<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:  JUNE 30, 1998

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

          FOR THE TRANSITION PERIOD FROM _____ TO _____


                       COMMISSION FILE NUMBER: 001-13637
                                        

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

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

865 SOUTH FIGUEROA STREET
LOS ANGELES, CALIFORNIA                                   90017
(Address of principal executive offices)                (Zip Code)
                                        
       Registrant's telephone number, including area code (213) 244-0440


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)                    6,052,000 as of August 5, 1998


--------------------------------------------------------------------------------
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<PAGE>
 
                          APEX MORTGAGE CAPITAL, INC.
                                   FORM 10-Q


                                     INDEX
                                        
<TABLE>
<CAPTION>
                                                                                              PAGE
                                                                                              ----
<S>                                                                                           <C> 
PART I.    FINANCIAL INFORMATION                              
 
 ITEM 1.   FINANCIAL STATEMENTS
 
                 BALANCE SHEETS AT JUNE 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997               3
 
                 STATEMENT OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998
                 (UNAUDITED)                                                                     4
 
                 STATEMENT OF STOCKHOLDERS' EQUITY FOR THE THREE AND SIX MONTHS ENDED
                 JUNE 30, 1998 (UNAUDITED)                                                       5
 
                 STATEMENTS OF CASH FLOWS FOR THE THREE AND SIX MONTHS ENDED JUNE 31, 1998
                 (UNAUDITED)                                                                     6
 
                 NOTES TO FINANCIAL STATEMENTS (UNAUDITED)                                       7
 
 ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
           FINANCIAL CONDITION AND RESULTS OF OPERATIONS                                         14
 
 
 PART II.  OTHER INFORMATION
 
  ITEM 1.  LEGAL PROCEEDINGS                                                                     23
 
  ITEM 2.  CHANGES IN SECURITIES                                                                 23
 
  ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                       23
 
  ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   23
 
  ITEM 5.  OTHER INFORMATION                                                                     23
 
  ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K                                                      24
 
  SIGNATURES                                                                                     25
</TABLE>

                                       2
<PAGE>

PART 1.    FINANCIAL INFORMATION

ITEM 1.    FINANCIAL STATEMENTS


                          APEX MORTGAGE CAPITAL, INC.

                                BALANCE SHEETS
<TABLE>
<CAPTION>
                                                                                              JUNE 30, 1998      DECEMBER 31, 1997
                                                                                               (Unaudited)        
<S>                                                                                           <C>                <C>
ASSETS  
           Cash and cash equivalents                                                           $ 38,867,000       $  3,085,000
           Mortgage-backed securities available-for-sale, at fair value (Note 3)                864,432,000        265,880,000
           Other investments (Note 4)                                                               113,000            174,000
           Accrued interest receivable                                                            5,349,000          1,316,000
           Principal payments receivable                                                            957,000                  -
           Receivable for unsettled securities                                                   56,593,000                  -
           Other assets                                                                             752,000            852,000
                                                                                               ------------       ------------
                                                                                               $967,063,000       $271,307,000
                                                                                               ============       ============

LIABILITIES AND STOCKHOLDERS' EQUITY

     Liabilities

            Reverse repurchase agreements (Note 5)                                             $753,752,000       $ 87,818,000
            Payable for unsettled securities                                                    120,860,000         88,638,000
            Accrued interest payable                                                              3,898,000            110,000
            Dividend payable                                                                      1,560,000            268,000
            Accrued expenses and other liabilities                                                1,133,000          1,476,000
                                                                                               ------------       ------------
                                                                                                881,203,000        178,310,000
                                                                                               ------------       ------------

     Commitments and contingencies (Notes 10 and 11)

     Stockholders' Equity

            Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized;   
                 no shares outstanding                                                     
            Common Stock, par value $0.01 per share; 100,000,000 shares                    
                 authorized; 6,700,100 shares outstanding (Notes 8 and 9)                            67,000             67,000
            Additional paid-in-capital                                                           92,916,000         92,860,000
            Accumulated other comprehensive income                                                1,444,000            188,000
            Accumulated dividend distributions in excess of net income                           (2,131,000)          (118,000)
            Treasury stock, at cost (535,000 shares) (Note 7)                                    (6,436,000)                 -
                                                                                               ------------       ------------
                                                                                                 85,860,000         92,997,000
                                                                                               ------------       ------------
                                                                                               $967,063,000       $271,307,000 
                                                                                               ============       ============
</TABLE>

See accompanying notes to financial statements


                                       3
<PAGE>

                          APEX MORTGAGE CAPITAL, INC.

                            STATEMENT OF OPERATIONS
                                  (UNAUDITED)
<TABLE> 
<CAPTION> 
                                                                THREE MONTHS        SIX MONTHS
                                                                   ENDED              ENDED    
                                                               JUNE 30, 1998      JUNE 30, 1998
<S>                                                            <C>                <C> 
INTEREST INCOME:                                                                                                              
   Mortgage-backed securities                                    $9,224,000        $13,949,000                                
   Cash and cash equivalents                                        274,000            456,000                                
                                                                 ----------        ----------- 
                                                                  9,498,000         14,405,000                                
                                                                                                                              
INTEREST EXPENSE                                                  8,999,000         13,010,000                                
                                                                                                                              
                                                                 ----------        ----------- 
NET INTEREST INCOME                                                 499,000          1,395,000                                
                                                                 ----------        ----------- 
                                                                                                                              
GAINS ON INVESTMENT TRANSACTIONS, NET                               469,000            469,000                                
                                                                                                                              
GENERAL AND ADMINISTRATIVE EXPENSES:                                                                                          
   Management fee (Note 8)                                          161,000            334,000                                
   Audit and tax fees                                                11,000             23,000                                
   Insurance expense                                                 67,000            133,000                                
   Directors' fees                                                   20,000             40,000                                
   Stock Option expense                                              28,000             56,000                                
   Other                                                             72,000            105,000                                
                                                                 ----------        ----------- 
                                                                    359,000            691,000                                
                                                                 ----------        ----------- 

NET INCOME                                                       $  609,000        $ 1,173,000                                
                                                                 ==========        =========== 

                                                                                                                              
   Basic                                                         $     0.10        $      0.18                                
                                                                 ==========        =========== 
   Diluted                                                       $     0.10        $      0.18                                
                                                                 ==========        =========== 
                                                                                                                              
Weighted Average Number of Shares Outstanding:                                                                                
   Basic                                                          6,387,000          6,495,000                                
                                                                 ==========        =========== 
   Diluted                                                        6,387,000          6,495,000                                
                                                                 ==========        =========== 
                                                                                                                            
Dividends Declared Per Share                                     $     0.25        $      0.50                              
                                                                 ==========        =========== 
</TABLE> 

See accompanying notes to financial statements

                                       4
<PAGE>

                          Apex Mortgage Capital, Inc.

