UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-Q

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

         For the quarterly period ended June 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 August 11, 1998: 18,965,000 shares.

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                                      OCWEN ASSET INVESTMENT CORP.
                                                FORM 10-Q

                                                I N D E X
---------------------------------------------------------------------------------------------------------


PART I - FINANCIAL INFORMATION                                                                       PAGE

<S>  <C>                                                                                              <C>
Item 1.  Interim Consolidated Financial Statements (Unaudited)................................        3

         Consolidated Statements of Financial Condition
         at June 30, 1998 and December 31, 1997...............................................        3

         Consolidated Statements of Operations for the three and six months ended              
         June 30, 1998 and for the period May 14, 1997 to June 30, 1997.......................        4

         Consolidated Statements of Changes in Shareholders' Equity for the six months
         ended June 30, 1998 and for the period from May 14, 1997 to December 31, 1997........        5

         Consolidated Statements of Cash Flows for the six months ended June 30, 1998                  
         and for the period May 14, 1997 to June 30, 1997.....................................        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...........................       35

PART II - OTHER INFORMATION

Item 2.  Changes in Securities................................................................       36

Item 4.  Submission of Matters to a Vote of Security Holders..................................       36

Item 6.  Exhibits and Reports on Form 8-K.....................................................       37

Signature.....................................................................................       39
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                                                   2
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                                     PART I - FINANCIAL INFORMATION
ITEM 1.  INTERIM FINANCIAL STATEMENTS (UNAUDITED)

                                      OCWEN ASSET INVESTMENT CORP.
                             CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                                                                           June 30,       December 31,
                                                                             1998            1997
                                                                        -------------    -------------
<S>                                                                     <C>              <C>          
ASSETS:
Cash and amounts due from depository institutions ...................   $  11,764,015    $     331,047
Interest-bearing deposits ...........................................       1,336,511       48,346,076
Securities available for sale, at market value ......................     415,933,375      146,026,907
Commercial and multi-family loan portfolio, net .....................      44,866,458        9,481,436
Residential loan portfolio, net .....................................     138,668,931        6,350,043
Discount loan portfolio, net ........................................       8,511,730       26,978,888
Investment in real estate, net ......................................     176,925,349       45,430,039
Principal and interest receivable ...................................      13,157,828        2,518,272
Deposits on pending asset acquisitions ..............................         503,500        1,000,000
Other assets ........................................................      10,382,508        1,540,633
                                                                        -------------    -------------
                                                                        $ 822,050,205    $ 288,003,341
                                                                        =============    =============

LIABILITIES AND SHAREHOLDERS' EQUITY

LIABILITIES:
  Securities sold under agreements to repurchase ....................   $ 223,819,860    $          --
  Obligation outstanding under lines of credit ......................     154,179,487               --
  Obligation outstanding under lines of credit secured by real estate     115,235,500               --
  Dividends and distributions payable ...............................      10,179,129        7,458,750
  Accrued expenses, payables and other liabilities ..................      15,069,491        6,344,783
                                                                        -------------    -------------
                                                                          518,483,467       13,803,533
                                                                        -------------    -------------
Minority interest ...................................................      29,885,939        2,941,541
                                                                        -------------    -------------

COMMITMENTS AND CONTINGENCIES (NOTE 7)

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 ........................................     294,461,432      280,503,838
  Distributions in excess of earnings ...............................     (19,999,538)      (2,107,331)
  Unrealized gain (loss) on securities available for sale ...........          81,221       (7,327,890)
  Cumulative translation adjustments ................................      (1,051,966)              --
                                                                        -------------    -------------
     Total shareholders' equity .....................................     273,680,799      271,258,267
                                                                        -------------    -------------
                                                                        $ 822,050,205    $ 288,003,341
                                                                        =============    =============

        THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
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                                                   3
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                                            OCWEN ASSET INVESTMENT CORP.
                                       CONSOLIDATED STATEMENTS OF OPERATIONS

                                                                       For the        For the       For the Period
                                                                    Three Months     Six Months     May 14, 1997
                                                                         Ended          Ended            to
                                                                    June 30, 1998   June 30, 1998   June 30, 1997
                                                                    -------------   -------------   -------------
<S>                                                                 <C>             <C>             <C>         
Interest income:
  Repurchase agreements and interest bearing deposits ...........   $     97,510    $    295,648    $  1,397,128
  Securities held for trading ...................................       (375,300)     (3,012,559)             --
  Securities available for sale .................................     11,534,635      16,183,217       1,005,184
  Commercial and multi-family loans .............................      1,467,916       2,273,702              --
  Residential loans .............................................      2,178,010       2,613,031              --
  Discount loans ................................................        423,421       1,326,198          80,495
                                                                    ------------    ------------    ------------
                                                                      15,326,192      19,679,237       2,482,807
                                                                    ------------    ------------    ------------
Interest expense:
  Securities sold under agreements to repurchase ................      3,302,044       3,966,815              --
  Obligations outstanding under lines of credit .................      2,244,723       2,273,769              --
                                                                    ------------    ------------    ------------
                                                                       5,546,767       6,240,584              --
                                                                    ------------    ------------    ------------

  Net interest income before provision for loan losses ..........      9,779,425      13,438,653       2,482,807
  Provision for loan losses .....................................        100,976         206,049              --
                                                                    ------------    ------------    ------------

  Net interest income after provision for loan losses ...........      9,678,449      13,232,604       2,482,807
                                                                    ------------    ------------    ------------

Real estate-Operating income:
  Rental income .................................................      4,515,204       6,549,491              --
  Other .........................................................         18,978          26,835              --
                                                                    ------------    ------------    ------------
                                                                       4,534,182       6,576,326              --
                                                                    ------------    ------------    ------------
Real estate-Operating expenses:
  Rental operation ..............................................      2,342,105       3,275,851              --
  Depreciation and amortization .................................        758,484       1,062,921              --
  Obligations outstanding under lines of credit secured by real
    estate ......................................................      1,689,103       1,689,103              --
                                                                    ------------    ------------    ------------
                                                                       4,789,692       6,027,875              --
                                                                    ------------    ------------    ------------
Real estate-Net operating income ................................       (255,510)        548,451              --
                                                                    ------------    ------------    ------------
Other expenses:
  Management fees ...............................................      1,704,751       2,533,632         341,000
  Due diligence expenses ........................................        174,955         367,644              --
  Foreign currency (gain) loss ..................................             --        (116,953)             --
  Other .........................................................        386,439         576,094          81,583
                                                                    ------------    ------------    ------------
                                                                       2,266,145       3,360,417         422,583
                                                                    ------------    ------------    ------------

Gain (loss) on securities held for trading ......................             34     (13,957,594)             --
                                                                    ------------    ------------    ------------

  Income (loss) before minority interest ........................      7,156,828      (3,536,956)      2,060,224
  Minority interest in net income (loss) of operating partnership       (510,696)       (321,154)             --
                                                                    ------------    ------------    ------------
     Net (loss) income ..........................................   $  6,646,132    $ (3,858,110)   $  2,060,224
                                                                    ============    ============    ============

Earnings per share:
     Basic ......................................................   $       0.35    $      (0.20)   $       0.11
                                                                    ============    ============    ============
     Diluted ....................................................   $       0.35    $      (0.20)   $       0.11
                                                                    ============    ============    ============

Weighted  average shares outstanding:
     Basic ......................................................     18,965,000      18,965,000      19,390,194
                                                                    ============    ============    ============
     Diluted ....................................................     19,088,026      19,184,437      19,390,194
                                                                    ============    ============    ============

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

                                                        4
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                                                    OCWEN ASSET INVESTMENT CORP.
                                     CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                               FOR THE SIX MONTHS ENDED JUNE 30, 1998
                                        AND FOR THE PERIOD MAY 14, 1997 TO DECEMBER 31, 1997

                                                                                            Unrealized
                                                                                          gain (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 gain (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 ...........            --         --     13,957,594            --             --           --     13,957,594

 Net loss .......................            --         --             --    (3,858,110)            --           --     (3,858,110)

 Dividends ......................            --         --             --   (14,034,097)            --           --    (14,034,097)

 Change in unrealized gain (loss)            --         --             --            --      7,409,111           --      7,409,111

 Change in cumulative 
   translation adjustment .......            --         --             --            --             --   (1,051,966)    (1,051,966)
                                    -----------  ---------  -------------  ------------    -----------  -----------  -------------

 Balances at June 30, 1998 ......    18,965,000  $ 189,650  $ 294,461,432  $(19,999,538)   $    81,221  $(1,051,966) $ 273,680,799
                                    ===========  =========  =============  ============    ===========  ===========  =============

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

                                                                 5
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                                          OCWEN ASSET INVESTMENT CORP.
                                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                                    For the       For the Period
                                                                                  Six Months       May 14, 1997
                                                                                     ended              to
                                                                                 June 30, 1998    June 30, 1997
                                                                                 -------------    -------------
<S>                                                                              <C>              <C>          
Cash flows from operating activities:
   Net (loss) income .........................................................   $  (3,858,110)   $   2,060,224
     Adjustments to reconcile net income to net cash provided by
     operating activities:
       Premium amortization (discount accretion), net ........................      10,969,400           (6,002)
       Depreciation ..........................................................       1,062,921               --
       Foreign exchange (gain) ...............................................        (116,953)              --
       Cumulative translation adjustment .....................................      (1,051,966)              --
       Provision for loan losses .............................................         206,049               --
       Proceeds received on sale of securities held for trading ..............      53,365,882               --
       Loss on securities held for trading ...................................      13,957,594               --
       Increase in interest receivable .......................................     (10,639,556)        (962,299)
       Increase in other assets ..............................................      (8,841,875)        (233,839)
       Increase in accrued expenses, payables and other liabilities ..........       1,917,010          776,846
       Minority interest in net loss of operating partnership ................         321,154               --
                                                                                 -------------    -------------
Net cash provided by operating activities ....................................      57,291,550        1,634,930
                                                                                 -------------    -------------
Cash flows from investing activities:
   Purchases of securities available for sale ................................    (336,676,078)     (56,825,182)
   Maturities and principal payments received on securities available for sale      16,268,838           69,495
   Purchase of loans .........................................................    (175,968,169)              --
   Purchase of discount loans ................................................              --       (8,552,255)
   Principal payments received from discount loans ...........................         973,325            6,915
   Principal payments received from loans ....................................       8,425,556               --
   Investment in real estate .................................................    (114,932,518)              --
   Deposits on pending asset acquisitions ....................................         496,500               --
                                                                                 -------------    -------------
Net cash (used) by investing activities ......................................    (601,412,546)     (65,301,027)
                                                                                 -------------    -------------
Cash flows from financing activities:
   Proceeds from issuance of common stock, net of offering costs .............              --      283,688,000
   Dividend payments on common stock .........................................     (12,283,750)              --
   Proceeds from sale of operating partnership units .........................      27,593,302               --
   Increase in securities sold under agreements to repurchase ................     223,819,860               --
   Increase in obligations outstanding under lines of credit .................     269,414,987               --
                                                                                 -------------    -------------
Net cash provided by financing activities ....................................     508,544,399      283,688,000
                                                                                 -------------    -------------

