<PAGE>
 
               UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-K
                                   ---------

[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
     ACT OF 1934 
                 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998
                                            -----------------

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES ACT OF
     1934 
          For the transition period from  _________ to _____________

                       Commission File Number 000-22567
                                              ---------
                              THE WMF GROUP, LTD.
                              -------------------
            (Exact name of registrant as specified in its charter)

Delaware                                                    54-1647759
--------------------------------------------------------------------------------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              identification no.)

1593 Spring Hill Road, Suite 400, Vienna, Virginia                 22182
--------------------------------------------------------------------------------
(Address of principal executive offices)                       (Zip code)


Registrant's telephone number, including are code (703) 610-1400
                                                  --------------

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

Title of Each Class                    Name of Each Exchange on Which Registered
--------------------------------------------------------------------------------
Common Stock, $.01 par value                    The Nasdaq Stock Market
  

       Securities registered pursuant to Section 12 (g) of the Act: NONE

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 such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days, Yes X  No ____
                                       -         

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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.  _____

The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $57.7 million based on the closing price of such
shares on The Nasdaq Stock Market as of March 29, 1999.

As of March 29, 1999 there were 11,260,415 shares of common stock issued and
                                ----------                                  
outstanding.

                     DOCUMENTS INCORPORATED BY REFERENCE:
THE PROXY STATEMENT FOR THE 1999 ANNUAL MEETING OF STOCKHOLDERS IS INCORPORATED
BY REFERENCE INTO PART III OF THIS REPORT.

                                       1
<PAGE>
 
                              The WMF GROUP, LTD.

                                   FORM 10-K

                               TABLE OF CONTENTS
                               -----------------


<TABLE>
<CAPTION>
Item No.                                                                           Page
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<S>                                                                                <C> 
          PART I
 
   1.     Business                                                                    3
                                                                                       
   2.     Properties                                                                 17
                                                                                       
   3.     Legal Proceedings                                                          17
                                                                                       
   4.     Submission of Matters to  a Vote of Security Holders                       18
                                                                                       
          PART II                                                                      
                                                                                       
   5.     Market for Registrant's Common Equity and Related Stockholder Matters      18
                                                                                       
   6.     Selected Financial Data                                                    19
                                                                                       
   7.     Management's Discussion and Analysis of Financial Condition and              
          Results of Operations                                                      21 
 
   7a.    Quantitative and Qualitative Disclosure about Market Risk                  32
                                                                                       
   8.     Financial Statements and Supplementary Data                                32
                                                                                       
   9.     Changes in and disagreements with Accountants on Accounting and              
          Financial Disclosure                                                       32
 
          PART III
 
   10.    Directors and Executive Officers of the Registrant                         32
 
   11.    Executive Compensation                                                     32
 
   12.    Security Ownership of Certain Beneficial  Owners and Management            32
 
   13.    Certain Relationships and Related Transactions                             32
 
          PART  IV
 
   14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K           32
</TABLE>
                                        

                                       2
<PAGE>
 
                  A Warning About Forward Looking Statements

     This report may contain "forward-looking statements." Any statement in this
report, other than a statement of historical fact, may be a forward-looking
statement.
 
     You can generally identify forward-looking statements by looking for words
such as "may," "will," "expect," "intend," "estimate," "anticipate," "believe"
or "continue." Variations on those or similar words, or the negatives of such
words, also may indicate forward-looking statements.
 
     Although the Company believes that the expectations reflected in this
report are reasonable, the Company cannot assure you that its expectations will
be correct. The Company has included a discussion entitled "Risk Factors" in
this report, disclosing important factors that could cause its actual results to
differ materially from its expectations. If in the future you hear or read any
forward-looking statements concerning the Company, you should refer to these
Risk Factors.

    The forward-looking statements in this report are accurate only as of its
date.  If the Company's expectations change, or if new events, conditions or
circumstances arise, the Company is not required to, and may not, update or
revise any forward-looking statement in this report.


                                    PART I
                                        
ITEM 1.   BUSINESS

                               COMPANY OVERVIEW

     The WMF Group, Ltd. (the "Company") is one of the largest commercial
mortgage financial services companies in the United States, as measured by
servicing portfolio size, according to a survey published by the Mortgage
Bankers Association of America (the "MBA"). As the nation's largest originator
of Federal National Mortgage Association ("Fannie Mae") and Federal Housing
Authority ("FHA") insured multifamily and health care loans, the Company has
originated more than $9 billion in conventional and FHA-insured multifamily and
commercial loans since 1993, and has a servicing portfolio of approximately
$12.1 billion, at December 31, 1998. The company has 346 employees and operates
19 offices nationwide. The Company has three principal lines of business: (i)
mortgage banking, (ii) capital markets and (iii) advisory services.

     The WMF Group, Ltd. is a Delaware corporation formed in October 1992 under
the name "WMF Holdings, Inc." Originally, the Company was created to hold the
operations of WMF Huntoon, Paige Associates Limited ("WMF Huntoon Paige") and
WMF Washington Mortgage Corp. ("WMF Washington Mortgage"). WMF Huntoon Paige and
WMF Washington Mortgage are wholly-owned subsidiaries of the Company.

     WMF Huntoon Paige has originated and serviced multifamily and healthcare
mortgages insured by FHA under various owners and under various names since
1979. WMF Washington Mortgage acquired WMF Huntoon Paige in 1991. WMF Washington
Mortgage has originated and serviced multifamily and commercial mortgages under
various owners and under various names since 1984.

     On April 1, 1996, NHP Incorporated ("NHP") purchased the Company and named
it "NHP Financial Services, Inc." In early 1997, NHP was acquired by Apartment
Investment and Management Co. ("AIMCO"). As a condition of that purchase, AIMCO
required NHP to spin-off the Company. On December 8, 1997, the Company became an
independent, publicly traded company. The Company's primary shareholders are
Demeter Holdings Corporation ("Demeter"), Phemus Corporation ("Phemus") and
Capricorn Investors II, L.P. ("Capricorn"). Demeter and Phemus are affiliates of
Harvard Private Capital Holdings, Inc. ("Harvard").

                                       3
<PAGE>
 
                               INDUSTRY OVERVIEW
                                        
     The Company believes that the financing of commercial and multifamily real
estate offers significant growth opportunities. Commercial and multifamily real
estate encompasses a wide spectrum of assets including multifamily, office,
industrial, retail and hospitality. These assets are financed by an estimated
$1.3 trillion of outstanding commercial real estate debt. During the past ten
years, total commercial mortgage originations have averaged approximately $210
billion annually, of which approximately 75 percent to 80 percent consist of
non-multifamily assets. The Company anticipates that on a stabilized basis, the
commercial real estate market will require debt financing for existing
properties of approximately $120 to $140 billion annually, plus additional
amounts for new construction.

     Mortgage banking involves the origination and servicing of mortgage loans.
Commercial mortgage banks have arranged a significant portion of the debt
financing for commercial real estate. Historically, commercial mortgage banks
originated and serviced loans for life insurance companies in specified
geographic regions. In addition to providing loans to life insurance companies,
some commercial mortgage banks acted as originators for Government Sponsored
Entities ("GSEs") such as Fannie Mae and Federal Home Loan Mortgage Corporation
("Freddie Mac"), and also acted as brokers for other lenders. As a result, a
fragmented industry has developed which is comprised of small local and regional
firms.

     However, since the early 1990s the commercial mortgage banking industry has
experienced significant change, in part due to the growth in commercial mortgage
securitization, the expanded involvement of GSEs, increased borrower
sophistication and advances in information technology. Many of the existing
firms lack the capital and financial sophistication to compete effectively in
today's rapidly changing market. Accordingly, the Company believes the
commercial mortgage industry is going through a period of consolidation similar
to that experienced in the residential mortgage industry. Although consolidation
provides significant growth opportunities for the Company, certain risks are
also involved. See "Risk Factors -- The Company May Be Unable to Complete
Acquisitions or Enter into New Business Lines."


                             STRATEGIC OBJECTIVES

     Because of its geographic scope, multiple investor relationships,
underwriting expertise, operating systems and product development capabilities,
the Company believes that it is well-positioned to compete effectively in the
commercial real estate financing industry. Technological demands, large and
sophisticated infrastructure for real estate underwriting and risk evaluation,
and rapid market changes increasingly characterize this industry. The Company
believes that these developments will lead to the creation of large and
sophisticated mortgage finance enterprises offering a wide spectrum of
commercial finance products. The Company seeks to use its existing
infrastructure and market position to increase market share of its established
businesses and to expand into related businesses.

     The Company seeks to increase reported earnings and cash flow through (i)
acquisitions, (ii) internal growth, (iii) design and delivery of new mortgage
products, including structured loan products and participating loan products,
(iv) expansion into related businesses, such managing commercial mortgage
investment funds, and (v) diversification of fee income sources.

Acquisitions.  The Company has pursued a strategy of acquiring (1) multifamily
and commercial mortgage businesses that either serve key real estate markets in
the United States or provide specialized services that enhance its product line,
and (2) additional servicing portfolios. In the past, the Company has sought to
acquire companies with active and productive loan origination staffs,
significant market share and servicing portfolios of $250 million or more and
expects to continue to do so in the future, to the extent adequate capital and
attractive opportunities are available.

Since 1996, the Company has made six acquisitions (the "Acquistions"):

 .    During 1996, the Company increased its portfolio of serviced mortgages by
     40.9 percent from $4.4 billion to $6.2 billion, primarily as a result of
     two acquisitions. On May 13, 1996, WMF Huntoon Paige purchased a portion of
     the loan production pipeline and servicing, as well as certain other
     assets, of American Capital Resources Investment Corp. ("ACR") for
     approximately $4.2 million, plus potential future payments based on
     realization of loans closed from the pipeline through August 1997. The
     acquired pipeline and loan production offices originated approximately $138
     million in multifamily and healthcare loans for WMF Huntoon Paige in 1996.

                                       4
<PAGE>
 
 .    On December 31, 1996, WMF Washington Mortgage acquired all of the common
     stock of Detroit-based Proctor & Associates of Michigan ("Proctor"), the
     37th largest commercial mortgage banking firm in the United States based on
     a survey by the MBA. WMF Washington Mortgage paid approximately $3.7
     million in cash to acquire Proctor. The acquisition brought to the Company
     a $1.1 billion loan servicing portfolio of multifamily, retail and office
     building mortgages, as well as 17 active correspondent relationships with
     life insurance companies.

 .    On April 15, 1997, WMF Washington Mortgage purchased substantially all of
     the mortgage banking assets and liabilities of Askew Investment Company
     ("Askew") in Dallas, Texas for $5.6 million, excluding transaction costs
     (82 percent of which was paid at closing and the remaining 18 percent of
     which will be paid in the form of earnouts upon the attainment of certain
     performance objectives over a 36-month period). Askew is a multifamily and
     commercial mortgage bank with correspondent relationships with 14 insurance
     companies, which originated $375 million of mortgages in 1996. The
     acquisition increased the Company's mortgage servicing portfolio by $425
     million and gave the Company access to the traditional insurance company
     whole-loan buyers in the markets served by Askew. The purchase also
     provided the Company with a new source of loans it intended for
     securitization through the Company's capital market relationships.

 .    On November 5, 1997, WMF Washington Mortgage purchased 100 percent of the
     outstanding stock of The Robert C. Wilson Company and its Arizona
     subsidiary (collectively, "Robert C. Wilson") for a purchase price of
     approximately $4.0 million in cash (80 percent of which was paid at closing
     and the remaining 20 percent of which will be paid in the form of earnouts
     upon the attainment of certain performance objectives over a 42-month
     period). In addition to its mortgage and equity origination and servicing
     activities, Robert C. Wilson provides commercial office leasing and real
     estate sales. Robert C. Wilson has correspondent relationships with 24
     insurance companies and originated approximately $475 million of mortgages
     in 1997. The acquisition increased the Company's servicing portfolio by
     $554 million.

 .    On December 23, 1997, WMF Washington Mortgage purchased substantially all
     of the mortgage banking assets of New York Urban West, Inc. ("New York
     Urban") for a purchase price of approximately $4.9 million in cash (84
     percent of which was paid at closing and the remaining 16 percent of which
     will be paid in the form of earnouts upon the attainment of certain
     performance objectives over a 42-month period). An approved HUD mortgagee,
     New York Urban originated $225 million of mortgages in 1997 and had
     correspondent relationships with several life insurance companies. The
     acquisition increased the Company's servicing portfolio by $1.3 billion.

 .    On March 27, 1998, the Company created WMF Carbon Mesa Advisors, Inc. ("WMF
     Carbon Mesa"), which purchased all of the assets of Carbon Mesa Advisors,
     Inc. and Strategic Real Estate Partners for a combination of cash and
     common stock. WMF Carbon Mesa develops new loan products, manages
     commercial mortgage investment funds, provides special asset management
     services and originates commercial mortgages.

The Company also grows its servicing portfolio through the acquisition of
servicing rights. Since 1992, the Company has acquired servicing rights on
approximately $1.3 billion of mortgages in over 44 transactions.

     The Company routinely reviews and conducts investigations of potential
acquisitions of multifamily and commercial mortgage businesses. As of March 30,
1999, the Company does not have any agreements or letters of intent with respect
to pending acquisitions. However, if the Company has access to sufficient
capital, the Company may enter into discussions with one or more potential
acquisition targets in the commercial mortgage financial services business. The
Company cannot assure you that such discussions will result in future
acquisitions, or that if those acquisitions are completed, they will be
successful.

Internal Growth.  The Company has grown through internal expansion. This growth
has occurred though a combination of opening of new offices, hiring new loan
officers, implementing loan officer training programs, and creating a national
sales force capable of originating loans for multiple of investor sources.
Prospectively, the Company seeks to grow via continued expansion of its national
origination system, further streamlining of its servicing operations, and the
realization of other operating efficiencies.

     - In addition to expanding its origination system through acquisitions, the
     Company opened four new loan origination offices and hired 16 new loan
     officers in 1998.  Through training and other management initiatives, the
     Company has developed a national sales force, capable of selling all loan
     products offered by the Company.

     - The Company implemented a cost-reduction program, which is expected to
     result in savings of at least $7.5 million annually 

                                       5
<PAGE>
 
     from previously anticipated levels. See "Major Developments in 1998 - Cost-
     Saving Measures".
 
     As a result of acquisitions and internal growth, the Company has increased
loan originations by approximately 62 percent annually, from approximately $240
million in 1992 to approximately $4.3 billion in 1998. The Company's servicing
portfolio has increased by approximately 26 percent annually, from approximately
$3.0 billion in 1992 to $12.1 billion as of December 31, 1998.


Design and delivery of new mortgage products.  Since 1992, the Company has been
involved in developing more than eight new products, including one of the first
whole-loan conduits (Common Sense/SM/), a revolving credit facility for real
estate investment trusts, a bridge loan program for mark-to-market properties
and a forward commitment program for tax-credit new construction.  Using these
products, the Company has originated loans totaling over $1.7 billion from 1992
to 1998.

     The Company has also enhanced its interim financing product, has added a
number of loan products to sell to life insurance companies, has created a small
loan program, and has developed a securitized loan product with a major Wall
Street conduit for commercial lending. The Company intends to enhance its
ability to develop new financing products in response to changing market
conditions, including continued development of bridge loan products, as well as
the addition of high-yield, mezzanine and participating loan products.  The
Company cannot assure you that it will be successful in developing any
particular new product or, if a product is developed, that it will be profitable
for the Company.

Expansion into related businesses.  The Company seeks to build upon its
experience in evaluating real estate to expand its services and develop related
products. The Company has used its expertise to provide due diligence services
for institutional clients, to enter the advisory services/funds management
business and to expand its presence in the commercial mortgage-backed securities
market. Other possible businesses may include asset management, commercial
leasing and management and the purchase and retention of commercial mortgage-
backed securities. Expansion may occur through a combination of acquisitions,
strategic alliances and internal business development. There can be no assurance
that the Company will seek to undertake any specific line of business, or that,
if it undertakes a particular line of business, that the business will be
successful.

Fee Diversification.  The Company intends to manage the risks of the commercial
real estate financing industry by (i) focusing its activities on earning service
and origination fees rather than earning interest on retained mortgage assets,
(ii) developing strategic relationships with multiple investors, (iii) lending
to a variety of commercial asset classes and (iv) operating on a national basis.

 .  Fee-based Earnings. In 1998, approximately 96.8% of the Company's revenue was
   ------------------      
   generated from origination, servicing and other related fees. Of this amount,
   fees and other revenue related to servicing and funds management agreements
   accounted for approximately 44% of Company fee revenue. In addition to
   providing a stable source of earnings, this approach requires significantly
   less capital than the retention of mortgage assets. While it may make
   minority investments in funds it manages, the Company does not intend to take
   significant principal risk positions.

 .  Multiple Investors.  In the past, changes in the financial markets and 
   -------------------     
   investor requirements have contributed to the volatility of the commercial
   mortgage financial markets. The Company seeks to manage this risk by
   developing strategic relationships with a variety of investor sources,
   including commercial banks, GSEs, investment banks and insurance companies.
   The Company believes this strategy enabled it to originate $1.1 billion of
   multifamily and commercial mortgages in the fourth quarter of 1998 despite
   the limited liquidity in the conduit market.

 .  Multiple Asset Classes. The Company has lent to a wide variety of commercial
   ----------------------                                                      
   asset classes, including multifamily, retail, office and hospitality. The
   Company believes that business and financing cycles vary among asset classes.
   By lending to multiple asset classes, the Company can reduce risk and improve
   operating efficiency by redeploying its origination activities as market
   conditions change.

 .  National Presence.  The Company has 19 loan origination offices located
   ------------------                                                     
   throughout the country and has originated loans in every state and the
   District of Columbia. This national presence provides another source of
   diversification, helping to mitigate the risk posed by changes in regional
   business conditions.

   See "Risk Factors" for a detailed discussion of the risks that may affect the
Company.

                                       6
<PAGE>
 
                          MAJOR DEVELOPMENTS IN 1998

1998 Losses.  During the year ended December 31, 1998, the Company incurred a
net loss of $33.3 million, or $6.38 per share. Almost all of these losses were
incurred at the Company's wholly owned subsidiary WMF Capital Corp. ("Capital
Corp.") and resulted from volatility in commercial mortgage-backed securities
markets and interest rates on U.S. Treasury securities. Despite the losses, the
Company's mortgage banking segment remained profitable during the year, and the
Company as a whole experienced increased revenue during 1998.

Losses and Restructuring at Capital Corp.  Most of the Company's losses during
1998 resulted from short-sale transaction losses related to Capital Corp.'s
inventory of mortgage loans. During the first three quarters of 1998, Capital
Corp. originated $969 million in mortgage loans. To protect itself against
interest rate fluctuations prior to the sale or securitization of its loans,
Capital Corp. entered into arrangements for the short sale of U.S. Treasury
securities. Because of interest rate volatility during that period, the Company
was required to fund losses related to changes in the value of its short-sale
positions. To reduce its exposure to margin calls, Capital Corp. sold $691
million in loans and closed the related U.S. Treasury short positions at a loss
in the third quarter of 1998.

     During December of 1998, Capital Corp. sold  the remainder of its loan
inventory and closed the related short-sale positions without incurring
additional losses.  As part of these sales, the Company and Commercial Mortgage
Investment Trust, Inc. ("COMIT") purchased $2.4 million and $7.6 million,
respectively, of subordinated interests in a pool of $63.5 million of these
loans. COMIT is a real estate investment trust ("REIT") that is owned by
Harvard, Capricorn and the Company. WMF Carbon Mesa manages COMIT. See "The
Company's Lines of Business - Advisory Services (WMF Carbon Mesa)" for more
information on WMF Carbon Mesa.

     As a result of the losses incurred, Capital Corp. was unable to satisfy
certain loan commitments.  Capital Corp. has settled one claim related to these
obligations but Capital Corp. may not be able to settle similar claims in the
future.  See "Risk Factors -- Unsatisfied Loan Obligations May Cause Additional
Losses."  The Company does not intend to contribute additional capital to
Capital Corp. or to take principal risk positions at Capital Corp.

Cost-Saving Measures.  In response to its 1998 losses, the Company implemented a
cost-reduction program, reducing its workforce by 15 percent and decreasing
general and administrative expenses.  The Company expects that the cost-
reduction program will result in annual savings of at least $7.5 million from
previously anticipated levels, beginning in 1999.

Issuance and Repayment of Subordinated Notes. On September 4, 1998, the Company
entered into a Credit Agreement with COMIT. Under the Credit Agreement, Harvard
and Capricorn contributed a total of $20 million to COMIT, and the Company then
sold $20 million of its subordinated notes to COMIT. The Company also issued
warrants to COMIT entitling it to purchase 1,200,000 shares of common stock at
$11.25 per share. COMIT later assigned 960,000 of the warrants to Harvard and
240,000 of the warrants to Capricorn. As part of the Recapitalization Plan,
described below, Harvard and Capricorn surrendered those warrants. The Company
repaid $16.6 million of the subordinated notes on December 31, 1998. On March
12, 1999, the Company repaid the remaining principal and interest due under the
subordinated notes, and the notes were canceled.

Recapitalization Plan.  To provide for its working and other capital needs after
the losses at Capital Corp., the Company entered into the Recapitalization Plan.
The Recapitalization Plan had two parts and raised a total of approximately
$27.5 million of new equity:

 .  Sale of $16.6 Million of Capital Stock to Demeter, Phemus and Capricorn

   On December 31, 1998, Demeter, Phemus and Capricorn acquired 3,635,972 shares
   of the Company's Class A Non-Voting Convertible Preferred Stock (the "Class A
   Stock") for total cash proceeds of approximately $16.6 million. On January
   14, 1999, each share of Class A Stock was converted into one share of common
   stock. As a result of these transactions, Demeter acquired 2,757,633 shares
   of the Company's common stock, Phemus acquired 151,145 shares of common
   stock, and Capricorn acquired 727,194 shares of common stock.

   As part of the Class A Stock transaction, Harvard and Capricorn canceled the
   warrants to purchase 1,200,000 shares of common stock issued to COMIT in
   connection with the subordinated notes. In addition, Demeter, Phemus and
   Capricorn entered into a Standby Purchase Agreement to purchase up to 664,028
   shares of common stock not otherwise purchased in the rights offering
   described below, for a total purchase price of $3,320,140. The Company
   applied the proceeds of the sale of Class A Stock to repay part of the
   subordinated notes held by COMIT.

                                       7
<PAGE>
 
   Because of their participation in this transaction, Demeter, Phemus and
   Capricorn agreed not to exercise, transfer or acquire any rights during the
   rights offering.

 .  $10.9 Million Public Rights Offering/Private Placement

   The Company issued all of its shareholders of record as of February 1, 1999,
   1.072 transferable rights for each share of common stock held by them on that
   date. Each right entitled its holder to purchase one share of common stock
   for $5.00. The rights expired on March 8, 1999.

   Through the rights offering, the Company sold a total of 1,482,271 shares of
   common stock for total proceeds of approximately $7.4 million. On March 19,
   1999, Demeter, Phemus and Capricorn completed the purchase of a total of
   664,028 shares of the Company's common stock pursuant to the Standby Purchase
   Agreement, for total proceeds to the Company of approximately $3.3 million.
   Also, Capricorn has agreed to purchase an additional 34,520 shares at 
   $5.375 per share, for proceeds to the Company of $185,545. The Company 
   expects that this sale to Capricorn will close shortly.

   The Company applied the proceeds from the rights offering first to repay the
   remaining subordinated notes held by COMIT. The Recapitalization Plan
   resulted in the effective conversion of the Company's $20 million of
   subordinated notes into common stock and raised approximately $7.5 million of
   additional common equity, which was used to repay borrowings under the
   Company's revolving line of credit and for working capital.

Expansion into Funds Management. Though the acquisition of Carbon Mesa Advisors,
Inc. and Strategic Real Estate Partners in March 1998, the Company started its
advisory services segment, which manages commercial mortgage investment funds,
provides special asset management services and develops new loan products. In
June, the Company, with Harvard and Capricorn, formed a commercial mortgage REIT
to invest in bridge, mezzanine, and structured loans originated by the Company.
The REIT is managed by WMF Carbon Mesa and is expected to fund up to $345
million of commercial and multifamily mortgages through June 1999.

                        THE COMPANY'S LINES OF BUSINESS

MORTGAGE ORIGINATION

      Mortgage origination involves the making of loans to borrowers who use
real estate property as collateral. The Company's staff of 59 loan originators
targets a wide variety of borrowers, including developers, local entrepreneurial
owners, large portfolio owners and public companies such as REITs.

      Currently, the Company originates mortgages through two channels -- retail
and correspondent. For the retail operation, the Company has loan originators in
19 offices located throughout the country. Those individuals directly solicit
owners of real estate, as well as local multifamily and commercial mortgage
brokers. The Company believes that having a local presence within a market
significantly adds to its understanding of the local economic, demographic and
real estate trends, thus allowing it to serve borrowers and investors better. A
local presence also helps develop borrower relationships and identify new
customers.

