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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K
(Mark one)
[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
         For the fiscal year ended December 31, 1998
                                       OR
[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934
          For the transition period from: _____________to _____________

                           Commission File No. 1-14043

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

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

            The Forum, Suite1000                            33401
       -------------------------------                   ----------
       1675 PALM BEACH LAKES BOULEVARD                   (Zip Code)
          WEST PALM BEACH, FLORIDA
   (Address of principal executive office)

                                 (561) 682-8000
              ----------------------------------------------------
              (Registrant's telephone number, including area code)
           Securities registered pursuant to Section 12(b) of the Act:

   COMMON STOCK, $.01 PAR VALUE        NEW YORK STOCK EXCHANGE (NYSE)
       (Title of each class)     (Name of each exchange on which registered)

   Securities registered pursuant to Section 12 (g) of the Act: Not applicable.

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[ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part  III of this  Form  10-K or any
amendment to this Form 10-K. [ ]

Aggregate  market  value  of  the  common  stock,   $.01  par  value,   held  by
nonaffiliates  of the registrant,  computed by reference to the closing price as
reported on the NYSE as of the close of business on March 9, 1999:  $72,121,312.
Number of shares of common  stock,  $.01 par value,  outstanding  as of March 9,
1999: 18,965,000 shares.

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<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                          1998 FORM 10-K ANNUAL REPORT
                                TABLE OF CONTENTS

                                                                            PAGE
                                     PART I

Item 1.     Business........................................................  4

              General.......................................................  4
              Structure of the Company......................................  4
              Discontinuance of Investment Activities
                and Proposed Change in REIT Status..........................  4
              The Manager...................................................  5
              Management Fees...............................................  6
              Investment Guidelines.........................................  7
              Federal Income Tax Considerations............................. 12
              Competition................................................... 19

Item 2.     Properties...................................................... 19

Item 3.     Legal Proceedings............................................... 19

Item 4.     Submission of Matters to a Vote of Security Holders............. 19

                                     PART II

Item 5.     Market for the Registrant's Common Equity 
                and Related Stockholder Matters............................. 20

Item 6.     Selected Consolidated Financial Data............................ 20

Item 7.     Management's Discussion and Analysis of Financial
                Condition and Results of Operations......................... 22

Item 7A.    Quantitative and Qualitative Disclosures About Market Risk...... 48

Item 8.     Financial Statements............................................ 51

Item 9.     Changes in and Disagreements with Accountants on Accounting
                and Financial Disclosure.................................... 76

                                    PART III

Item 10.    Directors and Executive Officers of the Registrant.............. 76

Item 11.    Executive Compensation.......................................... 78

Item 12.    Security Ownership of Certain Beneficial Owners and Management.. 79

Item 13.    Certain Relationships and Related Transactions.................. 80

                                     PART IV

Item 14.    Exhibits, Financial Statement Schedules, and 
                Reports on Form 8-K ........................................ 82

            SIGNATURES...................................................... 85

                                        2

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FORWARD-LOOKING STATEMENTS

         CERTAIN  STATEMENTS  CONTAINED  HEREIN ARE NOT, AND CERTAIN  STATEMENTS
CONTAINED  IN FUTURE  FILINGS BY THE COMPANY  WITH THE  SECURITIES  AND EXCHANGE
COMMISSION  (THE  "COMMISSION"),  IN  THE  COMPANY'S  PRESS  RELEASES  OR IN THE
COMPANY'S  OTHER  PUBLIC  OR  SHAREHOLDER  COMMUNICATIONS  MAY NOT BE,  BASED ON
HISTORICAL  FACTS AND ARE  "FORWARD-LOOKING  STATEMENTS"  WITHIN THE  MEANING OF
SECTION 27A OF THE  SECURITIES  ACT OF 1933, AS AMENDED,  AND SECTION 21E OF THE
SECURITIES ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS,  WHICH ARE
BASED ON VARIOUS  ASSUMPTIONS (SOME OF WHICH ARE BEYOND THE COMPANY'S  CONTROL),
MAY  BE  IDENTIFIED  BY  REFERENCE  TO A  FUTURE  PERIOD(S)  OR BY  THE  USE  OF
FORWARD-LOOKING  TERMINOLOGY  SUCH  AS  "ANTICIPATE,"  "BELIEVE,"  "COMMITMENT,"
"CONSIDER,"  "CONTINUE," "COULD," "ENCOURAGE,"  "ESTIMATE," "EXPECT," "FORESEE,"
"INTEND," "IN THE EVENT OF," "MAY," "PLAN,"  "PRESENT,"  "PROPOSE,"  "PROSPECT,"
"UPDATE," "WHETHER," "WILL," "WOULD," FUTURE OR CONDITIONAL VERB TENSES, SIMILAR
TERMS, VARIATIONS ON SUCH TERMS OR NEGATIVES OF SUCH TERMS. ALTHOUGH THE COMPANY
BELIEVES  THE  ANTICIPATED  RESULTS  OR  OTHER  EXPECTATIONS  REFLECTED  IN SUCH
FORWARD-LOOKING  STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS,  IT CAN GIVE NO
ASSURANCE THAT THOSE RESULTS OR  EXPECTATIONS  WILL BE ATTAINED.  ACTUAL RESULTS
COULD DIFFER  MATERIALLY  FROM THOSE  INDICATED IN SUCH STATEMENTS DUE TO RISKS,
UNCERTAINTIES AND CHANGES WITH RESPECT TO A VARIETY OF FACTORS,  INCLUDING,  BUT
NOT LIMITED TO, INTERNATIONAL, NATIONAL, REGIONAL OR LOCAL ECONOMIC ENVIRONMENTS
(PARTICULARLY IN THE MARKET AREAS WHERE THE COMPANY OPERATES), GOVERNMENT FISCAL
AND  MONETARY  POLICIES  (PARTICULARLY  IN THE MARKET  AREAS  WHERE THE  COMPANY
OPERATES),  PREVAILING  INTEREST OR CURRENCY  EXCHANGE RATES,  EFFECTIVENESS  OF
INTEREST  RATE,  CURRENCY AND OTHER  HEDGING  STRATEGIES,  LAWS AND  REGULATIONS
AFFECTING  FINANCIAL  INSTITUTIONS,  REAL ESTATE INVESTMENT  TRUSTS,  INVESTMENT
COMPANIES AND REAL ESTATE  (INCLUDING  REGULATORY  FEES,  CAPITAL  REQUIREMENTS,
INCOME AND  PROPERTY  TAXATION,  ACCESS FOR DISABLED  PERSONS AND  ENVIRONMENTAL
COMPLIANCE),  UNCERTAINTY  OF FOREIGN LAWS,  COMPETITIVE  PRODUCTS,  PRICING AND
CONDITIONS (INCLUDING FROM COMPETITORS THAT HAVE SIGNIFICANTLY GREATER RESOURCES
THAN  THE  COMPANY),  CREDIT,  PREPAYMENT,  BASIS,  DEFAULT,  SUBORDINATION  AND
ASSET/LIABILITY  RISKS,  LOAN  SERVICING  EFFECTIVENESS,   ABILITY  TO  IDENTIFY
ACQUISITIONS  AND  INVESTMENT  OPPORTUNITIES  MEETING THE  COMPANY'S  INVESTMENT
STRATEGY,  COURSE OF NEGOTIATIONS AND ABILITY TO REACH AGREEMENT WITH RESPECT TO
MATERIAL  TERMS  OF  ANY  PARTICULAR  TRANSACTION,  SATISFACTORY  DUE  DILIGENCE
RESULTS,  SATISFACTION  OR  FULFILLMENT  OF AGREED UPON TERMS AND  CONDITIONS OF
CLOSING OR PERFORMANCE,  TIMING OF TRANSACTION CLOSINGS,  THE RECENT DECISION TO
CURTAIL EACH BUSINESS LINE AND DISCONTINUE INVESTMENT  ACTIVITIES,  ACQUISITIONS
AND INTEGRATION OF ACQUIRED BUSINESSES,  SOFTWARE  INTEGRATION,  DEVELOPMENT AND
LICENSING,  AVAILABILITY  OF AND COSTS  ASSOCIATED  WITH OBTAINING  ADEQUATE AND
TIMELY SOURCES OF LIQUIDITY,  DEPENDENCE ON EXISTING SOURCES OF FUNDING, ABILITY
TO REPAY OR REFINANCE  INDEBTEDNESS (AT MATURITY OR UPON ACCELERATION),  TO MEET
COLLATERAL  CALLS BY LENDERS  (UPON  RE-VALUATION  OF THE  UNDERLYING  ASSETS OR
OTHERWISE),  TO GENERATE  REVENUES  SUFFICIENT TO MEET DEBT SERVICE PAYMENTS AND
OTHER OPERATING EXPENSES AND TO SECURITIZE WHOLE LOANS, TAXABLE INCOME EXCEEDING
CASH FLOW,  AVAILABILITY OF DISCOUNT LOANS FOR PURCHASE,  SIZE OF, NATURE OF AND
YIELDS  AVAILABLE  WITH RESPECT TO THE SECONDARY  MARKET FOR MORTGAGE  LOANS AND
FINANCIAL, SECURITIES AND SECURITIZATION MARKETS IN GENERAL, ALLOWANCES FOR LOAN
LOSSES,  GEOGRAPHIC  CONCENTRATIONS OF ASSETS  (TEMPORARY OR OTHERWISE),  TIMELY
LEASING OF UNOCCUPIED  SQUARE  FOOTAGE  (GENERALLY  AND UPON LEASE  EXPIRATION),
CHANGES IN REAL ESTATE CONDITIONS  (INCLUDING  LIQUIDITY,  VALUATION,  REVENUES,
RENTAL RATES, OCCUPANCY LEVELS AND COMPETING PROPERTIES),  ADEQUACY OF INSURANCE
COVERAGE  IN THE EVENT OF A LOSS,  KNOWN OR  UNKNOWN  ENVIRONMENTAL  CONDITIONS,
EXTERNAL MANAGEMENT,  CONFLICTS OF INTEREST, YEAR 2000 COMPLIANCE, OTHER FACTORS
GENERALLY UNDERSTOOD TO AFFECT THE REAL ESTATE ACQUISITION, MORTGAGE AND LEASING
MARKETS,  SECURITIES  INVESTMENTS  AND RAPID GROWTH  COMPANIES,  AND OTHER RISKS
DETAILED  FROM  TIME TO TIME IN THE  COMPANY'S  REPORTS  AND  FILINGS  WITH  THE
COMMISSION, INCLUDING ITS REGISTRATION STATEMENTS ON FORMS S-3, S-4 AND S-11 AND
PERIODIC REPORTS ON FORMS 10-Q, 8-K AND 10-K. GIVEN THESE UNCERTAINTIES, READERS
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH  STATEMENTS.  THE COMPANY DOES
NOT UNDERTAKE,  AND SPECIFICALLY  DISCLAIMS ANY OBLIGATION,  TO PUBLICLY RELEASE
THE RESULT OF ANY REVISIONS WHICH MAY BE MADE TO ANY FORWARD-LOOKING  STATEMENTS
TO  REFLECT  THE   OCCURRENCE  OF  ANTICIPATED   OR   UNANTICIPATED   EVENTS  OR
CIRCUMSTANCES AFTER THE DATE OF SUCH STATEMENTS.

         PLEASE  REFER TO EXHIBIT  99.2,  RISK  FACTORS,  FOR A  DESCRIPTION  OF
MATERIAL RISKS FACED BY THE COMPANY AND ITS SECURITIES HOLDERS.

                                        3

<PAGE>
PART I

ITEM 1.  BUSINESS

GENERAL

         Ocwen Asset Investment Corp.  ("OAC" or the "Company") was incorporated
in the  Commonwealth of Virginia on January 22, 1997, and,  through December 31,
1998, has elected to be taxed as a Real Estate  Investment  Trust ("REIT") under
Sections 856 through 860 of the Internal  Revenue Code of 1986,  as amended (the
"Code").  As such, OAC will generally not be subject to federal income  taxation
on that  portion of its income that it  distributes  to its  shareholders  if it
distributes at least 95% of its taxable income to its shareholders  annually and
meets certain other income and asset tests.

         The  Company's  business  and  investment  affairs are managed by Ocwen
Capital Corporation ("OCC" or the "Manager"), a Florida corporation wholly-owned
by Ocwen Financial Corporation ("OCN"), a diversified financial services company
that is  primarily  engaged in the  acquisition,  servicing  and  resolution  of
subperforming  and  nonperforming  residential  and  commercial  mortgage  loans
through Ocwen Federal Bank, FSB (the "Bank") and other subsidiaries.

         The  Company has sought to  capitalize  on  inefficiencies  in the real
estate and mortgage  markets by investing in several  categories  of real estate
and real estate  related  assets.  Such  investments  consist  primarily of: (i)
subordinate and residual interests in commercial and residential mortgage-backed
securities;  and (ii)  distressed  commercial  and  multi-family  real property,
including   properties   acquired  by  a  mortgage  lender  at  foreclosure  (or
deed-in-lieu  of  foreclosure).  The  Company  believes  that  these  investment
activities  complement  each  other,  from both a cash  flow and a tax  planning
perspective.  In the early years after an  acquisition  real  property  tends to
generate  more  cash  flow  than  taxable  income  as a result  of  depreciation
deductions,  while  subordinate and residual  securities  during the same period
tend to generate more taxable  income than cash flow. The  relationship  between
taxable  income and cash flow  will,  with  respect to each type of  investment,
generally reverse in later years.

         The Company also has invested, by way of purchase and origination,  in:
(i)  commercial,  multi-family  and single family  residential  mortgage  loans,
including  construction  and  rehabilitation  loans and  mezzanine  loans;  (ii)
interest-only and inverse interest-only mortgage-related securities supported by
residential and commercial  mortgage loans; and (iii) mortgage loans that are in
default or for which  default is likely or imminent or for which the borrower is
currently  making  monthly  payments  in  accordance  with  a  forbearance  plan
(collectively, "discount loans").

STRUCTURE OF THE COMPANY

         The Company conducts its business  primarily through Ocwen Partnership,
L.P.  ("the  Operating  Partnership"),  a Virginia  limited  partnership.  Ocwen
General, Inc. (the "General Partner"), a Virginia corporation and a wholly-owned
qualified  REIT  subsidiary  of the  Company,  holds  an  0.9%  interest  in the
Operating  Partnership  and is the general partner of and controls the Operating
Partnership.  In addition,  Ocwen  Limited,  Inc.  (the  "Limited  Partner"),  a
Virginia  corporation  and a  wholly-owned  qualified  REIT  subsidiary  of  the
Company,  currently owns a 90.4% limited  partnership  interest in the Operating
Partnership.   The  remaining  8.7%  partnership   interests  in  the  Operating
Partnership  are limited  partnership  interests  held by OCN through  Investors
Mortgage Insurance Holding Company ("IMIHC"), a wholly-owned subsidiary.

         The  relationship  among the Company,  the Operating  Partnership,  the
General Partner and the Limited  Partner is commonly  referred to as an umbrella
partnership REIT (or "UPREIT") structure.  In this structure,  the Company holds
the same  number of units in the  Operating  Partnership  (through  the  General
Partner and the Limited  Partner) as the number of shares of common  stock,  par
value  $0.01 per share (the  "Common  Stock"),  which the Company has issued and
outstanding.  As  a  result,  any  additional  units  issued  by  the  Operating
Partnership  share  ratably  with  the  Common  Stock  of  the  Company  in  any
distributions made by the Operating  Partnership.  The benefit of this structure
is that  owners of real  estate  assets may  transfer  them to the UPREIT  while
deferring the recognition of the built-in gain for tax purposes.

DISCONTINUANCE OF INVESTMENT ACTIVITIES AND PROPOSED CHANGE IN REIT STATUS

         DISCONTINUANCE  OF  INVESTMENT  ACTIVITIES.  As discussed  under Item 7
below,  on October 26, 1998, the Company  announced  that,  for the  foreseeable
future, it does not plan to acquire any additional assets or fund any additional
loans  (beyond  those  which  are  currently  committed),  and it  will  work to

                                        4
<PAGE>

accelerate  the  stabilization  of its existing  assets and increase its overall
liquidity position.  As a result, the Company has curtailed each of its business
lines,  which include the acquisition of subordinate  and residual  interests in
residential and commercial  mortgage-related  securities,  underperforming  real
estate and residential and commercial real estate loans,  including construction
and renovation loans.

         PROPOSED  CHANGE  IN REIT  STATUS.  As  discussed  in Item 7 below,  on
December  21,  1998,  the  Company  announced  that its Board of  Directors  has
approved a proposal to terminate  the Company's  status as a REIT  effective for
calendar year 1999.  The  proposal,  which  requires  amendment of the Company's
Articles  of  Incorporation,  is  subject  to  shareholder  approval.  The Board
currently  anticipates  that this  proposal  will be  considered  at the  Annual
Meeting of  Shareholders  of the Company  which is  scheduled  to be held in May
1999.  If  approved,  the Company will be treated as a general  corporation  for
federal, state, and local tax purposes and will be subject to federal, state and
local income tax on its taxable  income.  In addition,  the Company would not be
eligible to re-elect REIT status until 2004.

THE MANAGER

         GENERAL.  The Manager is a  wholly-owned  subsidiary  of OCN.  OCN is a
financial  services  company  that  is  primarily  engaged  in the  acquisition,
servicing and resolution of  subperforming  and  nonperforming  residential  and
commercial  mortgage  loans. At December 31, 1998, OCN had $3.3 billion of total
assets and shareholders' equity of $436.4 million.

         The Company has entered  into a management  agreement  with the Manager
(the  "Management  Agreement") for an initial term expiring on May 19, 1999, the
second  anniversary  of the closing date of the initial  public  offering of the
Common Stock (the "Initial Public Offering"). Thereafter, successive extensions,
each for a period not to exceed one year,  may be made by agreement  between the
Company and the Manager,  subject to the  affirmative  vote of a majority of the
Company's  Independent  Directors,  as  defined  in the  Company's  Articles  of
Incorporation.  The Company may terminate, or decline to extend the term of, the
Management Agreement without cause at any time after the first two years upon 60
days written notice by a majority vote of the Independent Directors or by a vote
of the  holders  of a  majority  of the  outstanding  shares  of  Common  Stock;
provided,  that a termination  fee, equal to the sum of the base  management fee
and incentive  management  fee earned during the twelve  months  preceding  such
termination,  will be due. In  addition,  the Company has the right to terminate
the  Management  Agreement  upon the  occurrence  of certain  specified  events,
including a material  breach by the Manager of any  provision  contained  in the
Management  Agreement,  without  the  payment  of any  termination  fee.  If the
Management  Agreement  is  terminated  for any  reason,  OCN will  have  certain
registration rights with respect to the Common Stock held by it.

         The Manager at all times is subject to the supervision of the Company's
Board of  Directors  and has only such  functions  and  authority as the Company
delegates to it. The Manager is responsible for the day-to-day operations of the
Company and performs (or causes to be performed)  such  services and  activities
relating  to the assets and  operations  of the  Company as may be  appropriate,
including:  (i) serving as the Company's  consultant with respect to formulation
of  investment  criteria and  preparation  of policy  guidelines by the Board of
Directors (the  "Guidelines");  (ii) representing the Company in connection with
the purchase and commitment to purchase assets,  the sale and commitment to sell
assets, and the maintenance and administration of its portfolio of assets; (iii)
furnishing  reports  and  statistical  and  economic  research  to  the  Company
regarding the Company's activities and the services performed for the Company by
the  Manager;  (iv)  monitoring  and  providing  to the Board of Directors on an
ongoing basis price information and other data obtained from certain  nationally
recognized  dealers that maintain  markets in assets  identified by the Board of
Directors  from  time to time,  and  providing  data and  advice to the Board of
Directors in connection with the  identification of such dealers;  (v) providing
executive  and  administrative  personnel,  office  space  and  office  services
required in rendering services to the Company; (vi) administering the day-to-day
operations of the Company and performing and supervising the performance of such
other administrative functions necessary in the management of the Company as may
be  agreed  upon by the  Manager  and the  Board  of  Directors,  including  the
collection  of revenues and the payment of the Company's  debts and  obligations
and maintenance of appropriate  computer services to perform such administrative
functions;  (vii) communicating on behalf of the Company with the holders of any
equity or debt  securities  of the Company as required to satisfy the  reporting
and other requirements of any governmental bodies or agencies or trading markets
and to maintain effective relations with such holders;  (viii) to the extent not
otherwise  subject  to an  agreement  executed  by the  Company,  designating  a
servicer for mortgage loans sold to the Company and arranging for the monitoring
and  administering of such servicers;  (ix) counseling the Company in connection
with policy  decisions  to be made by the Board of  Directors;  (x)  engaging in
hedging  activities  on behalf of the  Company,  consistent  with the  Company's
status as a REIT and with the Guidelines; (xi) upon request by and in accordance
with the  directions of the Board of  Directors,  investing or  reinvesting  any
money of the Company; and (xii) counseling the Company regarding the maintenance
of its  status  as a REIT  and  monitoring  compliance  with  the  various  REIT

                                        5

<PAGE>

qualification  tests and other rules set out under the Code by the U.S. Treasury
(the "Treasury Regulations"). See "Federal Income Tax Considerations" below.

