UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

   
                                   FORM 10-Q/A
                                (Amendment No. 2)
    

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934

    For the quarterly period ended September 30, 1998

                                       OR

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


                          Commission File No. 001-14043

                          OCWEN ASSET INVESTMENT CORP.
                          ----------------------------
             (Exact name of registrant as specified in its charter)


Virginia                                                              65-0736120
--------                                                              ----------
(State or other jurisdiction                                     (I.R.S.Employer
of incorporation or organization)                            Identification No.)


                              The Forum, Suite 1000
                              ---------------------
         1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401
         ---------------------------------------------------------------
               (Address of principal executive offices) (Zip Code)


                                 (561) 682-8000
                                 --------------
              (Registrant's telephone number, including area code)



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


Number of shares of Common Stock,  $.01 par value,  outstanding  at the close of
business on November 13, 1998: 18,965,000 shares.

<PAGE>
   
                          OCWEN ASSET INVESTMENT CORP.
                                    FORM 10-Q/A

                                    I N D E X

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


                                                                            Page
                                                                            ----
PART I - FINANCIAL INFORMATION

Item 1.  Interim Consolidated Financial Statements........................    3

         Consolidated Statements of Financial Condition...................    3

         Consolidated Statements of Operations............................    4

         Consolidated Statements of Changes in Shareholders' Equity.......    5

         Consolidated Statements of Cash Flows............................    6

         Notes to Consolidated Financial Statements.......................    7

Item 2.  Management's Discussion and Analysis of Financial Condition
         and Results of Operations........................................   12

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.......   41

PART II - OTHER INFORMATION

Item 2.  Changes in Securities............................................   44

Item 6.  Exhibits and Reports on Form 8-K.................................   44

Signature.................................................................   45

    
                                       2

<PAGE>
<TABLE>
<CAPTION>
                                      PART I - FINANCIAL INFORMATION
                                       OCWEN ASSET INVESTMENT CORP.

                              CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                                                                           September 30,     December 31,
                                                                                1998             1997
                                                                            (Unaudited)       (Audited)
                                                                           -------------    -------------
<S>                                                                        <C>              <C>
   
ASSETS:
Cash and amounts due from depository institutions ......................   $   3,135,888    $     331,047
Interest earning deposits ..............................................      15,193,815       48,346,076
Securities available for sale, at market value .........................     395,495,423      146,026,907
Commercial and multi-family loan portfolio, net ........................      55,116,284        9,481,436
Residential loan portfolio, net ........................................     197,495,230        6,350,043
Discount loan portfolio, net ...........................................       8,589,370       26,978,888
Investment in real estate, net .........................................     209,851,125       45,430,039
Principal and interest receivable ......................................       5,967,421        2,518,272
Deposits on pending asset acquisitions .................................              --        1,000,000
Other assets ...........................................................      19,553,108        1,540,633
                                                                           -------------    -------------
                   Total assets ........................................   $ 910,397,664    $ 288,003,341
                                                                           =============    =============
    

LIABILITIES:
    Securities sold under agreements to repurchase .....................   $ 143,058,656    $          --
    Obligation outstanding under line of credit ........................     189,136,665               --
    Obligation outstanding under line of credit - secured by real estate     142,444,500               --
    11.5% Notes due 2005 ...............................................     143,000,000               --
    Dividends and distributions payable ................................       9,140,443        7,458,750
    Accrued expenses, payables and other liabilities ...................      12,267,243        6,344,783
                                                                           -------------    -------------
                   Total liabilities ...................................     639,047,507       13,803,533
                                                                           -------------    -------------

Minority interest ......................................................      28,369,583        2,941,541
                                                                           -------------    -------------

SHAREHOLDERS' EQUITY:
    Preferred stock, $.01 par value; 25,000,000 shares authorized;
       0 shares issued and outstanding .................................              --               --
     Common stock, $.01 par value; 200,000,000 shares authorized;
       18,965,000 shares issued and outstanding ........................         189,650          189,650
    Additional paid-in capital .........................................     294,461,433      280,503,838
    Distributions in excess of earnings ................................     (35,982,904)      (2,107,331)
    Accumulated other comprehensive income:
         Net unrealized loss on securities available for sale ..........     (13,719,114)      (7,327,890)
         Accumulative translation adjustments ..........................      (1,968,491)              --
                                                                           -------------    -------------
         Total other comprehensive income ..............................     (15,687,605)      (7,357,890)
                                                                           -------------    -------------
               Total shareholders' equity ..............................     242,980,574      271,258,267
                                                                           -------------    -------------
                   Total liabilities and shareholders' equity ..........   $ 910,397,664    $ 288,003,341
                                                                           =============    =============

          THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                     3

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                    PART I - FINANCIAL INFORMATION
                                                     OCWEN ASSET INVESTMENT CORP.

                                                CONSOLIDATED STATEMENTS OF OPERATIONS
                                                             (UNAUDITED)

                                                         For the Three       For the Three       For the Nine      For the Period
                                                         Months ended        Months ended        Months ended      May 14, 1997 to
                                                      September 30, 1998  September 30, 1997  September 30, 1998  September 30, 1997
                                                      ------------------  ------------------  ------------------  ------------------
<S>                                                      <C>                 <C>                <C>                  <C>
Interest income:
  Repurchase agreements and interest bearing deposits    $    713,966        $  2,753,729       $  1,009,614         $  4,150,857
  Securities held for trading ........................             --                  --            106,892                   --
  Securities available for sale ......................     13,806,940           2,492,172         29,990,157            3,497,356
  Commercial and multifamily loans ...................      1,512,508                  --          3,786,210                   --
  Residential loans ..................................      3,862,725               5,565          6,475,756                5,565
  Discount loans .....................................        393,132             260,471          1,719,330              340,966
                                                         ------------        ------------       ------------         ------------
                                                           20,289,271           5,511,937         43,087,959            7,994,744
                                                         ------------        ------------       ------------         ------------
Interest expense:                                                                                                 
  Securities sold under agreements to repurchase .....      3,082,025                  --          7,048,840                   --
  Obligations outstanding under lines of credit ......      3,828,297                  --          6,102,066                   --
  11.5% Notes due 2005 ...............................      3,687,347                  --          3,687,347                   --
                                                         ------------        ------------       ------------         ------------
                                                           10,597,669                  --         16,838,253                   --
                                                         ------------        ------------       ------------         ------------
                                                                                                                  
  Net interest income before provision for loan losses      9,691,602           5,511,937         26,249,706            7,994,744
Provision for loan losses ............................        350,682                  --            556,731                   --
                                                         ------------        ------------       ------------         ------------
  Net interest income after provision for loan losses.      9,340,920           5,511,937         25,692,975            7,994,744
                                                         ------------        ------------       ------------         ------------
                                                                                                                  
Real estate-operating income:                                                                                     
  Rental income ......................................      8,035,170             107,668         14,584,661              107,668
  Other ..............................................          1,508               7,298             28,343                7,298
                                                         ------------        ------------       ------------         ------------
                                                            8,036,678             114,966         14,613,004              114,966
                                                         ------------        ------------       ------------         ------------
Real estate-operating expenses:                                                                                   
  Rental operation ...................................      3,626,054              29,039          6,901,905               29,039
  Depreciation & amortization ........................      1,159,652              21,386          2,222,573               21,386
  Interest ...........................................      2,707,478                  --          4,396,581                   --
                                                         ------------        ------------       ------------         ------------
                                                            7,493,184              50,425         13,521,059               50,425
                                                         ------------        ------------       ------------         ------------
Real estate income, net ..............................        543,494              64,541          1,091,945               64,541
                                                         ------------        ------------       ------------         ------------
                                                                                                                  
Other expenses (income):                                                                                          
  Management fees ....................................      1,576,379             719,914          4,110,011            1,060,914
  Due diligence expenses .............................        567,981             237,891            935,625              285,812
  Foreign currency gain ..............................             --              (2,497)          (116,953)              (2,497)
  Other ..............................................      1,067,996             270,898          1,644,090              304,562
                                                         ------------        ------------       ------------         ------------
                                                            3,212,356           1,226,206          6,572,773            1,648,791
                                                         ------------        ------------       ------------         ------------
                                                                                                                  
Net losses on securities and derivatives .............     15,646,384                  --         32,723,429                   --
                                                         ------------        ------------       ------------         ------------
                                                                                                                  
  (Loss) income before minority interest .............     (8,974,326)          4,350,272        (12,511,282)           6,410,494
Minority interest in net loss of 
  consolidated subsidiary.............................        720,513                  --            399,359                   --
                                                         ------------        ------------       ------------         ------------

  Net (loss) income before extraordinary items .......     (8,253,813)          4,350,272        (12,111,923)           6,410,494
                                                                                                                  
Extraordinary gain on repurchase of debt .............        615,047                  --            615,047                   --
                                                         ------------        ------------       ------------         ------------
     Net (loss) income ...............................   $ (7,638,766)       $  4,350,272       $(11,496,876)        $  6,410,494
                                                         ============        ============       ============         ============
                                                                                                                  
Basic (loss) earnings per share:                                                                                  
     (Loss) income before extraordinary item .........   $      (0.43)       $       0.23       $      (0.64)        $       0.34
     Extraordinary item ..............................           0.03                  --               0.03                   --
                                                         ------------        ------------       ------------         ------------
     Net (loss) income ...............................   $      (0.40)       $       0.23       $      (0.61)        $       0.34
                                                         ============        ============       ============         ============
                                                                                                                  
Diluted (loss) earnings per share:                                                                                
     (Loss) income before extraordinary item .........   $      (0.43)       $       0.22       $      (0.64)        $       0.33
     Extraordinary item ..............................           0.03                  --               0.03                   --
                                                         ------------        ------------       ------------         ------------
     Net (loss) income ...............................   $      (0.40)       $       0.22       $      (0.61)        $       0.33
                                                         ============        ============       ============         ============
                                                                                                                  
Weighted average shares outstanding:                                                                              
     Basic ...........................................     18,965,000          19,125,000         18,965,000           19,125,000
     Diluted .........................................     18,965,000          19,715,712         18,965,000           19,620,046

                THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                                           4
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                            PART I - FINANCIAL INFORMATION
                                             OCWEN ASSET INVESTMENT CORP.

                              CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                     FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
                                 AND FOR THE PERIOD MAY 14, 1997 TO DECEMBER 31, 1997

   
                                                                                        Other Comprehensive Income
                                                                                        --------------------------
                                                                                        Net unrealized
                                                                                          loss on    
                                        Common stock                      Distributions  securities     Cumulative
                                   ----------------------   Additional     in excess      available     translation
                                     Shares      Amount   Paid-in-capital  of earnings    for sale      adjustment       Total
                                   -----------  --------- --------------- ------------  ------------    -----------  -------------
<S>                                 <C>         <C>        <C>            <C>           <C>             <C>          <C>          
Issuance of common stock .......    19,125,000  $ 191,250  $ 283,496,750  $         --  $         --    $        --  $ 283,688,000
    

Retirement of common stock .....      (160,000)    (1,600)    (2,992,912)           --            --             --     (2,994,512)

Net income .....................            --         --             --    11,791,518            --             --     11,791,518

Dividends ......................            --         --             --   (13,898,849)           --             --    (13,898,849)

Change in unrealized loss ......            --         --             --            --    (7,327,890)            --     (7,327,890)
                                   -----------  ---------  -------------  ------------  ------------    -----------  -------------

Balances at December 31, 1997 ..    18,965,000    189,650    280,503,838    (2,107,331)   (7,327,890)            --    271,258,267

Capital contribution ...........            --         --     13,957,595            --            --             --     13,957,595

Net loss .......................            --         --             --   (11,496,876)           --             --    (11,496,876)

Dividends ......................            --         --             --   (22,378,697)           --             --    (22,378,697)

Change in unrealized loss ......            --         --             --            --    (6,391,224)            --     (6,391,224)

Change in cumulative translation
  adjustment ...................            --         --             --            --            --     (1,968,491)    (1,968,491)
                                   -----------  ---------  -------------  ------------  ------------    -----------  -------------

Balances at September 30, 1998      18,965,000  $ 189,650  $ 294,461,433  $(35,982,904) $(13,719,114)   $(1,968,491) $ 242,980,574
                                   ===========  =========  =============  ============  ============    ===========  =============

                       THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                  5
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
                                          PART I - FINANCIAL INFORMATION
                                           OCWEN ASSET INVESTMENT CORP.

                                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                   (UNAUDITED)
                                                                                   For the         For the Period
                                                                                  Nine Months      May 14, 1997
                                                                                     ended               to
                                                                                 September 30,     September 30,
                                                                                     1998               1997
                                                                                 -------------    -------------
<S>                                                                              <C>              <C>
Cash flows from operating activities:
   Net (loss) income .........................................................   $ (11,496,876)   $   6,410,494
     Adjustments to reconcile net (loss) income to net cash provided by
     operating activities:
       Premium amortization, net .............................................       7,992,956        1,422,847
       Depreciation ..........................................................       2,222,573           21,386
       Foreign exchange gain .................................................        (116,953)              --
       Cumulative translation adjustment .....................................      (1,968,491)              --
       Extraordinary gain on extinguishment of debt ..........................        (615,047)              --
       Provision for loan losses .............................................         556,731               --
       Proceeds received on sale of securities held for trading ..............      39,408,287               --
       Net losses on securities and derivatives ..............................      32,723,429               --
       Increase in interest receivable .......................................      (3,449,149)      (1,897,189)
       Increase in other assets ..............................................     (20,108,845)        (535,106)
       Decrease in accrued expenses, payables and other liabilities ..........      (1,071,622)       2,039,437
       Minority interest in net loss of operating partnership ................        (399,359)              --
                                                                                 -------------    -------------
Net cash provided by operating activities ....................................      43,677,634        7,461,869
                                                                                 -------------    -------------
Cash flows from investing activities:
   Purchases of securities available for sale ................................    (357,494,324)     (92,295,129)
   Maturities and principal payments received on securities available for sale      30,388,130        2,957,402
   Principal payments received from discount loans ...........................         973,325            6,915
   Principal payments received from loans ....................................      20,344,923               --
   Purchase of loans .........................................................    (257,818,817)      (3,773,321)
   Purchase of discount loans ................................................         (10,031)     (25,191,206)
   Payment received from sale of loans .......................................         111,109               --
   Investment in real estate .................................................    (149,017,946)     (26,285,103)
   Deposits on pending asset acquisitions ....................................         996,500       (6,184,300)
                                                                                 -------------    -------------
Net cash (used) by investing activities ......................................    (711,527,131)    (150,764,742)
                                                                                 -------------    -------------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net of offering costs .............              --      283,688,000
   Dividend payments on common stock .........................................     (22,378,697)      (1,912,500)
   Proceeds received from sale of securities to affiliates 
     in excess of market value ...............................................      13,957,595               --
   Proceeds from issuance of Notes ...........................................     150,000,000               --
   Repurchase of Notes .......................................................      (6,309,944)              --
   Proceeds from sale of operating partnership units .........................      27,593,302               --
   Increase in securities sold under agreements to repurchase ................     143,058,656               --
   Increase in obligations outstanding under lines of credit .................     331,581,165               --
                                                                                 -------------    -------------
Net cash provided by financing activities ....................................     637,502,077      281,775,500
                                                                                 -------------    -------------

Net (decrease) increase in cash and cash equivalents .........................     (30,347,420)     138,472,627
Cash and cash equivalents at beginning of period .............................      48,677,123               --
                                                                                 -------------    -------------
Cash and cash equivalents at end of period ...................................   $  18,329,703    $ 138,472,627
                                                                                 =============    =============
Reconciliation of cash and cash equivalents at end of period:
   Cash and amounts due from depository institutions .........................       3,135,888           10,850
   Interest bearing deposits .................................................      15,193,815        8,461,777
   Repurchase agreements .....................................................              --      130,000,000
                                                                                 -------------    -------------
     Total ...................................................................   $  18,329,703    $ 138,472,627
                                                                                 =============    =============
Supplemental schedule of non-cash financing activities:
  Interest paid ..............................................................   $  16,204,823    $          --
Non-cash activities:
  Loans transferred through the foreclosure of a related
  Mortgage loan to real estate owned .........................................      17,625,713               --
  Change in unrealized (loss) gain on securities available for sale ..........      (6,391,224)       1,605,820


             THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS


                                                        6
</TABLE>
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998

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

NOTE 1            BASIS OF PRESENTATION

The accompanying  unaudited consolidated financial statements have been prepared
in conformity  with the  instructions to Form 10-Q and Article 10, Rule 10-01 of
Regulation  S-X  for  interim  financial  statements.  Accordingly,  they do not
include all of the  information  and  footnotes  required by generally  accepted
accounting   principles   ("GAAP")  for  complete  financial   statements.   The
consolidated financial statements include the accounts of Ocwen Asset Investment
Corp.  ("OAC" or the  "Company")  and its  subsidiaries.  The interim  financial
information  should be read in conjunction with the Company's 1997 Annual Report
on Form 10-K.

OAC  directly  owns  two  qualified  real  estate   investment   trust  ("REIT")
subsidiaries,  Ocwen General,  Inc. ("General Partner") and Ocwen Limited,  Inc.
("Limited  Partner"),  among others.  At September 30, 1998, the General Partner
and the Limited Partner owned 0.9% and 90.4%, respectively of Ocwen Partnership,
L.P.  ("Operating  Partnership").  The minority  interest at September  30, 1998
represents an 8.7% interest (1,808,733 units) in the Operating  Partnership held
by  Investors   Mortgage  Insurance  Holding  Company  ("IMI"),  a  wholly-owned
subsidiary  of Ocwen  Financial  Corporation  ("OCN").  IMI also owns  1,540,000
shares, or 8.12 percent, of the Company's outstanding common stock.

In the opinion of management,  the accompanying financial statements contain all
adjustments,  consisting of normal and recurring accruals,  necessary for a fair
presentation of the Company's:

   o  financial  condition  at September  30, 1998 and  December  31, 1997,

   o  the  results  of its  operations  for the  three  and  nine  months  ended
      September 30, 1998;  and for the quarter ended  September 30, 1997 and the
      period May 14, 1997 to September 30, 1997,

   o  the  changes  in  shareholders'  equity for the nine  month  period  ended
      September  30, 1998 and for the period May 14, 1997 to December  31, 1997,
      and

   o  cash flows for the nine months ended September 30, 1998 and for the period
      May 14, 1997 to September 30, 1997.

Operating  results for the period ended  September 30, 1998 are not  necessarily
indicative of the results that may be expected for any other  interim  period or
the entire year ending December 31, 1998.

In preparing the consolidated  financial  statements,  management is required to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities at the dates of the  statements of financial  condition and revenues
and expenses for the periods  covered.  Actual  results  could differ from those
estimates and assumptions.


NOTE 2            ORGANIZATION AND RELATIONSHIPS

OAC was incorporated in the Commonwealth of Virginia on January 22, 1997 and was
initially  capitalized  on February  12, 1997  through the sale of 100 shares of
common  stock for $1,600.  On May 14,  1997,  the Company  completed  an initial
public offering ("IPO") with the sale of 19,125,000  shares of common stock, par
value $.01 per share,  at a price of $16.00 per share (before  underwriting  and
offering expenses),  and commenced  operations thereon. 

The  Company  has  entered  into  a  management  agreement  with  Ocwen  Capital
Corporation  ("OCC" or the "Manager"),  a wholly-owned  subsidiary of OCN, under
which OCC advises the Company on various  facets of its business and manages its
day-to-day  operations,  subject to the  supervision  of the Company's  Board of
Directors.  For its services,  OCC receives a quarterly  base  management fee of
0.25% per quarter


                                       7
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998

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

on average  invested  assets except for residential  mortgage  loans.  Effective
January 1, 1998, the base management fee for residential  loans,  was reduced to
0.25% per quarter of average net equity invested.  In addition,  OCC is entitled
to  receive  an annual  incentive  fee in an amount  equal to 25% of the  dollar
amount by which funds from  operations,  as adjusted,  exceeds  certain  defined
levels per the management agreement.