      In those markets where the Company does not have a retail presence, it
acts through "correspondent relationships" with local mortgage brokers. In this
relationship, a local commercial mortgage broker identifies potential borrowers
and refers them to the Company for their loans. Currently, the Company
originates loans through correspondents throughout the United States. In 1998,
the Company obtained 25.9 percent of its $4.3 billion of loan originations
through correspondents.

      The Company's relationship with correspondents differs between multifamily
and commercial lending and FHA lending. For multifamily and commercial lending,
the Company enters into an agreement with each correspondent which generally
provides that (1) the borrower will pay the correspondent, usually based on a
percentage of the loan, (2) in some instances, the Company will have a right of
first refusal to finance properties meeting the criteria of its loan programs
and investors and (3) the correspondent will be eligible for incentive fees
based on the servicing fees received by the Company from the originated loans.
Generally either party to a multifamily and commercial correspondent agreement
may terminate the relationship without cause upon prior written notice.  The
multifamily and commercial correspondent agreements usually do not place
geographic restrictions on either the Company or the correspondent.

      With respect to FHA lending, correspondents generally enter into
agreements with the Company for each individual 

                                       8
<PAGE>
 
transaction and the terms of the agreements vary from transaction to
transaction. These agreements define the compensation, roles, representations
and warranties for the correspondent and the Company.

     After it identifies a potential borrower, the Company determines which of
its mortgage products best meets the borrower's needs. Then the Company works
with the borrower and a mortgage investor to prepare a loan application. When
the borrower completes the application, the Company's underwriters conduct due
diligence. In the case of FHA loans, the FHA conducts due diligence. See "--
Mortgage Underwriting" below. The loan is evaluated, and if appropriate,
submitted to a loan committee consisting of senior officers of the Company.

     If the Company or the FHA approves the loan, the Company issues a
commitment to the borrower. Normally, the Company simultaneously commits to sell
the loan to an appropriate investor. This simultaneous commitment from both a
borrower and a mortgage investor enables the Company to eliminate its exposure
to interest rate changes for each transaction. Typical investors include
insurance companies, banks, credit corporations, GSEs (such as Fannie Mae) and
other institutional investors. Typically the Company funds a loan 15 to 30 days
after the loan commitment. At that time, the Company funds the loan using its
warehouse lines of credit and the borrower pays the Company an origination fee,
typically one percent of the principal amount of the loan.

     Within 10 to 45 days after funding the loan, the Company completes the sale
of the loan to an investor.  In connection with such sales, the Company
sometimes retains certain liabilities. See "Risk Factors -- The Company is
Liable for Certain Representation and Warranties Concerning Mortgage Loans" and
"Risk Factors -- The Company May Incur Losses on Mortgage Loans Under the DUS
Program." After selling a mortgage loan, the Company typically retains the right
to service the loan. See "-- Mortgage Servicing" below.

     As of December 31, 1998, the Company held 33 mortgage loans for sale with
an aggregate principal balance of $34.2 million. After December 31, 1998, the
Company sold these loans. As of December 31, 1997, the Company held 32 mortgage
loans for sale with an aggregate principal balance of $49.4. After that date,
the Company sold these loans. As of December 31, 1998, the Company's subsidiary,
Capital Corp., had $65.8 million of forward commitments to lend that were not
matched with investor commitments. Those commitments are subject to market risk
until such time as a permanent investor is identified. See "Risk Factors - The
Company May Incur Losses Related To Loan Commitments For Which It Does Not Have
A Purchaser And Has Not Entered Into Hedge Arrangements" below.

     The Company provides a diverse range of products to borrowers through three
business units: Conventional Multifamily, FHA Multifamily and Healthcare, and
Commercial/Life Insurance Company. The following table sets forth information
regarding loan origination volume by business unit for each of the last three
years.

                                       9
<PAGE>
 
                   LOAN ORIGINATION VOLUME BY BUSINESS UNIT
                             (DOLLARS IN MILLIONS)

<TABLE>
<CAPTION>
                                               1998       1997      1996
                                             --------  --------  --------
     <S>                                     <C>       <C>       <C> 
     CONVENTIONAL MULTIFAMILY                $1,263.5  $  742.0  $  505.4
     FHA MULTIFAMILY AND HEALTHCARE             451.3     489.7     505.6
     COMMERCIAL/LIFE INSURANCE/ (1)/          2,633.9   1,075.2     117.5
                                             --------  --------  --------
     TOTAL                                   $4,348.7  $2,306.9  $1,128.5
                                             ========  ========  ========
</TABLE>

/(1)/ Includes Capital Corp. and other conduit originations.

Conventional Multifamily (Fannie Mae).  This business unit finances multifamily
properties that are not supported by governmental insurance or guaranties. The
Company sells such loans to a variety of mortgage investors, including Fannie
Mae. Through WMF Washington Mortgage, one of the Company's most active
conventional products is Fannie Mae's Delegated Underwriting and Servicing
Program ("DUS Program"). Currently, there are only 26 companies approved to
participate in this program. The Company, through WMF Washington Mortgage,
originated approximately $660 million and $240 million of DUS Program loans in
1998 and 1997, respectively.

     Under the DUS Program, Fannie Mae allows WMF Washington Mortgage to
approve, close and service loans on multifamily mortgages that meet
predetermined criteria. Fannie Mae commits to purchase these loans after they
close. As part of the program, Fannie Mae requires that participating companies
share in the risk of loss on the loan. See "Risk Factors -- The Company May
Incur Losses on Mortgage Loans Under the DUS Program." In return for sharing the
risk of loss, the Company receives a servicing fee that is significantly higher
than its typical fee. The Company underwrites each loan to manage its loss
exposure and enhance its return on servicing. See "-- Mortgage Underwriting"
below.

     In addition to its participation in the DUS Program, the Company, through
WMF Washington Mortgage, is a Fannie Mae Prior Approval Lender and is one of the
designated post-closing review lenders for the Fannie Mae Aggregation Facility.
These programs allow WMF Washington Mortgage to sell certain loans to Fannie Mae
that would not otherwise qualify for the DUS Program. Unlike DUS, however,
neither of these programs requires that the Company share in the risk of loss.

FHA Multifamily and Healthcare.  The Company, through WMF Huntoon Paige, is the
largest provider of FHA-insured multifamily and healthcare financing in the
country. The Company originates and services both construction and permanent
loans. For the twelve months ended September 30, 1998, WMF Huntoon Paige
originated approximately 12.0 percent of all FHA multifamily and healthcare
insured debt financing, more than any other FHA mortgagee.

     The Company operates FHA lending through a separate subsidiary because
typical property characteristics, borrower requirements, licensing and approval
processes differ significantly between FHA and conventional multifamily
financing. The Company, through WMF Huntoon Paige, is an FHA-approved mortgagee
and, as such, must comply with the applicable requirements of the National
Housing Act ("Housing Act") and the regulations and policies of the FHA that are
promulgated pursuant to the Housing Act. See "Risk Factors-The Company May Be
Unable To Continue To Comply With Government Regulations and Programs," below.

Commercial/Life Insurance Company Loans.  With its acquisitions in 1996 and
1997, the Company substantially increased its presence in the market for
commercial, non-multifamily financing. The Company originates loans secured by a
variety of properties, including office buildings, retail centers, hotels,
warehouses and nursing homes. Through relationships with regional mortgage
banks, insurance companies have been particularly active investors in this
segment. The Company, through its acquisitions, has established relationships
with a number of insurance companies, including: John Hancock, UNUM, Canada
Life, CIGNA, American General, Nationwide, Berkshire Life, Government Personnel
Mutual and Century Life.

     In addition to originating commercial and multifamily loans placed with
insurance companies, the Company has established origination relationships with
commercial mortgage conduits operated by major financial institutions, including
Greenwich Capital Markets and NationsBank, N.A.  In 1998, the Company originated
loans totaling approximately $1.5 billion through commercial mortgage conduits.
The Company will typically process conduit eligible loans through WMF Funding, a
division of WMF

                                       10
<PAGE>
 
Washington Mortgage (see "-Capital Markets (WMF Funding)" below).

MORTGAGE UNDERWRITING.  The Company's originators work with underwriters who
perform due diligence on all loans prior to commitment and approval.  The
Company's underwriters assess each proposed loan including a review of (1)
borrower financial position and credit history, (2) past operating performance
of the underlying collateral, (3) potential changes in project economics and (4)
appraisal, environmental and engineering studies completed by a pre-approved
list of third-party consultants.  Additionally, underwriters inspect the
property, review tenant and lease files, survey comparable markets, and analyze
area economic and demographic trends.  A loan committee consisting of the
Company's senior officers reviews and approves each proposed loan.

     The Company applies its own underwriting guidelines, as well as those
provided by investors.  Among other things, the Company considers debt service
coverage and loan-to-value ratios, property financial and operating performance,
quality of property management, borrower credit history and tenant profile. The
standards vary from investor to investor and may include a subjective element
based on an assessment of the total credit risk. The standards generally do not
involve mechanical application of a set formula. The Company revises its
underwriting criteria based on its experience and as market conditions and
investor requirements change.

     Due in part to its underwriting procedures, in 1998 the Company achieved a
loan delinquency rate (i.e., loans delinquent over 60 days) equal to only .14
percent of its entire conventional multifamily and commercial portfolios based
on unpaid principal balance. In connection with the Fannie Mae DUS Program, the
Company has originated over 358 DUS loans since 1990 with original principal
balances in excess of $1.9 billion. The Company has experienced one loss of $0.3
million on a DUS Program loan. Another lender originated that loan, and the
Company acquired the risk-sharing obligation as part of its DUS approval in
1990.

     The Company uses the underwriting criteria established by the FHA to
recommend loans for FHA insurance. The Company must provide the FHA with certain
information. The FHA then examines the loans and decides whether to provide
insurance.

MORTGAGE SERVICING

     As a mortgage servicer, the Company performs both primary and master
servicing functions. Primary servicing involves the collection of mortgage
payments, maintenance of escrow accounts for the payment of taxes and insurance
premiums, remittance of payments of principal and interest, reporting to
investors on financial and property issues and general loan administration. The
primary servicer must inspect properties, determine the adequacy of insurance
coverage, monitor delinquent accounts and, in cases of extreme delinquency,
institute forbearance arrangements or foreclosure proceedings on behalf of
investors.

     Master servicers administer and report on securitized pools of mortgage-
backed securities. Normally, the mortgages in the pool are serviced by
individual primary servicers. Master servicing agreements typically require the
primary servicer to retain responsibility for administering the mortgage loans,
and the master servicer supervises the primary servicers by monitoring their
compliance with the servicing contract. The master servicer consolidates all
accounting and reporting to the issuer of the securities.

     The Company has contracts to service loans with mortgage owners and
originators of mortgage-backed securities. The contracts are generally for a
term equal to the term of the serviced mortgage or the mortgage-backed security
and are terminable for cause. Contracts with insurance companies who own
mortgages are usually terminable on 30 days' notice by the owner, in many
instances without cause. In some circumstances, the insurance company must pay a
termination fee if it terminates a servicing contract without cause. Under these
agreements, the Company receives an annual fee for primary servicing. The fee
typically ranges from five basis points to 40 basis points of the unpaid
principal balance of the loans underlying the securities. Fees for master
servicing typically range from one to ten basis points.

     As of December 31, 1998, the Company acted as the primary servicer for
approximately $10.6 billion of loans and as the master servicer for an
additional $1.6 billion of loans. These loans were obtained through the
Company's origination network and through the purchase of servicing rights. A
breakdown of the servicing portfolio is shown below.

                                       11
<PAGE>
 
                      SERVICING PORTFOLIO BY PRODUCT TYPE
                                 $ IN MILLIONS

<TABLE>
<CAPTION>
                                           YEAR ENDED DECEMBER 31,
                                          -----------------------
                                          1998      1997     1996
                                          ----      ----     ----
          <S>                           <C>       <C>       <C>
          CONVENTIONAL MULTIFAMILY      $ 2,583   $ 1,544   $1,644
          FHA AND GINNIE MAE              3,905     4,201    3,076
          COMMERCIAL                      4,069     4,173    1,267
          MASTER SERVICING                1,585       952      214
                                        -------   -------   ------
             TOTAL                      $12,142   $10,870   $6,201
                                        =======   =======   ======
</TABLE>

     The Company principally services loans in its offices in Vienna, Virginia;
Edison, New Jersey; and Houston, Texas. It employs approximately 70 people in
these servicing facilities. As of December 31, 1998, the Company serviced 3,154
loans. As part of its servicing functions on these loans, the Company managed
escrow accounts totaling approximately $350 million and processed approximately
$83.0 million in principal and interest payments each month. The Company
continuously reviews its servicing operations and seeks to implement
improvements in its systems and business processes.

CAPITAL MARKETS (WMF FUNDING)

     To capitalize on its national loan origination system and conduit loan
processing system, as well as to reduce the capital requirements and principal
risks associated with operating a conduit, the Company created WMF Funding, a
division of WMF Washington Mortgage, in December 1998. The Company has entered
into a strategic relationship with Greenwich Capital Markets ("Greenwich")
pursuant to which WMF Funding will originate loans for sale to Greenwich.
Greenwich is expected to pool these loans with other loans and then sell
interests in, or "securitize," the pool. The Company will service the loans it
originates and receive a portion of the profits, if any, from any securitization
of those loans.

     Prior to September 1998, the Company had operated an independent commercial
mortgage conduit through its subsidiary Capital Corp. The operations of Capital
Corp. have been curtailed since it suffered substantial losses in the second and
third quarters of 1998 and the Company has determined not to make further
investments in Capital Corp. However, the Company cannot assure you that it will
not be required to do so.

ADVISORY SERVICES (WMF CARBON MESA)

     The Company's advisory services segment, WMF Carbon Mesa, was formed in
March 1998, when the Company acquired all of the assets of Carbon Mesa Advisors,
Inc. and Strategic Real Estate Partners. Based in Los Angeles, WMF Carbon Mesa
manages a private commercial mortgage fund, provides a variety of advisory
services to institutional investors and originated over $400 million in loans
and investments in 1997. WMF Carbon Mesa employs 16 people.

     WMF Carbon Mesa develops new loan products, manages commercial mortgage
investment funds, provides special asset management servicing and originates
commercial mortgages. In June 1998, WMF Carbon Mesa entered into an agreement to
manage COMIT. COMIT invests in multifamily and commercial mortgages, primarily
those originated by the Company that are not sold in securitizations or to other
institutional investors. These types of multifamily and commercial loans include
bridge, mezzanine and structured transactions.

     Financial information for each of the Company's operating segments is
included in Note 15 of the Company's Consolidated Financial Statements.

EMPLOYEES

     At December 31, 1998, the Company employed 346 persons. Most of these
people work in professional, administrative and technical positions and no
employee is represented by a labor union or subject to a collective bargaining
agreement. The Company believes that its employee relations are generally good.

                                       12
<PAGE>
 
                                 RISK FACTORS

UNSATISFIED CONTRACTUAL COMMITMENTS MAY CAUSE ADDITIONAL LOSSES - As a result of
the losses described above (See "Major Developments in 1998 - 1998 Losses") and
to reduce its exposure to additional losses, the Company has decided that it
will no longer contribute capital to Capital Corp. This determination, combined
with changes in market conditions, resulted in Capital Corp.'s being unable to
fulfill its obligations under at least one loan commitment. The Company has
settled all claims related to that loan commitment, but the Company cannot
assure you that it will not incur significant losses in the future related to
the Company's inability to meet other contractual commitments of Capital Corp.

LOSSES RELATED TO LOANS HELD FOR SALE FOR WHICH THE COMPANY DOES NOT HAVE
INVESTOR COMMITMENTS COULD AFFECT THE COMPANY'S RESULTS OF OPERATIONS -Generally
the Company sells loans to third-party mortgage investors at predetermined
prices before the Company funds or purchases the loan. However, sometimes the
Company originates or purchases a mortgage loan before an investor has agreed to
purchase it from the Company. During the period between the Company's
origination or purchase of a loan and the sale of the loan to an investor
(called the "holding period"), the Company must bear the interest rate risk and
credit risk associated with that loan. If the holding period is long, the
Company's risks are higher. Adverse changes in interest rates, the market for
these mortgage loans or the value of assets securing the mortgages could impair
the Company's ability to sell loans, increasing the Company's holding period and
potential losses. If the Company is unable to sell its loans for a long period
of time, the Company's business and results of operations could be materially
adversely affected.

THE COMPANY MAY INCUR LOSSES RELATED TO LOAN COMMITMENTS FOR WHICH IT DOES NOT
HAVE A PURCHASER AND HAS NOT ENTERED INTO HEDGE ARRANGEMENTS - Capital Corp. has
entered into forward commitments to lend money on certain terms and conditions
which subject the Company to interest rate and market risks until the Company
sells the loans. As of December 31, 1998, Capital Corp. had commitments
outstanding to extend credit to borrowers of $65.8 million. No investor has
committed to purchase these loans, and Capital Corp. has not entered into
arrangements to manage the interest rate and market risk associated with those
loans. If interest rates increase or the demand for such loans declines before
Capital Corp. is able to sell these loans, Capital Corp. may incur significant
losses. The Company is currently seeking investors for the loans, but the
Company cannot assure you that Capital Corp. will not incur significant losses
before such an investor is found or that it will locate an investor at all.

COMPANY'S LOSS OF DEFERRED TAX ASSETS COULD ADVERSELY AFFECT SHAREHOLDER EQUITY-
As of December 31, 1998, the Company had $17.3 million in deferred tax assets
related to the Company's losses during 1998. The Company has recognized the tax
benefit of those operating losses as deferred tax assets and believes that it is
more likely than not that the Company will have sufficient taxable income to
realize the tax benefits of those losses during the next 20 years. However, in
the event of a change of control of the Company or Capital Corp. or certain
other material changes in the Company's business, the Company would have to
establish a valuation allowance against the deferred tax asset. An increase in
the valuation allowance relating to the deferred tax asset could adversely
affect operating results and shareholder equity.

THE COMPANY MAY BE UNABLE TO COMPLETE ACQUISITIONS OR ENTER INTO NEW BUSINESS
LINES - The Company plans to expand its business both internally and through
acquisitions of other commercial mortgage financial service companies. The
Company cannot assure you that it will be able to support its continued growth.
The Company also cannot assure you that it will be able to identify, finance
and purchase additional acquisition candidates, or that future acquisitions, if
completed, will be successful.

     When the Company acquires new businesses with different markets, customers,
financial products, systems and management, the Company may have difficulty
integrating those business into its existing operations.  This integration
process may cause unforeseen difficulties and may require a large portion of
management's attention and the Company's resources. These difficulties may be
particularly acute as the Company expands into business lines outside of its
traditional multifamily business.
 
     The Company originally focused on originating and servicing mortgages on
multifamily properties, such as apartment buildings and condominiums. Since
1996, the Company has expanded its origination and servicing of mortgages on
other commercial properties, such as office buildings, hotels, and retail
stores. The Company plans to continue to expand its business in both the
multifamily and commercial mortgage areas. See "Business - Strategic
Objectives."

     To support, manage and control continued growth, the Company must be able
to hire, train, retain, supervise and manage its workforce. The Company must
also develop the skills necessary to compete successfully in its new business
lines. In particular, the

                                       13
<PAGE>
 
success of certain acquisitions may depend on the Company's ability to retain
key employees of the acquired business.
 
THE COMPANY MAY INCUR LOSSES ON MORTGAGE LOANS UNDER THE DUS PROGRAM - WMF
Washington Mortgage is an approved lender under the Fannie Mae DUS Program.
Under this program, WMF Washington Mortgage originates, places and services
multifamily loans for Fannie Mae without having to obtain Fannie Mae's prior
approval for each loan.

     The DUS Program requires WMF Washington Mortgage to pay a portion of any
losses on mortgages that it originates under the program. These losses may cost
WMF Washington Mortgage up to 20 percent of the original principal balance of
the loan. Additionally, if borrowers default under loans in the DUS Program, the
value of WMF Washington Mortgage's servicing rights for those loans could
materially decrease. See "The Company's Operations May Decline As a Result of
Impairment of Mortgage Servicing Rights"

     To remain in the DUS Program, WMF Washington Mortgage must maintain a
letter of credit or cash sufficient to cover its estimated portion of any
losses. As of December 31, 1998, the unpaid principal balance of WMF Washington
Mortgage loans in the DUS Program totaled $1.5 billion and WMF Washington
Mortgage had a $6.3 million reserve for probable loan losses under the DUS
Program. WMF Washington Mortgage also had a $5.2 million letter of credit to pay
for losses under the program. While the Company believes that these reserves are
sufficient, actual losses under the DUS Program could exceed these reserves and
hurt the Company's performance. If the Company incurs and is required to fund
additional losses, results of operations may be adversely affected.

THE COMPANY IS LIABLE FOR CERTAIN REPRESENTATIONS AND WARRANTIES CONCERNING
MORTGAGE LOANS - When the Company originates mortgage loans and then sells them
to investors, the Company must make certain representations and warranties
concerning those mortgages. These representations and warranties cover such
matters as title to mortgaged property, lien priority, environmental reviews and
certain other matters. When making these representations and warranties, the
Company relies in part on similar representations and warranties made by the
borrower or others.

     If the representations made by a borrower or others are false, the Company
will have a claim against the borrower or other party. The Company's ability to
recover its damages, however, depends on the financial condition of the party
that made the false representation. In addition, the Company makes some
representations and warranties even though it does not receive similar
representations and warranties from borrowers or others. If those
representations are later found to be false, the Company would have to pay for
any losses and would not have a claim against another party. The Company cannot
assure you that it will not experience a material loss as a result of its
representations and warranties.

THE COMPANY MAY INCUR LOSSES AS A RESULT OF CHANGES IN GENERAL ECONOMIC
CONDITIONS - The following general economic conditions could have an adverse
effect on the Company's business:

          .    periods of general, regional or industry-related economic
               slowdown or recession,
          .    declining demand for real estate or
          .    changes in interest rate levels.

     An economic slowdown will generally reduce the Company's origination and
sales of mortgages, which generated approximately 56.0 percent of the Company's
revenue during 1998. In addition, periods of economic slowdown or recession may
increase the risk that borrowers will default on multifamily and commercial
mortgage loans, and those defaults may have an adverse effect on the Company's
financial condition. When the owner of a mortgage forecloses on a property, the
Company's servicing fees may be reduced or eliminated and the Company may
experiences additional losses.

     Periods of economic slowdown or recession may be accompanied by decreased
demand for multifamily or commercial properties. Decreased demand may result in
declining values for the properties securing outstanding loans, and decreased
property values weaken the Company's collateral coverage and increase the
possibility of losses in the event of default. If more properties are for sale
during recessionary periods, the Company may receive lower prices when it sells
foreclosed properties, or it may have to delay such sales. The Company cannot
assure you that it will be able to sell foreclosed properties in the multifamily
or commercial markets. Any material deterioration of such markets could reduce
the Company's proceeds from foreclosure sales.

THE COMPANY EARNINGS MAY BE AFFECTED BY CHANGES IN INTEREST RATES - The Company
believes that interest rate changes can affect its operating results in a
variety of ways, including impacts on

                                       14
<PAGE>
 
origination fees, servicing fees, placement fee income and gains on loan sales,
as well as its own cost of financing. Generally, interest rate increases reduce
the level of economic and real estate activity, thereby decreasing the demand
for mortgage financing, which in turn may negatively affect the Company's
ability to earn origination fees and generate gains on loan sales. In addition
to possibly depressing loan origination levels, gains on loan sales may be
further restricted because the value of fixed income securities, such as many
real estate mortgages, tend to decline as interest rates increase. Finally,
interest rate increases raise the cost of debt financing, particularly if the
Company finances its operations with variable rate debt.

     Interest rate increases, however, positively affect Company earnings from
loan servicing activities. A reduction in real estate activity may reduce the
risk of borrower prepayments, potentially increasing the level of servicing fees
and the value of the Company's servicing portfolio. Additionally, placement fee
income earned by the Company may benefit from increased interest rate levels.

     Declines in interest rates should generally have a corresponding favorable
impact on Company earnings from originating, loan sales and financing activities
and a negative impact on servicing and placement fee income. Changes in the
relationship between short-term and long-term interest rates may also affect the
Company's results of operations. The Company earns net interest income,
typically based upon long-term rates earned on loans held between loan closing
and mortgage investor funding. Net interest income increases when long-term
rates increase relative to short-term rates and decreases when short-term rates
increase relative to long-term rates.

     Although the Company believes that the interest rate environment generally
has the foregoing effects, there is no consistent correlation between interest
rate levels and either the Company's revenues or its overall profitability. In
part, this lack of correlation reflects the refinancing of existing permanent
and construction mortgages at their maturities which may occur regardless of the
interest rate environment. Additionally, approximately 56 percent of the
Company's revenues are derived from originating and approximately 44 percent of
the Company's revenues are derived from servicing activities, and interest rates
have different impacts on each, as described above.

