<PAGE>

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                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:    SEPTEMBER 30, 1999

                                       OR

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

      FOR THE TRANSITION PERIOD FROM _____ TO _____

                        COMMISSION FILE NUMBER: 001-13637

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

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

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

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

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
             ---         ---

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of the issuer's classes of common
stock, as of the last practicable date.

Common Stock ($0.01 par value)                5,753,000 as of November 12, 1999

--------------------------------------------------------------------------------
--------------------------------------------------------------------------------



<PAGE>


                           APEX MORTGAGE CAPITAL, INC.
                                    FORM 10-Q

                                      INDEX

<TABLE>
<CAPTION>

PART I.   FINANCIAL INFORMATION                                                            PAGE
<S>       <C>                                                                              <C>
 ITEM 1.  FINANCIAL STATEMENTS

               BALANCE SHEETS AT SEPTEMBER 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998       3

               STATEMENT OF OPERATIONS FOR THE THREE MONTHS AND NINE
               MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1999
               (UNAUDITED)                                                                  4

               STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED
               SEPTEMBER 30, 1999 (UNAUDITED)                                               5

               STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS AND NINE MONTHS
               ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1999 (UNAUDITED)                  6

               NOTES TO FINANCIAL STATEMENTS (UNAUDITED)                                    7

 ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF
          FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                     15

 ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                        24


PART II.  OTHER INFORMATION

 ITEM 1.  LEGAL PROCEEDINGS                                                                 27

 ITEM 2.  CHANGES IN SECURITIES                                                             27

 ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                   27

 ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                               27

 ITEM 5.  OTHER INFORMATION                                                                 27

 ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                                  28

 SIGNATURES                                                                                 29

</TABLE>

<PAGE>

PART 1.   FINANCIAL INFORMATION

ITEM 1.   FINANCIAL STATEMENTS

                           APEX MORTGAGE CAPITAL, INC.

                                 BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                SEPTEMBER 30, 1999         DECEMBER 31, 1998
                                                                                   (Unaudited)
<S>                                                                             <C>                        <C>
ASSETS
      Cash and cash equivalents                                                   $  6,236,000               $ 12,679,000
      Fixed income securities available-for-sale, at fair value (Note 3)           730,002,000                829,712,000
      Equity securities available-for-sale, at fair value (Note 3)                  20,254,000                 16,422,000
      Accrued interest receivable                                                    5,851,000                  5,151,000
      Principal payments receivable                                                  3,827,000                    937,000
      Receivable for unsettled securities                                               63,000                          -
      Other assets                                                                     408,000                    577,000

                                                                                  ------------               ------------
                                                                                  $766,641,000               $865,478,000
                                                                                  ============               ============


LIABILITIES AND STOCKHOLDERS' EQUITY

   Liabilities

      Reverse repurchase agreements (Note 5)                                      $699,647,000               $767,908,000
      Payable for unsettled securities                                                  16,000                    838,000
      Unrealized loss on forwards (Note 11)                                            869,000                          -
      Accrued interest payable                                                       2,473,000                  6,173,000
      Dividend payable                                                               2,724,000                  1,777,000
      Accrued expenses and other liabilities                                           831,000                    752,000
                                                                                  ------------               ------------
                                                                                   706,560,000                777,448,000
                                                                                  ------------               ------------

   Commitments and contingencies (Note 10)

   Stockholders' Equity

      Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized;
         no shares outstanding

      Common Stock, par value $0.01 per share; 100,000,000 shares
         authorized; 6,700,100 shares outstanding (Notes 8 and 9)                       67,000                     67,000
      Additional paid-in-capital                                                    93,194,000                 92,978,000
      Accumulated other comprehensive income (loss)                                (22,796,000)                 6,689,000
      Retained Earnings (Deficit)                                                      185,000                 (1,135,000)
      Treasury stock, at cost (947,100 shares) (Note 7)                            (10,569,000)               (10,569,000)

                                                                                  ------------               ------------
                                                                                    60,081,000                 88,030,000
                                                                                  ------------               ------------
                                                                                  $766,641,000               $865,478,000
                                                                                  ============               ============
</TABLE>

     See accompanying notes to financial statements

                                     3

<PAGE>

                           APEX MORTGAGE CAPITAL, INC.

                             STATEMENT OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                Three Months Ended                        Nine Months Ended
                                                                   SEPTEMBER 30,                            SEPTEMBER 30,
                                                              1999               1998                  1999               1998
<S>                                                      <C>              <C>                     <C>                <C>
Interest Income:
     Fixed income securities                              $13,045,000       $13,469,000            $39,913,000       $27,418,000
     Cash and cash equivalents                                 79,000           173,000                229,000           629,000
                                                          -----------       -----------            -----------       -----------
                                                           13,124,000        13,642,000             40,142,000        28,047,000

INTEREST EXPENSE                                           10,231,000        11,271,000             32,251,000        24,281,000
                                                          -----------       -----------            -----------       -----------
NET INTEREST INCOME                                         2,893,000         2,371,000              7,891,000         3,766,000
                                                          -----------       -----------            -----------       -----------

NET GAIN ON INVESTMENT TRANSACTIONS                           437,000             7,000              1,714,000           476,000

DIVIDEND INCOME                                               503,000           186,000              1,899,000           186,000

GENERAL AND ADMINISTRATIVE EXPENSES:

     Management fee (Note 8)                                  158,000           156,000                472,000           490,000
     Incentive fee (Note 8)                                   480,000           197,000              1,498,000           197,000
     Audit and tax fees                                        19,000            11,000                 50,000            34,000
     Insurance expense                                         67,000            67,000                200,000           200,000
     Directors' fees                                           15,000            15,000                 45,000            55,000
     Stock option expense                                      71,000            28,000                217,000            84,000
     Other                                                     58,000            98,000                240,000           202,000
                                                          -----------       -----------            -----------       -----------
                                                              868,000           572,000              2,722,000         1,262,000
                                                          -----------       -----------            -----------       -----------

NET INCOME                                                $ 2,965,000       $ 1,992,000            $ 8,782,000       $ 3,166,000
                                                          ===========       ===========            ===========       ===========


Net Income Per Share:

     Basic                                                $      0.52       $      0.33            $      1.53       $      0.50
                                                          ===========       ===========            ===========       ===========
     Diluted                                              $      0.51       $      0.33            $      1.52       $      0.50
                                                          ===========       ===========            ===========       ===========

Weighted Average Number of Shares Outstanding:

     Basic                                                  5,753,000         6,022,000              5,753,000         6,334,000
                                                          ===========       ===========            ===========       ===========
     Diluted                                                5,784,000         6,022,000              5,782,000         6,334,000
                                                          ===========       ===========            ===========       ===========

Dividends Declared Per Share                              $      0.46       $      0.27            $      1.26       $      0.77
                                                          ===========       ===========            ===========       ===========
</TABLE>

                                     4


<PAGE>

                           APEX MORTGAGE CAPITAL, INC.
                        STATEMENT OF STOCKHOLDERS' EQUITY
                         PERIOD ENDED SEPTEMBER 30, 1999
                                   (Unaudited)

<TABLE>
<CAPTION>

                                                                                             Acccumulated
                                             Common Stock                Additional             Other
                                    -------------------------------       Paid-in           Comprehensive
                                        Shares          Amount           Capital              Income
                                    ---------------  --------------  ------------------  -------------------
<S>                                      <C>               <C>             <C>                   <C>
Balance, December 31, 1998               6,700,100         $67,000         $92,978,000           $6,689,000

Repurchases of common stock                    -                 -                   -                    -

Issuance of stock options

    to non-employees (Note 9)                  -                 -              74,000                    -

Net income                                     -                 -                   -                    -

Other comprehensive income:
    Net unrealized (loss) on
    investments available-
    for-sale                                   -                 -                   -           (2,861,000)