         PORTFOLIO   MANAGEMENT.   The  Manager  performs  portfolio  management
services on behalf of the Company and the Operating  Partnership pursuant to the
Management Agreement.  Such services include, but are not limited to, consulting
with the Company on purchase and sale  opportunities,  collection of information
and submission of reports pertaining to the Company's assets, interest rates and
general economic  conditions,  periodic review and evaluation of the performance
of the Company's  portfolio of assets,  acting as a liaison  between the Company
and banking, mortgage banking, investment banking and other parties with respect
to the  purchase,  financing  and  disposition  of assets,  and other  customary
functions  related  to  portfolio   management.   The  Manager  may  enter  into
subcontracts with other parties,  including its affiliates,  to provide any such
services to the Company, but has not done so to date.

         MONITORING  SERVICING.  The  Manager  performs  monitoring  services on
behalf of the Company  pursuant to the Management  Agreement with respect to the
Company's portfolio of mortgage loans. Such monitoring services include, but are
not limited to, the  following  activities:  negotiating  servicing  agreements;
serving as the  Company's  consultant  with respect to the servicing of mortgage
loans;  collection of information  and  submission of reports  pertaining to the
mortgage loans and to moneys remitted to the Manager or the Company; acting as a
liaison  between the servicers of the mortgage loans and the Company and working
with servicers to the extent  necessary to improve their servicing  performance;
with  respect to  mortgage  loans for which the  Company is  servicer,  periodic
review and  evaluation  of the  performance  of each  servicer to determine  its
compliance  with the terms and  conditions of the related  servicing  agreement;
review  of  and  recommendations  as  to  fire  losses,  easement  problems  and
condemnation,  delinquency  and  foreclosure  procedures with regard to mortgage
loans;  review of  servicers'  delinquency,  foreclosures  and other  reports on
mortgage loans;  supervising claims filed under any mortgage insurance policies;
and enforcing the obligation of any servicer to repurchase  mortgage loans.  The
Manager  may  enter  into  subcontracts   with  other  parties,   including  its
affiliates,  to provide any such services to the Company, but has not done so to
date.  For a description  of servicing  agreements  entered in to by the Company
with the Bank, see "Certain Transactions" under Item 13.

MANAGEMENT FEES

         BASE AND INCENTIVE  FEES. The Manager  receives a base  management fee,
calculated and paid  quarterly,  in an amount equal to 0.25% per quarter (1% per
annum),  based upon the Average Invested Assets of the Company for such quarter.
The term  "Average  Invested  Assets"  for any period  means the  average of the
aggregate  book value of the assets of the Company,  including the assets of all
of its direct and indirect subsidiaries, before reserves for depreciation or bad
debts or other similar noncash reserves, computed by taking the daily average of
such values during such period;  provided,  however,  effective January 1, 1998,
with respect to residential loans, the phase means average net equity invested.

         The  Manager is  entitled to receive  incentive  compensation  for each
fiscal quarter in an amount equal to the product of (A) 25% of the dollar amount
by which (1)(a) Funds From Operations  ("FFO") (before the incentive fee) of the
Company  per share of Common  Stock  (based on the  weighted  average  number of
shares outstanding) plus (b) gains (or minus losses) from debt restructuring and
sales of  property  per share of Common  Stock  (based on the  weighted  average
number of shares  outstanding),  exceed (2) an amount  equal to (a) the weighted
average of the price per share at the initial  offering and the prices per share
at any  secondary  offerings by the Company  multiplied by (b) the ten-year U.S.
Treasury rate plus five percent per annum multiplied by (B) the weighted average
number of shares of Common Stock outstanding during such period. FFO, as defined
by National  Association of Real Estate Investment Trusts ("NAREIT"),  means net
income,  computed in accordance with generally  accepted  accounting  principles
("GAAP"),  excluding  gains  (losses)  from  debt  restructuring  and  sales  of
property,  plus  depreciation and amortization on real estate assets,  and after
adjustments for  unconsolidated  partnerships  and joint ventures,  as discussed
under Item 7. FFO does not represent cash generated from operating activities in
accordance  with GAAP and  should not be  considered  as an  alternative  to net
income as an  indication  of the  Company's  performance  or to cash  flows as a
measure of liquidity or ability to make  distributions.  As used in  calculating
the Manager's  compensation,  the term "Ten Year U.S.  Treasury  Rate" means the
arithmetic  average of the weekly average yield to maturity for actively  traded
current  coupon U.S.  Treasury  fixed  interest  rate  securities  (adjusted  to
constant  maturities of ten years) published by the Federal Reserve Board during
a quarter,  or, if such rate is not published by the Federal Reserve Board,  any
Federal Reserve Bank or agency or department of the federal government  selected
by the Company.  If the Company  determines in good faith that the Ten Year U.S.
Treasury Rate cannot be calculated as provided above, then the rate shall be the
arithmetic  average of the per annum average  yields to  maturities,  based upon
closing  asked prices on each  business day during a quarter,  for each actively
traded  marketable  U.S.  Treasury  fixed  interest  rate  security with a final
maturity  date not less than eight nor more than  twelve  years from the date of
the closing  asked  prices,  as chosen and quoted for each  business day in each
such  quarter  in New York City by at least  three  recognized  dealers  in U.S.
Government securities selected by the Company.

                                        6

<PAGE>

         When the Manager's  employees  perform certain due diligence tasks that
purchasers of real estate  (including  managers of REITs) typically hire outside
consultants  to perform,  the Manager is reimbursed  for (or charges the Company
directly for) the Manager's out-of-pocket costs in performing such due diligence
on assets  purchased or considered  for purchase by the Company.  Moreover,  the
Manager  tracks the time its employees  spend in  performing  such due diligence
tasks and is entitled to reimbursement  for the allocated  portion of the salary
and benefits of such employees.

         EXPENSES.  The Company  does not,  and does not expect to,  maintain an
office or employ  full-time  personnel.  Instead it relies on the facilities and
resources  of the Manager to conduct its  operations,  and it is required to pay
out-of-pocket  expenses and an  allocated  portion of salary and benefits of the
Manager attributable to the operations of the Company.  Expense reimbursement is
made quarterly.

         PAYMENT  OF FEES AND  EXPENSES.  The  management  fees are  payable  in
arrears.  The  Manager's  base and  incentive  fees and due  diligence and other
expenses  are  calculated  by the  Manager  within 45 days after the end of each
quarter,  and such calculation is promptly delivered to the Company. The Company
is obligated to pay such fees and expenses  within 60 days after the end of each
fiscal quarter.

         During 1998,  the Manager earned $5.9 million in base  management  fees
and no incentive  compensation from the Company.  In addition,  for such period,
the Manager was  reimbursed  $1.8  million  for  out-of-pocket  costs and salary
allocations for due diligence tasks.

INVESTMENT GUIDELINES

GENERAL

         The Company invests primarily in (i) subordinate and residual interests
in mortgage-related  securities and (ii) distressed  commercial and multi-family
residential  real estate,  including  real estate  acquired in  connection  with
foreclosure on  non-performing  loans or by deed-in-lieu  thereof.  Although the
Company's  primary  emphasis is on the  acquisition of subordinate  and residual
interests  and  distressed  real  properties,  the Company has acquired and will
continue to acquire other real estate-related assets.

         The discussion below describes the principal  categories of assets that
the Company is authorized to acquire under the Guidelines,  which may be amended
at any time by the Board of  Directors  of the  Company to  reflect  competitive
conditions and other business  considerations.  As noted above,  the Company has
decided  that,  for the  foreseeable  future,  it does not plan to  acquire  any
additional  assets  or to fund any  additional  loans  (beyond  those  which are
currently  committed)  in order to enhance its  ability to meet its  obligations
under its indebtedness.  See "Management's  Discussion and Analysis of Financial
Condition and Results of Operations - General" under Item 7.

MORTGAGE-RELATED SECURITIES

         SUBORDINATE  AND RESIDUAL  INTERESTS.  The Company has the authority to
acquire subordinate and residual interests in mortgage-related securities backed
by single family  residential,  multi-family  residential  and  commercial  real
estate loans. Mortgage-related securities typically are divided into two or more
classes,  sometimes  called  "tranches."  The senior  classes are higher "rated"
securities, which are rated from low investment grade "BBB" to higher investment
grade "AA" or "AAA." The junior,  subordinated  classes typically include one or
more lower rated, non-investment grade classes, and an unrated, higher-yielding,
credit support class (which  generally is required to absorb the first losses on
the underlying mortgage loans).

         Mortgage-related    securities   generally   are   issued   either   as
collateralized mortgage obligations ("CMOs") or pass-through certificates.  CMOs
are debt  obligations  of special  purpose  corporations,  owner trusts or other
special purpose entities  secured by multi-family and commercial  mortgage loans
or mortgage-related securities.  Pass-through certificates evidence interests in
trusts,  the primary assets of which are mortgage loans.  CMOs and  pass-through
certificates may be issued or sponsored by private  originators of, or investors
in, mortgage loans,  including savings and loan associations,  mortgage bankers,
commercial banks, investment banks and other entities.

                                        7

<PAGE>

         In most mortgage  loan  securitizations,  a series of  mortgage-related
securities  is issued in  multiple  classes in order to obtain  investment-grade
ratings for the senior classes and thus increase their marketability. Each class
of  mortgage-related  securities  is generally  issued with a specific  fixed or
variable coupon rate and has a stated  maturity or final scheduled  distribution
date.  Principal  prepayments  on the  underlying  mortgage  loans may cause the
mortgage-related  securities  to be  retired  substantially  earlier  than their
stated  maturities  or final  scheduled  distribution  dates,  although  in many
instances mortgage loans may have penalties for or limitations on the ability of
the borrower to prepay the loan. Interest is paid or accrued on mortgage-related
securities on a periodic basis, typically monthly.

         The credit quality of mortgage-related securities depends on the credit
quality of the underlying  mortgage  loans.  Among the factors  determining  the
credit quality of the underlying mortgage loans are the  creditworthiness of the
borrowers,  the  ratio  of  the  mortgage  loan  balances  to the  value  of the
properties securing the mortgage loans, the purpose of the mortgage loans (e.g.,
refinancing or new purchase), the balance of the mortgage loans, their terms and
the geographic  diversification  of the location of the properties,  and, in the
case of commercial mortgage loans, the creditworthiness of the tenants.

         The principal of and interest on the  underlying  mortgage loans may be
allocated among the several classes of a mortgage-related security in many ways,
and the credit  quality of a particular  class results  primarily from the order
and timing of the receipt of cash flow generated  from the  underlying  mortgage
loans.  Subordinate  and residual  interests  carry  significant  credit  risks.
Typically,  in a  "senior/subordinate"  structure,  the subordinate and residual
interests  provide credit  protection to the senior classes by absorbing  losses
from loan  defaults or  foreclosures  before such losses are allocated to senior
classes. Moreover,  typically, as long as the more senior tranches of securities
are  outstanding,  all  prepayments on the mortgage loans  generally are paid to
those  senior  tranches,  at least until the end of a lock-out  period.  In some
instances,  particularly  with respect to  subordinate  interests in  commercial
securitizations,  the  holders of  subordinate  interests  are not  entitled  to
receive scheduled  payments of principal until the more senior tranches are paid
in full or until the end of a lock-out  period.  Because of this  structuring of
the cash flows from the  underlying  mortgage  loans,  subordinate  and residual
interests in a typical  securitization  are subject to a  substantially  greater
risk of  non-payment  than the senior  tranches.  Accordingly,  subordinate  and
residual  interests  are assigned  lower credit  ratings,  or no ratings at all.
Neither the subordinate and residual interests nor the underlying mortgage loans
are  guaranteed by agencies or  instrumentalities  of the U.S.  Government or by
other governmental entities and accordingly are subject,  among other things, to
credit risks.

         A  subordinate  and residual  interest  will be extremely  sensitive to
losses on the underlying  mortgage loans. For example, if the Company owns a $10
million subordinate  interest in a mortgage-related  security consisting of $100
million of underlying  mortgage loans, a 7% loss on all the underlying  mortgage
loans (assuming no principal paydown on such loans) will result in a 70% loss on
the subordinate interest.  Accordingly, the holder of a subordinate and residual
interest is  particularly  interested  in  minimizing  the loss  frequency  (the
percentage  of the loan  balances  that  default  over the life of the  mortgage
collateral)  and the loss severity  (the amount of loss on a defaulted  mortgage
loan, I.E., the principal amount of the mortgage loan unrecovered after applying
any  recovery  to the  expenses of  foreclosure  and  accrued  interest)  on the
underlying mortgage loans.

         The loss frequency on a pool of mortgage loans depends upon a number of
factors,  most of which are beyond the control of the Company or the  applicable
servicer. Among other things, the default frequency reflects broad conditions in
the economy generally and real estate  particularly,  economic conditions in the
local  area  in  which  the  underlying   mortgage  property  is  located,   the
loan-to-value  ratio of the mortgage loan, the purpose of the loan, and the debt
service  coverage ratio (with respect to commercial  mortgage  loans).  The loss
severity  depends upon many of the same  factors  described  above,  and also is
influenced by the servicer's  ability to promptly  return the loan to performing
status or to foreclose on the defaulted  mortgage  loan and sell the  underlying
mortgaged  property.  Various  legal  issues may extend the time of  foreclosure
proceedings  or may  require  the  expenditure  of  additional  sums to sell the
underlying mortgaged property, in either case increasing the amount of loss with
respect to the loan.

         Before  acquiring a  subordinate  and  residual  interest,  the Company
performs a number of due  diligence  tasks to  evaluate  the  investment  and to
verify the  information  and  material  provided by the seller.  With respect to
mortgage-related  securities  backed by single  family  residential  loans,  the
Manager  creates two sample pools:  1) a random sample and 2) an adverse sample,
with  characteristics  (such as high  loan-to-value  ratios or poor  delinquency
histories) that make them likely to perform more poorly than the average loan in
the pool. The Manager  obtains a broker's price opinion  ("BPO") from one of its
approved  brokers  for  each of the  loans  in the  sample  pools.  The  Manager
evaluates each BPO to verify its reasonableness, and, if appropriate, additional
information  is  obtained  until the  Manager  is  satisfied  that a  reasonable
determination  of the value of the loan can be made.  The Manager also estimates
the potential for increases or decreases in estimated  property  values based on
local real estate trends.

                                        8

<PAGE>

         Losses on mortgage  loans are measured in two ways,  loss frequency and
loss severity. Loss frequency is estimated by using industry standard predictive
models,  supplemented by OCN's historical data and experience.  Loss severity is
estimated by projecting the net resolution  proceeds expected to be derived from
the defaulted loans based upon OCN's proprietary  in-house computer models. This
net resolution  analysis  reviews all potential  forms of resolution,  including
full  payoff,   discounted   payoff,   reinstatement,   foreclosure   and  sale,
deed-in-lieu and sale, and takes into account,  among other things,  real estate
value,  carrying costs (that is, property taxes,  insurance and maintenance) and
average months to foreclose in the particular state.

         With  respect to  mortgage-related  securities  backed by  multi-family
residential  and  commercial  real estate  loans,  the Company  determines  on a
loan-by-loan  basis which loans will undergo a full-scope review and which loans
will undergo a more  streamlined  "desktop  analysis."  Although the choice is a
subjective  one,  considerations  that  influence the choice for scope of review
often include loan size, debt service coverage ratio,  loan to value ratio, loan
maturity,  lease rollover,  property type and geographic  location. A full-scope
review  may  include,   among  other  factors,   a  property  site   inspection,
tenant-by-tenant  rent roll analysis,  review of historical  income and expenses
for each property  securing the loan, a review of major leases for each property
(if available); recent appraisals (if available),  engineering and environmental
reports (if available),  and a BPO review. For those loans that are selected for
the more streamlined  desktop analysis,  the Manager's  evaluation may include a
review of the property operating  statements,  summary loan level data and third
party reports,  each as available.  If the Manager's  review of such information
does not reveal any unusual or unexpected characteristics or factors, no further
due diligence is performed. After completing the review of the documentation and
the  property  inspection,  the  formation  compiled is  analyzed  to  determine
collateral value for each property  securing the loans.  Based on these factors,
the  Manager  determines  a  resolution  value  for each  loan for  purposes  of
projecting future cash flows after adjustments for estimated future losses.

         Determining  a  resolution  value is a subjective  process,  requiring,
ultimately, a business judgment. In making this determination, the Manager often
evaluates  some  of  the  following   characteristics  of  the  mortgage-related
security: (i) the type of collateral (e.g., conforming or subprime single family
residential mortgage collateral,  multi-family  residential mortgage collateral,
or office, hotel,  industrial or retail mortgage  collateral);  (ii) the payment
status of the underlying mortgage (performing,  nonperforming or subperforming);
(iii) the actual mortgage prepayment and default history;  (iv) the ratio of the
unpaid mortgage  balance to the current  property value;  (v) the current income
and cash flows generated by multi-family and commercial real estate, as compared
to the debt  service  requirements;  and (vi) the region of the country in which
the collateral is concentrated. However, which of these characteristics (if any)
are important and how important each  characteristic may be to the evaluation of
a particular  mortgage-related security depends on the individual circumstances.
Because there are so many  characteristics  to consider,  each  subordinate  and
residual interest must be analyzed individually,  taking into consideration both
objective data as well as subjective analysis.

         After  completing  the foregoing  evaluations,  the Manager  models the
structure of the  mortgage-related  security based on the  disclosure  documents
that reveal its payment  structure  and the  characteristics  of the  underlying
mortgage  collateral.  This  modeling is done in order to  estimate  future cash
flows to be received by the subordinate or residual interests, after adjustments
for estimated future losses. Using that information,  the Manager determines the
price at which it would  effect the  purchase  of the  subordinate  or  residual
interest on behalf of the Company.

         Although  there  are  some  exceptions,  most  issuers  of  multi-class
mortgage-related  securities  elect  to  be  treated,  for  federal  income  tax
purposes,  as a Real Estate Mortgage  Investment Conduit ("REMIC").  The Company
acquires  subordinate  and  residual  interests  that  are  treated  as  regular
interests in REMICs, and also may acquire residual interests that are designated
as REMIC  residual  interests for federal  income tax purposes.  Unlike  regular
interests  in  REMICs,   REMIC  residual  interests  typically  generate  excess
inclusion or other forms of "phantom  income" that bear no  relationship  to the
actual economic income that is generated by a REMIC. Consequently, if a residual
interest that is designated as a REMIC residual interest generates a significant
amount of phantom  income in any taxable year,  the Company could be required to
borrow  funds or to  liquidate  assets  in  order to meet the REIT  distribution
requirement for such taxable year.

         Subordinate interests generally are issued at a significant discount to
their outstanding principal balance, which gives rise to original issue discount
("OID") for federal income tax purposes.  The Company will be required to accrue
the OID as taxable income over the life of the related subordinate interest on a
level-yield  method in advance of the receipt of the related cash flow.  The OID
income attributable to a subordinate  interest generally increases the Company's
REIT distribution  requirement in the early years of the Company's  ownership of
the  subordinate  interest  even  though the Company may not receive the related
cash flow from the subordinate interest until a later taxable year. As a result,
the Company could be required to borrow funds or to liquidate assets in order to
satisfy the REIT distribution requirement for any taxable year.

                                        9

<PAGE>

         Unlike  residential  mortgage-related  securities,  which typically are
backed by thousands of single family mortgage loans, commercial mortgage-related
securities  are backed  generally  by a more  limited  number of  commercial  or
multi-family  mortgage loans with larger principal balances than those of single
family  residential  loans.  As a  result,  a loss  on a  single  mortgage  loan
underlying a commercial  mortgage-related  security will have a greater negative
effect on the yield of such security, especially the subordinate interests.

         Subordinate  and  residual  interests in  residential  mortgage-related
securities may be backed by  "non-conforming"  mortgage  loans,  that is, single
family  residential  loans that do not qualify for sale to the Federal Home Loan
Mortgage  Corporation  ("FHLMC") or the Federal  National  Mortgage  Association
("FNMA").  Subordinate  and residual  interests in residential  mortgage-related
securities also may be backed by subprime  mortgage loans,  which also are known
as "B," "C" and "D" mortgage  loans. B, C and D mortgage loans are loans made to
borrowers  who  have  credit  histories  of a lower  overall  quality  than  "A"
borrowers.  These credit  histories  generally  result from  previous  repayment
difficulties, brief job histories, previous bankruptcies or other causes. Except
with  respect  to  loans  originated  under  programs   sponsored  by  HUD,  the
loan-to-value  ratio for a B, C and D mortgage  loan is typically  significantly
lower than the loan-to-value ratio of an "A" mortgage loan, and the pass-through
coupon of a B, C and D mortgage loan is typically higher than the coupon on an A
mortgage  loan.  As a result of the  typically  lower  loan-to-value  ratios and
higher  yields  on  B,  C and D  mortgage  loans,  the  Company  believes  these
residential mortgage-related securities with B, C and D mortgage loan collateral
may justify accepting the higher credit risk associated with such borrowers.

         Although  the  owner  of   subordinate   and   residual   interests  in
mortgage-related  securities  ordinarily  cannot  control the  servicing  of the
underlying  mortgage  loans,  the Company  generally  emphasizes  investments in
subordinate  and residual  interests in which the Company  acquires the right to
(i) direct the  foreclosure  upon any defaulted loan which backs such securities
and to take all other  actions that a servicer  generally may take in connection
with a  defaulted  loan  and/or (ii)  designate  the Bank (or another  party) as
special  servicer with respect to any defaulted  mortgage  loan,  subject to the
Company's  right to  exercise  the rights set forth in clause  (i).  The Company
believes that these arrangements  allow it to obtain the servicing  expertise of
the Bank and enable the related subordinate and residual interests to constitute
Qualifying   Interests  for  purposes  of  the   Investment   Company  Act.  See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Risk of Loss of Investment  Company Act Exemption" under Item 7. As
a result of the foregoing  arrangements,  however,  the Company does not benefit
from receipt of material amounts of special servicing fees.