     See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, 
for additional information about the Company's exposure to interest rate risk.

THE COMPANY'S OPERATIONS MAY DECLINE AS A RESULT OF IMPAIRMENT OF MORTGAGE
SERVICING RIGHTS - Under generally accepted accounting principles ("GAAP"), the
Company must treat its servicing rights as an asset. Servicing rights are
recorded as an asset on the Company's balance sheet at either the purchase price
paid for the servicing rights or the relative fair value of the servicing rights
at the time the Company sells a loan and retains the servicing associated with
that loan. The Company also must amortize the value of the servicing rights over
their estimated lives.

     If the value of the servicing rights, as shown on the Company's balance
sheet, exceeds their fair value, then the rights are impaired. The fair value of
the servicing rights may be affected by, and impairment may result from, factors
such as:

          .    changes in mortgage prepayments, which tend to increase as long-
               term interest rates decline, and tend to decrease as such
               interest rates rise;
          .    prepayment penalty terms, including lockout and yield maintenance
               requirements;
          .    higher than expected rate of loan defaults;
          .    lower than expected short-term interest rates;
          .    factors which impact the net cash flow generated from the
               servicing rights, such as the cost of servicing such loans; and
          .    the underlying loans' average custodial balances (the amount
               deposited by borrowers for taxes, deposits and replacement
               reserves).

     To the extent that the Company's servicing rights are impaired, the
Company's operating results may be adversely affected. Although the Company has
not recorded any impairment in the Consolidated Financial Statements presented
herein, it may record impairment at any time in the future. The Company cannot
assure you that it has accurately estimated the factors that could cause
impairment of the servicing, or that the Company's mortgage servicing rights can
be sold at their value, if at all.

THE COMPANY MAY INCUR LOSSES UPON TERMINATION OF CERTAIN SERVICING CONTRACTS -As
of December 31, 1998, the Company had contracts to service mortgages with a
total principal balance of $12.1 billion. Approximately 24 percent of those
contracts are terminable upon 30 days' notice by the owner of the serviced
mortgage. Most of the contracts with these termination provisions are for the
servicing of mortgages held by insurance companies. As the Company increases its
servicing of mortgages held by insurance companies, the percentage of servicing
contracts with such termination provisions may also increase.

                                       15
<PAGE>
 
     The rest of the Company's servicing contracts are for a term equal to the
life of the mortgage.  The holder of the mortgage may terminate the contract
only for cause, after paying the Company a termination fee, or after prepayment
or other early termination of the mortgage.

     If a significant number of the Company's mortgage servicing contracts were
terminated and the Company were unable to replace them with new servicing
contracts, the Company's operations would be adversely affected.

THE COMPANY MAY BE UNABLE TO CONTINUE TO COMPLY WITH GOVERNMENT REGULATIONS AND
PROGRAMS -

     The Company's operations are regulated by:

          .    federal, state and local government authorities, including the
               FHA and the Government National Mortgage Association ("Ginnie
               Mae");
          .    various federal, state and local laws and judicial and
               administrative decisions; and
          .    regulations of GSEs (such as Fannie Mae) that purchase mortgages
               originated and/or serviced by the Company.

     Among other things, these laws, regulations and decisions:

          .    require the Company to maintain a minimum net worth, minimum
               lines of credit, minimum liquid reserves and minimum errors and
               omissions and fidelity insurance;
          .    require the employment of trained personnel competent to perform
               their assigned responsibilities;
          .    require periodic financial reports;
          .    require a quality control plan for the underwriting, origination
               and servicing of loans;
          .    restrict loan originations, credit activities, maximum interest
               rates, and finance and other charges;
          .    regulate disclosures to customers, the terms of secured
               transactions and personnel qualifications; and
          .    require certain collection, repossession and claims-handling
               procedures and other trade practices.

     Although the Company believes that it complies in all material respects
with applicable laws and regulations and with the requirements of mortgage
purchasers, the Company cannot assure you that it will be able to continue to
comply if more restrictive laws, rules, regulations or requirements are adopted
in the future. If the Company fails to comply with all applicable requirements,
the Company could lose the opportunity to originate, sell or service mortgages
in certain jurisdictions, or to originate mortgages on behalf of, sell mortgages
to or service mortgages held by certain institutions. If that occurs, the
Company's financial results could be adversely affected.

     The FHA insured approximately 10.4 percent of loans originated by the
Company during the year ended December 31, 1998 and approximately 44.9 percent
of loans serviced by the Company as of December 31, 1998. If the laws or
regulations governing FHA programs change, the availability of FHA-insured loans
could decrease, and the Company's ability to originate or service those
mortgages could be affected. Any such change could have a material adverse
effect on the Company and its results of operations.

THE COMPANY MAY INCUR LOSSES RELATED TO THE YEAR 2000 CONVERSION - The Year 2000
Problem refers to errors that may occur when computers use two digits rather
than four to define the applicable year.  Software and hardware may recognize a
date using "00" as the year 1900, rather than the year 2000.  If a computer does
not recognize a date on or after January 1, 2000, the error could, among other
things, prevent the Company from processing transactions, sending invoices or
engaging in other normal business activities.

     Although the Company's Year 2000 program (see "Management's Discussion and
Analysis Of Financial Condition and Results of Operations - Year 2000") is
intended to minimize the adverse effects of the Year 2000 Problem on the
Company's business and operations, the actual effects of the Year 2000 Problem
and the success or failure of the Company's efforts described below cannot be
known until after January 1, 2000. If the Company, its major vendors, service
providers or major customers fail to address adequately the Year 2000 Problem in
a timely manner, the Company's business, results of operations and financial
condition could be adversely affected.

THE COMPANY MAY NOT BE ABLE TO COMPETE WITH OTHER MORTGAGE BANKING BUSINESSES -
The Company's competition varies by geographic market. Generally, competition is
fragmented with very few national competitors and many local and regional
competitors. 

                                       16
<PAGE>
 
In addition, the Company's business is characterized by low barriers to entry,
and new competitors have recently been successful in raising the capital
necessary to enter the business. Moreover, certain of the Company's competitors
are larger and have greater financial resources than the Company, including the
commercial mortgage banking arms of General Motors, General Electric, Mellon
Bank, Banc One and First Union. The Company competes largely on the basis of its
experience in purchasing and servicing and on its ability to respond promptly to
changing market conditions. Although management believes that the Company is
well positioned to continue to compete effectively in the multifamily and
commercial mortgage banking businesses, there can be no assurance that it will
do so or that the Company will not encounter further increased competition in
the future which could limit its ability to maintain or increase its market
share.



ITEM 2. PROPERTIES

The following table summarizes information about the Company's primary leased
office space:

<TABLE>
<CAPTION> 
    --------------------------------------------------------------------------------------------------------------------------   
      Location of the           Approximate square feet            Lease Expiration         Business Segment                     
           office                      Occupied                           Date               Occupying Space                     
    --------------------------------------------------------------------------------------------------------------------------   
    <S>                         <C>                               <C>                    <C>                                     
    Vienna, VA                        52,000 sf                   December 31, 2000      Mortgage Banking, Headquarters          
    --------------------------------------------------------------------------------------------------------------------------   
    Edison, NJ                        15,200 sf                     April, 28, 2000      Mortgage Banking                        
    --------------------------------------------------------------------------------------------------------------------------   
    Houston, TX                       10,200 sf                    January 28, 2001      Mortgage Banking                        
    --------------------------------------------------------------------------------------------------------------------------   
    Los Angeles, CA                   17,700 sf                    January 30, 2007      Advisory  Services, Mortgage Banking    
    --------------------------------------------------------------------------------------------------------------------------   
    Charlotte, NC                     16,500 sf                   February 14, 2003      Capital Markets, Mortgage Banking       
    --------------------------------------------------------------------------------------------------------------------------   
    New York, NY                      13,600 sf                    October 20, 2008      Mortgage Banking                        
    --------------------------------------------------------------------------------------------------------------------------   
</TABLE>

     The Company's headquarters are currently located in Vienna, Virginia. In
addition to the offices listed above, the Company has thirteen corporate offices
located around the country, including Phoenix, AZ; Detroit, MI; Dallas, TX;
Denver, CO; and Atlanta, GA.

ITEM 3. LEGAL PROCEEDINGS

     The Company is involved from time to time in legal proceedings arising in
the ordinary course of business. In connection with the Company's loan servicing
activities, the Company is indemnified to varying degrees by the party on whose
behalf the Company is acting. The Company also maintains insurance that
management believes is adequate for the Company's operations. Except as
described below, none of the legal proceedings in which the Company is currently
involved, either individually or in the aggregate (and after consideration of
available indemnities and insurance), is expected to have a material adverse
effect on the Company's business or financial condition; however, any claims
asserted in the future may result in legal expenses or liabilities which could
have a material adverse effect on the Company's business or financial condition.

     Two lawsuits have been filed against Capital Corp. alleging, among other
things, breach of contract by Capital Corp. due to its failure to fund certain
loan commitments issued by it. The Company is also named as a defendant in one
of the lawsuits. An adverse judgement in these matters against Capital Corp.
would be material to Capital Corp., and if against the Company, could be
material to the Company. Capital Corp. is attempting to resolve the matters by
settlement and compromise but no assurances can be given that such attempts will
be successful. The Company does not anticipate a material adverse judgement
against it in the case where it is named as a defendant.

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

     No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the year ended December 31, 1998.
 
                                    PART II

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

                                       17
<PAGE>
 
     The Company's common stock began trading on December 8, 1997 and trades on
The Nasdaq Stock Market under the symbol "WMFG".

     The following table sets forth the high and low per-share closing prices
for the Company's common stock for each quarterly period since its initial
public offering:

<TABLE>
<CAPTION>
                     CALENDAR YEAR                        HIGH       LOW
                     -------------                        ----       --- 
          <S>                                          <C>         <C> 
          1997
          ----
          Fourth Quarter (from December 9, 1997)          $14      $12 1/8
 
          1998
          ----
          First Quarter                                32 1/2       11 1/8
          Second Quarter                               28 1/4       19 5/8
          Third Quarter                                    29            5
          Fourth Quarter                                8 1/4        3 3/8
 
          1999
          ----
          First Quarter (through March 29, 1999)        6 1/2        4 3/4
</TABLE>

     On March 29, 1999, the Company had approximately 244 stockholders of
record.

     The Company does not anticipate declaring and paying cash dividends on the
Company's common stock in the foreseeable future. The decision whether to apply
any legally available funds to the payment of dividends on the Company common
stock will be made by the Board of Directors of the Company from time to time in
the exercise of its business judgment, taking into account the Company's
financial condition, results of operations, existing and proposed commitments
for use of the Company's funds and other relevant factors.

     The Company's ability to pay dividends may be restricted from time to time
by financial covenants in its credit agreements or in arrangements with or
regulations of government sponsored entities.

     On December 30, 1998, the Company issued a total of 250,000 warrants as
part of a settlement agreement between the Company and one of its borrowers. As
adjusted, the warrants permit the borrower to purchase 100,000 shares of the
Company's common stock at $5.90 per share and 150,000 shares of the Company's
common stock at $9.70 per share. The exercise price of the warrants may be
further adjusted upon the occurrence of certain dilutive events. Also as part of
the settlement, the Company issued 50,000 shares of its common stock to be held
in escrow to secure Capital Corp.'s obligations under the settlement agreement.
These transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Securities Act"), because they did not
involve any public offering.

     On December 31, 1998, the Company sold a total of 3,635,972 shares of Class
A Stock to Demeter, Phemus and Capricorn for total proceeds of approximately
$16.6 million. The shares of Class A Stock were subsequently converted to an
equal number of shares of common stock. The Company used the proceeds from the
sale of Class A Stock to partially repay the subordinated notes held by COMIT.
The sale of the Class A Stock was exempt from registration pursuant to Section
4(2) of the Securities Act, because the sale did not involve any public
offering.

ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth selected financial and operating data of the
Company as of and for each of the years ended December 31, 1998, 1997, 1995.
Also set forth is data as of and for the three-month period ended March 31, 1996
and as of and for the nine-month period ended December 31, 1996. The data for
the three-month period ended March 31, 1996 and the nine-month period ended
December 31, 1996 are presented separately as a result of the acquisition of the
Company, which was formerly known as WMF Holdings Ltd., by NHP effective April
1, 1996 (the "NHP Acquisition"). The table also sets forth pro forma income
statement data for the year ended December 31, 1996 giving effect to the NHP
Acquisition as though it occurred January 1, 1996. The selected financial data
of the Company as of and for each of the above mentioned periods were derived
from the Company's consolidated

                                       18
<PAGE>
 
financial statements contained elsewhere herein. The pro forma data (which are
unaudited) are derived from the footnote 19 of the Company's consolidated
financial statements contained in this document. The pro forma results are not
necessarily indicative of operating results that would have been achieved had
the NHP Acquisition actually occurred on January 1, 1996. Additionally, the pro
forma operating results are not intended to be a projection of results of future
operations. The selected financial and operating data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements, pro forma financial
statements and related notes included elsewhere herein.

                                       19
<PAGE>
 
                      SELECTED CONSOLIDATED FINANCIAL DATA
                 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                                                        WMF Holdings Ltd. and
                                                   The Company                                                Subsidiaries
                                       -------------------------------                                 --------------------------
                                                                                        For the period   For the period
                                                                           Pro Forma      April 1 to      January 1 to    Year Ended
                                                                         December 31,    December 31,       March 31,   December 31,
                                               1998           1997         1996 (1)          1996             1996          1995
                                       ---------------------------------------------------------------------------------------------
                                                                           (Unaudited)
<S>                                        <C>            <C>            <C>            <C>              <C>              <C>
INCOME STATEMENT DATA
Revenues                                     $ 72,541       $ 44,645       $ 30,301        $23,473           $ 6,828     $ 21,999 
Expenses                                      105,863         42,203         29,416         22,318             6,523       21,222 
Net income (loss)                             (33,322)         2,442            885          1,155               305          777 
Net income (loss) per share-Basic (2)           (6.38)          0.57           0.21           0.27              0.07         0.16 
Weighted average shares                                                                                                           
 outstanding-Basic (2)                          5,224          4,272          4,217          4,217             4,217        4,717 
Net income (loss) per share-Diluted(2)          (6.38)          0.55           0.21           0.27              0.07         0.16 
Weighted average shares outstanding-                                     
 Diluted(2)                                     5,224          4,452          4,217          4,217             4,217        4,717 
</TABLE> 
 
<TABLE> 
<CAPTION> 
                                           DECEMBER 31,   DECEMBER 31,             DECEMBER 31,          MARCH 31,     DECEMBER 31,
                                               1998          1997                      1996                 1996           1995
                                               ----          ----                      ----                 ----           ----
<S>                                        <C>            <C>                      <C>                   <C>           <C>  
BALANCE SHEET DATA
Mortgage loans held for sale                 $ 34,217       $ 49,431                       $40,263           $23,116     $ 32,462
Servicing rights                               26,243         26,796                        22,460             8,477        8,466
Total assets                                  144,527        119,331                        88,097            48,976       57,176
Total debt (3)                                 79,151         59,904                        46,136            34,108       43,304
Shareholders' equity                           27,378         38,825                        22,528             4,324        4,018
OTHER DATA                                                                                                               
Cash Flows from                                                                                                          
 Operating  activities   (4)                 $ 14,086       $ (1,099)      $  1,275        $(8,708)          $ 9,983     $(21,897)
 Investing  activities   (4)                  (54,759)       (21,463)        (9,824)        (9,276)             (548)      (2,343)
 Financing  activities   (4)                   41,122         26,529          7,833         17,029            (9,196)      26,833
EBITDA (4)                                    (41,168)        11,439          8,256          6,502             1,754        4,743
</TABLE>

_____________
(1) Adjusted to reflect results of operations for the twelve months ended
    December 31, 1996, as if the NHP Acquisition had occurred January 1, 1996.
    Adjustments include all income amounts for the three months ended March
    31,1996 and additional amortization of $575,648.

(2) Gives retroactive effect to a 789.94 per share stock split effective October
    3, 1997.

(3) Includes $5,000,000 of notes to the Company's former shareholder as of March
    31, 1996 and December 31, 1995, which were repaid in conjunction with the
    NHP Acquisition.

(4) Operating, investing and financing cash flow represents the amount of cash
    generated from operating, investing and financing activities, respectively,
    as determined using GAAP.

(5) EBITDA is a non-GAAP presentation of the Company's performance and consists
    of income (loss) from operation before non-warehouse interest expense,
    income taxes, depreciation and amortization. EBITDA is included because it
    is used in the industry as a measure of a company's operating performance
    and provides information in addition to that supplied by GAAP-based data
    regarding the ability of the Company's business to generate cash, but should
    not be constructed as an alternative either (i) to income (loss) from
    operations (determined in accordance with GAAP) as measure of profitability
    or (ii) to cash flows from operating activities (determined in accordance
    with GAAP). EBITDA does not take into account the Company's debt service
    requirements and other commitments and, accordingly, is not necessarily
    indicative of amounts that may be available for discretionary uses and
    EBITDA as measured by the Company may not be comparable to EBITDA as
    measured by other companies.

                                       20
<PAGE>
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS


OVERVIEW

     On April 1, 1996, NHP acquired all the outstanding capital stock of the
Company for consideration of approximately $21 million, in the form of $16.8
million in cash and 210,000 shares of NHP Common Stock. (For periods prior to
NHP's acquisition of the Company, the Company is referred to as "WMF Holding.").
As a result of the NHP Acquisition, all assets and liabilities acquired were
recorded at their fair value which resulted in an increase of the recorded value
of the Company's servicing rights of $10.7 million and goodwill of $5.1 million.

     The following discussion and analysis presents the significant changes in
financial condition and results of operations of the Company for the years ended
December 31, 1998, 1997 and 1996. The results of operations of acquired
businesses are included in the Company's consolidated financial statements from
the date of acquisition. This discussion should be read in conjunction with the
Company's consolidated financial statements and notes thereto included elsewhere
herein. For the purpose of comparing the year ended December 31, 1997 to the
year ended December 31, 1996, the three months ended March 31, 1996 has been
combined with the nine months ended December 31, 1996. As a result of the NHP
Acquisition, the year ended December 31, 1997 includes $575,000 of additional
amortization expense as compared to the year ended December 31, 1996. For
purposes of comparing the year ended December 31, 1997 and 1996, no other income
statement amounts have been impacted by the NHP Acquisition.

          Although it incurred significant losses in 1998, since 1996, the
Company has experienced significant growth in its revenues, annual production
volume and servicing volume. The Company seeks to continue to expand its
business through (i) acquisitions, (ii) internal growth, (iii) design and
delivery of new mortgage products, (iv) expansion into related businesses, and
(v) diversification of fee income sources. On a going-forward basis, to the
extent that the Company is successful in completing acquisitions, the Company
will experience increased expenses associated with the amortization of goodwill
and acquired mortgage servicing rights and, if the acquisitions are financed by
additional indebtedness, an increase in interest expense. Through its
acquisitions, the Company's primary focus is to increase its mortgage
origination capabilities and servicing portfolio as well as to expand into
related businesses. Accordingly, such acquisitions may result in a short-term
decrease in income from operations during the period from acquisition through a
period necessary to integrate the acquired companies.

RESULTS OF OPERATIONS - SUMMARY

     The Company's primary business activities are commercial and multifamily
loan servicing, loan origination and sales of the loans to investors in the
secondary market. With the formation of Capital Corp. and the acquisition of
Carbon Mesa in the first quarter of 1998, the Company operated a commercial
mortgage conduit, manages commercial mortgage investment funds and provides
special asset management services. The Company manages its operations through
three business segments: mortgage banking, capital markets, and advisory
services. Revenues from mortgage banking activities are earned from the
origination of commercial and multifamily real estate mortgage loans and the
servicing of such loans. Sources of mortgage banking revenue include loan
servicing fees, gains on sale of mortgage loans (including related gains on
originated servicing rights), interest income on loans prior to sale, "placement
fees" (revenue earned relating to utilization of escrow funds) and origination
fee income. In capital markets, the principal sources of revenue include gain on
the sale of mortgage loans, gains on the sale of servicing and interest income
on loans prior to securitization. Structuring fee income, management fees and
origination fees represent the major sources of income for the advisory services
segment.

     The Company's revenue is significantly influenced by the timing of
origination and sales of mortgage loans and is somewhat sensitive to economic
factors such as the general level of interest rates and demand for commercial
and multifamily real estate. As a result, future revenues may fluctuate due to
changes in these factors. Therefore, the Company's historical results may not be
indicative of future periods.

                                       21
<PAGE>
 
The following table sets forth information derived from the Company's
consolidated statements of operations and reconciles the summary segment
financial information to the consolidated statements of operations for each of
the periods presented:

  Segment Financial Information and Reconciliation to Consolidated Statements
                           Statements of Operations
                                (in thousands)

<TABLE>
<CAPTION>
                                             Year Ended       Year Ended       Year Ended                                  
                                            December 31,     December 31,     December 31,                                 
                                                1998             1997             1996                  
                                           -----------------------------------------------             
Revenue                                                                        (Proforma)              
-------                                                                                                
<S>                                         <C>              <C>              <C>        
Mortgage Banking (1)                         $  67,567          $44,645           $30,301
Capital Markets                                  3,484                -                 -
Advisory Services                                1,490                -                 -
                                            ----------------------------------------------
Total                                           72,541           44,645            30,301
Consolidated Statement                          72,541           44,645            30,301
                                                                                         
Expenses (2)                                                                             
------------                                                                             
Mortgage Banking (1)                            59,169           39,116            27,154
Capital Markets                                 60,379                -                 -
Advisory Services                                2,114                -                 -
Non-operating interest                           3,267              758               278
                                            ----------------------------------------------
Total                                          124,929           39,874            27,432
Consolidated Statement                         124,929           39,874            27,432
                                                                                         
Pretax income (loss)                           (52,388)           4,771             2,869
                                                                                         
Provision (benefit) for taxes                  (19,066)           2,329             1,984
                                            ----------------------------------------------
Net income (loss)                             ($33,322)         $ 2,442           $   885
                                            ==============================================
                                                                                         
Mortgage Banking EBITDA (1)                     16,074           11,439           $ 8,256
Capital Markets EBITDA                         (56,766)               -                 -
Advisory Services EBITDA                          (476)               -                 -
                                            ----------------------------------------------
Total                                         ($41,168)         $11,439           $ 8,256
Consolidated EBITDA                           ($41,168)         $11,439           $ 8,256
</TABLE> 
 
(1)  Mortgage banking operations includes corporate administrative expenses.
(2)  The company recognized reorganization and recapitalization expenses of
     approximately $2.0 million with approximately $1.7 million reported in
     mortgage banking and $341,000 reported in capital markets.

                                       22
<PAGE>
 
The following table sets forth information derived from the Company's
consolidated balance sheet for each of the periods presented and a
reconciliation to the Company's consolidated balance sheet:

<TABLE>
<CAPTION>
                                      December 31,    December 31,     December 31,
                                         1998            1997             1996     
                                     ----------------------------------------------
<S>                                  <C>              <C>              <C>         
Assets                                                                             
------                                                                             
Mortgage Banking (1)                    $131,264        $119,331           $88,097
Capital Markets                            8,558               -                 -
Advisory Services                          4,705               -                 -
                                     ----------------------------------------------
Total                                    144,527         119,331            88,097
Consolidated Statement                  $144,527        $119,331           $88,097
</TABLE> 

 
(1)  Mortgage banking operations includes corporate administration.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997

     Net income (loss) was ($33.3) million for the year ended December 31, 1998,
a decrease of $35.7 million from $2.4 million for the same period in 1997.  The
decline in net income was due primarily to U.S. Treasury short sale transaction
losses of $36.7 million and losses of $10.5 million on loan sales at Capital
Corp.  The losses were partially offset by higher gains on loan sales, servicing
revenue and placement fee income in the mortgage banking segment and structuring
fee income in the advisory services segment.  Net income includes a tax benefit
of $19.1 million for the year ended December 31, 1998.

     The Company's earnings (losses) before non-operating interest expense,
income taxes, depreciation and amortization (EBITDA) for the year ended December
31, 1998 was ($41.2) million, a decrease of $52.6 million from $11.4 million for
the same period in 1997. The decrease in EBITDA for the year ended December 31,
1998 as compared to 1997 is due primarily to U.S. Treasury short sale
transaction losses and losses on loans sales at Capital Corp., as discussed
above.  Higher servicing fee and placement fee income in the mortgage banking
segment helped to offset the loss in EBITDA, as the Company's servicing
portfolio balance at December 31, 1998 was $12.1 billion, up from $10.9 billion
as of December 31, 1997.