Comprehensive income                           -                 -                   -                    -



Dividends declared                             -                 -                   -                    -


                                         ---------         -------         -----------         ------------
Balance, March 31, 1999                  6,700,100         $67,000         $93,052,000         $  3,828,000

Repurchases of common stock                    -                 -                   -                    -

Issuance of stock options
    to non-employees (Note 9)                  -                 -              71,000                    -

Net income                                     -                 -                   -                    -

Other comprehensive income:
    Net unrealized (loss) on
    investments available-
    for-sale                                   -                 -                   -          (13,036,000)



Comprehensive income (loss)                    -                 -                   -                    -


Dividends declared                             -                 -                   -                    -

                                         ---------         -------         -----------         ------------
Balance, June 30, 1999                   6,700,100         $67,000         $93,123,000          ($9,208,000)

Repurchases of common stock

Issuance of stock options
    to non-employees (Note 9)                                                   71,000

Net income

Other comprehensive income:
    Net unrealized (loss) on
    investments available-
    for-sale                                                                                    (13,588,000)



Comprehensive income (loss)


Dividends declared

                                         ---------         -------         -----------         ------------
Balance, September 30, 1999              6,700,100         $67,000         $93,194,000         ($22,796,000)
                                         =========         =======         ===========         ============




<CAPTION>

                                          Retained                                 Treasury
                                          Earnings           Comprehensive          Stock,
                                          (Deficit)             Income             At Cost           Total
                                         ---------           -------------        -----------       -------
<S>                                     <C>                  <C>                <C>                <C>
Balance, December 31, 1998              ($1,135,000)                            ($10,569,000)      $88,030,000

Repurchases of common stock                       -                    -                   -                 -

Issuance of stock options
     to non-employees (Note 9)                    -                    -                   -            74,000

Net income                                2,962,000            2,962,000                   -         2,962,000

Other comprehensive income:
     Net unrealized (loss) on
     investments available-
     for-sale                                     -           (2,861,000)                  -        (2,861,000)


                                                            ------------
Comprehensive income                                           $ 101,000
                                                            ============

Dividends declared                       (2,250,000)                                       -        (2,250,000)

                                        -----------                             ------------       -----------
Balance, March 31, 1999                   ($423,000)                            ($10,569,000)      $85,955,000

Repurchases of common stock                       -                    -                   -                 -

Issuance of stock options
     to non-employees (Note 9)                    -                    -                   -            71,000

Net income                                2,854,000            2,854,000                   -         2,854,000

Other comprehensive income:
     Net unrealized (loss) on
     investments available-
     for-sale                                     -          (13,036,000)                  -       (13,036,000)


                                                           -------------
Comprehensive income (loss)                                 $(10,182,000)
                                                           =============

Dividends declared                       (2,487,000)                                       -        (2,487,000)

                                       ------------                             ------------  ----------------
Balance, June 30, 1999                     ($56,000)                            ($10,569,000)      $73,357,000

Repurchases of common stock                                                                                  -

Issuance of stock options                                                                                    -
     to non-employees (Note 9)                                                                          71,000

Net income                                2,965,000            2,965,000                             2,965,000

Other comprehensive income:
     Net unrealized (loss) on
     investments available-
     for-sale                                                (13,588,000)                          (13,588,000)


                                                            ------------
Comprehensive income (loss)                                 $(10,623,000)                                    -
                                                            ============

Dividends declared                       (2,724,000)                                                (2,724,000)

                                        -----------                             ------------       -----------
Balance, September 30, 1999                $185,000                             ($10,569,000)      $60,081,000
                                        ===========                             ============       ===========
</TABLE>


                                  5


<PAGE>


                                                   APEX MORTGAGE CAPITAL, INC.

                                                    STATEMENT OF CASH FLOWS
                                                          (Unaudited)

<TABLE>
<CAPTION>
                                                                        THREE MONTHS ENDED              NINE MONTHS ENDED
                                                                          SEPTEMBER 30,                    SEPTEMBER 30,
                                                                      1999         1998                1999            1998
<S>                                                             <C>              <C>               <C>            <C>
OPERATING ACTIVITIES:
  Net Income                                                    $  2,965,000     $   1,992,000     $  8,782,000    $   3,166,000
  Adjustments to reconcile net income to net cash
     provided by operating activities:

        Amortization                                                 (52,000)          413,000          394,000        3,148,000
        Net gain on sale of securities                              (437,000)           (7,000)      (1,714,000)        (476,000)
        Change in assets and liabilities:
         Accrued interest receivable                                (116,000)          123,000         (700,000)      (3,910,000)
         Other assets                                                390,000           100,000          169,000          200,000
         Accrued interest payable                                   (210,000)         (774,000)      (3,700,000)       3,014,000
         Accrued expenses and other liabilities                       57,000          (668,000)          79,000       (1,011,000)
                                                                ------------     -------------     ------------    -------------
         Net cash provided by operating activities                 2,597,000         1,179,000        3,310,000        4,131,000
                                                                ------------     -------------     ------------    -------------
INVESTING ACTIVITIES:

  Purchase of equity securities                                   (5,089,000)       (9,980,000)     (12,630,000)      (9,980,000)
  Purchase of interest rate caps                                           -                 -                -          (80,000)
  Purchase of fixed income securities                             (1,410,000)     (198,034,000)    (117,141,000)  (1,464,500,000)
  Proceeds from sales of equity securities                         2,494,000                 -        6,870,000                -
  Proceeds from sales of fixed income securities                     172,000        80,199,000       40,578,000      541,801,000
  Principal payments on fixed income securities                   35,951,000        39,643,000      147,322,000      219,813,000
                                                                ------------     -------------     ------------    -------------
         Net cash provided by (used in) investing activities      32,118,000       (88,172,000)      64,999,000     (712,946,000)
                                                                ------------     -------------     ------------    -------------
FINANCING ACTIVITIES:

  Net proceeds from reverse repurchase agreements                (37,021,000)       57,928,000      (68,261,000)     723,862,000
  Dividend distributions                                          (2,487,000)       (1,560,000)      (6,491,000)      (3,454,000)
  Purchase of treasury stock                                               -        (2,672,000)               -       (9,108,000)
                                                                ------------     -------------     ------------    -------------
         Net cash (used in) provided by financing activities     (39,508,000)       53,696,000      (74,752,000)     711,300,000
                                                                ------------     -------------     ------------    -------------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS              (4,793,000)      (33,297,000)      (6,443,000)       2,485,000

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                  11,029,000        38,867,000       12,679,000        3,085,000
                                                                ------------     -------------     ------------    -------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                      $  6,236,000     $   5,570,000     $  6,236,000    $   5,570,000
                                                                ============     =============     ============    =============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

  Cash paid for interest                                        $ 10,474,000     $  12,001,000     $ 35,908,000    $  21,194,000
                                                                ============     =============     ============    =============
NONCASH INVESTING AND FINANCING ACTIVITIES:
  Net unrealized gain (loss) on mortgage-backed
      securities available-for-sale                             $(13,588,000)    $  10,603,000     $(29,485,000)   $  11,859,000
                                                                ============     =============     ============    =============
  Securities sold, not yet settled                              $   (484,000)    $ (56,593,000)        $ 63,000    $           0
                                                                ============     =============     ============    =============
  Principal payments, not yet received                          $    463,000     $    (799,000)    $  2,890,000    $     158,000
                                                                ============     =============     ============    =============
  Securities purchased, not yet settled                         $     16,000     $(120,720,000)    $  (822,000)    $ (88,498,000)
                                                                ============     =============     ===========     =============
  Dividends declared, not yet paid                              $ (2,724,000)    $  (1,601,000)    $(2,724,000)    $  (1,601,000)
                                                                ============     =============     ===========     =============
</TABLE>

See accompanying notes to financial statements


                                     6

<PAGE>


                           APEX MORTGAGE CAPITAL, INC.
                          NOTES TO FINANCIAL STATEMENTS

NOTE 1 - THE COMPANY

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

  CASH AND CASH EQUIVALENTS

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

  FIXED INCOME SECURITIES

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

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

         Interest income on the Company's other fixed income securities is
         accrued using the effective interest method applied prospectively based
         on current market assumptions.