                       Statement of Stockholders' Equity
                Three Months and Six Months Ended June 30, 1998
                                  (Unaudited)

<TABLE> 
<CAPTION> 
                                                                                     Accumulated  
                                            Common Stock             Additional         Other     
                                      -------------------------        Paid-in      Comprehensive 
                                        Shares         Amount          Capital         Income     
                                      ----------     ----------     ------------    -------------  
<S>                                    <C>           <C>            <C>              <C> 
Balance, December 31, 1997             6,700,100     $   67,000     $ 92,860,000     $   188,000  
                                                                                                  
Repurchases of common stock                    -              -                -               -  
                                                                                                  
Issuance of stock options                                                                         
 to non-employees (Note 9)                     -              -           28,000               -  
                                                                                                  
Net income                                     -              -                -               -  
                                                                                                  
Other comprehensive income:                                                                       
  Net unrealized gain on                                                                          
  mortgage-backed securities                                                                      
  available-for-sale                           -              -                -       1,547,000 
                                                                                                  
Comprehensive income                                                                              
                                                                                                  
                                                                                                  
Dividends declared                             -              -                -               -  
                                      ----------     ----------     ------------    ------------ 
                                                                                                  
Balance, March 31, 1998                6,700,100     $   67,000     $ 92,888,000     $ 1,735,000  
                                                                                                  
Repurchases of common stock                    -              -                -               -  
                                                                                                  
Issuance of stock options                                                                         
  to non-employees (Note 9)                    -              -           28,000               -  
                                                                                                  
Net income                                     -              -                -               -  
                                                                                                  
Other comprehensive income:                                                                       
  Net unrealized gain (loss) on                                                                   
  mortgage-backed securities                                                                      
  available-for-sale                           -              -                -        (291,000) 
                                                                                                  
                                                                                                  
Comprehensive income                           -              -                -               -  
                                                                                                  
                                                                                                  
Dividends declared                             -              -                -               -  
                                      ----------     ----------     ------------    ------------ 
Balance, June 30, 1998                 6,700,100     $   67,000     $ 92,916,000     $ 1,444,000  
                                      ==========     ==========     ============     ===========   
</TABLE> 
<TABLE> 
<CAPTION> 
                                      Accumulated
                                        Dividend
                                      Distribution                      Treasury
                                      In Excess of    Comprehensive       Stock,
                                       Net Income        Income          At Cost            Total
                                      ------------    -------------    ------------      ------------
<S>                                   <C>              <C>             <C>               <C> 
Balance, December 31, 1997            $  (118,000)     $        -      $          -      $ 92,997,000
                                                  
Repurchases of common stock                     -               -        (2,535,000)       (2,535,000)
                                                                                  
Issuance of stock options                                                         
 to non-employees (Note 9)                      -               -                 -            28,000
                                                  
Net income                                564,000         564,000                 -           564,000
                                                  
Other comprehensive income:                       
  Net unrealized gain on                          
  mortgage-backed securities                      
  available-for-sale                            -       1,547,000                 -         1,547,000
                                                       ----------
Comprehensive income                                   $2,111,000
                                                       ==========
                                                  
Dividends declared                     (1,626,000)                                -        (1,626,000)
                                      -----------                      ------------      ------------
                                      
Balance, March 31, 1998               $(1,180,000)     $        -      $ (2,535,000)     $ 90,975,000
                                      
Repurchases of common stock                     -               -        (3,901,000)       (3,901,000)
                                      
Issuance of stock options             
  to non-employees (Note 9)                     -               -                 -            28,000
                                      
Net income                                609,000         609,000                 -           609,000
                                      
Other comprehensive income:           
  Net unrealized gain (loss) on       
  mortgage-backed securities          
  available-for-sale                            -        (291,000)                -          (291,000)
                                      
                                                       ----------
Comprehensive income                                   $  318,000 
                                                       ==========
                                      
Dividends declared                     (1,560,000)                                -        (1,560,000)
                                      -----------                      ------------      ------------
Balance, June 30, 1998                $(2,131,000)                     $ (6,436,000)     $ 85,860,000
                                      ===========                      ============      ============
</TABLE> 

See accompanying notes to financial statements

                                       5
<PAGE>

                          APEX MORTGAGE CAPITAL, INC.

                            STATEMENT OF CASH FLOWS
                                  (UNAUDITED)
<TABLE> 
<CAPTION> 
                                                                     THREE MONTHS           SIX MONTHS
                                                                        ENDED                  ENDED
                                                                    JUNE 30, 1998          JUNE 30, 1998
<S>                                                                 <C>                   <C> 
OPERATING ACTIVITIES:
  Net Income                                                        $     609,000         $     1,173,000 
  Adjustments to reconcile net income to net cash                                                         
    provided by operating activities:                                                                     
       Amortization                                                     1,764,000               2,735,000  
       Net gain on sale of mortgage-backed securities                    (469,000)               (469,000)
       Change in assets and liabilities:                                                                  
         Accrued interest receivable                                   (1,220,000)             (4,033,000)
         Principal payments receivable                                  4,652,000                (957,000)
         Receivable for unsettled securities                          (56,593,000)            (56,593,000)
         Other Assets                                                      52,000                 100,000 
         Payable for unsettled securities                              33,766,000              32,222,000 
         Accrued interest payable                                       2,520,000               3,788,000 
         Accrued expenses and other liabilities                           594,000                (342,000)
                                                                    -------------         ---------------
         Net cash used in operating activities                        (14,325,000)            (22,376,000)
                                                                    -------------         ---------------