         Because the  acquisition  and special  servicing  of problem  loans and
distressed  real estate is one of the Bank's business  focuses,  the Bank has an
established network of real estate professionals throughout the United States to
assist its asset management activities. The Bank maintains working relationships
with  approved  engineers,  environmental  consultants  and real estate  brokers
nationwide, and calls upon these local advisors for assistance when appropriate.

DISTRESSED REAL ESTATE

         The Company has the authority to acquire  commercial  and  multi-family
real estate acquired at foreclosure or by receipt of a deed-in-lieu  thereof and
other  underperforming and otherwise distressed commercial and multi-family real
estate.  Commercial and multi-family  properties are acquired individually or in
pools. The Company's  policy is to conduct an investigation  and evaluation of a
distressed  real  property  before  purchase.  Prior to  purchase,  the  Manager
identifies and contacts real estate brokers and/or appraisers in the market area
of the subject  properties to obtain rent and sale  comparables and develops pro
forma cash flows and  estimates  of value for each  property.  The Company  also
engages construction engineering and environmental professionals to estimate the
scope and costs of potential  renovation  and other capital  improvement  costs.
This  information  is used to supplement  due diligence that is performed by the
Manager's employees.

         The  Company's due  diligence  generally  includes the review of market
studies for each applicable  market. The studies typically include area economic
data, employment trends, absorption rates and market rental rates. Due diligence
also includes site inspections by the Manager's employees or agents and a review
of all available  asset files and  documentation.  To the extent  possible those
will  include  examinations  of available  legal  documents,  litigation  files,
correspondence,  title reports, operating statements, appraisals and engineering
and  environmental  reports.  The  information  compiled  is  then  analyzed  to
determine a valuation for each property.

         The property  valuation  process  utilizes a variety of tools which may
include various proprietary financial models that have been developed by OCN and

                                       10

<PAGE>

are available to the Company through the management  agreement with the Manager.
Sources of  information  examined to  determine  value  generally  include:  (i)
current and historical operating  statements;  (ii) existing  appraisals;  (iii)
rent and sales  comparables;  (iv)  industry  statistics  and reports  regarding
operating  expenses  such as those  compiled  by the  Institute  of Real  Estate
Management;  (v) leases;  and (vi)  deferred  maintenance  observed  during site
inspections or described in structural reports, reports and correspondence found
in the asset files or by professionals engaged by the Manager.

         The Manager develops projections of net operating income and cash flows
taking  into  account  lease  rollovers,  tenant  improvement  costs and leasing
commissions.  The Manager  compares  its  estimates  of revenue and  expenses to
historical operating statements and estimates provided in appraisals and general
industry and regional statistics. Market capitalization rates and discount rates
are then applied to the cash flow projections to estimate  values.  These values
are then  compared  to  available  appraisals  and market  sale  comparables  to
determine  recommended  bid prices for each  asset.  The bids take into  account
projected  holding  periods,  capital costs and projected  profit  expectations.
Recommended  bid prices are then reviewed with senior  management and a decision
whether to bid is made. The amount offered by the Company  generally will be the
price that the  Manager  estimates  is  sufficient  to  generate  an  acceptable
risk-adjusted return on the Company's investment.

         After the Company acquires distressed real property, the Company's goal
generally is to improve the  positioning and management of the property so as to
increase the cash flow from the property. If cash flows can be increased and the
property  stabilized,  the Company may begin to seek an  opportunity to sell the
property. Although the period during which the Company will hold distressed real
properties will vary considerably from asset to asset, the Company believes that
most such  properties  will be held in its  portfolio  more than four  years and
generally fewer than ten years.

         If the Company is offered the opportunity to purchase a distressed real
property  that is likely  to be held for fewer  than  four  years,  the  Company
generally will establish a corporation in which the Operating  Partnership  will
hold  a  95%  non-voting  ownership  interest  to  make  the  purchase.  Such  a
corporation is not eligible for taxation as a qualified REIT subsidiary, and any
profits that it earns on its activities are subject to federal  corporate income
tax before they are  distributable  to the Company.  If the Company  purchases a
distressed real property with the intent to hold it in the Operating Partnership
for more than four years, but an opportunity arises to sell the property sooner,
the Company will consider certain strategies,  such as a like-kind exchange,  to
reduce any negative tax consequences relating to the sale.

         The Company has the authority to acquire real estate located throughout
the United  States or outside  the United  States or loans  secured by such real
estate.  The Company may not invest more than 25% of the Company's  total assets
in foreign real estate.

         The Company  also has the  authority  to acquire real estate with known
environmental problems that materially impair the value of the property or loans
secured by such real  estate.  The  Company  may not invest more than 10% of its
total assets in environmentally distressed real estate.

         The  Company  has  the  authority  to  participate  in  sale  leaseback
transactions in which the Company  purchases  improved or unimproved real estate
and then leases such real estate back to the seller under a long-term triple net
lease.  The Company also may provide  financing  necessary  to build  commercial
improvements  on the land,  to  refinance  existing  debt on the  property or to
provide  additional  funds to operate the  business.  After  participating  in a
number of these  transactions,  the Company may pool the leased real estate, and
issue debt backed by the real estate and the related leases in a  securitization
transaction.

          The Company has the  authority  to acquire real estate in exchange for
limited partnership interests in the Operating Partnership.

MORTGAGE LOANS

         CONSTRUCTION  LOANS AND MEZZANINE  LOANS. The Company has the authority
to provide  construction  or  rehabilitation  financing on commercial  property,
lending  generally  85% to 90% of total project  costs,  and taking a first lien
mortgage to secure the debt ("construction  loans"). The Company also may invest
in loans that are  subordinate to first lien mortgage  loans on commercial  real
estate ("mezzanine  loans").  For example, on a commercial property subject to a
first lien mortgage  loan with a principal  balance equal to 70% of the value of
the  property,  the Company  could lend the owner of the  property  (typically a
partnership)  an additional  15% to 20% of the value of the property.  Typically
the loan is secured,  either by the  property  subject to the first lien (giving
the Company a second lien position) or by a controlling  equity  interest in the
owner.  Construction  and mezzanine  loans provide the

                                       11

<PAGE>

Company with the right to receive a stated  interest  rate on the loan  balance,
and also may provide the Company with the right to receive a percentage of gross
revenues from the property, payable to the Company on an ongoing basis, and/or a
percentage  of any increase in value of the  property,  payable upon maturity or
refinancing  of the loan,  or otherwise  allow the Company to charge an interest
rate that provides an attractive risk-adjusted return.

         DISTRESSED  MORTGAGE  LOANS.  The Company has the authority to purchase
nonperforming and subperforming  mortgage loans,  particularly  those secured by
commercial  properties,  that are in default  or for which  default is likely or
imminent  or for which the  borrower is  currently  making  monthly  payments in
accordance with a forbearance  plan.  Because  nonperforming  and  subperforming
loans generally are purchased at a discount to both the unpaid  principal amount
of the  loan  and the  estimated  value  of the  security  property,  successful
resolution  can  provide  total  returns  which are in  excess of an  equivalent
investment in performing  mortgage loans.  The Company  classifies such loans as
discount loans and maintains them in a separate portfolio from its other loans.

         The Company  believes that it has a competitive  advantage  relative to
many of its competitors as a result of the Manager's  experience in managing and
resolving  discount  loans,  the  Manager's  large  investment  in the  computer
systems,  technology  and other  resources  which are  necessary to conduct this
business, the Manager's national reputation and the strategic  relationships and
contacts developed by the Manager in connection with these activities.

         Commercial  and  multi-family  discount  loans  generally  are reviewed
individually.  Prior to making an offer to purchase  discount loans, the Manager
conducts an extensive  investigation and evaluation of the loan.  Evaluations of
potential discount loans are conducted  primarily by the Manager's employees who
specialize  in  the  analysis  of  nonperforming   loans,   often  with  further
specialization based on geographic or collateral specific factors. The Manager's
employees  regularly use third parties,  such as brokers,  who are familiar with
the property's type and location,  to assist them in conducting an evaluation of
the collateral property, and depending on the circumstances, particularly in the
case of commercial  real estate  loans,  may use  subcontractors,  such as local
counsel and engineering and environmental  experts,  to assist in the evaluation
and  verification  of  information  and the gathering of other  information  not
previously made available by the potential seller.

         The Company determines the amount to offer to acquire discount loans by
using the Manager's  proprietary  modeling system and loan information  database
which focuses on the anticipated  recovery amount,  timing and cost of resolving
the loan. The amount offered by the Company generally is at a discount from both
the stated value of the loan and the value of the  underlying  collateral and is
sufficient to generate an acceptable  return on the Company's  investment.  Upon
acquisition, the servicing of the loan is transferred to the Manager.

         After a discount  loan is acquired,  the Manager  utilizes its computer
software system to resolve the loan as  expeditiously  as possible in accordance
with specified procedures. The various resolution alternatives generally include
the  following:  (i) the  borrower  brings the loan current in  accordance  with
original or modified  terms,  (ii) the borrower  repays the loan or a negotiated
amount  of the loan,  (iii) the  borrower  agrees  to deed the  property  to the
Company in lieu of  foreclosure,  in which case it is classified as real estate,
or (iv) the Company  forecloses  on the loan and the property is acquired at the
foreclosure sale either by a third party or by the Company,  in which case it is
classified as real estate.

         PERFORMING  MORTGAGE  LOANS FOR  SECURITIZATION.  The  Company  has the
authority  to  purchase  single  family  residential  loans to pool in a special
purpose entity and to issue  mortgage-related  securities  backed by such loans.
The Company generally  intends to retain the subordinate and residual  interests
in any such mortgage-related  securities and the right to service (by assignment
to the Bank) the loans which back such securities.

FEDERAL INCOME TAX CONSIDERATIONS

         The statements in this  discussion  are based on current  provisions of
the Code,  regulations  promulgated under the Code by the Treasury  Regulations,
the  legislative  history  of the  Code,  existing  administrative  rulings  and
practices of the IRS and  judicial  decisions.  No  assurance  can be given that
future legislative,  judicial or administrative actions or decisions,  which may
be retroactive in effect, will not affect the accuracy of any statements in this
Annual  Report with respect to the  transactions  entered  into or  contemplated
prior to the effective date of such changes.

         The  Company's  ability to qualify  and to be taxed as a REIT under the
requirements of the Code and the Treasury Regulations promulgated thereunder is

                                       12

<PAGE>
dependent upon actual  operating  results and compliance with  distribution  and
other  requirements.  Accordingly,  no  assurance  can be given  that the actual
results of the Company's operations for any particular taxable year will satisfy
such  requirements.  For a  discussion  of the tax  consequences  of  failure to
qualify as a REIT, see " Failure to Qualify" below.

TAXATION OF THE COMPANY

         The Company  has made an election to be taxed as a REIT under  Sections
856 through 860 of the Code, commencing with its short taxable year beginning on
the day prior to the  closing  of the  Initial  Public  Offering,  and ending on
December 31, 1997,  and intends to continue to maintain  such  election  through
calendar 1998. The following  discussion sets forth the material  aspects of the
Code  sections  that govern the federal  income tax  treatment of a REIT and its
shareholders,  which are highly  technical and complex.  The discussion does not
address  taxation  of the  Company  in the event  that it ceases to qualify as a
REIT.  The  discussion  is  qualified  in its  entirety by the  applicable  Code
provisions,   the  Treasury   Regulations   and   administrative   and  judicial
interpretations  thereof,  all of which are subject to change  prospectively  or
retroactively.

         The Company  generally will not be subject to federal  corporate income
tax on its net income that is distributed  currently to its  shareholders.  That
treatment substantially eliminates the "double taxation" (I.E., taxation at both
the corporate and shareholder  levels) that generally results from an investment
in a corporation.  However, the Company will be subject to federal income tax in
the  following  circumstances.  First,  the  Company  will be taxed  at  regular
corporate   rates  on  any   undistributed   REIT  taxable   income,   including
undistributed  net capital  gains.  Second,  under  certain  circumstances,  the
Company may be subject to the  "alternative  minimum  tax" on its  undistributed
items of tax  preference,  if any. Third, if the Company has (i) net income from
the sale or other  disposition of "foreclosure  property" that is held primarily
for  sale to  customers  in the  ordinary  course  of  business  or  (ii)  other
nonqualifying income from foreclosure property, it will be subject to tax at the
highest  corporate  rate on such income.  Fourth,  if the Company has net income
from  prohibited  transactions  (which are, in general,  certain  sales or other
dispositions  of property (other than  foreclosure  property) held primarily for
sale to  customers  in the  ordinary  course of  business),  such income will be
subject to a 100% tax. A shared  appreciation  provision may give rise to income
from a prohibited  transaction if the debt instrument was in default, or default
was imminent,  when the  instrument was acquired.  Fifth,  if the Company should
fail to  satisfy  the 75% gross  income  test or the 95% gross  income  test (as
discussed  below),  and nonetheless has maintained its  qualification  as a REIT
because certain other  requirements  have been met, it will be subject to a 100%
tax on the net  income  attributable  to the  greater of the amount by which the
Company  fails the 75% or 95% gross income test.  Sixth,  if the Company  should
fail to distribute  during each calendar year at least the sum of (i) 85% of its
REIT ordinary income for such year, (ii) 95% of its REIT capital gain net income
for such year and (iii) any undistributed taxable income from prior periods, the
Company  would be  subject  to a 4% excise  tax on the  excess of such  required
distribution  over the amounts  actually  distributed.  Seventh,  if the Company
acquires any asset from a C corporation  (I.E., a corporation  generally subject
to full corporate-level tax) in a merger or other transaction in which the basis
of the asset in the  Company's  hands is determined by reference to the basis of
the asset (or any other asset) in the hands of the C corporation and the Company
recognizes  gain on the  disposition  of such asset  during the  10-year  period
beginning  on the date on which it acquired  such  asset,  then to the extent of
such asset's  "built-in-gain" (I.E., the excess of the fair market value of such
asset at the time of  acquisition by the Company over the adjusted basis in such
asset at such time),  the Company will be subject to tax at the highest  regular
corporate rate applicable (as provided in Treasury Regulations that have not yet
been  promulgated).  The  results  described  above  with  respect to the tax on
"built-in-gain"  assume that the Company will elect pursuant to IRS Notice 88-19
to be subject to the rules  described  in the  preceding  sentence if it were to
make any such  acquisition.  Finally,  the Company will be subject to tax at the
highest  marginal  corporate rate on the portion of any Excess  Inclusion income
derived by the Company from REMIC residual  interests equal to the percentage of
the stock of the  Company  held by the  United  States,  any state or  political
subdivision thereof, any foreign government, any international organization, any
agency  or  instrumentality  of any  of  the  foregoing,  any  other  tax-exempt
organization (other than a farmer's cooperative  described in Section 521 of the
Code) that is exempt from taxation under the unrelated  business  taxable income
provisions of the Code, or any rural electrical or telephone  cooperative (each,
a  "Disqualified  Organization").  Any such  tax on the  portion  of any  Excess
Inclusion allocable to stock of the Company held by a Disqualified  Organization
will  reduce  the  cash  available  for  distribution  from the  Company  to all
shareholders.

REQUIREMENTS FOR QUALIFICATION

         The Code defines a REIT as a  corporation,  trust or  association:  (i)
that is  managed  by one or more  trustees  or  directors;  (ii) the  beneficial
ownership of which is  evidenced  by  transferable  shares,  or by  transferable
certificates of beneficial  interest;  (iii) that would be taxable as a domestic
corporation,  but for Sections 856 through 860 of the Code; (iv) that is neither
a financial  institution nor an insurance company subject to certain  provisions
of the  Code;  (v) the  beneficial  ownership  of  which  is held by 100 or more

                                       13

<PAGE>

persons;  (vi) not more than 50% in value of the outstanding  shares of which is
owned,  directly or indirectly,  by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of each taxable year (the
"5/50  Rule");  (vii)  that  makes an  election  to be a REIT (or has made  such
election for a previous  taxable  year) and  satisfies  all relevant  filing and
other  administrative  requirements  established  by the IRS that must be met in
order to elect and maintain  REIT status;  (viii) that uses a calendar  year for
federal income tax purposes and complies with the recordkeeping  requirements of
the Code and Treasury Regulations  promulgated  thereunder;  and (ix) that meets
certain  other tests,  described  below,  regarding the nature of its income and
assets.  The Code provides that conditions (i) to (iv),  inclusive,  must be met
during  the entire  taxable  year and that  condition  (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable  year of less  than 12  months.  Conditions  (v) and (vi) do not apply
until after the first  taxable year for which an election is made by the Company
to be taxed as a REIT. For purposes of  determining  stock  ownership  under the
5/50 Rule, a  supplemental  unemployment  compensation  benefits plan, a private
foundation or a portion of a trust permanently set aside or used exclusively for
charitable  purposes  generally is considered an  individual.  A trust that is a
qualified trust under Code Section 401(a), however,  generally is not considered
an individual and beneficiaries of such trust are treated as holding shares of a
REIT in  proportion to their  actuarial  interests in such trust for purposes of
the 5/50 Rule.

         The Company's  subsidiaries include the General Partner and the Limited
Partner.  Code Section 856(i)  provides that a corporation  that is a "qualified
REIT subsidiary" shall not be treated as a separate corporation, and all assets,
liabilities  and items of  income,  deduction  and credit of a  "qualified  REIT
subsidiary"  shall be  treated  as  assets,  liabilities  and  items of  income,
deduction and credit of the REIT. A "qualified REIT subsidiary" is a corporation
all of the capital  stock of which is held by the REIT.  Thus,  in applying  the
requirements  described herein, any "qualified REIT subsidiaries" of the Company
will be ignored, and all assets,  liabilities and items of income, deduction and
credit of such subsidiaries will be treated as assets,  liabilities and items of
income, deduction and credit of the Company. The General Partner and the Limited
Partner are  "qualified  REIT  subsidiaries."  Accordingly,  neither the General
Partner nor the Limited Partner is subject to federal corporate income taxation,
although each may be subject to state and local taxation.

         In the case of a REIT  that is a  partner  in a  partnership,  Treasury
Regulations  provide that the REIT will be deemed to own its proportionate share
of the assets of the  partnership and will be deemed to be entitled to the gross
income of the partnership  attributable  to such share. In addition,  the assets
and gross income of the partnership  will retain the same character in the hands
of the REIT for purposes of Section 856 of the Code,  including  satisfying  the
gross income and asset tests described  below.  Because the Company is a partner
in the Operating  Partnership,  the Company's  proportionate share of the assets
and gross income of the  Operating  Partnership  are treated as assets and gross
income of the  Company  for  purposes of  applying  the  requirements  described
herein.

         INCOME  TESTS.  In order for the Company to qualify and to maintain its
qualification as a REIT, two requirements relating to the Company's gross income
must be satisfied  annually.  First,  at least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year must
consist  of  defined  types  of  income  derived  directly  or  indirectly  from
investments  relating to real property or mortgages on real property  (including
"rents from real property" and interest on  obligations  secured by mortgages on
real property or on interests in real property) or temporary  investment income.
Second,  at least 95% of the Company's gross income (excluding gross income from
prohibited  transactions)  for each  taxable year must be derived from such real
property,  mortgages  on  real  property  or  temporary  investments,  and  from
dividends,  other types of interest,  certain payments under hedging instruments
and gain from the sale or disposition of stock,  securities and certain  hedging
instruments,  or from any combination of the foregoing. The specific application
of these tests to the Company is discussed below.

         The term  "interest,"  as defined for purposes of the 75% and 95% gross
income  tests,  generally  does not  include  any  amount  received  or  accrued
(directly or indirectly) if the determination of such amount depends in whole or
in part on the income or profits of any person.  However,  an amount received or
accrued generally will not be excluded from the term "interest" solely by reason
of being based on a fixed  percentage or  percentages  of receipts or sales.  In
addition,  an amount received or accrued generally will not be excluded from the
term  "interest"  solely by reason of being  based on the income or profits of a
debtor if the debtor  derives  substantially  all of its gross  income  from the
related property  through the leasing of  substantially  all of its interests in
the  property,  to the  extent  the  amounts  received  by the  debtor  would be
characterized as rents from real property if received by a REIT. Furthermore, to
the extent that interest from a loan that is based on the cash proceeds from the
sale of the  property  securing  the loan  constitutes  a  "shared  appreciation
provision" (as defined in the Code),  income  attributable to such participation
feature  will be treated as gain from the sale of the  secured  property,  which
generally  is  qualifying  income for  purposes of the 75% and 95% gross  income
tests.

                                       14

<PAGE>

         Interest on  obligations  secured by mortgages  on real  property or on
interests in real  property is  qualifying  income for purposes of the 75% gross
income test. Any amount  includible in gross income with respect to a regular or
residual  interest in a REMIC  generally is treated as interest on an obligation
secured by a mortgage on real property. If, however, less than 95% of the assets
of a REMIC  consists of real estate  assets  (determined  as if the Company held
such   assets),   the  Company  will  be  treated  as  receiving   directly  its
proportionate  share of the income of the REMIC.  In  addition,  if the  Company
receives interest income with respect to a mortgage loan that is secured by both
real property and other  property and the highest  principal  amount of the loan
outstanding  during a taxable  year  exceeds the fair  market  value of the real
property on the date the Company  purchased  the  mortgage  loan,  the  interest
income will be  apportioned  between the real  property and the other  property,
which  apportionment  may cause the  Company  to  recognize  income  that is not
qualifying income for purposes of the 75% gross income test.