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

  EQUITY SECURITIES

         The Company's equity securities consist primarily of equity securities
         issued by other real estate investment trusts. Dividend income on
         equity securities is recorded on the declaration date. Realized gains
         and losses on sales of the securities are determined on a specific
         identification basis. A majority of the Company's equity securities are
         expected to qualify as real estate assets under the REIT Provisions of
         the Code.

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

  INTEREST RATE HEDGING TRANSACTIONS

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

         The Company also enters into forward contracts to sell U.S. Treasury
         notes in order to mitigate the negative impact of rising interest rates
         on the fair value of its fixed income securities available-for-sale.
         Unrealized gains are shown as an asset on the balance sheet as deferred
         hedging income. Unrealized losses are shown as a liability on


                                       7

<PAGE>

         the balance sheet as deferred hedging expense. All changes in the fair
         value of the forward contracts are included in other comprehensive
         income in the Statement of Stockholders' Equity. Realized gains or
         losses on the termination of the contracts are recorded as a deferred
         asset or liability on the balance sheet and are amortized over the
         remaining life of the fixed income securities being hedged as an
         adjustment to interest income in the Statement of Operations.

  STOCK BASED COMPENSATION

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

  FEDERAL AND STATE INCOME TAXES

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

  NET INCOME PER SHARE

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

  INCOME RECOGNITION

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

  CREDIT RISK

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

  USE OF ESTIMATES

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

  COMPREHENSIVE INCOME

         The Company has adopted Statement of Financial Accounting Standards
         ("SFAS") No. 130, REPORTING COMPREHENSIVE INCOME. This statement
         establishes standards for reporting and display of comprehensive income
         and its components 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 from non-owner sources. It includes all
         changes in equity during a period except those resulting from
         investments by owners and distributions to owners."

  RECENTLY ISSUED ACCOUNTING STANDARDS

         During the nine months ended September 30, 1999, the Company wrote off
         $64,000 of unamortized organizational costs in accordance with the
         adoption of Statement of Position ("SOP") 98-5, "Reporting on the Cost
         of Start-Up Activities."


                                       8

<PAGE>

         In June 1998, the Financial Accounting Standards Board issued SFAS No.
         133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The
         Statement establishes accounting and reporting standards requiring that
         every derivative instrument (including certain derivative instruments
         embedded in other contracts) be recorded in the balance sheet as either
         an asset or liability measured at its fair value. The Statement
         requires that changes in the derivative's fair value be recognized
         currently in earnings unless specific hedge accounting criteria are
         met. Special accounting for qualifying hedges allows a derivative's
         gains and losses to offset related results on the hedged item in the
         income statement, and requires that a company must formally document,
         designate, and assess the effectiveness of transactions that receive
         hedge accounting. SFAS No. 133, as amended by SFAS No. 137, is
         effective for fiscal years beginning after June 15, 2000. A company may
         also implement the Statement as of the beginning of any fiscal quarter
         after issuance (that is, fiscal quarters beginning June 16, 1998 and
         thereafter). Statement 133 cannot be applied retroactively. Statement
         133 must be applied to (a) derivative instruments and (b) certain
         derivative instruments embedded in hybrid contracts that were issued,
         acquired, or substantively modified after December 31, 1998 (and, at
         the Company's election, before January 1, 1998). The Company will adopt
         the reporting requirements of SFAS No. 133 by the first quarter of
         2001. An earlier adoption may be made if circumstances warrant. The
         Company expects the impact of the adoption of the reporting
         requirements of SFAS No. 133 to include the recording of the
         approximate fair value of the Company's interest rate swaps as
         comprehensive income.

  RECLASSIFICATIONS

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

NOTE 3 - FIXED INCOME SECURITIES AND EQUITY SECURITIES

         At September 30, 1999, fixed income securities consisted of the
following:

<TABLE>
<CAPTION>

                                             Adjustable Rate          Fixed Rate          Other Fixed
        (in thousands)                              Mortgage            Mortgage              Income
                                                  Securities          Securities           Securities           Total
                                            ---------------------------------------------------------------------------
        <S>                                 <C>                       <C>                 <C>                  <C>
        Principal Amount                             $34,362            $706,455             $10,400           $751,217
        Unamortized Premium (Discount)                   596               1,838              (3,062)             (628)
                                            ---------------------------------------------------------------------------
        Amortized Cost                                34,958             708,293               7,338            750,589
        Unrealized Gains                                  33                  23                   0                 56
        Unrealized Losses                               (297)            (19,645)               (701)           (20,643)
                                            ---------------------------------------------------------------------------
        Fair Value                                   $34,694            $688,671             $ 6,637           $730,002
                                            ---------------------------------------------------------------------------
                                            ---------------------------------------------------------------------------
</TABLE>


         At December 31, 1998, fixed income securities consisted of the
following:

<TABLE>
<CAPTION>

                                             Adjustable Rate          Fixed Rate         Other Fixed
        (in thousands)                              Mortgage            Mortgage              Income
                                                  Securities          Securities          Securities           Total
                                            ---------------------------------------------------------------------------
        <S>                                 <C>                       <C>                 <C>                  <C>
        Principal Amount                             $61,590            $758,110             $ 5,400           $825,100
        Unamortized Premium (Discount)                   772                 800              (1,380)               192
                                            ---------------------------------------------------------------------------
        Amortized Cost                                62,362             758,910               4,020            825,292
        Unrealized Gains                                  86               4,762                   0              4,848
        Unrealized Losses                               (110)                (15)               (303)              (428)
                                            ---------------------------------------------------------------------------
        Fair Value                                   $62,338            $763,657             $ 3,717           $829,712
                                            ---------------------------------------------------------------------------
                                            ---------------------------------------------------------------------------
</TABLE>

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

         A portion of the other fixed income securities generally have an
         original maturity of five years subject to certain acceleration
         provisions. The expected average remaining maturity at September 30,
         1999 and December 31, 1998


                                       9

<PAGE>

         were approximately 3.3 and 4.0 years, respectively. The remaining
         portion has a fixed remaining maturity of approximately 2.8 years as
         of September 30, 1999.

         The adjustable rate mortgage securities are typically subject to
         periodic and lifetime caps that limit the amount an adjustable rate
         mortgage security's interest rate can change during any given period
         and over the life of the asset. At September 30, 1999 and December 31,
         1998, the average periodic cap on the adjustable rate mortgage
         securities was 2.0% per annum and the average lifetime cap was equal
         to 11.3%.

         There were no sales of mortgage securities during the quarter ended
         September 30, 1999. During the quarter ended September 30, 1998, the
         Company realized $104,000 in gains on the sale of $79,300,000 mortgage
         securities which were classified as available-for-sale.

         At September 30, 1999 and December 31, 1998, equity securities
consisted of the following:

<TABLE>
<CAPTION>


        (in thousands)
                                    September 30, 1999      December 31, 1998
                                  -------------------------------------------
        <S>                       <C>                       <C>
        Cost Basis                           $21,594                $14,154
        Unrealized Gains                       1,965                  2,268
        Unrealized Losses                     (3,305)                    (0)
                                  -------------------------------------------
        Fair Value                           $20,254                $16,422
                                  -------------------------------------------
                                  -------------------------------------------
</TABLE>

         During the quarter ended September 30, 1999, the Company realized
         $421,000 in gains on the sale of $2,494,000 of equity securities that
         were classified as available-for-sale.