     EBITDA is widely used in the industry as a measure of a company's operating
performance, but should not be considered as an alternative either (i) to income
from continuing operations (determined in accordance with GAAP) as a measure of
profitability or (ii) to cash flows from operating activities (determined in
accordance with GAAP).  EBITDA does not take into account the Company's debt
service requirements and other commitments and, accordingly, is not necessarily
indicative of amounts that are available for discretionary uses.

     The Company's consolidated tax benefit for the year ended December 31, 1998
was $19.1 million, compared to a tax expense of $2.3 million for the same period
in 1997. The tax provision change is the result of the Company recognizing a
deferred tax asset related to the losses incurred at Capital Corp. during the
year ended December 31, 1998. Differences between the effective income tax rate
and the federal and state income tax rates are due primarily to the amortization
of goodwill, a portion of which is not deductible for income tax purposes. The
Company has concluded that it is more likely than not to have sufficient taxable
income, either through continuing operations or asset dispositions during the
carry forward period, to realize the tax benefit of $19.1 million.

Mortgage Banking Operations:
 
     Servicing fees earned by the mortgage banking segment were $14.7 million
for the year ended December 31, 1998, an increase of $2.8 million or 24% from
$11.9 million for the same period in 1997. Revenue related to mortgage servicing
is based upon the unpaid principal balance of loans serviced. The increase in
servicing fees for the year ended December 31, 1998 is a result of the average
principal balance of mortgage banking segment's servicing portfolio increasing
to $11.7 billion in 1998, from $7.8 billion in 1997, an increase of 49%.
The mortgage banking segment's servicing portfolio year-end principal balance
was $12.1 billion and $10.9 billion for 1998 and 1997, respectively, an increase
of 11%. The percentage increase in average principal balance is greater than the

                                       23
<PAGE>
 
percentage increase in the year-end servicing portfolio primarily due to a sale
of servicing rights at the end of the fourth quarter of 1998 and the servicing
portfolio increases resulting from the acquisitions of Askew, Robert C. Wilson,
and New York Urban in 1997. Typically, the percentage increase in servicing fee
revenue is less than the percentage increase in the average servicing portfolio
because the servicing fee on the added servicing, which includes servicing
received from insurance companies and conduits, is lower than the Company's
historical average servicing rate. The average servicing fee rate was .126% in
1998, a decrease of .026% from .152% in 1997.

     Gain on sale of mortgage loans was $31.3 million for year ended December
31, 1998, an increase of $11.6 million or 59% from $19.7 million for the same
period in 1997. For the year ended December 31, 1998, the mortgage banking
segment sold $3.3 billion in mortgage loans, as compared to $2.3 billion for the
year ended December 31, 1997. Gain on sale of mortgage loans includes the gain
on recognizing originated mortgage servicing rights in the amount of $6.0
million and $2.1 million for the years ended December 31, 1998 and 1997,
respectively. In addition, 1998 results include a $1.3 million loss related to
an interest rate lock agreement, which was terminated in the third quarter.

     Gain on sale of servicing rights was $2.0 million for the year ended
December 31, 1998, an increase of $1.7 million from $0.3 million for the same
period in 1997. The increase in income is attributed to the sale of
approximately $500 million of servicing rights.

     Interest income was $5.9 million for the year ended December 31, 1998, an
increase of $0.1 million or 1.7% from $5.8 million for the same period in 1997.
The increase in income is attributed to the higher average balance of loans held
until funding during the fourth quarter of 1998.

     Placement fee income was $8.5 million for the year ended December 31, 1998,
an increase of $3.2 million or 60% from $5.3 million for the same period in
1997. This increase was the result of an increase in the average investor escrow
balances held by the Company, to $340 million from $277 million for the year
ended December 31, 1998 and 1997, respectively. The escrow balances are on
deposit in escrow bank accounts and are not included in the Company's balance
sheet.

     Other income (which includes prepayment penalties, termination fees and
loan management fees) was $5.2 million for the year ended December 31, 1998, an
increase of $3.5 million or 206% from $1.7 million for the same period in 1997.
The increase in income is attributed primarily to higher termination and
prepayment fees associated with the prepayment of loans serviced by the Company.
This increase in prepayments is mainly the result of a lower interest rate
environment in 1998, which resulted in higher mortgage refinancing.

     The mortgage banking segment's total expenses consist of salaries and
benefits (including commissions), other general and administrative expenses,
provision for loan servicing losses, operating interest expense, amortization of
mortgage servicing rights and other depreciation and amortization. The mortgage
banking segment's expenses include corporate administrative expenses.

     Salaries and benefits, the largest category of expenses for the segment,
increased with loan production due to the payment of commissions on loan
originations. Salaries and benefits expense was $32.3 million for the year ended
December 31, 1998, an increase of $11.1 million or 52%, from $21.2 million for
the same period in 1997. This increase is due primarily to increased
originations and the Acquisitions. Salaries and benefits related to corporate
administrative costs also increased due to the acquisition of WMF Carbon Mesa
and the formation of Capital Corp. These factors, combined with mortgage
banking's expansion into non-multifamily commercial lending, contributed to the
increase in the number of mortgage banking and corporate administrative
employees to 318 as of December 31, 1998 from 272 as of December 31, 1997.
Additionally, salaries and benefits in the fourth quarter of 1998 include
approximately $429,000 related to severance payments as a result of the
Company's cost-savings measures.

     General and administrative expenses consist of professional fees, travel,
reorganization and recapitalization expenses, management information, equipment
rental, and other expenses. General and administrative expenses were $12.3
million for the year ended December 31, 1998, an increase of $4.7 million or 62%
from $7.6 million for the same period in 1997. The increase is a result of
integration and start-up costs associated with the Acquisitions and formation of
Capital Corp., as well as recapitalization and reorganization costs incurred
during the fourth quarter of 1998. Recapitalization and reorganization costs
reported in general and administrative expenses totaled $1,201,500 and include
approximately $300,000 in legal and accounting fees, $337,500 in financial
advisory service fees and $564,000 in other costs.

     Occupancy expense was $3.8 million for the year ended December 31, 1998, an
increase of $1.7 million or 81% from $2.1 million for the same period in 1997.
This increase was due to an increased number of offices in 1998.

                                       24
<PAGE>
 
     The mortgage banking segment's provision for loan servicing losses was $1.1
million for the year ended December 31, 1998, an increase of $371,000 or 51%
from $729,000 for the same period in 1997. The provision for losses is the
result of management's ongoing assessment of the Company's exposure related to
its Fannie Mae DUS portfolio. Mortgage banking's principal balance of Fannie Mae
DUS loans in the servicing portfolio was $1.5 billion and $944 million as of
December 31, 1998 and 1997, respectively. Although management considers the
allowance appropriate and adequate to cover inherent loan servicing losses,
management's judgment is based on a number of assumptions about future events
which are believed to be reasonable but which may or may not prove valid. There
can be no assurance that losses will not exceed the allowance, and future
increases in the allowance may be required.

     Warehouse interest expense was $2.3 million for the year ended December 31,
1998, an increase of $0.8 million or 53% from $1.5 million for the same period
in 1997. The increase is due to commitment fees paid to the warehouse lender
during the fourth quarter of 1998 to temporarily increase the warehouse line.

     Non-operating interest expense was $3.3 million for the year ended December
31, 1998, an increase of $2.5 million or 313% from $0.8 million for the same
period in 1997. The interest expense on a $20 million note issued by COMIT,
combined with increased borrowings under bank credit facilities, contributed to
the increase in expense.
 
     Depreciation and amortization was $7.7 million for the year ended December
31, 1998, an increase of $1.8 million or 31% from $5.9 million for the same
period in 1997. This increase was due primarily to the amortization related to
the originated mortgage servicing rights recognized during 1998 and the full
year effect of amortization of goodwill related to 1997 Acquisitions.

Capital Markets Segment:

     Capital Corp., the capital markets segment of the Company, was formed in
February of 1998 to conduct the securitization conduit activities of the
Company.  During the year, capital markets experienced a loss of $10.5 million
on the sale of loans with a principal balance $971.0 million.  This loss is net
of gains from the sales of the related servicing rights of $5.5 million.

     Interest income earned on commercial mortgage loans held for sale was $14.9
million for the year ended December 31, 1998.  The capital markets segment sold
its remaining loan portfolio of $278.8 million during the fourth quarter of
1998.

     Salary and benefits expense was $5.4 million for the year ended December
31, 1998. This expense includes $341,000 of severance costs associated with the
Company's reorganization and recapitalization, which took place during the
fourth quarter of 1998.

     Occupancy expense was $772,000 for the year ended December 31, 1998.

     Interest expense on warehouse balances was $12.2 million for the year ended
December 31, 1998. Capital Markets sold its remaining loan portfolio and closed
out the related warehouse balances during the fourth quarter of 1998.

     Realized losses on short sales of U.S. Treasury securities for the year
ended December 31, 1998 was $36.7 million. Those losses were attributed to the
Company's use of short sales of U.S. Treasury securities to manage interest rate
volatility. The losses resulted from volatility in commercial mortgage-backed
securities and interest rates on U.S. Treasury securities.

     Other general and administrative expense was $6.1 million for the year
ended December 31, 1998.  Capital Corp. recognized $1.5 million in legal
settlement expenses incurred in connection with the curtailment of conduit
operations during the fourth quarter.

Advisory Services Segment:

     The advisory services segment of the Company, WMF Carbon Mesa, began
operations during the second quarter of 1998. Revenue within the advisory
services segment of the Company consists of origination fee income and
management fees. Origination fee income includes structuring fees and loan
processing fees, which are included in gain on loan sales. Structuring fees are
paid to WMF Carbon Mesa for structuring loans for borrowers and loan processing
fees are paid to WMF Carbon Mesa for processing mortgage loan applications. For
the year ended December 31, 1998, origination fees totaled $1.2 million. WMF
Carbon Mesa originates loans for and manages two commercial mortgage funds.
Those funds paid WMF Carbon Mesa management fees of $295,000 for the year ended
December 31, 1998. Total assets under management by WMF Carbon Mesa as of
December 31, 1998, 

                                       25
<PAGE>
 
was $138.7 million.

     Expenses consist primarily of salary and benefits, occupancy and
amortization.  Total expenses were $2.1 million for the year ended December 31,
1998.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996

     Net income increased by $1.5 million or 166% from $0.9 million for the year
ended December 31, 1996 to $2.4 million for the year ended December 31, 1997.
This increase was primarily due to an increase in loan originations and sales as
well as increases in servicing fees. These increases were offset partially by
increases in salaries and employee benefits, general and administrative expenses
and income tax expense which were in part related to the Company's expansion
into non-multifamily commercial lending, the impact of the WMF Proctor and WMF
Askew acquisitions and increased interest expense.

     The Company's earnings before non-operating interest expense, income taxes,
depreciation and amortization ("EBITDA") for the year ended December 31, 1997
was $11.4 million compared with $8.3 million for the same period of 1996, an
increase of $3.1 million or 37%. The increase in EBITDA for the year ended
December 31, 1997 is attributable primarily to an increase in loan originations
and sales as well as increases in servicing fees, offset partially by increases
in salaries and employee benefits, general and administrative expenses and
income tax expense which were in part related to the Company's expansion into
non-multifamily commercial lending, the impact of the WMF Proctor and WMF Askew
acquisitions and increased interest expense. The fourth quarter results were
affected by a one-time charge of $0.75 million related to the issuance of
138,000 shares of common stock through an employee stock purchase plan, the
recognition of a one-time charge of $0.34 million related to the issuance of
271,250 stock options under the Key Employee Incentive Plan and the recognition
of a $1.2 million gain related to the Company's origination of conduit mortgage
loans. During the fourth quarter the Company evaluated recent market trades and
other factors related to conduit servicing, and concluded it had sufficient
basis to capitalize servicing rights related to the origination of conduit
loans. As a result, the Company capitalized $1.2 million of conduit servicing.
Prior to the fourth quarter, the Company only capitalized originated servicing
rights on loans insured by the FHA. The Company originated multifamily and
commercial mortgages of $2.3 billion and $1.1 billion for the years ended
December 31, 1997 and 1996, respectively. The EBITDA increase also reflects the
$0.6 million loss on Beverly Hills Securities in 1996 as discussed below.

     EBITDA is widely used in the industry as a measure of a company's operating
performance, but should not be considered as an alternative either (i) to income
from continuing operations (determined in accordance with GAAP) as a measure of
profitability or (ii) to cash flows from operating activities (determined in
accordance with GAAP). EBITDA does not take into account the Company's debt
service requirements and other commitments and, accordingly, is not necessarily
indicative of amounts that may be available for discretionary uses.

     Servicing fees were $11.9 million for the year ended December 31, 1997, an
increase of $2.6 million or 28% from $9.3 million for the year ended December
31, 1996. Revenue related to mortgage servicing is based upon the unpaid
principal balance of loans serviced. The increase in servicing fees for the year
ended December 31, 1997 is a result of the principal balance of the Company's
servicing portfolio increasing. Such balances were $10.9 billion and $6.2
billion as of December 31, 1997 and 1996, respectively. The increase in the
servicing portfolio for the year ended December 31, 1997 is attributable
primarily to loan originations of $2.3 billion and the acquisitions of Proctor,
ACR, Askew, Robert C. Wilson and New York Urban, which added rights to service
loans with principal balances of $3.5 billion for the year ended December 31,
1997. The percentage increase in servicing fee revenue is less than the
percentage increase in the servicing portfolio because the fee as a percentage
of unpaid principal balance on the added servicing, primarily for insurance
companies, is lower than the Company's historical average servicing rate.

     Gain on sale of mortgage loans was $19.7 million for the year ended
December 31, 1997, an increase of $9.5 million or 93% from $10.2 million for the
year ended December 31, 1996. For the years ended December 31, 1997 and 1996,
the Company originated $2.3 billion and $1.1 billion mortgage loans,
respectively. The increase in gain on sale of mortgage loans is a result of the
increase in loan origination fees, recognition of gain in the amount of $1.2
million related to the Company's origination of conduit mortgage loans, as
discussed above, and includes the gain on recognizing originated mortgage
servicing rights on other products of $2.1 million and $2.8 million for the
years ended December 31, 1997 and 1996, respectively.

     Gain on sale of servicing of $0.3 million, for the year ended December 31,
1997, represents the sale of the Company's servicing portfolio of loans held by
Federal Home Loan Mortgage Corporation. The Company does not expect the sale of
this portfolio 

                                       26
<PAGE>
 
to have a material impact on future results.

     Interest income was $5.8 million for the year ended December 31, 1997, an
increase of $1.5 million or 35% from $4.3 million for the year ended December
31, 1996. This increase was due to the increase in originations for the year
ended December 31, 1997 compared to the year ended December 31, 1996, as
discussed above.

     Placement fee income was $5.3 million for the year ended December 31, 1997,
an increase of $0.3 million or 6% from $5.0 million for the year ended December
31, 1996. This increase was the result of earnings on invested mortgagor escrow
amounts. The Company's escrow balance was $323 million and $228 million as of
December 31, 1997 and 1996, respectively.

     Other income was $1.7 million for the year ended December 31, 1997, an
increase of $0.2 million or 13% from $1.5 million for the year ended December
31, 1996. The increase was the result of loan modifications, prepayment
penalties and recoveries. The increase in the year ended December 31, 1997 is
primarily related to the recovery of approximately $0.5 million in escrow
advances that had previously been written off during the year ended December 31,
1996.

     The Company's total expenses consist of salaries and benefits (including
commissions), other general and administrative expenses, provision for loan
servicing losses, operating interest expense, amortization of mortgage servicing
rights, and other depreciation and amortization.

     Salaries and benefits, the largest category of expenses for the Company,
increase with loan production due primarily to the payment of commissions on
loan originations. Salaries and benefits increased $8.5 million, or 67%, from
$12.7 million for the year ended December 31, 1996 to $21.2 million for the year
ended December 31, 1997. This increase is due primarily to increased
originations, recognition of a one-time charge related to issuance of shares
through stock option plans, as discussed above, and the acquisitions of Proctor,
Askew, Robert C. Wilson and New York Urban which occurred subsequent to the year
ended December 31, 1996 and the acquisition of ACR in May, 1996. These
acquisitions, combined with the Company's expansion into non-multifamily
commercial lending contributed to the increase in the Company's number of
employees from 171 at December 31, 1996 to approximately 300 at December 31,
1997.

     General and administrative expenses consist of professional fees, travel,
management information, occupancy, telephone and equipment rental, and other
expenses. General and administrative expenses were $7.6 million for the year
ended December 31, 1997, an increase of $2.8 million or 58% from $4.8 million
for the year ended December 31, 1996. The increase is a result of costs
associated with acquisitions and the resulting additional offices.

     The Company's provision for loan servicing losses was $0.7 million for the
year ended December 31, 1997, a decrease of $ 0.6 million or 46% from $1.3
million for the year ended December 31, 1996. The decrease in reserves is the
result of management's determination, as part of its ongoing assessment of the
reserve, that current market conditions do not require a further increase in
reserves. The Company's principal balance of Fannie Mae DUS loans in the
servicing portfolio was $944 million and $776 million as of December 31, 1997
and 1996, respectively. In 1997 the Company did not incur any losses related to
its DUS portfolio.

     Interest expense of $2.3 million for the year ended December 31, 1997
increased $1.0 million or 77% from $1.3 million for the year ended December 31,
1996. This increase was due to the Company's increased production and
acquisition borrowings.

     Depreciation and amortization of $5.9 million for the year ended December
31, 1997 increased $0.8 million or 16% from $5.1 million for the year ended
December 31, 1996. This increase was due primarily to the acquisitions made by
the Company.

     Losses from Beverly Hills Securities, as discussed below, of $0 and $0.6
million for the years ended December 31, 1997 and 1996, respectively, decreased
due to the Company writing off its investment/advances in Beverly Hills
Securities during the first quarter of 1996.

     In July 1994, the Company exchanged its stock in WMF Residential Mortgage
Corporation ("Residential"), a wholly-owned subsidiary, for a 40 percent limited
partnership interest in Beverly Hills Securities Company, Ltd. ("Beverly").
Residential and Beverly specialized in the origination, purchase, sale and
servicing of single-family residential mortgage loans. No gain or loss was
recognized on the exchange. The Company recognized $0.7 million and $0.7 million
in equity losses relating to Beverly during 1995 and 1994, respectively. At
December 31, 1995, the carrying value of the Company's investment in Beverly was
written off as a result of operating losses and concerns about the
recoverability of the investment. The Company's exposure was limited to its
original 

                                       27
<PAGE>
 
investment amount in and advances to Beverly. The Company had advanced
approximately $1.1 million to Beverly at December 31, 1995. During 1996,
approximately $0.5 million of the advance to Beverly was collected and the
remaining balance was written off.

LIQUIDITY AND CAPITAL RESOURCES

     The Company's principal financing needs are the funding of loan
originations, the pursuit of new company acquisitions and the purchase of
servicing rights. To meet these needs, the Company currently utilizes warehouse
lines of credit, a secured line of credit and a revolving credit facility. As
part of the Company's strategy to limit interest rate and spread risk, Capital
Corp. has terminated its $50 million credit facility with Merrill Lynch Capital
Markets, sold all remaining commercial mortgage loans and terminated the related
U.S. Treasury short sale transactions, which were financed by the facility.

     The Company incurred substantial operating losses during the second and
third quarters of 1998. In response to the losses, the Company has curtailed its
operations at Capital Corp. The Company also refinanced its $150 million
warehouse line of credit, $4.2 million term loan, $35 million secured revolving
line and $10 million line of credit, on February 10, 1999. These facilities were
replaced with the warehouse lines of credit, credit lines and term loans
described below. The Company's servicing rights collateralize these facilities.
In addition, the warehouse line of credit is secured by the mortgage loans held
for sale.

     The Company has a warehouse line of credit for $150 million, which can be
drawn for purposes of originating loans. Historically, the Company has
temporarily increased this line of credit at times to allow borrowings beyond
the credit limit. The warehouse line of credit is required to be repaid with
interest upon sale of the mortgage loans. The interest rate of the warehouse
line of credit is equal to one percent to the extent compensating balances are
maintained at or above the amount borrowed, or is equal to the London InterBank
Offered Rate ("LIBOR") plus one percent for amounts borrowed in excess of
compensating balances. The warehouse line of credit is renewable annually. The
facility can also be used for certain principal and interest advances with
credit limits totaling $10.0 million.

     The Company has a $25 million term loan to be repaid in twenty quarterly
installments based on a 10-year amortization schedule beginning on March 31,
1999. The interest rate on the term loan is three percent to the extent
compensating balances are maintained at or above the amount borrowed and is
equal to LIBOR plus three percent for amounts in excess of compensating
balances. Interest is payable monthly. The Company cannot borrow any additional
amounts under this line, which will mature as follows: $2.5 million in each year
from 1999 to 2003 and $15 million in 2004.

     The Company has a $25 million revolving credit facility to be used for
servicing acquisitions or working capital purposes. The facility matures in
February 2002. The interest rate on the revolving credit facility is 2.5 percent
to the extent compensating balances are maintained at or above the amount
borrowed and is equal to LIBOR plus 2.5 percent for amounts in excess of
compensating balances. Interest is payable monthly. At closing, the Company
borrowed $10.7 million under this line to repay its previous credit facilities.

     In addition to these new facilities the Company has a $35 million revolving
line of credit, which principally can be drawn for purposes of originating
loans. The warehouse advances are secured by mortgage loans held for sale and
are required to be repaid upon sale of the mortgage loans. The interest rate on
the warehouse advances is 3/4 percent to the extent compensating balances are
maintained and is equal to the Euro-Rate plus 3/4 percent for amounts borrowed
in excess of the compensating balances. Interest is payable monthly. The
facility can also be used for principal and interest advances and working
capital purposes with credit limits of $4 million and $5 million, respectively.
The interest rates on the principal and interest advances and working capital
portion of the facility are 1.5 percent and 2.0 percent, respectively, to the
extent compensating balances are maintained and the Euro-Rate plus 1.5 percent
or 2 percent, respectively, for amounts borrowed in excess of the compensating
balances, respectively. Interest is payable monthly. Borrowings under this
facility totaled $19.9 million as of December 31, 1998 and $0 million as of
December 31, 1997. This facility expires on April 1, 1999. The Company does not
plan to renew this facility upon expiration, but may replace the facility in the
future.

     The Company has also established a letter of credit on behalf of Fannie Mae
for the DUS Program of $5.2 million and $4.4 million as of December 31, 1998 and
1997, respectively.  This letter of credit is secured by cash equivalents and
mortgage-backed securities with a market value of $6.3 million and $5.5 million
as of December 31, 1998 and December 31, 1997, respectively.
 
     On September 4, 1998, the Company and COMIT entered into a Credit Agreement
whereby COMIT loaned $20 million to the Company and the Company granted COMIT
warrants to purchase up to 1.2 million shares of common stock of the Company at
$11.25 per share. COMIT immediately assigned the warrants to two of its
shareholders, which provided the capital for the loan.

                                       28
<PAGE>
 
Harvard received warrants for the purchase of up to 960,000 shares of common
stock, and Capricorn received warrants for the purchase of up to 240,000 shares
of common stock. The interest rate on the loan was 11 percent through January
31, 1999 and 15 percent thereafter, until the maturity date of May 31, 1999. On
December 31, 1998, the Company used the proceeds from the sale of its Class A
Stock, described below, to reduce the unpaid principal balance of the loan to
$3.9 million. In connection with the sale of the Class A Stock, Harvard and
Capricorn agreed to cancel the warrants that COMIT assigned to them. On March
12, 1999, the Company repaid the remaining principal and interest due under the
subordinated notes, and the notes were canceled.
 

     On December 31, 1998, the company's three largest shareholders, Demeter,
Phemus and Capricorn, purchased a total of 3,635,972 shares of Class A Stock for
an aggregate purchase price of approximately $16.6 million.  On January 14,
1999, each outstanding share of Class A Stock was converted into one share of
the Company's common stock. In addition, Demeter, Phemus and Capricorn entered
into a Standby Purchase Agreement to purchase up to 664,028 shares of the
Company's capital stock for up to $3,320,140 following the rights offering.
Because of their participation in this transaction, Demeter, Phemus and
Capricorn agreed not to exercise, transfer or acquire any rights during the
rights offering described below.

     The Company issued to all of its shareholders of record as of February 1,
1999, 1.072 transferable rights for each share of common stock held by them on
that date. Each right entitled the holder to one share of common stock for
$5.00. The rights expired on March 8, 1999. Through the rights offering, the
Company sold a total of 1,482,271 shares of common stock for total proceeds of
approximately $7.4 million. On March 19, 1999, Demeter, Phemus and Capricorn
completed the purchase of a total of 664,028 shares of the Company's common
stock pursuant to the Standby Purchase Agreement, for total proceeds to the
Company of approximately $3.3 million. Also, Capricorn has agreed to purchase 
an additional 34,520 shares at $5.375 per share, for proceeds to the Company 
of $185,545. The Company expects that this sale to Capricorn will close shortly.