Net (decrease) increase in cash and cash equivalents .........................     (35,576,597)     220,021,903
Cash and cash equivalents at beginning of period .............................      48,677,123               --
                                                                                 -------------    -------------
Cash and cash equivalents at end of period ...................................   $  13,100,526    $ 220,021,903
                                                                                 =============    =============
Reconciliation of cash and cash equivalents at end of period:
   Cash and amounts due from depository institutions .........................      11,764,015    $     503,606
   Interest bearing deposits .................................................       1,336,511       19,518,297
   Repurchase agreements .....................................................              --      200,000,000
                                                                                 -------------    -------------
     Total ...................................................................   $  13,100,526    $ 220,021,903
                                                                                 =============    =============
Supplemental schedule of non-cash financing activities:
   Common stock dividends and distributions declared but not paid ............   $  10,179,129    $          --
                                                                                 =============    =============

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

                                                        6
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                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 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.  OAC directly  owns two
qualified  real estate  investment  trust ("REIT")  subsidiaries,  Ocwen General
Partner,  Inc. ("General Partner") and Ocwen Limited,  Inc. ("Limited Partner"),
among others.  At June 30, 1998,  General Partner and Limited Partner owned 0.9%
and 90.4%,  respectively of Ocwen Partnership,  L.P. ("Operating  Partnership").
The minority  interest at June 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%, 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  financial  condition at June 30, 1998
and  December  31,  1997,  the results of its  operations  for the three and six
months ended June 30, 1998 and for the period May 14, 1997 to June 30, 1997, the
changes in shareholders' equity for the six month period ended June 30, 1998 and
for the period May 14, 1997 to December  31, 1997 and its cash flows for the six
months  ended June 30,  1998 and for the period May 14,  1997 to June 30,  1997.
Operating  results  for the  period  ended  June 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 base  management  fee of 0.25% per
quarter (1% per annum) of average invested assets,  as defined in the management
agreement,  payable quarterly. In addition, OCC is entitled to receive incentive
compensation  in an amount equal to 25% of the dollar amount by which funds from
operations, as adjusted ("FFO"), exceeds certain defined levels.

         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

                                       7
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                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 30, 1998

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

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  pursuant to
which Ocwen Federal Bank FSB ("OFB" or the "Bank"), a wholly-owned subsidiary of
OCN, services for specified fees all of the Company's mortgage loans, subject to
the Company's  right to direct  foreclosure  upon any defaulted loan and to take
all other  actions  that a  servicer  generally  may take in  connection  with a
defaulted  loan.  In addition,  the Bank  receives  fees from the Company in its
capacity as special  servicer  (which  generally  involves asset  management and
resolution  services with respect to defaulted  mortgage  loans within a pool of
mortgage  loans and with respect to the  management  and disposal of  foreclosed
properties)  for the loans  underlying most of the  mortgage-related  securities
owned by the Company,  subject to the Company's  right to direct the foreclosure
upon any such  defaulted  loan and to take all  other  actions  that a  servicer
generally may take in connection with a defaulted loan.

NOTE 3            RECENTLY ISSUED ACCOUNTING STANDARDS

         In February  1997,  the FASB issued  Statement of Financial  Accounting
Standards  ("SFAS") No. 128,  "Earnings per Share." SFAS No. 128  simplifies the
standards found in APB No. 15 for computing earnings per share ("EPS") and makes
them comparable to international standards.  Under SFAS No. 128, OAC is required
to  present  both  basic  and  diluted  EPS on the  face  of its  statements  of
operations.  Basic EPS,  which  replaces  primary EPS required by APB No. 15 for
entities with complex capital structures,  excludes common stock equivalents and
is  computed  by  dividing  income  available  to  common  stockholders  by  the
weighted-average number of common shares outstanding for the period. Diluted EPS
gives  effect to all  dilutive  potential  common  shares that were  outstanding
during the period.  SFAS No. 128 is effective for financial  statements for both
interim  and  annual  periods  ending  after  December  15,  1997  with  earlier
application not permitted.  The Company adopted SFAS No. 128 effective  December
31, 1997.

         In June 1997,  the FASB issued SFAS No. 130,  "Reporting  Comprehensive
Income." SFAS No. 130 requires the inclusion of comprehensive  income, either in
a  separate  statement  for  comprehensive  income,  or as  part  of a  combined
statement of income and  comprehensive  income in a full-set of  general-purpose
financial statements. Comprehensive income is defined as the change in equity of
a business  enterprise  during a period from  transactions  and other events and
circumstances,  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.  SFAS No. 130 also requires that an enterprise  display the  accumulated
balance of other  comprehensive  income  separately  from retained  earnings and
additional  paid-in  capital in the equity  section of a statement  of financial
position.  SFAS No. 130 became effective for the Company's fiscal year beginning
January 1, 1998. SFAS No. 130 requires the  presentation of information  already
contained in the Company's  financial  statements  and therefore did not have an
impact on the  Company's  financial  position  or  results  of  operations  upon
adoption.

         In June 1997,  the FASB also issued SFAS No.  131,  "Disclosures  About
Segments of an Enterprise  and Related  Information."  SFAS No. 131  establishes
standards for the reporting of information  about  operating  segments by public
business  enterprises  in their annual and interim  financial  reports issued to
shareholders.  SFAS No. 131 requires that a public  business  enterprise  report
financial  and  descriptive  information,  including  profit  or  loss,  certain
specific  revenue and expense items,  and segment  assets,  about its reportable
operating  segments.   Operating  segments  are  defined  as  components  of  an
enterprise  about which  separate  financial  information  is available  that is
evaluated regularly by the chief operating decision-

                                       8
<PAGE>

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

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

maker in deciding how to allocate resources and in assessing  performance.  SFAS
No.  131 is  effective  for  the  Company's  financial  statements  for  periods
beginning after December 15, 1997. SFAS No. 131 is a disclosure  requirement and
therefore did not have an effect on the Company's  financial position or results
of operations upon adoption.

         In June 1998, the FASB issued SFAS No. 133,  "Accounting for Derivative
Instruments and Hedging  Activities".  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 position and measure those instruments
at fair value.  If certain  conditions are met, a derivative may be specifically
designated  as (a) a hedge of the  exposure  to  changes  in the fair value of a
recognized asset or liability or an unrecognized firm commitment, (b) a hedge of
the exposure to variable cash flows of a forecasted transaction,  or (c) a hedge
of the foreign currency exposure of a net investment in a foreign operation,  an
unrecognized   firm   commitment,   an   available-for-sale   security,   or   a
foreign-currency-denominated forecasted transaction.

         The accounting for changes in the fair value of a derivative  (that is,
gains  and  losses)  depends  on the  intended  use of the  derivative  and  the
resulting  designation.  For a derivative  designated as hedging the exposure to
changes  in  the  fair  value  of a  recognized  asset  or  liability  or a firm
commitment  (referred to as a fair value hedge),  the gain or loss is recognized
in earnings in the period of change together with the offsetting loss or gain on
the  hedged  item  attributable  to the risk  being  hedged.  The effect of that
accounting  is to  reflect  in  earnings  the  extent  to which the hedge is not
effective  in  achieving  offsetting  changes in fair  value.  For a  derivative
designated  as hedging  the  exposure  to  variable  cash flows of a  forecasted
transaction  (referred to as a cash flow hedge),  the  effective  portion of the
derivative's  gain  or  loss is  initially  reported  as a  component  of  other
comprehensive  income  (outside  earnings) and  subsequently  reclassified  into
earnings when the  forecasted  transaction  affects  earnings.  The  ineffective
portion  of the  gain  or  loss  is  reported  in  earnings  immediately.  For a
derivative  designated  as  hedging  the  foreign  currency  exposure  of a  net
investment  in a  foreign  operation,  the  gain or loss is  reported  in  other
comprehensive  income (outside  earnings) as part of the cumulative  translation
adjustment.  The accounting for a fair value hedge  described above applies to a
derivative  designated  as a  hedge  of  the  foreign  currency  exposure  of an
unrecognized firm commitment or an available-for-sale  security.  Similarly, the
accounting  for a cash  flow  hedge  described  above  applies  to a  derivative
designated   as   a   hedge   of   the   foreign   currency    exposure   of   a
foreign-currency-denominated   forecasted  transaction.  For  a  derivative  not
designated as a hedging  instrument,  the gain or loss is recognized in earnings
in the period of change.

         Under SFAS No. 133, an entity that elects to apply hedge  accounting is
required to establish  at the  inception of the hedge the method it will use for
assessing  the  effectiveness  of the  hedging  derivative  and the  measurement
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.

         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 the
results  of  operations,  financial  position  or  cash  flows  as a  result  of
implementing SFAS No. 133.

                                       9
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  JUNE 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.  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 corresponding 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 from transactions and other events and circumstances,
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.
Comprehensive income amounted to $4.7 million and $2.5 million for the three and
six months  ended June 30, 1998,  respectively,  and $3.8 million for the period
May 14, 1997 to December 31, 1997.

NOTE 6            INTEREST RATE RISK MANAGEMENT INSTRUMENTS

         In order to  match-fund  the  Company's  asset  base  with  anticipated
borrowings and thereby  minimize the impact from changes in net interest  income
due to changes in 1-month London Interbank  Offered Rate ("LIBOR"),  the Company
has entered into certain swaps. Under these 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
amount.  The terms of these swaps  provide for the Company to receive a floating
rate of interest equal to LIBOR and to pay fixed interest  rates.  The following
table sets forth information  regarding the swaps which were outstanding at June
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>           <C>    
      2003           $  100,000         1-month            5.75%           5.66%         $     333
      2001               17,000         1-month            6.00            5.66                (94)
      2001               75,000         1-month            6.00            5.66               (406)
      2002                8,780         1-month            6.04            5.66                (68)
</TABLE>

         On May 18, 1998, the Company entered into a foreign  currency swap with
a AAA-rated  counterparty  to hedge  currency  exposure in  connection  with its
investment  in residual  interests  originated in the United  Kingdom  ("U.K.").
Under the terms of the  agreement,  the Company will swap (British  pound)14,731
million for $23,548  million on January 29, 1999 based on the  exchange  rate on
the date the contract became effective.

                                       10
<PAGE>

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

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

NOTE 7            COMMITMENTS

         At June 30, 1998,  outstanding  commitments  totaled  $79.7 million and
included  $36.0 million  related to the  acquisition  of an office  building and
$43.7  million   related  to  the   origination  of  a  commercial  real  estate
construction loan.

         Each of these  commitments  is subject to  various  closing  conditions
including, but not limited to, completion of satisfactory due diligence efforts,
the negotiation of definitive  purchase and sales agreements  and/or  conditions
the borrowers or sellers must satisfy prior to OAC funding the transactions.

NOTE 8            SHAREHOLDERS' EQUITY

         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.  This  transaction  increased IMI's minority  interest in the Operating
Partnership to 8.7%.