NOTE 4 - INTEREST RATE CAP AGREEMENTS AND TREASURY PUT OPTIONS

         Interest rate cap agreements include the carrying value of purchased
         interest rate caps, entered into by the Company in order to mitigate
         the impact of rising interest rates on the cost of its short-term
         borrowings. As discussed in Note 10, the Company has entered into
         certain interest rate swap transactions. The execution of these swaps
         eliminated the need for the cap protection previously purchased.
         Accordingly, the interest rate cap agreements no longer qualify for
         hedge accounting and were written down to zero during the year ended
         December 31, 1998 which approximates their fair value.

         The terms of outstanding interest rate cap agreements are as follows:

<TABLE>
<CAPTION>

                                  At September 30, 1999    At December 31, 1998
                                  ---------------------------------------------
           <S>                    <C>                      <C>
           Notional Amount                                   $900,000,000
           Average Contract Rate          -                     10.4%
           Average Final Maturity         -                January 24, 2002
</TABLE>


         Under these agreements, the Company received cash payments to the
         extent of the excess of the three month London Interbank Offered Rate
         ("LIBOR") over the agreements' contract rate times the notional amount.
         During the quarter ended September 30, 1999, interest rate caps with a
         notional amount of $900,000,000 were sold resulting in a realized gain
         of $172,000 which is included in Net Gain on Investment Transactions in
         the Statement of Operations.

         During the quarter ended September 30, 1999, the expiration of put
         options on ten-year U.S. Treasury futures contracts with a notional
         amount of $50,000,000 resulted in a realized loss of $156,000 which is
         included in Net Gain on Investment Transactions in the Statement of
         Operations.

NOTE 5 - REVERSE REPURCHASE AGREEMENTS

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


                                      10

<PAGE>

         At September 30, 1999, the Company had outstanding $699,647,000 of
         reverse repurchase agreements with a weighted average current borrowing
         rate of 5.41% and a maturity of 1.9 months. The reverse repurchase
         agreements were collateralized by mortgage related securities with an
         estimated fair value of $739,986,000.

         At December 31, 1998, the Company had outstanding $767,908,000 of
         reverse repurchase agreements with a weighted average current borrowing
         rate of 5.34% and a maturity of 2.9 months. The reverse repurchase
         agreements were collateralized by fixed income securities with an
         estimated fair value of $800,260,000.

         For the quarter ended September 30, 1999, the average reverse
         repurchase agreement balance was $715,263,000 with a weighted average
         interest cost of 5.18%. The maximum reverse repurchase agreement
         balance outstanding during the quarter ended September 30, 1999 was
         $736,668,000.

         For the quarter ended September 30, 1998, the average reverse
         repurchase agreement balance was $774,420,000 with a weighted average
         interest cost of 5.74%. The maximum reverse repurchase agreement
         balance outstanding during the quarter ended September 30, 1998 was
         $818,540,000.

NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS

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

<TABLE>
<CAPTION>

                                               At September 30, 1999                  At December 31, 1998

                                                   Amortized                             Amortized
                                                        Cost   Fair Value                     Cost      Fair Value
                                             ------------------------------        ---------------------------------
<S>                                                 <C>        <C>                        <C>           <C>
        Mortgage related securities                 $743,251     $723,365                 $821,272        $825,995
        Equity securities                             21,594       20,254                   14,154          16,422
        Other fixed income securities                  7,338        6,637                    4,020           3,717
        Interest rate swaps                                -        1,146                        -          (9,994)
        Forward contracts                                  -         (869)                       -               -
</TABLE>


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

NOTE 7 - STOCK REPURCHASE PROGRAM

         The Company's Board of Directors has authorized a program to repurchase
         shares of the Company's common stock. At September 30, 1999 and
         December 31, 1998, the Company was authorized to repurchase an
         additional 552,900 shares of the Company's common stock pursuant to
         the repurchase program.

         At September 30, 1999 and December 31, 1998, the Company held 947,100
         shares of treasury stock. During the quarter ended September 30, 1999,
         the Company did not repurchase any treasury shares, however, for the
         quarter ended September 30, 1998, the Company repurchased 247,500
         shares which are held at cost in the financial statements herein.

NOTE 8 - TRANSACTIONS WITH AFFILIATES

                                      11

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

         The Company paid the Manager $158,000 and $156,000 in base management
         compensation during the quarters ended September 30, 1999 and September
         30, 1998, respectively.

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

         The Company accrued $480,000 and $197,000 for incentive compensation to
         the Manager for the quarters ended September 30, 1999 and September 30,
         1998, respectively.

         The Company may also grant stock options to directors, officers and key
         employees of the Company, the Manager, its directors, officers and key
         employees.

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

NOTE 9 - STOCK OPTIONS

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

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

         The Company recognized stock option expenses relating to these options
         of $71,000 and $28,000 during the quarters ended September 30, 1999 and
         September 30, 1998, respectively.

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

<TABLE>
<CAPTION>
                                                                            Quarter Ended            Quarter Ended
                                                                         September 30, 1999       September 30, 1998
                                                                      -----------------------   -----------------------
        <S>                                                           <C>                       <C>
        Net income - as reported                                             $2,965,000                $1,992,000
        Net income - pro forma                                                2,840,000                 1,951,000

        Basic and diluted earnings per share - as reported                        $0.52                     $0.33
        Basic and diluted earnings per share - pro forma                          $0.49                     $0.32
</TABLE>

                                      12

<PAGE>

         Information regarding stock option activity during the nine months
         ended September 30, 1999 is as follows:

<TABLE>
<CAPTION>

                                                                                                   Weighted Average
                                                                                      Shares         Exercise Price
                                                                             ---------------------------------------
        <S>                                                                  <C>                   <C>
        Options Granted Prior to December 31, 1998                                    570,000             $13.62
        Exercised                                                                        -                  -
        Expired                                                                          -                  -
                                                                             ---------------------------------------
        Options Outstanding at September 30, 1999                                     570,000             $13.62
                                                                             ---------------------------------------
                                                                             ---------------------------------------
</TABLE>

NOTE 10 - CONTRACTUAL COMMITMENTS

         At September 30, 1999 the Company had entered into interest rate swap
         agreements with the total current notional amount as stated below.
         Under these agreements, the Company receives a floating rate and pays a
         fixed rate.

<TABLE>
<CAPTION>

                                                                                              Average         Unrealized
            Current                                       Average                           Termination     Gains (Losses)
     Notional Amount (000)            Type              Fixed Rate       Floating Rate         Date             (000)
------------------------------------------------------------------------------------------------------------------------------
     <S>                       <C>                      <C>              <C>                <C>             <C>
          $410,552             Interest Rate Swap         5.869%           1Mo LIBOR         8/9/2001           $1,146
</TABLE>

         At December 31, 1998 the Company entered into interest rate swap
agreement as follows:

<TABLE>
<CAPTION>

                                                                                              Average         Unrealized
            Current                                       Average                           Termination     Gains (Losses)
     Notional Amount (000)            Type              Fixed Rate       Floating Rate         Date             (000)
-------------------------------------------------------------------------------------------------------------------------------
     <S>                       <C>                      <C>              <C>                <C>             <C>
          $703,590             Interest Rate Swap         5.850%           1Mo LIBOR         2/16/2001           $(9,994)
</TABLE>

         The Company paid $736,000 and $146,000 to the swap counter-parties
         during the quarters ended September 30, 1999 and September 30, 1998,
         respectively, which is included in interest expense in the statement of
         operations.

         During the quarter ended September 30, 1999, the Company terminated
         interest rate swap agreements with a combined notional amount of
         $255,530,000 which resulted in a net deferred loss of $66,000, which
         will be amortized over the remaining life of the original swap
         agreements. The deferred loss is included in Accrued Expenses and Other
         Liabilities on the Balance Sheet and the amortization expense is
         included in Interest Expense on the Statement of Operations. During the
         quarter ended September 30, 1999, $17,000 of the deferred loss was
         amortized.