     On March 12, 1999, the Company applied a portion of the proceeds from the
rights offering to repay the remaining subordinated notes held by COMIT. The
remaining proceeds from the rights offering and the proceeds from the purchases
by Demeter, Phemus and Capricorn will be used to repay borrowings under the
Company's revolving line of credit and for working capital.

     In the course of the Company's mortgage banking operations, the Company
sells to investors the mortgage loans it originates but generally retains the
right to service the loans, thereby increasing the Company's investment in loan
servicing rights. The Company views the sale of loans on a servicing-retained
basis in part as an investing activity. Significant unanticipated prepayments in
the Company's servicing portfolio could have a material adverse effect on the
Company's future operating results and liquidity.

     The Company enters into commitments to extend credit to borrowers in the
normal course of business. In the event there are significant fluctuations in
interest rates and spreads, the value of the commitments could have a material
adverse effect on the Company's future operating results and consequently the
Company's ability to honor the commitments. In the future, the Company intends
to manage this risk by issuing commitments to borrowers and obtaining loan sale
commitments from appropriate investors at the same time. The Company expects
that this essentially simultaneous commitment from both a borrower and a
mortgage investor will enable it to eliminate its exposure to interest rate and
credit spread changes for each transaction.

     The Company's debt agreements, as amended, require the maintenance of
certain financial ratios relating to liquidity, leverage, working capital and
net worth, among other restrictions, all of which were met at December 31, 1998.

     The Company believes its funds on hand at December 31, 1998, its unused
borrowing capacity under its credit lines, and its proceeds from the public
rights offering and private placements will be sufficient to meet its
anticipated operating needs as well as planned investments for at least the next
twelve months. Principal capital requirements in 1999 include co-investment in
commercial mortgage funds managed by the advisory services segment, systems
investments to support the Company's loan servicing and origination activities,
and furniture, fixtures, and equipment. In addition, the Company is obligated to
make certain earn-out and other payments to the prior owners of acquired
companies. The maximum amounts of the payments total approximately $3.3 million.
Of this amount, $1.6 million is subject to the achievement of certain
performance objectives over a defined period. The magnitude of the Company's
acquisition and investment program will be governed to some extent by the
availability of capital.

YEAR 2000

     The Year 2000 Problem refers to errors that may occur when computers use
two digits rather than four to define the applicable year. Software and hardware
may recognize a date using "00" as the year 1900, rather than the year 2000. If
a computer 

                                       29
<PAGE>
 
does not recognize a date on or after January 1, 2000, the error could, among
other things, prevent the Company from processing transactions, sending
invoices, or engaging in other normal business activities.

The Company's Program.  The Company has developed a program to address the Year
2000 Problem as it may affect:

          .   the Company's computer and operating systems, including its
              servicing, accounting, human resources and financial reporting
              systems;

          .   the Company's other systems, such as buildings, equipment,
              telephone systems and other non-computer systems that may contain
              technology that is sensitive to the Year 2000 Problem;

          .   certain systems of the Company's major vendors and material
              service providers, if those systems relate to the Company's
              business activities;

          .   certain systems of the Company's material customers and investors,
              if those systems relate to the Company's ability to provide
              services to the customers and investors.

     As described below, the Company's Year 2000 program involves

          1.  assessing the Year 2000 Problem and determining how it may
              negatively affect the Company;

          2.  developing remedies to address the problems discovered in the
              assessment phase;

          3.  testing of the remedies; and

          4.  preparing contingency plans to deal with the most likely worst-
              case scenarios.

Assessment Phase.  The following table shows the current state of Year 2000
compliance in the Company's computer systems:

<TABLE>
<CAPTION>
                                                         Year 2000         Year 2000
                                                         Compliant       Non-Compliant 
          Component                                        Number            Number
          -----------------------------------------------------------------------------
          <S>                                            <C>             <C> 
          Business Critical Software
          --------------------------

               Servicing Systems                               2                0
               Accounting System                               1                0
               Human Resources                                 1                0
          Hardware                                                               
          --------                                                               
               Personal Computers                            400                0
               File/Data Services                             34                0
               Networks                                       20                0
          Office Software Suites                             400                0
          ----------------------
</TABLE>

     The Company has evaluated all of its systems and has completed remedies for
the Year 2000 Problem.  During the last quarter of 1998, the Company sent
letters to certain of its significant hardware, software and other equipment
vendors and other material service providers, as well as to its significant
customers, requesting that they provide detailed, written information concerning
existing or anticipated Year 2000 compliance by their systems. The Company
expects that it will complete these inquiries and receive substantially all
third-party responses by March 30, 1999.

     While the Company cannot thoroughly assess other parties' Year 2000
readiness, it will attempt to identify areas of vulnerability and change
relationships with those parties as appropriate.  If the Company believes that
third-party systems may have a negative material impact on its operations, it
will develop relationships with other parties who have been thoroughly screened
for Year 2000 compliance.

Remediation and Testing Phase.  During the remediation and testing phase, the
Company addressed potential Year 2000 Problems in systems.  Vendors supply all
computer software systems that are critical to the Company's business, and the
vendors are contractually responsible for the systems' becoming Year 2000
compliant.  However, the Company cannot assure you that it will be able to
recover damages from any vendor who fails to bring a system into Year 2000
compliance.

                                       30
<PAGE>
 
     Of the Company's critical systems, its accounting and human resources
systems have been certified Year 2000 compliant and were substantially tested by
December 31, 1998. The Company combined its four loan servicing systems into
two. The two surviving loan-servicing systems are now Year 2000 compliant and
have been tested internally. These systems will be tested with major customers
and investors to ensure that the delivery of proper data will occur on and after
January 1, 2000.

     All of the Company's servers are Year 2000 compliant. All non-compliant
personal computers have been put out of service. The Company has replaced all
critical non-Year 2000 compliant office software, and other less significant
personal computer software will be upgraded by June 30, 1999. All telephone
equipment is Year 2000 compliant.

Contingency Plans.  The Company has not yet fully identified its most likely
worst-case scenarios that could occur because of the Year 2000 Problem. The
Company is developing contingency plans for the scenarios that have been
identified. The Company intends to complete its determination of worst case
scenarios after it has received and analyzed responses to most of the inquiries
it has made of third parties. After its analysis, the Company plans to develop a
timetable for completing its contingency plans.

Costs Related to the Year 2000 Problem.  To date, the Company has spent
approximately $100,000 for its Year 2000 program, mostly in labor costs and
hardware replacement. The Company expects to incur additional costs, which it
estimates will not exceed $300,000. Compliance costs are relatively low because
all business critical software systems were upgraded under normal vendor
maintenance agreements. The Company currently believes that the costs to resolve
the Year 2000 Problem for its other systems will not be material. However, the
Company cannot assure you that its cost estimates will not change until the
Company completes its contingency planning

NEW ACCOUNTING STANDARDS

     In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, Disclosures About Segments of an Enterprise and Related Information
("SFAS No. 131"). SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997, but need not be applied to interim financial statements in the initial
year of application. The Company has adopted the provisions of this statement as
of and for the period ended December 31, 1998.
 
     In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS No. 133"). This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for changes
in the fair value of a derivative depends on the intended use of the derivative
and the resulting designation. If certain conditions are met, a derivative may
be specifically designated as (a) a hedge of certain exposure to changes in the
fair value of a recognized asset or liability or an unrecognized firm
commitment, (b) a hedge of the exposure to variable cash flows of a recognized
asset or liability or of a forecasted transaction, or (c) a hedge of the foreign
currency exposures. This statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. Earlier adoption is permitted. The
Company has not yet determined the impact, if any, of this statement, including
its provisions for the potential reclassifications of investment securities, on
earnings, financial condition or equity.

     In October 1998, SFAS No. 134, Accounting for Mortgage-Backed Securities 
Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage 
Banking Enterprise, was issued. SFAS No. 134 requires that mortgage banks 
classify the retained interests in mortgage-backed securities that were 
originally classified as mortgage loans available for sale in accordance with 
the provisions of SFAS No. 115, Accounting for Certain Investments in Debt and 
Equity Securities. The Company adopted SFAS No. 134 upon its issuance.

ITEM 7A.  QUANTITIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     Interest rate risk is the most significant market risk affecting the
Company. Interest rate risk is the possibility that changes in interest rates
will cause unfavorable changes in net income or in the value of interest rate-
sensitive assets, liabilities and commitments. In particular, changes in
interest rates affect the volume of mortgage loan originations, the interest
rate spread on the Company's portfolio of loans, the amount of gain on the sale
of loans, the amount of placement fee income earned on invested escrow balances
and the value of the Company's loan servicing portfolio. The Company has been
managing this risk by striving to balance its revenue from loan origination and
loan servicing segments, which generally are counter-cyclical in nature. The
Company does not maintain a trading portfolio. As a result, the Company is not
exposed to market risk as it relates to trading activities.

                                       31
<PAGE>
 
     Generally, interest rate increases reduce the level of economic and real
estate activity, thereby decreasing the demand for mortgage financing. Such a
decrease in demand may negatively affect the Company's ability to earn
origination fees and generate gains from the sale of loans. In the ordinary
course of business, the Company enters into commitments to extend credit to
borrowers. Normally, the Company simultaneously commits to sell the loan to an
investor, limiting the Company's exposure to interest rate fluctuations. To the
extent that the Company has committed to extend credit to borrowers without a
pre-existing sale commitment, changes in interest rates and spreads affect the
value of the commitments and could have a material adverse effect on the
Company's future operating results. Between the time that the loan is originated
and sold to the ultimate investor, the Company earns interest income. The loans
are funded through the use of a revolving warehouse line of credit, for which
the Company is charged interest based upon short-term interest rates. Therefore,
the net interest income that is earned by the Company is generally dependent
upon the spread between long-term mortgage rates and short-term interest rates.
An increase in short-term rates relative to long-term rates could have an
adverse effect on net interest income.

     Interest rate increases, however, positively affect Company earnings from 
loan servicing activities.  A reduction in real estate activity may reduce the 
risk of borrower prepayments, potentially increasing the level of servicing fees
and the value of the Company's servicing portfolio.  Additionally, placement fee
income earned by the Company may benefit from increased interest rate levels.

     Although loans within the servicing portfolio may have prepayment 
restrictions and yield maintenance provisions, declines in interest rates can
adversely affect the Company's revenues by increasing the level of loan
prepayments. To the extent that future mortgage servicing rights have been
capitalized by the Company, higher than anticipated rates of loan prepayments or
losses could cause an increase of the amortization of these servicing assets or
require the Company to write down the value of these assets, adversely affecting
earnings. In addition, increased prepayment rates can reduce the Company's
servicing income by decreasing the size of the Company's servicing portfolio.
Declines in interest rates could also have an adverse effect on the placement
fee income earned on invested escrow balances. At the same time, interest rate 
declines should generally have a corresponding favorable impact on Company 
earnings from origination, loan sales and financing activities.

     The Company currently does not enter into hedging activities. In the
future, the Company may use hedging techniques including futures, options,
interest rate swap agreements or other hedge instruments to help mitigate
interest rate and market risk. However, there can be no assurance that any of
the above hedging techniques will be successful. To the extent they are not
successful, the Company's profitability may be adversely affected.

     Based on the information available and the interest environment as of
December 31, 1998, the Company believes that an instantaneous 100 basis point
increase, all else being constant, would result in a decrease in the Company's
net income of $1.7 million over a twelve-month period. An instantaneous 100
basis point decrease in rates, all else being constant, would result in an
increase in the Company's net income of $0.4 million over a twelve-month period.
The Company believes that larger or smaller interest rate changes would result 
in proportionately larger or smaller gains and losses. The change in net income
principally reflects the impact of forward loan commitment gain or losses and
interest expense on variable rate debt, offset partially by changes in placement
fee income. The sensitivity analyses relate solely to the Company's rate-
sensitive assets, liabilities and commitments at December 31, 1998 and do not
capture changes in cash flows and earnings related to certain production and
servicing activities that would be expected to affect financial performance in
the simulated rate environments. These estimates are limited by the fact that
they are performed at a particular point in time and do not incorporate other
factors that would impact the Company's financial performance in such a
scenario. Consequently, the preceding estimates should not be viewed as a
forecast.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The Consolidated Financial Statements and Supplementary Data of the Company
are listed and included under Item 14 of this report.

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

     Information concerning the directors and executive officers of the Company
is incorporated by reference from the Company's Proxy Statement for the Annual
Meeting of Stockholders to be held on June 10, 1999, (the "1999 Proxy
Statement") under the caption "Election of Directors."

ITEM 11.  EXECUTIVE COMPENSATION

     Information regarding executive compensation is incorporated by reference
from the 1999 Proxy Statement under the caption 

                                       32
<PAGE>
 
"Executive Compensation."

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     Information regarding the stock ownership of each person known to the
Company to be the beneficial owner of more than 5 percent of the Common Stock, 
of each director and executive officer of The WMF Group, Ltd., and all directors
and executive officers as a group is incorporated by reference from the 1999
Proxy Statement under the caption "Beneficial Ownership of Common Stock."

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information regarding certain relationships and related transactions is
incorporated by reference from the 1999 Proxy Statement under the caption
"Certain Relationships and Related Transactions."

                                    PART IV

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

A.        The following documents are filed as part of this report.

          1.   The Consolidated Financial Statements of The WMF Group, Ltd.
 
               See Index to Financial Statements on Page F-1 included herein


B.     The Company filed one current report on Form 8-K during the last quarter
       of 1998. On October 26, 1998, the Company filed a current report on Form
       8-K, incorporating information from four press releases related to the
       Company's third-quarter losses, the Credit Agreement between the Company
       and COMIT, and the Recapitalization Plan.

C.        Exhibits -

     EXHIBIT NO.                             DESCRIPTION
     -----------                             -----------

     2.1                 Rights Agreement dated as of April 21, 1997, by and
                         between NHP Incorporated, NHP Financial Services, Ltd.
                         and The First National Bank of Boston (1)

     3.1                 Restated Certificate of Incorporation of The WMF Group,
                         Ltd. (the "Company") (3)

     3.2                 Amendment to the Company's Restated Certificate of
                         Incorporation (4)

     3.3                 Certificate of Designations, Preferences and Rights of
                         Class A Non-Voting Convertible Preferred Stock (2)

     3.4                 Amended and Restated Bylaws of The WMF Group, Ltd. (5)

     4.1                 Form of certificate representing shares of Common Stock
                         of The WMF Group, Ltd. (4)

     10.1                Mortgage Selling and Servicing Contract between Fannie
                         Mae and the Company, dated December 21, 1990. (3)

     10.2                Delegated Underwriting and Servicing Addendum to
                         Mortgage Selling and Servicing Contract between Fannie
                         Mae and the Company, dated as of March 1, 1994. (3)

     10.3                Delegated Underwriting and Servicing Master Loss
                         Sharing Agreement between Fannie Mae and the Company,
                         dated as of March 1, 1994. (3)

     10.4                Delegated Underwriting and Servicing Reserve Agreement
                         among Fannie Mae, State Street Bank and Trust Company
                         and the Company, dated as of June 4, 1996. (3)

     10.5                Credit and Security Agreement (Syndicate Agreement)
                         dated as of February 10, 1999, between the Company, WMF
                         Washington Mortgage Corp., WMF/Huntoon Paige Associates
                         Limited, WMF Proctor Ltd., The Robert C. Wilson
                         Company, The Robert C. Wilson Company- Arizona, WMF
                         Carbon Mesa Advisors, Inc. and Residential Funding
                         Corporation and certain other lenders party thereto.

                                       33
<PAGE>
 
     10.6           Warehousing Promissory Note between The WMF Group, Ltd., a
                    Delaware corporation; WMF Washington Mortgage Corp., a
                    Delaware corporation; WMF/Huntoon, Paige Associates Limited,
                    a Delaware corporation; WMF Proctor, Ltd., a Michigan
                    corporation; The Robert C. Wilson Company, a Texas
                    corporation; The Robert C. Wilson-Arizona Company, an
                    Arizona corporation and WMF Carbon Mesa Advisors, Inc., a
                    Delaware corporation, and _______________ dated as of
                    February 10, 1999


     10.7           Term Loan Facility Promissory Note between The WMF Group,
                    Ltd., a Delaware corporation; WMF Washington Mortgage Corp.,
                    a Delaware corporation; WMF/Huntoon, Paige Associates
                    Limited, a Delaware corporation; WMF Proctor, Ltd., a
                    Michigan corporation; The Robert C. Wilson Company, a Texas
                    corporation; The Robert C. Wilson-Arizona Company, an
                    Arizona corporation and WMF Carbon Mesa Advisors, Inc., a
                    Delaware corporation, and __________________ dated as of
                    February 10, 1999

     10.8           Servicing Promissory Note between The WMF Group, Ltd., a
                    Delaware corporation; WMF Washington Mortgage Corp., a
                    Delaware corporation; WMF/Huntoon, Paige Associates Limited,
                    a Delaware corporation; WMF Proctor, Ltd., a Michigan
                    corporation; The Robert C. Wilson Company, a Texas
                    corporation; The Robert C. Wilson-Arizona Company, an
                    Arizona corporation and WMF Carbon Mesa Advisors, Inc., a
                    Delaware corporation, and _____________________ dated as of
                    February 10, 1999

     10.9           Swingline Promissory Note between The WMF Group, Ltd., a
                    Delaware corporation; WMF Washington Mortgage Corp., a
                    Delaware corporation; WMF/Huntoon, Paige Associates Limited,
                    a Delaware corporation; WMF Proctor, Ltd., a Michigan
                    corporation; The Robert C. Wilson Company, a Texas
                    corporation; The Robert C. Wilson-Arizona Company, an
                    Arizona corporation and WMF Carbon Mesa Advisors, Inc., a
                    Delaware corporation, and Residential Funding corporation
                    dated as of February 10, 1999

     10.10          Sublimit Promissory Note between The WMF Group, Ltd., a
                    Delaware corporation; WMF Washington Mortgage Corp., a
                    Delaware corporation; WMF/Huntoon, Paige Associates Limited,
                    a Delaware corporation; WMF Proctor, Ltd., a Michigan
                    corporation; The Robert C. Wilson Company, a Texas
                    corporation; The Robert C. Wilson-Arizona Company, an
                    Arizona corporation and WMF Carbon Mesa Advisors, Inc., a
                    Delaware corporation, and __________________ dated as of
                    February 10, 1999

     10.11          Letter Agreement dated October 25, 1996 between Washington
                    Mortgage Financial Group and Michael D. Ketcham. (3)

     10.12          Key Employee Incentive Plan. (4)

     10.13          Key Employee Incentive Award Agreement. (4)

     10.14          Key Employee Deferral Compensation Plan. (4)

     10.15          Employee Stock Purchase Plan. (4)

     10.16          Stock Purchase Agreement dated as of October 31, 1997
                    between Washington Mortgage Financial Group, Ltd. and The
                    Robert C. Wilson Company (7)

     10.17          Asset Purchase Agreement dated as of Dated December 16, 1997
                    between Washington Mortgage Financial Group, Ltd. and NY
                    Urban West Inc. (8)

     10.18          Registration Rights Agreement dated December 7, 1997 between
                    the Company and Capricorn Investors II, L.P.

     10.19          Registration Rights Agreement dated June 12, 1998, between
                    the Company, Harvard Private Capital Holdings, Inc. and
                    Capricorn Investors II, L.P., as amended by the First
                    Amendment to the Registration Rights Agreement, dated as of
                    October 16, 1998, among the Company, Harvard Private Capital
                    Holdings, Inc., Capricorn Investors II, L.P., Demeter
                    Holdings Corporation and Phemus Corporation (2)

     10.20          Series 2 Warrant Agreement dated December 30, 1998, between
                    the Company and [*] (2)(6)
                    
     10.21          Series 3 Warrant Agreement dated December 30, 1998, between
                    the Company and [*] (2)(6) 

     10.22          Registration Rights Agreement dated December 30, 1998,
                    between the Company and [*] (2)(6)

     21             Subsidiaries of the Registrant (8)

     23             Consent of KPMG LLP

     27             Financial Data Schedule

                                       34
<PAGE>
 
     (1)  Incorporated by reference to Exhibit 2.2 to the current report on Form
8-K previously filed by NHP Incorporated on April 24, 1997.

     (2)  Incorporated by reference to the current report on Form 8-K previously
filed by the Company on January 13, 1999.

     (3)  Incorporated by reference to the registration statement on Form 10
previously filed by the Company on August 4, 1997 as amended.

     (4)  Incorporated by reference to the registration statement on Form S-1
filed by the Company on October 30, 1997.

     (5)  Incorporated by reference to the Company's Form 10-Q for the quarter
ended March 31, 1998, filed on May 15, 1998.

     (6)  Portions of this document have been omitted pursuant to a confidential
treatment request.

     (7)  Incorporated by reference to the  Form 8-K previously filed by the
Company on November 20, 1997.

     (8)  Incorporated by reference to the Company's annual report on Form 10-K
for the year ended December 31, 1997, filed on March 31, 1998.

     (9)  Incorporated by reference to the Company's quarterly report on Form
10-Q for the quarter ended June 30, 1998, filed on August 14, 1998.

                                       35
<PAGE>
 
                                  SIGNATURES



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

                    THE WMF GROUP, LTD.
                    By: /s/ Shekar Narasimham
                       ----------------------
                    Shekar Narasimham
                    Director, President and Chief Executive Officer


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

<TABLE>
<CAPTION>
                          SIGNATURE                               TITLE                          DATE
                          ---------                               -----                          ----
          <S>                                         <C>                                   <C>
          /s/ J. Roderick Heller, III                      Chairman of the Board            March 31, 1999
          ---------------------------
          J. Roderick Heller, III

          /s/ Shekar Narasimhan                           Director, President and           March 31, 1999
          ---------------------
          Shekar Narasimhan                               Chief Executive Officer              
                                                      (Principal Executive Officer)            

          /s/ Michael D. Ketcham                          Executive Vice President          March 31, 1999
          ----------------------
          Michael D. Ketcham                            and Chief Financial Officer        
                                                         (Principal Financial and          
                                                            Accounting Officer)             

          /s/ Mohammed A. Al-Tuwaijri                            Director                   March 31, 1999
          ---------------------------                                                                     
          Mohammed A. Al-Tuwaijri                                                                         
                                                            
          /s/  Tim R. Palmer                                     Director                   March 31, 1999
          ------------------                                                                              
          Tim R. Palmer                                                                                   
                                             
          /s/  John D. Reilly                                    Director                   March 31, 1999
          -------------------                                                                             
          John D. Reilly                                                                                  
                                             
          /s/  Herbert S. Winokur, Jr.                           Director                   March 31, 1999
          ----------------------------                                                                    
          Herbert S. Winokur, Jr.                                                                         
                                             
          /s/ Michael R. Eisenson                                Director                   March 31, 1999
          -----------------------
          Michael R. Eisenson
</TABLE>

                                       36
<PAGE>
 
                  INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                  ------------------------------------------


<TABLE>
<CAPTION>
                                                                            Page
<S>                                                                        <C>
Independent Auditors' Report                                               F - 1
 
Consolidated Balance Sheets
 As of  December  31, 1998 and 1997                                        F - 3
 
Consolidated Statements of Operations
 For the Years Ended December 31, 1998 and 1997, 
 for the Period April 1, 1996 to December 31, 1996 and 
 for the Period January 1, 1996 to March 31, 1996                          F - 4
 
Consolidated Statements of Stockholders' Equity
 For the Years Ended December 31, 1998 and 1997,
 for the Period April 1, 1996 to December 31, 1996 and
 for the Period January 1, 1996 to March 31, 1996                          F - 5
 
Consolidated Statements of Cash Flows
 For the Years Ended December 31, 1998 and 1997,
 for the Period April 1, 1996 to December 31, 1996 and
 for the Period January 1, 1996 to March 31, 1996                          F - 6
 
Notes to Consolidated Financial Statements                                 F - 8
</TABLE>

                                       37
<PAGE>
 
                          INDEPENDENT AUDITORS' REPORT


The Board of Directors
The WMF Group, Ltd. and subsidiaries:


We have audited the accompanying consolidated balance sheets of The WMF Group
Ltd. and subsidiaries (collectively "the Company") as of December 31, 1998 and
1997, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for the years then ended.  These
consolidated financial statements are the responsibility of the Company's
management.  Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.  The consolidated financial statements
of the Company for the periods April 1, 1996 to December 31, 1996 and January 1,
1996 to March 31, 1996, were audited by other auditors whose report dated
February 28, 1997, expressed an unqualified opinion on those statements.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.


Washington, D.C.
March 5, 1999, except for
Note 20 which is as of
March 19, 1999
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Board of Directors and Shareholders of
The WMF Group, Ltd. and Subsidiaries:

     We have audited the accompanying consolidated balance sheets of The WMF
Group, Ltd., and Subsidiary (the "Company") (formerly NHP Financial Services,
Ltd. and Subsidiary and formerly WMF Holdings Ltd., and Subsidiaries  see Note
1) as of December 31, 1996, and the related consolidated statements of
operations, changes in shareholder's equity and cash flows for the periods April
1, 1996, to December 31, 1996, and January 1, 1996, to March 31, 1996.  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 audit.