OCC has 1,912,500 options (478,125 of which vested in May 1998 and an additional
25% of which  vest each  year over the next  three  years) to  purchase,  at the
election of the Company, either shares of the Company or an equivalent number of
units in the Operating Partnership, at an exercise price of $16.00 per share.

The Company also has entered into servicing  agreements  with Ocwen Federal Bank
FSB ("OFB" or the "Bank"),  a wholly-owned  subsidiary of OCN, for the servicing
of all of the Company's mortgage loans. In addition, the Bank in its capacity as
servicer  or  special  servicer  receives  fees  from  certain   mortgage-backed
securities in which the Company owns a subordinate  or residual  interest.  As a
Special  Servicer,  the Bank provides asset  management and resolution  services
with respect to  defaulted  mortgage  loans  subject to the  Company's  right to
direct the foreclosure, the management and disposal of foreclosed properties and
all other actions that a servicer may take in connection with a defaulted loan.

On May 7, 1998, the Operating  Partnership  issued 1,473,733  additional limited
partnership  units  to IMI in  exchange  for a  capital  contribution  of  $24.5
million.  At  September  30,  1998,  IMI's  minority  interest in the  Operating
Partnership was 8.7 percent.

Also on May 7, 1998, the Company sold its entire portfolio of AAA-rated interest
only ("IO") and inverse  floating rate interest only  ("Inverse  IO") classes of
mortgage related  securities backed by single-family  residential loans (the "IO
Portfolio") to affiliates of the Company,  the Manager and OCN, for a cash price
of $54.6  million,  which  represents  the IO  Portfolio's  amortized  cost plus
accrued  interest and exceeded the IO Portfolio's  market value by approximately
$14.0 million.  Because the IOs were being sold to a principal  shareholder  and
another related party, the $14.0 million by which amortized cost exceeded market
value  was  recorded  as a charge  to  earnings  and has been  reflected  on the
Company's books as a capital contribution.


NOTE 3            RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial  Accounting Standards Board ("FASB") issued SFAS No.
133,  "Accounting  for Derivative  Instruments  and Hedging  Activities",  which
amends FASB  Statements No. 52 and 107, and supersedes  FASB  Statements No. 80,
105 and 119. SFAS No. 133  establishes  accounting  and reporting  standards for
derivative  instruments,  including certain derivative  instruments  embedded in
other contracts and for hedging activities. SFAS No. 133 requires that an entity
recognize all  derivatives  as either assets or  liabilities in the statement of
financial condition and measure those instruments at fair value. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
Initial application of SFAS No. 133 should be as of the beginning of an entity's
fiscal quarter; on that date, hedging  relationships must be designated anew and
documented  pursuant to the provisions of SFAS No. 133.  Earlier  application of
SFAS No. 133 is  encouraged  but is  permitted  only as of the  beginning of any
fiscal  quarter that begins after  issuance of SFAS No. 133. The Company has not
yet determined the impact on its results of  operations,  financial  position or
cash flows as a result of implementing SFAS No. 133.

In October 1998, the FASB issued SFAS No. 134,  "Accounting for  Mortgage-Backed
Securities  Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage  Banking  Enterprise",  an amendment of FASB  Statement  No. 65. This
statement is effective for the first fiscal quarter beginning after December 15,
1998. This Statement standardizes how mortgage banking firms account for certain
securities  and other  interests they retain after  securitizing  mortgage loans
that were held for sale.  Adoption of this pronouncement is not expected to have
a material impact on the Company's consolidated financial statements.


                                       8
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998

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

NOTE 4            INCOME TAXES

The Company  qualifies as a REIT under  Sections 856 through 860 of the Internal
Revenue Code of 1986,  as amended (the  "Code").  A REIT will  generally  not be
subject to  federal  income  taxation  on that  portion  of its  income  that is
distributed to shareholders if it distributes at least 95% of its taxable income
for the year by the due date of its federal  income tax return and complies with
certain other requirements.  Accordingly, no provision has been made for federal
income  taxes  for  the  Company  and  its   subsidiaries  in  the  accompanying
consolidated financial statements.

NOTE 5            COMPREHENSIVE INCOME

Comprehensive income is defined as the change in equity of a business enterprise
during a period as a result of transactions  and other events and  circumstances
during  such  period,   excluding  those  resulting  from   investments  by  and
distributions  to owners.  SFAS No. 130 requires  that  comprehensive  income be
presented  beginning  with net income and adding the  elements of  comprehensive
income not  included  in the  determination  of net income in order to arrive at
comprehensive income.

The following table computes comprehensive income for the periods indicated.

<TABLE>
<CAPTION>
                                                    For the              For the             For the         For the Period
                                                 Three Months         Three Months         Nine Months        May 14, 1997
                                                     Ended                Ended               Ended                to
                                               September 30, 1998   September 30, 1997  September 30, 1998  September 30, 1997
                                               ------------------   ------------------  ------------------  ------------------
<S>                                               <C>                 <C>                 <C>                 <C>         
Net (loss) income before extraordinary item..     $ (8,253,813)       $  4,350,272        $(12,111,923)       $  6,410,494
Other comprehensive (loss) income:                                                                          
   Foreign currency translation adjustment...         (916,525)                 --          (1,968,491)                 --
Unrealized losses on securities:                                                                            
   Unrealized (losses) gains arising                                                                        
    during the period .......................      (27,376,733)           (177,989)        (37,044,667)          1,605,820
   Adjustment for losses included in                                                                   
    net income ..............................       13,576,398                  --          30,653,443                  --
                                                  ------------        ------------        ------------        ------------
       Net unrealized (losses) gains ........      (13,800,335)           (177,989)         (6,391,224)          1,605,820

       Other comprehensive (loss) income ....      (14,716,860)           (177,989)         (8,359,715)          1,605,820
                                                  ------------        ------------        ------------        ------------
Comprehensive (loss) income before                                                                          
    extraordinary  item .....................     $(22,970,673)       $  4,172,283        $(20,471,638)       $  8,016,314
Extraordinary item ..........................          615,047                  --             615,047                  --
                                                  ------------        ------------        ------------        ------------
Comprehensive (loss) income .................     $(22,355,626)       $  4,172,283        $(19,856,591)       $  8,016,314
                                                  ============        ============        ============        ============
</TABLE>

NOTE 6            RISK MANAGEMENT INSTRUMENTS

The Company enters into derivatives,  particularly interest rate swaps, to hedge
interest rate exposures arising from mismatches  between assets and liabilities.
Under interest rate swaps, the Company agrees with other parties to exchange, at
specified  intervals,   the  difference  between  fixed-rate  and  floating-rate
interest amounts  calculated by reference to an agreed notional principal amount
and the London Interbank Offered Rate ("LIBOR").  The terms of these swaps allow
the  Company to receive a floating  rate of  interest  equal to LIBOR and to pay
fixed  interest  rates.

   
The  swaps  are used to hedge  current  LIBOR  rate  debt  incurred  to fund the
Company's  acquisitions of real estate and subordinate and residual  securities.
None of the Company's swaps are held for trading  purposes.  As of September 30,
1998 the  Company  held  swaps with a notional  amount of  approximately  $200.8
million.  The fair  value of the swaps are not  recognized  in the  Consolidated
Financial Statements.
    

                                       9
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998

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

   
To qualify for hedge accounting the derivative must meet two criteria:

      o  the Company is exposed to interest rate risk as the result of a debt it
         has incurred; and

      o  the interest rate protection  agreement reduces the Company's  exposure
         to such risk.
    

If an interest  rate  protection  agreement  does not qualify as a hedge,  it is
accounted for as an investment at fair value,  with any gain or loss included as
a component of current income.

The  Company  is exposed to credit  loss in the event of  nonperformance  by the
counterparties  to the interest  rate  agreements  should the floating  interest
rates received by the Company exceed the fixed interest rates paid by it. All of
the  counterparties  have  long-term debt ratings of A+ or above by Standard and
Poor's and A1 or above by Moody's.  Although a swap generally may not be sold or
transferred without the consent of the counterparty, management does not believe
that this consent would be withheld.  Although  none of the Company's  swaps are
exchange-traded,  there are a number of financial  institutions which enter into
these  types  of  transactions  as  part of  their  day-to-day  activities.

The following table  indicates the interest rate swaps  outstanding at September
30, 1998:

<TABLE>
<CAPTION>
                  Notional       LIBOR                       Floating Rate at
    Maturity       Amount        Index       Fixed Rate        End of Period      Fair Value
    --------       ------        -----       ----------        -------------      ----------
                                   (In Thousands)
      <S>        <C>            <C>                <C>             <C>            <C>       
      2003       $  100,000     1-month            5.75%           5.59%          $  (3,273)
      2001           17,000     1-month            6.00            5.66                (492)
      2001           75,000     1-month            6.00            5.64              (2,158)
      2002            8,780     1-month            6.04            5.66                (341)
                 ----------                                                       ----------
                  $ 200,780                                                       $  (6,264)
                  =========                                                       =========
</TABLE>

   
The Company has a foreign  currency swap contract to hedge currency  exposure in
connection  with its  investment  in residual  interests  backed by  residential
mortgage  loans  originated in the United  Kingdom  ("U.K."),  currently held by
OAIC-UK, a wholly owned subsidiary of the Company.  The purpose of the Company's
foreign currency hedging activities is to protect the Company from the risk that
the eventual  dollar net cash  inflows will be adversely  affected by changes in
exchange  rates.  Under the terms of the  agreement,  the Company will settle in
U.S. dollars on January 29, 1999, on the difference between the exchange rate on
the effective date of the contract and the exchange rate on January 29, 1999, on
a notional  amount of 14.7 million  British  Pounds  Sterling.  At September 30,
1998, the fair value of the foreign currency contract was ($1.4) million.  Gains
and  losses  on  foreign  currency  translation  from  operations  for which the
functional currency is other than the U.S. dollar,  together with related hedged
item, are reported in Shareholders' Equity.

The Company also enters into U.S.  Treasury  interest rate futures  contracts as
part of its  overall  interest  rate risk  management  activity.  Interest  rate
futures  contracts  are  commitments  to  either  purchase  or  sell  designated
financial  instruments at a future date for a specified price and may be settled
in cash or through delivery. U.S. Treasury futures have been sold by the Company
to hedge the risk of a  reduction  in the market  value of  fixed-rate  mortgage
loans and certain fixed-rate  mortgage-backed  and related securities  available
for sale in a rising interest rate environment.  Gains and losses on the futures
contracts  are recorded in the  Consolidated  Statement  of Financial  Condition
offsetting the item being hedged.
    

Terms and other  information on interest rate futures  contracts sold short were
as follows at the dates indicated:


                                Maturity      Notional Principal     Fair Value
                                --------      ------------------     ----------
                                            (Dollars in Thousands)
SEPTEMBER 30, 1998:
U.S. Treasury futures......     Dec. 1998          $ 13,400            $  345


                                       10
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                               SEPTEMBER 30, 1998

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

The fair value of the  interest  rate swaps,  the  foreign  currency  swap,  and
interest rate futures contracts  represent the estimated amount that the Company
would receive or pay to terminate these  agreements  taking into account current
interest and exchange rates.  Market quotes are available for these  agreements.
       

NOTE 7            SECURITIES AVAILABLE FOR SALE

Securities are classified as available for sale when in  management's  judgement
they may be sold in response to or in  anticipation of changes in interest rates
and resulting  prepayment risk, or other factors.  Available for sale securities
are  carried at fair  value.  Unrealized  gains and losses on these  securities,
along with any unrealized gains and losses on related derivatives,  are reported
in shareholders' equity. Securities that the Company has the positive intent and
ability to hold to maturity are classified as  held-to-maturity  and are carried
at  amortized  cost.  At  September  30,  1998,  the Company  had no  securities
classified  as  held-to-maturity.  Interest and dividend  income on  securities,
including  amortization of premiums and accretion of discounts,  are reported in
earnings.  Interest income is recognized using the interest method. The specific
identification method is used to determine realized gains and losses on sales of
securities,  which are reported in earnings.  The carrying  value of  individual
securities   is   reduced   through   write-downs   in   earnings   to   reflect
other-than-temporary impairments in value.

NOTE 8            LOANS

Loans are generally  reported at the principal  amount  outstanding,  net of the
allowance for loan losses,  purchase  premium or discount,  and any net deferred
loan fees. Interest income is recognized using the interest method or on a basis
approximating  a level  yield  over the term of the loan.  Loans  are  placed on
nonaccrual  status when the loan is past due 90 days or more.  Interest  accrued
but not collected at the date a loan is placed on nonaccrual  status is reversed
against interest income. In addition, the amortization of net deferred loan fees
is suspended  when a loan is placed on  nonaccrual  status.  Interest  income on
nonaccrual  loans is recognized  only to the extent  received in cash.  However,
where  there  is  doubt  regarding  the  ultimate  collectibility  of  the  loan
principal,  cash  receipts,  whether  designated  as principal or interest,  are
thereafter  applied to reduce the carrying value of the loan. Loans are restored
to accrual status only when interest and principal  payments are brought current
and future payments are reasonably assured.


NOTE 9            COMMITMENTS

   
As of November 16, 1998, OAC had no outstanding  commitments to acquire  assets.
All other  previously  announced  commitments or negotiations  have been closed,
discontinued,  or failed to close.  The unfunded  balances on the commercial and
multi-family loan portfolio amounted to $65.3 million as of October 31, 1998 and
are expected to be funded through  working  capital and/or a $200.0 million line
of credit  secured by certain of the  Company's  investments  in real estate and
commercial and multi-family loans.
    

                                       11

<PAGE>
ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

General

The Company is a Virginia corporation, formed in the first quarter of 1997, that
has  elected to be taxed as a REIT under  Sections  856 through 860 of the Code.
The Company's primary investments include:

   o  commercial  and  residential   subordinate   and  residual   interests  in
      collateralized mortgage obligations and other mortgage-related  securities
      (collectively, "mortgage-related securities"); and
   
   o  underperforming or otherwise  distressed  commercial and multi-family real
      property, including properties acquired by mortgage lenders at foreclosure
      or through deed-in-lieu thereof.

The Company also has invested, by way of purchase or origination,  in other real
estate related assets including:

   o  commercial,   multifamily  and  single-family  mortgage  loans,  including
      construction and renovation loans and mezzanine loans,  which comprise the
      Company's loan portfolio, and
 
   o  nonperforming  and  subperforming  mortgage  loans,  which  generally  are
      purchased at a discount to their  aggregate  unpaid  principal  amount and
      comprise the Company's discount loan portfolio.

RECENT OPERATING LOSSES; DISCONTINUANCE OF INVESTMENT ACTIVITIES

The Company  reported a loss of $7.6 million or ($0.40) per fully  diluted share
for the three months  ended  September  30, 1998 and a loss of $11.5  million or
($0.61) per fully  diluted  share for the nine months ended  September 30, 1998.
These losses were primarily  attributable  to: (i) an aggregate of $17.1 million
of losses  incurred in  connection  with the  Company's  portfolio  of AAA-rated
interest-only ("IO") and inverse interest-only  ("Inverse IO") securities backed
by single-family  residential  loans (the "IO  Portfolio"),  which was adversely
affected  in the first  quarter of 1998 by an  increase  in  prepayments  of the
underlying  mortgages in response to a decrease in market  interest  rates;  and
(ii)  $15.6  million  of  losses  on  subordinate  and  residual   interests  in
mortgage-related  securities and derivatives (consisting of a $13.6 million loss
on  securities  and a $2.0 million loss on  derivatives),  which were  adversely
affected by  increased  prepayments  of the  underlying  mortgage  loans and the
substantial volatility in U.S. and foreign securities markets which has resulted
in widening  mortgage spreads and declining  market  liquidity.  Moreover,  as a
result of these conditions, in recent months there has been a general "flight to
quality" by investors, with the result that the market or demand for subordinate
and residual  interests in  mortgage-related  securities has been  substantially
reduced or eliminated.  These factors have adversely affected the operations and
financial  condition of numerous  companies in the financial  service,  REIT and
mortgage-backed security sectors, including the Company.

As a result of the foregoing  developments,  particularly  as they relate to the
Company's subordinate and residual interests in mortgage-related securities, the
Company has received requests from its lenders to pledge  additional  collateral
or repay certain portions of its debt pursuant to the terms of its indebtedness,
which it has been able to meet as of the date hereof. See "Capital Resources and
Liquidity."  In  anticipation  of a possible  economic  downturn and in order to
enhance its ability to meet the obligations under its indebtedness,  the Company
has decided that, for the  foreseeable  future,  it does not plan to acquire any
additional assets or fund any additional loans (beyond those which are currently
committed),  and it will work to accelerate  the  stabilization  of its existing
assets and increase its overall liquidity position. As a result, the Company has
currently curtailed each of its business lines, which include the acquisition of
subordinate    and   residual    interests   in   residential   and   commercial
mortgage-related  securities,  underperforming  real estate and commercial  real
estate loans, including construction and renovation loans.

At September 30, 1998,  the Company's  shareholders'  equity  amounted to $243.0
million or $12.81 per fully diluted  share.  This amount was comprised of $295.0
million  of  stated  capital  and  additional  paid-in  capital  related  to the
Company's  Common  Stock,  less  distributions  in excess of  earnings  of $36.0
million, unrealized losses on securities available for sale of $13.7 million and
accumulative translation adjustments of $2.0 million.

                                       12
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

The future success of the Company will be primarily  dependent on its ability to
continue to be able to meet its obligations under its indebtedness. This ability
will depend  largely on the Company's  future  performance,  which,  in turn, is
subject to prevailing economic  conditions and to financial,  business and other
factors  beyond  its  control,  including  levels  of  interest  rates,  and its
dependence on its existing assets.  There can be no assurance that the Company's
existing  assets will be sufficient to ensure  future  profitable  operations or
enable the  Company to meet its  indebtedness  obligations,  or that such assets
will not be further  significantly  adversely  affected by changes in market and
economic conditions and other factors.

OTHER SIGNIFICANT EVENTS FOR THE QUARTER ENDED SEPTEMBER 30, 1998

For the quarter  ended  September  30,  1998,  the Company  closed  transactions
totaling  approximately  $114.6 million, all of which were funded. This activity
brings  the  Company's  total  closed  transactions  since  its  initial  public
offering, net of repayments, to $917.1 million as of September 30, 1998. Of this
amount,  $866.5 million has been funded and the remaining $50.6 million is to be
funded over the construction and renovation periods,  which range from two to 18
months.

On July 14,  1998,  OAC  issued  $150.0  million  of 11 1/2% Notes due 2005 (the
"Notes")  under  Rule  144A of the  Securities  Act of  1933,  as  amended  (the
"Securities Act").

On July 22, 1998,  the Company  acquired the  Prudential  Building,  an existing
488,080 square foot,  22-story office building  located in the central  business
district of Jacksonville, Florida, for $36.0 million in cash plus closing costs.
The purchase  price was funded with cash on hand and advances from the Company's
line of credit.  Simultaneous  with the closing,  the Company also leased 97% of
the  building  back to the  Prudential  Insurance  Co. of  America  and sold two
parcels of adjacent parking areas to an adjacent hospital for approximately $4.1
million. See "Changes in Financial Condition - Investments in Real Estate."