         The Company is generally required to deposit collateral with the swap
         agreement counter-parties in an amount at least equal to the amount of
         any unrealized losses. At September 30, 1999 and December 31, 1998, the
         Company had securities with a fair market value of $2,975,000 and
         $17,327,000, respectively, on deposit with its counter-parties. If
         unrealized losses on the interest rate swap agreements were to
         increase, the Company would be required to deposit additional
         collateral.

                                      13

<PAGE>

NOTE 11 - FORWARD CONTRACTS

       At September 30, 1999, the Company had entered into forward contracts to
sell U.S. Treasury notes with terms stated below.

<TABLE>
<CAPTION>

                                                                    Average          Unrealized       Average Maturity
            Current                                               Termination      Gains (Losses)      of Underlying
     Notional Amount (000)      Type (Underlying Security)           Date               (000)            Securities
--------------------------------------------------------------------------------------------------------------------------
     <S>                      <C>                                 <C>              <C>                <C>
        $235,000              Forward Sale-(US Treasury Notes)      11/12/99           $(869)           3.35 Years
</TABLE>



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

NOTE 12 - ACQUISITION PROPOSAL

On September 7, 1999, the Company submitted an offer to acquire Impac Commercial
Holdings, Inc. ("ICH") in a tax free merger by exchanging 0.60328 shares of its
common stock for each outstanding ICH share. By letter dated October 26, 1999,
the ICH Board of Directors rejected the Company's offer. The offer by the
Company to acquire ICH is still outstanding and the Company is currently
evaluating its options regarding the offer.


                                      14

<PAGE>

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

                     SAFE HARBOR/FORWARD LOOKING STATEMENTS

     Certain information contained in this Quarterly Report on Form 10-Q
constitutes "forward-looking statements" which can be identified by the use of
forward-looking terminology such as "may," "will," "should," "expect,"
"anticipate," "estimate," "intend," "continue," or "believes" or the negatives
thereof or other variations thereon or comparable terminology. Discussed below
are some important factors that would cause actual results to differ materially
from those in any forward-looking statements, including changes in interest
rates; domestic and foreign business, market, financial or legal conditions;
differences in the actual allocation of the assets of the Company from those
assumed; and the degree to which assets are hedged and the effectiveness of the
hedge, among others. In addition, the degree of risk is increased by the
Company's leveraging of its assets. For additional discussion of factors that
could cause actual results to differ from those contained in such
forward-looking statements, see "Principal Risks and Special Considerations",
"Item 7 Management's Discussion and Analysis of Financial Conditions and Results
of Operations" and "Item 7A Quantitative and Qualitative Disclosures About
Market Risk" in the Company's annual report on Form 10-K for the year ended
December 31, 1998. The Company does not undertake, and specifically disclaims
any obligation, to update any forward-looking statements to reflect occurrences
or unanticipated events or circumstances after the date of such statements.

                               GENERAL

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

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

     The goal of the Company is to be an efficient investor in mortgage assets.
The Company generally acquires mortgage assets primarily in the secondary
mortgage market through the operational experience and market relationships of
TCW Investment Management Company and its affiliates.

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

                                    STRATEGY

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

     -    purchase primarily single-family adjustable and fixed rate mortgage
          related assets;


                                      15

<PAGE>

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

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

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

     -    utilize interest rate caps, swaps and similar financial instruments to
          mitigate interest rate risks; and

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

     There can be no assurance that the Company will be able to generate
competitive earnings and dividends while holding primarily high quality mortgage
related assets and maintaining a disciplined risk-control profile.

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

                                    POLICIES

     The Company's current investment policies are set forth in its Annual
Report on Form 10-K for the year ended December 31, 1998.


                                      16

<PAGE>

                               FINANCIAL CONDITION

FIXED INCOME SECURITIES

         At September 30, 1999, the Company held $730,002,000 of Fixed Income
Securities as compared to $829,712,000 at December 31, 1998. The following table
is a schedule of Fixed Income Securities held listed by security type (dollars
in thousands):

<TABLE>
<CAPTION>

                                               September 30, 1999                  December 31, 1998
                                      --------------------------------------------------------------------
                                           Carrying       Percent of          Carrying        Percent of
   Fixed Income Securities                    Value        Portfolio           Value          Portfolio
 ---------------------------------------------------------------------------------------------------------
<S>                                   <C>                 <C>                <C>              <C>
   Mortgage Securities:
      Adjustable Rate (1)                  $ 34,694             4.8%         $ 62,338              7.5%
      Fixed Rate                            688,671            94.3%          763,657             92.0%
   Other Fixed Income Securities              6,637             0.9%            3,717              0.5%
                                           --------          ------          --------           ------
        Totals                             $730,002           100.0%         $829,712            100.0%
                                           --------          ------          --------           ------
                                           --------          ------          --------           ------
</TABLE>

          (1) At September 30, 1999 and December 31, 1998, the interest rate
              indices for 97% and 3% of the adjustable rate mortgage securities
              were based on the one-year U.S. Treasury rate and the six-month
              London Inter-Bank Offered Rate, respectively.

     The following table shows various weighted average characteristics of the
Fixed Income Securities held by the Company at September 30, 1999 (dollars in
thousands):

<TABLE>
<CAPTION>

                                                           Percent of                                          Weighted
                                                            Total Par       Amortized    Market      Current    Average
Security Type                                Par Amount      Amount        Cost Basis    Price       Coupon     Life (1)
------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>           <C>             <C>           <C>         <C>       <C>
15 Year Agency/AAA Pass-throughs                 $202,314        26.9%        100.40%    98.15%       6.50%       5.1
20 Year Agency Pass-throughs                      256,899        34.2%        100.46%    96.92%       6.50%       6.6
30 Year Agency Pass-throughs                       32,531         4.3%        101.40%    97.32%       7.00%       7.9
AAA CMOs                                          214,712        28.6%         99.72%    97.60%       6.85%       7.9
                                                 --------        ----         ------    ------       -----        ---
Total Fixed Rate Holdings                        $706,455        94.0%        100.26%    97.50%       6.63%       6.6

Other Fixed Income Securities                      10,400         1.4%         70.56%    64.89%      14.56%       3.0
Adjustable Rate Holdings                           34,362         4.6%        101.73%   100.97%       6.49%       1.0
                                                 --------        ----         ------    ------       -----        ---

Total Portfolio                                  $751,217       100.0%        100.07%    97.37%       6.70%       6.3
                                                 --------        ----         ------    ------       -----        ---
                                                 --------        ----         ------    ------       -----        ---
</TABLE>


                                      17

<PAGE>

     The following table shows various weighted average characteristics of the
Fixed Income Securities held by the Company at December 31, 1998 (dollars in
thousands):

<TABLE>
<CAPTION>

                                                              Percent of                                        Weighted
                                                              Total Par    Amortized    Market      Current     Average
Security Type                                  Par Amount      Amount      Cost Basis   Price       Coupon      Life (1)
--------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>            <C>          <C>          <C>         <C>         <C>
15 Year Agency/AAA Pass-throughs                 $253,581        33.4%        100.42%   101.23%      6.50%        3.7
20 Year Agency Pass-throughs                      209,566        27.6%        100.45%   101.06%      6.50%        6.1
30 Year Agency Pass-throughs                        8,076         1.1%        102.19%   101.99%      7.50%        3.2
AAA CMOs                                          286,887        37.8%         99.52%   100.01%      6.82%        2.7
                                                 --------       -----         ------    ------       ----         ---
Total Fixed Rate Holdings                        $758,110        91.9%        100.11%   100.73%      6.63%        3.9

Other Fixed Income Securities                       5,400         0.7%         74.43%    72.24%      21.83%       4.0
Adjustable Rate Holdings                           61,590         7.5%        101.25%   101.21%      6.79%        1.0
                                                 --------       -----         ------    ------       ----         ---

Total Portfolio                                  $825,100       100.0%        100.02%   100.58%      6.74%        3.7
                                                 --------       -----         ------    ------       ----         ---
                                                 --------       -----         ------    ------       ----         ---

</TABLE>

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

EQUITY SECURITIES

     At September 30, 1999, the Company held $20,254,000 of equity securities
compared to $16,422,000 at December 31, 1998. Equity securities consist
primarily of investment in equities issued by other real estate investment
trusts.

