assets to be
     acquired, (ii) complying with the Company's investment policy, (iii)
     actively monitoring the ongoing credit quality and servicing of its
     Mortgage Related Assets, and (iv) maintaining appropriate capital
     levels and allowances for possible credit losses;

-    finance purchases of Mortgage Related Assets with the net proceeds of
     equity offerings and, to the extent permitted by the Company's
     leverage policy, to utilize leverage to increase potential returns to
     stockholders through borrowings (primarily reverse repurchase
     agreements) with interest rates that will also reflect changes in
     short-term market interest rates;

-    seek to structure its borrowings in accordance with its interest rate
     risk management policy;

-    utilize interest rate swaps, forward contracts on U.S. Treasury notes,
     interest rate caps and similar financial instruments to mitigate interest
     rate risks; and

-    seek to minimize prepayment risk primarily by structuring a
     diversified portfolio with a variety of prepayment characteristics.

     There can be no assurance that the Company will be able to generate
competitive earnings and dividends while holding primarily High Quality
Mortgage Related Assets and maintaining a disciplined risk-control profile.

     The Company may attempt to increase the return to stockholders over time
by: (i) raising additional capital in order to increase its ability to invest
in additional Mortgage Related Assets; (ii) lowering its effective borrowing
costs through direct funding with collateralized lenders, in addition to
using Wall Street intermediaries, and investigating the possibility of using
collateralized commercial paper and medium-term note programs; and (iii)
improving the efficiency of its balance sheet structure by issuing
uncollateralized subordinated debt and other forms of capital.

MANAGEMENT POLICIES AND PROGRAMS

     The Company is a financial company that uses its equity capital and
borrowed funds to seek to generate net income based on the difference between
the interest income on its assets and the cost of its borrowings. The Company
has elected to be taxed as a REIT under the Code. The Company intends to
operate in accordance with its operating policies as approved by the
Company's Board of Directors at least annually.

     The Company has established the following four primary operating
policies to implement its business strategy of acquiring assets consisting
primarily of United States agency and other high rated single-family real
estate mortgage securities and mortgage loans in order to generate dividend
yields that provide a competitive rate of return for its stockholders.

-    Investment Policy
-    Leverage Policy
-    Interest Rate Risk Management Policy
-    REIT Compliance Policy

     Compliance with the policy guidelines shall be determined at the time of
purchase of the Mortgage Related Assets (based on the most recent valuation used
by the Company) and will not be affected by events subsequent to such purchase.
Such events include, without limitation, changes in characterization, value or
rating of any specific Mortgage Related Assets or economic conditions or other
events generally affecting any Mortgage Related Assets of the type held by the
Company.

                                       5

<PAGE>

INVESTMENT POLICY

     The Company intends to acquire investments that it believes will
maximize returns on capital invested, after considering (i) the amount and
nature of the anticipated returns from the investment, (ii) the Company's
ability to pledge the investment to secure collateralized borrowings, and
(iii) the costs associated with financing, hedging, managing, securitizing
and reserving for such investments.

     The Company generally expects to primarily invest in Mortgage Related
Assets that may include Short-Term Investments, Mortgage-Backed Securities,
High Credit Quality Mortgage Loans, Mortgage Derivative Securities and Other
Investments.

The Company's investment policy is intended to provide guidelines for the
acquisition of its investments. Specifically, the investment policy states
that the Company intends to acquire a portfolio of investments that can be
segregated into specific categories. Each category and its respective
investment limitations are as follows:

50% CATEGORY

     At least 50% of the Company's total assets are expected to consist of
(i) Short-Term Investments, (ii) Mortgage-Backed Securities that are either
issued or guaranteed by an agency of the U.S. government, (iii)
Mortgage-Backed Securities that are rated AAA by at least one nationally
recognized rating agency or (iv) High Credit Quality Mortgage Loans that are
funded with Committed Secured Borrowings.

75% CATEGORY

     At least 75% of the Company's total assets are expected to consist of
investments that qualify for the 50% Category or other Mortgage-Backed
Securities that have received an investment grade rating by at least one
nationally recognized rating agency.

90% CATEGORY

     At least 90% of the Company's total assets are expected to consist of
investments that qualify for the 75% Category or High Credit Quality Mortgage
Loans that are not funded by Committed Secured Borrowings.

10% CATEGORY

     Not more than 10% of the Company's total assets are expected to consist
of (i) Mortgage-Backed Securities rated below investment grade, (ii) Mortgage
Derivative Securities or (iii) Other Investments.

LEVERAGE POLICY

     The Company generally anticipates utilizing leverage to increase returns
to its shareholders. The Company's goal is to strike a balance between the
under-utilization of leverage, which reduces potential returns to
stockholders, and the over-utilization of leverage, which could reduce the
Company's ability to meet its obligations during periods of adverse market
conditions. The Company has established a leverage policy to control the type
and amount of leverage used to fund the acquisition of its Mortgage Related
Assets. The Company's leverage policy is intended to provide guidelines for
utilizing secured borrowings in the form of Uncommitted Secured Borrowings
and Committed Secured Borrowings.

UNCOMMITTED SECURED BORROWINGS

     The Company expects a substantial portion of its borrowings may consist
of Uncommitted Secured Borrowings, including reverse repurchase agreements,
lines of credit, Dollar-Roll Agreements and other financing transactions.
Such funding sources generally do not commit the lender to continue to
provide financing to the Company. The Company intends to limit the amount of
Uncommitted Secured Borrowings to 92% of its total assets, less any assets
that are funded with Committed Secured Borrowings, plus the market value of
any related hedging transactions. If the amount of such borrowings exceeds
92%, the Manager will be required to submit to the Company's Board of
Directors a plan designed to bring the total amount of Uncommitted Secured
Borrowings below the 92% limitation. It is anticipated that in many
circumstances this goal will be achieved over time without active management
through the natural process of mortgage principal repayments and increases in
the market value of the Company's total assets. The Company anticipates that
it will
                                       6
<PAGE>

only enter into repurchase agreements and other financing transactions with
counter-parties rated investment grade by a Rating Agency.

COMMITTED SECURED BORROWINGS

     The Company's borrowings may consist of Committed Secured Borrowings,
including the issuance of CMOs, structured commercial paper programs, secured
term notes and other financing transactions. Such funding sources generally
commit the lender to provide financing to the Company for a specified period
of time or to provide financing to the Company to fund specific assets until
they mature. The Company intends to limit the amount of Committed Secured
Borrowings to 97% of the assets funded with such borrowings at the time any
corresponding transaction is entered into.

INTEREST RATE RISK MANAGEMENT POLICY

     The Company has established an interest rate risk management policy that
is intended to mitigate the negative impact of changing interest rates. The
Company generally intends to mitigate interest rate risk by targeting the
difference between the market weighted average duration on its Mortgage
Related Assets funded with secured borrowings to the market weighted average
duration of such borrowings to one year or less, taking into account all
hedging transactions. The Company generally does not intend to have any
specific duration target for the portion of its Mortgage Related Assets that
are not funded by secured borrowings.

     There can be no assurance that the Company will be able to limit such
duration differences and there may be periods of time when the duration
difference will be greater than one year.

     The Company may implement its interest rate risk management policy by
utilizing various hedging transactions, including interest rate swaps,
interest rate swaptions, interest rate caps, interest rate floors, financial
futures contracts, options on financial futures contracts and other
structured transactions. The Company does not intend to enter into such
transactions for speculative purposes.

REIT COMPLIANCE POLICY

     The Company intends to operate its business in compliance with the REIT
Provisions of the Code. Accordingly, all of the provisions outlined in the
Company's investment, leverage and interest rate risk management policies are
subordinate to the REIT Provisions of the Code if any conflicts arise.

     To qualify for tax treatment as a REIT, the Company must meet certain
tests as fully described in sections 856 and 857 of the Code. A summary of
the requirements for qualification as a REIT is described immediately below.

     STOCK OWNERSHIP TESTS. The capital stock of the Company must be held by
at least 100 persons and no more than 50% of the value of such capital stock
may be owned, directly or indirectly, by five or fewer individuals at all
times during the last half of the taxable year. Tax-Exempt Entities, other
than private foundations and certain unemployment compensation trusts, are
generally not treated as individuals for these purposes. The stock ownership
requirements must be satisfied in the Company's second taxable year and in
each subsequent taxable year.

     ASSET TESTS. The Company must generally meet the following asset tests
at the close of each quarter of each taxable year. At least 75% of the value
of the Company's total assets must consist of Qualified REIT Real Estate
Assets, U.S. Government securities, cash and cash items (the "75% Asset
Test"). The value of securities held by the Company but not taken into
account for purposes of the 75% Asset Test must not exceed (i) 5% of the
value of the Company's total assets in the case of securities of any one
non-government issuer, or (ii) 10% of the outstanding voting securities of
any such issuer.

     INCOME TESTS. The Company must generally meet certain gross income tests
for each taxable year. At least 75% of the Company's gross income must be
derived from certain specified real estate sources, including interest income
and gain from the disposition of Qualified REIT Real Estate Assets or
Qualified Temporary Investment Income (the "75% Gross Income Test"). At least
95% of the Company's gross income for each taxable year must be derived from
sources of income qualifying for the 75% Gross Income Test, dividends,
interest unrelated to real estate, and gains from the sale of stock or other
securities (including certain interest rate swap and cap agreements entered
into to hedge variable rate debt incurred to acquire Qualified REIT Real
Estate Assets) not held for sale in the ordinary course of business (the "95%
Gross Income Test").

                                       7
<PAGE>

     DIVIDEND DISTRIBUTION REQUIREMENTS. The Company must generally
distribute to its stockholders an amount equal to at least 95% of the
Company's taxable income before deductions of dividends paid and excluding
net capital gains. The Company has until January 31 following the end of the
fiscal year to pay the dividends out to shareholders and is permitted to
offer a special dividend in order to meet the 95% requirement.

OTHER POLICIES

     The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act. The Company does not currently
intend to (i) originate Mortgage Loans or (ii) offer securities in exchange
for real property. The Company will not purchase any Mortgage Related Assets
from its Affiliates other than mortgage securities that may be purchased from
a taxable subsidiary of the Company that may be formed in connection with the
securitization of Mortgage Loans.

FUTURE REVISIONS IN POLICIES AND STRATEGIES

     The Company's Board of Directors has established the policies and
strategies set forth in this report. The Board of Directors (subject to
approval by a majority of Unaffiliated Directors) has the power to modify or
waive such policies and strategies without the consent of the stockholders.
The Company's Board of Directors will at least annually establish and approve
(including approval by a majority of Unaffiliated Directors) the policies and
strategies of the Company.

DESCRIPTION OF MORTGAGE RELATED ASSETS

     The Company invests principally in the following types of Mortgage
Related Assets subject to the operating restrictions described in "Management
Policies and Programs" below.

PRIMARY MORTGAGE SECURITIES

     PASS-THROUGH CERTIFICATES. Pass-Through Certificates are securities
representing interests in "pools" of mortgage loans secured by residential
real property in which payments of both interest and principal on the
securities are generally made monthly, in effect "passing through" monthly
payments made by the individual borrowers on the mortgage loans which
underlie the securities (net of fees paid to the issuer or guarantor of the
securities). Early repayment of principal on some Mortgage Related Assets
(arising from prepayments of principal due to sale of the underlying
property, refinancing, or foreclosure, net of fees and costs which may be
incurred) may expose the Company to a lower rate of return upon reinvestment
of principal. This is known as prepayment risk. Also, if a security subject
to prepayment has been purchased at a premium, the value of the premium would
be lost in the event of prepayment. Like other fixed income securities, when
interest rates rise, the value of a Mortgage Related Asset generally will
decline; however, when interest rates are declining, the value of Mortgage
Related Assets with prepayment features may not increase as much as other
fixed income securities. The rate of prepayments on underlying mortgages will
affect the price and volatility of a Mortgage Related Asset, and may have the
effect of shortening or extending the effective maturity of the security
beyond what was anticipated at the time of purchase. When interest rates
rise, the holdings of Mortgage Related Assets by the Company can reduce
returns if the owners of the underlying mortgages pay off their mortgages
later than anticipated. This is known as extension risk.

     Payment of principal and interest on some mortgage pass-through
securities (but not the market value of the securities themselves) may be
guaranteed by the full faith and credit of the U.S. Government (in the case
of securities guaranteed by the Government National Mortgage Association
("GNMA")) or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by the federally chartered
and privately owned corporation organized and existing under the Federal
National Mortgage Association Charter Act (12 U.S.C., Section 1716 et seq.),
formerly known as the Federal National Mortgage Association ("Fannie Mae"),
or the Federal Home Loan Mortgage Corporation ("FHLMC")) which are supported
only by the discretionary authority of the U.S. Government to purchase the
agency's obligations. Mortgage Related Assets created by non-governmental
issuers (such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market
issuers) may be supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance and letters of
credit, which may be issued by governmental entities, private insurers or the
mortgage poolers.

                                       8
<PAGE>

     COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized Mortgage Obligations
("CMOs") are hybrid mortgage related instruments. Interest and pre-paid
principal on a CMO are paid, in most cases, on a monthly basis. CMOs may be
collateralized by whole mortgage loans but are more typically collateralized
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC,
or Fannie Mae. CMOs are structured into multiple classes, with each class
bearing a different stated maturity. Monthly payments of principal, including
prepayments, are first returned to investors holding the shortest maturity
class; investors holding the longer maturity classes receive principal only
after the first class has been retired. CMOs that are issued or guaranteed by
the U.S. Government or by any of its agencies or instrumentalities will be
considered U.S. Government securities by the Company.

OTHER MORTGAGE SECURITIES

     GENERAL. The Company may acquire other mortgage securities such as
non-High Quality Mortgage Related Assets and other mortgage securities
collateralized by single-family Mortgage Loans, mortgage warehouse
participations, Mortgage Derivative Securities, subordinated interests and
other mortgage-backed and mortgage-collateralized obligations, other than
pass-through certificates and CMOs.

     MORTGAGE DERIVATIVE SECURITIES. The Company may acquire Mortgage
Derivative Securities not to exceed 10% of its total assets. Mortgage
Derivative Securities provide for the holder to receive interest only,
principal only, or interest and principal in amounts that are
disproportionate to those payable on the underlying Mortgage Loans. Payments
on Mortgage Derivative Securities are highly sensitive to the rate of
prepayments on the underlying Mortgage Loans. In the event of more rapid
(slower) than anticipated prepayments on such Mortgage Loans, the rates of
return on interests in Mortgage Derivative Securities representing the right
to receive interest only or a disproportionately large amount of interest
("Interest Only Derivatives") would be likely to decline (increase).
Conversely, the rates of return on Mortgage Derivative Securities
representing the right to receive principal only or a disproportionate amount
of principal ("Principal Only Derivatives") would be likely to increase
(decrease) in the event of rapid (slow) prepayments.

     The Company may also invest in Inverse Floaters, a class of CMOs with a
coupon rate that resets in the opposite direction from the market rate of
interest to which it is indexed such as the London Inter-Bank Offered Rate
("LIBOR") or the 11th District Cost of Funds Index ("COFI"). Any rise in the
index rate (as a consequence of an increase in interest rates) causes a drop
in the coupon rate of an Inverse Floater while any drop in the index rate
causes an increase in the coupon of an Inverse Floater. An Inverse Floater
may behave like a security that is leveraged since its interest rate usually
varies by a magnitude much greater than the magnitude of the index rate of
interest. The "leverage-like" characteristics inherent in Inverse Floaters
are associated with greater volatility in their market prices.

     The Company also may invest in other Mortgage Derivative Securities that
may in the future be developed.

     SUBORDINATED INTERESTS. The Company also may acquire subordinated
interests, which are classes of mortgage securities that are junior to other
classes of such series of mortgage securities in the right to receive
payments from the underlying Mortgage Loans. The subordination may be for all
payment failures on the Mortgage Loans securing or underlying such series of
mortgage securities. The subordination will not be limited to those resulting
from certain types of risks, such as those resulting from war, earthquake or
flood, or the bankruptcy of a borrower. The subordination may be for the
entire amount of the series of mortgage securities or may be limited in
amount.

     MORTGAGE WAREHOUSE PARTICIPATIONS. The Company also may from time to
time acquire mortgage warehouse participations as an additional means of
diversifying its sources of income. The Company anticipates that such
investments, together with its investments in Other Mortgage Assets, will not
in the aggregate exceed 10% of its total Mortgage Related Assets. These
investments are participations in lines of credit to Mortgage Loan
originators that are secured by recently originated Mortgage Loans that are
in the process of being sold to investors. Mortgage warehouse participations
do not qualify as Qualified REIT Real Estate Assets. Accordingly, this
activity is limited by the REIT Provisions of the Code.

MORTGAGE LOANS

     GENERAL. The Company may acquire and accumulate Mortgage Loans as part
of its investment strategy until a sufficient quantity has been accumulated
for securitization into High Credit Quality Mortgage Loans. The Company
anticipates that the Mortgage Loans acquired by it and not yet securitized
will not constitute more than 25% of the Company's total Mortgage Related
Assets at any time. All Mortgage Loans will be acquired with the intention of
securitizing them into High Credit Quality Mortgage Loans. However, there can
be no assurance that the Company will be

                                       9

<PAGE>

successful in securitizing the Mortgage Loans. To meet the Company's
investment criteria, the Mortgage Loans to be acquired by the Company will
generally conform to the underwriting guidelines established by Fannie Mae,
FHLMC or other credit insurers. Applicable banking laws generally require
that an appraisal be obtained in connection with the original issuance of
Mortgage Loans by the lending institution. The Company does not intend to
obtain additional appraisals at the time of acquiring Mortgage Loans.

     The Mortgage Loans may be originated by or purchased from various
suppliers of Mortgage Related Assets throughout the United States, such as
savings and loan associations, banks, mortgage bankers, home-builders,
insurance companies and other mortgage lenders. The Company may acquire
Mortgage Loans directly from originators and from entities holding Mortgage
Loans originated by others. The Board of Directors of the Company has not
established any limits upon the geographic concentration of Mortgage Loans to
be acquired by the Company or the credit quality of suppliers of Mortgage
Related Assets.

     CONFORMING AND NONCONFORMING MORTGAGE LOANS. The Company may acquire
both Conforming and Nonconforming Mortgage Loans for securitization.
Conforming Mortgage Loans comply with the requirements for inclusion in a
loan guarantee program sponsored by Fannie Mae, FHLMC or GNMA. Nonconforming
Mortgage Loans are Mortgage Loans that do not qualify in one or more respects
for purchase by Fannie Mae or FHLMC under their standard programs. The
Company expects that a majority of Nonconforming Mortgage Loans it purchases
will be nonconforming primarily because they have original principal balances
which exceed the requirements for FHLMC or Fannie Mae programs.

     COMMITMENTS TO MORTGAGE LOAN SELLERS. The Company may issue commitments
to originators and other sellers of Mortgage Loans who follow policies and
procedures that generally comply with Fannie Mae and FHLMC regulations and
guidelines and that comply with all applicable federal and state laws and
regulations for Mortgage Loans secured by single-family (one-to-four units)
residential properties. In addition, commitments may be issued for agency
certificates as well as privately issued pass-through certificates and
Mortgage Loans. Although the Company may commit to acquire Mortgage Loans
prior to funding, all Mortgage Loans are to be fully funded prior to their
acquisition by the Company. Following the issuance of commitments, the
Company will be exposed to risks of interest rate fluctuations similar to
those risks on Mortgage Related Assets.

     SECURITIZATION OF MORTGAGE LOANS. The Mortgage Loans will be acquired by
the Company and held until a sufficient quantity has been accumulated for
securitization. During the accumulation period, the Company will be subject
to risks of borrower defaults and bankruptcies, fraud losses and special
hazard losses (such as those occurring from earthquakes or floods) that are
not covered by standard hazard insurance. In the event of a default on any
Mortgage Loan held by the Company, the Company will bear the risk of loss of
principal to the extent of any deficiency between the value of the collateral
underlying the Mortgage Loan and the principal amount of the Mortgage Loan.
No assurance can be given that any such mortgage, fraud or hazard insurance
will adequately cover a loss suffered by the Company. Also during the
accumulation period, the costs of financing the Mortgage Loans through
reverse repurchase agreements and other borrowings and lines of credit with
warehouse lenders could exceed the interest income on the Mortgage Loans. It
may not be possible or economical for the Company to complete the
securitization for all Mortgage Loans that the Company acquires, in which
case the Company will continue to bear the risks of borrower defaults and
special hazard losses.

     PROTECTION AGAINST MORTGAGE LOAN RISKS. It is anticipated that each
Mortgage Loan purchased will have a commitment for mortgage pool insurance
from a mortgage insurance company with a claims-paying ability rated
investment grade by either of the Rating Agencies. Mortgage pool insurance
insures the payment of certain portions of the principal and interest on
Mortgage Loans. In lieu of mortgage pool insurance, the Company may arrange
for other forms of credit enhancement such as letters of credit,
subordination of cash flows, corporate guaranties, establishment of reserve
accounts or over-collateralization.