On August 28, 1998,  the Company  purchased  for $19.8 million from Nomura Asset
Securities Corp., a single B-rated subordinate interest collateralized by a pool
of ten first lien conduit  quality  commercial  loans secured by 108 properties.
The  purchase  price  was  funded  with  cash on hand and a  reverse  repurchase
agreement in the amount of $14.7 million,  which matures in August, 1999. OFB is
the special  servicer  for these loans.  See  "Changes in Financial  Condition -
Securities Available for Sale."

On September 22, 1998,  the Company  declared a cash dividend of $0.44 per share
for the third quarter of 1998,  which was payable to  shareholders  of record on
September 30, 1998, and paid on October 15, 1998.

Also on September 22, 1998,  the Company  announced  that its Board of Directors
authorized  a  program  to  repurchase  up to  $10  million  of its  issued  and
outstanding  shares of common stock.  Any such  repurchases will be at times, at
prices per share, in amounts and through  solicited or unsolicited  transactions
in the open market,  on the New York Stock  Exchange or in privately  negotiated
transactions,  in each case as the Company deems appropriate depending on market
conditions,  corporate requirements, and applicable securities laws. The Company
has no plans to repurchase any common stock at this time.

On September  23, 1998,  the Company  filed a  registration  statement  with the
Securities  and Exchange  Commission  (the "SEC") as the first step in effecting
its planned  exchange  offer for the Notes whereby the holders of the Notes will
receive new Notes with  substantially  the same terms which have been registered
with the SEC.

On  September  30,  1998,  the Company  filed with the SEC a shelf  registration
statement  allowing  for  the  issuance  of up to $250  million  of  common  and
preferred stock, senior and subordinated debt and other securities.  The Company
has no plans to conduct a registered  offering of securities in the  foreseeable
future.


                                       13
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

RECENT DEVELOPMENTS

During October of 1998,  the Company closed an existing  commitment to finance a
hotel  construction  loan in the amount of $17.7 million,  of which $1.2 million
has been funded.

On November 13, 1998, OAC completed the securitization of 1,808 first and second
single family  residential  mortgage loans having an aggregate  unpaid principal
balance of $182.2  million.  The mortgage  loans were  acquired by the Operating
Partnership  during 1997 and 1998.  After the payment in full of all transaction
expenses and the repayment in full of the approximately $136.0 million warehouse
facility  secured  by such  mortgage  loans,  the  securitization  will  net OAC
approximately  $35.0  million in cash.  OAC will retain an  approximately  $10.1
million  non-investment  grade equity  certificate which will entitle OAC to the
available excess cashflow, and OFB will continue to service the mortgage loans.

RESULTS OF OPERATIONS

The  following  discussion of the Company's  consolidated  financial  condition,
results from  operations and capital  resources and liquidity  should be read in
conjunction with the Interim Consolidated Financial Statements and related Notes
included in Item 1 above.

GENERAL.  The Company  reported a net loss of $7.6 million for the quarter ended
September 30, 1998, or ($0.40) per diluted share, compared to net income of $4.4
million, or $0.22 per diluted share, for that same period a year ago. During the
third  quarter of 1998,  the Company  recognized a charge of $15.6  million,  or
($0.75) per diluted  share after  minority  interest,  related  primarily to its
commercial and residential mortgage-backed securities. For the nine months ended
September 30, 1998, the Company reported a net loss of $11.5 million, or ($0.61)
per diluted share.

INTEREST INCOME. Interest income increased by $14.8 million from $5.5 million in
the third quarter of 1997 to $20.3 million for the three months ended  September
30, 1998. This increase was primarily the result of a $346.6 million increase in
the average  balance of  securities  available for sale during the quarter ended
September  30, 1998 as compared to the quarter  ended  September  30, 1997 and a
$231.6 million  increase in the average  balances of the loan portfolios  during
the third  quarter of 1998 as compared to the third  quarter of 1997.  Likewise,
interest  income  increased  $35.1  million to $43.1 million for the nine months
ended  September  30, 1998,  compared to $8.0 million for the same period a year
ago. This increase was primarily  attributable  to a $223.8 million  increase in
the  average  balance of  securities  available  for sale during the nine months
ended  September  30, 1998 as compared to the same period in 1997,  and a $146.6
million  increase  in the  average  balance of loan  portfolios  during the same
respective periods.

INTEREST EXPENSE. The Company had no interest expense during the three months or
nine months ended September 30, 1997 compared to $10.6 million and $16.8 million
during the three months and nine months ended September 30, 1998,  respectively.
This increase was the result of the Company  being newly formed and  unleveraged
during the three and nine months ended September 30, 1997. For purposes of these
financial  statements,  interest expense does not include the expense associated
with the  borrowings  secured by investments in real estate which is included in
determining  the  operations  of the  Company's  real  estate.  See "Real Estate
Income, net" below.

NET  INTEREST  INCOME.  Net interest  income  before  provision  for loan losses
increased by $4.2  million to $9.7  million in the third  quarter of 1998 versus
the same period a year ago.  This  increase was largely due to an $11.3  million
increase  in  interest  income  from  securities  available  for sale and a $3.9
million increase in interest income from residential loans, which were partially
offset by a $2.0 million decrease in interest income from repurchase  agreements
and interest earning deposits and a $10.6 million increase in interest  expense.
These increases in interest income and interest expense versus the same period a
year ago were  largely  the result of OAC being  newly  formed,  only  partially
invested  and not  levered in the third  quarter of 1997.  Net  interest  income
before  provision for loan losses  increased  $18.3 million to $26.2 million for
the nine months ended September 30, 1998, versus the same period a year ago.

                                       14

<PAGE>
ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

   
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing  liabilities. Net interest income depends
upon  the  relative  amount  of  interest-earning  assets  and  interest-bearing
liabilities  and the interest rate earned or paid on them.  The following  table
sets forth certain information relating to the Company's Consolidated Statements
of Financial  Condition and Consolidated  Statements of Operations for the three
and nine months ended  September 30, 1998, for the three months ended  September
30, 1997 and for the period May 14, 1997 to September 30, 1997, and reflects the
average  yield  on  assets  and  average  cost of  liabilities  for the  periods
indicated.  Such yields and costs are  derived by dividing  income or expense by
the  average  balance of assets or  liabilities,  respectively,  for the periods
shown.  Average  balances are derived from average  daily  balances.  The yields
include amortization of fees which are considered adjustments to yields.
    
<TABLE>
<CAPTION>
                                                                        For the three months ended September 30,
                                                    -------------------------------------------------------------------------
                                                                   1998                                   1997
(Dollars in Thousands)                              -----------------------------------    ----------------------------------
                                                     Average                Annualized     Average                Annualized
                                                     Balance    Interest    Yield/Rates    Balance     Interest   Yield/Rates
                                                    --------    --------    -----------    -------     --------   -----------
<S>                                                 <C>         <C>            <C>         <C>         <C>           <C>
Interest-earning assets:
   Repurchase agreements and 
     interest-bearing deposits ..................   $ 54,861    $    714        5.16%      $193,385    $  2,754       5.70%    
   Securities available for sale ................    412,265      13,807       13.29         65,699       2,492      15.17
   Commercial and multifamily loan portfolio, net     50,323       1,512       11.92             --          --         --
   Residential loan portfolio, net .............     181,545       3,863        8.44            294           6       7.58
   Discount loans, net .........................       8,527         393       18.29         11,480         260       9.08
                                                    -----------------------------------    ----------------------------------
        Total interest-earning assets ...........    707,521      20,289       11.38        270,858       5,512       8.14
                                                    -----------------------------------    ----------------------------------
Interest-bearing liabilities:                                                              
   Securities sold under agreements to repurchase    163,253       3,082        7.49             --          --         --
   Obligations outstanding under lines of credit     189,414       3,828        8.02             --          --         --
   11.5% Notes due 2005 .........................    128,255       3,687       11.50             --          --         --
                                                    -----------------------------------    ----------------------------------
        Total interest-bearing liabilities ......    480,922      10,597        8.74             --          --         --
                                                    -----------------------------------    ----------------------------------
Net interest income/spread (1) ..................                  9,692        2.64%                     5,512       8.14%
Net interest margin (2) .........................                               5.43%                                 8.14%

<CAPTION>
                                                         For the nine months ended           For the period May 14, 1997 to
(Dollars in Thousands)                                      September 30, 1998                     September 30, 1997
                                                    -----------------------------------    ----------------------------------
                                                     Average                Annualized     Average                Annualized
                                                     Balance    Interest    Yield/Rates    Balance     Interest   Yield/Rates
                                                    --------    --------    -----------    -------     --------   -----------
<S>                                                 <C>         <C>            <C>        <C>          <C>           <C>
Interest-earning assets:
   Repurchase agreements and interest-bearing       
    deposits.....................................   $ 26,375    $  1,010        5.12%      $203,527    $  4,151       5.58%
   Securities available for trading .............     28,702         107        0.50             --          --         --
   Securities available for sale ................    285,298      29,990       14.05         61,525       3,497      15.55
   Commercial and multifamily loan portfolio, net     38,815       3,786       13.04             --          --         --
   Residential loan portfolio, net ..............    108,017       6,476        8.02            201           6       7.58
   Discount loans, net ..........................     14,845       1,719       15.48          9,632         341       9.68
                                                    -----------------------------------    ----------------------------------
        Total interest-earning assets ...........    502,052      43,088       11.47        274,885       7,995       7.96
                                                    -----------------------------------    ----------------------------------
Interest-bearing liabilities:                                                              
   Securities sold under agreements to repurchase    126,071       7,049        7.48             --          --         --
   Obligations outstanding under lines of credit     108,514       6,102        7.52             --          --         --
   11.5% Notes due 2005 .........................     42,752       3,687       11.50             --          --         --
                                                    -----------------------------------    ----------------------------------
        Total interest-bearing liabilities ......    277,337      16,838        8.12             --          --         --
                                                    -----------------------------------    ----------------------------------
Net interest income/spread (1) ..................                 26,250        3.35%                     7,995       7.96%
Net interest margin (2) .........................                               6.99%                                 7.96%
</TABLE>

--------------
(1) Interest rate spread  represents the difference  between the average rate on
    interest-earning   assets   and  the   average   cost  of   interest-bearing
    liabilities.
(2) Net interest income divided by average interest-earning assets.

                                       15
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

PROVISION  FOR LOAN LOSSES.  The allowance  for loan losses was  established  in
1998. The provision for loan losses amounted to $351,000 during the three months
ended  September 30, 1998,  which  reflects the Company's  evaluation of current
economic  conditions,  a credit  review of loans,  an analysis of specific  loan
situations and the size and composition of the commercial and multi-family  loan
portfolio. At September 30, 1998, the allowance for loan losses amounted to $0.6
million or 1.0% of the net commercial and  multifamily  loan  portfolio.  At the
same date,  the Company had not  established an allowance for loan losses on the
single-family residential loan portfolio or the discount loan portfolio.

REAL ESTATE INCOME,  NET. Real estate income, net increased $479,000 to $543,000
for the three months  ended  September  30, 1998,  versus the same period a year
ago. This  increase was largely due to a $7.9 million  increase in rental income
offset by a $3.6 million  increase in rental operation  expense,  a $1.1 million
increase in depreciation and amortization expense and a $2.7 million increase in
interest  expense.  These increases in real estate operating income and expenses
versus the same  period a year ago were  largely  the result of an  increase  in
OAC's  investment in real estate,  net of $209.8  million at September 30, 1998,
versus $26.3  million at September  30, 1997.  For the same reason,  real estate
income,  net  increased  $1.0  million to $1.1 million for the nine months ended
September 30, 1998, versus the same period a year ago.

OTHER  EXPENSES.  Other expenses  increased $2.0 million to $3.2 million for the
three months ended  September 30, 1998,  versus the same period a year ago. This
increase was largely due to a $0.9  million  increase in  management  fees and a
$0.8 million increase in other expenses (which consisted generally of servicing,
legal,  and accounting  expenses).  These increases in other expenses versus the
same period a year ago are largely the result of OAC becoming fully invested and
leveraging  its assets in 1998.  Other  expenses  increased $4.9 million to $6.6
million for the nine months ended  September 30, 1998,  versus the same period a
year ago. The management fees payable by OAC to OCC totaled $1.6 million for the
quarter  ended  September  30,  1998 and $4.1  million  for  nine  months  ended
September  30, 1998.  OCC advises the Company on various  facets of its business
and  manages  its  day-to-day  operations,  subject  to the  supervision  of the
Company's Board of Directors.  See Note 2 to the Interim Consolidated  Financial
Statements  included in Item 1 above.  In addition,  OAC  reimbursed OCC for due
diligence  expenses  of  $568,000  and  $936,000  in  connection  with its asset
acquisitions  during the three and nine months ended  September  30, 1998 (which
amounts are likely to be  substantially  reduced or eliminated to the extent OAC
does not review or acquire assets in the future).

LOSSES ON SECURITIES  AND  DERIVATIVES.  Due to accelerated  prepayment  speeds,
widening mortgage spreads and declining market liquidity, OAC recognized a $15.6
million  charge to earnings  during the third  quarter of 1998.  This charge was
comprised of a $13.6  million  writedown of the  securities  available  for sale
portfolio  (which is comprised of  residential  and commercial  subordinate  and
residual mortgage-backed securities) and a $2.0 million charge on futures losses
incurred  on  short  positions  in  U.S.  Treasury  futures  used to  hedge  the
residential  loan portfolio.  Total losses on securities and derivatives for the
nine months ended September 30, 1998, were $32.7 million.

MINORITY INTEREST IN NET LOSS OF CONSOLIDATED  SUBSIDIARY.  Minority interest in
net loss of $0.7  million and $0.4  million for the three and nine months  ended
September  30,  1998,  respectively,  arose  from the  investment  by IMI in the
Operating  Partnership which conducts the majority of OAC's business activities.
OAC has a 91.3% ownership interest in the Operating Partnership.

EXTRAORDINARY GAIN ON REPURCHASE OF DEBT. On September 30, 1998, OAC repurchased
in the open market $7.0 million of its $150.0 million  outstanding  Notes.  This
resulted in OAC  realizing an  extraordinary  gain of $615,000  during the third
quarter of 1998. At September 30, 1998, the outstanding balance of the Notes was
$143.0 million.


                                       16
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

NET  INCOME/LOSS  AND OTHER  COMPREHENSIVE  INCOME/LOSS.  The Company's net loss
before  extraordinary item amounted to $8.3 million and $12.1 million during the
three and nine months ended September 30, 1998,  respectively,  as compared to a
comprehensive  loss before  extraordinary  item during the same periods of $22.4
million and $19.9 million,  respectively.  The  comprehensive  loss exceeded the
Company's  net loss during the three and nine months  ended  September  30, 1998
primarily  because of $13.8  million and $6.4  million of  unrealized  losses on
securities  which  were  not  included  in the  Company's  net loss  during  the
respective periods,  and to a lesser extent $917,000 and $2.0 million of foreign
currency  translation  losses which were not included in the  Company's net loss
during  the  respective  periods.  For  further  information,  see Note 5 to the
Interim Consolidated Financial Statements included in Item 1 above.

CHANGES IN FINANCIAL CONDITION

   
GENERAL.  From December 31, 1997 to September 30, 1998,  total assets  increased
$622.4 million or 216.1% to $910.4 million. This increase was primarily due to a
$45.6 million  increase in the commercial and  multi-family  loan  portfolio,  a
$191.1 million  increase in the  residential  loan  portfolio,  a $164.4 million
increase  in  investments  in real  estate  and a  $249.5  million  increase  in
securities  available  for sale,  which were  offset in part by a $18.4  million
decrease in the discount loan  portfolio.  Total  liabilities  increased  $625.2
million during the period,  primarily as a result of $143.1 million  increase in
securities  sold under  agreements to repurchase,  $189.1 million of obligations
outstanding  under lines of credit,  $142.4 million of  obligations  outstanding
under  lines of credit  secured by real estate and a $143.0  million  obligation
with respect to the Notes.
    

CASH  AND   INTEREST-EARNING   DEPOSITS.   At   September   30,  1998  cash  and
interest-earning  deposits amounted to $18.3 million or 2.0% of total assets and
were comprised of deposits at various banks.  Interest-bearing deposits declined
by $30.4  million or 62% from December 31, 1997 to September 30, 1998 due to the
reinvestment of cash and cash  equivalents into long-term  assets.  Although the
Company had no repurchase agreements at September 30, 1998 or December 31, 1997,
it enters into such  agreements  from time to time. In these  transactions,  the
Company  purchases  securities  from a  counterparty,  and  agrees  to sell  the
securities  back to the  counterparty  at a specified  future  date.  Repurchase
agreements  are  carried  at  the  amounts  at  which  the  securities  will  be
subsequently  resold to the counterparty plus accrued interest,  as specified in
the  respective  agreements.  The  Company  monitors  the  market  value  of the
underlying securities relative to the amounts due under the agreements and, when
necessary, requires prompt additional collateral or reduction in loan balance to
ensure that the market value remains  sufficient to protect  itself in the event
of  default by the  counterparty.  At October  31,  1998,  OAC had cash and cash
equivalents of approximately $26.6 million.

SECURITIES  AVAILABLE FOR SALE. The Company's investment in securities available
for sale at September  30, 1998  increased by $249.5  million to $395.5  million
from $146.0  million at December 31, 1997. At September 30, 1998,  the Company's
securities available for sale portfolio of $395.5 million consisted of:

   
   o  Non-investment  grade and unrated subordinate  commercial  mortgage-backed
      securities  having a book value of $134.1  million  and a market  value of
      $129.6 million;
   o  Unrated  residential  subprime  residuals  having a book  value of  $254.7
      million and a market value of $245.2 million; and
   o  Unrated subordinate residential  mortgage-backed  securities having a book
      value of $20.4 million and a market value of $20.7 million.
    

At September 30, 1998,  the Company's  unrated  subprime  residual  portfolio of
$245.2 million consisted of:

   o  $112.8 million of seasoned residuals (i.e.,  securitized  between 1994 and
      1997) with  overcollateralization  reserves funded at approximately $125.3
      million.
   o  $132.4 million of unseasoned  residuals  (i.e.,  securitized in 1998) with
      overcollateralization reserves funded at approximately $23.3 million.

                                       17
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

   
At  October  31,  1998,  the  market  value and book  value of OAC's  securities
available for sale was approximately  $362.1 million and $397.2, which consisted
of the following:

   o  Non-investment  grade and unrated subordinate  commercial  mortgage-backed
      securities  having a book value of $133.4  million  and a market  value of
      $120.3 million;

   o  Unrated  residential  subprime  residuals  having a book  value of  $243.6
      million and a market value of $222.0 million; and

   o  Unrated subordinate residential  mortgage-backed  securities having a book
      value of $20.2 million and a market value of $19.8 million.

At October 31, 1998, the Company's unrated subprime residual portfolio of $222.0
million consisted of:

   o  $107.3 million of seasoned residuals (i.e.,  securitized  between 1994 and
      1997) with  overcollateralization  reserves funded at approximately $120.9
      million.

   o  $114.7 million of unseasoned  residuals  (i.e.,  securitized in 1998) with
      overcollateralization reserves funded at approximately $24.8 million.
    

The following table  describes the  composition of the securities  available for
sale at the dates indicated:

                                            September 30,    December 31,
                                                1998             1997
                                              --------         --------
                                                   (In Thousands)
Single family residential:
   FHLMC interest-only .................      $     --         $ 21,178
   FNMA interest-only ..................            --           22,573
   AAA-rated interest-only .............            --              729
   Subordinates ........................        20,743            9,444
   Subprime residuals ..................       245,181               --
                                              --------         --------
                                               265,924           53,924
                                              --------         --------
                                                              
Multi-family residential and commercial:                      
   AAA-rated interest-only .............           508              866
   A-rated interest-only ...............           265              480
   Non-rated interest-only .............         3,951            4,803
   Non-rated principal-only ............           608              960
   Subordinates ........................       124,239           84,994
                                              --------         --------
                                               129,571           92,103
                                              --------         --------
                                                              
     Total .............................      $395,495         $146,027
                                              ========         ========
                                                         

Yield to maturity  represents  a measure of the  average  rate of return that is
earned on a security  if held to  maturity.  