         Interest,  OID and market discount income that the Company derives from
its  investments  in  subordinate  and  residual  interests  generally  will  be
qualifying interest income for purposes of both the 75% and the 95% gross income
tests, except to the extent that less than 95% of the assets of a REMIC in which
the Company holds an interest  consists of real estate assets  (determined as if
the Company held such  assets),  and the  Company's  proportionate  share of the
income of the REMIC includes  income that is not qualifying  income for purposes
of the 75% and 95% gross  income  tests.  Most of the  income  that the  Company
recognizes  with respect to its  investments in loans will be qualifying  income
for purposes of both gross income tests. In some cases, however, the loan amount
may exceed the value of the real property  securing the loan,  which will result
in a portion of the income from the loan being  classified as qualifying  income
for purposes of the 95% gross income test, but not for purposes of the 75% gross
income test. It is also possible that, in some  instances,  the interest  income
from a loan may be based in part on the borrower's profits or net income,  which
generally will  disqualify the income from the loan for purposes of both the 75%
and the 95% gross income tests.

         The Company may  originate or acquire  construction  loans or mezzanine
loans that have shared  appreciation  provisions.  The Company generally will be
required to recognize income from a shared appreciation  provision over the term
of the related loan using the constant yield method pursuant to certain Treasury
Regulations.  The Company may also acquire distressed mortgage loans with shared
appreciation  provisions.  Such  loans  may be  subject  to the  100% tax on net
income. See "Taxation of the Company" above.

         The Company may originate or acquire and  securitize  loans through the
issuance of non-REMIC CMOs. As a result of such  transactions,  the Company will
retain an equity  ownership  interest in the loans that,  after  considering the
notes  issued in the  securitization,  has economic  characteristics  similar to
those of a  subordinate  interest.  In  addition,  the Company may  resecuritize
mortgage-related   securities  (or  non-REMIC  CMOs)  through  the  issuance  of
non-REMIC CMOs, retaining an equity interest in the mortgage-related  securities
used as collateral  in the  resecuritization  transaction.  The Company does not
intend to enter into any such  transactions that could cause the Company to fail
to satisfy the gross income tests or the asset tests described herein.

         The  Company  may  receive  income  not  described  above  that  is not
qualifying  income  for  purposes  of the 75% and 95% gross  income  tests.  For
example,  certain fees for services  rendered by the Operating  Partnership will
not be  qualifying  income for  purposes of the gross  income  tests.  It is not
anticipated that the Operating  Partnership will receive a significant amount of
such fees. Such fees include, without limitation:  (i) fees for servicing loans,
(ii) fees for performing underwriting or appraisal services for others and (iii)
fees for managing property owned by others.  The Company will monitor the amount
of  nonqualifying  income  produced  by its  assets  and  intends  to manage its
portfolio in order to comply at all times with the two gross income tests.

         The rent  received by the Company from the tenants of its real property
("Rent")  will  qualify as "rents from real  property" in  satisfying  the gross
income  tests for a REIT  described  above only if several  conditions  are met.
First,  the amount of Rent must not be based, in whole or in part, on the income
or profits of any person.  However, an amount received or accrued generally will
not be excluded  from the term "rents  from real  property"  solely by reason of
being based on a fixed  percentage or percentages of receipts or sales.  Second,
the Code  provides  that the Rent  received  from a tenant  will not  qualify as
"rents from real  property" in satisfying the gross income tests if the Company,
or a direct or indirect owner of 10% or more of the Company, owns 10% or more of
such  tenant,  taking into  account  both direct and  constructive  ownership (a
"Related Party  Tenant").  Third,  if Rent  attributable  to personal  property,
leased in connection  with a lease of real property,  is greater than 15% of the
total Rent received under the lease,  then the portion of Rent  attributable  to
such personal property will not qualify as "rents from real property."  Finally,
for the Rent to qualify as "rents from real  property,"  the  Company  generally
must not operate or manage the real  property  or furnish or render  services to
the  tenants  of  such  real  property,   other  than  through  an  "independent
contractor"  who is adequately  compensated and from whom the Company derives no
revenue. (An "independent contractor" for this purpose generally means a service
provider  that is not (i) an  employee  of the  Company or (ii) in  general,  an
entity  which owns 35% or more of the  Company or an entity of which the persons
owning a greater than 35% equity  interest also own 35% or more of the Company.)
The "independent contractor" requirement,  however, does not

                                       15

<PAGE>

apply to the extent  the  services  provided  by the  Company  are  "usually  or
customarily  rendered" in connection with the rental of space for occupancy only
and are not otherwise  considered  "rendered to the occupant."  Pursuant to a de
minimus exception, the Company may provide non-customary services to its tenants
other than through an independent  contractor  without  disqualifying the income
from  the  property  as  long  as  the  amount  the  Company  receives  for  the
impermissible services does not exceed 1% of the Company's gross income from the
property.  The  amount  that  the  Company  receives  that  is  attributable  to
impermissible  services cannot be valued at less than 150% of the direct cost to
the Company of providing the services.

         It is the Company's policy that it will not charge Rent for any portion
of any Real  Property  that is  based,  in whole or in part,  on the  income  or
profits of any person (except by reason of being based on a fixed  percentage or
percentages  of receipts of sales,  as  described  above) to the extent that the
receipt  of such Rent  would  jeopardize  the  Company's  status  as a REIT.  In
addition,  it is the  Company's  intention  that, to the extent that it receives
Rent from a Related Party  Tenant,  such Rent will not cause the Company to fail
to satisfy  either the 75% or 95% gross  income test.  It is also the  Company's
intention  that it will not allow the Rent  attributable  to  personal  property
leased in connection  with any lease of real property to exceed 15% of the total
Rent  received  under the lease,  if the  receipt  of such Rent would  cause the
Company to fail to satisfy either the 75% or 95% gross income test. Finally, the
Company  intends that it will not operate or manage its real property or furnish
or render  noncustomary  services to the tenants of its real property other than
through an  "independent  contractor,"  to the extent that such operation or the
provision of such services would jeopardize the Company's status as a REIT.

         REITs generally are subject to tax at the maximum corporate rate on any
income from  foreclosure  property  (other than income that would be  qualifying
income for  purposes  of the 75% gross  income  test),  less  expenses  directly
connected with the production of such income.  "Foreclosure property" is defined
as any real  property  (including  interests in real  property) and any personal
property  incident to such real  property  (i) that is acquired by a REIT as the
result  of such REIT  having  bid in such  property  at  foreclosure,  or having
otherwise  reduced  such  property to ownership  or  possession  by agreement or
process of law,  after there was a default (or default was  imminent) on a lease
of such  property  or on an  indebtedness  owed to the REIT that  such  property
secured, (ii) for which the related loan was acquired by the REIT at a time when
default was not  imminent or  anticipated  and (iii) for which such REIT makes a
proper election to treat such property as foreclosure property. The Company does
not anticipate that it will receive any income from foreclosure property that is
not  qualifying  income for purposes of the 75% gross  income test,  but, if the
Company does receive any such income, the Company intends to make an election to
treat the related property as foreclosure property.

         If  property  is  not  eligible  for  the  election  to be  treated  as
foreclosure  property  ("Ineligible  Property")  because  the  related  loan was
acquired by the REIT at a time when default was imminent or anticipated,  income
received with respect to such Ineligible  Property may not be qualifying  income
for purposes of the 75% or 95% gross income test. The Company  anticipates  that
any income it receives  with respect to  Ineligible  Property will be qualifying
income for purposes of the 75% and 95% gross income tests.

         Net income derived from a "prohibited transaction" is subject to a 100%
tax.  The  term  "prohibited  transaction"  generally  includes  a sale or other
disposition of property (other than foreclosure property) that is held primarily
for sale to customers in the ordinary course of a trade or business. The Company
believes that no asset owned by the Company or the Operating Partnership will be
held for sale to customers  and that a sale of any such asset will not be in the
ordinary  course  of the  Company's  or the  Operating  Partnership's  business.
Whether property is held "primarily for sale to customers in the ordinary course
of a trade or business"  depends,  however,  on the facts and  circumstances  in
effect from time to time,  including  those  related to a  particular  property.
Nevertheless,  the Company will  attempt to comply with the terms of  safeharbor
provisions in the Code prescribing when asset sales will not be characterized as
prohibited  transactions.  Complete assurance cannot be given, however, that the
Company can comply with the  safeharbor  provisions  of the Code or avoid owning
property  that may be  characterized  as property  held  "primarily  for sale to
customers in the ordinary course of a trade or business."

         From time to time the Company  enters into  hedging  transactions  with
respect  to  one  or  more  of its  assets  or  liabilities.  Any  such  hedging
transactions  could  take a  variety  of  forms,  including  interest  rate swap
contracts,  interest rate cap or floor contracts,  futures or forward  contracts
and options. To the extent that the Company enters into an interest rate swap or
cap  contract  to hedge its  interest  rate risk with  respect  to  indebtedness
incurred or to be incurred to acquire or carry real estate assets,  any periodic
income or gain from the disposition of such contract should be qualifying income
for purposes of the 95% gross income test, but not the 75% gross income test. To
the extent that the Company hedges with other types of financial  instruments or
in other  situations,  it may not be  entirely  clear how the income  from those
transactions will be treated for purposes of the various income tests that apply
to  REITs  under  the  Code.  The  Company  intends  to  structure  any  hedging
transactions  in a  manner  that  does  not  jeopardize  its  status  as a REIT.
Accordingly,  the  Company may  conduct  some or all of its  hedging  activities
through a corporate subsidiary that is fully subject to federal corporate income
tax.

                                       16

<PAGE>

         If the  Company  fails to satisfy  one or both of the 75% and 95% gross
income tests for any taxable  year,  it  nevertheless  may qualify as a REIT for
such year if it is  entitled to relief  under  certain  provisions  of the Code.
Those relief provisions  generally will be available if the Company's failure to
meet such tests is due to reasonable cause and not due to willful  neglect,  the
Company  attaches a schedule  of the sources of its income to its return and any
incorrect  information on the schedule was not due to fraud with intent to evade
tax. It is not  possible,  however,  to state whether in all  circumstances  the
Company  would be  entitled  to the  benefit  of  those  relief  provisions.  As
discussed  above,  even if those relief  provisions  apply,  a 100% tax would be
imposed on the net income attributable to the greater of the amount by which the
Company fails the 75% or 95% gross income test.

         ASSET TESTS. The Company,  at the close of each quarter of each taxable
year,  also must satisfy two tests relating to the nature of its assets.  First,
at least 75% of the value of the Company's  total assets must be  represented by
cash or cash items (including certain receivables), government securities, "real
estate  assets," or, in cases where the Company raises new capital through stock
or long-term (at least five-year) debt offerings, temporary investments in stock
or debt instruments  during the one-year period following the Company's  receipt
of such  capital.  The term "real  estate  assets"  includes  interests  in real
property,  interests in mortgages on real  property to the extent the  principal
balance of a mortgage  does not exceed the fair market  value of the  associated
real  property,  regular or residual  interests in a REMIC (except that, if less
than 95% of the assets of a REMIC consists of "real estate  assets"  (determined
as if the Company  held such  assets),  the  Company  will be treated as holding
directly its  proportionate  share of the assets of such  REMIC),  and shares of
other  REITs.  For  purposes of the 75% asset test,  the term  "interest in real
property"  includes  an  interest  in  mortgage  loans or land and  improvements
thereon,  such as buildings or other inherently permanent structures  (including
items  that are  structural  components  of such  buildings  or  structures),  a
leasehold  of real  property,  and an  option to  acquire  real  property  (or a
leasehold of real  property).  An "interest"  in real  property  also  generally
includes an interest in mortgage loans secured by controlling  equity  interests
in entities  treated as  partnerships  for federal  income tax purposes that own
real property, to the extent that the principal balance of the mortgage does not
exceed the fair  market  value of the real  property  that is  allocable  to the
equity interest. Second, of the investments not included in the 75% asset class,
the value of any one issuer's  securities owned by the Company may not exceed 5%
of the value of the  Company's  total  assets,  and the Company may not own more
than 10% of any one  issuer's  outstanding  voting  securities  (except  for its
interests  in the  Operating  Partnership,  the  General  Partner,  the  Limited
Partner, any other qualified REIT subsidiary, partnership or any other REIT).

         The Company  expects that any distressed real  properties,  subordinate
and residual  interests,  IOs,  Inverse IOs and  temporary  investments  that it
acquires generally will be qualifying assets for purposes of the 75% asset test,
except to the  extent  that less than 95% of the  assets of a REMIC in which the
Company  owns an interest  consists of "real  estate  assets" and the  Company's
proportionate  share of those  assets  includes  assets  that are  nonqualifying
assets for purposes of the 75% asset test. Loans also will be qualifying  assets
for purposes of the 75% asset test to the extent that the  principal  balance of
each mortgage loan does not exceed the value of the  associated  real  property.
The Company  will monitor the status of the assets that it acquires for purposes
of the  various  asset  tests and  intends to manage its  portfolio  in order to
comply at all times with such tests.

         If the  Company  should fail to satisfy the asset tests at the end of a
calendar  quarter,  such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding  calendar quarter
and (ii) the discrepancy between the value of the Company's assets and the asset
test requirements  arose from changes in the market values of its assets and was
not wholly or partly  caused by the  acquisition  of one or more  non-qualifying
assets. If the condition described in clause (ii) of the preceding sentence were
not satisfied, the Company still could avoid disqualification by eliminating any
discrepancy  within 30 days after the close of the calendar  quarter in which it
arose.

                                       17

<PAGE>

         RECORDKEEPING    REQUIREMENTS.    Pursuant   to   applicable   Treasury
Regulations,  in order to be able to  elect to be taxed as a REIT,  the  Company
must maintain certain records and request on an annual basis certain information
from  its  shareholders  designed  to  disclose  the  actual  ownership  of  its
outstanding stock. The Company intends to comply with such requirements.

DISTRIBUTION REQUIREMENTS

         The  Company,  in order  to  avoid  corporate  income  taxation  of the
earnings that it  distributes,  is required to  distribute  with respect to each
taxable year dividends  (other than capital gain dividends) to its  shareholders
in an  aggregate  amount  at least  equal to (i) the sum of (A) 95% of its "REIT
taxable income" (computed without regard to the dividends paid deduction and its
net  capital  gains) and (B) 95% of the net income  (after  tax),  if any,  from
foreclosure  property,  minus (ii) the sum of certain  items of noncash  income.
Such  distributions must be paid in the taxable year to which they relate, or in
the  following  taxable  year if declared  before the Company  timely  files its
federal  income  tax  return  for such year and if paid on or  before  the first
regular  dividend  payment date after such  declaration.  To the extent that the
Company does not  distribute all of its net capital gain or distributes at least
95%, but less than 100%, of its "REIT taxable  income," as adjusted,  it will be
subject to tax thereon at regular  ordinary  and  capital  gains  corporate  tax
rates.  Furthermore,  if the  Company  should  fail to  distribute  during  each
calendar  year (or, in the case of  distributions  with  declaration  and record
dates  falling in the last three months of the calendar  year, by the end of the
January immediately following such year) at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain income for such
year and (iii) any undistributed  taxable income from prior periods, the Company
would be subject to a 4% nondeductible excise tax on the excess of such required
distribution over the amounts actually distributed.  The Company intends to make
distributions  sufficient  to  satisfy  the  annual  distribution  requirements,
although it incurred a liability as a result of the  above-mentioned  excise tax
in connection with a decision to defer payment of a dividend on the Common Stock
in the fourth  quarter of 1998.  See  "Management's  Discussion  and Analysis of
Financial  Condition and Results of Operations - Proposed Change in REIT Status"
under Item 7.

         It is possible  that,  from time to time,  the  Company may  experience
timing  differences  between (i) the actual receipt of income and actual payment
of  deductible  expenses and (ii) the  inclusion of that income and deduction of
such expenses in arriving at its REIT taxable income.  For example,  the Company
will recognize  taxable income in excess of its cash receipts when, as generally
happens,  OID accrues with respect to its subordinated  interests.  Furthermore,
some  loans,  IOs and  Inverse  IOs may be deemed to have OID, in which case the
Company will be required to recognize  taxable  income in advance of the related
cash flow. In addition,  pursuant to certain Treasury  Regulations,  the Company
may be required to recognize  the amount of any payment to be made pursuant to a
shared  appreciation  provision  over the term of the  related  loan  using  the
constant yield method.  OID generally  will be accrued using a methodology  that
does not allow credit losses to be reflected  until they are actually  incurred.
In addition,  the Company may recognize  taxable market discount income upon the
receipt  of  proceeds  from  the  disposition  of,  or  principal  payments  on,
subordinated  interests  and  loans  that are  "market  discount  bonds"  (I.E.,
obligations with a stated  redemption price at maturity that is greater than the
Company's tax basis in such  obligations),  although such proceeds often will be
used to make  non-deductible  principal  payments  on  related  borrowings.  The
Company also may recognize  Excess  Inclusion or other "phantom"  taxable income
from REMIC residual interests.  It also is possible that, from time to time, the
Company may recognize net capital gains  attributable to the sale of depreciated
property that exceeds its cash receipts from the sale. Finally,  the Company may
recognize taxable income without receiving a corresponding  cash distribution if
it forecloses on or makes a "significant  modification"  (as defined in Treasury
Regulations  Section  1.1001-3(e)) to a loan, to the extent that the fair market
value of the underlying  property or the principal  amount of the modified loan,
as applicable,  exceeds the Company's basis in the original loan. Therefore, the
Company may have less cash than is necessary to meet its annual 95% distribution
requirement  or to avoid  corporate  income  tax or the  excise  tax  imposed on
certain  undistributed  income.  In such a  situation,  the  Company may find it
necessary to arrange for  short-term  (or possibly  long-term)  borrowings or to
raise funds through the issuance of capital stock.

         Under  certain  circumstances,  the  Company  may be able to  rectify a
failure to meet the distribution  requirements for a year by paying  "deficiency
dividends"  to its  shareholders  in a later year,  which may be included in the
Company's  deduction  for  dividends  paid for the earlier  year.  Although  the
Company may be able to avoid being taxed on amounts  distributed  as  deficiency
dividends,  it will be required to pay to the IRS interest based upon the amount
of any deduction taken for deficiency dividends.

                                       18
<PAGE>

FAILURE TO QUALIFY

         If the Company  fails to qualify for  taxation as a REIT in any taxable
year, and the relief provisions do not apply, the Company will be subject to tax
(including  any  applicable  alternative  minimum tax) on its taxable  income at
regular corporate rates. Distributions to the Company's shareholders in any year
in  which the Company fails to qualify will not be deductible by the Company nor
will they be required to be made. In such event,  to the extent of the Company's
current and accumulated  earnings and profits, all distributions to shareholders
will be taxable as ordinary  income and,  subject to certain  limitations of the
Code,  corporate  distributees  may  be  eligible  for  the  dividends  received
deduction.  Unless entitled to relief under specific statutory  provisions,  the
Company also will be  disqualified  from taxation as a REIT for the four taxable
years  following the year during which the Company  ceased to qualify as a REIT.
It is not possible to state  whether in all  circumstances  the Company would be
entitled to such statutory relief.

COMPETITION

         GENERAL.  The  Company's   competition  varies  by  business  line  and
geographic   market.   In  many  cases,  the  acquisition  of   mortgage-related
securities,  real  estate  and  commercial  and  multi-family  loans is based on
competitive  bidding,  which  involves the risk that the Company may bid too low
(which  generates no business) or too high (which could result in an acquisition
at an economically  unattractive  price). Many of the Company's  competitors are
larger and have greater  financial  resources than the Company,  and thus may be
better  able than the  Company to pursue  business  opportunities  or to survive
periods of industry consolidation.

         MORTGAGE-RELATED   SECURITIES.   Until  recently  the  competition  for
subordinate  interests in mortgage-related  securities was intense and dominated
by a relatively few large entities, including Criimi Mae, Inc. Other significant
purchasers of these  securities from time to time have included General Electric
Capital  Corporation,  First  Chicago  Commercial  Assets,  Wilshire Real Estate
Investment Trust,  Amresco,  Inc., Clarion Capital Corp. and Anthracite Capital,
Inc. Recent  volatility in the U.S. and foreign stock markets in general and the
market for high-risk debt securities in particular has  significantly  decreased
the number of entities  which are willing to purchase  subordinate  interests at
current  prices  and  resulted  in  Criimi  Mae,  Inc.  filing  for  bankruptcy.
Currently,  the Company is unable to predict the market for such  securities  in
the  future or the nature of any  competition  which it may  encounter  for such
securities in the event that it resumes investment activities.

         REAL ESTATE. The markets in which the Company invests in commercial and
multi-family real estate are located nationwide and characterized by competitive
factors that vary based upon the type of real estate and geographic  region.  In
general,  in periods of increasing  real estate values the market for commercial
and multi-family real estate is highly  competitive.  The Company's  competitors
for  investments in real estate include  Goldman  Sach's  Whitehall  Street Real
Estate Funds, Cargill Financial Services,  Colony Capital Management,  Lone Star
Financial and other REITs, insurance companies and institutional lenders.