                                       11
<PAGE>

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

GENERAL

         The  Company  is a  Virginia  corporation  that was formed in the first
quarter of 1997, that has elected to be taxed as a real estate  investment trust
("REIT") under the Internal  Revenue Code of 1986, as amended (the "Code"),  and
that  generally  specializes  in  investments  in (i)  subordinate  and residual
interests in  collateralized  mortgage  obligations  and other  mortgage-related
securities    (collectively,    "mortgage-related    securities")    and    (ii)
underperforming  or  otherwise  distressed   commercial  and  multi-family  real
property,  including  properties  acquired by mortgage lenders at foreclosure or
through deed-in-lieu thereof.

          As of June 30, 1998, OAC's total closed transactions since its initial
public  offering on May 14, 1997, net of repayments to date,  amounted to $845.9
million.  Of this amount,  $779.6 million had been funded and $66.3 million will
be funded over the construction and renovation periods,  which range from six to
30 months.

        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 hereof.

HIGHLIGHTS FOR THE QUARTER ENDED JUNE 30, 1998

         On April 1, 1998,  the  Company  purchased  the "BB,",  "B" and unrated
classes of a commercial  mortgage-related  security,  and on May 15,  1998,  the
Company purchased an additional unrated class of this mortgage-related security.
The  aggregate  purchase  price for  these  subordinated  investments  was $43.9
million  and the  aggregate  par  amount of these  interests  amounted  to $50.9
million. The original securitization  contained 132 commercial real-estate loans
totaling $287.7 million.  As of June 30, 1998, 85 loans remain  outstanding with
an aggregate par amount of $166.2  million.  The Company  funded the purchase of
the  foregoing  securities  in part with  proceeds  of a $23.1  million  reverse
repurchase  agreement which is secured by the purchased  securities.  OFB is the
special servicer of the loans which secure this securitization.

         On April 8, 1998,  the Company  acquired the Bush Street  Property,  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 in cash.  The purchase  was funded by a $75.0  million loan from Salomon
Brothers  Realty Corp. and cash reserves on hand.  During the three months ended
June 30, 1998,  the Company also  acquired  title to two real estate  properties
which previously had secured discount loans acquired by the Company,  consisting
of a shopping  center  located in Halifax,  Nova  Scotia and an office  building
located in Dayton, Ohio.

         On April 24,  1998,  the Company  acquired  securitized  mortgage  loan
residuals for approximately  (British  pound)33.7 million  (approximately  $56.3
million)  from the  United  Kingdom  subsidiary  of  Cityscape  Financial  Corp.
("CFC").  (The  dollar  equivalent  amounts  sets  forth  herein are based on an
exchange rate on April 24, 1998 of $1.667 per British  pound.) This purchase was
made in connection with OCN's  acquisition of  substantially  all of the assets,
and certain  liabilities,  of the United Kingdom  operations of CFC. The Company
funded this acquisition with a loan from Greenwich Capital Financial Products in
the  principal  amount  of  approximately  (British  pound)19.0  million  ($31.8
million),  which was collateralized by the residuals, and a loan from IMI in the
principal amount of approximately  (British  pound)14.7 million ($24.5 million),
which was  collateralized  by  unrelated  assets and  subsequently  converted to
equity  via the  purchase  of limited  partnership  interests  in the  Operating
Partnership.  See Note 8 to the Interim Consolidated  Financial Statements.  The
mortgage loan residuals acquired by the Company were previously issued as a part
of six prior  securitizations  effected by CFC's U.K. operations.  In connection
with the  foregoing  acquisition,  the Company and OCN entered into an agreement
for the Bank to service the securitized mortgage loan residuals.

                                       12
<PAGE>

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

         On April 30, 1998,  the Company  purchased for $59.3 million an unrated
residual security backed by a pool of 6,946 subprime  single-family  residential
loans. The notional amount of the residual  security  amounted to $769.7 million
at the date of acquisition.  The acquisition of this security was funded in part
with the proceeds  from a $45.0 million  certificate  financing  agreement  with
Lehman  Brothers.  The Bank is the master  servicer of the loans which back this
securitization.

         On May 1, 1998,  the Company  purchased for $13.4 million a subordinate
security  backed  by a pool  of  7,474  single-family  residential  loans  which
previously  were in default or under a  forbearance  plan but  generally now are
performing in accordance with their terms.  The seller,  an  unaffiliated  third
party, had retained the subordinate  interest after it and the Bank had effected
the securitization of the underlying loans, which had been purchased by the Bank
and such  third  party from the  Department  of  Housing  and Urban  Development
("HUD"). The security purchased by the Company had a current par amount of $32.6
million at the date of acquisition.  The subordinate  interest  purchased by the
Company has a blended BB-NR rating.  The Bank is the servicer of the loans which
back this securitization.

         On May 1, 1998,  OAC's Common Stock began trading on the New York Stock
Exchange under the symbol "OAC." From May 14, 1997 to April 30, 1998, the Common
Stock had been  traded  under the  symbol  "OAIC" on the Nasdaq  Stock  Market's
National Market.

         On May 7, 1998, the Operating  Partnership issued 1,473,733  additional
limited partnership units to IMI, a wholly-owned  subsidiary of Ocwen Financial,
in exchange for forgiveness of debt (accounted for as a capital contribution) of
$24.5  million.  This  transaction  increased  IMI's  minority  interest  in the
Operating Partnership to 8.7%.

         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 William C. Erbey,  Chairman and Chief Executive  Officer
of the Company, the Manager and OCN, and Barry N. Wish, a director of OCN, for a
cash price of $54.6 million, which represented 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 for the quarter ended
March 31, 1998 in accordance with generally accepted accounting principles.  The
$14.0  million  received in excess of market value upon sale of the IO Portfolio
has been reflected on the Company's books as a capital contribution, effectively
reestablishing the Company's equity position.  Management believes that the sale
of the IO Portfolio will reduce the volatility of the Company's revenues.

         On May 18, 1998,  the Company  purchased  for $66.9 million 25 residual
interests from ten different issuances of mortgage-related  securities backed by
subprime  single-family  residential  loans  which  were  sponsored  by the same
company or its predecessor. In addition, on June 18, 1998, the Company purchased
residual  interests  in  another  mortgage-related  security  sponsored  by same
company after  amendments to the related  pooling and servicing  agreement  were
made to permit  the  Company to acquire  the right to  control  the  foreclosure
process and  appoint  the Bank as special  servicer of the loans which back this
securitization,  as it has with  respect  to the loans  which  back the other 25
securitizations  in which  the  Company  acquired  interests.  As of the date of
original issuance, approximately $1.84 billion of fixed-rate and adjustable-rate
subprime  single-family  residential loans backed the foregoing securities.  The
Company  funded  the  purchase  of the  foregoing  securities  in part  with the
proceeds of a $41.7 million reverse repurchase agreement which is secured by the
purchased securities.

         On June 10, 1998, the Company modified for the purpose of enhancing the
types of collateral eligible for inclusion under the $200 million loan agreement
with Salomon Brothers Realty Corp. to include the origination of commercial real
estate loans. See "Capital Resources and Liquidity."

                                       13
<PAGE>

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

         On June 11, 1998, the Company purchased for $13.1 million,  a non-rated
subordinate  interest  collaterized  by a pool  of  1,414  first  lien  subprime
mortgage loans. The Bank is the master servicer and servicer for these loans.

         On June 15, 1998,  the Company  closed a $7.6 million  commercial  real
estate loan,  which has not yet been funded,  to construct a six-story,  183,000
square  foot,  136-suite  hotel,  located  in a Chicago  suburb  of  Schaumburg,
Illinois.

         On June 18, 1998, the Company purchased for $13.9 million,  a non-rated
subordinate  interest  collaterized  by a pool of  2,432  subprime  multi-family
residential loans consisting of closed-end adjustable rate and fixed rate, fully
amortizing  and balloon  loans.  The Bank is the  special  servicer of any loans
which are 60 days or more delinquent.

RECENT DEVELOPMENTS

         On July 15, 1998, the Company completed the issuance of $150 million of
11.5% Senior Notes due 2005 under Rule 144A of the  Securities  Act of 1933,  as
amended (the "Securities  Act"). The Company intends to effect an exchange offer
for the Senior  Notes  whereby the holders of the Senior  Notes will receive new
Senior Notes which have been registered under the Securities Act.

         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
OAC's line of credit with Salomon Brothers Realty Corp. Simultaneously with this
closing,  OAC 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  extension options. OAC 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.

         On August 7, 1998,  the Company  entered into an agreement with another
party which is subject to confidentiality provisions and which gives the Company
the exclusive right to evaluate and negotiate a potential  transaction involving
the  acquisition  of a certain  number  of  commercial  properties  that have an
estimated  gross value in excess of $185  million and secure  mortgage  loans of
approximately  $110 million.  It is  contemplated  that the Company would obtain
financing and purchase certain of these properties for cash and that the Company
and the other party would  thereafter each contribute all of the properties to a
newly-formed,  jointly-owned limited liability entity (the "Joint Venture"). The
parties'  respective  interests  in the  Joint  Venture  would  be  based on the
relative  net  equity  value  of the  properties  contributed  by  each  of them
(generally,   the  gross  value  less  mortgage   indebtedness  secured  by  the
properties).  The Joint  Venture  would be  managed by the  Company,  subject to
specified  major  decisions  which would require the  unanimous  approval of its
members.  The foregoing  transaction  is contingent on (i) the  negotiation  and
execution of a definitive agreement or agreements, (ii) the receipt of requisite
financing  for the  properties  to be acquired and  contributed  by the Company,
(iii) the satisfactory  results of the Company's due diligence evaluation of the
properties  and (iv)  approval by the Boards of Directors of the Company and the
other party.  There can be no assurance  that these and other  requirements  for
consummation of the transaction will be satisfied in the timeframe  contemplated
by the parties or at all.

FUNDS FROM OPERATIONS

         Most  industry  analysts,   including  the  Company,  consider  FFO  an
appropriate  supplementary  measure of operating performance of a REIT. However,
FFO does not represent cash provided by operating  activities in accordance with
generally accepted  accounting  principles ("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.  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.  The following  table computes FFO under the
NAREIT definition.  FFO consists of net income applicable to common shareholders
(computed in accordance with generally accepted accounting principles) 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.

                                       14

<PAGE>

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

         The following table sets forth the calculation of the Company's FFO for
the periods indicated.
<TABLE>
<CAPTION>

                                                For the       For the      For the Period
                                             Three Months    Six Months    May 14, 1997
                                                Ended          Ended            to
                                            June 30, 1998  June 30, 1998   June 30, 1997
                                            -------------  -------------   -------------
                                                (In Thousands, except per share data)

<S>                                          <C>           <C>             <C>        
Net income ...............................   $     6,646   $     (3,858)   $     2,060
Add: Depreciation and Amortization .......           759          1,063             --
      Loss on IO portfolio ...............            --         13,957             --
                                             -----------   ------------    -----------
FFO ......................................   $     7,405   $     11,162    $     2,060
                                             -----------   ------------    -----------

FFO per diluted weighted average shares
outstanding ..............................   $      0.39   $       0.58    $      0.11
                                             ===========   ============    ===========

Diluted weighed average shares outstanding    19,088,026     19,184,437     19,390,194
                                             ===========   ============    ===========
</TABLE>

RESULTS OF OPERATIONS

         The Company  completed an initial  public  offering on May 14, 1997 and
commenced  operations  thereon.  The  Company  earned net income for the quarter
ended June 30,  1998 of $6.6  million,  or $0.35 per  diluted  weighted  average
common share,  and incurred a net loss for the six months ended June 30, 1998 of
$3.9 million,  or $0.20 per diluted  weighted average common share. The loss for
the six months ended June 30, 1998 was  attributable  to a  mark-to-market  loss
during the first quarter of 1998 of $14.0 million on the IO Portfolio, which was
classified as held for trading as of March 31, 1998 in  anticipation of the sale
of the IO Portfolio to related  parties,  in addition to  write-downs  on the IO
Portfolio taken during the first quarter totaling $3.1 million.