     It is expected that when the Company acquires Mortgage Loans, the seller
will generally represent and warrant to the Company that there has been no
fraud or misrepresentation during the origination of the Mortgage Loans and
generally agree to repurchase any Mortgage Loan with respect to which there
is fraud or misrepresentation. The Company will provide similar
representations and warranties when the Company sells or pledges the Mortgage
Loans as collateral for mortgage securities. If a Mortgage Loan becomes
delinquent and the pool insurer is able to prove that there was a fraud or
misrepresentation in connection with the origination of the Mortgage Loan,
the pool insurer will not be liable for the portion of the loss attributable
to such fraud or misrepresentation. Although the Company will generally have
recourse to the seller based on the seller's representations and warranties
to the Company, the Company will generally be at risk for loss to the extent
the seller does not perform its repurchase obligations.

                                       10

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     OTHER INVESTMENTS. The Company may acquire Other Investments that
include (i) equity and debt securities issued by other primarily mortgage
related finance companies, (ii) interests in mortgage related collateralized
bond obligations, (iii) other subordinated interests in pools of mortgage
related assets, (iv) commercial mortgage loans and securities, and (v)
residential mortgage loans other than High Credit Quality Mortgage Loans.
Although the Company expects that its Other Investments will be limited to
less than 10% of total assets, there is no limit to how much of the Company's
shareholders' equity will be allocated to Other Investments. There may be
periods in which Other Investments represent a large portion of the Company's
shareholders' equity.

                   PRINCIPAL RISKS AND SPECIAL CONSIDERATIONS

     LEVERAGE RISK. The Company employs a leveraging strategy of generally
borrowing up to 92% of its total assets to finance the acquisition of
additional Mortgage Related Assets. The Company's borrowing may, at times,
exceed 92% of its total assets. In the event borrowing costs exceed the
income on its Mortgage Related Assets, the Company will experience negative
cash flow and incur losses. Another risk of leverage is the possibility that
the value of the collateral securing the borrowings will decline. In such
event, additional collateral or repayment of borrowings would be required.
The Company could be required to sell Mortgage Related Assets under adverse
market conditions in order to maintain liquidity. If these sales were made at
prices lower than the carrying value of the Mortgage Related Assets, the
Company would experience losses.

     INTEREST RATE RISK. There is the possibility that the value of the
Company's Mortgage Related Assets may fall since fixed income securities
generally fall when interest rates rise. The longer the term of a fixed
income instrument, the more sensitive it will be to fluctuations in value
from interest rate changes. Changes in interest rates may have a significant
effect on the Company's operations, because it may hold Mortgage Related
Assets with long terms to maturity. Rising interest rates will negatively
impact the Company's borrowings since the value of the collateral securing
the borrowing will decline in value, requiring additional collateral or
repayments of borrowing. This could reduce the level of borrowings and reduce
returns. Also, when interest rates rise, the Company's holding of Mortgage
Related Assets can reduce returns if the owners of the underlying mortgages
pay-off their mortgages later than anticipated. This is known as EXTENSION
RISK. When interest rates drop, the Company's holdings of the Mortgage
Related Assets can reduce returns if the owners of the underlying mortgages
pay off their mortgages sooner than anticipated since the funds prepaid will
have to be invested at the then lower prevailing rate. This is known as
PREPAYMENT RISK. In addition, when interest rates drop, not only can the
value of Mortgage Related Assets drop, but the yield can drop, particularly
where the yield on the security is tied to interest rates, such as adjustable
mortgages.

     LIQUIDITY RISK. There is the possibility that the Company may lose money
or be prevented from earning capital gains if it cannot sell a Mortgage
Related Asset at a time and price that is most beneficial to the Company. The
Company is subject to liquidity risk because it invests in mortgage
securities which have experienced periods of illiquidity.

     CREDIT RISK. Credit risk is the possibility that the Company could lose
money if an issuer is unable to meet its financial obligations, such as the
payment of principal and/or interest on an instrument, or goes bankrupt. The
Company may invest a portion of its assets in Mortgage Related Assets which
are not guaranteed by the U.S. Government or investment grade, which may make
the Company subject to substantial credit risk. This is especially true
during periods of economic uncertainty or during economic down-turns.

     EQUITY RISK. Equity risk is the possibility that the Company could lose
money if its equity investments decline in value. Such a decline could be
caused by a number of factors, including but not limited to, overall market
conditions, suspension or omission of dividends, bankruptcies and litigation.
This is especially true during periods of economic uncertainties and economic
downturns.

     FAILURE TO MAINTAIN REIT STATUS RISK. Failure to maintain REIT status
risk refers to the possibility that the Company may become subject to federal
income tax as a regular corporation. The Company intends at all times to
maintain substantially all of its investments in, and otherwise conduct its
business in a manner consistent with, the REIT Provisions of the Code. If the
Company fails to qualify as a REIT, it would be treated as a regular
corporation for federal tax purposes. This would result in the Company being
subject to federal income tax that would further result in a substantial
reduction of cash available for distribution to shareholders.

     FAILURE TO MAINTAIN INVESTMENT COMPANY ACT EXEMPTION RISK. The Company
intends to conduct its business so as not to become a "regulated investment
company" under the Investment Company Act. As a result, the Company's

                                       11
<PAGE>

ownership of certain Mortgage Related Assets may be limited by the Investment
Company Act. This could have the effect of adversely affecting the Company's
operations and returns to shareholders. In addition, if the Company fails to
qualify for the exemption from registration as an investment company, its
ability to use leverage would be substantially reduced. This could reduce
income to the Company and returns to shareholders.

                         FEDERAL INCOME TAX CONSEQUENCES

     The following discussion summarizes certain federal income tax
consequences for the Company. This discussion is based on current law. The
following discussion is not exhaustive of all possible tax considerations. It
does not give a detailed discussion of any state, local or foreign tax
considerations, nor does it discuss all of the aspects of federal, state,
local or foreign income taxation that may be relevant to a stockholder of the
Company in light of such stockholder's particular circumstances.

     Prospective investors in the Company are urged to consult with their own
tax advisors regarding the specific consequences to each of them of the
purchase, ownership and sale of stock in an entity electing to be taxed as a
REIT, including the federal, state, local, foreign and other tax
considerations of such purchase, ownership, sale and election and the
potential changes in applicable tax laws.

GENERAL

     The Code provides special tax treatment for organizations that qualify
and elect to be taxed as REITs. In brief, if certain specific conditions
imposed by the Code are met, entities that invest primarily in real estate
assets, including Mortgage Loans, that otherwise would be taxed as
corporations are generally not taxed at the corporate level on their taxable
income that is distributed to their stockholders. This treatment eliminates
most of the "double taxation" (at the corporate level and then again at the
stockholder level when the income is distributed) that typically results from
the use of corporate investment vehicles. A qualifying REIT, however, may be
subject to certain excise and other taxes, as well as income taxes, on
Taxable Income that is not currently distributed to its stockholders.

     The Company has made an election to be taxed as a REIT under the Code
commencing with its taxable year ended December 31, 1997. There can be no
assurance, however, that all qualification requirements for such treatment
will be met.

     In the event that the Company does not qualify as a REIT in any taxable
year, it will be subject to federal income tax as a domestic corporation and
its stockholders will be taxed in the same manner as stockholders of ordinary
corporations. To the extent that the Company would, as a consequence, be
subject to potentially significant tax liabilities, the amount of earnings
and cash available for distribution to its stockholders would be reduced.

REQUIREMENTS FOR QUALIFICATION AS A REIT

     To qualify for tax treatment as a REIT under the Code, the Company must
meet certain tests. The Company has adopted a policy to comply with the REIT
Provisions of the Code.


TERMINATION OR REVOCATION OF REIT STATUS

     The Company's status as a REIT will be terminated automatically if it fails
to meet the Code's requirements for qualification as a REIT, unless certain
relief provisions apply with respect to the Company's failure to meet the Code's
requirements. If the Company's REIT status were to be terminated, the Company
will not be eligible again to elect REIT status until the fifth taxable year
that begins after the year for which its status as a REIT was terminated. The
Company may also voluntarily revoke its election, in which case it would be
prohibited, without exception, from electing REIT status for the year to which
the revocation relates and the following four taxable years. The Company has no
intention to voluntarily revoke its REIT election.

     If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company would be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate income tax rates. Distributions to stockholders of the Company
with respect to any year in which it fails to qualify as a REIT would not be
deductible by the Company nor would they be required to be made. Failure to
qualify as a REIT would result in the Company's reduction of its distributions
to stockholders in order to pay the resulting taxes. If, after terminating its
REIT status, the Company later qualifies and elects to be taxed as a REIT again,
the Company could face significant adverse tax consequences.

                                    12

<PAGE>
TAXATION OF THE COMPANY

     In any year in which the Company qualifies as a REIT, it generally will not
be subject to federal income tax on that portion of its Taxable Income or net
capital gain which is distributed to its stockholders. The Company generally
will, however, be subject to federal income tax (at the rates applicable to
corporations) on any net income or net capital gain that is not distributed to
its stockholders. The Company intends to distribute substantially all of its
Taxable Income to its stockholders on a pro rata basis in each year.

     In addition, the Company will also be subject to a tax of 100% of net
income from any "prohibited transaction" under the Code and will be subject to a
100% tax on the greater of the amount by which it fails either the 75% or 95%
Gross Income Tests, multiplied by a fraction intended to reflect the Company's
profitability, if the failure to satisfy such tests is due to reasonable cause
and not willful neglect and if certain other requirements are met. The Company
may also be subject to the alternative minimum tax on certain items of tax
preference with respect to undistributed income.

     The Company may securitize Mortgage Loans and sell such mortgage securities
through a taxable subsidiary. However, if the Company itself were to sell such
mortgage securities on a regular basis, there is a substantial risk that they
would be deemed dealer property and that all of the profits from such sales
would be subject to tax at the rate of 100% as income from "prohibited
transactions" under the Code. The Company therefore intends to make any such
sales through a taxable subsidiary. The taxable subsidiary will not be subject
to this 100% tax on income from prohibited transactions under the Code, which is
only applicable to REITs. However, the taxable subsidiary will be subject to
federal income, tax on its taxable income at the tax rates applicable to
corporations.

     The Company may elect to retain and pay income tax on all or a portion of
its net long-term capital gains for any taxable year, in which case the
Company's stockholders would include in their income as long-term capital gains
their proportionate share of such undistributed capital gains. The stockholders
would be treated as having paid their proportionate share of the income taxes
paid by the Company on the undistributed capital gains, which amounts would be
credited or refunded to the stockholders.

     The Company will also be subject to a nondeductible 4% excise tax if it
fails to make timely dividend distributions in certain amounts for each calendar
year. The Company intends to declare its fourth regular annual dividend during
the final quarter of the year and to make such dividend distribution no later
than 31 days after the end of the year in order to avoid imposition of the
excise tax. Such a distribution would be taxed to the stockholders in the year
that the distribution was declared, not in the year paid. Imposition of the
excise tax on the Company would reduce the amount of cash available for
distribution to its stockholders.


TAXABLE SUBSIDIARIES

         The Company may, in the future, cause the creation and sale of mortgage
securities through a taxable corporation or corporations. The Company may own
interests in such corporations, known as "taxable REIT subsidiaries," so long as
no more than 20% of the value of the Company's gross assets consist of
securities of taxable REIT subsidiaries. In addition, the dividends received by
the Company from any taxable REIT subsidiaries will not qualify as income from
Qualified REIT Real Estate Assets for purposes of the 75% Gross Income Test, and
will have to be limited, along with the Company's other interest, dividends,
gains on the sale of securities, hedging income and other income not derived
from Qualified REIT Real Estate Assets to less than 25% of the Company's gross
revenues in each taxable year. If the taxable subsidiary creates a taxable
mortgage pool, such pool itself will constitute a separate taxable subsidiary
of the taxable subsidiary. The taxable subsidiary would be unable to offset
the income derived from such a taxable mortgage pool with losses derived from
any other activities.


                                       13
<PAGE>

TAXATION OF STOCKHOLDERS

     For any taxable year in which the Company is treated as a REIT for
federal income tax purposes, amounts distributed by the Company to its
stockholders out of current or accumulated earnings and profits will be
includable by the stockholders as ordinary income for federal income tax
purposes unless properly designated by the Company as capital gain dividends.
In the latter case, the distributions will be taxable to the stockholders as
long-term capital gains.

     Distributions of the Company will not be eligible for the dividends
received deduction for corporate shareholders. Stockholders may not deduct
any net operating losses or capital losses of the Company.

     Any loss on the sale or exchange of shares of the Common Stock held by a
stockholder for six months or less will be treated as a long-term capital
loss to the extent of any capital gain dividend received on the Common Stock
held by such stockholders during the six-month period.

     If the Company makes distributions to its stockholders in excess of its
current and accumulated earnings and profits, those distributions will be
considered first a tax-free return of capital, reducing the tax basis of a
stockholder's shares until the tax basis is zero. Such distributions in
excess of the tax basis will be taxable as a gain realized from the sale of
the Company's Common Stock.

     The Company will notify stockholders after the close of the Company's
taxable year as to the portions of the distributions which constitute
ordinary income, return of capital and capital gain. Dividends and
distributions declared in the last quarter of any year payable to
stockholders of record on a specified date in such month may be deemed to
have been received by the stockholders and paid by the Company on December 31
of the record year, provided that such dividends are paid before February 1
of the following year.

TAXATION OF TAX-EXEMPT ENTITIES

     In general, a Tax-Exempt Entity that is a stockholder of the Company is
not subject to tax on distributions. The IRS has ruled that amounts
distributed by a REIT to an exempt employees' pension trust do not constitute
UBTI and thus should be nontaxable to such a Tax-Exempt Entity. However, if a
Tax-Exempt Entity has financed the acquisition of any of its stock in the
Company with "acquisition indebtedness" within the meaning of the Code,
distributions on such stock could be treated as UBTI. Under certain
conditions, if a tax-exempt employee pension or profit sharing trust were to
acquire more than 10% of the Company's Common Stock, a portion of the
dividends on such Common Stock could be treated as UBTI.

     For social clubs, voluntary employee benefit associations, supplemental
unemployment benefit trusts, and qualified group legal services plans exempt
from federal income taxation under Code Sections 501(c)(7), (c)(9), (c)(17)
and (c)(20), respectively, income from an investment in the Company will
constitute UBTI unless the organization is able to properly deduct amounts
set aside or placed in reserve for certain purposes so as to offset the UBTI
generated by its investment in the Company. Such entities should review Code
Section 512(a)(3) and should consult their own tax advisors concerning these
"set aside" and reserve requirements.

STATE AND LOCAL TAXES

     The Company and its stockholders may be subject to state or local
taxation in various jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their
own tax advisors regarding the effect of state and local tax laws on an
investment in the Common Stock.

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES APPLICABLE TO FOREIGN
HOLDERS

     The following discussion summarizes certain United States tax
consequences of the acquisition, ownership and disposition of the Common
Stock by a purchaser of the Common Stock that, for United States income tax
purposes, is not a "United States Holder" (a "Foreign Holder"). For purposes
of discussion, a United States Holder means: a citizen or resident of the
United States; a corporation, partnership, or other entity created or
organized in the United States or under the laws of the United States or of
any political subdivision thereof (unless, in the case of a partnership, the
IRS provides otherwise by regulations); an estate whose income is includable
in gross income for United States income tax purposes regardless of its

                                       14

<PAGE>

source; or, a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more
United States persons have the authority to control all substantial decisions
of the trust. This discussion does not consider any specific facts or
circumstances that may apply to a particular Foreign Holder. Prospective
investors are urged to consult their tax advisors regarding the United States
tax consequences of acquiring, holding and disposing of Common Stock, as well
as any tax consequences that may arise under the laws of any foreign, state,
local or other taxing jurisdiction.

     DIVIDENDS. Dividends paid by the Company out of earnings and profits to
a Foreign Holder will generally be subject to federal income tax withholding
at the rate of 30%, unless reduced or eliminated by an applicable tax treaty
or unless such dividends are treated as effectively connected with a United
States trade or business conducted by the Foreign Holder. A Foreign Holder
eligible for a reduction in withholding under an applicable treaty must so
notify the Company by completing the appropriate IRS form. Distributions paid
by the Company in excess of its earnings and profits will be treated as a
tax-free return of capital to the extent of the holder's adjusted basis in
his Common Stock, and thereafter as gain from the sale or exchange of a
capital asset as described below. If it cannot be determined at the time a
distribution is made whether such distribution will exceed the Company's
earnings and profits (which, under most circumstances, will correspond to the
Company's net income before the deduction for dividends paid), the
distribution will be subject to withholding at the same rate as dividends.
However, any amounts withheld will be refundable or creditable against the
Foreign Holder's United States tax liability if the Company subsequently
determines that such distribution was, in fact, in excess of the earnings and
profits of the Company. If the receipt of the dividend is treated as being
effectively connected with the conduct of a trade or business within the
United States by a Foreign Holder, the dividend received will be subject to
the United States federal income tax on net income that applies to United
States persons generally (and, in addition with respect to foreign corporate
holders and under certain circumstances, the 30% branch profits tax).

     For any year in which the Company qualifies as a REIT, distributions to
a Foreign Holder that are attributable to gain from the sales or exchanges by
the Company of "United States real property interests" will be treated as if
such gain were effectively connected with a United States business and will
thus be subject to tax at the normal capital gain rates applicable to United
States stockholders (subject to applicable alternative minimum tax) under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Also, distributions subject to FIRPTA may be subject to a 30%
branch profits tax in the hands of a foreign corporate stockholder not
entitled to a treaty exemption. The Company is required to withhold 35% of
any distribution that could be designated by the Company as a capital gains
dividend. This amount may be credited against the Foreign Holder's FIRPTA tax
liability.

     GAIN ON DISPOSITION. A Foreign Holder will generally not be subject to
United States federal income tax on a gain recognized on a sale or other
disposition of the Common Stock unless (i) the gain is effectively connected
with the conduct of a trade or business within the United States by the
Foreign Holder, (ii) in the case of a Foreign Holder who is a nonresident
alien individual and holds the Common Stock as a capital asset, such holder
is present in the United States for 183 or more days (computed in part by
reference to days present in the two prior years) in the taxable year and
certain other requirements are met, or (iii) the Foreign Holder is subject to
tax under the FIRPTA rules discussed below. Gain that is effectively
connected with the conduct of a United States Holder will be subject to the
United States federal income tax on net income that applies to United States
persons generally (and, with respect to corporate holders and under certain
circumstances, the branch profits tax) but will not be subject to
withholding. Foreign Holders should consult applicable treaties, which may
provide for different rules.

     Gain recognized by a Foreign Holder upon a sale of its Common Stock will
generally not be subject to tax under FIRPTA if the Company is a
"domestically controlled REIT," which is defined generally as a REIT in which
at all times during a specified testing period less than 50% in value of its
shares were held directly or indirectly by non-U.S. persons. Because only a
minority of the Company's stockholders are expected to be Foreign Holders,
the Company anticipates that it will qualify as a domestically controlled
REIT. Accordingly, a Foreign Holder should not be subject to U.S. tax from
gains recognized upon disposition of the Common Stock. However, because the
Common Stock is publicly traded, no assurance can be given that the Company
will continue to be a domestically controlled REIT.

     INFORMATION REPORTING AND BACKUP WITHHOLDING. United States information
reporting requirements and backup withholding tax will generally not apply to
dividends paid on the Common Stock to a Foreign Holder at an address outside
the United States. Payments by a United States office of a broker of the
proceeds of a sale of the Common Stock is subject to both backup withholding
at a rate of 31% and information reporting unless the holder certifies its
Foreign Holder status under penalties of perjury or otherwise establishes an
exemption. Information reporting requirements (but not backup withholding)
will also apply to payments of the proceeds of sales of the Common Stock by
foreign offices of United States brokers, or foreign brokers with certain
types of relationships to the United States, unless the broker has
documentary

                                       15
<PAGE>


evidence in its records that the holder is a Foreign Holder and certain other
conditions are met, or the holder otherwise establishes an exemption.

     Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Foreign
Holder's United States federal income tax liability, provided that the required
information is furnished to the IRS.

                              ERISA CONSIDERATIONS

     In considering an investment in the Common Stock, a fiduciary of a
profit-sharing, pension stock bonus plan or individual retirement account
("IRA"), including a plan for self-employed individuals and their employees or
any other employee benefit plan subject to prohibited transaction provisions of
the Code or the fiduciary responsibility provisions of ERISA (an "ERISA Plan")
should consider (a) whether the ownership of Common Stock is in accordance with
the documents and instruments governing such ERISA Plan, (b) whether the
ownership of Common Stock is consistent with the fiduciary's responsibilities
and satisfies the requirements of Part 4 of Subtitle B of Title I of ERISA
(where applicable) and, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA, (c) ERISA's prohibitions in
improper delegation of control over, or responsibility for, "plan assets" and
ERISA's imposition of co-fiduciary liability on a fiduciary who participates in,
permits (by action or inaction) the occurrence of, or fails to remedy a known
breach of duty by another fiduciary and (d) the need to value the assets of the
ERISA Plan annually.

     In regard to the "plan assets" issue noted in clause (c) above, O'Melveny &
Myers LLP, the Company's counsel, at the time of the Company's public offering
was of the opinion that the Common Stock should qualify as a "publicly offered
security," and, therefore, the acquisition of such Common Stock by ERISA Plans
should not cause the Company's assets to be treated as assets of such investing
ERISA Plans for purposes of the fiduciary responsibility provisions of ERISA or
the prohibited transaction provisions of the Code. Fiduciaries of ERISA Plans
and IRAs should consult with and rely upon their own advisors in evaluating the
consequences under the fiduciary provisions of ERISA and the Code of an
investment in Common Stock in light of their own circumstances.