INVESTING ACTIVITIES:                                                                                     
   Purchase of mortgage-backed securities                            (684,451,000)         (1,242,095,000)
   Proceeds from sales of mortgage-backed securities                  461,602,000             461,602,000 
   Principal payments on mortgage-backed securities                   119,941,000             181,127,000 
   Purchase of hedging assets                                                 -                   (80,000)
                                                                    -------------         ---------------
         Net cash used in investing activities                       (102,908,000)           (599,446,000)
                                                                    -------------         ---------------

FINANCING ACTIVITIES:                                                                                     
   Net proceeds from reverse repurchase agreements                    156,470,000             665,934,000 
   Dividend distributions                                              (1,626,000)             (1,894,000)
   Purchase of treasury stock                                          (3,901,000)             (6,436,000)
                                                                    -------------         ---------------
         Net cash provided by financing activities                    150,943,000             657,604,000
                                                                    -------------         --------------- 
                                                                                                          
NET INCREASE IN CASH AND CASH EQUIVALENTS                              33,710,000              35,782,000 
                                                                                                          
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                        5,157,000               3,085,000 
                                                                    -------------         ---------------

CASH AND CASH EQUIVALENTS AT END OF PERIOD                          $  38,867,000         $    38,867,000 
                                                                    =============         ===============

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                                                         
   Cash paid for interest                                           $   6,463,000         $     9,193,000 
                                                                    =============         ===============
                                                                                                          
NONCASH INVESTING AND FINANCING ACTIVITIES:                                                               
                                                                                                          
   Net unrealized gain (loss) on mortgage-backed                                                          
      securities available-for-sale                                 $    (291,000)        $     1,256,000 
                                                                    =============         ===============
                                                                                                          
   Dividends declared, not yet paid                                 $   1,560,000         $     1,560,000  
                                                                    =============         ===============
</TABLE> 

See accompanying notes to financial statements

                                       6
<PAGE>
 
                          APEX MORTGAGE CAPITAL, INC.

                         NOTES TO FINANCIAL STATEMENTS

                          QUARTER ENDED JUNE 30, 1998
                                  (UNAUDITED)
                                        

NOTE 1 - THE COMPANY

     Apex Mortgage Capital, Inc. (the "Company") was incorporated in Maryland on
     September 15, 1997.  The Company commenced its operations of acquiring and
     managing a portfolio of mortgage assets on December 9, 1997, upon receipt
     of the net proceeds from the initial public offering of the Company's
     common stock.  The Company uses its equity capital and borrowed funds to
     seek to generate income based on the difference between the yield on its
     mortgage backed 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

     These interim financial statements are unaudited, internally prepared
     statements, that reflect the necessary interim adjustments which, in the
     opinion of management, are necessary to present a fair statement of the
     results for such interim period.  The results of operations for this
     interim period are not indicative of the results for a full fiscal year.
     This filing should be read in conjunction with the Annual Report on Form
     10-K for the year ended December 31, 1997.

  Cash and Cash Equivalents

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

  Mortgage-Backed Securities

     The Company's mortgage-backed securities consist of securities backed by
     single-family residential real estate mortgage loans.  Mortgage-backed
     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.  Substantially all of the Company's
     mortgage-backed securities are expected to qualify as real estate assets
     under the REIT provisions of the Code.

     Interest income is accrued based on the outstanding principal amount of the
     mortgage-backed securities and their contractual terms.  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.

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

                                       7
<PAGE>
 
  Other Investments

     Other investments are held at fair value to the extent that they do not
     qualify as hedging instruments.  Changes in fair value are recorded as an
     adjustment to net income.  Other investments that qualify as hedging
     instruments are recorded at amortized cost.

  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 investments and amortized over the lives of such
     agreements as an adjustment to interest expense.

  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 will elect to be taxed as a REIT and generally will not be
     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

     Net income per share is computed in accordance with Statement of Financial
     Accounting Standards ("SFAS") No. 128, Earnings Per Share, and is
     calculated on the basis of the weighted average number of common shares
     outstanding during each period plus the additional dilutive effect of
     common stock equivalents.  The dilutive effect of outstanding stock options
     is calculated using the treasury stock method.

     Stock options that could potentially dilute basic net income per share in
     the future were not included in the computation of diluted net income per
     share because to do so would have been antidilutive for the period
     presented.

  Income Recognition

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

  Credit Risk

     At June 30, 1998, the Company has limited its exposure to credit losses on
     its portfolio of mortgage-backed 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.  At June 30, 1998, all of the
     Company's mortgage-backed securities have an actual or implied "AAA"
     rating.

  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

                                       8
<PAGE>
 
     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

     During the six months ended June 30, 1998, the Company adopted 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

     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 is effective for
     fiscal years beginning after June 15, 1999.  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, 1997 (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 2000.  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.

NOTE 3 - MORTGAGE-BACKED SECURITIES

     At June 30, 1998, mortgage-backed securities consisted of the following:

<TABLE>
<CAPTION>
                                                                                           
                                                 Adjustable Rate       Fixed Rate Mortgage 
(in thousands)                                 Mortgage Securities         Securities                Total
                                               -------------------------------------------------------------
<S>                                                 <C>                  <C>                     <C>
Principal Amount                                     $91,386                $769,490              $860,876       
Unamortized Premium (Discount)                         1,529                     583                 2,112       
                                               -------------------------------------------------------------
Amortized Cost                                        92,915                 770,073               862,988       
Unrealized Gains                                          22                   2,048                 2,070       
Unrealized Losses                                       (219)                   (407)                 (626)      
                                               -------------------------------------------------------------
Fair Value                                           $92,718                $771,714              $864,432       
                                               =============================================================
</TABLE>


     At December 31, 1997, mortgage-backed securities consisted of the
     following:

<TABLE>
<CAPTION>
                                                                                           
                                                 Adjustable Rate       Fixed Rate Mortgage 
(in thousands)                                 Mortgage Securities         Securities            Total
                                               ----------------------------------------------------------
<S>                                                 <C>                  <C>                     <C>
Principal Amount                                    $237,929               $24,826             $262,755       
Unamortized Premium                                    2,743                   194                2,937       
                                               ----------------------------------------------------------
Amortized Cost                                       240,672                25,020              265,692       
Unrealized Gains                                         162                    41                  203       
Unrealized Losses                                        (15)                    0                  (15)       
                                               ----------------------------------------------------------
Fair Value                                          $240,819               $25,061             $265,880       
                                               ==========================================================
</TABLE>

                                       9
<PAGE>
 
     The contractual final maturity of the mortgage loans supporting the
     mortgage-backed 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.