         INTEREST INCOME.  The following tables set forth information  regarding
the total  amount of  income  from  interest-earning  assets  and the  resultant
average  yields.  Information  is based on daily  average  balances  during  the
reported periods.
<TABLE>
<CAPTION>

                                                              For the Three Months
                                                              Ended June 30, 1998
                                                      ----------------------------------
                                                       Average   Interest     Annualized
                                                       Balance    Income        Yield
                                                      --------   --------      --------
                                                                (In Thousands)

<S>                                                   <C>        <C>             <C>  
Repurchase agreements and interest-bearing deposits   $  9,781   $     97        4.00%
Securities held for trading .......................     20,106       (375)      (7.49)
Securities available for sale .....................    319,909     11,535       14.46
Commercial and multi-family loan portfolio ........     40,563      1,468       14.52
Residential loan portfolio ........................    118,348      2,178        7.38
Discount loan portfolio ...........................      9,282        423       18.30
                                                      --------   --------
   Total ..........................................   $517,989   $ 15,326       11.87%
                                                      ========   ========
</TABLE>

                                       15
<PAGE>


Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
================================================================================
<TABLE>
<CAPTION>

                                                              For the Six Months
                                                              Ended June 30, 1998
                                                      ---------------------------------
                                                       Average    Interest   Annualized
                                                       Balance    Income       Yield
                                                      --------   ---------   ----------
                                                              (In Thousands)
<S>                                                   <C>        <C>             <C>  
Repurchase agreements and interest-bearing deposits   $ 11,896   $    296        5.01%
Securities held for trading .......................     36,929     (3,013)     (16.45)
Securities available for sale .....................    227,304     16,183       14.36
Commercial and multi-family loan portfolio ........     32,964      2,274       13.91
Residential loan portfolio ........................     70,644      2,613        7.46
Discount loan portfolio ...........................     18,057      1,326       14.81
                                                      --------   --------
   Total ..........................................   $397,794   $ 19,679        9.98%
                                                      ========   ========
</TABLE>
<TABLE>
<CAPTION>

                                                               For the Period
                                                               May 14, 1997 to
                                                                June 30, 1997
                                                      ---------------------------------
                                                       Average    Interest   Annualized
                                                       Balance    Income       Yield
                                                      --------   ---------   ----------
                                                              (In Thousands)
<S>                                                   <C>        <C>          <C>  
Repurchase agreements and interest-bearing deposits   $104,239   $1,397       5.36%
Securities held for trading .......................         --       --         --
Securities available for sale .....................     24,546    1,005      16.38
Commercial and multi-family loan portfolio ........         --       --         --
Residential loan portfolio ........................         --       --         --
Discount loan portfolio ...........................      2,606       81       6.18
                                                      --------   ------
   Total ..........................................   $131,391   $2,483       7.56%
                                                      ========   ======
</TABLE>

         The negative  yield on  securities  held for trading for the six months
ended June 30, 1998 was  attributable  to declining  interest rates resulting in
increased prepayment speeds, and $3.1 million in permanent write-downs on the IO
Portfolio  during  the first  quarter  of 1998.  The  decline in value of the IO
Portfolio  during the first quarter was  attributable to projected  increases in
prepayment  speeds  during  the  quarter  as a result  of a  decrease  in market
interest  rates and a resulting  shortening  of the  weighted  average  lives of
certain individual securities in the IO Portfolio. During the quarter ended June
30, 1998,  the Company  sold the IO Portfolio to William C. Erbey,  Chairman and
Chief  Executive  Officer of OAC,  and Barry N.  Wish,  a  director  of OAC,  as
discussed above.

         INTEREST EXPENSE. The following tables set forth information  regarding
the  total  amount  of  interest   expense   associated  with   interest-bearing
liabilities  and the  resultant  average  yields.  For  purposes  of the tables,
interest-bearing  liabilities do not include outstanding balances under mortgage
loans to  acquire  real  estate  and a $200  million  real  estate-secured  loan
agreement with Salomon Brothers Realty Corp., the expense  associated with which
is included in  determining  the  operations of the Company's  real estate.  See
"Real Estate - Net Income" below. Information is based on daily average balances
during reported periods in which interest-bearing liabilities were outstanding.

                                       16
<PAGE>

Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
================================================================================
<TABLE>
<CAPTION>

                                                             For the Three Months
                                                             Ended June 30, 1998
                                                      ---------------------------------
                                                       Average    Interest   Annualized
                                                       Balance    Income       Yield
                                                      --------   ---------   ----------
                                                                (In Thousands)
<S>                                                    <C>        <C>           <C>  
Securities sold under agreements to repurchase......  $ 174,024   $   3,302     7.61%
Obligation outstanding under lines of credit........    132,246       2,245     6.81
                                                      ---------   ---------
   Total............................................  $ 306,270   $   5,547     7.26%
                                                      =========   =========
</TABLE>
<TABLE>
<CAPTION>

                                                               For the Six Months
                                                              Ended June 30, 1998
                                                      ---------------------------------
                                                       Average    Interest   Annualized
                                                       Balance    Income       Yield
                                                      --------   ---------   ----------
                                                                (In Thousands)
<S>                                                   <C>         <C>           <C>  
Securities sold under agreements to repurchase .......$107,172    $  3,967      7.46%
Obligation outstanding under lines of credit..........  67,393       2,274      6.80
                                                      --------    --------
   Total..............................................$174,565    $  6,241      7.21%
                                                      ========    ========
</TABLE>

For additional information see "Capital Resources and Liquidity".

         REAL ESTATE - NET INCOME.  The Company  incurred a net loss of $256,000
for the three  months  ended June 30,  1998 and  earned  net income of  $548,000
during the six months ended June 30, 1998 on  investments  in real estate.  Such
income generally  represents  aggregate rental income, net of operating expenses
and  depreciation,  generated  from  the  Company's  investment  in four  office
buildings  located in California,  an office building  located in Ohio, a retail
shopping center located in Florida, and a retail shopping center located in Nova
Scotia, net of depreciation and amortization and operating  expenses  associated
with the  Company's  investments  in real  estate,  which  include  the  expense
associated  with  mortgage  loans to acquire  real  estate  and the  outstanding
balances  under a $200 million real  estate-secured  loan agreement with Salomon
Brothers Realty Corp.

         OPERATING  EXPENSES.  Management  fees  totaling  $1.7 million and $2.5
million for the three and six months  ended June 30,  1998,  respectively,  were
comprised solely of the base management fee (0.25% per quarter, or 1% per annum,
of average  invested assets) earned by OCC pursuant to the terms of a management
agreement  entered  into between the Company and OCC. 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  hereof.  In  addition,
pursuant  to the  management  agreement  the  Company  reimbursed  OCC  for  due
diligence  expenses  of  $175,000  and  $368,000  in  connection  with its asset
acquisitions during the three and six months ended June 30, 1998,  respectively.
Foreign currency gain for the six months ended June 30, 1998 was $117,000.  This
gain was a result of the declining  U.S.  dollar versus the Canadian  dollar and
related to the Company's  investment in a Canadian commercial discount loan upon
which the Company  foreclosed in April 1998. See  "Investments  in Real Estate."
Other  expenses of $386,000 and  $576,000  during the three and six months ended
June 30, 1998, respectively, were comprised of auditing fees, insurance premiums
and other miscellaneous  expenses, were incurred by OCC on OAC's behalf and were
reimbursed to OCC.

CHANGES IN FINANCIAL CONDITION

         GENERAL.  From  December  31,  1997  to June  30,  1998,  total  assets
increased  $534.0  million  or 185.4%  to  $822.1  million.  This  increase  was
primarily due to a $35.4 million  increase in the  commercial  and  multi-family
loan portfolio, a $132.3 million increase in the residential loan portfolio,  an
$11.4 million increase in cash and amounts due from depository  institutions,  a
$131.5  million  increase in  investments  in real estate,  and a $269.9 million
increase in securities  available for sale, which were offset in part by a $47.0
million  decrease in  interest-bearing  deposits.  Total  liabilities  increased
$504.7 million during the period, primarily as

                                       17
<PAGE>

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

a result of $223.8 million of securities sold under agreements to repurchase,  a
$154.2  million  obligation  outstanding  under a line of  credit  and a  $115.2
million obligation outstanding under a line of credit secured by real estate.

         REPURCHASE  AGREEMENTS AND INTEREST-EARNING  DEPOSITS. At June 30, 1998
total interest-earning deposits amounted to $1.3 million or 0.2% of total assets
and were  comprised  of deposits  at various  banks.  Interest-bearing  deposits
declined by $47.0  million or 97.2% from  December 31, 1997 to June 30, 1998 due
to the reinvestment of cash and cash equivalents into long-term assets.

         Although the Company had no  repurchase  agreements at June 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.

         The Company earned  interest  income of $98,000 and $296,000 during the
three and six months ended June 30, 1998,  respectively,  from its investment in
interest-bearing deposits and repurchase agreements. Of such income, $43,000 was
earned from investments in repurchase agreements.

         SECURITIES HELD FOR TRADING.  Securities held for trading  purposes are
carried at market value with  unrealized  gains or losses  included in earnings.
The Company's  investment in securities held for trading consisted solely of the
IO Portfolio and was  transferred  from the available for sale category on March
31, 1998.  There were no securities  held for trading as of December 31, 1997 or
June 30, 1998.

         Losses on the IO  Portfolio  during the six months  ended June 30, 1998
amounted  to $14.0  million,  in  addition to  permanent  write-downs  on the IO
Portfolio  totaling $3.1 million during the first quarter.  As noted above,  the
Company sold the IO Portfolio in May 1998.

         SECURITIES   AVAILABLE   FOR  SALE.   The   Company's   investment   in
mortgage-related  securities  available  for sale of $415.9  million at June 30,
1998  included  $81,000  of  net  unrealized   gains,   which  was  included  in
shareholders' equity. The Company's securities available for sale were comprised
of the following at the dates indicated.