                                   COMPETITION

     The Company believes that the principal competition in the business of
acquiring and holding Mortgage Related Assets are financial institutions such as
banks, savings and loans, life insurance companies, institutional investors such
as mutual funds and pension funds, and certain other mortgage REITs. The Company
anticipates that it will be able to compete effectively and generate competitive
rates of return for stockholders due to the Manager's experience in managing
mortgage capital, access to and experience in secondary mortgage markets,
relative freedom to securitize its Mortgage Related Assets, relatively low level
of operating costs, ability to utilize prudent amounts of leverage through
accessing the wholesale market for collateralized borrowings, freedom from
certain forms of regulation and the tax advantages of its REIT status.


                                    EMPLOYEES

         As of December 31, 2000, the Company had no employees. The Manager
manages the day to day operations of the Company, subject to the direction and
oversight of the Company's Board of Directors and under the terms of a
Management Agreement discussed below.


                            THE MANAGEMENT AGREEMENT

     The Company has entered into a Management Agreement with the Manager for a
one year term ending on December 31, 2001. The Manager is primarily involved in
two activities: (i) asset/liability management--acquisition, financing, hedging,
management and disposition of Mortgage Related Assets, including credit and
prepayment risk management; and (ii) capital management--oversight of the
Company's structuring, analysis, capital raising and investor relations
activities. In conducting these activities, the Manager formulates operating
strategies for the Company, arranges for the acquisition of Mortgage Related
Assets by the Company, arranges for various types of financing for the Company,
monitors the

                                       16

<PAGE>


performance of the Company's Mortgage Related Assets and provides certain
administrative and managerial services in connection with the operation of
the Company. The Manager is required to manage the business affairs of the
Company in conformity with the policies that are approved and monitored by
the Company's Board of Directors. The Manager is required to prepare regular
reports for the Company's Board of Directors that will review the Company's
acquisitions of Mortgage Related Assets, portfolio composition and
characteristics, credit quality, performance and compliance with the policies
approved by the Company's Board of Directors.

     At all times, the Manager is subject to the direction and oversight of the
Company's Board of Directors and will have only such functions and authority as
the Company may delegate to it. The Manager is responsible for the day-to-day
operations of the Company.

     The Management Agreement may be renewed for additional one-year terms at
the discretion of the Unaffiliated Directors, unless previously terminated by
the Company or the Manager upon written notice. Except in the case of a
termination or non-renewal by the Company for cause, upon termination or
non-renewal of the Management Agreement by the Company, the Company is obligated
to pay the Manager a termination or non-renewal fee, which may be significant.
The termination or non-renewal fee shall be equal to the fair market value of
the Management Agreement without regard to the Company's termination right, as
determined by an independent appraisal. The selection of the independent
appraiser shall be subject to the approval of the Unaffiliated Directors.
Neither the fair market value of the Management Agreement nor the various
factors which the appraiser may find relevant in its determination of the fair
market value can be determined at this time.

     The fair market value of the Management Agreement will be affected by
significant variables, including (i) the historical management fees paid to the
Manager, (ii) any projections of future management fees to be paid to the
Manager determined by the independent appraiser, (iii) the relative valuations
of agreements similar to the Management Agreement and (iv) other factors, all of
which may be unrelated to the performance of the Manager.

     The Management Agreement may be assigned by the Manager to an Affiliate of
TCW without the consent of the Company. The Management Agreement may be assigned
to a non-Affiliate of TCW only with the approval of a majority of the
Unaffiliated Directors.


MANAGER COMPENSATION

     The Manager will receive annual base management compensation based on the
Average Net Invested Capital of the Company, payable monthly in arrears, equal
to 3/4 of 1% of Average Net Invested Capital. The term "Average Net Invested
Capital" means the month end sum of (1) the Company's total shareholders' equity
computed in accordance with generally accepted accounting principles plus (2)
any unsecured debt that has been approved for inclusion by the Unaffiliated
Directors at issuance plus or minus (3) an adjustment to exclude the impact of
any unrealized gains, losses or other items that do not affect realized net
income. Accordingly, incurring collateralized debt to finance specific
investment purchases does not ordinarily increase Average Net Invested Capital.

     The Manager shall also be entitled to receive as incentive compensation for
each fiscal quarter, an amount equal to 30% of the Net Income of the Company,
before incentive compensation, in excess of the amount that would produce an
annualized Return on Equity equal to the Ten-Year U.S. Treasury Rate plus 1%.
The incentive compensation calculation and payment will be made quarterly in
arrears. The term "Return on Equity" is calculated for any quarter by dividing
the Company's Net Income for the quarter by its Average Net Worth for the
quarter. For purposes of calculating the incentive compensation payable, the
definition "Return on Equity" is not related to the actual distributions
received by stockholders or to an individual investor's actual return on
investment. For such calculations, the "Net Income" of the Company means the
taxable income of the Company (including net capital gains, if any) before the
Manager's incentive compensation, net operating loss deductions arising from
losses in prior periods and deductions permitted by the Code in calculating
taxable income for a REIT plus the effects of adjustments, if any, necessary to
record hedging and interest transactions in accordance with generally accepted
accounting principles. A deduction for all of the Company's interest expenses
for borrowed funds is taken into account in calculating Net Income. "Average Net
Worth" for any period means the arithmetic average of the sum of the gross
proceeds from any offering of its equity securities by the Company, before
deducting any underwriting discounts and commissions and other expenses and
costs relating to the offerings, plus the Company's retained earnings (without
taking into account any losses incurred in prior periods) computed by taking the
average of such values at the end of each month during such period, minus the
cumulative amounts paid by the Company to repurchase its shares.

                                       17

<PAGE>


     The ability of the Company to achieve an annualized Return on Equity in
excess of the Ten-Year U.S. Treasury Rate plus 1%, and of the Manager to earn
the incentive compensation described in the preceding paragraph, is dependent
upon the level and volatility of interest rates, the Company's ability to react
to changes in interest rates and to utilize successfully the operating
strategies described herein, and other factors, many of which are not within the
Company's or the Manager's control. The Manager's base compensation shall be
calculated by the Manager within 15 days after the end of each month, and such
calculation shall be promptly delivered to the Company. The Company is obligated
to pay the base compensation within 30 days after the end of each month. The
Manager shall compute the quarterly incentive compensation within 45 days after
the end of each fiscal quarter, and the Company shall pay the incentive
compensation with respect to each fiscal quarter within 15 days following the
delivery to the Company of the Manager's written statement setting forth the
computation of the incentive compensation for such quarter. The Company's Board
of Directors shall review and approve the calculation of base and incentive
compensations paid to the Manager quarterly, one quarter in arrears, during each
scheduled quarterly Board of Directors meeting. Quarterly incentive compensation
is subject to an annual adjustment so that the incentive compensation is based
on earnings for the entire year. The Company believes that this compensation
arrangement benefits its stockholders because it ties the Manager's compensation
to Return on Equity and, in periods of low earnings, the Manager's incentive
compensation is reduced or eliminated, thereby lowering the Company's operating
expenses.


EXPENSES

     Subject to the limitations set forth below, the Company will generally pay
all its operating expenses, except those specifically required to be borne by
the Manager under the Management Agreement. The operating expenses required to
be borne by the Manager include the compensation of the Company's officers and
the cost of office space, equipment and other personnel required for the
Company's day-to-day operations. The expenses that are paid by the Company will
include (but not necessarily be limited to) the cost of money borrowed by the
Company (including interest), taxes and license fees, issuance and transaction
costs incident to the acquisition, disposition and financing of investments,
costs related to hedging transactions, legal, investigatory, accounting and
auditing fees and expenses, consultants' advisory services with respect to REIT
and other compliance matters, the compensation and expenses of the Company's
Unaffiliated Directors, the costs of making distributions and printing and
mailing proxies and reports to stockholders, costs incurred by employees of the
Manager for travel on behalf of the Company, costs incident to the issuance of
mortgage securities, costs incident to the accumulation and servicing of
Mortgage Loans, costs associated with any computer software or hardware that is
used solely for the Company, costs to obtain liability insurance to indemnify
the Manager, the Company's directors and officers, and the Company's
underwriters, the compensations and expenses of the Company's custodian,
transfer agent and registrar, and any extraordinary or non-recurring costs or
charges incurred by the Company, if any. Certain Company operating expenses
shall be limited to an amount per year equal to the greater of 2% of the Average
Net Invested Capital of the Company or 25% of its Net Income for that year. The
operating expenses that are subject to this limitation are:

          (i) all insurance costs incurred by the Company or any subsidiary of
     the Company, including any costs to obtain liability or other insurance to
     indemnify the Manager and underwriters of any securities of the Company;

          (ii) expenses connected with payments of dividends or interest or
     distributions in any other form made or caused to be made by the Board of
     Directors to holders of the securities of the Company or any subsidiary of
     the Company;

          (iii) all expenses of third parties pertaining to communications to
     holders of equity securities or debt securities of the Company or any
     subsidiary of the Company and the other bookkeeping and clerical work
     necessary to maintain relations with holders of such securities and in
     complying with the continuous reporting and other requirements of
     governmental bodies or agencies (these expenses include any costs of
     computer services utilized in connection with these communications and
     reporting requirements, the cost of printing and mailing certificates for
     such securities and proxy solicitation materials and reports to holders of
     the Company's or any subsidiary's securities and reports to third parties
     required under any indenture to which the Company or any subsidiary of the
     Company is a party);

          (iv)  custodian's, transfer agent's and registrar's fees and charges;

          (v)   compensation, fees and expenses paid to Unaffiliated Directors
     of the Company or any subsidiary of the Company, the cost of director and
     officer liability insurance and premiums for fidelity and errors and
     omissions insurance;

          (vi)  legal, accounting and auditing fees and expenses relating to the
     Company's or any subsidiary's operations (excluding litigation-related fees
     and expenses);

                                       18

<PAGE>


          (vii) expenses relating to any office or office facilities maintained
     by the Company or any subsidiary of the Company, exclusive of the office of
     the Manager;

          (viii) travel and related expenses of directors, officers and
     employees of the Manager and of directors, officers and employees of the
     Company or any subsidiary of the Company who are also directors, officers
     or employees of the Manager, incurred in connection with attending meetings
     of the Board of Directors or holders of securities of the Company or any
     subsidiary of the Company or performing other business activities that
     relate to the Company or any subsidiary of the Company, including expenses
     allocable to such meetings or business activities;

          (ix) costs associated with computer hardware and software, third party
     information services and office expenses that relate solely to the business
     activities of the Company; and

          (x) all other expenses regarded as ordinary operating expenses in
     accordance with generally accepted accounting principles, exclusive of
     certain specifically excluded expenses as described below.

     Expenses excluded from the expense limitation and wholly payable by the
Company are (but are not limited to) those incurred in connection with the
accumulation and servicing of Mortgage Loans, the issuance and administration of
mortgage securities from pools of Mortgage Loans, the raising of capital, the
acquisition of Mortgage Related Assets, interest and hedging expenses, taxes and
license fees, non-cash costs, litigation, investigations in connection with
litigation or threatened litigation, base and incentive management compensation
and extraordinary and non-recurring expenses. The determination of Net Income
for purposes of calculating the expense limitation will be the same as for
calculating the Manager's incentive compensation except that it will include any
incentive compensation payable for such period.

     Expenses in excess of the expense limitation will be paid and shall not be
recoverable (by reclassification as compensation or otherwise) by the Manager,
unless the Unaffiliated Directors determine that, based upon unusual or
non-recurring factors, a higher level of expenses is justified for such fiscal
year. In that event, such expenses may be recovered by the Manager in succeeding
years to the extent that expenses in succeeding quarters are below the
limitation of expenses. Expense reimbursement will be made monthly, subject to
adjustment at the end of each year.


CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST

     In addition to its base management compensation under the Management
Agreement, the Manager has the opportunity to earn incentive compensation for
each fiscal quarter, subject to an annual reconciliation so that the incentive
compensation is based on earnings for the entire calendar year, in an amount
equal to 30% of the Net Income of the Company (before payment of such incentive
compensation) in excess of the amount that would produce on annualized Return on
Equity equal to the Ten-Year U.S. Treasury Rate plus 1%. In evaluating Mortgage
Related Assets for investment and in other operating strategies, an undue
emphasis on the maximization of income at the expense of other criteria, such as
preservation of capital, in order to achieve a higher incentive fee could result
in increased risk to the value of the Company's Mortgage Related Asset
portfolio.

     The Company, on the one hand, and the Manager and its Affiliates, on the
other hand, do not presently expect to, but may in the future, enter into a
number of relationships other than those governed by the Management
Agreement, some of which may give rise to conflicts of interest between the
Manager and its Affiliates and the Company. The market in which the Company
will seek to purchase Mortgage Related Assets is characterized by rapid
evolution of products and services and, thus, there may in the future be
relationships between the Company and the Manager and its Affiliates in
addition to those described herein. Any such relationships or transactions
will require the approval of the Company's Board of Directors, including a
majority of the Unaffiliated Directors.

     The Manager and its Affiliates may act as investment adviser or manager for
other entities, which may or may not include services similar to those it
renders to the Company. Pursuant to the terms of the Management Agreement, the
Manager and its Affiliates will agree on the allocation of mortgage securities
between the Company and other accounts over which the Manager and its Affiliates
have control. The Manager will base allocation decisions on the procedures the
Manager considers fair and equitable, including, without limitation, such
considerations as investment objectives, restrictions and time horizon,
availability of cash and the amount of existing holdings.


                                       19

<PAGE>


LIMITS OF RESPONSIBILITY

     Pursuant to the Management Agreement, the Manager does not assume any
responsibility other than to undertake the services called for thereunder and is
not responsible for any action of the Company's Board of Directors in following
or declining to follow its advice or recommendations. The Manager, its directors
and its officers will not be liable to the Company, any issuer of mortgage
securities, any subsidiary of the Company, the Unaffiliated Directors, the
Company's stockholders or any subsidiary's stockholders for acts performed in
accordance with and pursuant to the Management Agreement, except by reason of
acts constituting bad faith, willful misconduct, gross negligence or reckless
disregard of their duties under the Management Agreement.

     The Company has agreed to indemnify the Manager, its directors and its
officers with respect to all expenses, losses, damages, liabilities, demands,
charges and claims arising from any acts or omissions of the Manager made in
good faith in the performance of its duties under the Management Agreement. The
Management Agreement does not limit or restrict the right of the Manager or any
of its officers, directors, employees or Affiliates from engaging in any
business or rendering services of any kind to any other person, including the
purchase of, or rendering advice to others purchasing Mortgage Related Assets
that meet the Company's policies and criteria. The Manager may also advise or
manage other mortgage related entities subject to certain limitations, including
REITs, that invest in residential and commercial mortgages and other residential
and non-residential mortgage securities. The ability of the Manager and its
officers and employees to engage in other business activities could reduce the
time and effort spent on the Company. The Management Agreement does not specify
a minimum amount of time or attention that the Manager or its officers or
employees must devote to the Company's business.


ITEM 2.   PROPERTIES

         The Company does not own or lease any real property. The Company's
principal executive offices are located at 865 South Figueroa Street, Los
Angeles, California 90017, telephone (213) 244-0440. Such offices are provided
by the Manager in accordance with the Management Agreement.


ITEM 3.   LEGAL PROCEEDINGS

     There are no legal proceedings pending against the Company.


ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     At the 2000 Annual Meeting of Shareholders held June 20, 2000, shareholders
of record as of April 28, 2000 were asked to vote to ratify the selection of
Deloitte & Touche LLP as the Company's independent auditors. 5,594,139 shares
were voted for the proposal, 7,472 shares were voted against the proposal, no
shares were withheld, 14,797 shares abstained and no votes were broker
non-votes. In addition, the above-described shareholders were asked to vote on
the two Class II Directors of the Company's Board of Directors to hold office
until the Annual Meeting of Shareholders in 2003. 5,586,315 shares were voted
for Peter G. Allen and 30,093 shares were voted against or were withheld.
5,584,715 shares were voted for Philip A. Barach and 31,693 shares were voted
against or were withheld.


                                     PART II


ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


EQUITY MARKET ACTIVITY

     The Company's Common Stock began trading on December 4, 1997 and is traded
on the American Stock Exchange under the trading symbol AXM. The Company
previously traded on the New York Stock Exchange. As of March 16, 2001, the
Company had 5,753,000 shares of Common Stock issued and outstanding.


                                       20

<PAGE>


     The following table sets forth the high, low and closing sales prices per
share of Common Stock as reported on the New York Stock Exchange composite tape
and the cash dividend declared per share of Common Stock.

<TABLE>
<CAPTION>
                                                                                          CASH
                                                                STOCK PRICE             DIVIDENDS
                                                       -------------------------------   DECLARED
2000                                                     HIGH       LOW       CLOSE     PER SHARE
----                                                     ----       ---       -----     ---------
<S>                                                    <C>         <C>        <C>       <C>
Fourth Quarter ended December 31, 2000                   $7.35     $6.80      $6.89       $0.35
Third Quarter ended September 30, 2000                   $9.00     $7.06      $7.30       $0.35
Second Quarter ended June 30, 2000                      $10.19     $8.50      $8.50       $0.35
First Quarter ended March 31, 2000                      $10.56     $8.75      $8.75       $0.46

1999

Fourth Quarter ended December 31, 1999                  $12.69     $10.06    $10.19       $0.46
Third Quarter ended September 30, 1999                  $13.56     $11.50    $12.38       $0.46
Second Quarter ended June 30, 1999                      $13.94     $12.13    $13.31       $0.42
First Quarter ended March 31, 1999                      $13.50     $9.86     $13.50       $0.38

1998

Fourth Quarter ended December 31, 1998                  $11.13      $7.25      $9.63      $0.30
Third Quarter ended September 30, 1998                  $12.06      $9.06      $9.56      $0.27
Second Quarter ended June 30, 1998                      $12.75     $10.44    $10.50       $0.25
First Quarter ended March 31, 1998                      $14.06     $11.50    $12.38       $0.25

</TABLE>


         On March 20, 20001 the Company's Board of Directors declared a dividend
distribution of $0.35 per share. The dividend is payable on April 20, 2001, to
shareholders of record on March 30, 2001.

     The Company intends to pay quarterly dividends and to make distributions to
its stockholders of all or substantially all of its taxable income each year
(subject to certain adjustments) so as to qualify for the tax benefits accorded
to a REIT under the Code. All distributions will be made by the Company at the
discretion of the Board of Directors and will depend on the taxable earnings of
the Company, financial condition of the Company, maintenance of REIT status and
such other factors as the Board of Directors may deem relevant from time to
time.


SHARE REPURCHASE PROGRAM

         On January 13, 1998, the Company's board of directors authorized a
program to repurchase up to 750,000 shares of the Company's Common Stock. On
September 16, 1998, the Company's board of directors authorized a program to
repurchase up to an additional 750,000 shares of the Company's Common Stock
having completed the original repurchase program of 750,000 shares.

         The Company repurchased 947,100 shares of common stock during the
year ended December 31, 1998. The average price per share repurchased during
the year ended December 31, 1998 was $11.16. The repurchased shares are held
in treasury at cost in the financial statements herein. No shares were
repurchased during the years ended December 31, 2000 and 1999.

         An additional 552,900 shares of common stock are currently
authorized for potential repurchase in the future. The Company may continue
to repurchase shares of common stock in the future when market conditions
warrant.

                                       21

<PAGE>


ITEM 6.   SELECTED FINANCIAL DATA

The following selected financial data are derived from audited financial
statements for the years ended December 31, 2000, 1999, 1998, and the period
from commencement of operations on December 9, 1997 to December 31, 1997. The
selected financial data should be read in conjunction with the more detailed
information contained in the financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this report.

<TABLE>
<CAPTION>
                                                                                                            PERIOD FROM
                                                    YEAR ENDED         YEAR ENDED         YEAR ENDED      DECEMBER 9, 1997
                                                DECEMBER 31, 2000  DECEMBER 31, 1999  DECEMBER 31, 1998   TO DECEMBER 31,
                                                                                                                1997
                                                ----------------------------------------------------------------------------
<S>                                             <C>                 <C>                <C>                <C>
STATEMENT OF OPERATIONS DATA:
Days in period                                                 366                365                365                 22

Interest income                                        $42,834,000        $52,517,000        $41,975,000           $428,000
Interest expense                                       $33,779,000        $42,345,000        $36,007,000           $111,000
Net interest income                                     $9,055,000        $10,172,000         $5,968,000           $317,000
Net (loss) gain on investment transactions           ($36,703,000)         $1,938,000         $1,047,000                  -
General and administrative expenses                     $1,734,000         $3,385,000         $2,104,000           $167,000
Net (loss) income                                    ($28,243,000)        $11,112,000         $5,547,000           $150,000
Average number of shares outstanding                                                           6,190,000          6,700,100
                                                         5,753,000          5,753,000
Basic net income per share                                 ($4.91)              $1.93              $0.90              $0.02
Diluted net income per share                               ($4.91)              $1.92              $0.90              $0.02
Dividends declared per share                                 $1.51              $1.72              $1.07              $0.04


                                                 AT DECEMBER 31,    AT DECEMBER 31,    AT DECEMBER 31,    AT DECEMBER 31,
                                                       2000               1999               1998               1997
                                                ----------------------------------------------------------------------------
BALANCE SHEET DATA:
Mortgage-backed securities                            $600,131,000       $701,143,000       $829,713,000       $265,880,000
Other investments                                       $9,068,000        $17,481,000        $16,422,000                  -
Total assets                                          $614,073,000       $735,745,000       $865,478,000       $271,307,000
Reverse repurchase agreements                         $545,434,000       $672,660,000       $767,908,000        $87,818,000
Total liabilities                                     $569,690,000       $679,704,000       $777,448,000       $178,310,000
Stockholders' equity                                   $44,383,000        $56,041,000        $88,030,000        $92,997,000
Book value per share                                         $7.71              $9.74             $15.30             $13.88
Fair value of off balance sheet hedging
instruments                                                      -         $3,815,000       ($9,994,000)                  -
Impact of terminated interest rate swap
contracts on equity value                               $2,546,000                  -                  -                  -
Adjusted book value per share                                $8.16             $10.40             $13.56             $13.88

</TABLE>


                                       22

<PAGE>


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

GENERAL

         The Company uses its equity capital and borrowed funds to seek to
generate income based on the difference between the yield on its Mortgage
Related Assets and the cost of its borrowings. The Company will elect to be
taxed as a REIT under the Code. The Company will not generally be subject to
federal taxes on its income to the extent that it distributes its net income to
its stockholders and maintains its qualification as a REIT.