     The adjustable rate mortgage-backed securities are typically subject to
     periodic and lifetime caps that limit the amount an adjustable rate
     mortgage-backed security's interest rate can change during any given period
     and over the life of the asset.  At June 30, 1998, the average periodic cap
     on the adjustable rate mortgage assets was 1.9% per annum and the average
     lifetime cap was equal to 11.6%.  At December 31, 1997, the average
     periodic cap on the adjustable rate mortgage assets was 2.0% per annum and
     the average lifetime cap was equal to 11.4%.

     During the quarter ended June 30, 1998 the Company realized $582,000 in
     gains on the sale of $461.6 million of adjustable rate mortgage-backed
     securities which were classified as available-for-sale.

NOTE 4 - OTHER INVESTMENTS

     Other investments includes 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 entered into certain interest rate swap transactions
     during June, 1998.  The execution of these swaps eliminated the need for a
     portion of the cap protection previously purchased.  As such a portion of
     the caps are no longer effective as a hedge and are no longer accounted for
     as such (see Note 2).

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

<TABLE>
<CAPTION>
                                  At June 30, 1998             At December 31, 1997
                                  -------------------------------------------------
<S>                               <C>                            <C>
Notional Amount                      $900,000,000                  $500,000,000
Average Contract Rate                   10.4%                         10.0%
Average Final Maturity             January 24, 2002              December 24, 2001
</TABLE>

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

NOTE 5 - REVERSE REPURCHASE AGREEMENTS

     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 June 30, 1998, the Company had outstanding $753,752,000 of reverse
     repurchase agreements with a weighted average current borrowing rate of
     5.62% and a maturity of 3.2 months.  The reverse repurchase agreements were
     collateralized by mortgage-backed securities with an estimated fair value
     of $768,283,000.

     At December 31, 1997, the Company had outstanding $87,818,000 of reverse
     repurchase agreements with a weighted average current borrowing rate of
     5.82% and a maturity of 2.8 months.  The reverse repurchase agreements were
     collateralized by mortgage-backed securities with an estimated fair value
     of $90,043,000.

     For the quarter ended June 30, 1998, the average reverse repurchase
     agreement balance was $639,029,000 with a weighted average interest cost of
     5.60%.  The maximum reverse repurchase agreement balance outstanding during
     the quarter ended June 30, 1998 was $753,752,000.

                                       10
<PAGE>
 
     For the six months ended June 30, 1998, the average reverse repurchase
     agreement balance was $464,031,000 with a weighted average interest cost of
     5.58%.  The maximum reverse repurchase agreement balance outstanding during
     the six months ended June 30, 1998 was $753,752,000.


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 June 30, 1998                          At December 31, 1997
 
                                       Carrying Amount      Fair Value               Carrying Amount      Fair Value
                                       -------------------------------               -------------------------------
<S>                                    <C>                  <C>                       <C>                <C>
Mortgage-backed securities               $862,988            $864,432                    $265,692          $265,880           
Other Investments                             113                  83                         174               174           
Interest Rate Swaps                             -              (1,212)                          -                 -            
</TABLE>


     Management bases its fair value estimates for mortgage-backed securities
     and other investments 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

     On January 13, 1998, the Company's board of directors authorized a program
     to repurchase up to 750,000 shares of the Company's Common Stock.  The
     Company repurchased 337,300 shares of its common stock during the second
     quarter and 535,000 shares for the six months ended June 30, 1998.  The
     average price per share repurchased during the quarter and the six months
     ended June 30, 1998 was $11.57 and $12.03, respectively.  The repurchased
     shares are held in treasury at cost in the financial statements herein.

     An additional 215,000 shares are currently authorized for potential
     repurchase in the future.  The Company may continue to repurchase shares in
     the future when market conditions warrant.


NOTE 8 - TRANSACTIONS WITH AFFILIATES

     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 $161,000 in base management compensation in
     accordance with the terms of the Management Agreement for the quarter ended
     June 30, 1998.  The Company paid the Manager $334,000 in base management
     compensation for the six months ended June 30, 1998.

                                       11
<PAGE>
 
     The Company will also pay the Manager, as incentive compensation, an amount
     equal to 30% of the Net Income of the Company, before incentive
     compensation, in excess of the amount that would produce an annualized
     return on equity equal to the ten-year US Treasury rate plus 1% as further
     defined in the Management Agreement.

     The Company did not accrue for or pay the Manager any incentive
     compensation for the quarter or six months ended June 30, 1998.

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


NOTE 9 - STOCK OPTIONS

     The Company has adopted a stock option plan (the "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 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 1997 Stock Option Plan authorizes the grant of options to purchase an
     aggregate of up to 10% of the outstanding shares of the Company's common
     stock, but not more than 1,000,000 shares of common stock.

     No options were granted under the 1997 Stock Option Plan during the quarter
     or six months ended June 30, 1998. The Company recognized compensation
     expense of $28,000 during the quarter ended June 30, 1998 for stock options
     previously granted to non-employees.  The Company recognized compensation
     expense of $56,000 during the six months ended June 30, 1998 for stock
     options previously granted to non-employees.

     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           Six Months Ended               
                                                              June 30, 1998            June 30, 1998                 
                                                             -----------------------------------------               
<S>                                                          <C>                          <C>                        
Net income - as reported                                         $609,000                  $1,173,000                 
Net income - pro forma                                            578,000                   1,111,000                 
                                                                                                                      
Basic and diluted earnings per share - as reported               $   0.10                  $     0.18                 
Basis and diluted earnings per share - pro forma                 $   0.09                  $     0.17                  
</TABLE>

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

     Information regarding stock option activity for the quarter and six months
     ended June 30, 1998 is as follows:
<TABLE>
<CAPTION>
                                                                                Shares
                                                                              ----------
<S>                                                                          <C>
Outstanding, beginning of period                                               400,000
Exercised                                                                            -
Expired                                                                              -
                                                                              ----------
Outstanding, end of period                                                     400,000
                                                                              ==========
</TABLE>

                                       12
<PAGE>
 
     The remaining contractual life of each option is ten years.  The options
     vest in three equal installments on February 3, 1999, December 3, 1999 and
     December 3, 2000.