     The Company's investments in other real estate investment trusts consist of
publicly traded preferred and common stock securities issued by companies
involved in the mortgage finance industry. The Company generally expects to
receive dividend income on the majority of these investments.

HEDGING RELATED TRANSACTIONS

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

     Interest rate cap agreements consisted of LIBOR based agreements as
follows:

                              At September 30, 1999       At December 31, 1998
                         -------------------------------------------------------

Notional Amount                           -                     $900,000,000
Average Contract Rate                     -                         10.4%
Average Final Maturity                    -                   January 24, 2002

     Under these agreements, the Company received cash payments to the extent of
the excess of three-month LIBOR over the agreements' contract rate times the
notional amount. During the quarter ended September 30, 1999, the sale of
interest rate caps with a notional amount of $900,000,000 resulted in a realized
gain of $172,000 which is included in Net Gain on Investment Transactions in the
Statement of Operations.

                                      18

<PAGE>

     During the quarter ended September 30, 1999, the expiration of put options
on ten-year U.S. Treasury futures contracts with a notional amount of
$50,000,000 resulted in a realized loss of $156,000 which is included in Net
Gain on Investment Transactions in the Statement of Operations.

     At September 30, 1999, the Company had entered into interest rate swap
agreements with the total current notional amount as stated below. Under these
agreements, the Company receives a floating rate and pays a fixed rate.

<TABLE>
<CAPTION>

                                                                                              Average         Unrealized
            Current                                       Average                           Termination     Gains (Losses)
     Notional Amount (000)            Type              Fixed Rate       Floating Rate         Date             (000)
----------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                      <C>              <C>                <C>             <C>
          $410,552             Interest Rate Swap         5.869%           1Mo LIBOR         8/9/2001               $1,146

</TABLE>

     The weighted average life of the agreements at September 30, 1999 was 1.8
years. During the quarter ended September 30, 1999, the sale of interest rate
swaps with a combined notional amount of $255,530,000 resulted in a net deferred
loss of $66,000 which is amortized over the remaining life of the original swap
agreements. The deferred loss is included in Accrued Expenses and Other
Liabilities in the Balance Sheet while the monthly amortization is included in
Interest Expense in the Statement of Operations. During the quarter ended
September 30, 1999, $17,000 of the deferred loss was amortized.

     At December 31, 1998, the Company had entered into interest rate swap
agreements with the total current notional amount as stated below.

<TABLE>
<CAPTION>

                                                                                              Average         Unrealized
            Current                                       Average                           Termination     Gains (Losses)
     Notional Amount (000)            Type              Fixed Rate       Floating Rate         Date             (000)
----------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                      <C>              <C>                <C>             <C>
          $703,590            Interest Rate Swap         5.850%           1Mo LIBOR         2/16/2001              $(9,994)

</TABLE>

     The weighted average life of the agreements at December 31, 1998 was 1.9
years.

     The Company is generally required to deposit collateral with the swap
agreement counter-parties in an amount at least equal to the amount of any
unrealized losses. At September 30, 1999 the Company had securities with a fair
market value of $2,975,000 on deposit with its counter-parties. If the
unrealized losses on the interest rate swap agreements were to increase, the
Company would be required to deposit additional collateral.

At September 30, 1999, the Company had entered into forward contracts to sell
U.S. Treasury notes with terms stated below.

<TABLE>
<CAPTION>

                                                                         Fair value of        Average         Unrealized
            Current                                      Average           contracts        Termination     Gains (Losses)
     Notional Amount (000)            Type            Contract Price         (000)             Date             (000)
---------------------------------------------------------------------------------------------------------------------------
<S>                            <C>                      <C>              <C>                <C>             <C>
           $235,000               Forward Sale            99.711            233,929           11/12/99            $(869)

</TABLE>

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

     There can be no assurance that the Company will enter into hedging
activities or that, if entered into, such activities will have the desired
beneficial impact on the Company's results of operations or financial condition.
Moreover, no

                                      19

<PAGE>

hedging activity can completely insulate the Company from the risks
associated with changes in interest rates and prepayment rates.

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

LIABILITIES

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

     At September 30, 1999, the Company had outstanding $699,647,000 of reverse
repurchase agreements with a weighted average current borrowing rate of 5.41%
and a maturity of 1.9 months. The reverse repurchase agreements were
collateralized by mortgage-backed securities with an estimated fair value of
$739,986,000.

       At December 31, 1998, the Company had outstanding $767,908,000 of reverse
repurchase agreements with a weighted average current borrowing rate of 5.34%
and a maturity of 2.9 months. The reverse repurchase agreements were
collateralized by mortgage-backed securities with an estimated fair value of
$800,260,000.

     The Company had $6,913,000 and $9,540,000 of other liabilities at September
30, 1999 and December 31, 1998, respectively, consisting primarily of accrued
interest payable and payables for unsettled securities at September 30, 1999 and
December 31, 1998, respectively. The Company anticipates settling all other
liabilities within one year by entering into additional reverse repurchase
agreements.

RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1999

     For the quarter ended September 30, 1999, the Company's net income was
$2,965,000, or $0.52 per share on a basic basis and $0.51 on a diluted basis,
based on a weighted average of 5,753,000 and 5,784,000 shares outstanding,
respectively. That compares to $1,992,000, or $0.33 per share on both a basic
and diluted basis, based on a weighted average of 6,022,000 shares outstanding
for the quarter ending September 30, 1998. Net interest income for the third
quarter 1999 was $2,893,000 consisting of interest income on mortgage assets and
cash balances less interest expense on reverse repurchase agreements compared to
$2,371,000 for the third quarter in 1998. The Company reported dividend income
of $503,000 from dividends on equity investments for the quarter ended September
30, 1999. The Company reported dividend income of $186,000 from dividends on
equity investments for the quarter ended September 30, 1998. The Company
reported gains on investment transactions, net of $437,000 primarily from the
sale of equity securities during the quarter ending September 30, 1999. The
Company realized a net gain of $104,000 on the sale mortgage-backed securities,
which was offset by a charge of $97,000 to write-off the interest rate cap
agreements for the quarter ending September 30, 1998. The Company incurred
operating expenses of $868,000 for the quarter ending September 30, 1999
consisting of management fees, audit, tax, legal, printing, insurance and other
expenses compared to $572,000 for the quarter ending September 30, 1998.