         COMMERCIAL AND MULTI-FAMILY  LENDING  ACTIVITIES.  The markets in which
the Company conducts commercial and multi-family  lending activities are located
nationwide and  characterized  by  competitive  factors that vary based upon the
type of loan  product and  geographic  region.  The  Company's  competitors  for
commercial and multi-family loans include commercial banks, thrift institutions,
insurance companies, finance companies, asset-based lenders and other REITs.

ITEM 2.  PROPERTIES

         The Company  does not maintain an office.  It relies on the  facilities
provided by its Manager,  OCC. For information regarding real estate acquired by
the  Company  for  investment,  see  "Management's  Discussion  and  Analysis of
Financial  Condition  and  Results  of  Operations  -  Comparison  of  Financial
Condition at December 31, 1998 and 1997 - Investment  in Real Estate" under Item
7.

ITEM 3.  LEGAL PROCEEDINGS

         Neither the Company nor the Operating Partnership is currently involved
in any material  litigation  nor, to the  Company's  knowledge,  is any material
litigation   currently   threatened   against  the  Company  or  the   Operating
Partnership.

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

         None.

                                       19
<PAGE>

                                     PART II

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

PRICE RANGE OF THE COMMON STOCK

         The Common Stock began  trading on the Nasdaq Stock  Market's  National
Market  ("NASDAQ") on May 14, 1997 under the symbol "OAIC".  On May 1, 1998, the
Common  Stock  began  trading  on the New York Stock  Exchange  under the symbol
"OAC." Upon  effectiveness of the NYSE listing,  the Company delisted its common
stock from NASDAQ.  The following table sets forth for the indicated periods the
high and low bid prices for the common stock, as traded on each market.

<TABLE>
<CAPTION>

                                                        1998                           1997
                                             -------------------------     -------------------------
                                                HIGH            LOW            HIGH           LOW
                                             ---------      ----------     ----------     ----------
<S>                                              <C>             <C>            <C>           <C>   
       First quarter .....................   $  21.000      $   16.750     $      N/A     $      N/A
       Second quarter ....................      18.875          15.875         20.125         17.875
       Third quarter......................      17.000           6.125         24.875         19.750
       Fourth quarter.....................       6.938           3.125         24.000         17.500

</TABLE>

       At the close of business on March 9, 1999,  the Company's  Common Stock
price was $4.187.

NUMBER OF HOLDERS OF COMMON STOCK

         At March 9, 1999,  18,965,000  shares of Common Stock were  outstanding
and held by  approximately  87  holders of record,  which does not  reflect  the
number of beneficial  owners of the Common Stock. The following table sets forth
the amount of cash  dividends  declared on the Common  Stock  during the periods
indicated.


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

         First quarter................................    $   0.25     $     --
         Second quarter ..............................        0.49         0.10
         Third quarter................................        0.44         0.24
         Fourth quarter...............................          --         0.39


(1)  Includes June 1998 special dividend of $0.08 per share  attributable to the
     Company's remaining undistributed 1997 taxable income.

(2)  The  Board  of  Directors  has  deferred  declaration  and  payment  of the
     Company's  final  1998  dividend,  which is  expected  to range  from $14.6
     million,  or $0.77 per share,  to $16.1  million,  or $0.85 per share.  The
     Board  expects  to pay this  dividend  in 1999,  although  there  can be no
     assurance as to whether or when that dividend will be paid.

ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

         The following table presents  selected  consolidated  financial data of
the Company at the dates and for the periods  indicated.  The  selected  balance
sheet data at December 31, 1998 and 1997, and the  operations  data for the year
ended  December  31, 1998 and for the period May 14, 1997 to December  31, 1997,
have  been  derived  from  the  consolidated  financial  statements  audited  by


                                       20
<PAGE>

PricewaterhouseCoopers  LLP,  independent  certified  public  accountants.   The
selected consolidated  financial data should be read in conjunction with, and is
qualified in its entirety by reference to, the  information in the  consolidated
financial statements and related notes set forth elsewhere herein.

<TABLE>
<CAPTION>

                                                                         ------------     ------------
(Dollars in Thousands, except share data)                                    1998              1997
                                                                         ------------     ------------
<S>                                                                      <C>              <C>         
OPERATIONS DATA:
     Net interest income .............................................   $     34,789     $     13,462
     Real estate income, net .........................................          1,140            1,494
     Expenses ........................................................         13,317            3,155
     Loss on securities, derivatives and real estate .................        (86,267)              --
     Extraordinary gain on repurchase of debt ........................            615               --
     Minority interest in net loss (income) of consolidated subsidiary          4,855               (9)
                                                                         ------------     ------------
       Net (loss) income .............................................   $    (58,186)    $     11,792

COMMON STOCK DATA:
     Earnings (loss) per share:
       Basic .........................................................   $      (3.07)    $       0.62
       Diluted .......................................................   $      (3.07)    $       0.60

     Weighted average common shares outstanding:
       Basic .........................................................     18,965,000       19,108,789
       Diluted .......................................................     18,965,000       19,564,770
     Book value per share ............................................   $      11.66     $      14.30
     Cash dividends per share ........................................   $       1.18     $       0.73

BALANCE SHEET DATA:
   Total assets ......................................................   $    888,326     $    288,003
   Cash and cash equivalents .........................................         53,365           48,677
   Securities available for sale .....................................        351,154          146,027
   Commercial and multi-family loans, net ............................         65,283            9,481
   Residential loans, net ............................................          8,058            6,350
   Discount loan portfolio, net ......................................          5,618           26,979
   Investment in real estate, net ....................................        208,059           45,430
   Minority interest .................................................         23,914            2,942
   Securities sold under agreements to repurchase ....................        138,612               --
   Obligations outstanding under line of credit ......................         34,472               --
   Obligations outstanding under line of credit - real estate ........        142,557               --
   11.5% Redeemable Notes due 2005 ...................................        143,000               --
   Shareholders' equity ..............................................        221,176          271,258

SELECTED OTHER DATA AND RATIOS:
   Average assets ....................................................   $    708,190     $    289,215
   Average equity ....................................................        268,966          284,260
   Return on average assets ..........................................          (8.22)%           6.56%
   Return on average equity ..........................................         (21.63)%           6.67%
   Net interest spread ...............................................           3.21%            8.56%
   Net interest margin ...............................................           6.49%            8.56%
</TABLE>

                                       21
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

         The  following  discussion  of  the  Company's  consolidated  financial
condition,  results from operations,  and capital resources and liquidity should
be read in  conjunction  with the  Consolidated  Financial  Information  and the
Consolidated Financial Statements and related notes included elsewhere herein.

GENERAL

         The  Company  reported  a net loss of $58.2  million or $3.07 per fully
diluted share for the year ended December 31, 1998.  These losses were primarily
attributable  to:  (i)  $65.1  million  of losses on  subordinate  and  residual
interests in mortgage-related  securities and derivatives,  which were adversely
affected by  increased  prepayments  of the  underlying  mortgage  loans and the
substantial  volatility  in U.S. and foreign stock markets in the second half of
1998,  which has  resulted in widening  mortgage  spreads and  declining  market
liquidity  and (ii) $17.1  million of losses  incurred  in  connection  with the
Company's  AAA-rated  portfolio  of agency  interest  only  ("IO")  and  inverse
floating  rate  interest  only  ("Inverse   IO")  classes  of   mortgage-related
securities backed by single family residential loans (the "IO Portfolio"), which
were adversely  affected in the first quarter of 1998 by a projected increase in
prepayments  of the  underlying  mortgages  in  response to a decrease in market
interest  rates.  Moreover,  as a result of these  conditions,  in recent months
there has been a general "flight to quality" by investors,  with the result that
the market for the subordinate and residual mortgage-related securities has been
substantially  reduced or eliminated.  These factors have adversely affected the
operations  and  financial  condition  of numerous  companies  in the  financial
service, REIT and mortgage-backed security sectors, including the Company.

         As a result of the foregoing developments,  particularly as they relate
to the  Company's  subordinate  and residual  mortgage-related  securities,  the
Company  has been  receiving  requests  from its  lenders  to pledge  additional
collateral or post additional cash margins  (referred to herein  collectively as
"collateral")  pursuant to the terms of its loan  agreements,  which it has been
able to meet as of the date  hereof.  The  Company  has  decided  that,  for the
foreseeable  future,  it does not plan to acquire any additional  assets or fund
any additional loans (beyond those which are currently  committed),  and it will
work to accelerate  the  stabilization  of its existing  assets and increase its
overall liquidity  position.  As a result, the Company has curtailed each of its
business  lines,  which  include the  acquisition  of  subordinate  and residual
interests   in   residential   and   commercial   mortgage-related   securities,
underperforming  real estate and  residential  and commercial real estate loans,
including construction and renovation loans.

PROPOSED CHANGE IN REIT STATUS

         On December 21, 1998, the Company announced that its Board of Directors
had approved a proposal to terminate  the Company's  status as a REIT  effective
for calendar  1999.  The  proposal,  which  requires  amendment of the Company's
Articles  of  Incorporation,  is  subject  to  shareholder  approval.  The Board
currently  anticipates  that this  proposal  will be  considered  at the  Annual
Meeting of  Shareholders  of the Company  which is  scheduled  to be held in May
1999.  If  approved,  the Company will be treated as a general  corporation  for
federal,  state and local tax purposes and will be subject to federal, state and
local income tax on its taxable  income.  In addition,  the Company would not be
eligible to re-elect REIT status until 2004.

         The Board of  Directors  action is  motivated  by the desire to enhance
shareholder  value.  Unlike  general  corporations,  REITs are penalized for not
distributing  at least 95% of  taxable  income to their  shareholders,  although
general  corporations  do  pay  corporate  income  tax  on  taxable  income.  By
eliminating the dividend  requirement,  retained earnings can be used to enhance
liquidity,  improve  shareholders'  equity and  facilitate the transition of the
Company to a different strategy.

         Currently,  it is not  anticipated  that the proposal to terminate  the
Company's  status as a REIT,  if adopted  by  shareholders,  will  result in any
material  change in the Company's  current plans to cease to acquire  additional
assets  or fund  additional  loans or, in the  event  that the  Company  resumes
investment  activities,  in the Company's investment guidelines and practices or
corporate  structure,  although  there can be no assurance that this will be the
case.

         Consistent with the Company's focus on enhancing  shareholder value and
improving liquidity, the Board of Directors has deferred declaration and payment
of the  Company's  final 1998  dividend,  which is  expected to range from $14.6
million,  or $0.77 per share,  to $16.1 million,  or $0.85 per share.  The Board
expects to pay this dividend in 1999,  although  there can be no assurance as to
whether or when that dividend will be paid.

                                       22
<PAGE>

         Assuming  that the Company's  status as a REIT will  terminate for 1999
and that the Company will be taxed as a general  corporation for 1999 and future
years,  the Company will be subject to federal  income  taxes on taxable  income
earned during 1999 and  thereafter and will no longer be entitled to a deduction
for any dividends  paid to  shareholders.  In addition,  the Company will not be
subject to the distribution  rules applicable to REITs.  Corporate  shareholders
that satisfy certain holding period requirements will be entitled to a dividends
received deduction on dividends paid out of current or accumulated  earnings and
profits. The Company, however, does not currently anticipate paying dividends on
its common stock following  termination of its REIT status (except to the extent
necessary to meet the remainder of the REIT distribution  requirement for 1998).
Any  distributions  on the Common Stock will be treated as dividends for federal
income tax  purposes  to the  extent of the  Company's  current  or  accumulated
earnings and profits and, as such, will be eligible for any applicable dividends
received  deduction for corporate  shareholders  (except to the extent that such
dividends  constitute  all or a portion of the remainder of the  Company's  REIT
distribution  requirement  for 1998) and will be  treated as  ordinary  dividend
income for other shareholders.

         The Company  anticipates  that as a result of the deferral of its final
1998  dividend it will be subject to a 4%  non-deductible  excise tax imposed by
Section  4981 of the Code on REITs that fail to make  certain  distributions  by
calendar  year-end.  Pursuant to Section 4981 of the Code, if the Company should
fail to distribute  during each  calendar year (or, in the case of  distribution
with  declaration  and record  dates  falling  in the last  three  months of the
calendar year, by the end of January  immediately  following such year) at least
the sum of: (i) 85% of the Company's ordinary income for the calendar year, (ii)
95% of the Company's capital gain net income for the calendar year and (iii) any
undistributed taxable income from prior periods, the Company would be subject to
a 4% nondeductible  excise tax on the excess of such required  distribution over
the amounts  actually  distributed.  The Company  currently  estimates  that the
deferral of its quarterly  dividend  will result in the  incurrence of an excise
tax liability under Section 4981 of the Code of approximately $0.4 million.

COMPARISON  OF  OPERATING  RESULTS FOR THE YEAR ENDED  DECEMBER 31, 1998 AND THE
PERIOD MAY 14, 1997 TO DECEMBER 31, 1997

         GENERAL.  Net loss for the  year  ended  December  31,  1998 was  $58.2
million,  a decrease of $70.0  million,  compared to net income of $11.8 million
for the period  ended  December  31, 1997.  This  decrease was due  primarily to
impairment  losses on securities,  derivatives  and real estate of $86.3 million
and an increase in other expenses of $10.2 million,  which were partially offset
by an increase in net interest income of $22.0 million.

        INTEREST  INCOME.  Interest  income  increased  $49.5  million  to $63.0
million for the year ended  December 31, 1998 from $13.5  million for the period
May 14, 1997 to December 31, 1997. This increase was primarily due to additional
interest of $16.6 million on loans and $37.1 million on the securities available
for sale portfolio,  which was partially offset by a decrease of $4.3 million on
repurchase  agreements and interest-bearing  deposits.  The increase in interest
resulted from  additional  investments in interest  earning  assets.  Securities
available for sale increased from an average balance of $101.0 million to $396.9
million,  residential loans increased from an average balance of $3.7 million to
$95.4 million and commercial and  multi-family  loans  increased from an average
balance of $6.6  million to $59.4  million.  The average  balance on  repurchase
agreements and  interest-bearing  deposits decreased from $101.7 million in 1997
to $25.1 million in 1998.

        INTEREST  EXPENSE.  The  Company had no interest  expense  during  1997,
compared  to $27.5  million  during  1998.  The  Company  was  newly-formed  and
unleveraged  during 1997 (OAC  commenced  operations on May 14, 1997).  Interest
expense does not include the expense  associated with the borrowings  secured by
investments in real estate,  which is included in determining  the operations of
the Company's real estate. See " -Real Estate Income, Net" below.

         NET INTEREST  INCOME.  Net interest  income  represents  the difference
between  income on  interest-earning  assets  and  expense  on  interest-bearing
liabilities.   Net  interest   income  depends  upon  the  relative   amount  of
interest-earning assets and interest-bearing  liabilities, and the interest rate
earned or paid on them.

         The  following  table sets forth  certain  information  relating to the
Company's  consolidated  statements  of  financial  condition  and  consolidated
statement of  operations  form the periods  indicated,  and reflects the average
yield on assets and average cost of liabilities for the periods indicated.  Such
yields and costs are  derived  by  dividing  income or  expense  by the  average
balance of assets or liabilities,  respectively,  for the periods shown. Average
balances  are  derived  from  average  daily   balances.   The  yields   include
amortization of fees which are considered adjustments to yields.

                                       23
<PAGE>

<TABLE>
<CAPTION>

                                                                         For the Three Months Ended December 31,
                                                     -------------------------------------------------------------------------
(Dollars In Thousands)                                                1998                                    1997
                                                     ---------------------------------    ------------------------------------
                                                     Average               Annualized     Average                  Annualized
                                                     Balance    Interest   Yield/Rates    Balance       Interest   Yield/Rates
                                                     -------    --------   -----------    -------       --------   -----------
<S>                                                  <C>        <C>            <C>       <C>            <C>            <C>  
Interest-earning assets:
   Repurchase agreements and interest-bearing
     deposits .....................................  $ 25,176   $    203       3.16%     $  101,715     $  1,388       5.41%
   Securities available for sale ..................   396,965     13,456      13.56         101,047        2,866      11.25
   Commercial and multi-family loan portfolio, net.    59,408      1,950      13.13           6,637          245      14.65
   Match funded residential loans, net ............    93,929      1,915       8.16              --           --         --
   Residential loan portfolio, net ................    95,444      1,949       8.17           3,671           60       6.48
   Discount loans, net ............................     7,752        397      20.49          26,636          908      13.52
                                                     --------   --------      -----      ----------     --------      ----- 
     Total interest-earning assets ................  $679,214   $ 19,870      11.70%     $  239,706     $  5,467       9.05%
                                                     --------   --------      -----      ----------     --------      ----- 
Interest-bearing liabilities:
   Securities sold under agreements to repurchase..  $159,001   $  3,361       8.46%     $       --     $     --         --%
   Obligations outstanding under lines of credit ..    96,902      1,687       6.96              --           --         --
   11.5% Redeemable Notes due 2005 ................   143,000      4,111      11.50              --           --         --
   Bonds match funded .............................    91,372      1,531       6.70              --           --         --
                                                     --------   --------      -----      ----------     --------      -----
     Total interest-bearing liabilities ...........  $490,275   $ 10,690       8.72%     $       --     $     --         --%
                                                     --------   --------      -----      ----------     --------      -----

Net interest income/spread (1).....................             $  9,180       2.98%                    $  5,467       9.05%
                                                                ========                                ========
Net interest margin (2)............................                            5.41%                                   9.05%

                                                             For the Year Ended              For the Period May 14, 1997 to
                                                             December 31, 1998                      December 31, 1997
                                                     ---------------------------------    ------------------------------------
                                                     Average               Annualized     Average                  Annualized
                                                     Balance    Interest   Yield/Rates    Balance       Interest   Yield/Rates
                                                     -------    --------   -----------    -------       --------   -----------
<S>                                                  <C>        <C>            <C>       <C>            <C>            <C>  
Interest-earning assets:
   Repurchase agreements and interest-bearing
     deposits .....................................  $ 26,209   $  1,213       4.63%     $  155,757     $  5,539       5.72%
   Securities available for trading ...............    21,757        107       0.49              --           --         --
   Securities available for sale ..................   312,433     43,446      13.91          76,423        6,363      13.39
   Commercial and multi-family loan portfolio, net.    43,862      5,736      13.08           2,691          245      14.64
   Match funded residential loans, net ............    23,675      1,915       8.09              --           --         --
   Residential loan portfolio, net ................   104,494      8,424       8.06           1,604           66       6.62
   Discount loans, net ............................    13,802      2,117      15.34          16,453        1,249      12.20
                                                     --------   --------      -----      ----------     --------      -----
     Total interest-earning assets ................  $546,232   $ 62,958      11.53%     $  252,928     $ 13,462       8.56%
                                                     --------   --------      -----      ----------     --------      -----

Interest-bearing liabilities:
   Securities sold under agreements to repurchase..  $146,533   $ 11,683       7.97%     $       --     $     --         --%
   Obligations outstanding under lines of credit...    93,425      6,516       6.97              --           --         --
   11.5% Redeemable Notes due 2005 ................    67,814      7,799      11.50              --           --         --
   Bonds match funded .............................    23,031      1,530       6.65              --           --         --
                                                     --------   --------      -----      ----------     --------      -----
     Total interest-bearing liabilities ...........  $330,803   $ 27,528       8.32%     $       --     $     --         --%
                                                     --------   --------      -----      ----------     --------      -----

Net interest income/spread (1).....................             $ 35,430       3.21%                    $ 13,462       8.56%
                                                                ========                                ========
Net interest margin (2)............................                            6.49%                                   8.56%

</TABLE>

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

(2)  Net interest income divided by average interest-earning assets.

         PROVISION   FOR  LOAN  LOSSES.   The  allowance  for  loan  losses  was
established  in 1998. The provision for loan losses during 1998 amounted to $0.6
million,   which  reflected  the  Company's   evaluation  of  current   economic
conditions,  a credit review of loans,  an analysis of specific loan  situations
and the size and composition of the commercial and multi-family  loan portfolio.
At December  31, 1997,  the Company had not  established  an allowance  for loan
losses on the single  family  residential  loan  portfolio or its discount  loan
portfolios.

                                       24
<PAGE>

         REAL ESTATE INCOME, NET. Real estate income, net decreased $0.4 million
to $1.1 million for the year ended  December 31,  1998,  compared to 1997.  This
decrease was primarily due to a $20.5 million increase in rental income,  offset
by a $10.3 million increase in rental operation expense, a $3.4 million increase
in  depreciation  and  amortization  expense,  and a $7.2  million  increase  in
interest expense.  These increases in real estate operating income and expenses,
compared to 1997, were largely the result of an increase in OAC's  investment in
real  estate,  net of $208.1  million at December  31,  1998,  compared to $45.4
million at December 31, 1997, which was not leveraged.  Real estate income,  net
does not include  writedowns  in the value of real estate  which are included in
losses on securities, derivatives and real estate, as discussed below.

         OTHER EXPENSES. Other expenses increased $10.2 million to $13.3 million
for the year ended  December  31,  1998,  compared to 1997.  This  increase  was
largely  due to a $4.1  million  increase in  management  fees,  a $5.3  million
increase in other expenses (which consisted generally of servicing,  accounting,
audit,  legal, excise tax, and bond amortization  expenses),  and a $1.5 million
increase in due  diligence  expense.  These  increases  in other  expenses  were
largely the result of OAC becoming  fully  invested and leveraging its assets in
1998. The management fees payable by the Company to OCC totaled $5.9 million for
the year ended December 31, 1998.