NOTE 10 - CONTRACTUAL COMMITMENTS

     During the quarter ended June 30, 1998 the Company entered into interest
     rate swap agreements with original notional amounts as stated below.  Under
     these agreements, the Company receives a floating rate and pays a fixed
     rate.

<TABLE>
<CAPTION>
         Current
    Notional Amount                                                              Termination     Unrealized
         (000)                   Type              Fixed Rate   Floating Rate       Date        Gains (Losses)
-------------------------------------------------------------------------------------------------------------
<S>     <C>                 <C>                     <C>        <C>               <C>              <C> 
         $ 95,000           Interest Rate Swap        5.880%     1Mo LIBOR         5/29/00         $  (235)
           30,000           Interest Rate Swap        5.905%     1Mo LIBOR         6/30/00             (91)
           29,000           Interest Rate Swap        5.765%     1Mo LIBOR         7/25/00               4
           63,000           Interest Rate Swap        5.775%     1Mo LIBOR         8/25/00               9
           60,000           Interest Rate Swap        5.900%     1Mo LIBOR         5/18/01            (179)
          100,000           Interest Rate Swap        5.883%     1Mo LIBOR         5/25/01            (226)
          130,288           Interest Rate Swap        5.905%     1Mo LIBOR         5/25/01            (327)
           57,000           Interest Rate Swap        5.750%     1Mo LIBOR         7/14/01              53
           65,000           Interest Rate Swap        5.791%     1Mo LIBOR         7/25/01               4
           48,803           Interest Rate Swap        5.960%     1Mo LIBOR         5/15/02            (224)
                                                                                                   -------
                                                                                                   $(1,212)
                                                                                                   -------
</TABLE>

NOTE 11 - CONTINGENCIES

     A mortgage company with a similar name recently filed suit against the
     Company demanding that the Company not operate under the name "Apex
     Mortgage Capital."  The litigation was instituted by Apex Mortgage Corp.,
     a Pennsylvania corporation engaged in the origination, trading and
     servicing of mortgage loans, on November 24, 1997 in the United States
     District Court for the Southern District of New York.

     During the quarter ended June 30, 1998, the Company entered into a
     settlement agreement with the plaintiff that resolved the matter.  The
     agreement was reached without material impact on the financial statements
     or operations of the Company.

                                       13
<PAGE>
 
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

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 "Risk Factors" in the Prospectus included
in the Registration Statement on Form S-11 (333-36069) filed by the Company on
November 29, 1997 and incorporated by reference as Exhibit 99.1 in the Company's
annual report on Form 10-K for the year ended December 31, 1997.  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 and
other highly rated, single-family real estate mortgage securities and mortgage
loans.  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 assets and the
cost of its borrowings.  The Company will elect 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 (the "Manager") and its affiliates.

The day-to-day operations of the Company are managed by the Manager subject to
the direction and oversight of the Company's Board of Directors, a majority of
whom are unaffiliated with the Manager.  The Manager is a wholly-owned
subsidiary of The TCW Group, Inc. ("TCW").  The Manager was established in 1992
and TCW 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 ten 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.


                                    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 mortgage assets;

 .  manage the credit risk of its mortgage assets through, among other activities
   (i) carefully selecting mortgage assets to be acquired, (ii) complying with
   the Company's policies with respect to credit risk concentration which, among
   other things, require the Company to maintain a mortgage asset portfolio with
   a weighted average rating generally equivalent to AA (or a comparable rating)
   or better, (iii) actively monitoring the ongoing credit quality and

                                       14
<PAGE>
 
   servicing of its mortgage assets, and (iv) maintaining appropriate capital
   levels and allowances for possible credit losses;

 .  finance purchases of mortgage assets with the net proceeds of equity
   offerings and to utilize leverage to increase potential returns to
   stockholders through borrowings (primarily reverse repurchase agreements)
   with interest rates that will generally reflect changes in short-term market
   interest rates; and

 .  utilize 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.

During the quarter, the Company modified its emphasis on investing primarily in
adjustable-rate mortgage assets.  Under the new policy as approved by the
Company's Board of Directors (including all of the independent directors who are
not affiliated with the Manager or TCW), the Company will be able to invest in
either fixed-rate mortgage assets or adjustable-rate mortgage assets without a
defined allocation to either asset category.  Investments in fixed-rate mortgage
assets funded with borrowings are generally expected to be combined with hedging
instruments in order to mitigate interest rate risk to the extent possible.  See
"Hedging Instruments and Other Investments" and "Effects of Interest Rate
Changes" below.  The Company also refined its interest rate risk management
policy in light of a potential shift toward fixed-rate investments. Whereas the
previous policy generally required that the weighted average time to reset on
the Company's mortgage assets and borrowings remain within 90 days, the new
policy targets the difference between the weighted average duration of the
Company's mortgage assets and the related borrowings used for funding to one
year or less, taking into account all hedging transactions. At a meeting in May,
1998, the Board approved amending the Company's Investment Policy, Asset
Acquisition Policy and Interest Rate Risk Management Policy to reflect the
foregoing policy changes, copies of which are attached as Exhibits to this Form
10-Q.

Prepayment rates on mortgage assets are influenced by changes in current
interest rates and a variety of economic, geographic and other factors beyond
the control of the Company, and consequently, such prepayment rates cannot be
predicted with certainty.  In periods of declining mortgage asset interest
rates, prepayments on mortgage assets generally increase.  If general interest
rates decline as well, the proceeds of such payments received during such
periods are likely to be reinvested by the Company in assets yielding less than
the yields on the mortgage assets that were prepaid.  In addition, the market
value of the mortgage assets may, because of the risk of prepayment, benefit
less than other fixed-income securities from declining interest rates.
Conversely, in periods of rising interest rates, prepayments on mortgage assets
generally decrease, in which case the Company would not have the prepayment
proceeds available to invest in assets with higher yields.  Prepayment of
mortgage assets in such interest rate environments could negatively impact the
Company's financial condition, cash flows and results of operations.