                                            June 30,  December 31,
                                              1998       1997
                                            --------  -----------
                                                (In Thousands)
Mortgage-related securities:
 Single family residential:
     FHLMC interest-only ................   $     --   $ 21,178
     FNMA interest-only .................         --     22,573
     AAA-rated interest-only ............         --        729
     Subordinates and residuals..........    289,827      9,444
                                            --------   --------
                                            $289,827     53,924
                                            --------   --------

 Multi-family residential and commercial:
     AAA-rated interest-only ............        780        866
     A-rated interest-only ..............        400        480
     Non-rated interest-only ............      5,030      4,803
     Subordinates .......................    119,896     85,954
                                            --------   --------
                                             126,106     92,103
                                            --------   --------

       Total ............................   $415,933   $146,027
                                            ========   ========

                                       18
<PAGE>
Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
================================================================================

         The increase in securities  available for sale of $269.9 million during
the six months ended June 30, 1998 was due to  purchases of $343.5  million (See
"Highlights  for the Quarter Ended June 30, 1998") and an increase in unrealized
gains of $7.4  million,  which were offset in part by the  transfer of the $56.5
million IO Portfolio to the held for trading  category during the first quarter,
$16.3  million of  principal  payments  and  maturities  and $8.2 million of net
premium amortization.

         The Company's strategy regarding mortgage-related  securities currently
emphasizes  subordinate  interests  in  mortgage-related  securities  backed  by
multi-family  and  commercial  real estate  loans and  subordinate  and residual
interests in  mortgage-related  securities  backed by single-family  residential
loans,  particularly  loans which have experienced  payment problems in the past
but are  currently  performing  (such as loans  acquired  from HUD) and subprime
loans. The Company generally emphasizes securities backed by these loans because
of their potential for above-average  yields,  which the Company believes can be
enhanced in circumstances where it acquires the right to control the foreclosure
process  and  assigns to the Bank  servicing  rights to the loans which back the
mortgage-related securities purchased by the Company.

         Subordinates  are the  non-investment  grade  and  unrated  classes  of
mortgage-related  securities  that  provide  credit  enhancement  to more senior
classes of such  securities by having a lower payment  priority in the cash flow
from the underlying mortgage loans and by absorbing any losses on the underlying
mortgage   loans   prior  to  the  senior   classes.   On   "senior/subordinate"
transactions,  each  subordinate  class has a principal face amount equal to the
subordination  level  required for the classes,  if any, which are senior to the
respective  subordinate  class  and  the  subordination  level  required  at the
respective rating (i.e., BB, B, UR).

         Residuals are the unrated classes of  mortgage-related  securities that
receive the excess payments of interest from the underlying  mortgage loans that
exist  beyond  that which is needed to pay  interest to the holders of the other
classes of the  mortgage-related  security,  pay  transaction  fees and  satisfy
overcollateralization  requirements.  Overcollateralization  is the  predominant
form  of  credit  enhancement  on  securitizations  of  subprime   single-family
residential  loans,  which is made  possible  by use of the excess  spread  (the
amount by which the weighted  average  yield on the  underlying  mortgage  loans
exceeds the weighted  average yield on the classes of securities  backed by such
loans) to fast pay the senior classes of the  mortgage-related  security until a
level  of  subordination  predetermined  by  the  rating  agencies  is  reached.
Residuals have a notional  amount equal to the unpaid  principal  balance of the
underlying mortgage loans.

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

                                  Aggregate Notional
                                  Amount or Aggregate Aggregate     Aggregate
                                    Unpaid Principal    Book         Market
    Rating/Description                 Balance(1)       Value        Value(2)
  -------------------------            --------       --------       --------
                                                  (In Thousands)
Single-family Residential:
  Unrated residuals .......            $469,498       $270,535       $268,454
  B-rated subordinates ....               9,572          5,486          5,265
  Unrated subordinates ....              48,472         16,888         16,108
                                       --------       --------       --------
                                        527,542        292,909        289,827
                                       --------       --------       --------
Multi-family and Commercial:
  BB-rated subordinates ...              68,732         66,005         67,379
  B-rated subordinates ....              17,460         13,697         14,209
  Unrated subordinates ....              57,442         36,012         37,076
  AAA-Rated IOs ...........              78,014            849            780
  A-Rated IOs .............              19,700            476            400
  Unrated IOs(3) ..........              12,797          4,833          5,030
  Unrated POs(3) ..........              12,797          1,073          1,232
                                       --------       --------       --------
                                        266,942        122,945        126,106
                                       --------       --------       --------
          Total ...........            $794,484       $415,854       $415,933
                                       ========       ========       ========

                                       19
<PAGE>

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

(1) Notional  amounts  are  based  on  the  aggregate  principal  amount  of the
    underlying collateral.

(2) Estimated  fair  values  are  based on  dealer-quoted  market  prices or the
    average of  dealer-quoted  market prices for the Company's other  comparable
    securities.

(3) These securities relate to the same mortgage-related  security,  thus giving
    the Company both the  principal and interest  components  to the  particular
    class.

         The following tables set forth information regarding the mortgage loans
underlying the Company's multi-family and commercial mortgage-related securities
portfolio at June 30, 1998.


                                Current Aggregate
                                Unpaid Principal
Property Type                        Balance        Percentage(1)
-------------                       ---------        ----------
                                           (In Thousands)

Multi-family .....................   $464,754            46%
Retail ...........................    223,197            22
Office ...........................    119,933            12
Industrial .......................     46,995             5
Hotel ............................     39,018             4
Other ............................    105,812            11
                                     --------           ---
                                     $999,709           100%
                                     ========           ===

---------------
(1) Based  on a  percentage  of  the  total  unpaid  principal  balance  of  the
    underlying loans.

                                       20
<PAGE>


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


                                Current Aggregate
                                Unpaid Principal
Geographic Location                  Balance        Percentage(1)
-------------------                 ---------        ----------
                                           (In Thousands)

California ...................       $241,115           24%
Texas ........................        166,669           17
Florida ......................         80,027            8
Ohio .........................         53,310            5
New York .....................         47,732            5
Other ........................        410,856           41
                                     --------          ---
                                     $999,709          100%
                                     ========          ===
-----------------
(1) Based  on a  percentage  of  the  total  unpaid  principal  balance  of  the
    underlying loans.

         COMMERCIAL AND MULTI-FAMILY LOAN PORTFOLIO. The Company's investment in
commercial and multi-family  loans amounted to $44.9 million at June 30, 1998, a
$35.4 million  increase  over the $9.5 million  investment at December 31, 1997.
The  Company's  commercial  lending  activities  currently  focus 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.

         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:

                                           June 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 .............        (844)       (344)
Undisbursed loan proceeds .............     (61,008)    (47,640)
Allowance for loan losses .............        (206)         --
                                          ---------    --------
  Commercial and multi-family loans, net  $  44,866    $  9,481
                                          =========    ========

                                       21
<PAGE>
Item 2.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
================================================================================

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

<TABLE>
<CAPTION>
                                                                                           Loan per Stabilized
                                                  Loan Amount                  Ratio of     Unit/      Debt
                                        Loan      Outstanding     Type of      Loan to     Square    Coverage Coupon
Loan                   Location        Amount   At June 30, 1998   Loan         Cost        Foot      Ratio    Rate      Size
----                   --------        ------   ----------------   ----         ----        ----      -----    ----      ----
                                                        (In Thousands)
<S>                   <C>              <C>         <C>         <C>               <C>        <C>     <C>       <C>    <C>      
Multi-family Residential:
Fourth and Harrison... San Francisco,
                        CA             $11,550     $ 1,625      Construction      85%      $ 201     1.22      9.630% 160 units

241 Church Street..... New York, NY     30,280      13,684      Conversion        88         582      N/A      9.000  52  units

459 Washington Street. New York, NY      3,455       1,760      Conversion        61         314      N/A     10.500  11  units

Commercial:
Doubletree Hotel ..... Lowell, MA        7,652       7,278      Renovation        85          31     1.90     10.000  249 rooms

Hawthorn Suites Hotel. Schaumburg, IL    7,629           -      Construction      65          56     1.59      8.750  136 suites

Wyndham Garden
 Hotel ............... Wilmington, DE   13,300       6,079      Renovation        67          61     2.20      8.650  219 rooms

Landmark III-GTE...... Burlington, MA   33,058      15,490      Renovation        85          --     1.18      9.250  291,077 sq.ft.
                                     ---------    --------
                                     $ 106,924    $ 45,916
                                     =========    ========
</TABLE>

         The  following  tables set forth the  activity in the  Company's  gross
commercial and multi-family loan portfolio during the periods indicated.

                                                    Three Months Ended June 30,
                                                               1998
                                                    --------------------------
                                                      Balance   No. of Loans
                                                      --------  ------------
                                                         (In Thousands)

Balance at beginning of period .................      $ 99,295           6
Originations:
   Hotel loan ..................................         7,629           1
Principal repayments ...........................            --          --
                                                      --------     -------
   Net increase in loans .......................         7,629           1
                                                      --------     -------
Balance at end of period .......................      $106,924           7
                                                      ========     =======


                                                     Six Months Ended June 30,
                                                               1998
                                                      ----------------------
                                                      Balance   No. of Loans
                                                      --------  ------------
                                                          (In Thousands)

Balance at beginning of period .................      $ 57,465           4
Originations:
   Multi-family loans ..........................        41,830           2
   Hotel loan ..................................         7,629           1
Principal repayments ...........................            --          --
                                                      --------     -------
   Net increase in loans .......................        49,459           3
                                                      --------     -------
Balance at end of period .......................      $106,924           7
                                                      ========     =======

                                       22
<PAGE>

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

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

                                                    June 30,       December 31,
                                                      1998            1997
                                                  -----------      -----------
                                                          (In Thousands)

Past due less than 31 days..................      $    99,272      $    57,465
Past due 31 days to 89 days.................            7,652               --
Past due 90 days or more....................               --               --
                                                  -----------      -----------
                                                  $   106,924      $    57,465
                                                  ===========      ===========

         RESIDENTIAL  LOAN  PORTFOLIO.  The Company's  investment in residential
loans  amounted to $138.7  million at June 30, 1998, a $132.3  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:

                                                    June 30,       December 31,
                                                      1998            1997
                                                  -----------      -----------
                                                          (In Thousands)
   Single-family residential.................     $   137,462      $     6,465
   Deferred origination fees.................             808             (115)
   Deferred hedge............................             399               --
                                                  -----------      -----------
     Residential loans, net..................     $   138,669      $     6,350
                                                  ===========      ===========

         Of the $137.5 million of  single-family  residential  loans held by the
Company at June 30, 1998,  $31.6  million,  $16.0  million,  $7.9 million,  $6.4
million  and $6.0  million  were  secured by  properties  located  in  Michigan,
California, Texas, Ohio, and Massachusetts, respectively.

         The Company intends to pool its  single-family  residential  loans in a
special purpose entity which will issue  mortgage-related  securities  backed by
such loans. The senior classes in this  securitization will be acquired by third
parties,  and the Company will retain the subordinate and residual  interests in
such  securitization.  The  securitization  also will  provide the Company  with
additional funds for investment purposes.