     We conducted our audit in accordance with generally accepted auditing
standards.  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 audit provides a reasonable basis for our opinion.

     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 1996, and the results of its operations and its cash flows
for the periods April 1, 1996, to December 31, 1996, and January 1, 1996, to
March 31, 1996, in conformity with generally accepted accounting principles.

     As explained in Note 2 to the consolidated financial statements, effective
January 1, 1996, the Company changed its method of accounting for originated
mortgage servicing rights to comply with Statement of Financial Accounting
Standard No. 122, "Accounting for Mortgage Servicing Rights."



                                         ARTHUR ANDERSEN LLP

Washington, D.C.
February 28, 1997

<PAGE>
 
                              THE WMF GROUP, LTD.
                          
                          Consolidated Balance Sheets

                       As of December 31, 1998 and 1997
                 (dollars in thousands except per share data)

<TABLE> 
<CAPTION> 
                                ASSETS                                          1998               1997
                                                                           ----------------   ----------------
<S>                                                                        <C>                <C> 
Cash and cash equivalents                                                  $          8,897              8,448
Restricted cash                                                                      13,398              3,914
Mortgage-backed securities                                                            6,195              3,851
Mortgage loans held for sale, pledged                                                34,217             49,431
Principal, interest and other servicing advances                                      2,588              2,631
Investment                                                                            3,780                 --
Furniture, equipment and leasehold improvements, net                                  5,011              2,299
Servicing rights, net                                                                26,243             26,796
Goodwill, net                                                                        22,360             18,465
Deferred tax assets, net                                                             17,290                 --
Other assets                                                                          4,548              3,496
                                                                           ----------------   ----------------
                  Total assets                                             $        144,527            119,331
                                                                           ================   ================
                 LIABILITIES AND STOCKHOLDERS' EQUITY                             
          
Liabilities:                                                                                
    Accounts payable and accrued expenses                                  $         15,455              6,265
    Escrow payable                                                                   10,853              2,338
    Subordinated note                                                                 3,901                 --
    Warehouse lines of credit                                                        34,757             48,743
    Servicing loan                                                                    4,212              5,462
    Revolving credit facility                                                        36,281              5,699
    Deferred fees                                                                     5,437              3,600
    Accrued loan servicing portfolio losses                                           6,253              5,125
    Deferred tax liability, net                                                          --              3,274
                                                                           ----------------   ----------------
                  Total liabilities                                                 117,149             80,506
                                                                           ----------------   ----------------
Stockholders' equity:                                                                       
    Preferred stock, 12,500,000 shares                                      
       authorized; 3,635,972 shares issued and outstanding in 1998                   16,541                 --
    Common stock, $.01 par value, 25,000,000 shares authorized;                             
       5,349,403 and 5,042,723 shares issued and outstanding                                
       in 1998 and 1997, respectively                                                    53                 50
    Additional paid-in capital                                                       40,509             35,178
    Retained earnings (deficit)                                                     (29,725)             3,597
                                                                           ----------------   ----------------
                  Total stockholders' equity                                         27,378             38,825
                                                                           ----------------   ----------------
                  Total liabilities and stockholders' equity               $        144,527            119,331
                                                                           ================   ================
</TABLE> 

The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-3
<PAGE>
 
                              THE WMF GROUP, LTD.

                     Consolidated Statements of Operations
                 (dollars in thousands except per share data)

<TABLE> 
<CAPTION> 
                                                                               PRO FORMA   
                                                                              FOR THE YEAR   FOR THE PERIOD
                                             FOR THE YEAR    FOR THE YEAR        ENDED       APRIL 1, 1996   FOR THE PERIOD
                                                 ENDED           ENDED        DECEMBER 31,         TO         JANUARY 1, 1996
                                              DECEMBER 31,    DECEMBER 31,        1996        DECEMBER 31,          TO
                                                  1998            1997         (UNAUDITED)        1996        MARCH 31, 1996
                                             --------------  --------------  --------------  --------------  ----------------
<S>                                          <C>             <C>             <C>             <C>             <C> 
Revenues:                                             
    Servicing fees                           $       14,715          11,871           9,329           7,274             2,055   
    Gain on sale of mortgage loans, net              20,064          19,652          10,221           8,113             2,108   
    Gain on sale of servicing rights                  2,026             297              --              --                --    
    Interest income                                  20,844           5,771           4,250           3,388               862   
    Placement fee income                              8,470           5,330           4,959           3,823             1,136   
    Other income                                      6,422           1,724           1,542             875               667   
                                             --------------  --------------  --------------  --------------  ----------------
                Total revenues                       72,541          44,645          30,301          23,473             6,828   
                                             --------------  --------------  --------------  --------------  ----------------
Expenses:                                                                                                   
    Salaries and employee benefits                   38,816          21,163          12,745           9,975             2,770   
    General and administrative                       17,878           7,649           4,812           3,884               928   
    Occupancy                                         4,736           2,140           1,593           1,352               241   
    Provision for loan servicing losses               1,128             729           1,254             969               285   
    Interest                                         17,764           2,283           1,319           1,012               307   
    Realized losses on treasury short sale           36,653              --              --              --                --    
    Amortization of servicing rights                  5,153           4,250           3,914           3,062               471   
    Depreciation and amortization                     2,801           1,660           1,195             920                81   
    Losses on investments/advances                       --              --             600              --               600   
                                             --------------  --------------  --------------  --------------  ----------------
                Total expenses                      124,929          39,874          27,432          21,174             5,683   
                                             --------------  --------------  --------------  --------------  ----------------
                Income (loss) before                                                                        
                  income tax expense                (52,388)          4,771           2,869           2,299            1, 145   
Income tax expense (benefit)                        (19,066)          2,329           1,984           1,144               840   
                                             ==============  ==============  ==============  ==============  ================
                Net income (loss)            $      (33,322)          2,442             885           1,155               305   
                                             ==============  ==============  ==============  ==============  ================
Net income (loss) per share - Basic          $        (6.38)           0.57            0.21            0.27              0.07   
                                             ==============  ==============  ==============  ==============  ================
Net income (loss) per share - Diluted        $        (6.38)           0.55            0.21            0.27              0.07   
                                             ==============  ==============  ==============  ==============  ================
</TABLE> 

The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-4
<PAGE>
 
                              THE WMF GROUP, LTD.
          Consolidated Statements of Changes in Stockholders' Equity
                 (dollars in thousands except per share data)

<TABLE> 
<CAPTION> 
                                                Number of shares outstanding                    Additional
                                                ----------------------------
                                                 Preferred   Common        Common    Preferred    paid-in    Retained               
                                                   stock      stock         stock      stock      capital    earnings    Total      
                                                   -----      -----         ------     -----      -------    --------    -----      
<S>                                             <C>           <C>          <C>       <C>         <C>        <C>         
Balance at December 31, 1995                           --     4,217        $    42   $    --     $  2,640   $  1,336    $ 4,018     
    Net income                                         --        --             --        --           --        305        305     
                                                 --------    ------        -------   -------     --------   --------    -------     
Balance at March 31, 1996                              --     4,217             42        --        2,640      1,641      4,323     
                                                 ------------------------------------------------------------------------------     
    Elimination of equity upon sale                    --        --            (42)       --       (2,640)    (1,641)    (4,323)    
    Initial investment                                 --        --             42        --       21,331         --     21,373     
    Net income                                         --        --             --        --           --      1,155      1,155     
                                                   ------    ------        -------   -------     --------   --------    -------     
Balance at December 31, 1996                           --     4,217             42        --       21,331      1,155     22,528     
    Net income                                         --        --             --        --           --      2,442      2,442     
    Issuance of common stock -                                                                                                      
       Capricorn Investors                             --       547              6        --        4,994         --      5,000     
    Issuance of stock options                          --        --             --        --        1,093         --      1,093     
    Equity contribution - NHP                          --        --             --        --        6,500         --      6,500     
    Adjustment for NHP's conversion                    --       129              1        --           (1)        --        --      
    Exercise of stock options and others               --       150              1        --        1,261         --      1,262     
                                                   ------    ------        -------   -------     --------   --------    -------     
Balance at December 31, 1997                           --     5,043             50        --       35,178      3,597     38,825     
    Net loss                                           --        --             --        --           --    (33,322)   (33,322)    
    Issuance of preferred stock                     3,636        --             --    16,541           --         --     16,541     
    Issuance of stock options and warrants             --       215              2        --        3,239         --      3,241     
    Stock issued in conjunction with the                                                                                            
       acquisition of WMF Carbon Mesa                  --        91              1        --        2,092         --      2,093     
                                                   ------    ------        -------   -------     --------   --------    -------     
Balance at December 31, 1998                       $3,636     5,349        $    53    16,541     $ 40,509    (29,725)   $27,378     
                                                   ======    ======        =======   =======     ========   ========    =======     
</TABLE> 

The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-5

<PAGE>
 
                              THE WMF GROUP, LTD.
                     Consolidated Statements of Cash Flows
                            (dollars in thousands)

<TABLE> 
<CAPTION> 
                                                                                       FOR THE PERIOD    FOR THE PERIOD    
                                                                                       APRIL 1, 1996     JANUARY 1, 1996   
                                                                                             TO                TO          
                                                                                        DECEMBER 31,       MARCH 31,       
                                                              1998            1997            1996            1996         
                                                          -----------      ----------- --------------    -------------     
<S>                                                       <C>              <C>         <C>               <C> 
Cash flows from operating activities:                                                                                      
    Net income (loss)                                     $   (33,322)           2,442          1,155              305     
    Adjustments to reconcile net income (loss)                                                                             
      to net cash provided by operating activities:                                                                        
         Depreciation and amortization of furniture,                                                                       
           equipment and leasehold improvements                 1,136              596            313               77     
         Amortization of mortgage servicing rights              5,153            4,250          3,062              471     
         Amortization of goodwill                               1,665            1,064            578                4     
         Compensation related to stock options                     --            1,093             --               --     
         Losses from investments/advances                          --               --             --              600     
         Gain on sale of mortgage servicing rights             (2,026)            (297)            --               --     
         Provision for loan servicing losses                    1,128              729            969              285     
         Realized losses on treasury short sales               36,653               --             --               --     
         Deferred taxes, net                                  (20,564)              90             --               --     
         Mortgage loans originated                         (4,333,507)      (1,283,552)      (657,217)        (176,724)    
         Mortgage loans sold                                4,348,721        1,274,384        640,071          186,070     
         Increase (decrease) in escrows payable                 8,515              (86)            --               --     
         Decrease (increase) in principal, interest                                                                        
           and other servicing advances                            43             (619)         1,708             (926)    
         Increase (decrease) in due (from) affiliates              --             (872)         1,100              280     
         (Increase) decrease in restricted cash                (9,484)            (600)        (2,391)             (60)    
         (Increase) decrease in other assets                   (1,052)          (1,030)         1,210             (805)    
         Increase (decrease) in payable and accrued                                                                        
           expenses                                             9,190              495           (175)           1,563     
         Increase (decrease) in deferred fees                   1,837              814            909           (1,157)    
                                                          -----------      -----------    -----------      -----------     
                Net cash provided by (used in)                                                                             
                  operating activities                         14,086           (1,099)        (8,708)           9,983     
                                                          -----------      -----------    -----------      -----------     
Cash flows from investing activities:                                                                                      
    Purchase of furniture, equipment and leasehold                                                                         
      improvements                                             (3,848)          (1,410)          (910)             (71)    
    Purchase of mortgage servicing rights                      (1,594)          (4,272)        (3,728)            (332)    
    Acquisition of servicing rights                                --           (1,252)            --               --     
    Proceeds from securities sold but not                                                                                  
      yet purchased                                           850,000               --             --               --     
    Purchases to cover securities sold but not                                                                             
      yet purchased                                          (886,653)              --             --               --     
    Origination of servicing rights                            (5,980)          (3,251)        (2,659)            (150)    
    Purchase of ACR production system and pipeline                 --               --         (2,000)              --     
    Purchase price in excess of net assets acquired            (5,560)         (11,823)            --               --     
    Purchase of investment                                     (3,780)              --             --               --     
    Proceeds from sale of mortgage servicing rights             5,000              486             --               --     
    Repayments of mortgage-backed securities                       56               59             21                5     
    Purchase of mortgage-backed securities                     (2,400)              --             --               --     
                                                          -----------      -----------    -----------      -----------     
                Net cash used in investing activities         (54,759)         (21,463)        (9,276)            (548)    
                                                          -----------      -----------    -----------      -----------      
</TABLE> 

                                      F-6

<PAGE>
 


                              THE WMF GROUP, LTD.

                     Consolidated Statements of Cash Flows
                            (dollars in thousands)

<TABLE> 
<CAPTION> 
                                                                                            FOR THE PERIOD     FOR THE PERIOD   
                                                                                             APRIL 1, 1996     JANUARY 1, 1996  
                                                                                                   TO                TO         
                                                                                              DECEMBER 31,       MARCH 31,      
                                                             1998             1997                1996              1996        
                                                         -------------    --------------    ----------------   ---------------  
<S>                                                      <C>              <C>               <C>                <C>              
Cash flows from financing activities:                                                                                           
    Repayment of servicing loan                             $ (1,250)            (750)              (201)                (26)   
    Increase (decrease) in warehouse lines                                                                                      
      of credit, net                                         (13,986)           8,818             17,264              (9,170)   
    Payments on notes payable                                     --               --                (34)   
    Increase in revolving credit facilities, net              30,582            5,699                 --                  --    
    Proceeds from issuance of subordinated debt               20,000               --                 --                  --    
    Repayment of subordinated debt                           (16,099)              --                 --                  --    
    Stock issued in conjunction with acquisition               2,093               --                 --                  --    
    Issuance of stock options and warrants                     3,241            6,262                 --                  --    
    Equity contribution by NHP                                    --            6,500                 --                  --    
    Proceeds from issuance of preferred stock                 16,541               --                 --                  --    
                                                            --------         --------           --------            --------    
                Net cash (used in) provided by                                                                                  
                  financing activities                        41,122           26,529             17,029              (9,196)   
                                                            --------         --------           --------            --------    
                Net increase in cash                             449            3,967               (955)                239    

Cash at beginning of period                                    8,448            4,481              5,436               5,197    
                                                            ========         ========           ========            ========    
Cash at end of period                                       $  8,897            8,448              4,481               5,436    
                                                            ========         ========           ========            ========    
Supplemental disclosures:                                                                                                       
    Cash paid during the period for interest                $ 17,117            2,290                990                 474    
    Cash paid during the period for income taxes               1,156            2,610              1,008                 935     
</TABLE> 

The accompanying notes are an integral part of these consolidated financial
statements.

                                      F-7

<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)


(1)    ORGANIZATION

       The Company originates, underwrites, structures, places, sells and
       services multifamily and commercial real estate loans. With the formation
       of WMF Capital Corp. ("Capital Corp.") and the acquisition of WMF Carbon
       Mesa Advisors, Inc. ("WMF Carbon Mesa") in the first quarter of 1998, the
       Company operates a commercial mortgage conduit, manages commercial
       mortgage investment funds and provides special asset management services.
       Through its relationships with Government Sponsored Enterprises ("GSEs"),
       investment banks, life insurance companies, commercial banks and other
       investors, the Company provides and arranges financing to owners of
       multifamily and commercial real estate on a nationwide basis using both a
       retail and wholesale network. The Company generates revenues through
       origination fees, servicing fees, management fees, structuring fees, net
       interest income on loans held for sale and placement fees.

       On April 1, 1996, NHP Incorporated ("NHP"), purchased the Company and
       named it "NHP Financial Services, Inc." In early 1997, NHP was acquired
       by Apartment Investment and Management Co. ("AIMCO"). As a condition of
       that purchase, AIMCO required NHP to spin-off the Company. On December 8,
       1997, the Company became an independent, publicly traded company.

       The Company is a Delaware corporation formed in October 1992. The Company
       has three direct wholly owned subsidiaries: WMF Washington Mortgage Corp.
       ("WMF Washington Mortgage") (previously known as Washington Mortgage
       Financial Group, Ltd.), WMF Capital Corp., and WMF Carbon Mesa each of
       which are incorporated under the laws of Delaware. WMF Washington
       Mortgage's wholly owned subsidiaries are WMF Huntoon, Paige Associates
       Limited ("WMF Huntoon Paige"), WMF Proctor Ltd. ("WMF Proctor"), and WMF
       Robert C. Wilson Ltd. ("WMF Robert C. Wilson"), which are incorporated
       under the laws of the states of Delaware, Michigan and Texas,
       respectively.

       As a result of the Company's acquisition on April 1, 1996 by NHP, NHP's
       acquisition cost was pushed down to the Company and all assets acquired
       were recorded at their estimated fair value which resulted in an increase
       of the recorded value of the Company's servicing rights of $10,700. In
       addition, the Company recorded approximately $5,100 of goodwill related
       to the transaction and a deferred tax liability of approximately $3,200.
       The goodwill related to this transaction is being amortized over seven
       years. The acquired servicing rights are being amortized over their
       estimated lives. Both acquired servicing rights and goodwill are
       amortized based upon the estimated life of the assets acquired.


(2)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       (A)    BASIS OF PRESENTATION

              The consolidated financial statements include the accounts of the
              Company and its wholly owned subsidiaries. All material
              intercompany balances and transactions have been eliminated in

                                      F-8
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)
 


              consolidation. Certain prior year amounts have been reclassified
              to conform with the current year presentation.

              The preparation of financial statements in conformity with
              generally accepted accounting principles requires management to
              make estimates and assumptions that affect the reported amounts of
              assets and liabilities, disclosure of contingent assets and
              liabilities at the date of the consolidated financial statements
              and the reported amounts of revenues and expenses during the
              reporting period. Actual results could differ from those
              estimates. Significant estimates included in the financial
              statements relate to the valuation of mortgage-backed securities,
              mortgage loans held for sale, servicing rights, deferred tax
              assets, goodwill and accrued loan servicing portfolio losses.

       (B)    CASH AND CASH EQUIVALENTS

              The Company considers all highly liquid investments with initial
              maturities of 90 days or less to be cash equivalents. These
              include cash, demand deposits and overnight repurchase agreements.

       (C)    RESTRICTED CASH

              Restricted cash includes cash deposited at banks to cover escrow
              payables and money market funds that are collateral on a Federal
              National Mortgage Association ("Fannie Mae") Delegated
              Underwriting and Servicing ("DUS") letter of credit.

       (D)    MORTGAGE-BACKED SECURITIES

              The Company classifies its mortgage-backed securities as either
              held-to-maturity or as available for sale. Securities that it has
              the ability and the intent to hold until maturity are classified
              as held-to-maturity and are recorded at amortized cost. Premiums
              and discounts are amortized using the effective interest rate
              method over the term of the security. Mortgage backed securities
              classified as available for sale are carried at fair market value.
              Unrealized holding gains and losses, net of the related tax
              effect, on available-for-sale securities are excluded from
              earnings and are reported as a separate component of other
              comprehensive income until realized. Realized gains and losses
              from the sale of available-for-sale securities are determined on a
              specific identification basis.

       (E)    MORTGAGE LOANS HELD FOR SALE

              Mortgage loans held for sale are carried at the lower of aggregate
              cost or market as determined by outstanding commitments from
              investors or current investor yield requirements. Typically, loans
              are held for a period of no more than three months. As of December
              31, 1998 and 1997, there were no loans in the warehouse for a
              period greater than three months.

       (F)    INVESTMENT

              In June 1998, the Company began investing in Commercial Mortgage
              Investment Trust, Inc. ("COMIT") a commercial mortgage REIT of
              which the Company owns less than 20 percent. COMIT invests in
              multifamily and commercial mortgages, primarily those originated
              by the Company that are not sold in securitizations or to other
              institutional investors. These types of 

                                      F-9
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)


              multifamily and commercial loans include bridge, mezzanine and
              structured transactions. The Company records its investment in
              COMIT at cost.

       (G)    FURNITURE, EQUIPMENT, AND LEASEHOLD IMPROVEMENTS

              Furniture, equipment and leasehold improvements are stated at
              cost, net of accumulated amortization and depreciation.
              Depreciation of furniture and equipment is recognized using the
              straight-line method over the estimated useful life of the asset,
              approximately five years. Leasehold improvements are amortized
              over the estimated useful life of the asset or the lease term,
              whichever is less. Cost of maintenance and repairs are charged to
              expense as incurred.

       (H)    SERVICING RIGHTS

              The Company accounts for its servicing rights under Statement of
              Financial Accounting Standard ("SFAS") No. 125, Accounting for
              Transfers and Servicing of Financial Assets and Extinguishment of
              Liabilities.

              SFAS No. 125 requires servicing rights retained by the Company
              after the origination and sale of the related loan be capitalized
              by allocating the carrying amount between the loan and the
              servicing rights based on their relative fair value. If it is not
              practicable to determine the servicing rights' fair value then no
              value is allocated to the servicing rights. The Company has also
              determined that it is practicable to estimate the fair value of
              conduit servicing rights and servicing rights related to permanent
              Federal Housing Administration ("FHA") originated loans but does
              not capitalize other loan types due to the limited secondary
              market for the products. The capitalization of these originated
              mortgage servicing rights increases net income for the period by
              the amount capitalized less related amortization and impairment if
              any. Purchased servicing rights are initially recorded at their
              purchase price. Servicing rights are amortized over a seven-year
              period which is the estimated life of the asset.

                                      F-10
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)


              Under SFAS No. 125, all capitalized mortgage servicing rights are
              evaluated for impairment based on the excess of the carrying
              amount of the mortgage servicing rights over their fair value. In
              measuring impairment, the servicing rights are stratified based on
              the interest rate and loan type of the underlying loan. The
              assumptions used in estimating the net cash flows are based on
              market conditions and actual experience. Impairment, if any, is
              recognized through a valuation allowance for each individual
              stratum.

       (I)    GOODWILL

              Goodwill arising from acquisitions is determined based on the
              excess of the purchase price paid over the fair value of the
              assets acquired. The Company evaluates the impairment of goodwill
              whenever events or changes in circumstances indicate that the
              carrying amount may not be recoverable. Goodwill is amortized on a
              straight-line basis primarily over seven to twenty years.

       (J)    ACCRUED LOAN SERVICING PORTFOLIO LOSSES

              The Company bears a portion of the credit loss risk associated
              with the loans it services as a result of its participation in the
              Fannie Mae DUS multifamily loan program. The accrual for loan
              servicing portfolio losses represents management's estimate of the
              losses which may be incurred on recourse loans underwritten to
              date. Management believes the current accrual reserve is adequate
              to provide for such losses. Management regularly reviews the
              adequacy of this accrual, considering such items as economic
              conditions and collateral value, and makes adjustments to the
              accrual through the provision for loan servicing losses as
              considered necessary.

       (K)    SERVICING FEES

              Servicing fee income represents fees earned for servicing
              multi-family and commercial real estate mortgage loans owned by
              institutional investors, including subservicing fees, net of
              guarantee fees, pool insurance fees and trustee fees. The fees are
              generally calculated on the outstanding principal balances of the
              loans serviced and are recorded as income when collected. Late
              charge income is recognized as income when collected and is
              included in servicing fee income.

       (L)    GAIN ON SALE OF MORTGAGE LOANS

              Gains on sale of mortgage loans consist of origination fees,
              commitment fees and gains on originated mortgage servicing rights.
              The gain is recognized based upon the difference between the
              selling price and the carrying amount of the related mortgage
              loans sold, net of the allocation to servicing rights for
              permanent FHA and conduit originated loans. Origination fees and
              expenses, net of commitment fees paid in connection with the sale
              of the loans, are deferred and recognized at the time of sale in
              the gain or loss determination.

                                     F-11
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)


       (M)    GAIN ON SALE OF SERVICING RIGHTS

              Gain on sale of servicing rights is recognized based upon the
              difference between the selling price and the carrying amount of
              the related servicing rights.

       (N)    PLACEMENT FEE INCOME

              Placement fee income represents revenue earned from the placement
              and utilization of escrow funds. Income is recognized during the
              period in which it is earned.

       (O)    INCOME TAXES

              Between the acquisition of the Company by NHP on April 1, 1996
              through May 8, 1997, the Company filed a consolidated tax return
              with NHP. Since May 8, 1997 the Company has filed consolidated tax
              returns on its own behalf. The Company records income tax expense
              or benefit for each of the periods presented herein as if it filed
              a return on a stand-alone basis. Deferred tax assets and
              liabilities are recognized for the future tax consequences
              attributable to differences between the financial statement
              carrying amounts of existing assets and liabilities and their
              respective tax bases. Deferred tax assets and liabilities are
              measured using enacted tax rates expected to apply to taxable
              income in the years in which those temporary differences are
              expected to be recovered or settled. The effect on deferred tax
              assets and liabilities of a change in tax rates is recognized in
              income in the period that includes the enactment date. Prior to
              the acquisition on April 1, 1996, the Company filed a consolidated
              tax return together with its subsidiaries.