The Company has established the foregoing strategies along with certain
operating policies and procedures to implement them.  However, these strategies
and policies may be modified or waived by the Board of Directors at any time
without the consent or approval of the Company's stockholders.  The ultimate
effect of any such changes is uncertain.


FINANCIAL CONDITION
-------------------

MORTGAGE ASSETS

At June 30, 1998, the Company held $864,432,000 of mortgage assets as compared
to $265,880,000 at December 31, 1997.  The original maturity of a significant
portion of the mortgage assets ranges from fifteen to thirty years; the actual
maturity is subject to change based on the prepayments of the underlying
mortgage loans.

                                       15
<PAGE>
 
The following table is a schedule of mortgage assets held listed by security
type (dollars in thousands):

<TABLE>
<CAPTION>
                                               June 30, 1998                       December 31, 1997
                                      -----------------------------------------------------------------
                                       Carrying           Percent of        Carrying         Percent of     
Mortgage-Backed Securities               Value            Portfolio          Value           Portfolio      
-------------------------------------------------------------------------------------------------------
<S>                                   <C>                 <C>               <C>                <C>
Adjustable Rate (1)                     $ 92,718             10.7%           $240,819            90.6%                   
Fixed Rate                               771,714             89.3%             25,061             9.4%                   
                                        --------            -----            --------           -----                    
     Totals                             $864,432            100.0%           $265,880           100.0%                   
                                        ========            =====            ========           =====                     
</TABLE>
                                                                                
     (1) At June 30, 1998, the interest rate indices for 95% and 5% 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.  At December 31, 1997, the interest rate index for all
         adjustable rate mortgage securities was based on the one-year U.S.
         Treasury rate.

The following table shows various weighted average characteristics of the
mortgage assets held by the Company at June 30, 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         $330,245       38.4%         100.48%       100.51%         6.51%            3.5     
20 Year Agency Pass-throughs              123,213       14.3%         100.41%       100.18%         6.50%            5.7     
AAA CMOs                                  316,032       36.7%          99.49%       100.07%         6.81%            2.7     
                                         --------      -----          ------        ------          ----             ---     
Total Fixed Rate Holdings                 769,490       89.4%         100.08%       100.29%         6.63%            3.5     
                                                                                                                             
Adjustable Rate Holdings                   91,386       10.6%         101.67%       101.46%         6.90%            0.9     
                                         --------      -----          ------        ------          ----             ---     
                                                                                                                             
Total Portfolio                          $860,876      100.0%         100.25%       100.42%         6.66%            3.2     
                                         ========      =====          ======        ======          ====             ===     
</TABLE>

The following table shows various weighted average characteristics of the
mortgage assets held by the Company at December 31, 1998 (dollars in thousands):
<TABLE>
<CAPTION>
                                                     Percent of                                                    Weighted
                                                      Total Par       Amortized                      Current       Average
Security Type                          Par Amount      Amount        Cost Basis     Market Price     Coupon        Life (1)
-----------------------------------------------------------------------------------------------------------------------------
<S>                                    <C>          <C>             <C>             <C>            <C>           <C>
Fixed Rate Agency CMO                    $ 24,826        9.5%         100.78%        100.95%         7.50%            0.9     
                                                                                                                              
Adjustable Rate Holdings                  237,929       90.5%         101.12%        101.21%         6.90%            0.6     
                                         --------      -----          ------         ------          ----             ---     
                                                                                                                              
Total Portfolio                          $262,755      100.0%         101.11%        101.19%         6.66%            0.6     
                                         ========      =====          ======         ======          ====             ===     
</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.

                                       16
<PAGE>
 
HEDGING INSTRUMENTS AND OTHER INVESTMENTS

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 both interest rate cap and interest rate swap
agreements.

Interest rate cap agreements consisted of London Interbank Offered Rate
("LIBOR") based agreements as follows:

<TABLE>
<CAPTION>
                                  At June 30, 1998             At December 31, 1997
                              -------------------------------------------------------
<S>                               <C>                         <C>
Notional Amount                    $900,000,000                   $500,000,000
Average Contract Rate                  10.4%                          10.0%
Average Final Maturity           January 24, 2002               December 24, 2001
</TABLE>

Under these agreements, the Company will receive cash payments to the extent of
the excess of three-month LIBOR over the agreements' contract rate times the
notional amount.  The interest rate cap agreements are reported as other
investments on the balance. A portion of the interest rate cap agreements do not
qualify for hedge accounting now that the Company has entered into additional
hedging transactions as discussed below.

During the quarter, the Company entered into interest rate swap agreements with
current notional amounts as stated below.  Under these agreements, the Company
receives a floating rate and pays a fixed rate.
<TABLE>
<CAPTION>

     Current
 Notional Amount                                                        Termination     Unrealized
      (000)                Type              Fixed Rate  Floating Rate      Date       Gains (Losses)
----------------------------------------------------------------------------------------------------------
      <S>          <C>                      <C>         <C>              <C>              <C>          
       $ 95,000     Interest Rate Swap        5.880%     1Mo LIBOR         5/29/00         $  (235)            
         30,000     Interest Rate Swap        5.905%     1Mo LIBOR         6/30/00             (91)            
         29,000     Interest Rate Swap        5.765%     1Mo LIBOR         7/25/00               4             
         63,000     Interest Rate Swap        5.775%     1Mo LIBOR         8/25/00               9             
         60,000     Interest Rate Swap        5.900%     1Mo LIBOR         5/18/01            (179)            
        100,000     Interest Rate Swap        5.883%     1Mo LIBOR         5/25/01            (226)            
        130,288     Interest Rate Swap        5.905%     1Mo LIBOR         5/25/01            (327)            
         57,000     Interest Rate Swap        5.750%     1Mo LIBOR         7/14/01              53             
         65,000     Interest Rate Swap        5.791%     1Mo LIBOR         7/25/01               4             
         48,803     Interest Rate Swap        5.960%     1Mo LIBOR         5/15/02            (224)            
-----------------                                                                          -------
       $678,091                                                                            $(1,212)             
=================                                                                          ========
</TABLE>

The weighted average coupon the Company pays on the interest rate swap
agreements at June 30, 1998 was 5.86%.  The weighted average life of the
agreements at June 30, 1998 was 2.4 years.