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

                                                       Three Months Ended
                                                         June 30, 1998
                                                  ----------------------------
                                                    Balance       No. of Loans
                                                  -----------     ------------
                                                          (In Thousands)
Balance at beginning of period..............      $   105,949            1,077
Purchases:
   Single family residential loans..........           40,030              341
Principal repayments........................           (8,517)             (26)
                                                  -----------      -----------
   Net increase in loans....................           31,513              315
                                                  -----------      -----------
Balance at end of period....................      $   137,462            1,392
                                                  ===========      ===========

                                       23
<PAGE>

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

                                                       Six Months Ended
                                                         June 30, 1998
                                                 ----------------------------
                                                   Balance       No. of Loans
                                                 -----------     ------------
                                                          (In Thousands)
Balance at beginning of period...............    $     6,465               50
Purchases:
   Single family residential loans...........        139,880            1,368
Principal repayments.........................         (8,883)             (26)
                                                 -----------      -----------
   Net increase in loans.....................        130,997            1,342
                                                 -----------      -----------
Balance at end of period.....................    $   137,462            1,392
                                                 ===========      ===========

         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.

                                                    June 30,       December 31,
                                                      1998            1997
                                                  -----------      -----------
                                                          (In Thousands)

Past due less than 31 days..................      $   129,006      $     6,196
Past due 31 days to 89 days.................            5,534               --
Past due 90 days or more....................            2,922              269
                                                  -----------      -----------
                                                  $   137,462      $     6,465
                                                  ===========      ===========

                                       24
<PAGE>

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

         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 June 30, 1998, the Company's gross
discount loan portfolio amounted to $12.1 million,  exclusive of $3.6 million of
unaccreted discount.

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

                                                    June 30,       December 31,
                                                      1998             1997
                                                   ----------      -----------
                                                          (In Thousands)
Commercial real estate loans:
   Office....................................     $     8,236      $    11,893
   Retail....................................           3,873           30,636
                                                  -----------      -----------
     Total unpaid principal balance..........          12,109           42,529
Unaccreted discount..........................          (3,597)         (15,550)
                                                  -----------      -----------
   Discount loans, net.......................     $     8,512      $    26,979
                                                  ===========      ===========

         During the six months ended June 30, 1998, the Company acquired through
foreclosures  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 six
months ended June 30, 1998.

         At June 30, 1998,  the Company's  discount loans included a 13.83% PARI
PASSU  interest in a loan pool  purchased from a large  commercial  bank,  which
interest had an aggregate  outstanding  principal  balance of $9.2 million.  The
collateral for the loans currently consists of three office buildings located in
midtown Manhattan,  New York. As of June 30, 1998, all of the loans in this pool
were performing in accordance  with their terms.  The loans are serviced for the
Company by the Bank,  which was the other  successful  joint  bidder on the loan
pool.

         At June 30, 1998,  the discount  loan  portfolio  also  included 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  June  30,  1998,  the  loan  was  nonperforming  and  foreclosure
proceedings were in process.

         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.

                                                    June 30,       December 31,
                                                      1998             1997
                                                  -----------      -----------
                                                          (In Thousands)
Past due less than 31 days...................     $     2,622      $     7,964
Past due 31 days to 89 days..................           5,614               --
Past due 90 days or more.....................           3,873           34,565
                                                  -----------      -----------
                                                  $    12,109      $    42,529
                                                  ===========      ===========

                                       25
<PAGE>

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

         ALLOWANCES FOR LOAN LOSSES. 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 June 30, 1998,
the Company had provided an allowance  for loan losses in the amount of $206,049
on the loan  portfolio.  At December 31, 1997,  no allowance for loan losses had
been provided.

         INVESTMENTS IN REAL ESTATE.  The Company employs an opportunistic  real
estate investment  approach that seeks value creation  opportunities that can be
realized through increased management focus and capital investment.  The Company
generally looks to acquire  underperforming  properties that can be acquired and
renovated at discounts to  replacement  cost. In evaluating  opportunities,  the
Company focuses on a series of key investment  criteria.  These include analyses
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.

         At June 30, 1998, the Company's investments in real estate consisted of
seven  properties which had an aggregate  carrying value of $176.9 million.  For
information  related to an acquisition of real estate by the Company  subsequent
to June 30, 1998, see "Recent Developments".

         A total of four of the properties  currently  owned by the Company with
an aggregate  carrying  value of  approximately  $142 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 it is characterized by limited new supply
and significant  barriers to entry. Low vacancy rates,  coupled with lack of new
construction,  currently are boosting  rental rates to record highs.  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 all
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 $176.9 million
at June 30, 1998 from $45.4 million at December 31, 1997 and is comprised of the
following properties:
<TABLE>
<CAPTION>

                                                                                               Book Value at
  Date Acquired    Property             Location               Square Feet    Property Type    June 30, 1998
  -------------    --------             --------               -----------    -------------    -------------
                                                (In Thousands)
<S> <C>   <C>      <C>                  <C>                         <C>                          <C>       
    09/03/97       10 U.N. Plaza        San Francisco, CA           71,636    Office Bldg.       $    9,149
    09/23/97       450 Sansome St.      San Francisco, CA          130,437    Office Bldg.           17,366
    11/10/97       Cortez Plaza         Bradenton, FL              289,686    Shopping Ctr.          19,288
    01/23/98       690 Market St.       San Francisco, CA          124,692    Office Bldg.           13,724
    04/03/98       Park Center I        Dayton, OH                  44,000    Office Bldg.            1,534
    04/09/98       7075 Bayers Rd.      Halifax, Nova Scotia       402,529    Shopping Ctr.          15,360
    04/08/98       225 Bush Street      San Francisco, CA          536,382    Office Bldg.          101,746
                                                                                                 ----------
                                                                 Accumulated depreciation            (1,242)
                                                                                                 ----------
                                                                                                 $  176,925
                                                                                                 ==========
</TABLE>
         The Company's current overall strategy with respect to these properties
is to renovate and  reposition the facilities and target full floor tenants with
five to ten year lease terms.  The Company  estimates  that over the next twelve
months it will spend approximately $45 million in capital  improvements,  tenant
improvements  and leasing  commissions  to  renovate  and  reposition  the above
properties.  Repositioning is intended to result in rents, upon re-leasing, that
are greater than the current rents at the sites.

                                       26
<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 June 30, 1998.

         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 Bay.  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 June 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.

         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 80% leased as of June 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.
Subsequent  to the  foreclosure,  the property was  suboptimally  managed by the
institutional  owner.  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  is  investing
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.  Since  acquiring  the  property,  the Company has
commenced  its  repositioning  strategy.  In this regard,  the Company  recently
entered into a lease with a tenant for ground floor retail space at an effective
rate which  exceeded  the  Company's  projection  by over 50%.  The Company also
currently is leasing office space at rents that exceed $30 per square foot.

         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,  which the Company  believes  is below  current  market
levels.  The building was 45% leased as of June 30, 1998,  and over 93% of total
rentable  space will become  available by September  1998.  Short-term  holdover
agreements were  negotiated with two of the building's  largest tenants to allow
them time to relocate from the  building,  with rental rates during the holdover
terms  ranging from $25.00 to $38.00 per square foot.  The property is currently
being  marketed  for lease to  tenants  with full floor or full  building  space
requirements, and the Company is under active negotiation with several companies
for rents in the upper $20 per square  foot  range.  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.

         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
for this  occupied  space  averaged  $14.06 per square  foot,  which the Company
believes is below current market levels.  The building was 72% leased as of June
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

                                       27
<PAGE>

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

commissions.  The Company is currently implementing a new leasing program at the
property to  coincide  with the  renovation  schedule  and has renewed  existing
leases in the mid $20 per square foot range,  which  represents an approximately
30% increase.

         BUSH STREET  PROPERTY.  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.  The purchase  price for this property was funded  primarily by a $75.0
million loan from Salomon  Brothers  Realty Corp.  The Bush Street  Property 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  expects  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
and ADA upgrades.  As of June 30, 1998, the Bush Street  Property was 94% leased
and the average  rent per square  foot  amounted to  approximately  $18.30.  The
Company  estimates that the current average market rate for office  buildings in
this  area  of San  Francisco  approximates  $32 to $35  per  square  foot.  For
additional  information relating to the Bush Street Property, see "--Significant
Properties" below.

         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 80% leased at June 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
Company currently is preparing an operating plan for this investment.

LEASE EXPIRATIONS -- ALL PROPERTIES

         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 June 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............         40         114,109           8.91%    $   922,877     $ 19.54            7.46%
1999............         45         166,888          13.03       1,996,059       17.71           16.14
2000............         35         107,378           8.38       1,606,374       17.19           12.99
2001............         43         157,243          12.28       1,997,179       19.29           16.15
2002............         42         110,724           8.65         862,696       15.80            6.98
2003............          8          36,889           2.88         728,926       25.62            5.90
2004............          5          48,770           3.81         640,189       24.97            5.18
2005............          5          32,960           2.57         128,563        9.68            1.04
2006............          5         127,804           9.98         677,470        7.13            5.48
2007............          5         113,492           8.86       1,359,321       20.56           10.99
2008 and beyond.         12         264,496          20.65       1,445,298       11.97           11.69
                      -----       ---------         ------     -----------                      ------
                        245       1,280,753         100.00%    $12,364,952                      100.00%
                      =====       =========         ======     ===========                      ======
</TABLE>

                                                   28
<PAGE>

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

----------
(1) Lease year runs from January 1 to December 31 for all years except for 1998,
    in which the lease year is July 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 July 1 to
    lease expiration.

(3) Annualized base rent per square feet is calculated using the annualized base
    rent divided by a weighted average square footage.

         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  maintains  comprehensive  insurance  on each of its  real
properties,  including  liability  and fire and  extended  coverage,  in amounts
sufficient to permit the  replacement  of the properties in the event of a total
loss, subject to applicable  deductibles,  or in the case of a property acquired
by  foreclosure or by  deed-in-lieu  thereof in an amount equal to the lesser of
the unpaid principal  balance of the loan and actual cash value of the property,
dependent  upon the status of the  property.  There are certain types of losses,
however,  generally of a catastrophic  nature,  such as earthquakes,  floods and
hurricanes,  that may be uninsurable or not economically  insurable.  Inflation,
changes in building codes and ordinances, environmental considerations and other
factors also might make it not feasible to use  insurance  proceeds to replace a
property if it is damaged or destroyed. Under such circumstances,  the insurance
proceeds  received by the Company  might not be adequate to restore its economic
position with respect to the affected  distressed  real property.  The Company's
policy is to secure  earthquake  insurance equal to the probable maximum loss in
areas where  appropriate  and  available.  To date,  the  Company has  purchased
earthquake  insurance in amounts equal to the "probable maximum loss" for all of
the  properties it has acquired in San  Francisco,  California.  There can be no
assurance, however, that such coverage is sufficient or that it will continue to
be available upon expiration of the current terms.

SIGNIFICANT PROPERTIES

         Set forth  below is  additional  information  with  respect to the Bush
Street  Property,  which  is  deemed  "significant"  under  requirements  of the
Securities and Exchange Commission (the "Commission").