         LOSSES ON  SECURITIES,  DERIVATIVES  AND REAL ESTATE.  Due primarily to
accelerated  prepayment speeds,  widening mortgage spreads, and declining market
liquidity,  all of which adversely affected the Company's  securities  available
for sale and  derivatives,  OAC  recognized a $86.3  million  charge to earnings
during 1998. This charge was comprised  primarily of a $79.7 million  write-down
of the  securities  available  for  sale  portfolio  (subordinate  and  residual
mortgage-backed  securities),  a loss of $2.6 million on derivatives  and a $3.9
million charge on a property located in Halifax, Nova Scotia, as discussed under
"Comparison of Financial Condition at December 31, 1998 and 1997 - Investment in
Real Estate" below.

         MINORITY  INTEREST  IN NET LOSS OF  CONSOLIDATED  SUBSIDIARY.  Minority
interest in net loss of consolidated  subsidiary  increased $4.9 million for the
year ended  December 31, 1998,  which  represented  the portion of the Operating
Partnership's  loss  attributed  to the limited  partnership  interest  owned by
IMIHC, an affiliate of OCC. OAC has a 91.3% ownership  interest in the Operating
Partnership.

         EXTRAORDINARY  GAIN ON REPURCHASE  OF DEBT. On September 30, 1998,  OAC
repurchased  in the open market $7.0 million of its $150.0  million  outstanding
11.5% Redeemable Notes due 2005. This resulted in OAC realizing an extraordinary
gain of $0.6 million during the third quarter of 1998. At December 31, 1998, the
outstanding balance of the Redeemable Notes was $143.0 million.

                                       25
<PAGE>

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND 1997

         The following table sets forth  information  relating to certain of the
Company's assets and liabilities at the dates indicated:

<TABLE>
<CAPTION>

                                                                             December 31,        December 31,      Increase
                                                                                 1998                1997          (Decrease)
                                                                           ---------------      --------------   --------------
ASSETS:
<S>                                                                        <C>                  <C>              <C>           
    Cash and amounts due from depository institutions..................    $     3,484,929      $      331,047   $    3,153,882
    Interest-bearing deposits..........................................         49,880,276          48,346,076        1,534,200
    Securities available for sale, at fair value.......................        351,153,971         146,026,907      205,127,064
    Commercial and multi-family loan portfolio, net....................         65,282,965           9,481,436       55,801,529
    Residential loan portfolio, net....................................          8,058,445           6,350,043        1,708,402
    Match funded residential loans, net................................        173,609,873                  --      173,609,873
    Discount loan portfolio, net.......................................          5,618,022          26,978,888     (21,360,866)
    Investment in real estate, net.....................................        208,058,721          45,430,039      162,628,682
    Principal and interest receivable..................................          7,475,795           2,518,272        4,957,523
    Deposits on pending asset acquisitions.............................                 --           1,000,000      (1,000,000)
    Other assets.......................................................         15,702,816           1,540,633       14,162,183
                                                                           ---------------      --------------   --------------
       Total assets....................................................    $   888,325,813      $  288,003,341   $  600,322,472
                                                                           ===============      ==============   ==============
LIABILITIES:
    Securities sold under agreements to repurchase.....................    $   138,611,824      $           --   $  138,611,824
    Obligations outstanding under lines of credit......................         34,472,404                  --       34,472,404
    Obligations outstanding under lines of credit-
      secured by real estate ..........................................        142,556,880                  --      142,556,880
    11.5% Redeemable Notes due 2005....................................        143,000,000                  --      143,000,000
    Bonds - match funded loan agreement................................        163,403,966                  --      163,403,966
    Dividends and distributions payable................................                 --           7,458,750      (7,458,750)
    Accrued expenses, payables and other liabilities...................         21,190,288           6,344,783       14,845,505
                                                                           ---------------      --------------   --------------
       Total liabilities...............................................        643,235,362          13,803,533      629,431,829
                                                                           ---------------      --------------   --------------
Minority interest .....................................................         23,914,058           2,941,541       20,972,517
                                                                           ---------------      --------------   --------------

Shareholders' equity:..................................................    $   221,176,393      $  271,258,267   $ (50,081,874)
                                                                           ---------------      --------------   --------------

    Total liabilities and shareholders' equity.........................    $   888,325,813      $  288,003,341   $  600,322,472
                                                                           ===============      ==============   ==============
</TABLE>

         SECURITIES  AVAILABLE FOR SALE. The Company's  investment in securities
available  for sale at December 31, 1998  increased by $205.1  million to $351.2
million from $146.0 million at December 31, 1997.

At December 31, 1998, OAC's  securities  available for sale portfolio was $351.2
million and consisted of:

o        Non-investment grade and unrated subordinate commercial mortgage-backed
         securities  having an amortized cost of $115.7 million and a fair value
         of $117.1 million,
o        Unrated  residential  subprime  residuals  having an amortized  cost of
         $209.0  million  and a fair  value of  $218.7  million,  and 
o        Unrated subordinate  residential  mortgage-backed  securities having an
         amortized cost of $15.4 million and a fair value of $15.4 million.

OAC's unrated subprime residual portfolio of $218.7 million consisted of:

o        $110.0  million of seasoned  residuals  (securitized  between  1994 and
         1997)  with  overcollateralization  reserves  funded  at  approximately
         $122.5 million, and
o        $108.7  million  of  unseasoned  residuals  (securitized  in 1998) with
         overcollateralization reserves funded at approximately $26.6 million.

                                       26
<PAGE>

         The following  table sets forth the fair value and  composition  of the
Company's securities available for sale at the dates indicated.

<TABLE>
<CAPTION>


                                                                          December 31,
                                                                  ----------------------------
Mortgage-related  securities:                                         1998             1997
                                                                  ----------         ---------
   Single family residential:                                        (Dollars In Thousands)
     Interest only:                                                                
<S>                                                                   <C>                <C>  
       AAA-rated interest-only............................        $       --        $      730
       FHLMC..............................................                --            21,178
       FNMA...............................................                --            22,573
     Subordinates.........................................            15,390             9,444
     Subprime residuals...................................           218,724                --
                                                                  ----------        ----------
         Total single family residential..................        $  234,114        $   53,925
                                                                  ----------         ---------
   Multi-family residential and commercial:
     Interest only:                                                                
       AAA-rated interest-only............................        $      441        $      866
       A-rated interest-only..............................               222               480
       Non-rated interest-only ...........................             3,135             4,803
     Non-rated principal-only.............................               276               960
     Subordinates.........................................           112,966            84,993
                                                                  ----------        ----------
       Total multi-family residential and commercial......           117,040            92,102
                                                                  ----------        ----------
       Total mortgage-related securities..................        $  351,154        $  146,027
                                                                  ==========        ==========
</TABLE>

         The following tables detail the Company's securities available for sale
portfolio  at December 31, 1998,  and its  estimates of expected  yields on such
securities,  taking  into  consideration  expected  prepayment  and  loss  rates
together with other factors. Included in the tables are the following terms:

         ACTUAL  DELINQUENCY - Represents the total unpaid principal  balance of
loans more than 30 days  delinquent at the indicated date as a percentage of the
unpaid principal balance of the collateral at such date.

         ACTUAL  LIFE-TO-DATE  CPR - The  Constant  Prepayment  Rate  is used to
measure the average prepayment rate for the underlying mortgage pool(s) over the
period of time  lapsed  since the  issuance of the  securities  through the date
indicated and is calculated as follows:

<TABLE>
<CAPTION>

<S>                                          <C>                                               <C>
         Actual Life-to-Date CPR = 100 x   [(1 -  Final  Aggregate  Balance actual      )    (     12         )  ]
                                                  -------------------------------------       ---------------
                                                  Final  Aggregate  Balance scheduled         months in period
</TABLE>

         ACTUAL LIFE-TO-DATE LOSSES - Represents  cumulative losses expressed as
a percentage of the unpaid  balance of the original  collateral at the indicated
date.

         CLASS  DESIGNATION  LETTER - Refers to the credit rating  designated by
the rating agency for each  securitization  transaction.  Classes designated "A"
have a superior claim on payment to those rated "B", which are superior to those
rated "C." Additionally,  multiple letters have a superior claim to designations
with fewer letters.  Thus, for example, "BBB" is superior to "BB," which in turn
is superior  to "B." The lower class  designations  in any  securitization  will
receive  interest  payments  subsequent  to senior  classes and will  experience
losses prior to any senior class. The lowest potential class  designation is not
rated  ("NR")  which,  if included  in a  securitization,  will  always  receive
interest  last and  experience  losses first.  IO securities  receive the excess
interest  remaining  after the  interest  payments  have been made on all senior
classes  of bonds  based on their  respective  principal  balances.  There is no
principal associated with IO securities and they are considered  liquidated when
the  particular  class  they  are  contractually  tied to is paid  down to zero.
Principal only ("PO")  securities  receive excess  principal  payments after the
principal  has  been  made on all  classes  of bonds  based on their  respective
payment schedules.  There is no interest  associated with PO securities and they
are sold at a  discount.  The  return on PO  securities  is earned  through  the
receipt of the payments and the collection of the discounted amount.

                                       27
<PAGE>

         CLASS SIZE -  Represents  the  percentage  size of a  particular  class
relative to the total outstanding balance of all classes.

         COLLATERAL BALANCE - represents,  in the case of residuals,  the unpaid
principal  balance of the  collateral of the entire  securities at the indicated
date and, in the case of subordinates,  the outstanding principal balance of the
entire securitization at the indicated date.

         ISSUE DATE - Represents the date on which the indicated securities were
issued.

         OVER-COLLATERIZATION  LEVEL - For  residual  interests  in  residential
mortgage-backed  securities,  over-collaterization ("OC") is the amount by which
the  collateral  balance  exceeds the sum of the bond principal  amounts.  OC is
achieved  by  applying  monthly  a  portion  of  the  interest  payments  of the
underlying  mortgages  toward the reduction of the class  certificate  principal
amounts,  causing them to amortize more rapidly than the aggregate loan balance.
The OC  percentage,  expressed as a  percentage  of the  outstanding  collateral
balance,   represents  the  first  tier  of  loss  protection  afforded  to  the
non-residual   holders.   The  OC  percentage   also   determines   whether  the
over-collaterization  target has been satisfied as of a specific date, such that
cash flows to the residual  holder are warranted.  To the extent not consumed by
losses on more highly  rated  bonds,  OC is remitted  to the  residual  holders.
Reserve funds ("RF") are actual cash  reserves  expressed as a percentage of the
original collateral balance at issuance.

         RATING - Represents  the rating,  if any, on the security or securities
by the indicated rating agencies.

         SECURITIZATION - Series description.

         SECURITY  -  Represents  the name of the  class  associated  with  each
securitization held by the Company.  This has no relationship to a formal rating
but  is  for  identification   purposes  (although  the  names  are  usually  in
alphabetical or numeric order from the highest rated to the lowest rated).

         SUBORDINATION   LEVEL  -  Represents   the  credit   support  for  each
mortgage-backed security by indicating the percentage of outstanding bonds whose
right  to  receive  payment  is  subordinate  to the  referenced  security.  The
subordinate classes must experience a complete loss before any additional losses
would affect the particular referenced security.

         WEIGHTED AVERAGE DSCR - Represents debt service  coverage ratio,  which
is calculated by dividing cash flow available for debt service by debt service.

         WEIGHTED  AVERAGE LTV-  Represents  the ratio of the loan amount to the
value of the underlying collateral.

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

                                       28
<PAGE>

         The following  tables  details the Company's  securities  available for
sale portfolio at December 31, 1998:

<TABLE>
<CAPTION>
                                                                                                   OVER
                                              CLASS                                           COLLATERIZATION
                                    ISSUE   DESIGNATION     RATING      COLLATERAL   BALANCE      LEVEL AT      PRODUCT TYPE AT
 SECURITIZATION        SECURITY     DATE      LETTER       AGENCIES      ISSUANCE    12/31/98     12/31/98         12/31/98
 ------------------  ------------  -------   ----------  ------------   ----------  ---------- --------------   ---------------
<S>                  <C>            <C>          <C>     <C>             <C>        <C>             <C>         <C>
 RESIDENTIAL MORTGAGE
 BACKED SECURITIES                                                     (Dollars In Thousands)

 RESIDUALS:
 SASCO 1998-2(1)          X         Jan-98       NR       S&P, Fitch     $600,052   $ 480,920       1.09% OC    24% Fixed, 69% 
                                                                                                                2/28 ARM
 SASCO 1998-3(1)          X         Mar-98       NR       S&P, Fitch      769,671     643,182       2.09% OC    9% Fixed, 74%
                                                                                                                2/28 ARM
 MLMI 1998-FF1(2)         X         Jun-98       NR       S&P, Fitch      198,155     181,344       1.64% OC    18% 1/29 ARM, 79%
                                                                                                                2/28 ARM
 PANAM 1997-1(3)          X         Dec-97       NR      S&P, Moody's     113,544      93,671       4.12% OC    31% 6mo ARM, 62% 
                    Prepay Pen.                                                                                 2/28 ARM
 LHELT 1998-2(4)          X         Jun-98       NR     Moody's, Fitch    209,225     184,986       2.67% OC    40% Fixed, 37% 
                                                                                                                2/28 ARM
 EQUICON 1994-2(5)    B Fix, B-2    Oct-94       NR      S&P, Moody's,     78,846      26,712       5.59% OC    100% Fixed
                                                             Fitch
                     QS Fix, QS-2                NR
                     B Var., B-2                 NR                        32,306       7,580      14.64% OC    100% 6mo ARM
 EQUICON 1995-1(5)    B Fix, B-2    May-95       NR      S&P, Moody's,     70,024      21,500      15.22% OC    100% Fixed
                                                             Fitch
                     B Var., B-2                 NR                        70,519       8,553      24.19% OC    100% 6mo ARM
 EQUICON 1995-2(5)    B Fix, B-2    Oct-95       NR      S&P, Moody's      79,288      30,654      12.79% OC    100% Fixed
                     B Var., B-2                 NR                        39,667       9,716      17.35% OC    100% 6mo ARM
 ACCESS 1996-1(6)     B Fix, B-2    Feb-96       NR      S&P, Moody's     120,015      48,597       6.53% OC    100% Fixed
                     B Var., B-2                 NR                        55,362      14,074      12.63% OC    100% 6mo ARM
 ACCESS 1996-2(6)      B-I, B-1     May-96       NR      S&P, Moody's     142,259      61,062      11.63% OC    100% Fixed
                     BI-S, BI-S-1                NR
                      B-II, B-1                  NR                        68,345      17,985      10.93% OC    100% ARM
                        BII-S,                   NR
                       BII-S-1
 ACCESS 1996-3(6)      B-I, B-1     Aug-96       NR      S&P, Moody's     107,712      46,796       9.82% OC    100% Fixed
                     BI-S, BI-S-1                NR
                      B-II, B-1                  NR                        99,885      26,757      17.99% OC    100% ARM
                        BII-S,                   NR
                       BII-S-1
 ACCESS 1996-4(6)       B, B-1      Nov-96       NR      S&P, Moody's     239,778      90,794      13.17% OC    49% Fixed, 51% ARM
                      B-S, B-S-1                 NR
 ACCESS 1997-1(6)       B, B-1      Feb-97       NR      S&P, Moody's     276,442     130,539      13.88% OC    56% Fixed, 44% ARM
                      B-S, B-S-1                 NR
 ACCESS 1997-2(6)       B, B-1      May-97       NR      S&P, Moody's     185,197      95,395       8.74% OC    50% Fixed, 50% ARM
                      B-S, B-S-1                 NR
 ACCESS 1997-3(6)       B, B-1      Oct-97       NR      S&P, Moody's     199,884     116,848       5.50% OC    45% Fixed, 55% ARM
                      B-S, B-S-1                 NR

 OCWEN 98 - OAC-1        N/A        Nov-98       NR      S&P, Moody's     182,178     172,013       4.97% OC    22% Fixed, 78% ARM

 CMR1(8)            Deferred Comp   Apr-96       NR        S&P, Duff       47,802(9)   27,632(10)   7.62% RF    100% Amortizing

 CMR2(8)            Deferred Comp   Nov-96       NR    S&P, Duff, Fitch   106,692(9)   60,085(10)   8.02% RF    90.5% Amort 9.5% IO 
                                                                                                                mortgages
 CMR3(8)            Deferred Comp   Nov-96       NR    S&P, Duff, Fitch   195,610(9)  112,231(10)  11.18% RF    74.35% Amort 25.7% 
                                                                                                                IO mortgages
 CMR4(8)            Deferred Comp   Feb-97       NR    S&P, Duff, Fitch   108,630(9)   74,247(10)   5.32% RF    90.3% Amort 9.7% IO 
                                                                                                                mortgages
 CMR6(8)            Deferred Comp   May-97       NR    S&P, Duff, Fitch    91,442(9)   62,935(10)   5.52% RF    95.7% Amort 4.3% IO 
                                                                                                                mortgages
 SUBORDINATES:

 SBMS 1997-HUD1 (11)      B5        Apr-97  B2, n.a.    Moody's, DCR        9,785       9,476       4.70%       94% Fixed
                          B6        Apr-97       NR                        16,998      11,412       N/A
 ORMBS 1998-R1 (12)       B4        Mar-98       NR     Moody's, DCR       32,718      31,656       N/A         94% Fixed
 GECMS 1994-12 (13)       B4        Mar-94       NR    Moody's, Fitch,      2,069       1,564       N/A         100% Fixed
                                                             S&P
</TABLE>

                                       29
<PAGE>
<TABLE>
<CAPTION>

                                        WEIGHTED      WEIGHTED                    ACTUAL        ACTUAL
                                        AVERAGE        AVERAGE     ACTUAL       LIFE TO DATE  LIFE TO DATE       YIELD TO  
                                     INTEREST RATE     LTV AT:   DELINQUENCY AT:   CPR AT:     LOSSES AT:       MATURITY AT:
SECURITIZATION           SECURITY     AT: 12/31/98    12/31/98     12/31/98       12/31/98      12/31/98    PURCHASE  12/31/98
--------------           --------     ------------    --------   -------------  -----------   ------------  --------  --------
RESIDENTIAL MORTGAGE
BACKED SECURITIES                                                      (Dollars In Thousands)
<S>                         <C>          <C>            <C>         <C>           <C>         <C>            <C>       <C>
RESIDUALS:

SASCO 1998-2                 X           10.17%         74.47%      10.61%        20.90%      $  119         16.00%     7.13%
SASCO 1998-3 (1)             X            9.79          76.07        7.26         20.80           52         17.04      7.54
MLMI 1998-FF1 (2)            X            9.15          76.99        5.99         13.50           46         18.57     14.69
PANAM 1997-1 (3)             X           10.10          75.99       15.09         18.06          129         22.45     13.65
                        Prepay Pen.                                                                          25.69     46.05
LHELT 1998-2 (4)             X           10.05          76.04        7.37         18.70            0         18.55     23.57
EQUICON 1994-2 (5)      B Fix, B-2        9.94          66.18       15.32         33.74          612         18.00     49.27
                       QS Fix, QS-2                                                                                  
                        B Var., B-2      11.10          74.58       32.78         39.27          269         18.00     23.67
EQUICON 1995-1 (5)      B Fix, B-2       12.03          63.15       29.53         30.05          568         18.00     20.98
                        B Var., B-2      11.69          73.59       46.16         34.61          648         18.00     37.88
EQUICON 1995-2 (5)      B Fix, B-2       10.87          69.61       30.68         33.01          516         18.00     34.42
                        B Var., B-2      11.76          72.97       47.05         41.10          338         18.00     53.16
ACCESS 1996-1 (6)       B Fix, B-2       10.86          70.21       30.26         32.61        1,207         18.00     40.96
                        B Var., B-2      11.64          74.89       37.73         42.34          647         18.00     50.46
ACCESS 1996-2 (6)        B-I, B-1        11.01          70.99       29.19         33.36        1,294         18.00     16.57
                       BI-S, BI-S-1                                                                                  
                         B-11, B-1       11.53          74.89       45.82         48.45          401         18.00     21.36
                          BII-S,                                                                                     
                          BII-S-1                                                                                    
ACCESS 1996-3 (6)        B-I, B-1        11.45          74.59       32.25         35.19          731         18.00     19.48
                       BI-S, BI-S-1                                                                                  
                         B-II, B-1       11.98          76.14       43.85         51.72          469         18.00     24.67
                          BII-S,                                                                                     
                          BII-S-1                                                                                    
ACCESS 1996-4 (6)         B, B-1         11.89          73.94       42.48         42.22        1,125         18.00     16.04
                        B-S, B-S-1                                                                                   
ACCESS 1997-1 (6)         B, B-1         11.49          75.45       39.67         41.22        1,898         18.00     16.19
                        B-S, B-S-1                                                                                   
ACCESS 1997-2 (6)         B, B-1         11.38          74.01       35.84         41.76          725         18.00     10.69
                        B-S, B-S-1                                                                                   
ACCESS 1997-3 (6)         B, B-1         11.19          74.77       30.02         40.47          379         18.00     18.12
                        B-S, B-S-1                                                                                   
OCWEN 98-OAC-1 (7)          N/A           8.74          75.95        3.15         30.20            0          N/A        N/A
CMR1 (8)               Deferred Comp     13.46            N/A       36.03         20.09          511         18.00     38.50
CMR2 (8)               Deferred Comp     12.51            N/A       32.09         21.40        1,232         18.00     31.90
CMR3 (8)               Deferred Comp     13.64            N/A       18.31         17.58        1,737         18.00     16.30
CMR4 (8)               Deferred Comp     13.80            N/A       37.13         17.51          620         18.00     21.10
CMR6 (8)               Deferred Comp     13.61            N/A       35.40         19.84          112         18.00     26.10
                                                                                                                     
SUBORDINATES:                                                                                                        

SBMS 1997-HUD1 (11)         B5            9.82         110.54       17.54         13.95        5,172         16.87     18.97
                            B6                                                                               22.86     26.60
ORMBS 1998-R1 (12)          B4            8.98         117.19       30.83          4.45        1,945         13.75     10.17
GECMS 1994-12 (13)          B4            6.83          49.40        0.42          6.60         N/A(14)      19.37     20.50

</TABLE>

                                       30
<PAGE>

ISSUERS:   
(1)  Structured Asset Securities Corp.
(2)  Merrill Lynch Mortgage Investors, Inc.
(3)  Pan American Bank, FSB.
(4)  Lehman Home Equity Loan Trust.
(5)  Equicon Mortgage Loan Trust.
(6)  Access Financial Mortgage Loan Trust.
(7)  Ocwen Residential Mortgage-Backed Securities.
(8)  City Mortgage Receivable.
(9)  Dollar equivalent of amounts in British pounds at the rate of exchange that
     prevailed a the time of issuance.
(10) Dollar  equivalent of amounts in British  pounds at the rate of exchange at
     12/31/98.
(11) Salomon Brothers Mortgage Securities.
(12) Ocwen Mortgage Loan Trust. 
(13) GE Capital Mortgage Services, Inc.
(14) Not available.