                                       18
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

   
The  following  tables  detail  the  Company's  securities  available  for  sale
portfolio at September 30, 1998:

<TABLE>
<CAPTION>

RESIDUALS                                                           ($ THOUSANDS)
                                                                      COLLATERAL      CREDIT
                                                     RATING           BALANCE AT:   ENHANCEMENT PRODUCT TYPE AT:
DEAL NAME          SECURITY  ISSUE DATE  RATING     AGENCIES      ISSUANCE  9/30/98   9/30/98   9/30/98
                   --------  ----------  ------     --------      --------  -------   -------   -------

<S>                 <C>         <C>      <C>      <C>            <C>      <C>       <C>        <C>  
SASCO 1998-2(1)       X         Jan-98    UR      S&P, Fitch     600,052  524,294    1.01% OC  24% Fixed, 69% 2/28 ARM
SASCO 1998-3(1)       X         Mar-98    UR      S&P, Fitch     769,671  695,254    1.90% OC  9% Fixed, 74% 2/28 ARM
MLMI 1998-FF1(2)      X         Jun-98    UR      S&P, Fitch     198,155  190,695    1.03% OC  18% 1/29 ARM, 78% 2/28 ARM
PANAM 1997-1(3)       X         Dec-97    UR     S&P, Moody's    113,544  101,346    3.21% OC  33% 6mo ARM, 61% 2/28 ARM
                 Prepay Pen.
LHELT 1998-2(4)       X         Jun-98    UR    Moody's, Fitch   209,225  198,060    1.59% OC  40% Fixed, 37% 2/28 ARM
EQUICON 1994-2(5) B Fix, B-2    Oct-94    UR    S&P, Moody's,     78,846   30,481    8.42% OC  100% Fixed
                                                   Fitch
                 QS Fix, QS-2             UR
                  B Var, B-2              UR                      32,306    8,084   15.34% OC  100% 6mo ARM
EQUICON 1995-1(5) B Fix, B-2    May-95    UR    S&P, Moody's,     70,024   24,208   16.34% OC  100% Fixed
                                                   Fitch
                  B Var, B-2              UR                      70,519    9,589   24.88% OC  100% 6mo ARM
EQUICON 1995-2(5) B Fix, B-2    Oct-95    UR     S&P, Moody's     79,288   33,731   11.90% OC  100% Fixed
                  B Var, B-2              UR                      39,667   11,037   16.20% OC  100% 6mo ARM
ACCESS 1996-1(6)  B Fix, B-2    Feb-96    UR     S&P, Moody's    120,015   55,023    9.04% OC  100% Fixed
                  B Var, B-2              UR                      55,362   16,760   10.42% OC  100% 6mo ARM
ACCESS 1996-2(6)   B-I, B-1     May-96    UR     S&P, Moody's    142,259   69,355   10.48% OC  100% Fixed
                 BI-S, BI-S-1             UR
                  B-II, B-1               UR                      68,345   20,646   12.98% OC  96% 6mo ARM
                    BII-S,                UR
                   BII-S-1
ACCESS 1996-3(6)   B-I, B-1     Aug-96    UR     S&P, Moody's    107,712   52,972    8.54% OC  100% Fixed
                 BI-S, BI-S-1             UR
                  B-II, B-1               UR                      99,885   31,453   13.86% OC  99% 6mo ARM
                    BII-S,                UR
                   BII-S-1
ACCESS 1996-4(6)    B, B-1      Nov-96    UR     S&P, Moody's    239,778  103,063   10.90% OC  48% Fixed, 19% 6mo ARM, 33% 2/28 ARM
                  B-S, B-S-1              UR
ACCESS 1997-1(6)    B, B-1      Feb-97    UR     S&P, Moody's    276,442  147,923   11.25% OC  55% Fixed, 40% 2/28 ARM
                  B-S, B-S-1              UR
ACCESS 1997-2(6)    B, B-1      May-97    UR     S&P, Moody's    185,197  109,074    7.10% OC  49% Fixed, 25% 6mo ARM, 26% 2/28 ARM
                  B-S, B-S-1              UR
ACCESS 1997-3(6)    B, B-1      Oct-97    UR     S&P, Moody's    199,884  137,081    4.50% OC  43% Fixed, 23% 6mo ARM, 34% 2/28 ARM
                  B-S, B-S-1              UR

SUBORDINATES

SBMS 1997-HUD1(7)     B5        Apr-97  B2, n.a. Moody's, DCR      9,785    9,525    5.06%     97% Fixed, 3.9% ARM
                      B6        Apr-97    UR                      16,998   13,015     n.a. 
ORMBS 1998-R1(8)      B4        Mar-98    UR     Moody's, DCR    101,774  100,144     n.a.     98% Fixed, 2% ARM
GECMS 1994-12(9)      B4        Mar-94    UR    Moody's, Fitch,    2,069    1,594     n.a.     100% Fixed
                                                    S&P
</TABLE>
    

                                       19
<PAGE>
ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

<TABLE>
<CAPTION>
   
                                                                                                              ($ THOUSANDS)
RESIDUALS:                                WEIGHTED      WEIGHTED                                 ACTUAL           ACTUAL
                                          AVERAGE       AVERAGE             ACTUAL            LIFE TO DATE     LIFE TO DATE
                                         COUPON AT:     LTV AT:         DELINQUENCY AT:          CPR AT:        LOSSES AT:
DEAL NAME                 SECURITY        9/30/98       9/30/98             9/30/98              9/30/98         9/30/98
---------                 --------        -------       -------             -------              -------         -------
<S>                          <C>           <C>           <C>                 <C>                 <C>                <C>
SASCO 1998-2                  X            10.17%        74.61%              6.96%               17.70%             0
SASCO 1998-31                 X            9.77%         76.15%              5.21%               17.90%             0
MLMI 1998-FF12                X            9.15%         77.16%              1.95%               10.30%             0
PANAM 1997-13                 X            9.92%         76.02%              5.80%               15.00%             25
                         Prepay Pen.
LHELT 1998-24                 X            10.04%        76.14%              4.66%               15.10%             0
EQUICON 1994-25          B Fix, B-2        9.94%         69.01%              4.82%               31.19%            462
                        QS Fix, QS-2
                         B Var, B-2        11.17%        74.82%             14.09%               44.63%            237
EQUICON 1995-15          B Fix, B-2        12.06%        68.52%              6.56%               27.50%            439
                         B Var, B-2        11.80%        73.74%              5.60%               33.93%            579
EQUICON 1995-25          B Fix, B-2        10.85%        72.20%              7.82%               33.67%            432
                         B Var, B-2        11.81%        73.17%             11.74%               41.63%            329
ACCESS 1996-16           B Fix, B-2        10.86%        72.46%             40.52%               30.22%            926
                         B Var, B-2        11.77%        75.29%              9.14%               39.21%            423
ACCESS 1996-26            B-I, B-1         10.85%        72.90%              8.45%               31.08%            678
                        BI-S, BI-S-1
                          B-11, B-1        11.02%        74.86%             24.60%               50.62%            259
                       BII-S, BII-S-1
ACCESS 1996-36            B-I, B-1         11.38%        74.97%              9.36%               33.85%            361
                        BI-S, BI-S-1
                          B-II, B-1        12.05%        76.86%             13.27%               53.52%            433
                       BII-S, BII-S-1
ACCESS 1996-46             B, B-1          11.83%        75.04%             20.63%               43.88%            490
                         B-S, B-S-1
ACCESS 1997-16             B, B-1          11.44%        76.38%             11.96%               42.02%            883
                         B-S, B-S-1
ACCESS 1997-26             B, B-1          11.31%        75.17%             13.82%               42.06%            173
                         B-S, B-S-1
ACCESS 1997-36             B, B-1          11.13%        75.85%             32.95%               37.87%             70
                         B-S, B-S-1

SUBORDINATES:

SBMS 1997-HUD17              B5            9.77%        113.59%              8.62%               12.91%           3,665
                             B6
ORMBS 1998-R18               B4            8.92%        113.82%             12.82%                3.55%            679
GECMS 1994-129               B4            6.83%         50.50%              0.27%                6.20%             0
</TABLE>
<TABLE>
<CAPTION>

ISSUERS:                                           GLOSSARY OF TERMS:
--------                                           ------------------
<S>                                               <C>                        <C>
(1) Structured Asset Securities Corp.              Deal Name                  Series description
(2) Merrill Lynch Mortgage Investors, Inc.         Security                   Specific  certificate(s)  of the transaction  owned by
                                                                              the Company
(3) Pan American Bank, FSB                         Issue Date                 Date at which the trust issued the certificate
(4) Lehman Home Equity Loan Trust Rating           Rating                     Rating, if any, of the  certificate(s)
(5) Equicon Mortgage Loan Trust                    Rating Agencies            Rating agencies of the transaction
(6) Access Financial Mortgage Loan Trust           Collateral/Class Coupon    Residuals: Collateral Unpaid Principal Balance ("UPB")
                                                                              at the respective date
(7) Salomon Brothers Mortgage Securities                                      Subordinates:   Outstanding   bond   balance   at  the
                                                                              respective date
(8) Ocwen Residential Mortgage-Backed Securities   Weighted Average Coupon    Weighted  average  interest  rate  of  the  underlying
                                                                              collateral at the respective date
(9) GE Capital Mortgage Services, Inc.             Weighted Average LTV       Weighted average loan-to-value ratio at the respective
                                                                              date (loan is  represented by the UPB and the value is
                                                                              represented    by   the   last   recorded    appraisal
                                                                              value/Broker's Price Opinion "BPO")
                                                   Actual Delinquency         Total UPB of loans more than 30 days delinquent at the
                                                                              respective  date as a percentage of the collateral UPB
                                                                              at the respective date
                                                   Actual Life-to-Date CPR    Life-to-Date prepayment rate as of the respective date
                                                   Actual Life-to-Date Losses Cumulative   losses   expressed  as  a  percentage  of
                                                                              original collateral UPB at the respective date
                                                   Credit Enhancement         Residuals:   Level  of   over-collateralization  as  a
                                                                              percentage  of the  collateral  UPB at the  respective
                                                                              date
                                                                              Subordinates:  Percentage of securities outstanding at
                                                                              the  respective  date  junior  to the  security  owned
                                                                              intended to cover realized losses
                                                   OC                         Overcollaterization
                                                   CPR                        Conditional Pre-payment Rate
    
</TABLE>

                                       20
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

<TABLE>
<CAPTION>

   
COMMERCIAL MORTGAGE BACKED SECURITIES
                                                                                                      SUBORDINATION
                                                                                                        LEVEL AT:
                                                                                                --------------------
SECURITIZATION                SECURITY    ISSUE DATE     RATING         RATING AGENCIES         ISSUANCE     9/30/98
--------------                --------    ----------     ------         ---------------         --------     -------
<S>                           <C>          <C>           <C>          <C>                     <C>         <C>  
NASC 1996 MD-V (1)              B-2        Apr-96          B           S&P, Duff, Fitch           0.00%       0.00%
CSFB 1995-AEW1 (2)               E         Oct-95         BB             S&P, Fitch              13.75%      25.44%
                                F-1                        B                                      4.80%       8.86%
                                G-1                       NR                                      0.00%       0.00%
                                G-2                       NR                                      0.00%       0.00%
MRAC 1996-C2 (3)                 K         Dec-96         B-           Fitch, Moody's             2.50%       2.68%
                                L-1                      NR-PO                                    0.00%       0.00%
                                L-2                      NR-IO                                    0.00%       0.00%
BTC 1997-S1 (4)                E, F        Dec-97        BB/B            S&P, Fitch              19.00%      25.77%
                              Equity                      NR                                      0.00%       0.00%
DLJ 1993-MF17 (5)               B-2        Nov-93         BB            Moody's, Duff             4.59%       5.22%
                                B-3                        B                                      1.28%       1.46%
                                C-1                       NR                                      0.00%       0.00%
                                S-1                     AAA-IO                                   32.18%      36.64%
                                S-2                      A-IO                                    18.02%      20.52%
MLMCI 1993-M1 (6)                B         Sep-93         NR            Moody's, S&P              2.00%       6.19%
</TABLE>

<TABLE>
<CAPTION>
COMMERCIAL MORTGAGE BACKED SECURITIES:

                                 Weighted   Weighted              Actual       Actual
                                  Average   Average     Actual   Annual CPR  Life to Date   Class Size %           Yield to
                                  DSCR at    LTV at  Delinquency  Life to:    Losses at:   of Total as of:       Maturity at:
Securitization         Security  Issuance   Issuance   9/30/98    9/30/98      9/30/98    Issuance  09/30/98   Purchase  09/30/98
--------------         --------  --------   --------   -------    -------      -------    --------- --------   --------  --------
<S>                     <C>        <C>       <C>          <C>        <C>    <C>            <C>        <C>       <C>       <C>  
NASC 1996 MD-V(1)        B-2       1.69      62.0%         0.0%      0.0%           $0      4.36%      4.45%    9.90%     9.78%
CSFB 1995-AEW1(2)         E        1.26      71.8%         8.6%     19.0%     $739,362     11.00%     20.31%    7.93%     7.75%
                         F-1                                                                1.80%      3.32%    9.75%     9.65%
                         G-1                                                                4.80%      8.86%   12.84%    12.77%
                         G-2                                                                5.72%     10.11%   14.87%    14.60%
MRAC 1996-C2(3)           K        1.36      69.1%         0.8%      0.8%           $0      1.50%      1.61%   12.10%    12.14%
                         L-1                                                                2.50%      2.68%   12.31%    14.32%
                         L-2                                                                2.50%      2.68%   12.82%    16.25%
BTC 1997-S1(4)           E, F      1.27     106.0%        22.7%     31.44%  $3,006,908     14.50%     19.66%    8.36%     8.36%
                        Equity                                                             19.00%     25.77%   21.19%    27.19%
DLJ 1993-MF17(5)         B-2       1.36      73.7%         0.0%      0.0%           $0      9.41%     10.72%   12.29%    12.29%
                         B-3                                                                3.31%      3.76%   11.39%    14.93%
                         C-1                                                                1.28%      1.46%  -29.82%    29.25%
                         S-1                                                               67.82%     63.36%   16.69%    -3.67%
                         S-2                                                               14.15%     16.12%   14.46%    -8.84%
MLMCI 1993-M1(6)          B        1.51      56.0%        34.8%     80.4%           $0      9.00%     26.90%   13.65%     6.85%

ISSUERS:                                        GLOSSARY OF TERMS:
--------                                        ------------------
<S>                                             <C>                   <C>                                                        
(1) Nomura Asset Securities Corporation         DSCR:                 Debt Service Coverage Ratio is calculated as cash flow 
                                                                      available for Debt Service divided by Debt service.
(2) CS First Boston Mortgage Securities Corp.   Subordination Level:  Represents the percentage of outstanding bonds whose
                                                                      right to receive payments is subordinated to
                                                                      a particular class.
(3) Midland Realty Acceptance Corp.             Class Size:           Represents the percentage size of a particular class
                                                                      relative to the total outstanding balance of all classes.
(4) BTC Mortgage Investors Trust 1997-S1
(5) DLJ Mortgage Acceptance Corp.
(6) Merrill Lynch Mortgage Capital, Inc.
</TABLE>
    

                                       21
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

The  following   table   summarizes   information   relating  to  the  Company's
mortgage-related securities available for sale at September 30, 1998.

<TABLE>
<CAPTION>
                                                                               Original     Anticipated              Anticipated
                                                                              Anticipated   Unleveraged               Weighted  
                                                                              Unleveraged     Yield to                 Average  
                                       Amortized        Fair      Percent      Yield to      Maturity at              Remaining 
Rating/Description                        Cost          Value      Owned       Maturity      9/30/98        Coupon      Life    
------------------                     ---------        -----     -------     -----------   ------------    ------    ----------
                                            (In Thousands)
<S>                                    <C>             <C>           <C>          <C>           <C>          <C>         <C>
Single-family Residential:     
  Unrated residuals................    $254,652        $245,181      100%         17.90%        13.48%       0.00%       2.57(3)
  B-rated subordinates.............       5,143           5,143      100          16.87         18.82        7.75        7.11
  Unrated subordinates.............      15,205          15,600       41          15.16         11.19        7.03        6.27
                                       --------        --------
                                        275,000         265,924
                                       --------        --------
Multi-family and                                      
Commercial:                                           
  BB-rated subordinates............      66,070          66,567       68           8.67          8.62        7.86        4.38
                                                      
  B-rated subordinates.............      33,460          32,308       80          10.42         10.65        8.39       10.09
  Unrated subordinates.............      27,984          25,364       89          14.04         15.80        9.97        5.56
  AAA-Rated IOs....................         508             508      100          16.69         (3.67)       0.34        6.11
  A-Rated IOs......................         265             265      100          14.46         (8.84)       0.65        2.22
  Unrated IOs (1)..................       4,811           3,951      100          12.82         16.25        7.23       11.18
  Unrated principal only ("POs")(1)       1,117             608      100          12.31         14.32        0.00       11.21
                                       --------        --------
                                        134,215         129,571
                                       --------        --------

        Total......................    $409,215        $395,495
                                       ========        ========
</TABLE>
---------------
(1)  These securities relate to the same mortgage-related  security, thus giving
     the Company both the  principal and interest  components to the  particular
     class.
(2)  Changes in the September 30, 1998  anticipated  yield to maturity from that
     originally  anticipated  are  primarily the result of changes in prepayment
     assumptions and to a lesser extent loss assumptions.
(3)  Equals the weighted  average  duration based off of September 30, 1998 book
     value.

   
The following  table sets forth  information  regarding the geographic  location
underlying  the Company's  securities  available for sale portfolio at September
30, 1998,  based upon the notional  amount of the residual and par amount of the
class of subordinate securities held.
    

<TABLE>
<CAPTION>
Description                     California        Florida          Texas        New York         Ohio          Other (1)
-----------                     ----------        -------        --------       --------       --------       ----------
                                                                      (In Thousands)
<S>                              <C>             <C>             <C>            <C>            <C>            <C>       
Single-family residential.....   $244,511        $283,801        $179,629       $101,726       $122,276       $2,655,499

Multi-family and commercial...    209,663         131,793         166,496        112,286         54,303        1,024,357
                                 --------        --------        --------       --------       --------       ----------
Total.........................   $454,174        $415,594        $346,125       $214,012       $176,579       $3,679,856
                                 ========        ========        ========       ========       ========       ==========
Percentage (2)................        8.6%            7.9%            6.5%           4.1%           3.3%            69.6%
                                 ========        ========        ========       ========       ========       ==========
</TABLE>

---------------
(1)  No other individual state makes up more than 5% of total.
(2)  Based  on a  percentage  of  the  total  unpaid  principal  balance  of the
     underlying loans.

                                       22
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

The following  table sets forth the property  types of the Company's  commercial
mortgage-backed securities at September 30, 1998.