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

                                      20

<PAGE>

                         AVERAGE BALANCE AND RATE TABLE
                             (Dollars in thousands)

<TABLE>
<CAPTION>

                                                   For the Quarter Ended             For the Quarter Ended
                                                     September 30, 1999                September 30, 1998

                                                  Average         Effective          Average         Effective
                                                  Balance           Rate             Balance           Rate
                                                 ----------       ----------       -----------      -----------
<S>                                              <C>              <C>              <C>              <C>
Interest Earning Assets:
     Mortgage Securities                           $754,167            6.77%          $830,079          6.49%
     Other Fixed Income Assets                        6,458           17.62%                 -              -
     Cash and Cash Equivalents                        7,128            4.43%            13,185          5.25%
                                                 ----------       ----------       -----------      -----------
     Total Interest Earning Assets                  767,753            6.84%           843,264          6.47%
                                                 ----------       ----------       -----------      -----------

Interest Bearing Liabilities:
     Reverse Repurchase Agreements                  715,263            5.72%           774,420          5.82%

                                                 ----------       ----------       -----------      -----------
Net Interest Earning Assets and Spread              $52,490            1.12%           $68,844          0.65%
                                                 ----------       ----------       -----------      -----------
                                                 ----------       ----------       -----------      -----------

</TABLE>

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

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

                         AVERAGE BALANCE AND RATE TABLE
                             (Dollars in thousands)

<TABLE>
<CAPTION>

                                                   For the Quarter Ended             For the Quarter Ended
                                                     September 30, 1999                September 30, 1998

                                                                  Effective                        Effective
                                                  Average         Dividend           Average       Dividend
                                                  Balance           Yield            Balance         Yield
                                                  -------         --------           -------       --------
<S>                                               <C>             <C>                <C>           <C>
     Equity securities                            $19,618           10.26%            $3,343         16.73%

</TABLE>

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999

     For the nine months ended September 30, 1999, the Company's net income was
$8,782,000, or $1.53 per share on a basic and $1.52 per share on a diluted
basis, based on a weighted average of 5,753,000 and 5,782,000 shares
outstanding, respectively. That compares to $3,166,000, or $0.50 per share on
both a basic and diluted basis, based on a weighted average of 6,334,000 shares
outstanding for the nine months ending September 30, 1998. Net interest income
for the nine months ended 1999 was $7,891,000 consisting of interest income on
mortgage assets and cash balances less interest expense on reverse repurchase
agreements compared to $3,766,000 for the nine months in 1998. The Company
reported dividend income of $1,899,000 from dividends on equity investments for
the nine months ended September 30, 1999. The Company reported dividend income
of $186,000 from dividends on equity investments for the nine months ended
September 30, 1998. The Company reported gains on investment transactions, net
of $1,714,000 primarily from the sale of mortgage securities and equity
securities during the nine months ending September 30, 1999. For the nine months
ended September 30, 1998 the Company reported gains on investment transactions,
net of $686,000 which was offset by a charge of $210,000 to write off the
interest rate cap agreements. The Company incurred operating expenses of
$2,722,000 for the nine months ending September 30, 1999 consisting of
management fees, audit, tax, legal, printing, insurance and other expenses
compared to $1,262,000 for the nine months ending September 30, 1998.

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

                                      21

<PAGE>

                         AVERAGE BALANCE AND RATE TABLE
                             (Dollars in thousands)

<TABLE>
<CAPTION>

                                                 For the Nine months Ended         For the Nine months Ended
                                                     September 30, 1999                September 30, 1998

                                                  Average         Effective          Average       Effective
                                                  Balance           Rate             Balance          Rate
                                                 ----------      -----------        ----------     -----------
<S>                                              <C>             <C>                <C>            <C>
Interest Earning Assets:
     Mortgage Securities                           $786,934            6.67%          $621,082          5.89%
     Other Fixed Income Assets                        5,339           14.24%                 0             0%
     Cash and Cash Equivalents                        6,365            4.80%            16,306          5.14%
                                                 ----------      -----------        ----------     -----------
     Total Interest Earning Assets                  798,638            6.70%           637,388          5.87%
                                                 ----------      -----------        ----------     -----------

Interest Bearing Liabilities:
     Reverse Repurchase Agreements                  748,533            5.74%           568,630          5.69%

                                                 ----------      -----------        ----------     -----------
Net Interest Earning Assets and Spread              $50,105            0.96%           $68,758          0.18%
                                                 ----------      -----------        ----------     -----------

</TABLE>

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

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

                         AVERAGE BALANCE AND RATE TABLE
                             (Dollars in thousands)

<TABLE>
<CAPTION>

                                                 For the Nine months Ended         For the Nine months Ended
                                                     September 30, 1999                September 30, 1998

                                                                  Effective                        Effective
                                                  Average         Dividend           Average       Dividend
                                                  Balance           Yield            Balance         Yield
                                                 ---------        ---------         ---------      ----------
<S>                                              <C>              <C>               <C>            <C>
     Equity securities                            $18,375           13.78%            $3,343         16.73%

</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary sources of funds as of September 30, 1999 and
December 31, 1998, consisted of reverse repurchase agreements totaling
$699,647,000 and $767,908,000, respectively. The Company expects to continue to
borrow funds in the form of reverse repurchase agreements. At September 30, 1999
and December 31, 1998, the Company had borrowing arrangements with more than
twenty different investment banking firms. Increases in short-term interest
rates could negatively impact the valuation of the Company's mortgage assets
which could limit the Company's borrowing ability or cause its lenders to
initiate margin calls.

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

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

     The Company may in the future increase its capital resources by making
additional offerings of equity and debt securities, including classes of
preferred stock, common stock, commercial paper, medium-term notes, CMOs and
senior or

                                      22

<PAGE>

subordinated notes. All debt securities, other borrowings, and classes of
preferred stock will be senior to the Common Stock in a liquidation of the
Company. The effect of additional equity offerings may be the dilution of
stockholders' equity of the Company or the reduction of the price of shares
of the Common Stock, or both. The Company is unable to estimate the amount,
timing or nature of additional offerings as they will depend upon market
conditions and other factors.

INFLATION

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

YEAR 2000 MATTERS

     The year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Any computer system that the
Company relies on with time sensitive software may recognize a date entered as
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruption of operations, including, among
other things, a temporary inability to process transactions or engage in normal
business activities. The Company believes that most of its exposure to year 2000
issues involves the readiness of external third parties such as, but not limited
to, loan servicers, security master servicers, security paying agents and
trustees, its stock transfer agent, its securities custodian, the counterparties
on its various financing agreements and hedging contracts and vendors ("External
Service Providers").

     The Company relies on the Manager for its computer services and the Manager
has been addressing this issue at no cost to the Company. Specifically, the
Manager's internally developed computer systems have been implemented within the
past five years. These systems have been developed with software tools that
utilize a century date format (ccyymmdd). Although it has been a standard
procedure to use this format for all date fields, the Manager is nonetheless in
the process of unit testing its internally developed applications for numerous
date conditions, including: the first and last day of the year 2000, the leap
year day and the day after, the first day of the year 2001, functions with date
ranges from 1999 which cross over into year 2000, functions which have both
"from date" and "to date" in the year 2000, date arithmetic and validation using
standard routines through the year 2199.

     The Manager has been, and is currently in contact with, each of its
External Service Providers to evaluate their readiness for the year 2000. The
Manager has requested each of its External Service Providers to either (i)
prepare a description of its process for identifying date sensitive areas, its
approach for implementing changes, its testing methodology, along with its
timetable for completion, or (ii) certify as to its year 2000 compliance. The
Manager has received replies from each of its External Service Providers
indicating that each is in a state of year 2000 compliance. No assurances can be
given as to the adequacy of the External Service Providers' internal
evaluations.

     Due to the technical architecture of the Manager's internally developed
applications, its emphasis on using major providers and its ongoing
communication with those providers, the Manager anticipates it will be well
positioned to begin the year 2000. There can be no assurance, however, that the
Company's External Service Providers will resolve their own year 2000 issues in
a timely manner, or that any failure by these External Service Providers to
resolve such issues would not have an adverse effect on the Company's operations
and financial condition. Each External Service Provider is in turn subject to
the year 2000 issues of various third parties with which it does business,
making the Company's exposure to the noncompliance of any External Service
Provider difficult to assess. In a worst case scenario, a significant portion of
the Company's External Service Providers and contractual counter-parties could
fail to fulfill their respective obligations which would significantly impair
the Company's ability to meet its obligations under its financing and hedging
agreements. This would in turn cause the Company to liquidate assets at
potentially substantial losses and possibly render the Company insolvent. The
Company believes it is devoting the necessary resources to address the year 2000
issues over which it has control. The Company has completed all necessary
procedures for year 2000 compliance as of June 30, 1999. With respect to the
year 2000 issues of External Service Providers, over which the Company has no
control, the Company's contingency plan is to identify replacement vendors,
where possible.