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

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

                                       17
<PAGE>
 
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 June 30, 1998, the Company had outstanding $753,752,000 of reverse repurchase
agreements with a weighted average current borrowing rate of 5.62% and a
maturity of 3.2 months.  The reverse repurchase agreements were collateralized
by mortgage-backed securities with an estimated fair value of $768,283,000.

At December 31, 1997, the Company had outstanding $87,818,000 of reverse
repurchase agreements with a weighted average current borrowing rate of 5.82%
and a maturity of 2.8 months.  The reverse repurchase agreements were
collateralized by mortgage-backed securities with an estimated fair value of
$90,043,000.

The Company had $127,451,000 and $90,492,000 of other liabilities at June 30,
1998 and December 31, 1997, respectively, consisting primarily of payables for
unsettled securities.  The Company anticipates settling all other liabilities
within one year by entering into additional reverse repurchase agreements.


RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998

For the quarter ended June 30, 1998, the Company's net income was $609,000, or
$0.10 per share on both a basic and diluted basis, based on a weighted average
of 6,387,000 shares outstanding.  Net interest income for the period was
$499,000 consisting of interest income on mortgage assets and cash balance less
interest expense on reverse repurchase agreements.  The Company reported a net
gain primarily on the gains on investment transactions, net of $469,000.  The
Company incurred operating expenses of $359,000 for the quarter consisting of
management fees, audit, tax, legal, printing, insurance and other expenses.

As a REIT, the Company is required to declare dividends amounting to 85% of each
year's taxable income by the end of each calendar year and to have declared
dividends amounting to 95% of its taxable income for each year by the time it
files its applicable tax return.  The Company currently intends to distribute
approximately 100% of its taxable net income each year.

The Company anticipates that it will experience differences between its net
income based on generally accepted accounting principles ("GAAP") and its
taxable net income due primarily to differences in the methods used to amortize
purchase premiums and discounts and to the recognition of certain compensation
expenses that are not recognized for tax purposes.  However, the taxable income
information shown on a quarter by quarter basis is subject to change upon the
final filing of the Company's annual income tax return.  As the Company's
dividend distributions are generally based on expectations of annual earnings,
there may be differences between the quarterly taxable income reported and the
actual dividend declared during any given quarter.

                                       18
<PAGE>
 
The following table provides a reconciliation between the Company's GAAP net
income and its taxable net income for the three months ended June 30, 1998:

<TABLE>
<CAPTION>
                                                                   (Dollars in thousands)                            
Description                                           GAAP              Tax               Difference               
                                                      ----              ---               ----------               
<S>                                             <C>                <C>                 <C>                           
Coupon Interest Income                             $11,261            $11,261             $    -                
Less Amortization Expense                            1,763                906                857                
                                                   ---------------------------------------------
Net Interest Income                                  9,498             10,355                857                
Less Interest Expense                                8,999              8,999                  -                
                                                   ---------------------------------------------
Net Operating Income                                   499              1,356                857                
                                                                                                                
Gains on Investment Transactions, Net                  469               (804)             1,273                
                                                   ---------------------------------------------
                                                                                                                
Total Income                                           968                552                416                
                                                   ---------------------------------------------
                                                                                                                
Stock Option Expense                                    28                  -                 28                
Other G & A Expenses                                   331                331                  -                
                                                   ---------------------------------------------
Total G & A Expenses                                   359                331                 28                
                                                   ---------------------------------------------
                                                                                                                
Net Income                                         $   609            $   221             $  388                
                                                   =============================================
</TABLE>


The difference in amortization expense represents a timing difference that will
reverse in future periods or upon the sale of the related assets.  The
difference in net gain or loss on the sale of assets represents the differing
basis in the assets sold as caused by the different amortization amounts
recognized since the acquisition of the related assets.

At June 30, 1998, the Company had distributed $2,018,000 in excess of reported
net income.

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 for
the three months ended June 30, 1998 (dollars in thousands):

                         AVERAGE BALANCE AND RATE TABLE
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                        For the Quarter Ended
                                                            June 30, 1998
                                          --------------------------------------------
                                             Average Balance            Effective Rate
                                          ------------------        ------------------
<S>                                          <C>                       <C>
Interest Earning Assets:
     Mortgage Assets                          $681,123                      5.42%
     Cash and Cash Equivalents                  21,974                      5.00%
                                              --------                     -----
     Total Interest Earning Assets             703,097                      5.40%
                                              --------                     -----
 
Interest Bearing Liabilities:
     Reverse Repurchase Agreements             639,029                      5.63%
                                              --------                     -----
 
Net Interest Earning Assets and Spread        $ 64,068                     (0.23%)
                                              ========                     =====
</TABLE>

                                       19
<PAGE>
 
The effective yield data is computed by dividing the annualized net interest
income or expense into the average daily balance shown.

The Company experienced a negative net interest spread during the quarter ended
June 30, 1998 resulting from faster than expected prepayments on its mortgage
assets.  When actual prepayment experience exceeds expectations, the Company
must amortize its purchase premiums over a shorter time period, resulting in a
reduced yield on the Company's mortgage assets.  For the three months ended June
30, 1998, the Company's mortgage assets prepaid at an approximate average
annualized constant prepayment rate of 33%.

On January 13, 1998, the Company's board of directors authorized a program to
repurchase up to 750,000 shares of the Company's Common Stock. The Company
repurchased 337,300 shares of its Common Stock pursuant to the program during
the quarter ended June 30, 1998.  The average price per share repurchased was
$11.57.  The repurchased shares are held in treasury at cost in the financial
statements herein.

An additional 215,000 shares are currently authorized for potential repurchase
in the future.  The Company may continue to repurchase shares in the future when
market conditions warrant.