                                                     Percentage
                         Property type                Invested
                  -----------------------------       --------
                  Multi-family.................          27.4%
                  Retail.......................          25.7
                  Hotel........................          20.6
                  Office.......................          16.5
                  Industrial...................           5.3
                  Mixed use....................           2.8
                  Other........................           1.7
                                                      -------
                  Total........................         100.0%

Subordinate and residual interests in mortgage-related securities provide credit
support to the more senior classes of the mortgage-related securities. Principal
from the underlying  mortgage loans  generally is allocated  first to the senior
classes,  with the most senior  class  having a priority  right to the cash flow
from the mortgage loans until its payment  requirements  are  satisfied.  To the
extent  that  there are  defaults  and  unrecoverable  losses on the  underlying
mortgage loans,  resulting in reduced cash flows, the most subordinate  security
will be the first to bear this loss. Because  subordinate and residual interests
generally have no credit support, to the extent there are realized losses on the
mortgage loans  comprising  the mortgage  collateral  for such  securities,  the
Company  may  not  recover  the  full  amount  or,  indeed,  any of its  initial
investment in such subordinate and residual interests The Company generally owns
the most subordinate classes of the securities in which it invests and therefore
will be the first to bear any credit losses.

The credit risk of mortgage related  securities is affected by the nature of the
underlying mortgage loans. In this regard, the risk of loss on securities backed
by commercial and multifamily loans and single-family  residential loans made to
borrowers who, because of prior credit problems, the absence of a credit history
or other  factors,  are  unable or  unwilling  to  qualify  as  borrowers  under
guidelines  established by the Federal Home Loan Mortgage Corporation  ("FHLMC")
and the Federal National Mortgage Association ("FNMA") for purchases of loans by
such  agencies,   generally   involve  more  risk  than  securities   backed  by
single-family residential loans which conform to the requirements established by
FHLMC and FNMA for their purchase by such agencies.

The Company  generally  owns the most  subordinate  classes of the securities in
which it invests and therefore will be the first to bear any credit losses.

Subordinate  and  residual  interests  are  affected  by the rate and  timing of
payments  of  principal  (including   prepayments,   repurchase,   defaults  and
liquidations)  on the mortgage  loans  underlying  a series of  mortgage-related
securities.  The rate of  principal  payments may vary  significantly  over time
depending on a variety of factors, such as the level of prevailing mortgage loan
interest  rates  and  economic,  demographic,  tax,  legal  and  other  factors.
Prepayments  on the  mortgage  loans  underlying  a series  of  mortgage-related
securities   are   generally   allocated   to  the  more   senior   classes   of
mortgage-related  securities.  Although  in the  absence of defaults or interest
shortfalls all subordinates  receive interest,  amounts  otherwise  allocable to
residuals  generally are used to make payments on more senior classes or to fund
a   reserve    account   for   the    protection   of   senior   classes   until
overcollateralization  or the balance in the reserve account reaches a specified
level. In periods of declining  interest rates, rates of prepayments on mortgage
loans  generally  increase,  and if the  rate  of  prepayments  is  faster  than
anticipated,  then the yield on subordinates will be positively affected and the
yield on residuals will be negatively  affected.  Accelerated  prepayment speeds
were  a  significant  factor  in  the  $15.6  million  loss  on  securities  and
derivatives  recorded by the Company during the three months ended September 30,
1998.

Accelerated  prepayment speeds also  significantly  affected the IO portfolio in
the first half of 1998 at which time the  portfolio  was sold.  The IO portfolio
represents classes of mortgage-related  securities that are entitled to payments
of interest but no (or only  nominal)  payments of  principal,  and Inverse IOs,
which bear interest at a floating rate that varies  inversely with (and often at
a multiple  of)  changes in a  specified  index.  As a result of an  increase in
prepayment speeds due to declining  interest rates in the first quarter of 1998,
the Company incurred $17.1 million of losses on its IO Portfolio and,  following
the sale of the IO Portfolio to affiliates of the Company in May 1998 at a price
equal to its  amortized  cost plus accrued  interest,  the Company  discontinued
investing in the IO portfolio.

                                       23
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

   
The Company  marks its  securities  portfolio to market value at the end of each
month based upon broker/dealer marks, subject to an internal review process. For
those securities which do not have an available  market  quotation,  the Company
requests   market   values  and   underlying   assumptions   from  the   various
broker/dealers that underwrote,  are currently financing the securities, or have
had  prior  experience  with  the  type of  securities.  Because  the  Company's
subordinate and residual  securities are not readily  marketable,  trades can be
infrequent   (and  under  some  market   conditions,   non-existent)   and  most
broker/dealers  do not have  the  securities  modeled  and the  market  value is
typically available from only a small group of broker/dealers, and in most cases
only  one  broker/dealer.   When  valuations  are  obtained  from  two  or  more
broker/dealers,  the average  dealer mark is be utilized.  As of each  reporting
period,  the Company evaluates whether and to what extent any unrealized loss is
to be recognized as other them temporary.
    

During the third quarter of 1998, the Company  valued its  securities  available
for sale  portfolio and net  unrealized  losses thereon at the end of each month
as follows:

<TABLE>
<CAPTION>
   
                                                 July 31, 1998              August 31, 1998          September 30, 1998
                                              -----------------------------------------------------------------------------
                                                          Unrealized      Fair        Unrealized      Fair       Unrealized
                                              Value       Loss(Gain)      Value       Loss(Gain)      Value      Loss(Gain)
                                              -----       ----------      -----       ----------      -----      ----------
<S>                                         <C>            <C>           <C>           <C>           <C>
Single family residential:
   Subordinates...........................  $  20,331      $  8,508      $ 21,413      $   720       $ 20,743      $  (396)
   Residuals..............................    260,197         1,901       253,160       16,026        245,181        9,569
                                            ---------      --------      --------      -------       --------      -------
   Total single family....................    280,528        10,409       274,573       16,746        265,924        9,173
                                            ---------      --------      --------      -------       --------      -------
    

Commercial:
   AAA-rated interest-only................        584           255           534          299            508           --
   A-rated interest-only..................        296           175           271          198            265           --
   Non-rated interest-only................      5,023          (218)        4,427          381          3,951          859
   Non-rated principal-only...............      1,248          (163)          864          236            608          509
   Subordinates...........................    114,349        (2,643)      131,578       (2,354)       124,239        3,178
                                            ---------      --------      --------      -------       --------      -------
   Total commercial.......................  $ 121,500        (2,594)      137,674       (1,240)       129,571        4,546
                                            ---------      --------      --------      -------       --------      -------

    Total.................................  $ 402,028      $  7,815      $412,247      $15,506       $395,495      $13,719
                                            =========      ========      ========      =======       ========      =======
</TABLE>

COMMERCIAL  AND  MULTI-FAMILY  LOAN  PORTFOLIO.   The  Company's  investment  in
commercial  and  multi-family  loans  amounted to $55.1 million at September 30,
1998, a $45.6 million increase over the $9.5 million  investment at December 31,
1997. The Company's commercial lending activities focuses on real estate lending
opportunities  in selected  major  metropolitan  markets  throughout  the United
States where the Company believes there are significant  supply  constraints and
where  employment  and/or  population  growth and other  demand  generators  are
expected to remain strong.  The Company's general approach to commercial lending
is to capitalize  on the core  capabilities  of the Manager and its  affiliates,
which include an ability to assess the value creation potential of underutilized
real  estate and to oversee  and manage the  conversion,  rehabilitation  and/or
construction  process.  The Company  seeks to make loans to borrowers who have a
proven  ability to acquire  such assets and enhance  value  through a process of
repositioning  or development.  Loans are usually  structured to provide current
income  along with either  exit fees or gross  revenue  participation  features.
Loans may be originated as first  mortgage  loans or structured as  subordinated
debt or mezzanine financing.

                                       24
<PAGE>

The following table sets forth the  composition of the Company's  commercial and
multi-family loan portfolio by type of loan at the dates indicated:

                                                 September 30,  December 31,
                                                     1998          1997
                                                 -----------     -----------
                                                         (In Thousands)
  Multi-family ...............................   $    45,285     $     3,455
   Commercial real estate:
     Office...................................        33,058          33,058
     Hotel....................................        28,581          20,952
                                                 -----------     -----------
      Total loans.............................       106,924          57,465
  Deferred origination fees, net..............          (665)           (344)
   Loans in progress (1)......................       (50,586)        (47,640)
   Allowance for loan losses..................          (557)             --
                                                ------------     -----------
    Commercial and multi-family loans, net....   $    55,116     $     9,481
                                                 ===========     ===========
------------
(1) Represents the unfunded balance of closed loan agreements.

The Company  maintains an allowance for loan losses at a level which  management
considers  adequate to provide for potential  losses based upon an evaluation of
known and inherent  risks.  At September 30, 1998,  the Company had an allowance
for loan losses in the amount of $0.6 million on the commercial and multi-family
loan  portfolio.  At December  31, 1997,  no allowance  for loan losses had been
provided.

The following  table sets forth certain  information  regarding the loans in the
Company's commercial and multi-family loan portfolio at September 30, 1998.

<TABLE>
<CAPTION>
   
                                                       Loan Amount                  Loan per  Stabilized
                                                       Outstanding      Ratio of      Unit/     Debt/
                                             Loan    At September 30,   Type of      Loan to    Square   Coverage  Coupon  
       Loan                Location          Amount       1998           Loan         Cost      Foot      Ratio     Rate     Size
       ----                --------          ------       ----           ----         ----      ----      -----     ----     ----
                                                           (Dollars In Thousands except per square foot data)
<S>                     <C>                 <C>          <C>          <C>              <C>     <C>         <C>    <C>     <C>
Multi-family residential:
  Fourth & Harrison...  San Francisco, CA   $ 11,550     $ 3,228      Construction     85%     $ 201       1.22    9.63%  160 units
  241 Church Street...  New York, NY          30,280      13,684      Conversion       88        582       N/A     9.00    52 units
  459 Washington
   Street.............  New York, NY           3,455       2,026      Conversion       61        314       N/A    10.50    11 units

Commercial:
  Doubletree Hotel....  Lowell, MA             7,652       7,447      Renovation       85         31       1.90   10.00   249 rooms

Hawthorn Suites Hotel.  Schaumburg, IL         7,629          --      Construction     65         56       1.59    8.75   136 suites
  Wyndham Garden
   Hotel..............  Wilmington, DE        13,300      10,555      Renovation       67         61       2.20    8.65   219 rooms

Landmark III-GTE......  Burlington, MA        33,058      19,281      Renovation       85        114       1.18    9.25   291,077
                                            --------     -------
                                            $106,924     $56,221
                                            ========     =======
    
</TABLE>
------------
(1) Represents the net income of the stabilized property divided by debt service
    required by the loan.

                                       25
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

   
The following  table sets forth the activity in the Company's  gross  commercial
and multi-family loan portfolio during the periods indicated:
    

<TABLE>
<CAPTION>
                                                   Three Months                        Nine Months
                                                       Ended                              Ended
                                                 September 30, 1998                 September 30, 1998
                                           -----------------------------      -----------------------------
                                             Balance        No. of Loans        Balance        No. of Loans
                                           -----------        --------        -----------      ------------
                                                                  (In Thousands)
<S>                                        <C>                <C>             <C>                  <C>
Balance at beginning of period..........   $   106,924               7        $    57,465               4
Originations:                              
   Multi-family loans...................            --              --             41,830               2
   Hotel loan...........................            --              --              7,629               1
                                           -----------        --------        -----------          ------
   Net (decrease) increase in loans.....            --              --             49,459               3
                                           -----------        --------        -----------          ------
Balance at end of period................   $   106,924               7        $   106,924               7
                                           ===========        ========        ===========          ======
</TABLE>

During  October  1998,  the  Company  closed a  commitment  to  finance  a hotel
construction loan in New York, NY in the amount of $17.7 million,  of which $1.2
million has been funded.

   
The  following  table sets forth  certain  information  relating  to the payment
status  of  funded  loans in the  Company's  commercial  and  multi-family  loan
portfolio at the dates indicated:
    

                                             September 30,      December 31,
                                                 1998               1997
                                                -------            -------
                                                      (In Thousands)
Past due less than 31 days................     $ 56,221            $ 9,825
Past due 31 days to 89 days...............           --                 --
Past due 90 days or more..................           --                 --
                                               --------            -------
                                               $ 56,221            $ 9,825
                                               ========            =======

RESIDENTIAL  LOAN  PORTFOLIO.  The  Company's  investment in  residential  loans
amounted to $197.5 million at September 30, 1998, a $191.1 million increase over
the $6.4 million investment at December 31, 1997.

The following table sets forth the composition of the Company's residential loan
portfolio at the dates indicated:

                                                  September 30,     December 31,
                                                       1998             1997
                                                   -----------      ------------
                                                           (In Thousands)
   Single-family residential....................   $ 196,111          $  6,465
   Premium (discount), net......................       1,039              (115)
   Deferred hedge loss..........................         345                --
                                                   ---------          --------
     Residential loans, net.....................   $ 197,495          $  6,350
                                                   =========          ========

On November 13, 1998, the Company  securitized  approximately  $182.2 million of
its  single-family  residential  loans  through a special  purpose  entity which
issued  mortgage-related  securities backed by such loans. The senior classes in
this securitization were acquired by third parties, and the Company retained the
subordinate or residual  interests in such  securitization.  The  securitization
provided the Company with additional funds for general corporate purposes.

                                       26
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

The following table sets forth the geographic  location of the residential  loan
portfolio at September 30, 1998.

Geographic Location                        Balance            Percentage
-------------------                        -------            ----------
                                                      (In Thousands)
Michigan..............................    $   50,282               26.2%
California............................        19,710               10.3
Florida...............................        10,032                5.2
Ohio..................................         9,387                4.9
Texas.................................         9,259                4.8
Other.................................        97,441               48.6
                                          ----------            -------
                                          $  196,111              100.0%
                                          ==========            =======

The following table sets forth the activity in the Company's  gross  residential
loan portfolio during the periods indicated.

<TABLE>
<CAPTION>
                                            Three Months                     Nine Months
                                               Ended                            Ended
                                         September 30, 1998               September 30, 1998
                                  -----------------------------      ---------------------------
                                   Balance         No. of Loans       Balance       No. of Loans
                                  ---------        ------------      ---------      ------------
                                                        (In Thousands)
<S>                              <C>                   <C>          <C>                    <C>
Balance at beginning of period.. $   137,462           1,392        $     6,465            50
Purchases.......................      70,644             673            210,524         2,041
Sales...........................        (131)             (5)              (131)           (5)
Principal repayments............     (11,864)           (128)           (20,747)         (154)
                                 -----------         -------        -----------       -------
   Net increase in loans........      58,649             540            189,646         1,882
                                 -----------         -------        -----------       -------
Balance at end of period........ $   196,111           1,932        $   196,111         1,932
                                 ===========         =======        ===========       =======
</TABLE>

The  following  table sets forth  certain  information  relating  to the payment
status  of  loans in the  Company's  residential  loan  portfolio  at the  dates
indicated.

                                                September 30,     December 31,
                                                    1998              1997
                                                 ----------       -----------
                                                        (In Thousands)
Current to past due 30 days................      $   183,253      $     6,196
Past due 31 days to 89 days................            6,080               --
Past due 90 days or more...................            6,778              269
                                                 ----------       -----------
                                                 $   196,111      $     6,465
                                                 ===========      ===========

DISCOUNT LOAN PORTFOLIO.  The discount loan portfolio  consists of nonperforming
and  subperforming  mortgage  loans that are in default or for which  default is
likely or  imminent  or for which  the  borrower  is  currently  making  monthly
payments in accordance with a forbearance plan, which generally are purchased at
a discount  to both the unpaid  principal  amount of the loan and the  estimated
value of the security  property.  At September  30, 1998,  the  Company's  gross
discount loan portfolio amounted to $12.1 million,  exclusive of $3.5 million of
discount recorded in connection with the acquisition of discount loans.

                                       27
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

The following table sets forth the  composition  of the Company's  discount loan
portfolio by type of loan at the dates indicated.


                                                 September 30,     December 31,
                                                     1998              1997
                                                  -----------      -----------
                                                         (In Thousands)
Commercial real estate loans:
   Office.....................................    $     8,246      $    11,893
   Retail.....................................          3,873           30,636
                                                  -----------      -----------
     Total unpaid principal balance...........         12,119           42,529
Discount......................................         (3,530)         (15,550)
                                                  -----------      -----------

   Discount loans, net........................    $     8,589      $    26,979
                                                  ===========      ===========

During the nine months ended  September 30, 1998, the Company  acquired  through
foreclosure  a shopping  center  located in  Halifax,  Nova Scotia and an office
building located in Dayton, Ohio, which secured discount loans with a balance of
$15.4  million  and $1.5  million,  respectively.  These  foreclosures  were the
primary reason for the decrease in the discount loan  portfolio  during the nine
months ended September 30, 1998.

At September 30, 1998, the Company's discount loans included:

   o  a  13.83%  interest  in  two  loans,   which  interest  had  an  aggregate
      outstanding  principal  balance of $8.2 million.  The  collateral  for the
      loans consist of two office buildings  located in Manhattan,  New York. In
      September  1998,  the maturity date of one of these loans were extended to
      June 1st, 1999. As of September 30, 1998,  these loans were  performing in
      accordance with their terms.

   o  a loan  secured by a shopping  center  located in Havre,  Montana  with an
      unpaid principal  amount of $3.9 million.  The shopping center has 195,445
      gross  rentable  square  feet.  As of  September  30,  1998,  the loan was
      nonperforming  and  foreclosure  proceedings  were in process.  During the
      month of October 1998,  this property was acquired by the Company  through
      foreclosure sale.

The  following  table sets forth  certain  information  relating  to the payment
status of loans in the Company's discount loan portfolio at the dates indicated.

                                                  September 30,     December 31,
                                                      1998              1997
                                                    ---------        ---------
                                                          (In Thousands)
Current to past due 30 days....................     $   8,246        $   7,964
Past due 31 days to 89 days....................            --               --
Past due 90 days or more.......................         3,873           34,565
                                                    ---------        ---------
                                                    $  12,119        $  42,529
                                                    =========        =========

INVESTMENTS IN REAL ESTATE.  The Company's real estate  investment  approach had
sought  value  creation  opportunities  that can be realized  through  increased
management  focus  and  capital   investment.   The  Company   generally  sought
underperforming  properties  that can be acquired and  renovated at discounts to
replacement  cost.  In  evaluating  opportunities,  the Company has focused on a
series  of key  investment  criteria.  These  include  analysis  of the level of
proposed  new supply and  development  constraints  in the  markets  where it is
considering  investing.  An  underlying  premise of the  Company's  real  estate
investment  philosophy  is that,  while  demand  for real  estate  has  remained
relatively  constant  over time,  sudden and  dramatic  increases in supply have
driven boom and bust real estate cycles.

                                       28
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

At September 30, 1998,  the Company's  investments  in real estate  consisted of
eight  properties  which had an aggregate  carrying value of $209.9  million.  A
total of four of the properties currently owned by the Company with an aggregate
carrying  value of  approximately  $143.4  million are located in San Francisco,
California.  Three of these properties are located in the financial  district of
San Francisco, and one property is located in the adjacent civic center district
of San Francisco.  The Company believes that the office market in San Francisco,
particularly  the  financial   district,   satisfies  its  general  real  estate
investment  philosophy  because  in  management's  view it is  characterized  by
limited new supply and significant barriers to entry. Low vacancy rates, coupled
with lack of new construction, currently are increasing rental rates. Government
regulation of  development in conjunction  with local  construction  costs and a
lack of developable land provide significant barriers to entry to this area. The
Company  believes that its  investments in real estate in San Francisco are well
located and benefit from their  proximity to the majority of the city's  office,
retail and hotel accommodations.