         The Company has reviewed its financial instruments to identify those to
which SFAS No. 133 and related amendments apply. Management believes that the
only instruments for which the accounting will be affected by SFAS No. 133 are
the forward contracts used to hedge fixed income securities. The transition
adjustment that will be recorded on January 1, 2001 will result in the
reclassification of $2,173,000 net losses of unrealized and deferred gains and
losses on investment securities and forward contracts from accumulated other
comprehensive income to current income. Also, deferred gains on interest rate
swaps previously designated as hedges will be reclassified from other
liabilities to accumulated other comprehensive income.

         In conjunction with the adoption of SFAS No. 133 on January 1, 2001,
the Company will reclassify $594,469,000 of its mortgage securities from the
available-for-sale category to the trading category for investments accounted
for under SFAS No. 115. This change will result in the reclassification of
$1,742,000 net unrealized gains from accumulated other comprehensive income to
current income, in addition to net unrealized gains included in the SFAS No. 133
transition adjustment discussed above.

FINANCIAL CONDITION

FIXED INCOME SECURITIES

At December 31, 2000 and 1999 the Company held $600,131,000 and $701,143,000
of Fixed Income Securities, respectively. The original maturity of a
significant portion of the Fixed Income Securities ranges from fifteen to
thirty years; the actual maturity is subject to change based on the
prepayments of the underlying mortgage loans. The following table is a
schedule of Fixed Income Securities held listed by security type (dollars in
thousands):

<TABLE>
<CAPTION>
                                         December 31, 2000                     December 31, 1999
                                  ---------------------------------    -----------------------------------

Fixed Income Securities           Carrying Value        Percent of     Carrying Value          Percent of
                                                         Portfolio                              Portfolio
----------------------------------------------------------------------------------------------------------
<S>                               <C>                   <C>            <C>                 <C>
Mortgage Securities:
  Adjustable Rate (1)                    $40,253             6.71%            $32,256               4.50%
  Fixed Rate                            $554,216            92.35%            662,348              94.50%
Other Fixed Income Securities             $5,662             0.94%              6,539               1.00%
                                  ---------------   ---------------    ---------------    ----------------
     Totals                             $600,131           100.00%           $701,143             100.00%
                                  ===============   ===============    ===============    ================

</TABLE>

           (1) At December 31, 2000 and 1999, the interest rate indices for 97%
               and 3% of the adjustable rate mortgage securities were based on
               the one-year U.S. Treasury rate and the six-month London
               Inter-Bank Offered Rate, respectively.


                                       23

<PAGE>


     The following table shows various weighted average characteristics of the
Fixed Income Securities held by the Company at December 31, 2000 (dollars in
thousands):

<TABLE>
<CAPTION>

                                                              Percent of                                       Weighted
                                                              Total Par      Adjusted    Market    Current     Average
Security Type                                   Par Amount    Amount       Cost Basis    Price     Coupon     Life (1)
------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>          <C>           <C>          <C>        <C>        <C>
15 Year Agency/AAA Pass-throughs                 $145,251       23.90%        98.00%     99.90%     6.50%           4.5
20 Year Agency Pass-throughs                      230,193       37.90%        97.00%     99.30%     6.50%           5.6
30 Year Agency Pass-throughs                       54,759        9.00%        99.65%    101.23%     7.41%           5.0
AAA CMOs                                          127,759       21.00%        95.68%     97.92%     6.80%           6.4
                                        ------------------ ------------ ------------- ---------- ---------  ------------
Total Fixed Rate Holdings                        $557,962       91.80%        97.22%     99.33%     6.80%           5.4

Other Fixed Income Securities                      10,400        1.70%        64.31%     54.44%    15.89%           1.8
Adjustable Rate Holdings                           39,253        6.50%       102.49%    102.55%     8.00%           0.6
                                        ------------------ ------------ ------------- ---------- ---------  ------------

Total Portfolio                                  $607,615      100.00%        96.99%     98.77%     6.90%           5.1
                                        ================== ============ ============= ========== =========  ============
</TABLE>

     The following table shows various weighted average characteristics of the
Fixed Income Securities held by the Company at December 31, 1999 (dollars in
thousands):

<TABLE>
<CAPTION>

                                                           Percent of                                         Weighted
                                                           Total Par    Amortized      Market      Current     Average
Security Type                               Par Amount     Amount       Cost Basis     Price       Coupon     Life (1)
---------------------------------------------------------------------------------------------------------------------------
<S>                                         <C>           <C>          <C>            <C>            <C>         <C>
15 Year Agency/AAA Pass-throughs              $167,717        23.00%       100.49%      97.30%      6.50%          5.1
20 Year Agency Pass-throughs                   251,819        34.50%       100.46%      96.26%      6.50%          6.4
30 Year Agency Pass-throughs                    31,424         4.30%       101.36%      95.98%      6.99%          7.7
AAA CMOs                                       237,202        32.40%        99.76%      95.53%      6.82%          7.2
                                        ---------------  ------------ ------------- ----------- ----------  -----------
Total Fixed Rate Holdings                     $688,162        94.20%       100.26%      96.25%      6.63%          6.4

Other Fixed Income Securities                   10,400         1.40%        69.38%      62.88%     15.53%          2.1
Adjustable Rate Holdings                        31,923         4.40%       101.73%     101.04%      6.62%          1.0
                                        ---------------  ------------ ------------- ----------- ----------  -----------

Total Portfolio                               $730,485       100.00%        99.89%      95.88%      6.76%          6.1
                                        ===============  ============ ============= =========== ==========  ===========
</TABLE>

          (1) The weighted average life of the fixed rate mortgage securities is
          based upon market prepayment expectations as of the dates shown. The
          actual weighted average life could be longer or shorter depending on
          the actual prepayment rates experienced over the life of the
          securities. The weighted average life shown for the adjustable rate
          mortgage assets represents the average time until the next coupon
          reset date. All averages are shown in years.


EQUITY SECURITIES

     At December 31, 2000 and 1999 the Company held $9,068,000 and $17,481,000
of equity securities, respectively. Equity securities consist primarily of
investment in equities issued by other real estate investment trusts.

                                       24

<PAGE>

At December 31, 2000, equity securities consisted of the following:

<TABLE>
<CAPTION>

  (In thousands)                                   Shares Held      Adjusted Cost        Fair Value
                                                  --------------------------------------------------
  <S>                                              <C>              <C>                  <C>
  COMMON STOCK:
  American Residential Investment Trust, Inc.              109               $611              $238
  Anworth Mortgage Asset Corporation                       222                994               900
  Dynex Capital, Inc.                                       75                122                75
                                                               -------------------------------------
      Total Common Stock                                                    1,727             1,213
                                                               -------------------------------------

  CONVERTIBLE PREFERRED STOCK:
  Capstead Mortgage Corporation, Series B                  520              4,408             5,492
  Dynex Capital, Inc., Series A                             53                420               427
  Dynex Capital, Inc., Series B                            150              1,167             1,088
  Dynex Capital, Inc.,  Series C                           108                968               848
                                                               -------------------------------------
      Total Convertible Preferred Stock                                     6,963             7,855
                                                               -------------------------------------

  Total Equity Securities                                                  $8,690            $9,068
                                                               =====================================
</TABLE>

At December 31, 1999, equity securities consisted of the following:

<TABLE>
<CAPTION>

  (In thousands)                                   Shares Held               Cost        Fair Value
                                                  --------------------------------------------------
  <S>                                              <C>                       <C>         <C>
  COMMON STOCK:
  American Residential Investment Trust, Inc.              109               $611              $748
  Anthracite Capital, Inc.                                 500              3,071             3,188
  Anworth Mortgage Asset Corporation                       222                994               997
  Dynex Capital, Inc.                                       75              1,080               483
  Hanover Capital Mortgage Holdings, Inc.                  385              1,842             1,396
  Impac Commercial Holdings, Inc.                          249              1,441             1,307
                                                               -------------------------------------
      Total Common Stock                                                    9,039             8,119
                                                               -------------------------------------

  CONVERTIBLE PREFERRED STOCK:
  Capstead Mortgage Corporation, Series B                  520              4,408             4,940
  Dynex Capital, Inc., Series A                             53                920               715
  Dynex Capital, Inc., Series B                            150              2,711             1,987
  Dynex Capital, Inc.,  Series C                           108              2,292             1,720
                                                               -------------------------------------
      Total Convertible Preferred Stock                                    10,331             9,362
                                                               -------------------------------------

  Total Equity Securities                                                 $19,370           $17,481
                                                               =====================================

</TABLE>

HEDGING INSTRUMENTS

     The Company utilizes interest rate caps, swaps and similar financial
instruments to mitigate the risk of the cost of its variable-rate liabilities
exceeding the earnings on its mortgage assets during a period of rising interest
rates.

     Under these agreements, the Company received cash payments to the extent of
the excess of three-month LIBOR over the agreements' contract rate times the
notional amount. During the year ended December 31, 1999, the Company terminated
all outstanding interest rate caps with a notional amount of $900,000,000 which
resulted in a realized gain of $172,000 which is included in net gain on
investment transactions in the 1999 statement of operations.

                                       25
<PAGE>

     During the year ended December 31, 1999, the expiration of put options on
ten-year U.S. Treasury futures contracts with a notional amount of $50,000,000
resulted in a realized loss of $334,000 which is included in net gain on
investment transactions in the 1999 statement of operations.

     During the year ended December 31, 2000, the Company terminated all
outstanding interest rate swap agreements with a combined notional amount of
$386,213,000 which resulted in a deferred gain of $5,554,000 that will be
amortized over the remaining life of the original swap agreements. The deferred
gain is included in liabilities on the balance sheet and the amortization
expense is included in interest expense in the statement of operations. During
the year ended December 31, 2000, $3,008,000 of the deferred gain was amortized.
Approximately 92% of the deferred gain will be amortized by June 30, 2001. The
remaining deferred gain will be fully amortized by May 31, 2002.

     At December 31, 1999, the Company had entered into interest rate swap
agreements with the total current notional amount as stated below. Under these
agreements, the Company receives a floating rate and pays a fixed rate.

<TABLE>
<CAPTION>
           Current                                                                         Average           Unrealized
       Notional Amount         Weighted            Average                               Termination           Gains
            (000)            Average Life         Fixed Rate          Floating Rate         Date               (000)
    ---------------------- ------------------ -------------------- ------------------- ------------------- -----------------
       <S>                   <C>                  <C>                 <C>                 <C>                 <C>
          $400,129             1.6 years            5.869%             1Mo LIBOR            8/9/2001            $3,815
</TABLE>

     During the year ended December 31, 1999, the Company terminated interest
rate swap agreements with a combined notional amount of $255,530,000 which
resulted in a net deferred loss of $66,000, which was fully amortized at August
31, 2000. The deferred loss is included in other comprehensive income on the
balance sheet and the amortization expense is included in interest expense in
the statement of operations. During years ended December 31, 2000 and 1999,
$23,000 and $42,000 of the net deferred loss was amortized, respectively.

     The Company is generally required to deposit collateral with the swap
agreement counter-parties in an amount at least equal to the amount of any
unrealized losses. At December 31, 1999 the Company had securities with a fair
market value of $2,592,000 on deposit with its counter-parties. At December 31,
1999 the Company received fixed income securities with a fair market value of
$1,600,000 as a deposit from a swap agreement counter-party.

     There can be no assurance that the Company will enter into hedging
activities or that, if entered into, such activities will have the desired
beneficial impact on the Company's results of operations or financial condition.
Moreover, no hedging activity can completely insulate the Company from the risks
associated with changes in interest rates and prepayment rates.

     Hedging involves risk and typically involves costs, including transaction
costs. Such costs increase dramatically as the period covered by the hedging
increases and during periods of rising and volatile interest rates. The Company
may increase its hedging activity and, thus, increase its hedging costs during
such periods when interest rates are volatile or rising and hedging costs have
increased. The Company intends generally to hedge as much of the interest rate
risk as the Manager determines is in the best interest of the shareholders of
the Company given the cost of such hedging transactions and the Company's desire
to maintain its status as a REIT. The Company's policies do not contain specific
requirements as to the percentages or amount of interest rate risk that the
Manager is required to hedge.

At December 31, 2000, the Company had open forward contracts to sell U.S.
Treasury notes with terms stated below.

<TABLE>
<CAPTION>
            Current                                      Fair value of             Average               Unrealized
        Notional Amount           Average Contract         contracts             Termination           Gains (Losses)
            (000)                     Price                  (000)                  Date                    (000)
    ------------------------ --- -------------------- ---------------------- ---------------------- ------------------------
        <S>                        <C>                   <C>                      <C>                   <C>
           $575,000                    101.099              $585,048               1/19/2001               ($3,731)

</TABLE>
                                       26
<PAGE>


At December 31, 1999, the Company had entered into forward contracts to sell
U.S. Treasury notes with terms stated below.


<TABLE>
<CAPTION>
                                                          Fair value of             Average               Unrealized
            Current               Average Contract          contracts             Termination           Gains (Losses)
     Notional Amount (000)              Price                 (000)                  Date                    (000)
    ------------------------ --- -------------------- ---------------------- ---------------------- ------------------------
    <S>                           <C>                     <C>                    <C>
           $335,000                    99.278               $336,492               2/12/2000                $3,909
</TABLE>

     The contracts were entered into to mitigate the negative impact of
rising interest rates on fixed income securities available-for-sale that
generally have a market weighted average duration approximately equal to the
contracts shown above.

     The following is a presentation of forward contracts closed during the
year ended December 31, 2000:

<TABLE>
<CAPTION>
                                                        Deferral Amount
                                                             (000)
                                                   ---------------------------
                         <S>                            <C>
                         Deferred (Losses)                        $(22,902)
                         Deferred Gains                              6,042
                                                   ---------------------------
                         Total Deferral                           $(16,860)
                                                   ===========================
</TABLE>

     During the year ended December 31, 2000, forward contracts to sell U.S.
Treasury notes with a notional amount of $5,670,000,000 were closed resulting
in a net deferred loss of $16,860,000. $8,425,000 of the deferred loss
incurred was reclassified from other comprehensive income into net loss on
investment transactions in the statement of operations during the year ended
December 31, 2000 as part an impairment charge recorded on the underlying
assets being hedged. The Company anticipates reclassifying the remaining
deferred and unrealized losses from other comprehensive income into a net
loss line item in the statement of operations on January 1, 2001 in
connection with the adoption of Statement of Financial Accounting Standards
("SFAS") No. 133.

     During the year ended December 31, 1999, two forward contracts to sell
U.S. Treasury notes with a notional amount of $135,000,000 and $100,000,000
were closed resulting in a deferred loss of $390,000 and deferred gain of
$51,000, respectively.

LIABILITIES

     The Company has entered into reverse repurchase agreements to finance
certain of its mortgage-backed securities. These agreements are secured by a
portion of the Company's mortgage-backed securities and bear interest rates
that have historically moved in close relationship to LIBOR.

     At December 31, 2000, the Company had outstanding $545,434,000 of
reverse repurchase agreements with a weighted average current borrowing rate
of 6.61% and a maturity of 1.1 months. The reverse repurchase agreements were
collateralized by mortgage-backed securities with an estimated fair value of
$564,274,000.

     At December 31, 1999, the Company had outstanding $672,660,000 of
reverse repurchase agreements with a weighted average current borrowing rate
of 5.98% and a maturity of 2.0 months. The reverse repurchase agreements were
collateralized by mortgage-backed securities with an estimated fair value of
$689,396,000.

     The Company had $24,256,000 and $7,044,000 of other liabilities at
December 31, 2000 and 1999, respectively, consisting primarily of deferred
gain on interest rate swaps, accrued interest payable and payables for
unsettled securities at December 31, 2000 and accrued interest payable and
payables for unsettled securities at December 31, 1999. The Company
anticipates settling all other liabilities within one year.

                                     27
<PAGE>


OTHER MATTERS

     At December 31, 2000, the Company held equity securities and senior
unsecured notes issued by Dynex Capital, Inc. ("Dynex") with fair market
values of $2,437,000 and $3,750,000, respectively. During the year ended
December 31, 1999, Dynex suspended the payment of dividends on its preferred
stock. Accordingly, the Company is no longer recognizing dividend income on
its equity investments in Dynex. Dynex is currently paying interest on its
senior notes. Accordingly, the Company is recognizing interest income on the
senior note investments issued by Dynex. If Dynex were to suspend payment of
interest on its senior notes, interest income recognized by the Company would
be negatively impacted.

     During the year ended December 31, 2000, the Company recorded an
impairment reserve of $3,368,000 on its Dynex preferred stock holdings which
is included in net loss on investment transactions in the statement of
operations. The Company could also incur additional losses if the remaining
Dynex investments are sold or written-down further.

     During the year ended December 31, 2000, the Company recorded an
impairment reserve on its Dynex common stock holdings of $958,000 which is
included in net loss on investment transactions in the statement of
operations. The Company could also incur additional losses if the remaining
Dynex investments are sold or written-down further.

RESULTS OF OPERATIONS - 2000 COMPARED TO 1999

     For the year ended December 31, 2000, the Company's net loss was
$28,243,000, or $4.91 per share on a basic and diluted basis, based on a
weighted average of 5,753,000 shares outstanding. That compares to net income
of $11,112,000, or $1.93 per share on a basic basis and $1.92 on a diluted
basis, based on a weighted average of 5,753,000 and 5,779,000 shares
outstanding, respectively, for the year ended December 31, 1999. Net interest
income for the year ended December 31, 2000 was $9,055,000 consisting of
interest income on mortgage assets and cash balances less interest expense on
reverse repurchase agreements compared to $10,172,000 for the year ended
December 31, 1999. The Company reported dividend income of $1,139,000 from
dividends on equity investments for the year ended December 31, 2000 compared
to $2,387,000 for the year ended December 31, 1999. The Company reported net
losses on investment transactions of $36,703,000 consisting primarily of an
impairment charge of $18,284,000 on certain fixed-rate mortgage securities
that may be sold prior to maturity, an impairment charge of $4,326,000 on
certain equity securities, the recognition of the associated unrealized loss
and deferred hedging losses on the impaired assets of $8,425,000, a loss of
$5,795,000 on the sale of $193,953,000 of fixed income securities and a gain
of $126,000 on the sale of equity securities during the year ended December
31, 2000. The Company realized a net gain of $1,938,000 primarily from the
sale of equity investments for the year ended December 31, 1999. The Company
incurred operating expenses of $1,734,000 for the year ended December 31,
2000 consisting of incentive fees, management fees, audit, tax, legal,
printing, insurance and other expenses compared to $3,385,000 for the year
ended December 31, 1999.

         The following table reflects the average balances for each category
of the Company's interest earning assets as well as the Company's interest
bearing liabilities, with the corresponding effective rate of interest
annualized (dollars in thousands):

                                       28

<PAGE>

                         AVERAGE BALANCE AND RATE TABLE
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                     For the Year Ended                For the Year Ended
                                                     December 31, 2000                 December 31, 1999
                                                -----------------------------      ---------------------------
                                                  Average         Effective          Average       Effective
                                                  Balance           Rate             Balance          Rate
                                                ------------     ------------      ------------    -----------
<S>                                               <C>             <C>               <C>               <C>
Interest Earning Assets:
     Mortgage Securities                           $622,350            6.67%          $772,464          6.65%
     Other Fixed Income Assets                        6,945           16.09%             5,822         14.40%
     Cash and Cash Equivalents                        3,588            4.96%             6,322          4.76%
                                                ------------     ------------      ------------    -----------
     Total Interest Earning Assets                  632,883            6.76%           784,608          6.69%
                                                ------------     ------------      ------------    -----------
Interest Bearing Liabilities:
     Reverse Repurchase Agreements                  576,190            5.86%           732,960          5.78%
                                                ------------     ------------      ------------    -----------
Net Interest Earning Assets and Spread              $56,693            0.91%           $51,648          0.91%
                                                ============     ============      ============    ===========
</TABLE>


     The effective yield data is computed by dividing the annualized net
interest income or expense including hedging transactions into the average daily
balance shown.