<TABLE>
<CAPTION>

                                                                    CLASS                                 SUBORDINATION
                                                                 DESIGNATION        RATING                   LEVEL AT
SECURITIZATION                  SECURITY       ISSUE DATE          LETTER          AGENCIES             ISSUANCE     12/31/98
--------------                  --------       ----------          ------          --------             --------     --------
<S>                               <C>            <C>                 <C>         <C>                      <C>            <C>  
COMMERCIAL MORTGAGE
BACKED SECURITIES

NASC 1996 MD-V  (1)               B-2            Apr-96                B         S&P, Duff, Fitch         0.00%          0.00%
CSFB 1995-AEW1  (2)                E             Oct-95               BB            S&P, Fitch           13.75          27.98
                                  F-1                                  B                                  4.80           9.95
                                  G-1                                 NR                                  0.00           0.00
                                  G-2                                 NR                                  0.00           0.00
MRAC 1996-C2  (3)                  K             Dec-96               B-          Fitch, Moody's          2.50           2.69
                                  L-1                                NR-PO                                0.00           0.00
                                  L-2                                NR-IO                                0.00           0.00
BTC 1997-S1  (4)                  E, F           Dec-97              BB/B           S&P, Fitch           19.00          30.74
                                 Equity                               NR                                  0.00           0.00
DLJ 1993-MF17  (5)                B-2            Nov-93               BB          Moody's, Duff           4.59           5.25
                                  B-3                                  B                                  1.28           1.47
                                  C-1                                 NR                                  0.00           0.00
                                  S-1                               AAA-IO                               32.18          36.83
                                  S-2                                A-IO                                18.02          20.63
MLMCI 1993-M1  (6)                 B             Sep-93               NR           Moody's, S&P           2.00           6.50

</TABLE>

                                       31
<PAGE>

<TABLE>
<CAPTION>
                                                           Actual    Actual
                              Weighted  Weighted            life       life     
                              Average   Average   Actual   to date   to date       Class Size %       Yield to         Collateral
                              DSCR at   LTV at  Delinquency CPR at  losses at      Total as of       Maturity at       Balance at
SECURITIZATION      Security  Issuance  Issuance 12/31/98  12/31/98 12/31/98   Issuance 12/31/98 Purchase 12/31/98 Issuance 12/31/98
--------------      --------  --------  -------- --------- -------- ---------  -------- -------- -------- -------- -------- --------
                                                                (Dollars in thousands)
COMMERCIAL MORTGAGE
BACKED SECURITIES

<S>                    <C>     <C>       <C>       <C>       <C>    <C>           <C>     <C>      <C>      <C>   <C>       <C>     
NASC 1996 MD-V  (1)     B-2    1.69      62.0%     0.0%      0.0%   $        0    4.36%   4.47%    9.90%    9.98% $ 773,693 $755,005
CSFB 1995-AEW1  (2)      E     1.26      71.8%     1.7%      n/a    $  708,282   11.00   22.81     7.93     7.89    288,906  138,731
                        F-1                                                       1.80    3.73     9.75     9.84
                        G-1                                                       4.80    9.95    12.84    12.23
                        G-2                                                       5.72   11.35    14.87    13.97
MRAC 1996-C2  (3)        K     1.36      69.1%     0.8%      n/a    $        0    1.50    1.62    12.10    12.41    512,102  475,011
                        L-1                                                       2.50    2.69    12.31    13.86
                        L-2                                                       2.50    2.69    12.82    14.48
BTC 1997-S1  (4)       E, F    1.27     106.0%    18.6%    36.35%   $4,768,345   14.50   23.46     8.36     8.50    303,946  187,855
                      Equity                                                     19.00   30.74    21.19    25.59
DLJ 1993-MF17  (5)      B-2    1.36      73.7%     0.0%      0.0%   $        0    9.41   10.77    12.29    12.65    139,183  121,609
                        B-3                                                       3.31    3.78    11.39    15.40
                        C-1                                                       1.28    1.47   -29.82    14.53
                        S-1                                                      67.82   63.17    16.69    -3.64
                        S-2                                                      14.15   16.20    14.46    -8.67
MLMCI 1993-M1  (6)       B     1.51      56.0%    47.3%      n/a    $        0    9.00   26.95    13.65     9.45    258,765   13,239

</TABLE>

ISSUERS:
(1)  Nomura Asset Securities Corporation
(2)  CS First Boston Mortgage Securities Corp.
(3)  Midland Realty Acceptance Corp.
(4)  BTC Mortgage Investors Trust 1997-S1
(5)  DLJ Mortgage Acceptance Corp.
(6)  Merrill Lynch Mortgage Capital, Inc.

         The following  table sets forth the principal  amount of mortgage loans
by the geographic  location of the property  securing the mortgages that underly
the Company's securities available for sale portfolio at December 31, 1998.

<TABLE>
<CAPTION>

  Description                         California        Florida         Texas         New York       Maryland         Other (1)
  -------------------------------     ----------      ----------     ----------      ----------     ----------       -----------
                                                                       (Dollars In Thousands)
<S>                                   <C>             <C>            <C>             <C>            <C>              <C>        
  Single family residential .....     $  776,170      $  315,824     $  210,133      $  133,363     $  159,636       $ 2,523,144
  Multi-family and commercial....        201,729         130,596        161,033         107,520         88,914           986,982
                                      ----------      ----------     ----------      ----------     ----------       -----------
  Total..........................     $  974,899      $  446,420     $  371,166      $  240,883     $  248,550       $ 3,510,126
                                      ==========      ==========     ==========      ==========     ==========       ===========
  Percentage (2).................           16.8%            7.7%           6.4%            4.2%           4.3%             60.6%
                                      ==========      ==========     ==========      ==========     ==========       ===========

</TABLE>

(1)      (1)   No other  individual  state  makes up more than 5% of the  total.
         Includes  $55.2 million of loans  secured by single  family  residences
         located  in United  Kingdom  which back the  securities  issued by City
         Mortgage  Receivable  1-6,  which were acquired by the Company from the
         United  Kingdom  operations of Cityscape  Financial  Corp. See "Certain
         Transaction"  under  Item 13.  
(2)      Based on a  percentage  of the total  unpaid  principal  balance of the
         underlying loans.

                                       32
<PAGE>

         The following table  summarizes  information  relating to the Company's
mortgage-related securities available for sale at December 31, 1998.

<TABLE>
<CAPTION>

                                                                                                  ANTICIPATED            ANTICIPATED
                                                                                    ORIGINAL      UNLEVERAGED             WEIGHTED
                                                                                   ANTICIPATED     YIELD TO                AVERAGE
                                       AMORTIZED                     PERCENT        YIELD TO      MATURITY AT             REMAINING
   RATING/DESCRIPTION                   COST          FAIR VALUE      OWNED         MATURITY      12/31/98 (2)  COUPON     LIFE (3)
---------------------------------      --------       ---------      -------       ----------     ------------  ------    ---------
SINGLE FAMILY RESIDENTIAL                                                 (Dollars In Thousands)
<S>                                    <C>            <C>              <C>           <C>            <C>          <C>       <C>  
Unrated residuals................      $209,071       $ 218,724        100%          17.90%         13.48%       0.00%      2.57%
B-rated subordinates.............         4,738           4,738        100           16.87          18.82        7.75       7.11
Unrated subordinates.............        10,652          10,652         41           15.16          11.19        7.03       6.27
                                       --------       ---------
   Total single family...........       224,461         234,114
                                       --------       ---------
MULTI-FAMILY/COMMERCIAL
BB-rated subordinates............        62,327          62,770         68            8.67           8.62        7.86       4.38
B-rated subordinates.............        29,850          30,076         80           10.42          10.65        8.39      10.09
Unrated subordinates.............        19,377          20,120         89           14.04          15.80        9.97       5.56
AAA-rated IOs....................           454             441        100           16.69          (3.67)      34.00       6.11
A-rated IOs......................           236             222        100           14.46          (8.84)      65.00       2.22
Unrated IOs (1)..................         3,135           3,135        100           12.82          16.25        7.23      11.18
Unrated POs (1)..................           276             276        100           12.31          14.32        0.00      11.21
                                       --------       ---------
   Total multi-family/
     commercial..................       115,655         117,040
                                       --------       ---------
   Total mortgage
     related securities..........      $340,116       $ 351,154
                                       ========       =========
</TABLE>

         (1)      These securities relate to the same mortgage-related security,
                  thus  giving  the  Company  both the  principal  and  interest
                  components to the particular class.
         (2)      Changes in the December 31, 1998 anticipated yield to maturity
                  from that  originally  anticipated are primarily the result of
                  changes in prepayment  assumptions and to a lesser extent loss
                  assumptions.
         (3)      Equals the weighted average duration based off of December 31,
                  1998 book value.

         The  following  table sets forth the  property  types of the  Company's
commercial  mortgage-backed  securities  at December  31,  1998,  based upon the
principal amount.

                                                  Percentage
                     Property type                 Invested
              ------------------------------     ------------
              Multi-family..................         26.0%
              Retail........................         26.0
              Hotel.........................         14.5
              Office........................          7.7
              Industrial....................          4.8
              Mixed use.....................          2.8
              Other.........................         18.2
                                                 --------
              Total.........................        100.0%
                                                 ========

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

         The Company  determines the present value of anticipated  cash flows of
its mortgage-related  securities utilizing valuation assumptions  appropriate at
the time of each  acquisition or  securitization  transaction.  The  significant
valuation  assumptions  include  the  anticipated   prepayment  speeds  and  the
anticipated  credit  losses  related to the  underlying  mortgages.  In order to
determine  the present  value of this  estimated  excess cash flow,  the Company
currently  applies a  discount  rate of 18% to the  projected  cash flows on the
unrated  classes of securities.  The annual  prepayment  rate of the securitized
loans is a function of full and partial  prepayments  and

                                       33
<PAGE>

defaults.  The  Company  makes  assumptions  as to the  prepayment  rates of the
underlying loans, which the Company believes are reasonable,  in estimating fair
values of the subordinate  securities and residual securities  retained.  During
1998,  the Company  utilized  proprietary  prepayment  curves  generated  by the
Company (reaching an approximate  range of annualized rates of 30%-40%).  In its
estimates  of annual  loss  rates,  the  Company  utilizes  assumptions  that it
believes are reasonable.  The Company  estimates  annual losses of between 0.22%
and 2.06% of the underlying loans.

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

         Subordinate and residual  interests are affected by the rate and timing
of  payments of  principal  (including  prepayments,  repurchase,  defaults  and
liquidations)  on the mortgage  loans  underlying  a series of  mortgage-related
securities.  The rate of  principal  payments may vary  significantly  over time
depending on a variety of factors, such as the level of prevailing mortgage loan
interest  rates  and  economic,  demographic,  tax,  legal  and  other  factors.
Prepayments  on the  mortgage  loans  underlying  a series  of  mortgage-related
securities   are   generally   allocated   to  the  more   senior   classes   of
mortgage-related  securities.  Although  in the  absence of defaults or interest
shortfalls all subordinates  receive interest,  amounts  otherwise  allocable to
residuals  generally are used to make payments on more senior classes or to fund
a   reserve    account   for   the    protection   of   senior   classes   until
overcollateralization  or the balance in the reserve account reaches a specified
level. In periods of declining  interest rates, rates of prepayments on mortgage
loans  generally  increase,  and if the  rate  of  prepayments  is  faster  than
anticipated,  then the yield on subordinates will be positively affected and the
yield on residuals will be negatively affected. Accelerated prepayment speeds on
residential  mortgage-backed  securities were a significant  factor in the $79.7
million loss on securities recorded by the Company during 1998.

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

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

         COMMERCIAL AND MULTI-FAMILY LOAN PORTFOLIO. The Company's investment in
commercial  and  multi-family  loans  amounted to $65.3  million at December 31,
1998, a $55.8 million increase over the $9.5 million  investment at December 31,
1997.

         The  Company's  commercial  lending  activities  focus  on real  estate
lending  opportunities  in selected major  metropolitan  markets  throughout the
United  States  where  the  Company   believes  there  are  significant   supply
constraints  and where  employment  and/or  population  growth and other  demand
generators  are expected to remain  strong.  The Company's  general  approach to
commercial  lending is to capitalize on the core capabilities of the Manager and
its affiliates,  which include an ability to assess the value creation potential
of  underutilized  real  estate  and  to  oversee  and  manage  the  conversion,
rehabilitation  and/or construction  process. The Company seeks to make loans to
borrowers  who have a proven  ability to acquire  such assets and enhance  value
through a process of repositioning or development.  Loans are usually structured
to  provide  current  income  along  with  either  exit  fees or  gross  revenue
participation  features.  Loans may be  originated  as first  mortgage  loans or
structured as subordinated debt or mezzanine financing.

                                       34
<PAGE>

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

<TABLE>
<CAPTION>

                                                                      December 31,
                                                         ------------------------------------
                                                               1998                  1997
                                                         --------------        --------------
<S>                                                      <C>                   <C>           
  Multi-family residential loans .................       $   20,544,269        $    1,357,333
  Commercial real estate and land loans:
       Hotels.....................................           21,304,912             8,423,608
       Office buildings...........................           24,123,894                44,383
                                                         --------------        --------------
        Total loans...............................           65,973,075             9,825,324
  Deferred fees...................................              (48,434)             (343,888)
  Allowance for loan losses.......................             (641,676)                   --
                                                         --------------        --------------
       Commercial and multi-family loans, net.....       $   65,282,965        $    9,481,436
                                                         ==============        ==============

</TABLE>

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

         The following table sets forth certain information  regarding the loans
in the Company's  commercial  and  multi-family  loan  portfolio at December 31,
1998.

                                       35
<PAGE>

<TABLE>
<CAPTION>

                                                     LOAN AMOUNT                          LOAN PER  STABILIZED
                                                     OUTSTANDING                 RATIO OF   UNIT/     DEBT
                                          LOAN       AT DECEMBER   TYPE OF        LOAN TO  SQUARE    COVERAGE  COUPON
   LOAN             LOCATION             AMOUNT       31, 1998      LOAN           COST     FOOT     RATIO(1)   RATE        SIZE
---------------   -----------------     -------      ----------- ------------    --------  ------    --------  ------    -----------
MULTI-FAMILY                                               (Dollars In Thousands)
 RESIDENTIAL:
<S>                                     <C>            <C>       <C>               <C>        <C>       <C>     <C>       <C>      
Fourth &          
  Harrison .....  San Francisco, CA     $11,550       $ 4,198    Construction      85%      $201       1.22    9.630%     160 units
241 Church        
  Street .......  New York, NY           30,280        13,684    Conversion        88        582        N/A    9.000       52 units
459 Washington    
  Street .......  New York, NY            3,455         2,662    Conversion        61        314        N/A   10.500       11 units

COMMERCIAL:
Doubletree        
  Hotel ........  Lowell, MA              7,652         7,447    Renovation        85         31        1.9   10.000      249 rooms
Hawthorn Suites   
  Hotel ........  Schaumburg, IL          7,629           ---    Construction      65         56       1.59    8.750      136 suites
Thompson          
  Street Hotel .  New York, NY           17,715         1,806    Construction      80        209       1.66   10.000      100 rooms
Wyndham  Garden   
  Hotel ........  Wilmington, DE         13,300        12,052    Renovation        67         61        2.2    8.650      291 rooms
Landmark III-     
  GTE ..........  Burlington, MA         33,058        24,124    Renovation        85        114       1.18    9.250  291,007 sq.ft.
                                       --------       -------
                                       $124,639       $65,973
                                       ========       =======

</TABLE>

         (1)        Represents the net income of the stabilized property divided
                    by debt service required by the loan.

         During October 1998, the Company closed a commitment to finance a hotel
construction loan in New York, New York in the amount of $17.7 million, of which
$1.2  million  had  been  funded.  See  "Note  6 to the  Consolidated  Financial
Statements" under Item 8.

         RESIDENTIAL  LOAN  PORTFOLIO.  The Company's  investment in residential
loans  increased  to $8.0  million  at  December  31,  1998 from a $6.4  million
investment  at December 31, 1997.  These loans were  acquired with the intent of
accumulating such loans,  executing a securitization and retaining a subordinate
interest.

         At December 31, 1998,  $4.1  million or 49.5% of the  residential  loan
portfolio  was past  due 90 days or  more,  compared  to $0.3  million  or 0.1%,
respectively, at December 31, 1997

         On November 13, 1998, the Company completed the securitization of 1,808
first and second single family  residential  mortgage  loans having an aggregate
unpaid principal balance of $182.2 million.  The mortgage loans were acquired by
the Operating Partnership during 1997 and 1998. After the payment in full of all
transaction  expenses  and the  repayment  in full of the  approximately  $136.0
million  warehouse  facility secured by such mortgage loans, the  securitization
will  net  the   Company   approximately   $35.0   million   in  cash  from  the
securitization.   The  Company   retained   an   approximately   $10.1   million
non-investment  grade equity certificate,  which will entitle the Company to any
available  excess cash flow,  and the Bank will continue to service the mortgage
loans.  As a result of this  transaction,  at December  31, 1998 the Company had
$163.4 million of match funded  indebtedness  which is secured by $173.6 million
of match funded residential loans, net.

                                       36
<PAGE>

         DISCOUNT LOAN PORTFOLIO.  The Company believes that, under  appropriate
circumstances,  the acquisition of nonperforming  and  underperforming  mortgage
loans at discounts offers  significant  opportunities  to the Company.  Discount
loans generally have collateral  coverage which is sufficiently in excess of the
purchase price of the loan, such that  successful  resolutions can produce total
returns which are in excess of an equivalent  investment in performing  mortgage
loans. See "Business - Investment  Guidelines Mortgage Loans" under Item 1 for a
discussion of the Company's approach to acquiring mortgage loans.

       Nonperforming  and  subperforming  mortgage  loans  may  presently  be in
default  or  may  have a  greater  than  normal  risk  of  future  defaults  and
delinquencies,  compared to  newly-originated,  high-quality loans of comparable
type, size and geographic  concentration.  Returns on an investment of this type
depend on the borrower's  ability to make required  payments or, in the event of
default,  the ability of the loan's  servicer to  foreclose  and  liquidate  the
mortgage  loan.  There  can be no  assurance  that the  Company  will be able to
liquidate a defaulted  mortgage loan successfully  (through sale of the security
property or otherwise) or in a timely fashion.

         At December  31,  1998,  the  Company's  net  discount  loan  portfolio
amounted  to $5.6  million or 0.6% of the  Company's  total  assets.  All of the
Company's  discount loan  portfolio is secured by first  mortgage  liens on real
estate.

       At December 31, 1998, the Company's discount loans primarily consisted of
a  13.83%  participation  interest  in a loan  pool,  which  had an  outstanding
principal  balance  of $6.9  million.  The  collateral  for the  loans  consists
primarily of three office buildings located in midtown Manhattan,  New York. The
loans are  serviced  by the Bank,  which holds the  remaining  interest in these
loans.

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

<TABLE>
<CAPTION>
                                                             December 31,
                                                   -----------------------------
                                                       1998             1997
                                                   -------------    ------------
                                                       (Dollars In Thousands)
<S>                                                  <C>             <C>        
Balance at beginning of period .................   $ 42,528,782              --
Acquisitions ...................................             --      44,686,413
Resolutions and repayments(1) ..................     (2,349,969)     (1,281,846)
Loans transferred to investment in real estate .    (33,436,930)             --
Foreign exchange gain (loss) ...................        116,953        (875,785)
                                                   ------------    ------------
Balance at end of period .......................   $  6,858,836    $ 42,528,782
                                                   ============    ============
</TABLE>

(1)      Resolutions  and repayments  consists of loans which were resolved in a
         manner which  resulted in partial or full  repayment of the loan to the
         Company, as well as principal payments on loans which have been brought
         current in accordance  with their  original or modified  terms (whether
         pursuant to  forbearance  agreements  or  otherwise)  or on other loans
         which have not been resolved.