         DEPRECIATION.  For  federal  income tax  purposes,  the  basis,  net of
accumulated  depreciation,  of the Bush Street Property aggregated approximately
$101.4 million at June 30, 1998. A land only valuation of this property has been
ordered,  which may modify  the tax basis of this  property.  The real  property
associated  with the Bush Street  Property  (other than land)  generally will be
depreciated  for federal  income tax  purposes  over 39 years using the straight
line method.  For  financial  reporting  purposes,  the Bush Street  Property is
recorded at its  historical  cost and is  depreciated  using the  straight  line
method over its estimated useful life, which is estimated to be 39 years.

         REAL ESTATE  TAXES.  The 1997 annual real estate taxes paid on the Bush
Street  Property were  approximately  $343,701.  The city of San Francisco  real
estate tax is 1.19% of assessed value.

                                       29
<PAGE>

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

         OCCUPANCY.  At June 30, 1998, the Bush Street Property was leased to 36
tenants  which are  engaged  in a variety of  businesses,  including  oil,  law,
technology, engineering, publication, consulting and philanthropy. The following
table sets forth information relating to occupancy of and net effective rent for
the Bush Street Property for the periods indicated.


                                                    Average Occupancy*
                                             ------------------------------
                Property                      1997        1996        1995
          -------------------                -------     -------     ------
          Bush Street Property ..........       94%         78%        82%

                                                  Net Effective Rent
                                                   Per Square Foot*
                                             ------------------------------
                                             1997        1996        1995
                                             --------    --------    ------
          Bush Street Property ..........    $ 16.35     $ 16.17      $ *

------------
* Data is not available for periods prior to 1995 or as indicated.

         LEASE EXPIRATIONS. The following table sets forth a summary schedule of
the total lease  expirations for the Bush Street Property for leases in place as
of June 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>

 YEAR OF                                                                                                                      2008
  LEASE                                                                                                                       AND
EXPIRATION               1998      1999      2000        2001      2002       2003       2004      2005    2006       2007   BEYOND
-----------             ------    ------    ------      ------    ------     ------     ------   -------  ------     ------  -------
<S>                      <C>       <C>       <C>         <C>       <C>        <C>       <C>       <C>      <C>       <C>     <C>   
No. of Leases
  Expiring ..........        3          6         4          10         7          3         1        1         1         4       3

Square Footage
  of Expiring Leases.    5,681     83,411    38,152      66,415    28,504     26,174    22,714    3,784    22,742    85,992  76,306

Percent of Total
  Leased Square Feet.      1.2%      18.1%      8.3%       14.4%      6.2%       5.7%      4.9%     0.8%      5.0%     18.7%   16.6%

Annualized rent of
  Expiring Leases ... $ 88,416 $1,713,439  $642,897  $1,405,220  $451,181  $ 787,035  $454,280  $91,972  $454,836  $ 45,500 $29,845

Percent of Total
  Annualized Rent ...      0.9%      16.6%      6.2%       13.6%      4.4%       7.6%      4.4%     0.9%      4.4%     19.8%   21.3%

Annualized rent per
  Square ft. of
  Expiring Leases ... $  15.56  $    20.5  $  16.85  $    21.16  $  15.83  $   30.07  $  20.00 $  24.31  $  20.00  $  23.78 $ 28.80
</TABLE>

         At June 30,  1998,  the only tenant of the Bush Street  Property  which
occupied 10% or more of the rentable square footage in the building was Chevron,
which is engaged in the oil business.  Chevron  leases 207,529  rentable  square
feet on nine  floors.  Chevron has  subleased  all of its space except for three
floors  totaling  63,521  square  feet.  Of the 63,030  square feet that Chevron
occupies, 43,683 square feet expires in June 1999. Management is in negotiations
with Chevron to extend its term. The remaining  space  comprising  17,347 square
feet on the 22nd floor expires in June 2000.  Space sub-leased by Chevron totals
144,499 square feet. These  sub-leases  extend beyond Chevron's term (at the end
of which they will become  direct  leases with the  Company),  and have  varying
terms, as reflected in the lease expiration schedule.

                                       30
<PAGE>

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

         SECURITIES SOLD UNDER  AGREEMENTS TO REPURCHASE.  Securities sold under
agreements to repurchase increased to $223.8 million at June 30, 1998 from $0 at
December  31, 1997.  The Company  periodically  enters into sales of  securities
under  agreements  to  repurchase  the  same  securities   (reverse   repurchase
agreements). Fixed coupon reverse repurchase agreements with maturities of three
months  or less  are  treated  as  financings,  and  obligations  to  repurchase
securities  sold are reflected as a liability in the  accompanying  consolidated
statements of financial condition.  All securities underlying reverse repurchase
agreements are reflected as assets in the accompanying  consolidated  statements
of  financial   condition  and  are  held  in  safekeeping  by   broker/dealers.
Mortgage-related  securities  at amortized  cost of $324.4  million and a market
value of $323.8  million were pledged as collateral  for  securities  sold under
agreements to repurchase at June 30, 1998.

         OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT.  Obligations outstanding
under lines of credit amounted to $154.2 million at June 30, 1998 as compared to
$0 at December 31, 1997 and represents  borrowings having a one-year term and an
interest  rate that floats in  accordance  with a  designated  prime  rate.  See
"Capital Resources and Liquidity."

         OBLIGATIONS   OUTSTANDING   UNDER  LINES  OF  CREDIT  -  REAL   ESTATE.
Obligations outstanding under lines of credit secured by real estate amounted to
$115.2  million at June 30,  1998 as  compared  to $0 at  December  31, 1997 and
represents  borrowings  having a one-year term and interest  rates that float in
accordance with a designated prime rate. See "Capital Resources and Liquidity."

         The  Company's  general  strategy is to  leverage  its  investments  in
distressed real estate by incurring borrowings secured by such investments.

         Set  forth  below  is  information  regarding  the  Company's  mortgage
indebtedness  relating to the  Company's  investment  in real estate at June 30,
1998.
<TABLE>
<CAPTION>

                                       Principal      Interest                         Maturity         Annual
                 Property               Amount          Rate          Amortization       Date          Payments
      -------------------------------   -------  -------------------  -------------  -------------    ----------
                                                     (In Thousands)

<S>                                     <C>      <C>           <C>    <C>                  <C>        <C>       
      Bush Street Property...........   $75,000  (1)LIBOR plus 1.75%  None           April 2001(3)    $ 5,550(4)
      Other .........................   $40,235  (2)LIBOR plus 1.75%  None           May 2001(3)      $ 2,985(4)
</TABLE>

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

(2) Represents  the  outstanding  balance under the $200 million loan  agreement
    with Salomon  Brothers  Reality  Corp.  As of June 30, 1998,  the  Company's
    investments  in Cortez  Plaza,  450 Sansome  Street,  10 U.N.  Plaza and 690
    Market Street secured this loan.

(3) Subject to certain  conditions,  the borrower under this loan may extend the
    maturity date by one year.

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

         MINORITY  INTEREST.  At June 30, 1998,  minority interest totaled $29.9
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 8 to the Interim
Consolidated Financial Statements included in Item 1 hereof.

         SHAREHOLDERS'  EQUITY.  Shareholders'  equity increased by $2.4 million
from December 31, 1997 to June 30, 1998.  The increase in  shareholders'  equity
during this period was attributable to a $7.4 million

                                       31
<PAGE>

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

increase in unrealized gains on securities  available for sale, which was offset
in part by a net loss of $3.9  million  and a  cumulative  currency  translation
adjustment  of $1.1  million.  See the  Consolidated  Statement  of  Changes  in
Shareholders' Equity in the Interim  Consolidated  Financial Statements included
in Item 1 hereof.

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 half of 1998
consisted  of net cash  provided by  operating  activities,  reverse  repurchase
agreements and other secured  borrowings,  maturities and principal  payments on
loans and securities;  proceeds from the sale of Operating  Partnership units to
IMI.

         Cash and cash  equivalents  were $13.1  million at June 30,  1998.  The
Company's  operating  activities provided cash flows of $57.3 million during the
six months ended June 30, 1998.  The Company's  investing  activities  used cash
flows of $601.4  million  during the six months ended June 30, 1998.  During the
foregoing  period,  cash flows from investing  activities were used primarily to
purchase  securities  available for sale, loans and commercial real estate.  The
Company's financing  activities provided cash flows of $508.5 million during the
six months ended June 30, 1998 and  consisted  of proceeds  from lines of credit
and repurchase agreements of $493.2 million, and $27.6 million net proceeds from
the issuance of Operating  Partnership  units, net of $12.3 million of dividends
paid during the period.

         The  Company  expects  to meet its  short-term  liquidity  requirements
generally  through its working  capital and net cash  provided by operating  and
financing activities. On July 15, 1998, the Company issued $150 million of 11.5%
Senior Notes due 2005 pursuant to Rule 144A and, to a lesser extent,  Regulation
S under the  Securities  Act. The Company had $99.2  million and $159.8  million
available under its existing lines of credit with Merrill Lynch Mortgage Capital
Inc.  and  Salomon  Brothers  Realty  Corp.  at  June  30,  1998,  respectively.
Additionally,  on April 24, 1998,  the Company  entered into an agreement  for a
line of credit with Greenwich Capital  Financial  Products Inc. in the principal
amount of (British  pound)19.0  million ($32.1 million) to finance the Company's
acquisition of residual interests  originated in the U.K. operations of CFC. The
Company  believes  that the net cash  provided by its  operating  and  financing
activities  will be  sufficient  to allow the Company to make the  distributions
necessary for continued benefit from qualification as a REIT.

         The Company expects to meet certain long-term  liquidity  requirements,
such as property and security  acquisitions and loan originations:  by obtaining
various  third-party  borrowings  or  equity  infusions  and  has  entered  into
discussions  with  respect to obtaining  such  borrowings  or equity  infusions.
Additionally,   as   discussed   above,   the  Company   intends  to  execute  a
securitization  of its  single-family  residential  loan  portfolio  and use the
proceeds  for further  acquisitions.  The  Company  believes  that its  existing
sources of liquidity,  including third-party  borrowings and or equity infusions
currently  being  pursued,  will be adequate to fund planned  activities for the
foreseeable  future,  although there can be no assurances in this regard. In the
event  the  Company  was  unable  to  effect  such  third-party   borrowings  or
securitizations,  its  liquidity  could be  constrained  and the  impact  on its
results of operations, financial condition, and FFO could be significant.

                                       32

<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 as 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,  an  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 (i) 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 and/or (ii) designate the
Bank (or  another  party) as special  servicer  with  respect  to any  defaulted
mortgage loan,  subject to the Company's  right to exercise the rights set forth
in clause  (i).  At June 30,  1998,  the Company  believes  that its  Qualifying
Interests,  including subordinate and residual interests,  comprised over 75% 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 recission of relevant transactions.