Results of Operations for the Six Months Ended June 30, 1998

For the six months ended June 30, 1998, the Company's net income was $1,173,000,
or $0.18 per share on both a basic and diluted basis, based on a weighted
average of 6,495,000 shares outstanding.  Net interest income for the period was
$1,395,000 consisting of interest income on mortgage assets and cash balance
less interest expense on reverse repurchase agreements.  The Company reported a
net gain primarily on the gains on investment transactions, net of $469,000.
The Company incurred operating expenses of $691,000 for the period consisting of
management fees, audit, tax, legal, printing, insurance and other expenses.

The following table provides a reconciliation between the Company's GAAP net
income and its taxable net income for the six months ended June 30, 1998:

<TABLE>
<CAPTION>
                                                                            (Dollars in thousands)
Description                                                   GAAP                Tax                 Difference
                                                              ----                ---                 ---------- 
<S>                                                         <C>                <C>                     <C>            
Coupon Interest Income                                      $17,100             $17,100                 $    -        
Less Amortization Expense                                     2,695               1,079                  1,616        
                                                            --------------------------------------------------    
Net Interest Income                                          14,405              16,021                  1,616        
Less Interest Expense                                        13,010              13,010                      -        
                                                            --------------------------------------------------    
Net Operating Income                                          1,395               3,011                  1,616        
                                                                                                                      
Gains on Investment Transactions, Net                           469                (804)                 1,273        
                                                            --------------------------------------------------  
Total Income                                                  1,864               2,207                   (343)       
                                                            --------------------------------------------------    
Stock Option Expense                                             56                   -                     56        
Other G & A Expenses                                            635                 631                      4        
Total G & A Expenses                                            691                 631                     60        
                                                            --------------------------------------------------    
                                                                                                                      
Net Income                                                  $ 1,173             $ 1,576                 $ (403)       
                                                            ==================================================    
</TABLE>

The difference in amortization expense represents a timing difference that will
reverse in future periods or upon the sale of the related assets.  The
difference in net gain or loss on the sale of assets represents the differing
basis in the assets sold as caused by the different amortization amounts
recognized since the acquisition of the related assets.

                                       20
<PAGE>
 
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 for
the six months ended June 30, 1998 (dollars in thousands):

                         AVERAGE BALANCE AND RATE TABLE
                             (Dollars in thousands)
<TABLE>
<CAPTION>
                                                      For the Six Months Ended
                                                            June 30, 1998
                                          --------------------------------------------
                                             Average Balance            Effective Rate
                                          ------------------        ------------------
<S>                                          <C>                       <C>
Interest Earning Assets:
     Mortgage Assets                          $516,584                      5.40%
     Cash and Cash Equivalents                  17,893                      5.10%
                                              --------                      ----
     Total Interest Earning Assets             534,477                      5.39%
                                              --------                      ----
Interest Bearing Liabilities:
     Reverse Repurchase Agreements             464,031                      5.58%
                                              --------                      ----
Net Interest Earning Assets and Spread        $ 70,446                     (0.19%)
                                              ========                      =====
</TABLE>

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

On January 13, 1998, the Company's board of directors authorized a program to
repurchase up to 750,000 shares of the Company's Common Stock. The Company
repurchased 535,000 shares of its Common Stock pursuant to the program during
the six months ended June 30, 1998.  The average price per share repurchased was
$12.03.  The repurchased shares are held in treasury at cost in the financial
statements herein.


Liquidity and Capital Resources

The Company's primary sources of funds for the quarter ended June 30, 1998
consisted of reverse repurchase agreements totaling $753,752,000.  The Company
expects to continue to borrow funds in the form of reverse repurchase agreements
with maturities that generally correspond to the average reset date or average
life of the Company's mortgage assets after taking into account certain hedging
transactions.  At June 30, 1998, the Company had borrowing arrangements with
fourteen 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 subordinated notes.  All debt securities, other borrowings, and
classes of preferred stock will be senior to the common stock

                                       21
<PAGE>
 
in a liquidation of the Company. The effect of additional equity offerings may
be the dilution of the equity of stockholders 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.


EFFECTS OF INTEREST RATE CHANGES

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

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

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

The Company also 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.

During the quarter, the Company increased its current allocation to fixed-rate
mortgage assets from 14.2% of the portfolio at March 31, 1998 to 89.3% at June
30, 1998.  The Company may increase this allocation as market conditions
warrant.  As mentioned above, there are certain risks associated with investing
in fixed-rate mortgage assets in combination with hedging instruments.  The two
main risks the Company faces are that of extension risk and prepayment risk.

                                       22
<PAGE>
 
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.


PART 2.  OTHER INFORMATION

Item 1.  Legal Proceedings

         A mortgage company with a similar name recently filed suit against the
         Company demanding that the Company not operate under the name "Apex
         Mortgage Capital." The litigation was instituted by Apex Mortgage
         Corp., a Pennsylvania corporation engaged in the origination, trading
         and servicing of mortgage loans, on November 24, 1997 in the United
         States District Court for the Southern District of New York.

         During the quarter ended June 30, 1998, the Company entered into a
         settlement agreement with the plaintiff that resolved the matter. The
         agreement was reached without material impact on the financial
         statements or operations of the Company.

Item 2.  Changes in Securities

         Not Applicable

Item 3.  Defaults Upon Senior Securities

         Not Applicable

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

         At the 1998 Annual Meeting of Shareholders held July 1, 1998 (after the
         reporting period covered by this Form 10-Q) shareholders of record as
         of April 30, 1998 were asked to vote to ratify the selection of
         Deloitte & Touch LLP as the Company's independent auditors. 6,342,792
         shares were voted for the proposal, 15,365 shares were voted against
         the proposal, no shares were withheld, 21,150 shares abstained and no
         shares were broker non-votes.

Item 5.  Other Information

         None

                                       23
<PAGE>
 
Item 6.  Exhibits and Reports on Form 8-K:

         (a)  Exhibits
               Exhibit #27    Financial Data Schedule
               Exhibit #99.1  Investment Policy
               Exhibit #99.2  Asset Acquisition Policy
               Exhibit #99.3  Interest Rate Risk Management Policy

         (b)  Reports on Form 8-K
               None

                                       24
<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:   August 14, 1998

                                       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)

                                       25