                                      23
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                                   MARKET RISK

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

INTEREST RATE RISK

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

     Two primary risks the Company faces are that of extension risk and
prepayment risk.

     EXTENSION RISK. Fixed-rate assets are generally acquired with a projected
weighted average life based on certain assumptions regarding prepayments. In
general, when a fixed-rate mortgage asset is acquired with borrowings, the
Company will enter into an interest rate swap agreement or other hedging
instrument that effectively fixes the Company's borrowing costs for a period
close to the anticipated average life of the related asset. This strategy is
designed to protect the Company from rising interest rates because the borrowing
costs are fixed for the duration of the asset. However, if prepayment rates
decrease in a rising interest rate environment, the life of the mortgage asset
could extend beyond the term of the swap agreement or other hedging instrument.
This situation could negatively impact the Company as borrowing costs would no
longer be fixed after the end of the hedging instrument while the income earned
on the asset would remain fixed. This situation may also cause the market value
of the Company's mortgage assets to decline with little or no offsetting gain
from the related hedging transactions. In certain situations, the Company may be
forced to sell assets and incur losses to maintain adequate liquidity.

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

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

     The Company intends to fund a substantial portion of its acquisitions of
adjustable-rate mortgage assets with borrowings that have interest rates based
on indices and repricing terms similar to, but of somewhat shorter maturities
than, the interest rate indices and repricing terms of the mortgage assets.
Thus, the Company anticipates that in most cases the interest rate indices and
repricing terms of its mortgage assets and its funding sources will not be
identical, thereby creating an interest rate mismatch between assets and
liabilities. While the historical spread between relevant short-term interest
rate indices has been relatively stable, there have been periods, especially
during the 1979-1982 and 1994 interest rate

                                     24

<PAGE>

environments, when the spread between such indices was volatile. During
periods of changing interest rates, such interest rate mismatches could
negatively impact the Company's financial condition, cash flows and results
of operations.

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

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

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

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

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------------------------------
                                                                 Fair Value for Scenario Shown
                                                            Interest                       Interest
                                                           Rates Fall                     Rates Rise
                                                           100 Basis                       100 Basis
                                                             Points        Unchanged        Points
--------------------------------------------------------------------------------------------------------
<S>                                                       <C>            <C>                <C>
Interest Rate Sensitive Instruments                             $38,858         $30,632       $  15,020

Change in Fair Value                                             $8,226              --       $ (15,612)
Change as a Percent of Stockholders' Equity                      13.69%              --          (25.98)%
Change on a Per Share Basis                                       $1.43              --       $   (2.71)

</TABLE>

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

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

                                     25

<PAGE>

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

     During the quarter ended September 30, 1999 a general increase in
interest rates and a widening of the spread between mortgage rates and U.S.
Treasury rates caused the market weighted average duration of the Company's
mortgage related assets to extend beyond the original market weighted average
duration at the time the assets were purchased. While the Company has taken
steps to extend the duration of its borrowings through various hedging
strategies, the market weighted average duration of the Company's borrowings
has not been extended as much as the extension experienced on the mortgage
related assets. This has caused the difference between the market weighted
average duration on the mortgage related assets and the related borrowings to
exceed the Company's one year target. At September 30, 1999, this difference
was approximately 1.5 years. A duration difference of over one year is
generally expected to increase the fair value volatility of the Company's
interest rate sensitive investments. This increase in volatility could be
material and could negatively impact the value of the Company's investments.

     The contract terms of the Company's liabilities exclusive of hedging
instruments are subject to change as interest rates change. In general, the
Company utilizes short-term borrowings in the form of reverse repurchase
agreements to finance certain of its mortgage-backed securities. These
agreements are secured by a portion of the Company's mortgage-backed securities
and bear interest rates that have historically moved in close relationship to
LIBOR.

EQUITY PRICE RISK

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

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
                                                               Fair Value for Scenario Shown
                                                           Prices                          Prices
                                                        Decrease 10%     Unchanged      Increase 10%
---------------------------------------------------------------------------------------------------------
<S>                                                    <C>              <C>              <C>
Equity Investments                                           $18,229         $20,254         $22,279

Change in Fair Value                                          (2,025)             --           2,025
Change as a Percent of Fair Value                                (10)%            --              10%
Change as a Percent of Stockholders' Equity                     (3.4)%            --             3.4%
Change on a Per Share Basis                                    (0.35)             --            0.35

</TABLE>

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

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

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

                                     26

<PAGE>

PART 2.  OTHER INFORMATION

Item 1.  Legal Proceedings

     None.

Item 2.  Changes in Securities

     None.

Item 3.  Defaults Upon Senior Securities

     Not Applicable.

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

     Not Applicable.

Item 5.  Other Information

         None.

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

         (a)  EXHIBITS

The following exhibits are part of this quarterly report on Form 10-Q and are
numbered in accordance with Item 601 of Regulation S-K.

<TABLE>
<CAPTION>

Exhibit No.                Description
-----------                -----------------------------------------------------
<S>                       <C>
3.1                        Articles of Amendment and Restatement of Apex
                           Mortgage Capital, Inc. (the "Company"), as filed with
                           the Maryland State Department of Assessments and
                           Taxation on November 25, 1997 (previously filed as
                           Exhibit 3.2 to Form S-11/A, filed November 21, 1997,
                           and incorporated herein by reference).

3.2                        Articles Supplementary relating to the Series A
                           Junior Participating Preferred Stock of Apex Mortgage
                           Capital, Inc., as filed with the State Department of
                           Assessments and Taxation of the State of Maryland on
                           July 26, 1999 (previously filed as Exhibit 3.1 to
                           Form 8-K, filed July 27, 1999, and incorporated
                           herein by reference).

3.3                        Bylaws of Apex Mortgage Capital, Inc. (previously
                           filed as Exhibit 3.2 to Form S-11/A, filed
                           November 21, 1997, and incorporated herein by
                           reference).

4.1                        Shareholder Rights Agreement between Apex Mortgage
                           Capital, Inc. and The Bank of New York, as Rights
                           Agent, dated July 19, 1999 (previously filed as
                           Exhibit 3.1 to Form 8-K, filed July 27, 1999, and
                           incorporated herein by reference).

4.2                        Form of Rights Certificate (included as Exhibit B to
                           the Shareholder Rights Agreement filed as
                           Exhibit 4.1).

4.3                        Form of Common Stock certificate (including the
                           legend specified in the Shareholder Rights Agreement)
                           for all shares issued on or after July 30, 1998
                           (previously filed as Exhibit 4.3 to Form 8-K, filed
                           July 27, 1999, and incorporated herein by reference).

27                         Financial Data Schedule

</TABLE>

                                     27


<PAGE>

         (b)  REPORTS ON FORM 8-K

         On July 27, 1999 Apex filed a Form 8-K, dated June 30, 1999, disclosing
under Item 5 its adoption of a Shareholder Rights Plan.




                                     28

<PAGE>


                             SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                           Apex Mortgage Capital, Inc.

Dated:   November 12, 1999

                      By:      /s/ Philip A. Barach
                               ----------------------------------
                               Philip A. Barach
                               President and Chief Executive Officer
                               (Principal Executive Officer)

                      By:      /s/ Daniel K. Osborne
                               ----------------------------------
                               Daniel K. Osborne
                               Executive Vice President
                               Chief Operating Officer
                               Chief Financial Officer
                               (Principal Accounting Officer)





                                     29