     The following table reflects the average balances for the Company's equity
securities (dollars in thousands):

                         AVERAGE BALANCE AND RATE TABLE
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                     For the Year Ended                For the Year Ended
                                                     December 31, 2000                 December 31, 1999
                                                ----------------------------       ---------------------------
                                                                  Effective                        Effective
                                                  Average          Dividend           Average        Dividend
                                                  Balance           Yield            Balance         Yield
                                                ------------     ------------      ------------    -----------
     <S>                                          <C>             <C>                <C>           <C>
     Equity securities                              $15,578            7.31%           $18,763         12.73%
</TABLE>

RESULTS OF OPERATIONS - 1999 COMPARED TO 1998

     For the year ended December 31, 1999, the Company's net income was
$11,112,000, or $1.93 per share on a basic basis and $1.92 on a diluted
basis, based on a weighted average of 5,753,000 and 5,779,000 shares
outstanding, respectively. That compares to $5,547,000, or $0.90 per share on
both a basic and diluted basis, based on a weighted average of 6,190,000
shares outstanding for the year ended December 31, 1998. Net interest income
for the year ended December 31, 1999 was $10,172,000 consisting of interest
income on mortgage assets and cash balances less interest expense on reverse
repurchase agreements compared to $5,968,000 for the year ended December 31,
1998. The Company reported dividend income of $2,387,000 from dividends on
equity investments for the year ended December 31, 1999 compared to $636,000
for the year ended December 31, 1998. The Company reported net gains on
investment transactions of $1,938,000 primarily from the sale of equity
securities during the year ended December 31, 1999. The Company realized a
net gain of $1,047,000 primarily from the sale of mortgage-backed securities
and other investments for the year ending December 31, 1998. The Company
incurred operating expenses of $3,385,000 for the year ended December 31,
1999 consisting of incentive fees, management fees, audit, tax, legal,
printing, insurance and other expenses compared to $2,104,000 for the year
ended December 31, 1998.

         The following table reflects the average balances for each category of
the Company's interest earning assets as well as the Company's interest bearing
liabilities, with the corresponding effective rate of interest annualized
(dollars in thousands):

                                       29
<PAGE>

                         AVERAGE BALANCE AND RATE TABLE
                             (Dollars in thousands)

<TABLE>
<CAPTION>

                                                     For the Year Ended                For the Year Ended
                                                     December 31, 1999                 December 31, 1998
                                                ----------------------------       ---------------------------
                                                  Average         Effective          Average       Effective
                                                  Balance           Rate             Balance          Rate
                                                ------------     ------------      ------------    -----------
<S>                                              <C>              <C>               <C>            <C>
Interest Earning Assets:
     Mortgage Securities                           $772,464            6.65%          $670,559          6.13%
     Other Fixed Income Assets                        5,822           14.40%             1,324         14.37%
     Cash and Cash Equivalents                        6,322            4.76%            13,923          5.10%
                                                ------------     ------------      ------------    -----------
     Total Interest Earning Assets                  784,608            6.69%           685,806          6.12%
                                                ------------     ------------      ------------    -----------
Interest Bearing Liabilities:
     Reverse Repurchase Agreements                  732,960            5.78%           624,865          5.76%
                                                ------------     ------------      ------------    -----------
Net Interest Earning Assets and Spread              $51,648            0.91%           $60,941          0.36%
                                                ============     ============      ============    ===========
</TABLE>

     The effective yield data is computed by dividing the annualized net
interest income or expense including hedging transactions into the average daily
balance shown.

     The following table reflects the average balances for the Company's equity
securities (dollars in thousands):

                         AVERAGE BALANCE AND RATE TABLE
                             (Dollars in thousands)


<TABLE>
<CAPTION>

                                                     For the Year Ended                For the Year Ended
                                                     December 31, 1999                 December 31, 1998
                                                -----------------------------      ---------------------------
                                                                  Effective                         Effective
                                                  Average          Dividend          Average         Dividend
                                                  Balance           Yield            Balance          Yield
                                                ------------     ------------      ------------    -----------
     <S>                                          <C>             <C>                <C>           <C>
     Equity securities                              $18,763           12.73%            $3,718         17.10%
</TABLE>

     The effective yield data is computed by dividing the annualized net
interest income or expense into the average daily balance shown.


LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary sources of funds as of December 31, 2000 consisted of
reverse repurchase agreements totaling $545,434,000. The Company expects to
continue to borrow funds in the form of reverse repurchase agreements. At
December 31, 2000, the Company had borrowing arrangements with over twenty
different investment banking firms. Increases in short-term interest rates could
negatively impact the valuation of the Company's mortgage assets which could
limit the Company's borrowing ability or cause its lenders to initiate margin
calls.

     The Company will also rely on the cash flow from operations, primarily
monthly principal and interest payments to be received on the mortgage assets,
for liquidity.

     The Company believes that equity capital, combined with the cash flow from
operations and the utilization of borrowings, will be sufficient to enable the
Company to meet anticipated liquidity requirements. If the Company's cash
resources are at any time insufficient to satisfy the Company's liquidity
requirements, the Company may be required to liquidate mortgage assets or sell
debt or additional equity securities. If required, the sale of mortgage assets
at prices lower than the carrying value of such assets would result in losses.


                                     30
<PAGE>

     The Company may in the future increase its capital resources by making
additional offerings of equity and debt securities, including classes of
preferred stock, common stock, commercial paper, medium-term notes, CMOs and
senior or subordinated notes. All debt securities, other borrowings, and
classes of preferred stock will be senior to the Common Stock in a
liquidation of the Company. The effect of additional equity offerings may be
the dilution of stockholders' equity of the Company or the reduction of the
price of shares of the Common Stock, or both. The Company is unable to
estimate the amount, timing or nature of additional offerings as they will
depend upon market conditions and other factors.

INFLATION

     Virtually all of the Company's assets and liabilities are financial in
nature. As a result, interest rates and other factors drive the Company's
performance far more than does inflation. Changes in interest rates do not
necessarily correlate with inflation rates or changes in inflation rates. The
Company's financial statements are prepared in accordance with generally
accepted accounting principles and the Company's dividends are determined by
the Company's net income as calculated for tax purposes; in each case, the
Company's activities and balance sheet are measured with reference to
historical cost and or fair market value without considering inflation.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The Company's two primary components of market risk are interest rate risk
and equity price risk as discussed below.

INTEREST RATE RISK

     EFFECT ON NET INCOME. The Company invests in fixed-rate mortgage assets
that are expected to be funded with short-term borrowings. During periods of
rising interest rates, the borrowing costs associated with funding such
fixed-rate assets are subject to increase while the income earned on such
assets may remain substantially unchanged. This would result in a narrowing
of the net interest spread between the related assets and borrowings and may
even result in losses. The Company may enter into derivative transactions
seeking to mitigate the negative impact of a rising interest rate
environment. Hedging techniques will be based, in part, on assumed levels of
prepayments of the Company's mortgage assets. If prepayments are slower or
faster than assumed, the life of the mortgage assets will be longer or
shorter which would reduce the effectiveness of the Company's hedging
techniques and may result in losses on such transactions. Hedging techniques
involving the use of derivative securities are highly complex and may produce
volatile returns. The hedging activity of the Company will also be limited by
the asset and sources of income requirements applicable to the Company as a
REIT.

     EXTENSION RISK. Fixed-rate assets are generally acquired with a
projected weighted average life based on certain assumptions regarding
prepayments. In general, when a fixed-rate mortgage asset is acquired with
borrowings, the Company may, but is not required to, enter into an interest
rate swap agreement or other hedging instrument that effectively fixes the
Company's borrowing costs for a period close to the anticipated average life
of the related asset. This strategy is designed to protect the Company from
rising interest rates because the borrowing costs are fixed for the duration
of the asset. However, if prepayment rates decrease in a rising interest rate
environment, the life of the mortgage asset could extend beyond the term of
the swap agreement or other hedging instrument. This situation could
negatively impact the Company as borrowing costs would no longer be fixed
after the end of the hedging instrument while the income earned on the asset
would remain fixed. This situation may also cause the market value of the
Company's mortgage assets to decline with little or no offsetting gain from
the related hedging transactions. In certain situations, the Company may be
forced to sell assets and incur losses to maintain adequate liquidity.

     PREPAYMENT RISK. Fixed-rate assets in combination with hedging
instruments are also subject to prepayment risk. In falling interest rate
scenarios, the fixed-rate mortgage assets may prepay faster such that the
average life becomes shorter than its related hedging instrument. If this
were to happen, the Company would potentially need to reinvest at rates lower
than that of the related hedging instrument. This situation may result in the
narrowing of interest rate spreads or may cause losses.

     FORWARD CONTRACT RISK. The Company may also enter in forward contracts
to sell U.S. Treasury notes in addition to or instead of interest rate swap
agreements. These forward contracts are generally expected to mitigate the
impact of rising interest rates on the fair value of the Company's fixed
income securities. However, if the interest rate spread between mortgage
securities and U.S. Treasury notes were to widen, the fair value of the
Company's portfolio would generally be

                                   31

<PAGE>

expected to decline. In addition, the use of forward contracts to sell U.S.
Treasury notes generally does not directly impact borrowing costs in the same
manner as interest rate swap agreements. Therefore, the use of such forward
contracts could result in net income volatility during periods of interest
rate volatility.

     The Company also invests in adjustable-rate mortgage assets that are
typically subject to periodic and lifetime interest rate caps that limit the
amount an adjustable-rate mortgage asset's interest rate can change during
any given period, as well as the minimum rate payable. The Company's
borrowings will not be subject to similar restrictions. Hence, in a period of
increasing interest rates, interest rates on its borrowings could increase
without limitation by caps, while the interest rates on its mortgage assets
are generally limited by caps. This problem will be magnified to the extent
the Company acquires mortgage assets that are not fully indexed. Further,
some adjustable-rate mortgage assets may be subject to periodic payment caps
that result in some portion of the interest being deferred and added to the
principal outstanding. This could result in receipt by the Company of less
cash income on its adjustable-rate mortgage assets than is required to pay
interest on the related borrowings. These factors could lower the Company's
net interest income or cause a net loss during periods of rising interest
rates, which would negatively impact the Company's financial condition, cash
flows and results of operations.

     The Company intends to fund a substantial portion of its acquisitions of
adjustable-rate mortgage assets with borrowings that have interest rates
based on indices and repricing terms similar to, but of somewhat shorter
maturities than, the interest rate indices and repricing terms of the
mortgage assets. Thus, the Company anticipates that in most cases the
interest rate indices and repricing terms of its mortgage assets and its
funding sources will not be identical, thereby creating an interest rate
mismatch between assets and liabilities. While the historical spread between
relevant short-term interest rate indices has been relatively stable, there
have been periods, especially during the 1979-1982 and 1994 interest rate
environments, when the spread between such indices was volatile. During
periods of changing interest rates, such interest rate mismatches could
negatively impact the Company's financial condition, cash flows and results
of operations.

     Prepayment rates generally increase when prevailing interest rates fall
below the interest rates on existing mortgage assets. In addition, prepayment
rates generally increase when the difference between long-term and short-term
interest rates declines. Prepayments of mortgage assets could adversely
affect the Company's results of operations in several ways. The Company
anticipates that a substantial portion of its adjustable-rate mortgage assets
may bear initial "teaser" interest rates that are lower than their "fully
indexed" rates (the applicable index plus a margin). In the event that such
an adjustable-rate mortgage asset is prepaid prior to or soon after the time
of adjustment to a fully indexed rate, the Company will have held the
mortgage asset while it was less profitable and lost the opportunity to
receive interest at the fully indexed rate over the expected life of the
adjustable-rate mortgage asset. In addition, the prepayment of any mortgage
asset that had been purchased at a premium by the Company would result in the
immediate write-off of any remaining capitalized premium amount and
consequent reduction of the Company's net interest income by such amount.
Finally, in the event that the Company is unable to acquire new mortgage
assets to replace the prepaid mortgage assets, its financial condition, cash
flow and results of operations could be materially adversely affected.

     EFFECT ON FAIR VALUE. Another component of interest rate risk is the
effect changes in interest rates will have on the market value of the
Company's assets. This is the risk that the market value of the Company's
assets will increase or decrease at different rates than that of the
Company's liabilities including its hedging instruments.

     The Company primarily assesses its interest rate risk by estimating the
duration of its assets and the duration of its liabilities including all
hedging instruments. Duration essentially measures the market price
volatility of financial instruments as interest rates change. The Company
generally calculates duration using various financial models and empirical
data.

                                      32
<PAGE>


     The following sensitivity analysis table shows the estimated impact on the
fair value of the Company's interest rate sensitive investments net of its
hedging instruments and reverse repurchase agreement liabilities assuming rates
instantaneously fall one hundred basis points and rise one hundred basis points.
(Dollars are in thousands except per share amounts.)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                                 Fair Value for Scenario Shown
                                                            Interest                       Interest
                                                           Rates Fall                     Rates Rise
                                                           100 Basis                       100 Basis
                                                             Points        Unchanged        Points
-------------------------------------------------------------------------------------------------------
<S>                                                        <C>             <C>            <C>
Interest Rate Sensitive Instruments                            $34,842          $36,130        $32,896

Change in Fair Value                                           ($1,288)               -       ($3,234)
Change as a Percent of Fair Value                               (0.21%)               -        (0.54%)
Change as a Percent of Stockholders' Equity                     (2.90%)               -        (7.29%)
Change on a Per Share Basis                                     ($0.22)               -        ($0.56)
</TABLE>

     It is important to note that the impact of changing interest rates on fair
value can change significantly when interest rates change beyond one hundred
basis points from current levels. Therefore, the volatility in fair value for
the Company could increase significantly when interest rates change beyond one
hundred basis points. In addition, there are other factors that impact the fair
value of the Company's interest rate sensitive investments and hedging
instruments such as the shape of the yield curve, market expectations as to
future interest rate changes and other market conditions. Accordingly, there may
be differences between the fair value changes shown above and actual changes in
fair value as interest rates change and those differences may be material.

     The Company has established an interest rate risk management policy that is
intended to mitigate the negative impact of changing interest rates. The Company
generally intends to mitigate interest rate risk by targeting the difference
between the market weighted average duration on its mortgage related assets
funded with secured borrowings to the market weighted average duration of such
borrowings to one year or less, taking into account all hedging transactions.
The Company generally does not intend to have any specific duration target for
the portion its mortgage related assets that are not funded by secured
borrowings.

     There can be no assurance that the Company will be able to limit such
duration differences and there may be periods of time when the duration
difference will be greater than one year.

EQUITY PRICE RISK

     Another component of market risk for the Company is equity price risk. This
is the risk that the market value of the Company's equity investments will
decrease. The following table shows the impact on the Company's fair value as
the price of its equity securities change assuming price decreases of 10% and
increases of 10%. Actual price decreases or increases may be greater or smaller.
(Dollars are in thousands except per share amounts.)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
                                                               Fair Value for Scenario Shown
                                                          Prices                           Prices
                                                         Decrease                          Increase
                                                           10%            Unchanged          10%
-------------------------------------------------------------------------------------------------------
<S>                                                     <C>              <C>            <C>
Equity Investments                                            $8,161           $9,068          $9,975

Change in Fair Value                                            (907)               -             907
Change as a Percent of Fair Value                               (10%)               -             10%
Change as a Percent of Stockholders' Equity                    (2.0%)               -            2.0%
Change on a Per Share Basis                                    (0.16)               -            0.16
</TABLE>

                                      33

<PAGE>

     Although there is no direct link between changes in fair value and
changes in earnings in many cases, a decline in fair value for the Company
may translate into decreased earnings over the remaining life of the
investment portfolio.

     If the fair market value of the Company's portfolio were to decline
significantly, the Company's overall liquidity may be impaired which could
result in the Company being required to sell assets at losses.

     THE COMPANY'S ANALYSIS OF RISKS IS BASED ON MANAGEMENT'S EXPERIENCE,
ESTIMATES, MODELS AND ASSUMPTIONS. THESE ANALYSES RELY ON MODELS OF FINANCIAL
INFORMATION WHICH UTILIZE ESTIMATES OF FAIR VALUE AND INTEREST RATE
SENSITIVITY. ACTUAL ECONOMIC CONDITIONS OR IMPLEMENTATION OF INVESTMENT
DECISIONS BY THE MANAGER MAY PRODUCE RESULTS THAT DIFFER SIGNIFICANTLY FROM
THE ESTIMATES AND ASSUMPTIONS USED IN THE COMPANY'S MODELS AND THE PROJECTED
RESULTS SHOWN IN THE ABOVE TABLES AND IN THIS REPORT. THESE ANALYSES CONTAIN
CERTAIN "FORWARD-LOOKING STATEMENTS" AND ARE SUBJECT TO THE SAFE HARBOR
CONTAINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements of the Company and the related notes, together
with the Independent Auditors' Report thereon, are set forth on pages F-3
through F-20 on this Form 10-K.

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

     None.
                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by Item 10 is incorporated herein by reference to
the definitive Proxy Statement to be filed within 120 days from December 31,
2000 pursuant to general instruction G(3).


ITEM 11.  EXECUTIVE COMPENSATION

     The information required by Item 11 is incorporated herein by reference to
the definitive Proxy Statement to be filed within 120 days from December 31,
2000 pursuant to general instruction G(3).


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by Item 12 is incorporated herein by reference to
the definitive Proxy Statement to be filed within 120 days from December 31,
2000 pursuant to general instruction G(3).


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by Item 13 is incorporated herein by reference to
the definitive Proxy Statement to be filed within 120 days from December 31,
2000 pursuant to general instruction G(3).

                                       34

<PAGE>


                                     PART IV


ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  Documents filed as part of this report:

     1.   The following  financial  statements of the Company are included in
          Part II, Item 8 of this Annual Report on Form 10-K:

          -    Independent Auditors' Report;

          -    Balance Sheets as of December 31, 2000 and December 31, 1999;

          -    Statements of Operations: Years Ended December 31, 2000,
               December 31, 1999 and December 31, 1998;

          -    Statements of Stockholders' Equity:  Years Ended December 31,
               2000, December 31, 1999 and December 31, 1998;

          -    Statements of Cash Flows: Years Ended December 31, 2000,
               December 31, 1999 and December 31, 1998;

          -    Notes to Financial Statements.


     2.   Schedules to financial statements:

          All financial statement schedules have been omitted because they are
          either inapplicable or the information required is provided in the
          Company's Financial Statements and Notes thereto, included in Part II,
          Item 8 of this Annual Report on Form 10-K.


     3.   Exhibits:

<TABLE>
<CAPTION>
          Exhibit
          Number                     Exhibit
          --------                   -------
          <S>                        <C>
          24.1.1                     Powers of Attorney.
</TABLE>

(b)  Reports on Form 8-K.

         None.


                                       35
<PAGE>

                                    GLOSSARY

     As used in this Annual Report on Form 10-K, the capitalized and other
terms listed below have the meanings indicated.

     "Affiliate" means, when used with reference to a specified person, any
person that directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with the specified
person.

     "Average Net Invested Capital" means the month end sum of (1) the
Company's total shareholders' equity computed in accordance with generally
accepted accounting principles plus (2) any unsecured debt that has been
approved for inclusion by the Unaffiliated Directors at issuance plus or
minus (3) an adjustment to exclude the impact of any unrealized gains, losses
or other items that do not affect realized net income.

     "Average Net Worth" means for any period the arithmetic average of the
sum of the gross proceeds from the offerings of its equity securities by the
Company, before deducting any underwriting discounts and commissions and
other expenses and costs relating to the offerings, plus the Company's
retained earnings (without taking into account any losses incurred in prior
periods) computed by taking the average of such values at the end of each
month during such period, minus the cumulative amounts paid by the Company to
repurchase its shares.

     "Bankruptcy Code" means Title 11 of the United States Code, as amended

     "CMOs" means debt obligations (bonds) that are collateralized by
mortgage loans or mortgage certificates other than Mortgage Derivative
Securities and subordinated interests. CMOs are structured so that principal
and interest payments received on the collateral are sufficient to make
principal and interest payments on the bonds. Such bonds may be issued by
United States government agencies or private issuers in one or more classes
with fixed or variable interest rates, maturities and degrees of
subordination that are characteristics designed for the investment objectives
of different bond purchasers.

     "Code" means the Internal Revenue Code of 1986, as amended.

     "COFI" is the 11th District Cost of Funds Index, the index made
available monthly by the Federal Home Loan Bank Board of the cost of funds to
members of the Federal Home Loan Bank 11th District.

     "Committed Secured Borrowings" means (i) CMOs, (ii) structured
commercial paper programs, (iii) secured term notes and (iv) other secured
financing transactions that generally commit the lender to provide financing
to the Company for a specified period of time or to provide financing to the
Company to fund specific assets until they mature.

     "Common Stock" means the Company's shares of Common Stock, $0.01 par
value per share.

      "Company"  means Apex Mortgage Capital, Inc., a Maryland corporation.

     "Conforming Mortgage Loans" means conventional Mortgage Loans that
either comply with requirements for inclusion in credit support programs
sponsored by Fannie Mae, FHLMC, or GNMA or are FHA or VA Loans, all of which
are secured by first mortgages or deeds of trust on single-family (one to
four unit) residences.

     "Dollar-Roll Agreement" means an agreement to sell a security for
delivery on a specified future date and a simultaneous agreement to
repurchase the same or substantially similar security on a specified future
date.

     "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.

     "ERISA Plan" means a pension, profit-sharing, retirement or other
employee benefit plan that is subject to ERISA.

     "Fannie Mae" means the federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act (12 U.S.C., ss. 1716 et seq.), formerly known as the
Federal National Mortgage Association.

      "FHA"  means the United States Federal Housing Administration.