The  Company's  net  investment  in real estate  increased to $209.9  million at
September  30, 1998 from $45.4  million at December 31, 1997 and is comprised of
the following properties:

<TABLE>
<CAPTION>
  Date                                                                                   Book Value at
Acquired   Property                Location           Square Feet    Property Type    September 30, 1998
--------   --------                --------           -----------    -------------    ------------------
                                            (Dollars In Thousands)
<S>        <C>                     <C>                        <C>        <C>               <C>
04/08/98   225 Bush Street         San Francisco, CA          536,382    Office Bldg.         102,870
09/23/97   450 Sansome St.         San Francisco, CA          130,437    Office Bldg.          17,588
01/23/98   690 Market St.          San Francisco, CA          124,692    Office Bldg.          13,772
09/03/97   10 U.N. Plaza           San Francisco, CA           71,636    Office Bldg.           9,155
07/22/98   841 Prudential Drive    Jacksonville, FL           488,080    Office Bldg.          32,827
11/10/97   Cortez Plaza            Bradenton, FL              289,686    Shopping Ctr.         19,288
04/09/98   7075 Bayers Rd.         Halifax, Nova Scotia       402,529    Shopping Ctr.         15,219
04/03/98   Park Center I           Dayton, OH                  44,000    Office Bldg.           1,534
                                                              Accumulated depreciation         (2,402)
                                                                                            ----------
                                                                                            $ 209,851
                                                                                            =========
</TABLE>

The Company's  current overall  strategy with respect to these  properties is to
reposition  the  facilities and target larger or full floor tenants with five to
ten year  lease  terms.  Repositioning  is  intended  to result  in rents,  upon
re-leasing,  that are greater than the current rents at the sites.

   
The following table sets forth the cost of  improvements  for each investment in
real estate during the nine months ended September 30, 1998:
    

<TABLE>
<CAPTION>
                                                            Actual
                                           Budgeted        Cost of     Carrying Value                   Rents due and
                         Initial Cost       Cost of      Improvements    at September    Accumulated      Accrued at    Total Rental
    Property              to Company    Improvements(1)    to Date        30, 1998      Depreciation    end of Period     Income
    --------              ----------    ---------------    -------        --------      ------------    -------------     ------
<S>                       <C>             <C>              <C>           <C>               <C>            <C>            <C>
                                                          (In Thousands)
225 Bush Street.........    101,632          3,701            1,238         102,870            890             530          4,787
450 Sansome St..........     17,205            496              383          17,588            361             179          1,783
690 Market St...........     13,707          4,072               65          13,772            189              45          1,419
10 United Nations plaza.      9,080          2,417               75           9,155            196              66            999
Prudential Building.....     32,827            465               --          32,827            190              71          1,586
Cortez Plaza............     19,244            197               44          19,288            398             345          2,173
Bayers Road.............     15,219            609               --          15,219            162           1,208          1,838
Park Center I...........      1,534             --               --           1,534             16              --             --
                          ---------       --------          -------       ---------        -------         -------       --------
     Total..............  $ 210,448       $ 11,957          $ 1,805       $ 212,253        $ 2,402         $ 2,444       $ 14,585
                          =========       ========          =======       =========        =======         =======       ========
</TABLE>

(1) Projected through December 1999

                                       29
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

Set forth below is a brief  description of each of the Company's  investments in
real estate at September 30, 1998.

BUSH STREET.  In April 1998,  the Company  acquired an existing  536,382  square
foot,  22-story,  Class A office  building  located  at 225 Bush  Street  in the
financial district of San Francisco,  California for $100.2 million. Bush Street
was  originally  constructed  in 1923,  expanded  in 1994 and brought up to 1992
building code seismic  standards  during 1992-94.  Originally built as the world
headquarters of Chevron of USA, Inc. ("Chevron"), it was sold in 1994 as Chevron
sought to relocate its executive  offices.  The Company is projecting to make an
additional investment of approximately $11.1 million to pay tenants improvements
and leasing commissions and to install a sprinkler system,  life/safety systems,
ADA upgrades and cosmetic  improvements  to the entrance  lobby. As of September
30,  1998,  the Bush Street  Property  was 89% leased and the  average  rent per
square foot amounted to approximately $18.30. A new 25,000 square foot lease has
been executed and is projected for occupancy in October 1998,  with an effective
rate of $38 per square foot.

450 SANSOME  STREET.  In September  1997, the Company  acquired a 130,437 square
foot,  16-story,  Class B office  building  located at 450 Sansome Street in the
financial  district of San  Francisco,  California.  The Company  purchased this
property for $17.2  million.  The  building  was 77% leased as of September  30,
1998.  The property  was built in 1967 and upgraded in certain  respects in 1989
and 1990.  The property was acquired  from a lender who had taken title  through
foreclosure. As a result, average rent per square foot amounted to approximately
$18.00 at the date of acquisition. During the next five years, 86% of the leased
space in the property expires.  The Company plans to invest  approximately  $6.7
million  in this  property  to  renovate  the  entrance  lobby,  elevator  cabs,
bathrooms and hallways,  install a sprinkler system, install various upgrades to
enhance compliance with the Americans with Disabilities Act of 1990 (the "ADA"),
fund  deferred  maintenance  and  various  tenant  improvements  and pay leasing
commissions.  

690 MARKET STREET.  In January 1998, the Company acquired a 124,692 square foot,
16-story,  Class C office building located at 690 Market Street in the financial
district of San  Francisco,  California.  The property was  purchased  for $13.7
million.  The  property was  originally  constructed  in 1888 and has  undergone
numerous  renovations.  At the  date of  acquisition,  approximately  41% of the
building was  available  for  re-leasing  by the end of 1998 and existing  rents
averaged $14.06 per square foot. The building was 72% leased as of September 30,
1998. The Company is investing  approximately $4.3 million to install structural
upgrades,  a sprinkler  system and ADA upgrades,  fund deferred  maintenance and
tenant  improvements  and pay  leasing  commissions.  The  Company is  currently
implementing  a new  leasing  program  at the  property  to  coincide  with  the
renovation  schedule and has  executed  nine new leases  totaling  approximately
13,800 square feet.

10 UNITED NATIONS PLAZA. In September 1997, the Company acquired a 71,636 square
foot,  six-story,  Class B office building located at 10 United Nations Plaza in
the civic center district of San Francisco. The Company purchased this property,
which was  built in 1982,  for $9.1  million.  At the date of  acquisition,  the
property  was  substantially  leased and the  average  rent per square  foot was
$13.76. The building was 9% leased as of September 30, 1998, which is consistent
with the  acquisition  strategy  to  retenant  the  building.  The  property  is
currently  being  marketed for lease to tenants with full floor or full building
space requirements.  The Company is investing approximately $3.5 million in this
property  to fund  cosmetic  improvements  to  enhance  the lobby and  hallways,
install ADA upgrades,  fund deferred maintenance and tenant improvements and pay
leasing commissions.

PRUDENTIAL  BUILDING.  On July 22, 1998,  the Company  purchased the  Prudential
Building,  a 488,080  square  foot,  22 story  office  building  in the  central
business  district of Jacksonville,  Florida for an aggregate  purchase price of
$36.0 million,  plus closing  costs.  The purchase price was funded with cash on
hand and advances from the Company's  line of credit.  Simultaneously  with this
closing,  the Company  also leased 97% of the  building  back to the  Prudential
Insurance Co. of America,  and sold two adjacent  parking areas to a neighboring
hospital for approximately $4.1 million. The Prudential lease has a term of four
years with options to vacate the premises  during the term of the lease, as well
as three subsequent five year extension  options.  The Company also entered into
an agreement with the hospital  pursuant to which the hospital is to lease up to
150,000  square feet in the  Prudential  Building for a nine-year  period should
Prudential exercise its termination option.

CORTEZ PLAZA.  In November 1997, the Company  purchased  Cortez Plaza, a 289,686
square foot shopping  center located in Bradenton,  Florida,  a suburb of Tampa.
The Company  purchased this  property,  which was built in 1956 and renovated in
1988, for $18.4 million.  In a separate  transaction,  the fee simple title to a
large portion of the shopping center that had been subject to a ground lease was
purchased  simultaneously for $650,000,  which resulted in a total investment in
this property of $19.1 million. By simultaneously  acquiring fee simple title to
a ground lease that  encumbered a large part of the  shopping  center's  parking
lot,  the  Company   believes  that  it  immediately   improved  the  value  and
marketability of the project.  As of September 30, 1998, the shopping center was
97% leased,  and national  and regional  tenants,  including  Publix,  PetSmart,
Circuit City and Montgomery Ward, which currently is in bankruptcy,  comprised a
majority of the complex.  Below market leases covering  approximately 14% of the
center expire during 1998, 1999 and 2000.

                                       30
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

BAYERS ROAD SHOPPING CENTRE. In April 1998, the Company acquired the Bayers Road
Shopping Centre,  which is located at 7075 Bayers Road in Halifax,  Nova Scotia.
The property was acquired by  foreclosure  on the loans secured by the property,
which were acquired by the Company at a discount in September 1997. The property
contains 402,529 square feet of space,  which consists primarily of retail space
but also includes some office space and storage  space.  The original  buildings
were built in 1956 and were enclosed and expanded in several phases between 1971
and 1987. Major tenants of the property  currently consist of Zellers,  Lawton's
and  Mark's  Work  Wearhouse.  The  property  was  approximately  81%  leased at
September 30, 1998. The Company  currently is implementing an operating plan for
this  investment  that will include the  relocation of existing major tenants to
higher visibility areas in order to improve pedestrian traffic flow.

PARK CENTER I. In April 1998,  the  Company  acquired  Park Center I, a suburban
office building located on a frontage road to Interstate 75 in Dayton, Ohio. The
building was constructed in 1981 and has four stories and  approximately  44,000
square feet of rentable  space.  The property was acquired by foreclosure on the
loan secured by the property, which was acquired by the Company at a discount in
September  1997.  The building is  currently  vacant and  configured  for single
tenant use, but may be converted to multi-tenant use.

The following table sets forth a summary schedule of the total lease expirations
for the Company's investments in real estate for leases in place as of September
30,  1998,  assuming  that  none of the  tenants  exercise  renewal  options  or
termination rights, if any, at or prior to the scheduled expirations.

<TABLE>
<CAPTION>
                                              Percentage of                 Average Base    Percentage of
                                                Aggregate     Annualized      Rent per        Aggregate
                  Number of  Square Footage     Portfolio    Base Rent of  Square Foot of     Portfolio
  Year of Lease    Leases      of Expiring    Leased Square    Expiring       Expiring     Annualized Base
  Expiration(1)   Expiring       Leases           Feet         Leases(2)      Leases(3)         Rent
---------------- ----------  --------------  --------------  ------------  --------------  ----------------
     <S>             <C>       <C>               <C>          <C>               <C>            <C>  
     1998            36           75,627          4.39%       $  320,170        $ 4.23          1.69%
                                                                         
     1999            45          166,888          9.68         1,996,059         11.96         10.52
                                                                               
     2000            37          110,400          6.41         1,644,278         14.89          8.67
                                                                               
     2001            44          160,075          9.29         2,038,016         12.73         10.74
                                                                               
     2002            43          585,294         33.96         7,981,246         13.64         42.08
                                                                               
     2003             9           37,496          2.18           737,511         19.67          3.89
                                                                               
     2004             5           48,770          2.83           640,189         13.13          3.38
                                                                               
     2005             5           32,960          1.91           128,563          3.90          0.68
                                                                               
     2006             5          127,804          7.42           677,470          5.30          3.57
                                                                               
     2007             5          113,492          6.59         1,359,321         11.98          7.17
                                                                               
 2008 & beyond       12          264,496         15.35         1,445,298          5.46          7.62
                    ---        ---------        ------       -----------                      ------
                    246        1,723,302        100.00%      $18,968,121                      100.00%
                    ===        =========        ======       ===========                      ======
</TABLE>

-----------
(1)  Lease  year runs from  January 1 to  December  31 for all years  except for
     1998, in which the lease year is October 1 to December 31, 1998.
(2)  Annualized  base rent is calculated  based on the amount of rent  scheduled
     from January 1 of the listed year to the lease expiration,  except for 1998
     in which the amount is based on the amount of rent scheduled from October 1
     to lease  expiration.
(3)  Average base rent per square foot is calculated  using the annualized  base
     rent divided by the square footage.

                                       31
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

As part of its initial  repositioning  of a property after an  acquisition,  the
Company  generally  pursues a policy of  replacing  some  existing  tenants with
tenants  which  have  higher  lease  payments  and/or  a higher  probability  of
expansion and renewal.  This policy,  which is in accordance  with the Company's
philosophy  of  investing  in  distressed  real  estate,  may affect a number of
existing tenants at acquired  properties.  Although the Company's  repositioning
strategy  may  adversely  affect  tenant  retention  rates in the early years of
ownership  of  a  property,  management  believes  that  the  strategy  will  be
beneficial to the Company in the long term. There can be no assurance,  however,
that the  Company's  tenant  retention  rate will  increase as each  property is
repositioned  or  stabilized  or that the net  present  value of new or  renewed
leases will  substantially  exceed the net present value of leases with existing
tenants.

The  Company's  leases  generally  contain  provisions  designed to mitigate the
adverse  impact of inflation on net income.  These  provisions  include  clauses
enabling  the  Company  to pass  through  to tenants  certain  operating  costs,
including real estate taxes,  common area maintenance,  utilities and insurance,
thereby  reducing the  Company's  exposure to  increases in costs and  operating
expense resulting from inflation.  In addition, many of the Company's leases are
for terms of less than ten years,  which  permits the Company to seek  increased
rents upon re-leasing at higher market rates.

INDEBTEDNESS-GENERAL.  The Company's investments in real estate, subordinate and
residual  interests in  mortgage-related  securities  and other assets,  such as
single-family  residential  loans,  generally depend upon short-term  borrowings
such as  repurchase  agreements  and warehouse  facilities/lines  of credit with
financial  institutions  or  institutional  lenders  to  finance  the  Company's
acquisition  of such  assets  on a  short-term  basis in the case of  repurchase
agreements  and  on  a  one  to  three-year  basis  in  the  case  of  warehouse
facilities/lines  of credit.  There can be no assurance that such financing will
continue to be available on terms  reasonably  satisfactory to the Company.  The
inability of the Company to arrange  additional  borrowings  such as  repurchase
agreements  and  warehouse  facilities/lines  of credit  or to repay,  extend or
replace  existing  borrowings  when they  expire  would have a material  adverse
effect on the Company's business,  financial condition and results of operations
and on the Company's outstanding securities.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE. Securities sold under agreements
to repurchase  were $143.1 million at September 30, 1998, a decrease from $223.8
million  at June 30,  1998.  These  obligations  are  secured  by certain of the
Company's  investments in subordinated  interests in commercial  mortgage-backed
securities and residual interests in subprime residential loan  securitizations.
The following  table  summarizes the maturity dates of the Company's  repurchase
agreements  and the market  value of the  related  collateral  securities  as of
September 30, 1998:

<TABLE>
<CAPTION>
                             Outstanding        Commercial Securities     Residential Securities
   Maturity Date              Borrowing            Collateral Value          Collateral Value
   -------------              ---------            ----------------          ----------------
                                                (Dollars in Millions)
   <S>                         <C>                     <C>                      <C>
   0-30 days                   $  17.8                 $  20.9                  $     --
   6-12 months                    73.9                    60.5                      58.0
   18 months and over             51.4                      --                     104.7
                               -------                 -------                   -------
        Total                  $ 143.1                 $  81.4                  $  162.7
                               =======                 =======                  ========
</TABLE>

At September 30, 1998,  interest payments with respect to these obligations were
approximately  $0.6  million  per  month  (which  assumes  that  the  repurchase
agreements  which mature  within 30 days are renewed at  approximately  the same
rate of interest).
                                       32
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

The following  table  summarizes the maturity dates of the Company's  repurchase
agreements  and the market  value of the  related  collateral  securities  as of
October 31, 1998:

<TABLE>
<CAPTION>
                             Outstanding        Commercial Securities     Residential Securities
   Maturity Date              Borrowing            Collateral Value          Collateral Value
   -------------              ---------            ----------------          ----------------
                                                (Dollars in Millions)
   <S>                         <C>                     <C>                      <C>
   0-30 days                    $  28.2                 $  34.6                  $   15.1
   31-180 days                     53.7                    40.9                      51.9
   6-12 months                     13.7                    18.3                        --
   18 months and over              42.5                      --                      88.5
                                -------                 -------                  --------
        Total                   $ 138.1                 $  93.8                  $  155.5
                                =======                 =======                  ========
</TABLE>

At October 31, 1998,  interest  payments with respect to these  obligations were
approximately  $0.56 million  per  month  (which  assumes  that  the  repurchase
agreements  which mature  within 30 days are renewed at  approximately  the same
rate of interest).

OBLIGATIONS  OUTSTANDING  UNDER LINES OF CREDIT.  Obligations  outstanding under
lines of credit amounted to $189.1 million at September 30, 1998, as compared to
$154.2  million at June 30,  1998.  These  borrowings  at  September  30,  1998,
include:

   o  $28.9  million  pursuant to a three year  agreement  which matures in July
      2001, which is  collateralized by commercial loans, with respect to which,
      the monthly  interest  payments  were $0.18 million and which is described
      below under "Obligations Outstanding Under Lines of Credit - Real Estate";

   o  the U.S.  dollar  equivalent  of $24.2  million  pursuant  to a three year
      agreement  which  matures in June  2001,  which is  denominated  in Pounds
      Sterling  with respect to which the monthly  interest  payments were $0.20
      million  and   collateralized  by  certain  U.K.  mortgage  loan  residual
      securities; and

   o  $136.0 million  pursuant to an agreement  which matures in April 1999, and
      on which monthly interest payments were $0.67 million.  The obligation was
      collateralized  by single family  residential  mortgages but was repaid on
      November 13, 1998,  in conjunction with the  securitization of 1,808 first
      and second single family residential mortgage loans (as discussed above).

At October 31, 1998,  the outstanding  balances with respect to these borrowings
were $34.5 million,  $22.3 million,  and $136.0 million and the monthly interest
payments with respect to these  borrowings  were  approximately  $0.17  million,
$0.20 million, and $0.67 million. 

OBLIGATIONS  OUTSTANDING  UNDER  LINES  OF  CREDIT  - REAL  ESTATE.  Obligations
outstanding  under  lines of credit  secured by real  estate  amounted to $142.4
million at September 30, 1998,  as compared to $115.2  million at June 30, 1998.
These  borrowings  have a  three-year  term and an interest  rate that floats in
accordance with LIBOR.  Set forth below is information  regarding OAC's mortgage
indebtedness relating to its investment in real estate at September 30, 1998:

<TABLE>
<CAPTION>
                        Principal        Interest                 Maturity         Annual
Property                 Amount           Rate                      Date           Payments
--------                 ------           ----                      ----           --------
                                                (Dollars in Millions)
<S>                     <C>          <C>                       <C>                 <C>
Bush Street             $ 75.0 (1)    LIBOR plus 1.75%          April 2001 (3)      $5.5 (4)
Other..................   67.4 (2)    LIBOR plus 1.75%          June 2001  (3)      $5.0 (4)
                        ------
                        $142.4
                        ======
</TABLE>

(1) Plus up to $5.0 million of additional  advances for capital  improvements to
    Bush Street.

(2) Represents the portion of the outstanding  balance under a $200 million loan
    that is secured by real estate.  As of September 30, 1998, OAC's investments
    in Cortez Plaza, 450 Sansome Street, 10 U.N. Plaza, Prudential Plaza and 690
    Market  Street  secured  this loan,  and an  additional  $28.9  million  was
    borrowed and secured by commercial mortgage loans under this line of credit.

(3) Subject to certain conditions, OAC may extend the maturity date by one year.