       (P)    NET INCOME PER SHARE

              Effective December 15, 1997, the Company adopted the provision of
              SFAS No. 128 Earnings per Share. SFAS No. 128 requires earnings
              per share to be reported as basic earnings per share and diluted
              earnings per share. Basic earnings per share are based on total
              weighted average outstanding shares for a given period. Diluted
              earnings per share is based on total weighted average outstanding
              shares and also assumes exercise or conversion of all potentially
              dilutive instruments currently outstanding. In addition, net
              income per share is computed after retroactively applying the
              impact of the stock split.

       (Q)    COMPREHENSIVE INCOME

              In June 1998, SFAS No. 130, Reporting Comprehensive Income became
              effective. SFAS No. 130 establishes standards for reporting and
              display of comprehensive income and its components and in total in
              the financial statements. Comprehensive income is defined as the
              change in equity of a business enterprise during a period from
              transactions and other events and circumstances from non-owner
              sources. It includes all changes in equity during a period except
              those resulting from investments by owners and distributions to
              owners. The Company adopted the requirements of SFAS No. 130 on
              January 1, 1998. At December 31, 1998, the Company has no other 
              items of comprehensive income.

                                     F-12
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)

 
      (R)     NEW ACCOUNTING STATEMENTS

              In June 1998, SFAS No. 133, Accounting for Derivative Instruments
              and Hedging Activities was issued. SFAS No. 133 establishes
              accounting and reporting requirements for derivative instruments,
              including certain derivative instruments embedded in other
              contracts, (collectively referred to as derivatives) and for
              hedging activities. It requires that an entity recognize all
              derivatives as either assets or liabilities in the statement of
              financial position and measure those instruments at fair value.
              The accounting for changes in the fair value of a derivative
              depends on the intended use of the derivative and the resulting
              designation. If certain conditions are met, a derivative may be
              specifically designated as (a) a hedge of certain exposures to
              changes in the fair value of a recognized asset or liability or an
              unrecognized firm commitment, (b) a hedge of the exposure to
              variable cash flows of a recognized asset or liability or of a
              forecasted transaction, or (c) a hedge of foreign currency
              exposures. SFAS No. 133 is effective for all fiscal quarters of
              fiscal years beginning after June 15, 1999. Earlier adoption is
              permitted. The Company has not yet determined the impact, if any,
              of this statement, including its provisions for the potential
              reclassifications of investment securities, on earnings, financial
              condition, or equity.

              In October 1998, SFAS No. 134, Accounting for Mortgage-Backed
              Securities Retained after the Securitization of Mortgage Loans
              Held for Sale by a Mortgage Banking Enterprise, was issued. SFAS
              No. 134 requires that mortgage banks classify the retained
              interests in mortgage-backed securities that were originally
              classified as mortgage loans available for sale in accordance with
              the provisions of SFAS No. 115, Accounting for Certain Investments
              in Debt and Equity Securities. The Company adopted SFAS No. 134
              upon its issuance.

       (S)    STOCK-BASED EMPLOYEE COMPENSATION ARRANGEMENTS

              The Company follows Accounting Principles Board Opinion No. 25
              "Accounting for Stock Issued to Employees" ("APB 25") and related
              Interpretations in accounting for its employee stock options.
              Certain options granted by the Company have exercise prices less
              than the market price of the underlying stock on the date of
              grant. In accordance with APB 25, compensation expense is
              recognized on these options.

       (T)    RECLASSIFICATIONS

              Certain amounts in 1997 and 1996 have been reclassified to conform
              to their presentation in 1998.


(3)    ACQUISITIONS

       On April 15, 1997, WMF Washington Mortgage acquired the assets and
       liabilities of Askew Investment in Dallas, Texas for $5,600. In
       accordance with the purchase agreement, $4,600 of the purchase price was
       paid upon closing with the remaining $1,000 paid in the form of earnouts
       upon attainment of certain performance objectives. The acquisition has
       been accounted for as a purchase resulting in goodwill of $4,600. Such
       goodwill will be amortized on a straight-line basis over twenty years
       which is the estimated life of the mortgage loan production operations
       acquired.

       During 1998 and 1997, respectfully, $727 and $300 of goodwill was
       recorded in connection with the earnout agreement related to the
       acquisition of Askew Investments.

                                     F-13
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)


       On November 5, 1997, WMF Washington Mortgage acquired 100 percent of the
       outstanding stock of The Robert C. Wilson Company and its Arizona
       subsidiary (collectively "WMF Robert C. Wilson"), a Houston based
       commercial mortgage banking company. WMF Washington Mortgage acquired all
       of Wilson's issued and outstanding common stock for a purchase price of
       approximately $4,000 in cash. In accordance with the purchase agreement
       $3,200 was paid at closing and the remaining $800 would be paid in the
       form of earnouts upon the attainment of certain performance objectives
       over a 42 month period. The funds for the acquisition were obtained
       through a draw on an existing credit line of WMF Washington Mortgage. The
       acquisition has been accounted for as a purchase resulting in goodwill of
       $3,200 million. Such goodwill will be amortized on a straight-line basis
       over twenty years which is the estimated life of the mortgage loan
       production operations acquired.

       During 1998 an additional $267 of goodwill was recorded in connection
       with the earnout agreement related to the acquisition of WMF Robert C.
       Wilson.

       On December 23, 1997, WMF Washington Mortgage acquired the assets and
       liabilities of New York Urban West, Inc. ("WMF New York Urban"), a New
       York based commercial mortgage banking company for $4,900. In accordance
       with the purchase agreement, approximately $4,100 was paid in cash and
       the remaining $800 would be paid in the form of earnouts upon the
       attainment of certain performance objectives over a 42 month period. The
       funds for the acquisition were obtained through a draw on an existing
       credit line of WMF Washington Mortgage. The acquisition has been
       accounted for as a purchase resulting in goodwill of $2,700. Such
       goodwill will be amortized on a straight-line basis over twenty years
       which is the estimated life of the mortgage loan production operations
       acquired

       On March 27, 1998, the Company created WMF Carbon Mesa, which purchased
       all of the assets of Carbon Mesa Advisors, Inc., and Strategic Real
       Estate Partners for a combination of cash and common stock. The purchase
       did not have a significant impact on the Company's financial position or
       results of operations. WMF Carbon Mesa develops new loan products,
       manages commercial mortgage investment funds, provides special asset
       management services, and originates commercial mortgages.

 (4)   MORTGAGE-BACKED SECURITIES

       Mortgage-backed securities include Government National Mortgage
       Association ("Ginnie Mae") securities. These securities are classified as
       held to maturity. The market value of the securities is $3,813 and $3,935
       at December 31, 1998 and 1997, respectively. The securities held will
       mature in the years 2028 and 2029 and are pledged as collateral for a
       letter of credit established on behalf of Fannie Mae for loans originated
       under the DUS program. These securities carry an AAA credit rating.

       Mortgage-backed securities also include a subordinated interest in
       certain commercial tenant leases retained by the Company after their
       origination and sale. The cost and fair value of these securities at
       December 31, 1998 was $2,400. These securities are classified as
       available-for-sale and are scheduled to mature in 2012.

                                     F-14
<PAGE>
 
                               THE WMF GROUP, LTD.

                   Notes to Consolidated Financial Statements
             (dollars in thousands, except share and per share data)

(5)    Mortgage Loans Held for Sale

       Mortgage loans that the Company acquires or originates with the intent to
       sell in the foreseeable future are initially recorded at cost
       including any premium or discount related to acquired loans. Loans held
       for sale are carried on the books at the lower of cost or fair value
       calculated on the aggregate basis. Gains and losses on the sale of loans
       is recognized upon settlement with investor. The Company does not
       anticipate prepayment of loans held for sale due to the Company's short
       holding period, which is typically less than three months. Mortgage loans
       held for sale are pledged as collateral against the Company's warehouse
       lines of credit.

(6)    Furniture, Equipment, and Leasehold Improvements

       As of December 31, 1998 and 1997, furniture, equipment and leasehold
       improvements consist of the following:

                                                                1998       1997
                                                               ------     ------
Furniture and equipment                                        $5,911      2,745
Capital lease                                                     125        125
Leasehold improvements                                            933        251
                                                               ------     ------
                                                                6,969      3,121
Less -- accumulated depreciation and amortization               1,958        822
                                                               ------     ------
                                                               $5,011      2,299
                                                               ======     ======


                                                                    (Continued)
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)

(7)  DEBT FACILITIES

     The Company has two warehouse lines of credit for a total of $185,000 (one
     for $150,000 and another for $35,000) which can be drawn upon for purposes
     of originating loans. The warehouse lines of credit are secured by mortgage
     loans held for sale and are required to be repaid, with interest, upon sale
     of the mortgage loans. The interest rate on the $150,000 line of credit was
     .75 to 1 percent for 1997 and 1998 and 1 to 1.5 percent in 1996 to the
     extent borrowings were equal to or less than compensating balances
     maintained and was equal to the London InterBank Offered Rate ("LIBOR")
     plus .75 to 1 percent for 1997 and 1998 and 1 to 1.5 percent in 1996 for
     amounts borrowed in excess of compensating balances. The interest rate on
     the $35,000 line of credit was .75 percent to the extent borrowings were
     equal to or less than compensating balances maintained and was equal to the
     Euro-Rate plus .75 percent for amounts borrowed in excess of compensating
     balances. The Company had borrowed $34,757 and $48,743 against these lines
     of credit as of December 31, 1998 and 1997, respectively. The $150,000
     million line of credit was refinanced in February 1999.

     The $35,000 warehouse line of credit can also be used for principal and
     interest advances and working capital purposes with credit limits of $4,000
     to $5,000 respectively. The interest rate on the principal and interest
     advances and working capital portion of the facility are 1.5 percent and
     2.0 percent to the extent borrowings were equal to or less than
     compensating balances maintained and was equal to the Euro-Rate plus 1.5
     percent or 2 percent for amounts borrowed in excess of the compensating
     balances, respectively. Interest and principal is repayable monthly. The
     balance of these advance lines are required to be zero for at least seven
     consecutive days during each month of the year. The Company had borrowed
     $4,763 against this facility as of December 31, 1998.

     The Company has a servicing loan. The loan is to be repaid in twenty equal
     quarterly installments based on a 10-year amortization schedule beginning
     in October 1996, with the remaining balance due in June 2001. The interest
     rate on the servicing loan was 3 percent for 1997 and 1998 and 3 to 3.5
     percent in 1996 to the extent borrowings were equal to or less than
     compensating balances maintained and was equal to LIBOR plus 3 percent for
     1997 and 1998 and LIBOR plus 3 to 3.5 percent in 1996 for amounts borrowed
     in excess of compensating balances. Interest is payable monthly. The
     servicing loan is collateralized by servicing rights. The Company had
     outstanding under this loan $4,212 and $5,462 as of December 31, 1998 and
     1997, respectively. This loan was refinanced in February 1999.

     The Company has a $10,000 secured revolving credit agreement to be used for
     servicing acquisitions or working capital purposes. The revolving credit
     agreement is renewable annually through November 2002 and requires monthly
     interest payments. Any principal balance outstanding in November 2002 would
     be converted to a term loan due in quarterly installments through November
     2007. The interest rate on the term loan is 2.5 percent for amounts
     borrowed to the extent borrowings were equal to or less than compensating
     balances maintained and is equal to LIBOR plus 2.5 percent for amounts
     borrowed in excess of compensating balances. The revolving credit agreement
     is collateralized by all nonrecourse servicing rights. The Company had
     borrowed $10,000 and $2,829 against this line as of December 31, 1998 and
     1997, respectively. This line of credit was refinanced in February 1999.

                                      F-16
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)

     The Company has a $35,000 secured revolving line of credit which is
     utilized to finance the acquisition of commercial mortgage banking
     companies and related activities. The interest rate on this facility is 3
     percent to the extent borrowings were equal to or less than compensating
     balances maintained and was equal to LIBOR plus 3 percent for amounts
     borrowed in excess of the compensating balances. Interest is payable
     monthly. This facility is collateralized by all nonrecourse servicing
     rights. The Company had borrowed $21,519 and $2,870 against this facility
     as of December 31, 1998 and 1997, respectively. This line of credit was
     refinanced in February 1999.

     On September 4, 1998, the Company issued $20.0 million of subordinated debt
     to COMIT. From this borrowing, the Company used $10.0 million to repay a
     portion of the credit line with another lender. The balance of $10.0
     million was used for working capital purposes. The subordinated debt is
     subordinate in right of payment to certain of the Company's senior
     indebtedness, is unsecured and bears interest at a rate of 11 percent
     through January 31, 1999 and 15 percent from February 1, 1999 through the
     maturity date of May 31, 1999. Interest is payable on January 29, 1999, at
     maturity and upon repayment of principal. In connection with the COMIT
     subordinated debt agreement, the Company also issued COMIT warrants to
     purchase 1.2 million shares of the Company's common stock at an exercise
     price of $11.25 per share. The Company repaid $16.1 million of the
     subordinated notes on December 31, 1998 and as part of the sale of
     approximately $16.6 million of Class A Preferred Stock discussed in Note
     20, the warrants were surrendered. The Company repaid the remainder of the
     subordinated note in March 1999 (see note 20).

     The Company refinanced its $4,200 servicing loan, $35,000 revolving line,
     $10,000 line of credit and $150,000 of its warehouse lines of credit. These
     facilities were replaced with the following warehouse lines of credit,
     credit lines and term loans on February 10, 1999. The Company's servicing
     rights collateralized these facilities. The Company's debt agreements
     require maintenance of certain financial ratios relating to liquidity,
     leverage, working capital, and net worth among other restrictions. As a
     result of the refinancing of the Company's debt in February 1999, the
     Company was in compliance with these restrictions at December 31, 1998.

     The Company has a $25 million term loan to be repaid in twenty quarterly
     installments based on a 10-year amortization schedule beginning on March
     31, 1999. The interest rate on the term loan is 3 percent to the extent
     compensating balances are maintained and is equal to LIBOR plus 3 percent
     for amounts in excess of compensating balances. Interest is payable
     monthly. The Company cannot borrow any additional amounts under this line,
     which will mature as follows: $2.5 million in each year from 1999 to 2003
     and $15 million in 2004.

     The Company has a $25 million revolving credit agreement to be used for
     servicing acquisitions or working capital purposes. The facility matures in
     February 2002. The interest rate on the revolving credit facility is 2.5
     percent to the extent compensating balances are maintained and is equal to
     LIBOR

     Historically, the Company has temporarily increased its warehouse lines of
     credit at times to allow borrowing beyond the credit limit. The warehouse
     line of credit is renewable annually. The facility can also be used for
     certain principal and interest advances with credit limits totaling $10.0
     million.


                                      F-17
<PAGE>
 
                               THE WMF GROUP, LTD.

                   Notes to Consolidated Financial Statements
             (dollars in thousands, except share and per share data)


Following is certain information relating to the Company's various credit
agreements for the years ended December 31, 1998 and 1997, respectively.

<TABLE> 
<CAPTION> 
                                                                   Average          Maximum          Interest rate at    Average
                                               December 31,        balance          balance            December 31,      interest
                                                  1998           outstanding      outstanding              1998            rate
                                              -------------      -----------      -----------        -----------------   --------
<S>                                           <C>                <C>              <C>                <C>                 <C>  
$185,000 warehouse lines                        $34,757            71,159           170,815               2.58%            1.28%
Servicing loan                                    4,212             4,844             5,462               3.10%            3.04%
$45,000 revolving credit
     facilities                                  36,281            24,684            41,519              10.18%            3.92%
Subordinated note                                 3,901            19,037            20,000              11.00%           11.00%
                                              =============      ===========      ===========        =================   ========
<CAPTION> 
                                                                   Average          Maximum           Interest rate at   Average
                                               December 31,        balance          balance             December 31,     interest
                                                  1997           outstanding      outstanding               1997           rate
                                              -------------      -----------      -----------        -----------------   --------
<S>                                           <C>                <C>              <C>                <C>                 <C> 
$185,000 warehouse line                         $48,473            56,377           127,675               0.75%           0.75%
Servicing loan                                    5,462             5,775             6,212               3.0%            3.0%
$10,000 servicing
    acquisition line                              2,829             2,829             2,829               2.5%            2.5%
$35,000 revolving credit
    facility                                      2,870             2,870             2,870               3.0%            3.0%
                                              =============      ===========      ===========        =================   ========
</TABLE> 

     The Company has also established a letter of credit of $5,200 and $4,400 on
     behalf of Fannie Mae for the DUS program as of December 31, 1998 and 1997,
     respectively. This letter of credit is secured by cash equivalents and
     mortgagebacked securities with a market value of $6,358 and $5,511 as of
     December 31, 1998 and 1997, respectively.


(8)  Servicing Rights

     During 1998 and 1997, the activity for servicing rights consisted of the
     following:

                                                                     (Continued)
<PAGE>
 
                               THE WMF GROUP, LTD.

                   Notes to Consolidated Financial Statements
             (dollars in thousands, except share and per share data)


                                                       1998                1997
                                                      --------         --------
Beginning balance, net                                $ 26,796           22,460
    Increase due to acquisition                             --            1,252
    Purchases                                            1,594            4,272
    Originations                                         5,980            3,251
    Sale, net                                           (2,974)            (189)
    Amortization                                        (5,153)          (4,250)
                                                      --------         --------
Ending balance, net                                   $ 26,243           26,796
                                                      ========         ========

       SFAS No. 125 requires enterprises to measure the impairment of servicing
       rights based on the difference between the carrying amount of the
       servicing rights and their current fair value. At December 31, 1998 and
       1997, no allowance for impairment in the Company's mortgage servicing
       rights was necessary. The estimated fair value of the capitalized
       mortgage servicing rights was approximately $51,200 at December 31, 1998.
       The estimated fair value was determined using a discounted cash flow
       valuation model incorporating prepayment, default, cost to service and
       interest rate assumptions to the underlying loans. This estimated fair
       value presented herein is not necessarily indicative of the amounts the
       Company could realize in a current market exchange. The use of different
       market assumptions, valuation methodologies or both may have a material
       effect on the estimates of fair value.


(9)    Loan Administration

       The Company's portfolio of mortgage loans serviced for institutional
       investors aggregated $12,141,933 and $10,870,357 at December 31, 1998 and
       1997, respectively. Included in the Company's portfolio are approximately
       $11,553,866 and $10,248,834 of permanent multifamily and commercial
       loans, and $588,067 and $621,523 in construction loans at December 31,
       1998 and 1997, respectively.

       At December 31, 1998 and 1997, the Company serviced and subserviced loans
       for the following investors:

<TABLE> 
<CAPTION> 
                                                         1998                        1997
                                                ----------------------     -----------------------
                                                  Loan      Principal        Loan      Principal
                                                  count    outstanding       count     outstandng
                                                ---------- -----------     ---------  ------------
<S>                                             <C>       <C>              <C>        <C>    
Investor:
Federal National Mortgage
    Association                                     353   $ 2,583,180           256   $ 1,543,826
Government National Mortgage
    Association                                     283     1,411,756           382     1,612,716
Other investors                                   2,518     8,146,997         2,488     7,713,815
                                            -----------   -----------   -----------   -----------

          Total loans serviced for others         3,154   $12,141,933         3,126   $10,870,357
                                            ===========   ===========   ===========   ===========
</TABLE> 

                                                                     (Continued)
<PAGE>
 
                               THE WMF GROUP, LTD.

                   Notes to Consolidated Financial Statements
             (dollars in thousands, except share and per share data)



       The Company's DUS portfolio has the following geographic and interest
       rate concentrations as of December 31, 1998 and 1997, respectively:

                                                           1998            1997
                                                          ------          ------
State:
    New York                                                  5%              5%
    Oklahoma                                                  1               8
    Texas                                                    18              19
    Other                                                    76              68
                                                          ------          ------
                                                            100%            100%
                                                          ======          ======

Interest rate:
    Less than 7.5%                                           35%             27%
    7.5% to 9.49%                                            60              70
    Greater than 9.49%                                        5               3
                                                          ------          ------
                                                            100%            100%
                                                          ======          ======

       In addition, the Company makes voluntary advances under certain of its
       servicing agreements pending receipt from the mortgagors. Such advances
       amounted to $2,588 and $2,631 at December 31, 1998 and 1997,
       respectively.

       Related escrow funds of approximately $305,368 and $323,000 at December
       31, 1998 and 1997, respectively, are on deposit in escrow bank accounts
       and are not included in the accompanying consolidated balance sheet. As
       of December 31, 1998, the Company carried blanket bond insurance coverage
       of $13,100 and errors and omissions insurance coverage in the amount of
       $18,100.

       The Company bears the Level I risk of loss associated with the loans it
       services under the Fannie Mae DUS program. The Level I risk of loss
       imposes a lender deductible of 5 percent of the unpaid principal balance
       and limits the maximum loss to 20 percent of the original mortgage. The
       unpaid principal balance of the Fannie Mae DUS loan servicing portfolio
       was approximately $1,500,510 and $943,703 at December 31, 1998 and 1997,
       respectively. The DUS loans are secured by first liens on the underlying
       multifamily properties. The Company's portfolio includes one state
       (Texas) comprising over 10 percent of the total portfolio. No other state
       comprises over 10 percent of the Fannie Mae DUS portfolio. No Fannie Mae
       DUS loans were delinquent as of December 31, 1998 and 1997. The Company
       has provided a reserve for losses of $6,253 and $5,125 as of December 31,
       1998 and 1997, respectively. This reserve represents management's
       estimate of inherent losses on loans underwritten to date that are
       currently being serviced.

       Activity in the reserve for loan servicing losses is summarized as
       follows:


                                                                     (Continued)
<PAGE>
 
                               THE WMF GROUP, LTD.

                   Notes to Consolidated Financial Statements
             (dollars in thousands, except share and per share data)

<TABLE> 
<CAPTION> 
                                                                                   For the period      For the period
                                                                                  April 1, 1996 to    January 1, 1996 to
                                                  1998               1997         December 31, 1996     March 31, 1996
                                                --------           --------       -----------------   -------------------
<S>                                             <C>                <C>            <C>                 <C> 
Balance, beginning
    of period                                    $5,125              4,396              3,427              3,142
    Provision for
       loan servicing losses                      1,128                729                969                285
                                                --------           --------       -----------------   -------------------
Balance, end of period                           $6,253              5,125              4,396              3,427
                                                ========           ========       =================   ===================
</TABLE> 

(10)   Income Taxes

       Income tax expense (benefit) attributable to income (loss) before 
       income taxes for the years ended December 31, 1998 and 1997 and for 
       the period April 1, 1996 to December 31, 1996 and the period 
       January 1, 1996 to March 31, 1996 consisted of the following:

<TABLE> 
<CAPTION> 
                                                                                  For the period          For the period
                                                                                 April 1, 1996 to       January 1, 1996 to
                                                 1998             1997           December 31, 1996        March 31, 1996
                                               --------         --------         -----------------      -------------------
<S>                                             <C>              <C>             <C>                    <C> 
Federal
    Current                                   $      --           2,092               (2,183)                   613
    Deferred                                    (17,729)            (90)               3,184                     --
                                               ---------        --------              -------                  ----- 

                                                (17,729)           2,002               1,001                    613
                                               ---------        --------              -------                  ----- 
State                                                         
    Current                                       1,498              327                 143                    227
    Deferred                                     (2,835)              --                  --                     --
                                               ---------        --------              -------                  ----- 

                                                 (1,337)             327                 143                    227
                                               ---------        --------              -------                  ----- 

                    Total                     $ (19,066)           2,329               1,144                    840
                                               =========        ========              =======                  =====
</TABLE> 

       The following is a summary of the tax effects of temporary differences
       that give rise to significant portions of the deferred tax assets and
       deferred tax liabilities.