     "FHA Loans" means Mortgage Loans insured by the FHA.

      "FHLMC"  means the Federal Home Loan Mortgage Corporation.

                                       36
<PAGE>

     "FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.

     "Foreign Holder" means a purchaser of the Common Stock that, for United
States income tax purposes, is not a United States person.

      "GNMA"  means the Government National Mortgage Association.

     "High Credit Quality Mortgage Loans" means individual loans secured by
residential real property that are either underwritten to credit standards
that generally comply with the credit standards approved by Fannie, Freddie
Mac or GNMA or pools of loans that have other credit support features that
generally reduce the associated credit risk to that of investment grade
securities.

     "High Quality" means either (i) securities that are rated investment
grade or above by at least one of the Rating Agencies, or (ii) securities
that are unrated but are obligations of the United States or obligations
guaranteed by the United States government or an agency or instrumentality
thereof.

     "Interest Only Derivatives" means Mortgage Derivative Securities
representing the right to receive interest only or a disproportionately large
amount of interest.

     "Inverse Floaters" means a class of CMOs with a coupon rate that moves
inversely to a designated index, such as LIBOR or COFI. Income floaters have
coupon rates that typically change at a multiple of the changes at the
relevant index rate. Any rise in the index rate (as a consequence of an
increase in interest rates) causes a drop in the coupon rate of an Inverse
Floater while any drop in the index rate causes an increase in the coupon of
an Inverse Floater.

     "Investment Company Act" means the Investment Company Act of 1940, as
amended.

     "IRAs" means Individual Retirement Accounts.

     "IRS" means the Internal Revenue Service.

     "Keogh Plans"  means H.R. 10 Plans.

     "LIBOR" means the London-Inter-Bank Offered Rate.

     "Management Agreement" means the agreement by and between the Company
and the Manager whereby the Manager agrees to perform certain services to the
Company in exchange for certain compensation.

     "Manager"  means TCW Investment Management Company, a California
corporation.

     "MBS Group" means the TCW Group's Mortgage-Backed Securities Group.

     "Mortgage-Backed Securities" means securities representing interests in,
or secured by mortgages on residential real property that are not Mortgage
Derivative Securities.

     "Mortgage Derivative Securities" means mortgage backed securities that
are (i) Interest Only Derivatives, (ii) Principal Only Derivatives, (iii)
inverse interest only derivatives, (iv) Inverse Floaters and (v) other
mortgage related derivative instruments.

     "Mortgage Loans" means Conforming and Nonconforming Mortgage Loans, FHA
Loans and VA Loans.

     "Mortgage Related Assets" means (i) Short-Term Investments, (ii)
Mortgage-Backed Securities, (iii) High Credit Quality Mortgage Loans, (iv)
Mortgage Derivative Securities and (v) Other Investments.

     "Net Income" means the taxable income of the Company before the
Manager's incentive compensation, net operating loss deductions arising from
losses in prior periods and deductions permitted by the Code in calculating
taxable income for a REIT, including a deduction for the Company's interest
expenses for borrowed funds, plus the effects of adjustments, if any,
necessary to record hedging and interest transactions in accordance with
generally accepted accounting principles.

                                     37
<PAGE>

     "Nonconforming Mortgage Loans" means conventional Mortgage Loans that do
not conform to one or more requirements of Fannie Mae, FHA, FHLMC, GNMA or VA
for participation in one or more of such agencies' mortgage loan credit
support programs, such as the principal amounts financed or the underwriting
guidelines used in making the loan.

     "Other Investments" means (i) equity and debt securities issued by other
primarily mortgage related finance companies, (ii) interests in mortgage
related collateralized bond obligations, (iii) other subordinated interests
in pools of Mortgage Related Assets, (iv) commercial mortgage loans and
securities, and (v) residential mortgage loans other than High Credit Quality
Mortgage Loans.

     "Principal Only Derivatives" means Mortgage Derivative Securities
representing the right to receive principal only or a disproportionate amount of
principal.

     "Qualified REIT Real Estate Assets" means pass-through certificates,
Mortgage Loans, agency certificates, and other assets of the type described
in Section 856(c)(6)(B) of the Code.

     "Qualified Temporary Investment Income" means income attributable to
stock or debt instruments acquired with new capital of the Company received
during the one-year period beginning on the day such proceeds were received.

     "Rating Agencies" means any nationally recognized rating agency.

     "REIT" means a real estate investment trust as defined under Section 856
of the Code.

     "REIT Provisions of the Code" means Sections 856 through 860 of the Code.

     "Return on Equity" means an amount calculated for any quarter by
dividing the Company's Net Income for the quarter by its Average Net Worth
for the quarter.

     "Short-Term Investments" means short-term bank certificates of deposit,
short-term United States Treasury securities, short-term United States
government agency securities, commercial paper, repurchase agreements,
short-term CMOs, short-term asset-backed securities, and other similar types
of short-term investment instruments.

     "Tax-Exempt Entity" means a qualified pension, profit-sharing or other
employee retirement benefit plans, Keogh plans, bank commingled trust funds
for such plans, and IRAs, and other similar entities intended to be exempt
from federal income taxation.

     "Taxable Income" means for any year the taxable income of the Company
for such year (excluding any net income derived either from property held
primarily for sale to customers or from foreclosure property) subject to
certain adjustments provided in the REIT Provisions of the Code.

     "TCW" means The TCW Group, Inc.

     "TCW Group" means TCW and its subsidiaries and Affiliates.

     "Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly
average yield to maturity for actively traded current coupon U.S. Treasury
fixed interest rate securities (adjusted to a constant maturity of ten years)
published by the Federal Reserve Board during a quarter, or, if such rate is
not published by the Federal Reserve Board, any Federal Reserve Bank or
agency or department of the federal government selected by the Company. If
the Company determines in good faith that the Ten-Year U.S. Treasury Rate
cannot be calculated as provided above, then the rate shall be the arithmetic
average of the per annum average yields to maturities, based upon closing
asked prices on each business day during a quarter, for each actively traded
marketable U.S. Treasury fixed interest rate security with a final maturity
date not less than eight nor more than twelve years from the date of the
closing asked prices as chosen and quoted for each business day in each such
quarter in New York City by at least three recognized dealers in U.S.
government securities selected by the Company.

     "UBTI" means "unrelated trade or business income" as defined in Section
512 of the Code.

     "Unaffiliated Directors" means those directors that are not affiliated,
directly or indirectly, with the Manager or the TCW Group, whether by
ownership of, ownership interest in, employment by, any material business or
professional

                                     38
<PAGE>

relationship with, or serving as an officer or director of the Manager or the
TCW Group, and are not employed by or officers of the Company.

     "Uncommitted Secured Borrowings" means (i) reverse repurchase
agreements, (ii) lines of credit, (iii) Dollar-Roll Agreements, and (iv)
other secured financing transactions that generally do not commit the lender
to continue to provide financing to the Company.

     "United States Holder" means a purchaser of the Common Stock that, for
United States income tax purposes, is a United States person (i.e., is not a
Foreign Holder).

     "VA"  means the United States Veterans Administration.

     "VA Loans" means Mortgage Loans partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended.



                                     39
<PAGE>


                                   SIGNATURES

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


                                          Apex Mortgage Capital, Inc.
                                          (Registrant)


Dated: March 30, 2001                     /s/ Philip A. Barach
                                          --------------------------------------
                                          Philip A. Barach
                                          President and Chief Executive Officer
                                          (Principal Executive Officer)


Dated: March 30, 2001                     /s/ Daniel K. Osborne
                                          --------------------------------------
                                          Daniel K. Osborne
                                          Executive Vice President
                                          Chief Operating Officer and
                                          Chief Financial Officer
                                          (Principal Accounting Officer)


Pursuant to the requirements of the Securities and 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.

<TABLE>
<CAPTION>

Signature                                    Capacity                               Date
---------                                    --------                               ----
<S>                                      <C>                                    <C>

/s/ Marc I. Stern                        Chairman of the Board                  March 30, 2001
-------------------------------------
Marc I. Stern

/s/ Jeffrey E. Gundlach                  Vice Chairman of the Board             March 30, 2001
-------------------------------------    Chief Investment Officer
Jeffrey E. Gundlach

/s/ Philip A. Barach                     President and                          March 30, 2001
-------------------------------------    Chief Executive Officer
Philip A. Barach                         (Principal Executive Officer)

/s/ Peter G. Allen*                      Director                               March 30, 2001
-------------------------------------
Peter G. Allen

/s/ John C. Argue*                       Director                               March 30, 2001
-------------------------------------
John C. Argue

/s/ John A. Gavin*                       Director                               March 30, 2001
-------------------------------------
John A. Gavin

/s/ Carl C. Gregory III*                 Director                               March 30, 2001
-------------------------------------
Carl C. Gregory III

     *By: /s/Daniel K. Osborne
     --------------------------------
             Daniel K. Osborne
             Attorney-in-Fact
</TABLE>



                                       40
<PAGE>



                           APEX MORTGAGE CAPITAL, INC.


                              FINANCIAL STATEMENTS

                                       AND

                          INDEPENDENT AUDITORS' REPORT



                           FOR INCLUSION IN FORM 10-K

                                   FILED WITH

                       SECURITIES AND EXCHANGE COMMISSION

                                DECEMBER 31, 2000






                                     F-1


<PAGE>



                           APEX MORTGAGE CAPITAL, INC.

                          INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                          PAGE
                                                                          ----
<S>                                                                       <C>
Independent Auditors' Report                                              F-3

Balance Sheets                                                            F-4

Statements of Operations                                                  F-5

Statements of Stockholders' Equity                                        F-6

Statements of Cash Flows                                                  F-7

Notes to Financial Statements                                             F-8


</TABLE>






                                      F-2


<PAGE>


INDEPENDENT AUDITORS' REPORT


To the Stockholders of
  Apex Mortgage Capital, Inc.


We have audited the accompanying balance sheets of Apex Mortgage Capital, Inc.
(the "Company") as of December 31, 2000 and 1999 and the related statements of
operations, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000. 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 auditing standards generally accepted
in the United States of America. 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, such financial statements referred to above present fairly, in
all material respects, the financial position of Apex Mortgage Capital, Inc. as
of December 31, 2000 and 1999 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2000, in
conformity with accounting principles generally accepted in the United States of
America.


DELOITTE & TOUCHE LLP

Los Angeles, California
February 9, 2001







                                                F-3


<PAGE>

                              APEX MORTGAGE CAPITAL, INC.

                                   BALANCE SHEETS
<TABLE>
<CAPTION>

                                                                                     DECEMBER 31, 2000           DECEMBER 31, 1999
<S>                                                                                  <C>                         <C>
ASSETS

         Cash and cash equivalents                                                       $        140,000        $      2,605,000
         Fixed income securities available-for-sale, at fair value (Note 3)                   600,131,000             701,143,000
         Equity securities available-for-sale, at fair value (Note 3)                           9,068,000              17,481,000
         Accrued interest receivable                                                            3,734,000               6,254,000
         Principal payments receivable                                                            288,000               3,537,000
         Unrealized gain on forward contracts (Note 11)                                                -                3,909,000
         Other assets                                                                             712,000                 816,000
                                                                                         ----------------        ----------------
                                                                                         $    614,073,000        $    735,745,000
                                                                                         ================        ================


LIABILITIES AND STOCKHOLDERS' EQUITY

     Liabilities

         Reverse repurchase agreements (Note 5)                                          $    545,434,000        $    672,660,000
         Payable for unsettled securities                                                      14,514,000                       -
         Accrued interest payable                                                                 569,000               3,660,000
         Dividend payable                                                                       2,073,000               2,724,000
         Unrealized loss on forward contracts (Note 11)                                         3,731,000                       -
         Deferred gain on interest rate swap contracts                                          2,546,000                       -
         Accrued expenses and other liabilities                                                   823,000                 660,000
                                                                                         ----------------        ----------------
                                                                                              569,690,000             679,704,000
                                                                                         ================        ================

     Commitments and contingencies (Notes 3,4,10, and 11)

     Stockholders' Equity

         Preferred stock, par value $0.01 per share; 50,000,000 shares authorized;
              no shares outstanding
         Common stock, par value $0.01 per share; 100,000,000 shares authorized;
              6,700,100 shares outstanding (Notes 7 and 9)                                         67,000                  67,000
         Additional paid-in-capital                                                            93,360,000              93,265,000
         Accumulated other comprehensive income (loss)                                         (1,079,000)            (26,513,000)
         Accumulated dividend distributions in excess of net income                           (37,396,000)               (209,000)
         Treasury stock, at cost (947,100 shares) (Note 7)                                    (10,569,000)            (10,569,000)
                                                                                         ----------------        ----------------
                                                                                               44,383,000              56,041,000
                                                                                         ----------------        ----------------
                                                                                         $    614,073,000        $    735,745,000
                                                                                         ================        ================
</TABLE>

See accompanying notes to financial statements




                                                F-4
<PAGE>


                                     APEX MORTGAGE CAPITAL, INC.

                                      STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED
                                                                                           DECEMBER 31,
                                                            -----------------------------------------------------------------------
                                                                    2000                     1999                    1998
<S>                                                          <C>                     <C>                      <C>
INTEREST INCOME:
     Fixed income securities                                      $    42,618,000          $    52,216,000         $    41,265,000
     Cash and cash equivalents                                            216,000                  301,000                 710,000
                                                            ----------------------   ----------------------  ----------------------
                                                                       42,834,000               52,517,000              41,975,000

INTEREST EXPENSE                                                       33,779,000               42,345,000              36,007,000
                                                            ----------------------   ----------------------  ----------------------
NET INTEREST INCOME                                                     9,055,000               10,172,000               5,968,000
                                                            ----------------------   ----------------------  ----------------------

NET GAIN (LOSS) ON INVESTMENT TRANSACTIONS                            (36,703,000)               1,938,000               1,047,000

DIVIDEND INCOME                                                         1,139,000                2,387,000                 636,000

GENERAL AND ADMINISTRATIVE EXPENSES:
     Management fee (Note 8)                                              512,000                  629,000                 644,000
     Incentive fee (Note 8)                                                     -                1,714,000                 619,000
     Professional  fees                                                   382,000                   73,000                  75,000
     Insurance expense                                                    272,000                  267,000                 267,000
     Directors' fees                                                       76,000                   60,000                  70,000
     Stock option expense (Note 9)                                         95,000                  287,000                 118,000
     Other                                                                397,000                  355,000                 311,000
                                                            ----------------------   ----------------------  ----------------------
                                                                        1,734,000                3,385,000               2,104,000
                                                            ----------------------   ----------------------  ----------------------

NET INCOME (LOSS)                                                 $  (28,243,000)          $    11,112,000         $     5,547,000
                                                            ======================   ======================  ======================


Net Income (Loss) Per Share:
     Basic                                                        $        (4.91)          $          1.93         $          0.90
                                                            ======================   ======================  ======================
     Diluted                                                      $        (4.91)          $          1.92         $          0.90
                                                            ======================   ======================  ======================

Weighted Average Number of Shares Outstanding:
     Basic
                                                                        5,753,000                5,753,000               6,190,000
                                                            ======================   ======================  ======================
     Diluted                                                            5,753,000                5,779,000               6,190,000
                                                            ======================   ======================  ======================

Dividends Declared Per Share                                      $          1.51          $          1.72         $          1.07
                                                            ======================   ======================  ======================


</TABLE>


See accompanying notes to financial statements



                                                F-5
<PAGE>


                                        APEX MORTGAGE CAPITAL, INC.

                                    STATEMENTS OF STOCKHOLDERS' EQUITY
                                       YEAR ENDED DECEMBER 31, 2000

<TABLE>
<CAPTION>
                                                                                                         ACCUMULATED
                                                                                          ACCUMULATED      DIVIDEND
                                                         COMMON STOCK       ADDITIONAL       OTHER       DISTRIBUTIONS
                                                    ----------------------    PAID-IN    COMPREHENSIVE   IN EXCESS OF
                                                     SHARES      AMOUNT       CAPITAL    INCOME (LOSS)    NET INCOME
                                                    ---------  -----------  -----------  --------------  ------------
<S>                                                 <C>        <C>          <C>          <C>             <C>
Balance, January 1, 1998                            6,700,100   $  67,000   $92,860,000   $    188,000   $ (118,000)
Repurchases of common stock                                --          --           --              --
Issuance of stock options to non-employees (Note
  9)                                                       --          --      118,000              --
Net income                                                 --          --           --              --     5,547,000
Other comprehensive income:
  Net unrealized gain on investments
    available-for-sale, net of reclassification
    adjustment (Note 13)                                   --          --           --       6,501,000
Comprehensive income
Dividends declared                                         --          --           --              --    (6,564,000)
                                                    ---------   ---------    ---------    ------------    ----------
Balance, December 31, 1998                          6,700,100      67,000   92,978,000       6,689,000    (1,135,000)
Issuance of stock options to non-employees
  (Note 9)                                                 --          --      287,000              --            --
Net income                                                 --          --           --              --    11,112,000
Other comprehensive income:
  Net unrealized (loss) on investments
    available-for-sale, net of reclassification
    adjustment (Note 13)                                   --          --           --     (37,111,000)           --
  Unrealized gain on forward contracts                     --          --           --       3,909,000
Dividends declared                                         --          --           --              --   (10,186,000)
                                                    ---------   ---------    ---------    ------------    ----------
Balance, December 31, 1999                          6,700,100      67,000   93,265,000     (26,513,000)     (209,000)
Issuance of stock options to non-employees (Note
  9)                                                                            95,000
Net loss                                                                                                 ($28,243,000)
Other comprehensive income:
  Net unrealized gain on investments
    available-for-sale, net of reclassification
    adjustment (Note 13)                                                                   32,860,0000
  Unrealized (loss) and net deferred losses on
    forward contracts, net of reclassification
    adjustment (Note 13)                                                                    (7,426,000)

Comprehensive income (loss)
Dividends declared                                                                                        (8,944,000)
                                                    ---------   ---------    ---------    ------------    ----------
Balance, December 31, 2000                          6,700,100   $  67,000   $93,360,000   $ (1,079,000)  ($37,396,000)
                                                    =========   =========    =========    ============    ==========

<CAPTION>

                                                                    TREASURY
                                                    COMPREHENSIVE   STOCK, AT
                                                    INCOME/(LOSS)      COST        TOTAL
                                                    --------------  ----------   ----------
<S>                                                 <C>             <C>          <C>
Balance, January 1, 1998                                                           $92,997,000
Repurchases of common stock                                         $(10,569,000)  (10,569,000)
Issuance of stock options to non-employees (Note
  9)                                                                                   118,000
Net income                                           $  5,547,000           --       5,547,000
Other comprehensive income:
  Net unrealized gain on investments
    available-for-sale, net of reclassification
    adjustment (Note 13)                                6,501,000           --       6,501,000
                                                     ------------
Comprehensive income                                 $ 12,048,000
                                                     ============
Dividends declared                                                          --      (6,564,000)
                                                                    ----------      ----------
Balance, December 31, 1998                                          (10,569,000)    88,030,000
Issuance of stock options to non-employees (Note
  9)                                                                        --         287,000
Net income                                           $ 11,112,000           --      11,112,000
Other comprehensive income:
  Net unrealized (loss) on investments
    available-for-sale, net of reclassification
    adjustment (Note 13)                              (37,111,000)          --     (37,111,000)
  Unrealized gain on forward contracts                  3,909,000           --       3,909,000
Comprehensive) income (loss)                         $(22,090,000)                          --
                                                     ============
Dividends declared                                                          --     (10,186,000)
                                                                     ----------      ----------
Balance, December 31, 1999                                          (10,569,000)    56,041,000
Issuance of stock options to non-employees
  (Note 9)                                                                              95,000
Net loss                                              (28,243,000)                 (28,243,000)
Other comprehensive income:
  Net unrealized gain on investments
    available-for-sale, net of reclassification
    adjustment (Note 13)                               32,860,000                   32,860,000
  Unrealized (loss) and net deferred losses on
    forward contracts, net of reclassification
    adjustment (Note 13)                               (7,426,000)                 (7,426,000)
                                                     ------------
Comprehensive income (loss)                          $ (2,809,000)
                                                     ============
Dividends declared                                                                 (8,944,000)
                                                                    ----------      ----------
Balance, December 31, 2000                                          $(10,569,000) $44,383,000
                                                                      ==========   ==========
</TABLE>

                                       F-6
<PAGE>

                             APEX MORTGAGE CAPITAL, INC.