(4) Based on the interest rate in effect as of September 30, 1998.

                                       33
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

At October 31, 1998, the obligations under lines of credit - real estate had not
changed materially.

DERIVATIVE AND FOREIGN EXCHANGE  FINANCIAL  INSTRUMENTS.  Derivative and foreign
exchange transactions involve credit and market risk. Because of changing market
environments, the monitoring and managing of these risks is a continual process.
For a  further  discussion  of  market  risk,  see  Item  3,  "Quantitative  and
Qualitative  Disclosures  about  Market  Risk." The  Company  believes  the true
measure of credit  risk is the  replacement  cost of the  derivative  or foreign
exchange  contract.   This  is  also  referred  to  as  repayment  risk  or  the
mark-to-market  exposure amount. While notional amount is the most commonly used
volume  measure in the  derivative  and foreign  exchange  markets,  it is not a
measure of credit or market risk. The notional amount  typically does not change
hands,  but is simply a quantity  upon which  interest  and other  payments  are
calculated.  The  notional  amounts  of the  Company's  derivative  and  foreign
exchange  products  exceed the possible  credit and market loss that could arise
from such transactions. For a further discussion of the Company's derivative and
foreign exchange instruments,  see Note 6 to the Interim Consolidated  Financial
Statements included in Item 1 above.

The following table indicates the interest rate swaps outstanding at October 31,
1998:

<TABLE>
<CAPTION>
                      Notional           LIBOR                          Floating Rate at
    Maturity           Amount            Index           Fixed Rate       End of Period      Fair Value
    --------           ------            -----           ----------       -------------      ----------
                                              (In Thousands)
      <S>             <C>               <C>                 <C>                <C>           <C>       
      2003            $ 100,000         1-month             5.75%              5.22%         $  (3,327)
      2001               17,000         1-month             6.00               5.34               (522)
      2001               75,000         1-month             6.00               5.38             (2,292)
      2002                8,780         1-month             6.04               5.34               (349)
                      ---------                                                              ---------
                      $ 200,780                                                              $  (6,491)
                      =========                                                              =========

At October 31, 1998, there were no future contracts outstanding.
</TABLE>

MINORITY  INTEREST.  At September  30, 1998,  minority  interest  totaled  $28.4
million and represented  OCN's  ownership  through IMI of 1,808,733 units in the
Operating  Partnership.  On May 7, 1998, the Company sold 1,473,733 units in the
Operating  Partnership  to IMI for $24.5  million.  On February  17,  1998,  the
Company sold 175,000  shares of common stock for cash in an aggregate  amount of
approximately  $3.1 million to certain officers and directors of the Company and
OCN. In connection with this stock issuance, IMI sold a like number of shares of
the Company's common stock to the Company and invested in a like number of units
in the  Operating  Partnership  in order to  comply  with  the  stock  ownership
restrictions  imposed on REITs under the Code.  See Notes 1 and 2 to the Interim
Consolidated Financial Statements included in Item 1 above.

SHAREHOLDERS'  EQUITY.  Shareholders'  equity  decreased  by $28.3  million from
December 31, 1997 to September 30, 1998.  The decrease was due to a $6.4 million
increase in unrealized  losses on  securities  available for sale, a net loss of
$11.5 million,  a cumulative  currency  translation  adjustment of $2.0 million,
$22.4 million in cash dividends  paid during 1998,  which were offset by a $14.0
million  capital  contribution  in connection with the sale of the IO Portfolio.
See the  Consolidated  Statement  of  Changes  in  Shareholders'  Equity  in the
Consolidated Financial Statements included in Item 1 above.

FUNDS FROM OPERATIONS

The Company  generally  considers Funds From  Operations  ("FFO") to be a useful
financial  performance  measure of the operating  performance  of a REIT because
such measure does not recognize (i) depreciation and amortization of real estate
assets as operating  expenses,  which management  believes are not meaningful in
evaluating  income-producing  real estate because such real estate  historically
has not depreciated and (ii) gains/losses  from debt  restructuring and sales of
property.  In  addition,  FFO together  with net income and cash flow,  provides
investors  with an  additional  basis to evaluate the ability of a REIT to incur
and service debt and to fund  acquisitions and other capital  expenditures.  FFO
does not represent cash provided by operating activities in accordance with GAAP
and should not be  considered an  alternative  to net income as an indication of
the  results  of the  Company's  performance  or to cash  flows as a measure  of
liquidity. For a discussion of the Company's operating,  investing and financing
activities  under GAAP, see "-Capital  Resources and Liquidity"  below. In 1995,
the National Association of Real Estate Investment Trusts ("NAREIT") established
new  guidelines  clarifying its definition of FFO and requested that REITs adopt
this new definition  beginning in 1996. FFO consists of net income applicable to
common shareholders  (computed in accordance with GAAP) excluding gains (losses)
from  debt  restructuring  and  sales  of  property  (including   furniture  and
equipment) plus real estate related  depreciation  and  amortization  (excluding
amortization   of  deferred   financing   costs)  and  after   adjustments   for
unconsolidated   partnerships  and  joint  ventures.  Because  other  REITs  may
calculate FFO in a different manner, however, there can be no assurance that the
Company's FFO is comparable with the FFO reported by other entities.

                                       34
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

FFO for the three months ended September 30, 1998 was ($7.1) million compared to
$4.4  million  for the same  period a year ago.  FFO for the nine  months  ended
September 30, 1998,  was $4.1 million as compared to $6.4 million for the period
May 14,  1997,  to  September  30,  1997,  which  began on the date the  Company
completed the IPO.

FFO differs from cash made  available to holders of the Company's  common stock,
which is based on the Company's net taxable income.  Distributions  of dividends
to  shareholders  amounted to $6.5 million or $0.34 per share for the period May
14, 1997 to September 30, 1997 and $22.4 million or $1.10 per share for the nine
months ended September 30, 1998.

   
The following table reconciles FFO and net income:
    

<TABLE>
<CAPTION>
                                                       For the          For the           For the       For the Period
                                                    Three Months      Three Months      Nine Months      May 14, 1997
                                                        Ended            Ended             Ended              to
                                                    September 30,    September 30,     September 30,     September 30,
                                                        1998              1997              1998             1997
                                                     ---------         --------         ---------          --------
                                                                               (In Thousands)
<S>                                                  <C>               <C>              <C>                <C>     
Net income...................................        $  (7,639)        $  4,350         $ (11,497)         $  6,410
Depreciation and amortization................            1,160               22             2,223                22
Loss on sale of IO portfolio.................               --               --            13,957                --
Extraordinary  gain  on  repurchase  of                   (615)              --              (615)               --
                                                     ---------         --------         ---------          --------
debt                                                                                                    
FFO                                                  $  (7,094)        $  4,372         $   4,068          $  6,432
                                                     =========         ========         =========          ========
</TABLE>

CAPITAL RESOURCES AND LIQUIDITY

Liquidity is a  measurement  of the  Company's  ability to meet  potential  cash
requirements,   including  ongoing   commitments  to  repay   borrowings,   fund
investments,  engage in loan  acquisition  and lending  activities and for other
general business purposes.  Additionally, to maintain its status as a REIT under
the Code,  the  Company  must  distribute  annually  at least 95% of its taxable
income.  The primary sources of funds for liquidity during the first nine months
of  1998  consisted  of net  cash  provided  by  operating  activities,  reverse
repurchase  agreements,  proceeds  from  issuance  of the Notes,  other  secured
borrowings,  maturities  and  principal  payments  on loans and  securities  and
proceeds from the sale of Operating Partnership units to IMI.

The  Company's  operating  activities  provided  cash flows of $43.7 million and
$344,000  during the nine months and three  months  ended  September  30,  1998,
respectively.  The  Company's  investing  activities  used cash  flows of $711.5
million  and $110.2  million  during  the nine  months  and three  months  ended
September 30, 1998,  respectively.  During both of the foregoing  periods,  cash
flows from  investing  activities  were used  primarily  to purchase  securities
available for sale,  originate or purchase loans,  and purchase  commercial real
estate. The Company's financing activities provided cash flows of $637.5 million
and $129.0 million  during the nine months and three months ended  September 30,
1998, respectively, and primarily consisted of proceeds from lines of credit and
repurchase  agreements  of $474.6  million and proceeds from the issuance of the
Notes of $150.0 million.

                                       35
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

Fluctuations  in  interest  rates  will  continue  to impact the  Company's  net
interest  income to the extent  the  Company's  fixed rate  assets are funded by
variable rate debt or the  Company's  variable rate asset reprice on a different
schedule or in relation to a different  index than its floating  rate debt which
in turn could impact potential  returns to shareholders.  At September 30, 1998,
the  Company  had  interest  rate  swap  agreements  with a  notional  amount of
approximately  $200.8  million and a fair value of ($6.3)  million,  in order to
partially  limit the adverse  effects of rising  interest rates on the remaining
floating-rate  debt. When the Company's swap agreements expire, the Company will
have  interest  rate  risk  to  the  extent   interest  rates  increase  on  any
floating-rate  borrowings unless the swaps are replaced or other steps are taken
to mitigate this risk. The  flexibility  in the Company's  leverage is dependent
upon,  among  other  things,  the  levels  of  unencumbered  assets,  which  are
inherently linked to prevailing  interest rates and changes in the credit of the
underlying   asset.  At  September  30,  1998,  the  Company  had   unencumbered
residential  loans and securities  having a market value totaling  approximately
$167.6  million  ($57.9  million of  subordinate  and  residual  mortgage-backed
securities,  $48.2 million of commercial  mortgage-backed  securities, and $61.5
million of residential loans). In certain circumstances,  including, among other
things,  increases in interest rates, changes in market spreads, or decreases in
credit  quality of underlying  assets,  the Company would be required to provide
additional collateral in connection with its short-term, floating-rate borrowing
facilities.  During the third  quarter of 1998,  the Company was required to and
did fund requests by its lenders for additional  collateral calls on outstanding
reverse repurchase  agreements  collateralized by securities  available for sale
which  aggregated  $2.3 million in July 1998,  $1.4 million in August 1998,  and
$3.9 million in September  1998,  and $13.7 million in October 1998. The Company
funded requests for additional  margin deposits in connection with its swaps and
future  positions  which  aggregated  $0.7 million in July 1998, $1.0 million in
August 1998,  $4.6 million in September  1998, and $3.3 million in October 1998.
At October 31,  1998,  OAC had  unencumbered  securities  having a market  value
totaling  approximately  $67.0  million  which  comprised  of $40.5  million  of
subordinate  and  residual  mortgage-backed  securities  and  $26.5  million  of
commercial mortage-backed securities.

For additional  information with respect to the Company's monthly mark-to-market
of its  securities  available  for sale  portfolio,  see  "Changes in  Financial
Condition - Securities  Available  for Sale." The Company has  significant  debt
service obligations,  as discussed above. At September 30, 1998, the Company had
total consolidated  indebtedness of $617.6 million,  of which all but the $143.0
million of outstanding Notes was secured indebtedness,  as well as $21.4 million
of other  liabilities.  This consolidated  indebtedness  consisted of (i) $143.1
million  of  repurchase  agreements,  (ii)  lines of credit  aggregating  $331.6
million which mature in 1999 and 2002 and are secured by real estate,  loans and
securities and (iii) $143.0 million of outstanding  Notes.  The monthly interest
payments on the Company's  total  consolidated  indebtedness  were $4.1 million,
$5.2  million and $4.0  million for the months of July,  August,  and  September
1998,  respectively.  One line of credit  which  amounted  to $136.0  million at
September  30, 1998 was repaid on  November  13,  1998 (in  connection  with the
securitization  of the  residential  mortgage  loans which  secured this line of
credit,  and which  resulted  in $173.4  million of net  proceeds to the Company
prior to repayment of this line of credit).

Mortgage-related  securities which are subject to repurchase agreements, as well
as loans and real estate  which  secure  other  indebtedness,  periodically  are
revalued  by the  lender,  and a decline  in such value may result in the lender
requiring   the  Company  to  provide   additional   collateral  to  secure  the
indebtedness.  Although  to  date  the  Company  has  had  adequate  cash,  cash
equivalents  and  other  unencumbered   assets  to  meet  calls  for  additional
collateral,  to repay a portion of the related indebtedness or to meet its other
operating and financing requirements,  including its current capital expenditure
plans,  there can be no  assurance  that  sufficient  levels of such assets will
continue to be available.

If the Company is unable to fund additional  collateral needs or to repay, renew
or  replace  maturing  indebtedness  on  terms  reasonably  satisfactory  to the
Company, the Company would be required to sell, under adverse market conditions,
a portion of its assets,  and could incur  losses as a result.  Furthermore,  an
extremely   limited   market  for   subordinate   and   residual   interests  in
mortgage-related  securities  exists and there can be no assurance that one will
fully  develop,  thereby  limiting  the  Company's  ability  to  dispose of such
securities promptly for fair value in such situations.

                                       36
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

In addition to payment and, in the case of the Company's  secured  indebtedness,
collateralization   requirements,  the  Company  is  subject  to  various  other
covenants  in  the  agreements   evidencing  its  indebtedness,   including  the
maintenance of specified  amounts of equity.  At September 30, 1998, the Company
was in compliance  with all  obligations  under the  agreements  evidencing  its
indebtedness   with  respect  to  the   Company's   equity  and  the   Operating
Partnership's equity, as defined in the applicable agreement.  As of October 31,
1998, the Company  exceeded the highest  applicable  requirement by in excess of
$19.7 million.  There can be no assurance that additional  operating losses will
not result in the Company's  violation of its financial covenants in the future.
In the event of a default in such covenants,  the lender generally would be able
to accelerate  repayment of the subject  indebtedness and pursue other available
remedies,  which could result in defaults on other  indebtedness of the Company,
unless  the  applicable  lender or  lenders  allowed  the  Company  to remain in
violation of the  agreements.  Were a default to be declared,  the Company would
not be able to continue  to operate  without  the  consent of its  lenders.  The
Company currently is considering various  alternatives to enhance its ability to
meet its payment and other  obligations  under its  indebtedness and the funding
requirements  discussed  below,  including  the sale of  certain  assets and the
potential  tax and  other  consequences  associated  therewith.  There can be no
assurance  that  the  Company  will  have  sufficient  liquidity  to meet  these
obligations on a short-term or long-term basis.

For the quarter  ended  September  30, 1998,  OAC closed  transactions  totaling
approximately  $114.6  million,  all of which were funded.  This activity brings
OAC's total  closed  transactions  since its  initial  public  offering,  net of
repayment,  to $917.1  million as of September 30, 1998. Of this amount,  $866.5
million has been funded and the remaining $50.6 million is to be funded over the
construction  and  renovation  periods,  which  range from two to 18 months.  In
addition,  at September  30, 1998,  the Company had  budgeted  $11.9  million of
capital  expenditures on its investments in real estate in order to improve such
properties for reposition in the market, of which $4.8 million is anticipated to
be spent in the fourth  quarter of 1998 and $7.1  million is  anticipated  to be
spent in 1999.

Based on its  monthly  interest  and  other  expenses,  monthly  cash  receipts,
existing  commitments,  capital  expenditure  plans and rate of collateral calls
through  October 31, 1998,  the Company  believes  that its existing  sources of
funds will be adequate for purposes of meeting its short-term (one year or less)
and long-term  liquidity needs.  There can be no assurance that this will be the
case,  however.  Material increases in monthly interest expense or in collateral
calls,  or  material  decreases  in  monthly  cash  receipts,   generally  would
negatively impact the Company's liquidity. On the other hand, material decreases
in monthly  interest  expense or in collateral  calls generally would positively
affect the Company's liquidity.

Year 2000

As the year 2000 approaches, a critical business issue has emerged regarding how
existing  application  software  programs and operating  systems can accommodate
this date value. Many existing  application software products in the marketplace
were designed to accommodate only two-digit date entries.  Beginning in the year
2000,  these  systems  and  products  will need to be able to accept  four-digit
entries to distinguish  years beginning with 2000 from prior years. As a result,
computer  systems and software used by many companies may need to be upgraded to
comply with such Year 2000 requirements.

The Company is dependent  upon data  processing  systems and software to conduct
its business.  The data processing systems and software include those developed,
purchased  and  maintained  by OCC,  as well as OCN and its other  subsidiaries,
which provide management  services to the Company.  The Company does not own nor
maintain computer equipment or software.

OCN has established a project plan to achieve year 2000 readiness of its mission
critical and non-mission critical systems, including hardware infrastructure and
software   applications.   The  project   plan  is  divided   into  six  phases:
identification,   evaluation,  remediation,   validation,  risk  assessment  and
contingency planning.  As of September 30, 1998, the systems  identification and
evaluation   phases  of  the  project  were  completed.   OCN  expects  to  have
substantially  completed the remediation and validation phases of the project by
the end of 1998.

As part of the identification and evaluation phases of the project,  the Company
has documented  critical operating  functions within each business unit, as well
as strategic third-party and vendor  relationships.  OCN has retained a business
continuity  expert to prepare  contingency plans and assist with the testing and
validation  of  these  plans.  OCN  expects  to  complete  its year  2000  risks
assessment and  contingency  planning  efforts during the first quarter of 1999.
The cost of OCN's year 2000 project,  which is budgeted at $2.0 million, will be
borne by OCN. The Company does not expect to incur any costs in connection  with
achieving year 2000 compliance.

                                       37
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

REIT Status

The  Company  has  qualified  and  intends to  continue  to qualify a REIT under
Sections  856 through 860 of the Code.  Qualification  for  treatment  as a REIT
requires the Company to meet certain criteria,  including  certain  requirements
regarding  the nature of its  ownership,  assets,  income and  distributions  of
taxable income.  A REIT will generally not be subject to federal income taxation
on that  portion of its income that is  distributed  to its  shareholders  if it
distributes  at least 95 percent of its taxable  income and meets  certain other
income and asset  tests.  The  Company has until the filing of its tax return to
satisfy the distribution requirement. Since the Company plans to distribute 100%
of its taxable  income,  no provision has been made for federal income taxes for
the  Company  and its  subsidiaries  in the  accompanying  Interim  Consolidated
Financial  Statements.  As  taxable  income is  finalized  and the tax return is
filed, and additional distribution may be required which may be significant. The
Company may be subject to tax at normal corporate rates on net income or capital
gains not distributed.

RISK OF LOSS OF INVESTMENT COMPANY ACT EXEMPTION

The Company believes that it is not, and intends to conduct its operations so as
not to become,  regulated as an investment  company under the Investment Company
Act of 1940, as amended (the  "Investment  Company  Act").  Under the Investment
Company Act, an investment  company is required to register with the  Commission
and is subject to extensive,  restrictive and potentially  adverse  regulations.
The  Investment  Company  Act exempts  entities,  however,  that are  "primarily
engaged in the business of purchasing or otherwise acquiring mortgages and other
liens on and interests in real estate" ("Qualifying  Interests").  Under current
interpretations  by the staff of the  Commission,  qualifying for this exemption
requires the Company, among other things, to maintain at least 55% of its assets
in  Qualifying  Interests  and to  maintain  an  additional  25%  in  Qualifying
Interests or other real estate-related assets. The Company's investments in real
estate and mortgage loans generally  constitute  Qualifying  Interests,  and the
Company  believes that  subordinate and residual  interests in  mortgage-related
securities  constitute  Qualifying Interests when the Company acquires the right
to direct the  foreclosure  upon any defaulted loan which backs such  securities
and to take all other  actions that a servicer  generally may take in connection
with a defaulted loan.