                                       33
<PAGE>

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

FORWARD-LOOKING STATEMENTS

         CERTAIN  STATEMENTS  CONTAINED  HEREIN ARE NOT, AND CERTAIN  STATEMENTS
CONTAINED IN FUTURE FILINGS BY THE COMPANY WITH THE COMMISSION  (THE "SEC"),  IN
THE COMPANY'S  PRESS  RELEASES OR IN THE COMPANY'S  OTHER PUBLIC OR  SHAREHOLDER
COMMUNICATIONS,  MAY NOT BE BASED ON HISTORICAL  FACTS AND ARE  "FORWARD-LOOKING
STATEMENTS"  WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS
AMENDED,  AND SECTION 21E OF THE  SECURITIES  EXCHANGE ACT OF 1934,  AS AMENDED.
THESE FORWARD-LOOKING  STATEMENTS,  WHICH ARE BASED ON VARIOUS ASSUMPTIONS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL),  MAY BE IDENTIFIED BY REFERENCE TO A
FUTURE  PERIOD(S)  OR  BY  THE  USE  OF  FORWARD-LOOKING   TERMINOLOGY  SUCH  AS
"ANTICIPATE,"   "BELIEVE,"   "COMMITMENT,"   "CONSIDER,"   "CONTINUE,"  "COULD,"
"ENCOURAGE,"   "ESTIMATE,"   "EXPECT,"   "INTEND,"  "MAY,"  "PLAN,"   "PRESENT,"
"PROPOSE," "PROSPECT," "WILL," FUTURE OR CONDITIONAL VERB TENSES, SIMILAR TERMS,
VARIATIONS  ON SUCH TERMS OR  NEGATIVES  OF SUCH  TERMS.  ALTHOUGH  THE  COMPANY
BELIEVES  THE  ANTICIPATED  RESULTS  OR  OTHER  EXPECTATIONS  REFLECTED  IN SUCH
FORWARD-LOOKING  STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS,  IT CAN GIVE NO
ASSURANCE THAT THOSE RESULTS OR  EXPECTATIONS  WILL BE ATTAINED.  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
(PARTICULARLY IN THE MARKET AREAS WHERE THE COMPANY OPERATES), GOVERNMENT FISCAL
AND  MONETARY  POLICIES  (PARTICULARLY  IN THE MARKET  AREAS  WHERE THE  COMPANY
OPERATES),   PREVAILING   INTEREST  OR  CURRENCY   EXCHANGE  RATES,   GOVERNMENT
REGULATIONS  AFFECTING REAL ESTATE INVESTMENT TRUSTS,  COMPETITIVE  PRODUCTS AND
PRICING,  CREDIT,  PREPAYMENT,  BASIS AND ASSET/LIABILITY  RISKS, LOAN SERVICING
EFFECTIVENESS,  THE COURSE OF  NEGOTIATIONS  AND THE ABILITY TO REACH  AGREEMENT
WITH RESPECT TO THE MATERIAL TERMS OF ANY PARTICULAR  TRANSACTION,  SATISFACTORY
DUE DILIGENCE  RESULTS,  SATISFACTION  OR  FULFILLMENT  OF AGREED UPON TERMS AND
CONDITIONS  OF  CLOSING OR  PERFORMANCE,  THE  TIMING OF  TRANSACTION  CLOSINGS,
ACQUISITIONS  AND THE  INTEGRATION  OF ACQUIRED  BUSINESSES,  THE  FINANCIAL AND
SECURITIES  MARKETS,  THE  AVAILABILITY  OF AND COSTS  ASSOCIATED WITH OBTAINING
ADEQUATE AND TIMELY  SOURCES OF  LIQUIDITY,  DEPENDENCE  ON EXISTING  SOURCES OF
FUNDING, AVAILABILITY OF DISCOUNT LOANS FOR PURCHASE, THE SIZE AND NATURE OF THE
SECONDARY  MARKET FOR  MORTGAGE  LOANS AND OF THE  MARKET  FOR  SECURITIZATIONS,
GEOGRAPHIC  CONCENTRATIONS  OF ASSETS,  OTHER  FACTORS  GENERALLY  UNDERSTOOD TO
AFFECT THE REAL ESTATE ACQUISITION,  MORTGAGE AND LEASING MARKETS AND SECURITIES
INVESTMENTS, AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S REPORTS
AND FILINGS WITH THE SEC, INCLUDING ITS REGISTRATION  STATEMENT ON FORM S-11 AND
PERIODIC  REPORTS ON FORMS 10-Q,  8-K AND 10-K.  THE COMPANY DOES NOT UNDERTAKE,
AND SPECIFICALLY DISCLAIMS ANY OBLIGATION,  TO PUBLICLY RELEASE THE RESULT(S) OF
ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT THE
OCCURRENCE OF ANTICIPATED OR  UNANTICIPATED  EVENTS OR  CIRCUMSTANCES  AFTER THE
DATE OF SUCH STATEMENTS.

                                       34

<PAGE>

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

         Information   required  by  this  Item  is  not  applicable  under  the
circumstances.


                                       35
<PAGE>

                            PART II OTHER INFORMATION


Item 2.  Changes in Securities

         On July 14, 1998 the Company issued $150,000,000 principal amount of 11
         1/2%  Senior  Notes  due  2005  (the "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. In addition, 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 which
         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.

Item 4.  Submission of Matters to a Vote of Security Holders

         At the Company's Annual Meeting of Shareholders held on Wednesday,  May
         14,  1998,  the  following  individuals  were  elected  to the Board of
         Directors:


                                           Votes for           Votes Withheld
                                  -----------------------   --------------------

         William C. Erbey                 17,144,880               38,435
         Benjamin W. Navarro              17,142,962               40,353
         Christine A. Reich               17,143,971               39,344
         Timothy J. Riddiough             17,141,271               42,044
         Peter M. Small                   17,141,380               41,935


<TABLE>
<CAPTION>
         The following proposals were approved at the Company's Annual Meeting:

                                                                                                   Broker
                                                       Votes for   Votes Against  Abstentions    Non-Votes
                                                       ---------   -------------  -----------    ---------
<S>                                                    <C>             <C>           <C>           <C>   

           Ratification of  the appointment  by the   17,144,958      13,209        29,148          -
           Board of Directors of Price  Waterhouse,
           LLP  as  independent   auditor  for  the
           Company   for  the  fiscal  year  ending
           December 31, 1998.
                                                            
           Amendment   of   Article   VIII  of  the   17,091,958      17,539        52,248        21,570
           Company's  Articles of  Incorporation in
           order  to  provide,   in  effect,   that
           nothing  contained therein will prohibit
           the   settlement   of  any   transaction
           entered into through the  facilities  of
           any   national    securities    exchange
           registered under the Securities Exchange
           Act of 1934,  as amended (the  "Exchange
           Act"),  or on the national market system
           of  a  national  securities  association
           registered under the Exchange Act.
</TABLE>

                                                    36
<PAGE>

Item 6.  Exhibits and Reports on Form 8-K

         (a)      Exhibits

                  3.1      Amended and Restated Articles of Incorporation (1)

                  3.2      Amendment  to  Amended  and   Restated   Articles  of
                           Incorporation (2)

                  3.3      By laws (1)

                  4.1      Form of Common Stock Certificate (1)

                  4.2      Form of  Indenture  for the 11 1/2% Senior  Notes due
                           2005 between the Company and Norwest Bank  Minnesota,
                           National Association, as Trustee thereunder (3)

                  4.3      Form of 11 1/2% Senior  Notes due 2005  (attached  as
                           Exhibit A to the  Indenture  included as Exhibit 4.2)
                           (3)

                  4.4      Registration  Rights Agreement,  dated July 14, 1998,
                           among the Company and the Initial  Purchasers  of the
                           11 1/2% Senior Notes due 2005 (3)

                 10.1      First Amended and Restated Management Agreement (4)

                 10.2      Form of Registration Rights Agreement (1)

                 10.3      Third  Amended  and  Restated  Agreement  of  Limited
                           Partnership  of  Ocwen   Partnership,   L.P.   (filed
                           herewith)

                 10.4      Form of Stock Option Plan (1)

                 10.5      Purchase and Sale  Agreement  between  Ocwen  Capital
                           Corporation and Pacific Resources  Development,  Inc.
                           dated as of March 3, 1998 (5)

                 10.6      Assignment and Assumption  Agreement,  dated April 7,
                           1998, by and between Ocwen  Capital  Corporation  and
                           OAIC Bush Street, LLC (5)

                 10.7      Loan  Agreement  between  OAIC Bush  Street,  LLC and
                           Salomon Brothers Realty Corp. as of April 7, 1998 (5)

                 10.8      Purchase  and  Sale  Agreement   between   Prudential
                           Insurance   Company  of  America  and  Ocwen  Capital
                           Corporation, dated June 9, 1998 (6)

                 10.9      Loan Agreement  between the Company and Merrill Lynch
                           Mortgage  Capital  Inc.  as of March 30,  1998 (filed
                           herewith)

                 10.10     Loan  Agreement  between the  Company  and  Greenwich
                           Financial Products Inc. as of April 24, 1998 (4)

                                       37
<PAGE>

                 10.11     Amended and  Restated  Loan  Agreement  by and among,
                           inter alia, OAIC California  Partnership,  L.P., OAIC
                           California  Partnership  II, L.P.,  Salomon  Brothers
                           Realty Corp. and LaSalle  National Bank,  dated as of
                           June 10, 1998 (filed herewith)

                 27.1      Financial  Data Schedule - For the quarter ended June
                           30, 1998 (filed herewith)

                 99.1      Investment Guidelines (filed herewith)


                 ----------------
                           (1)   Incorporated  by  reference  to  the  Company's
                           Registration   Statement   on  Form  S-11  (File  No.
                           333-21965),  as amended,  declared  effective  by the
                           Commission on May 14, 1997.

                           (2) Incorporated by reference to the text thereof set
                           forth  on page 5 of the  Company's  definitive  Proxy
                           Statement  with respect to the Company's  1998 annual
                           meeting of  shareholders as filed with the Commission
                           on April 15, 1998.

                           (3)  Incorporated  by reference to the Current Report
                           on Form 8-K filed by the Company with the  Commission
                           on July 16, 1998.

                           (4)   Incorporated  by  reference  to  the  Company's
                           Quarterly  Report  on Form  10-Q  for  the  quarterly
                           period ended March 31, 1998.

                           (5)  Incorporated  by reference to the Current Report
                           on Form 8-K filed by the Company with the  Commission
                           on April 23, 1998.

                           (6)  Incorporated  by reference to the Current Report
                           on Form 8-K filed by the Company with the  Commission
                           on August 6, 1998.


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


                  (1)      A Form 8-K dated as of April 8, 1998, which contained
                           a news release  announcing the Company's  purchase of
                           the Bush Street property.


                  (2)      A Form 8-K dated as of May 7, 1998, which contained a
                           news  release  announcing  the  Company's   financial
                           results for the three  months  ended March 31,  1998,
                           the  sale  of its  IO  portfolio,  and an  additional
                           capital investment.

                  (3)      A Form 8-K/A dated as of April 8, 1998,  and filed on
                           June 12, 1998, which contained financial  information
                           relating to OAIC Bush Street, LLC.

                  (4)      A Form 8-K dated as of June 18, 1998, which contained
                           a  news  release   announcing  the  Company's  recent
                           investment activity.


                                       38
<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: August 14, 1998