                              STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                              YEAR ENDED
                                                                                              DECEMBER 31,
                                                                    -------------------------------------------------------------
                                                                        2000                 1999                  1998
<S>                                                                 <C>                 <C>                   <C>
OPERATING ACTIVITIES:
     Net Income (Loss)                                              $    (28,243,000)    $    11,112,000       $     5,547,000
     Adjustments to reconcile net income to net cash
         provided by operating activities:
             Amortization                                                 (2,559,000)            668,000             3,533,000
             Net (gain) loss on investment transactions                   36,703,000          (1,938,000)           (1,047,000)
             Change in assets and liabilities:
                Accrued interest receivable                                2,520,000          (1,103,000)           (3,835,000)
                Other assets                                                 104,000            (239,000)              275,000
                Accrued interest payable                                  (3,091,000)         (2,513,000)            6,063,000
                Accrued expenses and other liabilities                       163,000             (92,000)             (724,000)
                                                                    ------------------  -------------------   -------------------
                Net cash provided by operating activities                  5,597,000           5,895,000             9,812,000
                                                                    ------------------  -------------------   -------------------
INVESTING ACTIVITIES:
     Purchase of equity securities                                                 -         (12,946,000)          (19,716,000)
     Purchase of fixed income securities                                (133,930,000)       (117,094,000)       (1,511,359,000)
     Purchase of interest rate caps                                                -                   -               (80,000)
     Payments on closed forward contracts                                (23,283,000)                  -                     -
     Proceeds from sales of equity securities                              6,481,000           9,636,000             1,662,000
     Proceeds from sales of fixed income securities                      193,953,000          40,406,000           594,201,000
     Proceeds from closed forward contracts                                6,091,000                   -                     -
     Proceeds from sales of interest rate caps                                     -             172,000                     -
     Proceeds from terminating interest rate swaps                         5,554,000                   -                     -
     Principal payments on fixed income securities                        73,893,000         168,344,000           270,608,000
                                                                    ------------------  -------------------   -------------------
                Net cash provided by (used in) investing
                  activities                                             128,759,000          88,518,000          (664,684,000)
                                                                    ------------------  -------------------   -------------------

FINANCING ACTIVITIES:
     Net proceeds from reverse repurchase agreements                    (127,226,000)        (95,248,000)          680,090,000
     Dividend distributions                                               (9,595,000)         (9,239,000)           (5,055,000)
     Purchase of treasury stock                                                    -                   -           (10,569,000)
                                                                    ------------------  -------------------   -------------------
                Net cash used in financing activities                   (136,821,000)       (104,487,000)          664,466,000
                                                                    ------------------  -------------------   -------------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                      (2,465,000)        (10,074,000)            9,594,000

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                           2,605,000          12,679,000             3,085,000
                                                                    ------------------  -------------------   -------------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                          $        140,000     $     2,605,000       $    12,679,000
                                                                    ==================  ===================   ===================


SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Cash paid for interest                                         $     39,711,000     $    44,970,000       $    29,944,000
                                                                    ==================  ===================   ===================

NONCASH INVESTING AND FINANCING ACTIVITIES:
     Net unrealized loss on securities
         available-for-sale and forward contracts                   $     25,434,000     $   (33,202,000)      $     6,501,000
                                                                    ==================  ===================   ===================
     Principal payments, not yet received                           $      3,249,000     $     2,600,000       $       937,000
                                                                    ==================  ===================   ===================
     Securities purchased, not yet settled                          $     14,514,000     $       838,000       $    87,800,000
                                                                    ==================  ===================   ===================
     Dividends declared, not yet paid                               $      2,073,000     $     2,724,000       $     1,777,000
                                                                    ==================  ===================   ===================
</TABLE>

See accompanying notes to financial statements


                                                    F-7
<PAGE>


                           APEX MORTGAGE CAPITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - THE COMPANY

         Apex Mortgage Capital, Inc. (the "Company") was incorporated in
         Maryland on September 15, 1997. The Company commenced its operations of
         acquiring and managing a portfolio of mortgage assets on December 9,
         1997, upon receipt of the net proceeds from the initial public offering
         of the Company's common stock. The Company uses its equity capital and
         borrowed funds to seek to generate income based on the difference
         between the yield on its investments and the cost of its borrowings.
         The Company is structured for tax purposes as a real estate investment
         trust ("REIT") under the Internal Revenue Code of 1986, as amended (the
         "Code").

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     CASH AND CASH EQUIVALENTS

         Cash and cash equivalents include cash and highly liquid investments
         with original maturities of three months or less. The carrying amount
         of cash equivalents approximates their fair value.

     FIXED INCOME SECURITIES

         The Company's fixed income securities consist primarily of residential
         mortgage securities and other fixed income securities. All fixed income
         securities are recorded at cost on the date the assets are purchased.
         Realized gains and losses on sales of the securities are determined on
         an average cost basis. A majority of the Company's fixed income
         securities are expected to qualify as real estate assets under the REIT
         Provisions of the Code.

         Interest income on the Company's mortgage securities is accrued based
         on the actual coupon rate and the outstanding principal amount.
         Premiums and discounts are amortized into interest income over the
         lives of the securities using the effective yield method adjusted for
         the effects of estimated prepayments.

         Interest income on the Company's other fixed income securities is
         accrued using the effective interest method applied prospectively based
         on current market assumptions. When securities are deemed to be
         impaired, an impairment reserve is recorded. Such reserve is accounted
         for as an adjustment to the cost of the securities and is accreted into
         income on the same basis as the original discount.

         The Company's policy is to generally classify its fixed income
         securities as available-for-sale. The fixed income securities are
         reported at fair value with unrealized gains and losses excluded from
         earnings and reported in accumulated other comprehensive income.

     EQUITY SECURITIES

         The Company's equity securities consist primarily of equity securities
         issued by other real estate investment trusts.

         Dividend income on equity securities is recorded on the declaration
         date. Realized gains and losses on sales of the securities are
         determined on an average cost basis. A majority of the Company's equity
         securities are expected to qualify as real estate assets under the REIT
         Provisions of the Code.

         The Company's policy is to generally classify its equity securities as
         available-for-sale. Equity securities are reported at fair value with
         unrealized gains and losses excluded from earnings and reported in
         accumulated other comprehensive income.

     INTEREST RATE HEDGING TRANSACTIONS

         The Company enters into interest rate swap and interest rate cap
         agreements in order to mitigate the impact of rising interest rates on
         the cost of its short-term borrowings. Amounts payable or receivable
         from such agreements are accounted for on an accrual basis and
         recognized as a net adjustment to interest expense. Premiums paid for
         cap agreements accounted for as hedges are recorded as other assets and
         amortized over the lives of such agreements as an adjustment to
         interest expense. Realized gains and losses on terminated swaps

                                  F-8
<PAGE>

         accounted for as hedges are recorded as other assets or other
         liabilities and amortized over the original lives of the agreements
         as an adjustment to interest expense.

         The Company also enters into forward contracts to sell U.S. Treasury
         notes in order to mitigate the negative impact of rising interest rates
         on the fair value of its fixed income securities available-for-sale.
         Unrealized gains and losses on open forwards are shown as assets and
         liabilities, respectively, and as accumulated other comprehensive
         income in the balance sheets. Realized gains and losses on terminated
         forwards are recorded as deferred gains and losses and included in
         accumulated other comprehensive income in the balance sheets, and are
         amortized over the remaining lives of the fixed income securities being
         hedged as an adjustment to income in the statements of operations.

     STOCK BASED COMPENSATION

         The Company grants stock options to its directors and officers and to
         certain directors, officers and employees of its investment manager and
         the investment manager itself, as discussed in Note 9. Options granted
         to directors of the Company are accounted for using the intrinsic value
         method, and generally no compensation expense is recognized in the
         statements of operations for such options. Other options are accounted
         for using the fair value method; such options are measured at their
         fair value when they are granted and are recognized as a general and
         administrative expense during the periods when the options vest and the
         related services are performed.

     FEDERAL AND STATE INCOME TAXES

         The Company has elected to be taxed as a REIT and generally is not
         subject to federal and state taxes on its income to the extent it
         distributes annually 95% of its predistribution taxable income to
         stockholders and meets certain other asset, income and stock ownership
         tests. As such, no accrual for income taxes has been included in the
         financial statements.

     NET INCOME PER SHARE

         Basic net income per share is calculated on the basis of the weighted
         average number of common shares outstanding during each period. Diluted
         net income per share includes the additional dilutive effect of common
         stock equivalents and outstanding stock options, and is calculated
         using the treasury stock method.

         Stock options that could potentially dilute net income per share in the
         future were not included in the computation of diluted net income per
         share in 2000 and 1998 because they would have been antidilutive for
         the period presented.

      INCOME RECOGNITION

         Income and expenses are recorded on the accrual basis of accounting.

     CREDIT RISK

         The Company has limited its exposure to credit losses on its portfolio
         of fixed income securities by purchasing securities that are either
         rated "AAA" by at least one nationally recognized rating agency or are
         issued by the Federal Home Loan Mortgage Corporation ("FHLMC"), Fannie
         Mae (formerly known as the Federal National Mortgage Corporation) or
         the Government National Mortgage Association ("GNMA"). The payment of
         principal and interest on the FHLMC, Fannie Mae and GNMA securities are
         guaranteed by those respective agencies. In addition, the Company has
         the ability to purchase up to 10% of the portfolio in below investment
         grade securities.

     USE OF ESTIMATES

         The preparation of financial statements in conformity with accounting
         principles generally accepted in the United States of America requires
         management to make estimates and assumptions that affect the reported
         amounts of assets and liabilities at the date of the financial
         statements and the reported amounts of revenues and expenses during the
         reporting period. Actual results could differ from those estimates.


                                     F-9
<PAGE>


     RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 1998, the Financial Accounting Standards Board issued SFAS No.
         133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The
         Statement and subsequent amendments establish accounting and reporting
         standards requiring that every derivative instrument (including certain
         derivative instruments embedded in other contracts) be recorded in the
         balance sheet as either an asset or liability measured at its fair
         value. The Statement requires that changes in the derivative's fair
         value be recognized currently in earnings unless specific hedge
         accounting criteria are met. Special accounting for qualifying hedges
         allows a derivative's gains and losses to offset related results on the
         hedged item in the income statement, and requires that a company must
         formally document, designate, and assess the effectiveness of
         transactions that receive hedge accounting. SFAS No. 133, as amended,
         is effective for the Company's fiscal year beginning January 1, 2001.

         The Company has reviewed its financial instruments to identify those to
         which SFAS No. 133 and related amendments apply. Management believes
         that the only instruments for which the accounting will be affected by
         SFAS No. 133 are the forward contracts used to hedge fixed income
         securities. The transition adjustment that will be recorded on January
         1, 2001 will result in the reclassification of $2,173,000 net losses of
         unrealized and deferred gains and losses on investment securities and
         forward contracts from accumulated other comprehensive income to
         current income. Also, deferred gains on interest rate swaps previously
         designated as hedges will be reclassified from other liabilities to
         accumulated other comprehensive income.

         In conjunction with the adoption of SFAS No. 133 on January 1, 2001,
         the Company will reclassify $594,469,000 of its mortgage securities
         from the available-for-sale category to the trading category for
         investments accounted for under SFAS No. 115. This change will result
         in the reclassification of $1,742,000 net unrealized gains from
         accumulated other comprehensive income to current income, in addition
         to net unrealized gains included in the SFAS No. 133 transition
         adjustment discussed above.

         During the year ended December 31, 1999, the Company wrote off $64,000
         of unamortized organization costs in accordance with the adoption of
         SOP 98-5, REPORTING ON THE COST OF START-UP ACTIVITIES.

NOTE 3 - FIXED INCOME AND EQUITY SECURITIES

         At December 31, 2000, fixed income securities consisted of the
following:

<TABLE>
<CAPTION>

                                                   Adjustable Rate       Fixed Rate     Other Fixed
         (in thousands)                                   Mortgage         Mortgage          Income
                                                        Securities       Securities      Securities        Total
                                                  ---------------------------------------------------------------
         <S>                                      <C>                    <C>            <C>           <C>
         Principal Amount                                  $39,253         $557,962         $10,400     $607,615
         Unamortized Premium (Discount)                        978          (2,154)         (3,712)      (4,888)
         Impairment Reserve                                      -         (13,375)                     (13,375)
                                                  ---------------------------------------------------------------
         Adjusted Cost                                      40,231          542,433           6,688      589,352
         Unrealized Gains                                       46           11,783               -       11,829
         Unrealized Losses                                    (24)                -         (1,026)      (1,050)
                                                  ---------------------------------------------------------------
         Fair Value                                        $40,253         $554,216          $5,662     $600,131
                                                  ===============================================================
</TABLE>


                                      F-10
<PAGE>


         At December 31, 1999, fixed income securities consisted of the
following:

<TABLE>
<CAPTION>

         (in thousands)                            Adjustable Rate       Fixed Rate     Other Fixed
                                                          Mortgage         Mortgage          Income
                                                        Securities       Securities      Securities       Total
                                                  ---------------------------------------------------------------
         <S>                                       <C>                   <C>            <C>             <C>
         Principal Amount                                  $31,923         $688,162         $10,400     $730,485
         Unamortized Premium (Discount)                        553            1,823         (3,185)        (809)
                                                  ---------------------------------------------------------------
         Amortized Cost                                     32,476          689,985           7,215      729,676
         Unrealized Gains                                       33                -               -           33
         Unrealized Losses                                   (253)         (27,637)           (676)     (28,566)
                                                  ---------------------------------------------------------------
         Fair Value                                        $32,256         $662,348          $6,539     $701,143
                                                  ===============================================================
</TABLE>

         The contractual final maturity of the mortgage loans supporting the
         mortgage securities is generally between 15 and 30 years at
         origination. Because of prepayments on the underlying mortgage loans,
         the actual weighted-average maturity is expected to be less.

         A portion of the other fixed income securities generally have an
         original maturity of five years subject to certain acceleration
         provisions. The expected average remaining maturity at December 31,
         2000 and 1999 was approximately 2.0 and 3.0 years, respectively. The
         remaining portion has a fixed remaining maturity of approximately 1.5
         years as of December 31, 2000.

         A portion of the adjustable rate mortgage securities are typically
         subject to periodic and lifetime caps that limit the amount an
         adjustable rate mortgage-backed security's interest rate can change
         during any given period and over the life of the asset. At December 31,
         2000, the portion of adjustable rate mortgage securities that were
         subject to periodic and lifetime caps had an average periodic cap equal
         to 2.0% per annum and an average lifetime cap equal to 11.3%. At
         December 31, 1999, the average periodic cap on the adjustable rate
         mortgage assets was 2.0% per annum and the average lifetime cap was
         equal to 11.3%.

         During the year ended December 31, 2000 the Company realized $741,000
         and $6,536,000 in gains and losses, respectively, on the sale of
         $97,440,000 and $96,513,000 of fixed income securities, respectively,
         which were classified as available-for-sale. During the year ended
         December 31, 1999 the Company realized $219,000 and $25,000 in gains
         and losses, respectively, on the sale of $5,684,000 and $34,722,000 of
         fixed income securities, respectively, which were classified as
         available-for-sale. During the year ended December 31, 1998 the Company
         realized $972,000 in gains on the sale of $594,201,000 of fixed income
         securities which were classified as available-for-sale.

         During the year ended December 31, 2000, the Company recorded an
         impairment reserve of $18,284,000 on its fixed-rate mortgage
         securities, which is included in net loss on investment transactions in
         the statements of operations. The impairment reserve represents an
         other-than-temporary decline in the fair value, as of September 30,
         2000, of investments held that the Company no longer intends to hold
         until maturity. A portion of these investments were sold in the fourth
         quarter of 2000. The Company could also incur additional losses (or
         recapture losses already recognized) depending on the actual proceeds
         of future investment sales or if further impairment charges are
         required.

                                        F-11
<PAGE>

         The net deferred loss and unrealized loss of $7,345,000 and $1,079,000,
         respectively, on forward contracts were reclassified from other
         comprehensive income into net loss on investment transactions in the
         statement of operations during the year ended December 31, 2000 as part
         of the impairment charge recorded on the underlying assets being
         hedged.

         At December 31, 2000 and 1999, equity securities consisted of the
following:

<TABLE>
<CAPTION>


        (in thousands)                               December 31, 2000       December 31, 1999
                                               ------------------------ -----------------------
        <S>                                          <C>                     <C>
        Cost                                                   $13,016                 $19,370
        Unrealized Gains                                         1,091                     789
        Unrealized Losses                                        (713)                 (2,678)
        Impairment Reserve                                     (4,326)                       -
                                               ------------------------ -----------------------
        Fair Value                                              $9,068                 $17,481
                                               ======================== =======================
</TABLE>

         During the year ended December 31, 2000 the Company realized $348,000
         and $222,000 in gains and losses, respectively, on the sale of
         $3,419,000 and $3,062,000 of equity securities, respectively, which
         were classified as available-for-sale. During the year ended December
         31, 1999 the Company realized $1,916,000 and $10,000 in gains and
         losses, respectively, on the sale of $9,495,000 and $141,000 of equity
         securities, respectively, which were classified as available-for-sale.
         During the year ended December 31, 1998, the Company realized $303,000
         in gains on the sale of $1,662,000 of equity securities, which were
         classified as available-for-sale.

         At December 31, 2000, the Company held equity securities and senior
         unsecured notes issued by Dynex Capital, Inc. ("Dynex") with fair
         market values of $2,437,000 and $3,750,000, respectively. During the
         year ended December 31, 1999, Dynex suspended the payment of dividends
         on its preferred stock. Accordingly, the Company is no longer
         recognizing dividend income on its equity investments in Dynex. Dynex
         is currently paying interest on its senior notes. Accordingly, the
         Company is recognizing interest income on the senior note investments
         issued by Dynex. If Dynex were to suspend payment of interest on its
         senior notes, interest income recognized by the Company would be
         negatively impacted.

         During the year ended December 31, 2000, the Company recorded an
         impairment reserve of $3,368,000 on its Dynex preferred stock holdings
         which is included in net loss on investment transactions in the
         statement of operations. The Company could also incur additional losses
         if the remaining Dynex investments are sold or written down further.

         During the year ended December 31, 2000, the Company recorded an
         impairment reserve on its Dynex common stock holdings of $958,000 which
         is included in net loss on investment transactions in the statement of
         operations. The Company could also incur additional losses if the
         remaining Dynex investments are sold or written down further.

NOTE 4 - INTEREST RATE CAP AGREEMENTS AND TREASURY PUT OPTIONS

         Interest rate cap agreements include the carrying value of interest
         rate caps purchased by the Company to mitigate the impact of rising
         interest rates on the cost of its short-term borrowings. As discussed
         in Note 10, the Company has entered into certain interest rate swap
         transactions. The execution of these swaps eliminated the need for the
         cap protection previously purchased. Accordingly, the interest rate cap
         agreements no longer qualified for hedge accounting and were written
         down to zero during the year ended December 31, 1998. During the year
         ended December 31, 1999, the interest rate caps were sold, resulting in
         a realized gain of $172,000, which is included in net gain on
         investment transactions in the 1999 statement of operations.

         There were no outstanding interest rate cap agreements as of December
         31, 2000 and 1999.

         Under these agreements, the Company received cash payments to the
         extent of the excess of the three-month London Interbank Offered Rate
         ("LIBOR") over the agreements' contract rate times the notional amount.

         During the year ended December 31, 1999, the Company purchased put
         options on ten-year U.S. Treasury futures contracts with a notional
         amount of $50,000,000. The options did not qualify for hedge accounting
         under SFAS No. 80 and were therefore accounted for as trading
         securities under SFAS No. 115. The options

                                      F-12
<PAGE>

         expired during 1999, which resulted in a realized loss of $334,000,
         which is included in net gain on investment transactions in the 1999
         statement of operations.

NOTE 5 - REVERSE REPURCHASE AGREEMENTS

         The Company has entered into reverse repurchase agreements to finance
         certain of its investments. These agreements are secured by a portion
         of the Company's investments and bear interest rates that have
         historically moved in close relationship to LIBOR.

         At December 31, 2000, the Company had outstanding $545,434,000 of
         reverse repurchase agreements with a weighted average current borrowing
         rate of 6.61% and a maturity of 1.1 months. The reverse repurchase
         agreements were collateralized by securities with an estimated fair
         value of $564,274,000.

         At December 31, 1999, the Company had outstanding $672,660,000 of
         reverse repurchase agreements with a weighted average current borrowing
         rate of 5.98% and a maturity of 2.0 months. The reverse repurchase
         agreements were collateralized by securities with an estimated fair
         value of $689,396,000.

         For the year ended December 31, 2000, the average reverse repurchase
         agreement balance was $576,190,000 with a weighted average interest
         cost of 6.33%. The maximum reverse repurchase agreement balance
         outstanding during the year ended December 31, 2000 was $672,660,000.

         For the year ended December 31, 1999, the average reverse repurchase
         agreement balance was $732,960,000 with a weighted average interest
         cost of 5.28%. The maximum reverse repurchase agreement balance
         outstanding during the year ended December 31, 1999 was $812,019,000.

NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS

         The following table presents the amortized cost and estimated fair
         values of the Company's financial instruments. SFAS No. 107,
         DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, defines the fair
         value of a financial instrument as the amount at which the instrument
         could be exchanged in a current transaction between willing parties,
         other than in a forced or liquidation sale (dollars in thousands):

<TABLE>
<CAPTION>

                                           At December 31, 2000      At December 31, 1999
                                        -----------------------   ------------------------
                                           Adjusted        Fair      Adjusted        Fair
                                               Cost       Value          Cost       Value
                                        ------------------------  ------------------------
<S>                                     <C>            <C>        <C>            <C>
         Mortgage related securities       $582,664    $594,469      $722,461    $694,604
         Equity securities                    8,690       9,068        19,360      17,481
         Other fixed income securities        6,688       5,662         7,215       6,539
         Interest rate swaps                      -           -             -       3,815
         Forward contracts                        -      (3,731)            -       3,909
</TABLE>

         Adjusted cost in the table above includes the net effect of unamortized
         impairment reserves.

         The Company bases its fair value estimates for mortgage related
         securities, equity securities, other fixed income securities, interest
         rate swaps, and forward contracts primarily on third party price
         indications provided by dealers who make markets in these financial
         instruments when such indications are available. However, the fair
         value reported reflects estimates and may not necessarily be indicative
         of the amounts the Company could realize in a current market exchange.
         Cash and cash equivalents, interest receivable and reverse repurchase
         agreements are reflected in the financial statements at their costs,
         which approximates their fair value because of the short-term nature of
         these instruments.