At September  30, 1998,  the Company  believes  that its  Qualifying  Interests,
including  subordinate  and  residual  interests,  comprised  over  86%  of  the
Company's total assets and over 95% when combined with other real-estate related
assets.  As a result,  the Company  believes  that it was and is not required to
register as an investment  company under the Investment Company Act. The Company
does not intend,  however, to seek an exemptive order, no-action letter or other
form of interpretive  guidance from the Commission on this position,  and if the
Commission  were to take a different  position,  the  Company  could be required
either (a) to change the manner in which it conducts its  operations in order to
avoid  investment  company  registration  or (b) to  register  as an  investment
company, either of which could have a material adverse effect on the Company and
its securities,  could subject the Company to monetary  penalties and injunctive
relief in an action  brought by the  Commission,  could  cause the Company to be
unable to enforce  contracts with third parties and could cause third parties to
seek recession of relevant transactions.

                                       38
<PAGE>

ITEM 2.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
================================================================================

FORWARD-LOOKING STATEMENTS

CERTAIN  STATEMENTS  CONTAINED  HEREIN ARE NOT BASED ON HISTORICAL FACTS AND ARE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT  AND  SECTION  21E  OF  THE  SECURITIES  ACT  OF  1934,  AS  AMENDED.  THESE
FORWARD-LOOKING  STATEMENTS MAY BE IDENTIFIED BY REFERENCE TO A FUTURE PERIOD(S)
OR BY THE USE OF FORWARD-LOOKING  TERMINOLOGY SUCH AS "COMMITMENT,"  "CONTINUE,"
"EXPECT,"  "FORESEE,"  "MAY," "PLAN," "WILL," FUTURE OR CONDITIONAL VERB TENSES,
SIMILAR TERMS, VARIATIONS ON SUCH TERMS OR NEGATIVES OF SUCH TERMS. ALTHOUGH OAC
BELIEVES  THE  ANTICIPATED  RESULTS  OR  OTHER  EXPECTATIONS  REFLECTED  IN SUCH
FORWARD-LOOKING  STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS,  ACTUAL RESULTS
COULD DIFFER  MATERIALLY  FROM THOSE  INDICATED IN SUCH STATEMENTS DUE TO RISKS,
UNCERTAINTIES AND CHANGES WITH RESPECT TO A VARIETY OF FACTORS,  INCLUDING,  BUT
NOT   LIMITED  TO,   INTERNATIONAL,   NATIONAL,   REGIONAL  OR  LOCAL   ECONOMIC
ENVIRONMENTS,  GOVERNMENT FISCAL AND MONETARY,  PREVAILING  INTEREST OR CURRENCY
EXCHANGE RATES, EFFECTIVENESS OF INTEREST RATE, CURRENCY EXCHANGE RATE AND OTHER
HEDGING  STRATEGIES,  LAWS AND  REGULATIONS  AFFECTING  REAL  ESTATE  INVESTMENT
TRUSTS,  INVESTMENT  COMPANIES AND REAL ESTATE (INCLUDING CAPITAL  REQUIREMENTS,
INCOME AND  PROPERTY  TAXATION,  ACCESS FOR DISABLED  PERSONS AND  ENVIRONMENTAL
COMPLIANCE),  UNCERTAINTY  OF FOREIGN LAWS,  COMPETITIVE  PRODUCTS,  PRICING AND
CONDITIONS (INCLUDING FROM COMPETITORS THAT HAVE SIGNIFICANTLY GREATER RESOURCES
THAN OAC), CREDIT, PREPAYMENT, BASIS, DEFAULT, SUBORDINATION AND ASSET/LIABILITY
RISKS,  LOAN  SERVICING  EFFECTIVENESS,   SATISFACTORY  DUE  DILIGENCE  RESULTS,
SATISFACTION  OR  FULFILLMENT  OF AGREED UPON TERMS AND CONDITIONS OF CLOSING OR
PERFORMANCE,   TIMING  OF  TRANSACTION  CLOSINGS,   AVAILABILITY  OF  AND  COSTS
ASSOCIATED WITH OBTAINING  ADEQUATE AND TIMELY SOURCES OF LIQUIDITY,  DEPENDENCE
ON EXISTING SOURCES OF FUNDING,  ABILITY TO REPAY OR REFINANCE  INDEBTEDNESS (AT
MATURITY  OR UPON  ACCELERATION),  TO MEET  COLLATERAL  CALLS BY  LENDERS  (UPON
RE-VALUATION  OF THE  UNDERLYING  ASSETS OR  OTHERWISE),  TO  GENERATE  REVENUES
SUFFICIENT  TO MEET DEBT SERVICE  PAYMENTS AND OTHER  OPERATING  EXPENSES AND TO
SECURITIZE  WHOLE LOANS,  TAXABLE INCOME EXCEEDING CASH FLOW, SIZE OF, NATURE OF
AND YIELDS AVAILABLE WITH RESPECT TO THE SECONDARY MARKET FOR MORTGAGE LOANS AND
FINANCIAL, SECURITIES AND SECURITIZATION MARKETS IN GENERAL, ALLOWANCES FOR LOAN
LOSSES,  GEOGRAPHIC  CONCENTRATIONS OF ASSETS  (TEMPORARY OR OTHERWISE),  TIMELY
LEASING OF UNOCCUPIED  SQUARE  FOOTAGE  (GENERALLY  AND UPON LEASE  EXPIRATION),
CHANGES  IN REAL  ESTATE  MARKET  CONDITIONS  (INCLUDING  LIQUIDITY,  VALUATION,
REVENUES, RENTAL RATES, OCCUPANCY LEVELS AND COMPETING PROPERTIES),  ADEQUACY OF
INSURANCE  COVERAGE  IN THE  EVENT  OF A LOSS,  KNOWN OR  UNKNOWN  ENVIRONMENTAL
CONDITIONS,  EXTERNAL MANAGEMENT,  CONFLICTS OF INTEREST,  YEAR 2000 COMPLIANCE,
OTHER  FACTORS  GENERALLY  UNDERSTOOD  TO AFFECT  THE REAL  ESTATE  ACQUISITION,
MORTGAGE AND LEASING MARKETS, SECURITIES INVESTMENTS AND RAPID GROWTH COMPANIES,
AND OTHER RISKS DETAILED FROM TIME TO TIME IN OAC'S REPORTS AND FILINGS WITH THE
SEC,  INCLUDING ITS  REGISTRATION  STATEMENTS ON FORMS S-3, S-4 AND S-11 AND ITS
PERIODIC REPORTS ON FORMS 10-Q, 8-K AND 10-K. GIVEN THESE UNCERTAINTIES, READERS
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH STATEMENTS.

                                       39

<PAGE>
ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================

MARKET RISK

Market risk is the exposure to loss  resulting  from changes in interest  rates,
foreign currency exchange rates, commodity prices and equity prices. The primary
market  risk to which the  Company is exposed is  interest  rate risk,  which is
highly  sensitive  to many  factors,  including  governmental  monetary  and tax
policies,  domestic and international economic and political  considerations and
other factors beyond the control of the Company. Changes in the general level of
interest  rates can affect  the  Company's  net  interest  income,  which is the
difference between the interest income earned on interest-earning assets and the
interest expense incurred in connection with its  interest-bearing  liabilities,
by  affecting  the spread  between  the  Company's  interest-earning  assets and
interest-bearing  liabilities.  Changes in the level of interest  rates also can
affect,  among other things, the ability of the Company to originate and acquire
loans,  the  value  of  the  Company's  mortgage-related  securities  and  other
interest-earning  assets and its ability to realize  gains from the sale of such
assets.

The Company may utilize a variety of financial  instruments,  including interest
rate swaps, caps, floors and other interest rate exchange contracts, in order to
limit the effects of interest rates on its operations. The use of these types of
derivatives to hedge interest-earning assets and/or interest-bearing liabilities
carries  certain risks,  including the risk that losses on a hedge position will
reduce the funds  available for payments to holders of securities  and,  indeed,
that such losses may exceed the amount invested in such instruments. A hedge may
not  perform its  intended  purpose of  offsetting  losses or  increased  costs.
Moreover, with respect to certain of the instruments used as hedges, the Company
is exposed to the risk that the counterparties with which the Company trades may
cease making  markets and quoting prices in such  instruments,  which may render
the Company  unable to enter into an offsetting  transaction  with respect to an
open position.  If the Company anticipates that the income from any such hedging
transaction  will not be qualifying  income for REIT income test  purposes,  the
Company may conduct part or all of its hedging activities through a to-be-formed
corporate subsidiary that is fully subject to federal corporate income taxation.
The profitability of the Company may be adversely  affected during any period as
a result of changing interest rates.

The following table quantifies the potential  changes in net interest income and
net  portfolio  value should  interest  rates go up or down  (shocked) 400 basis
points,  assuming  the yield  curves of the rate shocks will be parallel to each
other.  Net  portfolio  value  is  defined  as  interest-earning  assets  net of
interest-bearing  liabilities.  All changes in income and value are  measured as
percentage  changes from the  projected  net interest  income and net  portfolio
value at the base  interest  rate  scenario.  The base  interest  rate  scenario
assumes  interest  rates at September 30, 1998 and various  estimates  regarding
prepayment  and all  activities  are made at each  level of rate  shock.  Actual
results could differ significantly from these estimates.

<TABLE>
<CAPTION>
                                                        Projected Percentage Change In
-------------------------------------------------------------------------------------------------------
Change in Interest Rate                      Net Interest Income(1)           Net Portfolio Value
=======================================================================================================
     <S>                                                   <C>                             <C>
      -400 Basis Points                                     38.53 %                         25.00 %
      -300 Basis Points                                     28.90                           17.60
      -200 Basis Points                                     19.26                           10.26
      -100 Basis Points                                      9.63                            3.67
     Base Interest Rate                                         0                               0
      +100 Basis Points                                     -9.63                           -4.26
      +200 Basis Points                                    -19.26                           -8.52
      +300 Basis Points                                    -28.90                          -15.05
      +400 Basis Points                                    -38.53                          -21.68
</TABLE>

(1) Represents the estimated  percentage  change in net interest income over the
    next twelve months.  For purposes of this  calculation,  net interest income
    includes as a deduction interest expense associated with real estate.

ASSET AND LIABILITY MANAGEMENT 

Asset and liability management is concerned with the timing and magnitude of the
repricing  of assets and  liabilities.  It is the  objective  of the  Company to
attempt to control risks  associated with interest rate  movements.  In general,
management's  strategy is to match asset and liability  balances within maturity
categories to limit the

                                       40
<PAGE>

ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================

Company's exposure to earnings  variations and variations in the value of assets
and liabilities as interest rates change over time.

   
The Company  utilizes a variety of  off-balance  sheet  financing  techniques to
assist it in the  management of interest  rate risk.  These  techniques  include
interest  rate  futures and interest  rate swaps,  pursuant to which the parties
exchange the difference between  fixed-rate and floating-rate  interest payments
on a specified  principal  amount  (referred to as the "notional  amount") for a
specified  period  without the  exchange  of the  underlying  principal  amount.
Interest rate swaps are utilized by the Company to protect  against the increase
in borrowing cost from floating rate debt or a short-term, fixed-rate liability,
such  as  reverse  repurchase   agreements,   in  an  increasing   interest-rate
environment.  At September 30, 1998,  the Company had entered into interest rate
swap agreements with an aggregate notional amount of $200.8 million.  See Note 6
to the Interim Consolidated Financial Statements included in Item 1 above.

The Company  currently has a foreign  currency swap with a counterparty to hedge
currency  exposure in  connection  with its  investment  in  residual  interests
originated in the U.K.  Currently held by Ocwen U.K., a wholly-owned  subsidiary
of the Company. The purpose of the Company's foreign currency hedging activities
is to  protect  the  Company  from the risk that the  eventual  dollar  net cash
inflows will be adversely affected by changes in exchange rates. Under the terms
of the agreement,  the Company will settle in U.S.  dollars on January 29, 1999,
on the  difference  between  the  exchange  rate  on the  effective  date of the
contract and the exchange rate on January 29, 1999, on a notional amount of 14.7
million  British  Pounds  Sterling.  See  Note  6 to  the  Interim  Consolidated
Financial Statements included in Item 1 hereof.
    

Methods for  evaluating  interest rate risk include an analysis of the Company's
interest rate  sensitivity  "gap",  which is defined as the  difference  between
interest-earning  assets and interest-bearing  liabilities maturing or repricing
within a given time  period.  A gap is  considered  positive  when the amount of
interest-rate  sensitive  assets exceeds the amount of  interest-rate  sensitive
liabilities.  A gap is  considered  negative  when the  amount of  interest-rate
sensitive liabilities exceeds interest-rate sensitive assets. During a period of
rising  interest  rates,  a  negative  gap would  tend to  adversely  affect net
interest income, while a positive gap would tend to result in an increase in net
interest income. During a period of falling interest rates, a negative gap would
tend to result in an increase in net interest income, while a positive gap would
tend to affect net interest income adversely.  Because different types of assets
and  liabilities  with the same or similar  maturities may react  differently to
changes in overall  market rates or  conditions,  changes in interest  rates may
affect net interest income  positively or negatively even if an institution were
perfectly matched in each maturity category.

The  following  table sets forth the  estimated  maturity  or  repricing  of the
Company's interest-earning assets and interest-bearing  liabilities at September
30, 1998. The amounts of assets and liabilities shown within a particular period
were  determined  in  accordance  with the  contractual  terms of the assets and
liabilities,  except (i)  adjustable-rate  loans, and securities are included in
the period in which their interest  rates are first  scheduled to adjust and not
in the period in which they mature, (ii) fixed-rate  mortgage-related securities
reflect estimated prepayments,  which were estimated based on analyses of broker
estimates,  the  results of a  prepayment  model  utilized  by the  Company  and
empirical data, (iii) non-performing discount loans reflect the estimated timing
of  resolutions  which result in  repayment  to the Company and (iv)  fixed-rate
loans reflect scheduled contractual amortization,  with no estimated prepayment.
Management  believes that these  assumptions  approximate  actual experience and
considers  them  reasonable;  however,  the  interest  rate  sensitivity  of the
Company's  assets  and  liabilities  in the table  could vary  substantially  if
different assumptions were used or actual experience differs from the historical
experience on which the assumptions are based.

                                       41
<PAGE>

ITEM 3.           QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================

<TABLE>
<CAPTION>
                                                                              September 30, 1998
                                                   --------------------------------------------------------------------------
                                                                                  More than 1
                                                     Within         4 to 12         Year to         3 Years
                                                    3 Months         Months         3 Years         and Over         Total
                                                   ----------      ----------      ----------      ----------      ----------
                                                                                 (In Thousands)
<S>                                              <C>             <C>             <C>             <C>               <C>
Rate-Sensitive Assets:                             
   Interest-earning cash and repurchase         
     agreements................................  $     15,194    $         --    $         --    $         --      $   15,194
   Securities available for sale...............        15,116          44,512          99,345         236,522         395,495
   Loan portfolio, net (1).....................        23,316          63,418          98,910          66,968         252,612
   Discount loan portfolio, net (1)............         1,201           1,770           5,618              --           8,589
                                                   ----------      ----------      ----------      ----------      ----------
     Total rate-sensitive assets...............        54,827         109,700         203,873         303,490         671,890
                                                   ----------      ----------      ----------      ----------      ----------
Rate-Sensitive Liabilities:                     
   Securities sold under agreements
     to repurchase.............................       143,059              --              --              --         143,059
   Obligations outstanding under lines of       
       credit..................................       331,581              --              --              --         331,581
   Notes, debentures and other interest-        
       bearing obligations.....................            --              --              --         143,000         143,000
                                                 ------------    ------------    ------------      ----------      ----------
     Total rate-sensitive liabilities..........       474,640              --              --         143,000         617,640
   Interest rate sensitivity gap before         
     off-balance sheet financial instruments...      (419,813)        109,700         203,873         160,490          54,250
Off-Balance Sheet Financial Instruments:        
   Futures contracts and interest rate swaps...       200,780              --         (92,000)       (108,780)             --
                                                 ------------    ------------    -------------   -------------     ----------
Interest rate sensitivity gap..................      (219,033)        109,700         111,873          51,710      $   54,250
                                                 -------------   ------------    ------------    ------------      ==========
Cumulative interest rate sensitivity gap.......  $   (219,033)   $   (109,333)   $      2,540    $     54,250
                                                 ============    ============    ============    ============
Cumulative interest rate sensitivity gap as a    
   percentage of total rate-sensitive assets ..        (32.60%)        (16.27%)          0.38%           8.07%
</TABLE>                                        

------------
(1) Balances have not been reduced for non-performing loans.


                                       42
<PAGE>

                            PART II OTHER INFORMATION
================================================================================

Item 2.  Changes in Securities

         On July 14, 1998 the Company issued  $150,000,000  principal  amount of
         Notes under Rule 144A of the  Securities  Act of 1933.  Interest on the
         Notes is payable in cash semi-annually in arrears on each January 1 and
         July 1 commencing on January 1, 1999.  The Notes will mature on July 1,
         2005 and are  redeemable,  at the  option of the  Company,  in whole or
         part, on or after July 1, 2002. During the first 36 months, the Company
         may, on any one or more occasions,  use the net proceeds of one or more
         offerings  of its  Common  Stock to redeem  up to 25% of the  aggregate
         principal   amount  of  the  Notes,   provided  that,  after  any  such
         redemption,  the aggregate  principal  amount of the Notes  outstanding
         must equal at least $112.5 million.  Upon the occurrence of a change of
         control,  the Company is required,  subject to certain  conditions,  to
         offer to purchase all of the Notes. The Indenture relating to the Notes
         contains  certain  covenants of the Company,  including a covenant that
         restricts  its ability to declare or pay  dividends or make payments or
         distributions   on  its   outstanding   Common  Stock  unless   certain
         requirements  are met. This covenant does not affect the ability of the
         Company to make  distributions  which are  necessary  to  preserve  its
         status as a REIT under the Code.  On September  30,  1998,  the Company
         repurchased  $7.0  million  principal  amount  of the Notes in the open
         market.

Item 6.  Exhibits and Reports on Form 8-K

         (a)      Exhibits

                  27  Financial Data Schedule - For the quarter ended  September
                      30, 1998 (filed herewith)

         (b)      Reports on Form 8-K filed during the quarter  ended  September
                  30, 1998

                  (1) A  Form  8-K  filed  on  July  14,  1998,  announcing  the
                      Company's  issuance of $150.0 million  principal amount of
                      11 1/2 % Notes due 2005.

                  (2) A Form 8-K filed on July 24, 1998,  which contained a news
                      release announcing the Company's financial results for the
                      three months ended June 30, 1998.

                  (3) A Form  8-K  filed  on  August  6,  1998,  announcing  the
                      Company's purchase of the Prudential Building.

                  (4) A Form 8-K filed on September  15, 1998,  which  contained
                      financial  information  for the  Prudential  Building  and
                      certain  additional  other  properties   acquired  by  the
                      Company.

                  (5) A Form 8-K filed on September 17, 1998,  which contained a
                      news release responding to the New York Stock Exchange and
                      investor inquiries regarding its common stock price.

                  (6) A Form 8-K filed on of September 22, 1998, which contained
                      a news release  announcing  the  Company's  third  quarter
                      dividend and a stock repurchase program.

                  (7) A Form 8-K filed on October 27,  1998,  which  contained a
                      news release  announcing the Company's  financial  results
                      for the three months ended September 30, 1998.


                                       43
<PAGE>

                                   SIGNATURE
================================================================================

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


                          OCWEN ASSET INVESTMENT CORP.



                          By:  /s/ Mark S. Zeidman
                               -------------------------------------------------
                               Mark S. Zeidman
                               Senior Vice President and Chief Financial Officer
                               (On behalf of the Registrant and as its principal
                               financial officer)




   
Date: December 17, 1998
    


                                       44