                                                                  (Continued)
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)

<TABLE> 
<CAPTION> 
                                                                                          For the period           For the period
                                                                                         April 1, 1996 to        January 1, 1996 to
                                                          1998             1997         December 31, 1996          March 31, 1996
                                                        ----------      -----------    ---------------------    --------------------

<S>                                                     <C>             <C>            <C>                      <C>   
Deferred tax assets:
    Reserve for loan servicing
       portfolio losses                                  $  2,501           2,050               1,758                   1,371
    Mark to market valuation allowance                        374              --                  --                      --
    Loss on investment in Beverly                              --              --                  --                     351
    Net operating loss carryforwards                       21,563              --                  --                      -- 
                                                         --------        --------            --------                --------
          Total gross deferred tax assets                  24,438           2,050               1,758                   1,722
    Less - valuation allowance                               (560)             --                  --                  (1,038)
                                                         --------        --------            --------                --------
          Net deferred tax assets                          23,878           2,050               1,758                     684

Deferred tax liabilities:                                                                                
    Originated mortgage servicing rights                   (6,472)         (5,238)             (4,883)                   (671)
    Other                                                    (116)            (86)                (59)                    (13)
                                                         --------        --------            --------                --------
          Total gross deferred tax liabilities             (6,588)         (5,324)             (4,942)                   (684)
                                                         --------        --------            --------                --------
          Net deferred tax assets (liabilities)          $ 17,290          (3,274)             (3,184)                     --
                                                         ========        ========            ========                ========
</TABLE> 



       The differences between the effective income tax rates and the Federal
       statutory income tax rates are as follows:

<TABLE> 
<CAPTION> 
                                                                          For the period          For the period
                                                                         April 1, 1996 to       January 1, 1996 to
                                             1998           1997        December 31, 1996         March 31, 1996
                                          -----------    -----------   ---------------------    --------------------
<S>                                       <C>            <C>           <C>                      <C>  
Federal income tax rate (benefit)             (35)%          35%                     35%                        35%
State income tax rate                          (3)            5                       5                          5
Valuation allowance                            (1)           --                      --                         25
Goodwill amortization                           3             9                      10                          8
                                          -----------    -----------   ---------------------    --------------------
       Effective income tax                   
       rate (benefit)                         (36)%          49%                     50%                        73%
                                          ===========    ===========   =====================    ====================
</TABLE> 

       As of December 31, 1998, the Company had a $17 million deferred tax asset
       related to the Company's losses during 1998. The Company will have to
       generate income to realize the deferred tax asset relating to net
       operating losses. Excluding the losses incurred in the Company's capital
       markets segment, which generated the 1998 losses and which the Company
       has taken steps to minimize, the Company believes its existing levels of
       pretax earnings for financial reporting purposes are sufficient to
       generate the minimum amount of future taxable income needed to realize
       the deferred tax asset. The Company has also identified the possible
       disposition of assets as a means of generating future taxable 

                                                                     (Continued)
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)

     income if enough taxable income is not derived from recurring operations in
     order to realize the deferred tax asset over the carryforward period of 20
     years. Management believes that it is more likely than not the Company will
     realize the benefits of these deductible differences, net of the existing
     valuation allowance for state deferred taxes at December 31, 1998. However,
     in the event of a change of control of the Company or Capital Corp. or
     certain other material changes in the Company's business, the Company would
     have to establish additional valuation allowances against the deferred tax
     asset.

     All of the net operating losses incurred in 1998 will expire in 2018.


(11)   Commitments and Contingencies

       (A)    Leases

              The Company is obligated under noncancelable leases for office
              space, furniture and equipment. Minimum future lease payments are
              as follows as of December 31, 1998:

                     Year                 Amount
                                          -------
                     1999                 $ 4,954
                     2000                   4,307
                     2001                   2,894
                     2002                   2,683
                     2003                   1,595
                     Thereafter             5,383
                                          -------
                       Total              $21,816
                                          =======


              Rent expense was $3,438 and $1,594, in the years ended December
              31, 1998 and 1997, respectively, and $975 and $230 in the nine
              months ended December 31, 1996 and three months ended March 31,
              1996, respectively.

                                                                     (Continued)
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)


     (B)  COMMITMENTS

          The Company enters into commitments to extend credit to borrowers in
          the normal course of business. Normally, the Company simultaneously
          commits to sell the loan to an appropriate investor. Because the
          commitment for the loan sometimes occurs prior to the investor
          commitment, the Company limits its exposure to interest rate changes
          for these transactions. As of December 31, 1998 the Company had
          commitments outstanding to extend credit to borrowers of $65,800
          without pre-existing investor sale commitments. In the event there are
          significant fluctuations in interest rates and spreads during the term
          of these commitments, the change in value of the commitments could
          have a material adverse effect on the Company's future operating
          results and consequently the Company's ability to honor the
          commitments.

          At December 31, 1998 and 1997, the Company had floating rate
          commitments outstanding to originate $49,627 and $183,207,
          respectively, in multifamily and commercial mortgage loans and
          mandatory delivery commitments in the amount of $229,830 and $212,883,
          respectively, to cover the Company's origination commitments and loans
          held for sale.

     (C)  LITIGATION

          Two lawsuits have been filed against Capital Corp. alleging, among
          other things, breach of contract by Capital Corp. due to its failure
          to fund certain loan commitments issued by it. The Company is also
          named as a defendant in one of the lawsuits. An adverse judgment in
          these matters against Capital Corp. would be material to Capital
          Corp., and if against the Company, could be material to the Company.
          Capital Corp. is attempting to resolve the matters by settlement and
          compromise but no assurances can be given that such attempts will be
          successful. The Company does not anticipate a material adverse
          judgment against it in the case where it is named as a defendant.

          The Company is involved in other litigation related to the normal
          course of business. Management is of the opinion that the litigation
          will not have a material adverse impact on the Company's financial
          position or operating results. No amounts have been accrued because
          the loss, if any, cannot be reasonably estimated.


(12) EMPLOYEE BENEFIT PLANS

     The Company has initiated a defined contribution plan under Section 401(k)
     of the Internal Revenue Code covering substantially all employees.
     Employees may contribute to the plan up to 15 percent of their salary up to
     the maximum allowable by the Internal Revenue Code. The Company will match
     employee contributions at 50 percent for an amount up to 5 percent of each
     employee's salary.

                                      F-24
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)

     Company contributions vest 20 percent after the first year of employment
     and an additional 20 percent in each subsequent year until fully vested in
     the fifth year. Contributions by the Company were $285 and $168 for the
     years ended December 31, 1998 and 1997, respectively.

(13) RELATED PARTY TRANSACTIONS

     As of December 31, 1998 the Company holds an investment in COMIT with a
     carrying value of $3,780 and owes a subordinated note to COMIT in the
     amount of $3,901, which was repaid in March 1999 (see note 20). WMF Carbon
     Mesa received $137 in advisory fees for services rendered to COMIT during
     1998.

     As of December 31, 1995, the Company had advanced funds of $1,086 to
     Beverly Hills Securities. The Company collected $486 in 1996, and wrote the
     remainder of the receivable off resulting in a $600 loss in 1996.


(14) DISCLOSURES OF FAIR VALUE OF FINANCIAL INSTRUMENTS

     The Company is required to disclose the estimated fair values for its
     financial instruments. The basic assumptions used and the estimates
     disclosed represent management's best judgment of appropriate valuation
     methods. These estimates are based on pertinent information available to
     management. In certain cases, fair values are not subject to precise
     quantification or verification and may change as economic and market
     factors, and management's evaluation of those factors change.

     Although management uses its best judgment in estimating the fair value of
     these financial instruments, there are inherent limitations in any
     estimation technique. Therefore, these fair value estimates are not
     necessarily indicative of the amounts that the Company would realize in a
     market transaction.

                                      F-25
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)


       The following fair values do not represent an estimate of the overall
       market value of the Company as a going concern, which would take into
       account future business opportunities.


<TABLE> 
<CAPTION> 
                                                                      1998                   1997
                                                             --------------------    ----------------------
                                                             Carrying      Fair       Carrying     Fair
                                                               value       value        value      value
                                                             ---------   --------     ---------  ----------
<S>                                                          <C>         <C>          <C>        <C> 
Assets:
    Cash, cash equivalents and restricted cash                $22,295      22,295      12,362      12,362
    Mortgage-backed securities                                  6,195       6,213       3,851       3,935
    Mortgage loans held for sale                               34,217      34,217      49,431      49,431
    Servicing rights                                           26,243      51,200      26,796      54,700
    Investment                                                  3,780       3,780          --          --

Liabilities:                                          
    Subordinated note                                           3,901       3,901          --          --
    Warehouse lines of credit                                  34,757      34,757      48,743      48,743
    Servicing acquisition line of credit                        4,212       4,212       5,462       5,462
    Revolving credit facilities                                36,281      36,281       5,699       5,699
                                                              =======     =======     =======     ======= 
Off-balance sheet instruments:                        
    Commitments to extend credit                              $    --          --          --          --
                                                              =======     =======     =======     ======= 
</TABLE> 

       The following methods and assumptions were used to estimate the fair
       value of each class of financial instruments for which it is practicable
       to estimate the value.

       (A)    Cash, Cash Equivalents, and Restricted Cash Equivalents

              For cash, cash equivalents, and restricted cash, the carrying
              amount is a reasonable estimate of fair value due to the
              relatively short time between the origination of the instruments
              and their expected realization.

       (B)    Mortgage-Backed Securities

              The fair value of the mortgage-backed securities is estimated
              based on bid quotations received from securities dealers.

       (C)    Mortgage Loans Held for Sale

              For mortgage loans held for sale, fair value was estimated based 
              on outstanding commitments from investors or current inventory 
              yield requirements calculated on an aggregate basis.  The fair 
              market value of loans held for sale also includes the market 
              value of commitments to extend credit to borrowers for which a 
              preexisting investor sale commitment

                                                                     (Continued)
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)

     (D)  SERVICING RIGHTS

          The estimated fair value was determined using a discounted cash flow
          valuation model incorporating prepayment, default, cost to service and
          interest rate assumptions to the underlying loans. This estimated fair
          value presented herein is not necessarily indicative of the amounts
          the Company could realize in a current market exchange. The use of
          different market assumptions, valuation methodologies or both may have
          a material effect on the estimates of fair value.

     (E)  WAREHOUSE LINES OF CREDIT, SERVICING ACQUISITION LINE OF CREDIT AND
          REVOLVING CREDIT FACILITY

          The estimated fair value of the warehouse lines of credit, servicing
          acquisition line of credit, and revolving credit facility, each of
          which are short-term liabilities, approximates their carrying values.

     (F)  COMMITMENTS TO EXTEND CREDIT

          The fair value of commitments is estimated using the fees currently
          charged to enter into similar agreements, taking into account the
          remaining terms of the agreements and the present creditworthiness of
          the counter parties. For fixed-rate loan commitments, fair value also
          considers the difference between current levels of interest rates and
          the committed rates. The fair value of such commitments are included
          in mortgage loans held for sale in the preceding table and are
          considered in the calculation of the lower of cost or market
          calculations for mortgage loans held for sale.

     (G)  OFF-BALANCE SHEET

          The Company uses a variety of off-balance sheet investment products as
          part of its risk management strategy and in its loan origination
          activities. The most frequently used off-balances sheet investment
          products are various types of interest rate swaps and forward rate
          agreements. Off-balance sheet investment products are typically
          classified as hedges. The Company does not enter into financial
          instruments for trading purposes. As of December 31, 1998 and 1997,
          the Company had no off-balance sheet investments outstanding. During
          1998 the Company did not enter into any off-balance sheet investments.

                                      F-27
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)

(15)   Segment Reporting

       In 1998, SFAS No. 131, Disclosure About Segments of an Enterprise and
       Related Information became effective. SFAS No. 131 established standards
       for reporting information about operating segments. The Company adopted
       the requirements of SFAS No. 131 for the fiscal year ending December 31,
       1998. The following table sets forth both information derived from the
       Company's consolidated statements of operations and reconciles the
       summary segment information for the consolidated statement of operations
       for each of the periods presented:

<TABLE> 
<CAPTION> 

                                          For the year    For the year
                                             ended          ended         For the period       For the period
                                          December 31,    December 31,   April 1, 1996 to    January 1, 1996 to
                                             1998            1997        December 31, 1996     March 31, 1996
                                         --------------  -------------  -------------------  --------------------
<S>                                      <C>             <C>            <C>                  <C> 
Revenue:
    Mortgage banking(1)                    $  67,567            44,645             23,473              6,828
    Capital markets                            3,484                --                 --                 --
    Advisory services                          1,490                --                 --                 --
                                           ---------         ---------          ---------          ---------
                    Total                     72,541            44,645             23,473              6,828
Expenses: (2)                                             
    Mortgage banking(1)                       59,169            39,116             20,953              5,626
    Capital markets                           60,379                --                 --                 --
    Advisory services                          2,114                --                 --                 --
                                           ---------         ---------          ---------          ---------
                    Total                    121,662            39,116             20,953              5,626
Earnings (loss) before non-operating                      
    interest expense and taxes:                           
       Mortgage banking (1)                    8,398             5,529              2,520              1,202
       Capital markets                       (56,895)               --                 --                 --
       Advisory services                        (624)               --                 --                 --
                                           ---------         ---------          ---------          ---------
                    Total                    (49,121)            5,529              2,520              1,202

Non-operating interest expense                 3,267               758                221                 57
                                           ---------         ---------          ---------          ---------
Pretax income (loss)                         (52,388)            4,771              2,299              1,145
Provision for (benefit from) taxes           (19,066)            2,329              1,144                840
                                           ---------         ---------          ---------          ---------
Net income (loss)                          $ (33,322)            2,442              1,155                305
                                           =========         =========          =========          =========
</TABLE> 

(1)  Mortgage banking operations includes corporate administration expenses.

(2)  The Company recognized reorganization and recapitalization expenses of
     approximately $2,000 with approximately $1,700 reported in mortgage banking
     and $341 reported in capital markets.

     The following table sets forth information derived from the Company's
     consolidated balance sheet for the date presented:

 

                                                                     (Continued)
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)



                                                December 31,   December 31,
                                                   1998           1997
                                                -----------    -----------
Assets:                                                        
    Mortgage banking                             $  131,264        119,331
    Capital markets                                   8,558             --
    Advisory services                                 4,705             --
                                                 ----------    -----------
                   Total                         $  144,527        119,331
                                                 ==========    ===========
                                                           


       Mortgage banking operations include corporate and administration assets.


(16)   Balance Sheet Classification

       The Company prepares its consolidated balance sheet using an unclassified
       balance sheet presentation as is customary in the mortgage banking
       industry. A classified presentation would have aggregated current assets,
       current liabilities, and net working capital as follows:

                                                            1998          1997
                                                          --------      --------
       Current assets                                     $ 49,980        63,363
       Current liabilities                                  55,649        58,608
                                                          --------      --------
                    Net working capital (deficit)         $ (5,669)        4,755
                                                          ========      ========




(17)   Stock and Stock Option Plans

       As part of the spinoff the Company granted, to certain key employees,
       options to purchase common shares under the Key Employee Incentive Plan.
       On December 8, 1997, the Company granted 271,250 nonqualified stock
       options for an aggregate of six percent of the total shares outstanding
       of the Company at December 31, 1997. The non-qualified stock option plan
       provides for the right to purchase Common Stock at a specified price. The
       options vest ratably over five years and are contingent upon continued
       employment of the individual and other factors as set forth in the
       agreement. Compensation expense of $288 and $343 was recognized in the
       years ended December 31, 1998 and 1997, respectively.

       The Company also issued options under its employee stock purchase plan
       during December 1997. Employees exercised the right to purchase 138,352
       shares at a purchase price of $9.15 per share. The Company incurred
       compensation expense of $750. No options under this plan were
       outstanding.


                                                                     (Continued)
<PAGE>
 
                              THE WMF GROUP, LTD

                  Notes to Consolidated Financial Statements 
          (dollars in thousands, except share and per share amounts)

 
       In 1997, the Company also issued 20,000 restricted shares under its Key
       Employee Deferred Compensation Plan. In 1998, the Company provided for
       the future issuance of an additional 118,000 restricted shares under this
       plan. Compensation cost for the restricted shares to be issued in the
       future is being recognized over the vesting period. The vesting period
       ranges from 13 months to five years. Issuance of the shares is contingent
       upon continued employment of the individual and other factors as set
       forth in the agreement. For 70,000 of these shares, vesting also is
       contingent upon the achievement of certain performance objectives.

       No options were granted prior to the fiscal year ended December 31, 1996.
       The following tables summarize the Company's stock option activity for
       the years ended December 31, 1998 and 1997:

<TABLE> 
<CAPTION> 

                                                      Weighted       Price                                Price
                                                       Average       range                    Average     range
                                                      exercise     of stock                  exercise   of stock
                                              1998     price        options        1997       price      options
                                          ----------- ---------   ------------  -----------  --------- ------------ 
<S>                                       <C>         <C>         <C>           <C>          <C>       <C>         
Number of shares under stock options                                                       
    Granted                                  606,104      12.12   3.96-26.12        707,017       7.79   3.96-7.29
    Exercised                               (126,073)     13.99    .25-26.12       (150,273)      8.81   4.88-9.15
    Forfeited                                (15,429)     11.63        11.63           --          --       --          
                                          -----------             ------------  -----------            ------------ 
Outstanding at the end of the year         1,021,346      10.07    3.96 - 15        556,744       7.51   3.96-9.15
                                          ===========             ============  ===========            ============
</TABLE> 

       The weighted average fair value of options granted during the years ended
       December 31, 1998 and 1997 were $12.12 and $7.82 per share, respectively.

<TABLE> 
<CAPTION> 
                                             Options outstanding                       Options exercisable
                              --------------------------------------------------  -------------------------------
                                                                    Weighted                         Weighted
                                                  Weighted          Average                           Average
          Options               Number of       average life        exercise        Number of        exercise
        outstanding              options          remaining          price           options           price
----------------------------  ---------------  ----------------  ---------------  --------------   --------------
<S>                            <C>             <C>                <C>             <C>              <C>    
Price range:
       $3.96 - 4.88               101,829                3.2            4.41          101,829            4.41   
       $6.00 - 6.92               226,667                5.3            6.26          136,667            6.44   
       $9.15                      392,350                9.2            9.15          125,100            9.15   
       $11.25 - 11.63              93,500                9.3           11.59           16,700           11.63   
       $15                        207,000                9.3           15.00               --           15.00    
                              -----------                                          --------------
       $3.96 - 15               1,021,346                                             380,296   
                              ===========                                          ==============   
</TABLE> 

       At December 31, 1998, there were 195,748 additional shares available for
       grant under the Plans. The per share weighted-average fair value of stock
       options was $6.66 on the date of grant using the Black Scholes
       option-pricing model with the following weighted-average assumptions:
       expected dividend 

                                                                     (Continued)

<PAGE>
 
                              THE WMF GROUP, LTD.
                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)
 
       yield of 0 percent, risk-free interest rate of 4.75 percent, a volatility
       of 20 percent and an expected life of 9.2 years.

       The Company applies APB Opinion No. 25 in accounting for its Plan and,
       accordingly, no compensation cost has been recognized for certain of its
       stock options in the financial statements. Had the Company determined
       compensation cost based on the fair value at the grant date for its stock
       options under SFAS No. 123, the Company's net income would have been
       reduced to the pro forma amounts indicated below: 

<TABLE> 
<CAPTION> 
--------------------------------------------------------------------------------------------
                                                                 1998             1997
--------------------------------------------------------------------------------------------
<S>                                 <C>                  
Net income (loss)                   As reported          $     (33,322)          $2,442
--------------------------------------------------------------------------------------------
                                    Pro forma                  (34,154)           2,244
--------------------------------------------------------------------------------------------
Net income (loss) per share         As reported                  (6.38)            0.55
--------------------------------------------------------------------------------------------
                                    Pro forma                    (6.54)            0.50
--------------------------------------------------------------------------------------------
</TABLE> 


       Pro forma net income reflects only options granted since December 31,
       1996. Therefore, the full impact of calculating compensations cost for
       stock options under SFAS 123 is not reflected in the proforma net income
       amounts presented above because compensation cost is reflected over the
       options' vesting period of five years.


(18)   Earnings per share

       The following is the computation of the Company's basic and diluted
       earnings per share for the years ended December 31, 1998 and 1997, the
       period April 1, 1996 to December 31, 1996, and the period January 1, 1996
       to March 31, 1996:


                                                                     (Continued)
<PAGE>
 
<TABLE> 
<CAPTION> 

                                                1998                                     1997
                            -------------------------------------------  ----------------------------------------

                                 Net                        Per share        Net                      Per share
                                 loss           Shares       amount         income        Shares        amount
                            ------------     ------------------------------------------  ------------------------
<S>                         <C>                 <C>         <C>          <C>              <C>        <C> 
Basic EPS                   $ (33,322)           5,224         (6.38)    $   2,442         4,272     $     0.57
Effect of dilutive
    securities options             --               --            --            --           180           (.02)
                            ------------     -----------    -----------  ---------------   ----------   ---------
Diluted EPS                 $ (33,322)           5,224         (6.38)    $   2,442         4,452     $     0.55
                            ============     ===========    ===========  ===============   ==========   =========

<CAPTION> 
                                           Period April 1 to                         Period January 1 to
                                           December 31, 1996                           March 31, 1996
                            ---------------------------------------------   -------------------------------------
                                 Net                        Per share        Net                      Per share
                                income          Shares       amount         income        Shares        amount
                            ------------     ------------------------------------------  ------------------------
<S>                         <C>              <C>            <C>          <C>              <C>        <C>   
Basic EPS                   $   1,155            4,217          0.27     $     305         4,217     $     0.07
Effect of dilutive
    securities options             --               --            --            --            --             -- 
                            ------------     -----------    -----------  ---------------   ----------   ---------
Diluted EPS                 $   1,155            4,217          0.27     $     305         4,217     $     0.07
                            ============     ===========    ===========  ===============   ==========   =========
</TABLE> 

(19)   Pro Forma Presentation (Unaudited)

       The unaudited pro forma income statement has been presented to reflect
       results of operations for the twelve months ended December 31, 1996 as if
       the acquisition of Holdings by NHP had occurred on January 1, 1996. The
       adjustments to the period April 1, 1996, to December 31, 1996, include
       (1) income from January 1, 1996, through March 31, 1996, of the acquired
       entity, and (2) an additional three months of amortization of the
       purchase accounting adjustments for the period January 1, 1996, through
       March 31, 1996. The following table summarizes these pro forma
       adjustments: 





                                                                     (Continued)
<PAGE>
 

                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)


<TABLE> 
<CAPTION> 

                                                  Historical                                      
                                      -----------------------------------                        Pro forma 
                                       For the period     For the period          Three        for the period
                                      April 1, 1996 to    January 1, 1996         months         year ended
                                        December 31,      to March 31,          additional      December 31,
                                           1996               1996             amortization         1996
                                      --------------     ----------------     --------------   --------------
<S>                                  <C>                 <C>                  <C>              <C> 
Revenue                              $     23,473               6,828                 --            30,301
                                      --------------     ----------------     --------------   --------------
Amortization/depreciation                   3,982                 551                575             5,108
Other expenses                             18,336               5,972                 --            24,308
                                      --------------     ----------------     --------------   --------------
                    Total                  22,318               6,523                575            29,416
                                      --------------     ----------------     --------------   --------------
                    Net income       $      1,155                 305               (575)              885
                                      ==============     ================     ==============   ==============
</TABLE> 

(20)   Recapitalization Plan

       (A) Sale of Approximately $16.7 Million of Class A Stock to the Company's
           Major Shareholders

           On December 31, 1998, the Company's three largest shareholders
           purchased a total of 3,635,972 shares of a new class of capital stock
           called the Class A Non-Voting Convertible Preferred Stock ("Class A
           Stock") for an aggregate purchase price of approximately $16.7
           million.

           On January 14, 1999, each outstanding share of Class A Stock was
           converted into one share of the Company's common stock, after the
           Federal Trade Commission informed the Company that it would not
           object to the conversion. As a result of the conversion, the
           Company's three largest shareholders received a total of 3,635,972
           shares of common stock.

           Also as part of the transaction, the warrants to purchase 1,200,000
           shares of common stock at a price of $11.25 per share that were
           received in connection with the financing of the purchase of $20,000
           of the Company's subordinated notes by COMIT on September 4, 1998
           were surrendered. In addition, the Company's three largest
           shareholders agreed to a stand-by purchase commitment, described
           below.

           The Company has applied the proceeds of the sale of shares of Class A
           Stock to partially repay the subordinated notes.





                                                                     (Continued)
<PAGE>
 
                              THE WMF GROUP, LTD.

                  Notes to Consolidated Financial Statements
            (dollars in thousands, except share and per share data)


          Because of their participation in this transaction, the Company's
          three largest shareholders agreed not to exercise, transfer or acquire
          any rights during the rights offering.

          The Company's three largest shareholders further agreed to a standby
          commitment to purchase up to 664,028 shares of the Company's capital
          stock for up to $3,300 following the rights offering, as described
          below.

     (B)  PUBLIC RIGHTS OFFERING

          The Company issued to all of its shareholders of record as of February
          1, 1999, 1.072 transferable rights for each share of common stock held
          by them on that date. Each right entitled its holder to purchase one
          share of common stock for $5.00. The rights expired on March 8, 1999.

          Through the rights offering the Company sold a total of 1,482,271
          shares of common stock for total proceeds of approximately $7,400. On
          March 19, 1999, the Company's three largest shareholders completed the
          purchase of a total of 664,028 shares of the Company's common stock
          pursuant to the standby commitment for total proceeds to the Company
          of approximately $3,300.

          The Company applied the proceeds form the rights offering first to
          repay the remaining subordinated notes held by COMIT.

                                      F-34