                                       F-13
<PAGE>

NOTE 7 - STOCK REPURCHASE PROGRAM

         The Company's Board of Directors has authorized a program to repurchase
         shares of the Company's common stock. At December 31, 2000 and 1999,
         the Company was authorized to repurchase an additional 552,900 shares
         of the Company's common stock pursuant to the repurchase program.

         At December 31, 2000 and 1999, the Company held 947,100 shares of
         treasury stock repurchased in 1998. During the years ended December 31,
         2000 and 1999, the Company did not repurchase any treasury shares.

NOTE 8 - TRANSACTIONS WITH AFFILIATES

         The Company has entered into a Management Agreement (the "Management
         Agreement"), as amended, with TCW Investment Management Company (the
         "Manager"), a wholly owned subsidiary of The TCW Group, Inc., under
         which the Manager will manage its day-to-day operations, subject to the
         direction and oversight of the Company's Board of Directors. The
         Company will pay the Manager annual base management compensation,
         payable monthly in arrears, equal to 3/4 of 1% of the average net
         invested capital as further defined in the Management Agreement.

         The Company recorded expense of $512,000, $629,000, and $644,000 in
         base management compensation to the Manager during the years ended
         December 31, 2000, 1999 and 1998, respectively.

         The accrued liability for base management compensation was $85,000 and
         $157,000 at December 31, 2000 and 1999, respectively.

         The Company also pays the Manager, as incentive compensation, an amount
         equal to 30% of the Net Income of the Company, before incentive
         compensation, in excess of the amount that would produce an annualized
         return on equity equal to the ten-year US Treasury rate plus 1% as
         further defined in the Management Agreement.

         The Company recorded expense of $1,714,000 and $619,000 for incentive
         compensation to the Manager for the years ended December 31, 1999 and
         1998, respectively. No incentive compensation was incurred for the year
         ended December 31, 2000.

         There was no accrued liability for incentive compensation at December
         31, 2000. The accrued liability for incentive compensation was $216,000
         at December 31, 1999.

         The Company may also grant stock options to directors, officers and key
         employees of the Company, the Manager, its directors, officers and key
         employees (see Note 9).

         The Management Agreement may be renewed each year at the discretion of
         the Company's Board of Directors, unless previously terminated by the
         Company or the Manager upon written notice. Except in the case of a
         termination or non-renewal by the Company for cause, upon termination
         or non-renewal of the Management Agreement by the Company, the Company
         is obligated to pay the Manager a termination or non-renewal fee, which
         may be significant. The termination or non-renewal fee shall be equal
         to the fair market value of the Management Agreement without regard to
         the Company's termination right, as determined by an independent
         appraisal. Neither the fair market value of the Management Agreement
         nor the various factors that an appraiser may find relevant in its
         determination of the fair market value can be determined at this time.
         The fair market value of the Management Agreement will be affected by
         significant variables, including (i) the historical management fees
         paid to the Manager, (ii) any projections of future management fees to
         be paid to the Manager determined by the independent appraiser, (iii)
         the relative valuations of agreements similar to the Management
         Agreement and (iv) other factors, all of which may be unrelated to the
         performance of the Manager. Similar management agreements have been
         valued at as much as eight times the historical annual fees paid under
         such agreements. Any termination or non-renewal fee paid may be
         materially greater than eight times historical fees and the Company can
         provide no assurance at this time as to the amount of any such fee.

         The Company's other fixed income investments include securities that
         are issued by special purpose companies that invest primarily in
         mortgage-related assets. The Manager serves as the investment manager
         to these companies and is paid fees in connection with such services.
         The Company does not anticipate paying any management fees directly to
         the Manager in connection with these investments.


                                       F-14
<PAGE>

NOTE 9 - STOCK OPTIONS

         The Company has adopted a stock option plan (the "Amended and Restated
         1997 Stock Option Plan") that provides for the grant of both qualified
         incentive stock options that meet the requirements of Section 422 of
         the Code, and non-qualified stock options, stock appreciation rights
         and dividend equivalent rights. Stock options may be granted to
         directors of the Company ("employees"), and to the Manager and the
         directors, officers and key employees of the Manager ("non-employees").

         The exercise price for any stock option granted under the Amended and
         Restated 1997 Stock Option Plan may not be less than 100% of the fair
         market value of the shares of common stock at the time the option is
         granted. Each option must terminate no more than ten years from the
         date it is granted. Subject to anti-dilution provisions for stock
         splits, stock dividends and similar events, the Amended and Restated
         1997 Stock Option Plan authorizes the grant of options to purchase an
         aggregate of 1,000,000 shares of common stock.

         The Company recognized stock option expense relating to the options
         granted to the non-employees of $95,000, $287,000 and $118,000 during
         the years ended December 31, 2000, 1999 and 1998, respectively.

         For stock options outstanding at December 31, 2000, the range of
         exercise prices is $6.98 to $15.00 per share and the weighted-average
         remaining contractual life is 8.19 years.

         For the year ended December 31, 2000, options to purchase 183,000
         shares of the Company's common stock were granted to directors of the
         Company and options to purchase 125,000 shares were granted to officers
         of the Company and officers and key employees of the Manager. The
         exercise price of the options granted during 2000 was $6.98 per share.
         None of the options granted during 2000 include dividend equivalent
         rights.

         The fair value of each option granted during 2000 was estimated to be
         $0.04 as of the grant date using the Black-Scholes option pricing model
         with the following assumptions: dividend yield of 20% per annum;
         expected volatility of 30%; risk free interest rate of 5.22% per annum;
         and an expected life of 10 years.

         The options granted during 2000 expire in December 2010 and vested in
         two equal installments during the month of December in 2001 and 2002.

         For the year ended December 31, 1998, options to purchase 112,000
         shares of the Company's common stock were granted to directors of the
         Company and options to purchase 58,000 shares were granted to officers
         of the Company and officers and key employees of the Manager. The
         exercise price of the options granted during 1998 was $10.38 per share.
         All of the options granted during 1998 include dividend equivalent
         rights that entitle the option holder to receive a cash payment equal
         to the dividends declared on the Company's common stock multiplied by
         the number of options held until the options are exercised or expire.

         The fair value of each option granted during 1998 was estimated to be
         $5.32 as of the grant date using the Black-Scholes option pricing model
         with the following assumptions: dividend yield of 0% per annum (to
         account for the dividend equivalent rights); expected volatility of
         30%; risk free interest rate of 4.57% per annum; and an expected life
         of 10 years.

         The options granted during 1998 expire in December 2008 and vested in
         two equal installments during the month of December in 1999 and 2000.

         For the year ended December 31, 1997, options to purchase 210,000
         shares of the Company's common stock were granted to directors of the
         Company and options to purchase 190,000 shares were granted to officers
         of the Company and officers and key employees of the Manager. The
         exercise price of the options granted during 1997 was $15 per share.

         The fair value of each option granted during 1997 was estimated to be
         $1.05 as of the grant date using the Black-Scholes option pricing model
         with the following assumptions: dividend yield of 11% per annum;
         expected volatility of 30%; risk free interest rate of 5.82% per annum;
         and an expected life of 10 years.


                                       F-15
<PAGE>

         The options granted during 1997 expire in December 2007 and vest in
         three equal installments during the month of February in 1999, 2000 and
         2001.

         If the Company had recorded stock option grants to Company directors at
         fair value and related compensation expense, the pro forma effect on
         the Company's net income and earnings per share would have been as
         follows:

<TABLE>
<CAPTION>

                                                              Year Ended          Year Ended      Year Ended
                                                              December 31,        December 31,    December 31,
                                                                 2000                1999             1998
                                                          ---------------------------------------------------
<S>                                                       <C>                  <C>              <C>
         Net (loss) income - as reported                      ($28,243,000)     $11,112,000       $5,547,000
         Net (loss) income - pro forma                        ($28,409,000)      10,611,000        5,411,000

         Basic earnings per share - as reported                     ($4.91)           $1.93            $0.90
         Diluted earnings per share - as reported                   ($4.91)           $1.92            $0.90
         Basic earnings per share - pro forma                       ($4.94)           $1.84            $0.87
         Diluted earnings per share - pro forma                     ($4.94)           $1.84            $0.87
</TABLE>

         Information regarding stock option activity during the years ended
         December 31, 2000, 1999, and 1998 is as follows:

<TABLE>
<CAPTION>

                                                                                                   Weighted
                                                                                                    Average
                                                                                 Shares          Exercise Price
                                                                            ------------------ ------------------
<S>                                                                         <C>                <C>
        Options Outstanding at January 1, 1998                                   400,000             $15.00

        Options Granted During 1998                                              170,000              10.38
        Exercised                                                                   -                  -
        Expired                                                                     -                  -
                                                                            ------------------
        Options Outstanding at December 31, 1998 and 1999                        570,000             13.62

        Options Granted During 2000                                              308,000              6.98
        Exercised                                                                   -                  -
        Expired                                                                     -                  -
                                                                            ------------------
        Options Outstanding at December 31, 2000                                 878,000            $11.29
                                                                            ==================
</TABLE>


                                       F-16


<PAGE>

NOTE 10 - CONTRACTUAL COMMITMENTS

         There were no interest rate swap agreements at December 31, 2000.

         During the year ended December 31, 1999 the Company entered into
         interest rate swap agreements as summarized below. Under these
         agreements, the Company received a floating rate and paid a fixed rate.

    December 31, 1999:

<TABLE>
<CAPTION>
             Current                                                                        Average           Unrealized
         Notional Amount                   Average                                         Termination           Gains
              (000)                       Fixed Rate               Floating Rate              Date               (000)
      ----------------------------------------------------------------------------------------------------------------------
         <S>                             <C>                       <C>                     <C>
           $400,129                        5.869%                   1Mo LIBOR              8/9/2001              $3,815
</TABLE>

         The Company received $334,000 from the swap counter-parties during the
         year ended December 31, 2000, which is netted against interest expense
         in the statements of operations. The Company paid $3,614,000 and
         $414,000 to the swap counter-parties during the years ended December
         31, 1999 and 1998, respectively, which is included in interest expense
         in the statements of operations.

         During the year ended December 31, 2000, the Company terminated all
         outstanding interest rate swap agreements with a combined notional
         amount of $386,213,000 which resulted in a deferred gain of $5,554,000
         that is being amortized over the remaining life of the original swap
         agreements. The deferred gain is included in other liabilities on the
         balance sheet and the amortization expense is included in interest
         expense in the statements of operations. During the year ended December
         31, 2000, $3,008,000 of the deferred gain was amortized. Approximately
         92% of the deferred gain will be amortized by August 31, 2001. The
         remaining deferred gain will be fully amortized by May 31, 2002.

         During the year ended December 31, 1999, the Company terminated
         interest rate swap agreements with a combined notional amount of
         $255,530,000 which resulted in a net deferred loss of $66,000 that is
         being amortized over the remaining life of the original swap
         agreements. The net deferred loss is included in other assets on the
         balance sheet and the amortization expense is included in interest
         expense on the statements of operations. During years ended December
         31, 2000 and 1999, $23,000 and $42,000 of the net deferred loss was
         amortized, respectively.

         The Company is generally required to deposit collateral with the swap
         agreement counter-parties in an amount at least equal to the amount of
         any unrealized losses. At December 31, 1999 the Company had securities
         with a fair market value of $2,592,000 on deposit with its
         counter-parties. At December 31, 1999 the Company received fixed income
         securities with a fair market value of $1,600,000 as a deposit from a
         swap agreement counter-party.

NOTE 11 -  FORWARD CONTRACTS

         At December 31, 2000, the Company had open forward contracts to sell
         U.S. Treasury notes with terms stated below.

<TABLE>
<CAPTION>
            Current                         Average                   Net Unrealized
         Notional Amount                  Termination                     Losses                Average Maturity of
             (000)                           Date                         (000)                Underlying Securities
      --------------------------------------------------------------------------------------------------------------------
        <S>                               <C>                        <C>                       <C>
           $575,000                        1/19/2001                     ($3,731)                   2.99 Years
</TABLE>

                                   F-17
<PAGE>


         At December 31, 1999, the Company had open forward contracts to sell
         U.S. Treasury notes with terms stated below.

<TABLE>
<CAPTION>
            Current                        Average                     Unrealized
        Notional Amount                  Termination                     Gains                Average Maturity of
            (000)                           Date                         (000)               Underlying Securities
      --------------------------------------------------------------------------------------------------------------------
       <S>                               <C>                           <C>                   <C>
           $335,000                        2/12/2000                      $3,909                    3.36 Years
</TABLE>

         During the year ended December 31, 2000, forward contracts to sell U.S.
         Treasury notes with a notional amount of $5,670,000,000 were closed
         resulting in a net deferred loss of $16,860,000. $8,425,000 of the
         deferred loss incurred was reclassified from other comprehensive income
         into net loss on investment transactions in the statement of operations
         during the year ended December 31, 2000 as part an impairment charge
         recorded on the underlying assets being hedged. The Company anticipates
         reclassifying the remaining deferred and unrealized losses from other
         comprehensive income into a net loss line item in the statement of
         operations on January 1, 2001 in connection with the adoption of
         Statement of Financial Accounting Standards ("SFAS") No. 133.

         During the year ended December 31, 1999, two forward contracts to sell
         U.S. Treasury notes with a notional amount of $135,000,000 and
         $100,000,000 were closed resulting in a deferred loss of $390,000 and
         deferred gain of $51,000, respectively. The deferred loss and gain are
         being amortized as an adjustment to interest income over the remaining
         weighted average lives of the fixed income securities being hedged,
         which was 4.8 years at December 31, 1999.

         The contracts were entered into to mitigate the negative impact of
         rising interest rates on fixed income securities available-for-sale
         that generally have a market-weighted average duration approximately
         equal to the contracts shown above.

NOTE 12 - ADOPTION OF SHAREHOLDER RIGHTS PLAN

         On June 30, 1999, the Board of Directors of Apex Mortgage Capital, Inc.
         (the "Company") declared a dividend distribution of one Right for each
         outstanding share of Company Common Stock to stockholders of record at
         the close of business on July 30, 1999 (the "Record Date"). Each Right
         entitles the registered holder to purchase from the Company one
         one-hundredth of a share of Series A Junior Participating Preferred
         Stock, par value $0.01 per share (the "Preferred Stock"), at a Purchase
         Price of $50, subject to adjustment. The description and terms of the
         Rights are set forth in a Shareholder Rights Agreement (the "Rights
         Agreement") between the Company and The Bank of New York, as Rights
         Agent.

         Initially, the Rights will be attached to all Common Stock certificates
         representing shares then outstanding, and no separate Rights
         Certificates will be distributed. Subject to certain exceptions
         specified in the Rights Agreement, the Rights will separate from the
         Common Stock and a Distribution Date will occur upon the earlier of (i)
         10 business days following a public announcement that a person or group
         of affiliated or associated persons (an "Acquiring Person") has
         acquired, or obtained the right to acquire, beneficial ownership of 15%
         or more of the outstanding shares of Common Stock (the "Stock
         Acquisition Date"), other than as a result of repurchases of stock by
         the Company or certain inadvertent actions by institutional or certain
         other stockholders or (ii) 10 business days (or such later date as the
         Board shall determine) following the commencement of a tender offer or
         exchange offer that would result in a person or group becoming an
         Acquiring Person. Until the Distribution Date, (i) the Rights will be
         evidenced by the Common Stock certificates and will be transferred with
         and only with such Common Stock certificates, (ii) new Common Stock
         certificates issued after the Record Date will contain a notation
         incorporating the Rights Agreement by reference and (iii) the surrender
         for transfer of any certificates for Common Stock outstanding will also
         constitute the transfer of the Rights associated with the Common Stock
         represented by such certificate. Pursuant to the Rights Agreement, the
         Company reserves the right to require that, prior to the occurrence of
         a triggering event, upon any exercise of Rights, a number of Rights be
         exercised so that only whole shares of Preferred Stock will be issued.

         The Rights are not exercisable until the Distribution Date and will
         expire on July 30, 2009, unless earlier redeemed or exchanged by the
         Company.

                                    F-18
<PAGE>

NOTE 13 - RECLASSIFICATION ADJUSTMENTS OF COMPREHENSIVE INCOME

         The following is a presentation of the reclassification amounts to
         comprehensive income for the years ended December 31, 2000, 1999 and
         1998:

<TABLE>
<CAPTION>
                                                         For the Year Ended  For the Year Ended   For the Year Ended
                                                          December 31, 2000  December 31, 1999    December 31, 1998
                                                         ------------------  ------------------  ------------------
       <S>                                                  <C>                <C>                  <C>
       Unrealized gains (losses) arising during the year    $    1,315,000     $  (36,212,000)      $    6,689,000
       Less:  reclassification of net losses to
       impairment reserve                                       22,610,000                  -                    -
       Less:  reclassification adjustment for net losses
       (gains) resulting from asset sales                        8,935,000           (899,000)            (188,000)
                                                         ------------------  ------------------  ------------------
       Net unrealized gains (losses) on investments
       available-for-sale                                   $   32,860,000     $  (37,111,000)      $    6,501,000
                                                         ==================  ==================  ==================

       Net deferred (losses) from forward contracts
       closed during the year                               $  (16,860,000)    $            -       $            -
       Less:  reclassification of net deferred and
       unrealized losses to impairment reserve                   8,424,000                  -                    -
       Less:  reclassification adjustment for net losses
       included in net income                                      346,000                  -                    -
       Less:  reclassification adjustment for net losses
       resulting from asset sales                                  664,000                  -                    -
                                                         ------------------  ------------------  ------------------
       Net unrealized (loss) and deferred losses on
       forward contracts                                   $   (7,426,000)     $            -       $            -
                                                         ==================  ==================  ==================
</TABLE>

                                     F-19
<PAGE>


NOTE 14 - SUMMARIZED QUARTERLY RESULTS (UNAUDITED)

         The following is a presentation of the quarterly results of operations
         (amounts are in thousands except per share amounts):

<TABLE>
<CAPTION>

                                                                   Year Ended December 31, 2000
                                                      -----------------------------------------------------
                                                        Fourth         Third        Second        First
                                                        Quarter       Quarter       Quarter       Quarter
                                                      ------------  ------------  ------------   -----------
<S>                                                     <C>           <C>           <C>           <C>
Interest Income                                           $10,224        $9,580       $10,893       $12,137
Interest Expense                                            7,901         7,600         8,590         9,688
                                                      ------------  ------------  ------------   -----------
     Net Interest Income                                    2,323         1,980         2,303         2,449
                                                      ------------  ------------  ------------   -----------

Net Gain (Loss) on Investment Transactions                    741       (29,912)       (7,532)            -

Dividend Income                                               230           185           354           370

General and Administrative Expenses                          (290)         (680)         (241)         (523)
                                                      ------------  ------------  ------------   -----------
     Net (Loss) Income                                     $3,004      ($28,427)      ($5,116)       $2,296
                                                      ============  ============  ============   ===========

Basic EPS                                                   $0.52        ($4.94)       ($0.89)        $0.40
                                                      ============  ============  ============   ===========

Diluted EPS                                                 $0.52        ($4.94)       ($0.89)        $0.40
                                                      ============  ============  ============   ===========

Average Number of Shares Outstanding - Basic
  (net of treasury shares)                                  5,753         5,753         5,753         5,753
                                                      ============  ============  ============   ===========

Average Number of Shares Outstanding - Diluted
  (net of treasury shares)                                  5,753         5,753         5,753         5,753
                                                      ============  ============  ============   ===========

Dividend Declared Per Share                                 $0.35         $0.35         $0.35         $0.46
                                                      ============  ============  ============   ===========
</TABLE>

                                       F-20
<PAGE>

<TABLE>
<CAPTION>
                                                                   Year Ended December 31, 1999
                                                       -----------------------------------------------------
                                                          Fourth        Third        Second        First
                                                          Quarter      Quarter       Quarter      Quarter
                                                       ------------  -----------  ------------  ------------
<S>                                                       <C>          <C>           <C>          <C>
Interest Income                                            $12,375      $13,124       $13,081       $13,937
Interest Expense                                            10,093       10,231        10,760        11,261
                                                       ------------  -----------  ------------  ------------
     Net Interest Income                                     2,282        2,893         2,321         2,676
                                                       ------------  -----------  ------------  ------------

Net Gain on Investment Transactions                            225          437           662           614

Dividend Income                                                489          503           684           711

General and Administrative Expenses                           (665)        (868)         (813)       (1,039)

                                                       ------------  -----------  ------------  ------------
     Net Income                                             $2,331       $2,965        $2,854        $2,962
                                                       ============  ===========  ============  ============

Basic EPS                                                    $0.41        $0.52         $0.50         $0.51
                                                       ============  ===========  ============  ============

Diluted EPS                                                  $0.40        $0.51         $0.49         $0.51
                                                       ============  ===========  ============  ============

Average Number of Shares Outstanding - Basic
  (net of treasury shares)                                   5,753        5,753         5,753         5,753
                                                       ============  ===========  ============  ============

Average Number of Shares Outstanding - Diluted               5,771        5,784         5,787         5,773
  (net of treasury shares)

Dividend Declared Per Share                                  $0.46        $0.46         $0.42         $0.38
                                                       ============  ===========  ============  ============
</TABLE>

                                       F-21