         Discount  loans  decreased  from $42.5  million at December 31, 1997 to
$6.9 million at December 31, 1998 primarily as a results of foreclosure on (i) a
Canadian loan with an unpaid  principal  balance of $27.6  million  (Cdn.  $38.3
million),  which was secured by a 402,529 square foot shopping center located in
Halifax,  Nova  Scotia,  (ii) a loan with an unpaid  principal  balance  of $6.6
million  which was secured by a 43,205  square  foot office  building in Dayton,
Ohio,  and (iii) a loan with an unpaid  principal  balance of $3.9 million which
was secured by a 223,355 square foot shopping center located in Havre,  Montana.
For  additional  information  regarding the  properties  acquired by the Company
through these foreclosures, see "Investment in Real Estate" below.

         The acquisition  cost for a pool of discount loans is allocated to each
individual  loan within the pool based upon the Company's  pricing  methodology.
The discount  which is associated  with  commercial  real estate loans which are
current,  and which the Company  believes will remain current,  is accreted into
interest  income  as a yield  adjustment  using  the  interest  method  over the
contractual maturity of the loan. For all other loans interest is earned as cash
is  received.  Gains on the  repayment  and  discharge  of loans are reported as
interest income on discount loans.  Upon receipt of title to property securing a
discount loan, the loans are transferred to investment real estate.

                                       37
<PAGE>

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

         At  December  31,  1998,  the  Company's  investments  in  real  estate
consisted of eight  properties  which had an aggregate  carrying value of $208.1
million.  A total of four of the properties  currently owned by the Company with
an aggregate  carrying value of approximately  $143.8 million are located in San
Francisco,  California.  Three of these  properties are located in the financial
district of San  Francisco,  and one property is located in the  adjacent  civic
center district of San Francisco. The Company believes that the office market in
San Francisco,  particularly the financial district,  satisfies its general real
estate investment philosophy because in management's view it is characterized by
limited new supply and significant barriers to entry. Low vacancy rates, coupled
with lack of new construction, currently are increasing rental rates. Government
regulation of  development in conjunction  with local  construction  costs and a
lack of developable land provide significant barriers to entry to this area. The
Company  believes that its  investments in real estate in San Francisco are well
located and benefit from their  proximity to the majority of the city's  office,
retail and hotel accommodations.

         The Company's  earthquake  insurance relating to its four properties in
San Francisco,  is in the aggregate amount of $50 million, which is the probable
maximum loss estimated to be sustained in the event the most powerful earthquake
recorded in  California  were to occur at the  properties,  as  determined by an
independent  structural engineer.  In the event of such probable maximum loss of
$50 million,  such damage would be insured,  less a deductible of  approximately
$12.8  million.  In the event of a more  catastrophic  earthquake  or damages in
excess of $50 million, the Company would not be insured for such losses.

         The Company's net investment in real estate increased to $208.1 million
at December 31, 1998 from $45.4 million at December 31, 1997 and is comprised of
the following properties:

<TABLE>
<CAPTION>
                                                                                              Book Value at
        Date                                                                                  December 31,
      Acquired         Property                 Location         Square Feet   Property Type      1998
      ---------  -----------------------   --------------------  -----------   -------------  -------------
                                                  (Dollars In Thousands)
<S>   <C>        <C>                       <C>                    <C>          <C>          <C>          
      04/08/98   225 Bush Street........   San Francisco, CA       570,637     Office Bldg.  $     104,884
      09/23/97   450 Sansome Street.....   San Francisco, CA       130,437     Office Bldg.         18,018
      01/23/98   690 Market Street......   San Francisco, CA       124,692     Office Bldg.         14,038
      09/03/97   10 U.N. Plaza..........   San Francisco, CA        71,636     Office Bldg.          9,431
      07/22/98   841 Prudential Drive...   Jacksonville, FL        488,080     Office Bldg.         32,827
      11/10/97   Cortez Plaza...........   Bradenton, FL           289,686     Shopping Ctr.        19,319
      04/09/98   7075 Bayers Road.......   Halifax, Nova Scotia    402,529     Shopping Ctr.        11,514
      10/01/98   Holiday Village........   Havre, MT               223,355     Shopping Ctr.         1,791

                                                                 Accumulated depreciation
                                                                         and amortization           (3,763)
                                                                                             -------------
                                                                                             $     208,059
                                                                                             =============
</TABLE>

         Set  forth  below  is a brief  description  of  each  of the  Company's
investments in real estate at December 31, 1998.

         225 BUSH  STREET.  In April  1998,  the  Company  acquired  an existing
570,637  square  foot,  22-story,  Class A office  building  located at 225 Bush
Street  in the  financial  district  of San  Francisco,  California  for  $100.2
million.  Bush Street was originally  constructed in 1923,  expanded in 1994 and
brought up to 1992 building code seismic  standards  during 1992-94.  Originally
built as the world headquarters of Chevron of USA, Inc. ("Chevron"), it was sold
in 1994 as Chevron  sought to relocate  its  executive  offices.  The Company is
projecting to make an additional  investment of  approximately  $17.0 million to
make tenant  improvements and pay leasing commissions and to upgrade mechanical,
HVAC, and electrical systems,  fire life/safety systems under the Americans with
Disabilities  Act of 1990 (the "ADA"),  as well as upgrades and  improvements to
the ground floor retail and annex entrance lobby.

                                       38
<PAGE>

Approximately  $7.5 million is budgeted for 1999.  As of December 31, 1998,  the
Bush Street Property was 96% leased.

         450 SANSOME STREET.  In September 1997, the Company  acquired a 130,437
square foot, 16-story,  Class B office building located at 450 Sansome Street in
the financial district of San Francisco,  California. The Company purchased this
property for $17.2 million. The building was 77% leased as of December 31, 1998.
The  property  was built in 1967 and  upgraded  in certain  respects in 1989 and
1990.  The  property  was  acquired  from a lender who had taken  title  through
foreclosure. As a result, average rent per square foot amounted to approximately
$18.00 at the date of acquisition.  During the next five years, leases on 86% of
the space in the property expire. The Company plans to invest approximately $7.3
million in this property in various  renovations  including the entrance  lobby,
elevator cabs, bathrooms, hallways, certain building systems and compliance with
the  ADA  as  well  as  tenant   improvements   and  pay  leasing   commissions.
Approximately  $4.0  million  is  budgeted  for 1999.  Two new  leases  totaling
approximately  12,800 square feet were executed in December 1998 and will result
in an increased occupancy level to 87% by April 1999.

         690 MARKET  STREET.  In January  1998,  the Company  acquired a 124,692
square foot,  16-story,  Class C office building located at 690 Market Street in
the financial district of San Francisco,  California. The property was purchased
for $13.7  million.  The property  was  originally  constructed  in 1888 and has
undergone numerous renovations. At the date of acquisition, approximately 41% of
the building was available  for releasing by the end of 1998, of which  existing
rents averaged  $14.06 per square foot.  The Company has recently  executed nine
new leases totaling  approximately  13,800 square feet, which increased building
occupancy to 82% as of December 31, 1998. The Company is investing approximately
$6.0  million in  structural  upgrades,  a  sprinkler  system and ADA  upgrades,
deferred maintenance, tenant improvements and leasing commissions. Approximately
$5.0 million is budgeted for 1999

         10 UNITED NATIONS  PLAZA.  In September  1997,  the Company  acquired a
71,636  square foot,  six-story,  Class B office  building  located at 10 United
Nations  Plaza in the  civic  center  district  of San  Francisco.  The  Company
purchased this property,  which was built in 1982, for $9.1 million. At the date
of acquisition,  the property was substantially  leased and the average rent per
square foot was $13.76.  The building was 9% leased as of December 31, 1998, and
was  approximately 49% leased as of March 15, 1999, which is consistent with the
acquisition strategy to re-tenant the building.  The property is currently being
marketed  for  lease  to  tenants  with  full  floor  or  full  building   space
requirements.  The  Company  is  investing  approximately  $3.6  million in this
property  to fund  cosmetic  improvements  to  enhance  the lobby and  hallways,
install ADA upgrades,  fund deferred maintenance and tenant improvements and pay
leasing commissions. Approximately $3.4 million is budgeted for 1999.

         PRUDENTIAL  BUILDING.  On July 22,  1998,  the  Company  purchased  the
Prudential  Building, a 488,080 square foot, 22 story office building located in
the central business district of Jacksonville, Florida for an aggregate purchase
price of $36.0 million,  plus closing costs.  The purchase price was funded with
cash on hand  and  advances  from a line of  credit.  Simultaneously  with  this
closing,  the Company  also leased 98% of the  building  back to the  Prudential
Insurance Co. of America,  and sold two adjacent  parking areas to a neighboring
hospital for approximately $4.1 million. The Prudential lease has a term of four
years with options to vacate the premises  during the term of the lease, as well
as three subsequent  five-year extension options.  The Company also entered into
an agreement with the hospital  pursuant to which the hospital is to lease up to
150,000  square feet in the  Prudential  Building for a nine-year  period should
Prudential exercise its termination option.

         CORTEZ PLAZA. In November 1997, the Company  purchased  Cortez Plaza, a
289,686 square foot shopping center located in Bradenton,  Florida,  a suburb of
Tampa.  The  Company  purchased  this  property,  which  was  built  in 1956 and
renovated in 1988, for $18.4 million. In a separate transaction,  the fee simple
title to a large  portion  of the  shopping  center  that had been  subject to a
ground lease was purchased  simultaneously for $0.7 million, which resulted in a
total investment in this property of $19.3 million. By simultaneously  acquiring
fee simple title to a ground lease that  encumbered a large part of the shopping
center's  parking lot, the Company  believes  that it  immediately  improved the
value and  marketability  of the project.  As of December 31, 1998, the shopping
center was 97% leased with  national and  regional  tenants,  including  Publix,
PetSmart,  Circuit City,  Montgomery Ward (which  currently is in bankruptcy but
paying rent) and  BankAmerica,  comprising  70.5% of the leaseable  area.  Below
market leases  covering  approximately  15% of the center expire during 1999 and
2000.

         BAYER'S ROAD SHOPPING  CENTRE.  In April 1998, the Company acquired the
Bayers Road  Shopping  Centre,  which is located at 7075 Bayers Road in Halifax,
Nova Scotia.  The property was acquired by  foreclosure  on the loans secured by
the property, which was acquired by the Company at a discount in September 1997.
The property contains 402,529 square feet of space,  which consists primarily of
retail space but also includes some office space and storage space. The original
buildings  were built in 1956 and were  enclosed and expanded in several  phases
between  1971 and 1987.  Major  tenants  of the  property  currently  consist of
Zellers,  Lawton's and Mark's Work Warehouse. The property was approximately 81%

                                       39
<PAGE>

leased at December 31, 1998. The Company  currently is implementing an operating
plan to  establish  the  second  level as a  strong  community  shopping  center
anchored with both national and regional value-oriented retailers, while filling
the lower level with service  providers,  discount  retailers and  entertainment
uses. The upper level would remain office space. Additional capital required for
the redevelopment and budgeted for 1999 totals $10.8 million.

         HOLIDAY VILLAGE SHOPPING CENTRE.  In October 1998, the Company acquired
the Holiday Village Shopping Centre,  which is located at 1753 Highway 2 West in
Havre,  Montana. The property was acquired by foreclosure on the loan secured by
the property,  which was acquired by the Company at a discount in November 1997.
The property contains 223,355 square feet of retail space. The original building
was built in 1978.  Ownership  of the  property  may be  subject  to two  ground
leases,  the status of which is currently being  litigated.  The major tenant at
the property currently is Herberger's. The property was approximately 47% leased
at December 31,  1998.  The Company  currently  is  developing a leasing plan to
stabilize the property that will include  leasing one of the anchor vacant space
to a national  or  regional  anchor  tenant and lease the balance of the in-line
space to local and regional tenants.

         The  following  table  sets  forth  the cost of  improvements  for each
investment in real estate through December 31, 1998.

<TABLE>
<CAPTION>
                                 Budgeted        Actual                             Book                      Rents due
                       Initial    Cost of        Cost of                           Value at                  and accrued  Total
                       Cost to  Improvements  Improvements Impairment             December 31,  Accumulated   at end of   Rental
    Property           Company    for 1999      to Date     Writedown     Sales     1998        Depreciation   period     Income
--------------------   -------  ------------  ------------ ----------   --------- -----------   ------------ -----------  ------
                                                        (Dollars In Thousands)
<S>                    <C>        <C>           <C>         <C>         <C>        <C>           <C>           <C>        <C>     
225 Bush Street.....   $101,632   $  7,536      $  3,252    $           $           $104,884    $    1,594    $    982   $  7,866
450 Sansome Street..     17,205      3,988           813                              18,018           472         168      2,316
690 Market Street...     13,707      5,014           331                              14,038           265          31      1,985
10 U.N. Plaza.......      9,080      3,414           351                               9,431           246           6      1,036
841 Prudential Dr...     32,827        484            --                              32,827           380         291      3,689
Cortez Plaza........     19,244      1,354            75                              19,319           524         449      2,935
7075 Bayers Road....     15,219     10,782           197      (3,902)                 11,514           274         147      2,689
Holiday Village.....      1,791         --            --                               1,791             8          45        186
Park Center I.......      1,534         --            --                  (1,534)         --            --          --         --
                       --------   --------      --------    --------    --------    --------    ----------    --------   --------
   Total............   $212,239   $ 32,572      $  5,019    $ (3,902)   $ (1,534)   $211,822    $    3,763    $  2,119   $ 22,702
                       ========   ========      ========    ========    ========    ========    ==========    ========   ========
</TABLE>

         The  following  table sets forth a summary  schedule of the total lease
expirations for the Company's  investments in real estate for leases in place as
of December 31, 1998, assuming that none of the tenants exercise renewal options
or termination rights, if any, at or prior to the scheduled expirations.

<TABLE>
<CAPTION>
                                                             Percentage of                      Average Base
                                                               Aggregate        Annualized        Rent per       Percentage of
                            Number of          Sq. Ft.         Portfolio       Base Rent of        Sq. Ft.         Aggregate
       Year of Lease         Leases         of Expiring         Leased           Expiring         Expiring         Portfolio
       Expiration(1)        Expiring           Leases           Sq. Ft.         Leases(2)         Leases(3)        Base Rent
       -------------        --------       --------------    -------------     -----------     ------------     ----------------
           <S>                  <C>             <C>               <C>          <C>                   <C>              <C>   
           1999                 78              251,069           14.27%       $ 3,985,174           15.87            14.05%
           2000                 41              141,298            8.03          2,375,084           16.81             8.37
           2001                 47              118,420            6.73          2,163,758           18.27             7.63
           2002                 44              587,407           33.38          9,234,379           15.72            32.56
           2003                 18               34,973            1.99            770,985           22.05             2.72
           2004                  5               70,697            4.02          1,785,673           25.26             6.30
           2005                  4               29,120            1.65            209,195            7.18             0.74
           2006                  7              108,902            6.19            660,449            6.06             2.33
           2007                  5              116,019            6.59          2,283,263           19.68             8.05
           2008                  7              142,122            8.08          3,109,179           21.88            10.96
       2009 & beyond             6              159,573            9.07          1,782,696           11.17             6.29
                             -----           ----------        --------        -----------                          -------
                               262            1,759,600          100.00%       $28,359,835                           100.00%
                             =====           ==========        ========        ===========                          =======
</TABLE>

(1)      Lease year runs from January 1 to December 31 for all properties.
(2)      Base  rent  is  calculated  based  on the  amount  of  rent
         scheduled  from  January 1 of the listed year to the lease  expiration.
(3)      Average base rent per square foot is  calculated  using the  annualized
         base rent divided by the square footage.

                                       40
<PAGE>

         Noncancelable  operating  leases with tenants  expire on various  dates
through 2028.  The future minimum rental income (base rent) to be received under
leases existing as of December 31, 1998, are as follows:

                  (Dollars In Thousands)
         1999.....................................  $  25,230
         2000.....................................     23,791
         2001.....................................     21,464
         2002.....................................     19,143
         2003.....................................     15,074
         Thereafter...............................     47,246
                                                    ---------
              Total                                 $ 151,948
                                                    =========

         SIGNIFICANT PROPERTIES.  Set forth below is additional information with
respect to the Bush Street  Property  and the  Prudential  Building,  which were
deemed "significant" under Commission requirements as of December 31, 1998.

         BUSH STREET  PROPERTY;  DEPRECIATION.  For federal income tax purposes,
the  basis,  net of  accumulated  depreciation,  of  the  Bush  Street  Property
aggregated  approximately $103.4 million at December 31, 1998. The real property
associated  with the Bush Street  Property  (other than land)  generally will be
depreciated  for federal  income tax  purposes  over 39 years using the straight
line method.  For  financial  reporting  purposes,  the Bush Street  Property is
recorded at its  historical  cost and is  depreciated  using the  straight  line
method over its estimated useful life, which is estimated to be 39 years.

         BUSH STREET  PROPERTY;  REAL ESTATE TAXES.  The 1998 annual real estate
taxes on the  Bush  Street  Property  are  estimated  to be  approximately  $1.2
million. The city of San Francisco real estate tax is 1.19% of assessed value.

         BUSH STREET PROPERTY;  OCCUPANCY. At December 31, 1998, the Bush Street
Property was leased to 33 tenants which are engaged in a variety of  businesses,
including  oil,  law,  technology,  engineering,   publication,  consulting  and
philanthropy.  The following table sets forth information  relating to occupancy
of and net  effective  rent  for  the  Bush  Street  Property  for  the  periods
indicated.

                             Average Occupancy*
         -----------------------------------------------------------
          1998              1997              1996             1995
         -----             ------            ------           ------
          97%                94%              78%               82%

                    Net Effective Rent per Square Foot*
         -----------------------------------------------------------
          1998              1997              1996             1995
         ------            ------            ------           ------
         $20.18            $16.35            $16.17            $*

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

         BUSH STREET PROPERTY; LEASE EXPIRATIONS. The following table sets forth
a summary  schedule of the total lease  expirations for the Bush Street Property
for leases in place as of December 31, 1998,  assuming  that none of the tenants
exercise  renewal  options or  termination  rights,  if any,  at or prior to the
scheduled expirations.

<TABLE>
<CAPTION>


 Year of Lease                                                                                                  2009 &
 Expiration             1999       2000     2001    2002     2003     2004    2005    2006    2007      2008    Beyond
 ----------------    ---------  ---------  ------- -------  -------  ------- ------  ------ --------- --------- -------
<S>                        <C>        <C>      <C>     <C>      <C>      <C>    <C>     <C>       <C>       <C>     <C>
 No. of leases
  Expiring..........         9          7        8       7        2        2      1       1         4         3       2

 Square footage of
  Expiring leases...   129,711     63,036   21,416  28,994    4,204   45,996  1,574   2,210    88,519    78,956  23,942

 Percent of total
  Leased square feet.    26.55      12.90     4.38    5.93     0.86     9.41   0.32    0.45     18.12     16.16    4.90

 Annualized rent of
  Expiring leases... 2,550,710  1,088,351  460,580 457,677  136,838  909,120 47,220  44,752 2,028,888 2,600,798 742,144

 Percent of total
  Annualized rent...     23.05       9.83     4.16    4.14     1.24     8.21   0.43    0.40     18.33     23.50    6.71

 Annualized rent per
  square foot of
  Expiring leases...     19.66      17.27    21.51   15.79    32.55    19.77  30.00   20.25     22.92     32.94   31.00
</TABLE>

                                       41
<PAGE>

         At December 31, 1998, the only tenant of the Bush Street Property which
occupied 10% or more of the rentable square footage in the building was Chevron,
which is engaged in the oil business.  Chevron  leases 133,358  rentable  square
feet on nine  floors.  Chevron has  subleased  all of its space except for three
floors  totaling  63,031  square  feet.  Of the 63,031  square feet that Chevron
occupies, the leases on 45,674 square feet expire in June 1999. Management is in
negotiations  with Chevron to extend those  leases.  The lease on the  remaining
space  comprising  17,347  square  feet on the 22nd floor  expires in June 2000.
Space sub-leased by Chevron totals 70,337 square feet.  These sub-leases  extend
beyond  Chevron's  term (at the end of which they will become direct leases with
the  Company),  and have varying  terms,  as  reflected in the lease  expiration
schedule.

         PRUDENTIAL BUILDING; DEPRECIATION. For federal income tax purposes, the
basis, net of accumulated  depreciation,  of the Prudential  Building aggregated
approximately  $32.4 million at December 31, 1998. The real property  associated
with the Prudential Building (other than land) generally will be depreciated for
federal income tax purposes over 39 years using the  straight-line  method.  For
financial  reporting  purposes,  the  Prudential  Building  is  recorded  at its
historical  cost and is  depreciated  using the  straight-line  method  over its
estimated useful life, which is estimated to be 39 years.

         PRUDENTIAL  BUILDING;  REAL ESTATE  TAXES.  The 1998 annual real estate
taxes paid on the Prudential  Building were  approximately  $588,772.  The Duval
county real estate tax is 1.92 percent of assessed value.

         PRUDENTIAL  BUILDING;  OCCUPANCY.  At December 31, 1998, the Prudential
Building was leased to five  tenants  engaged in  insurance  and food  services.
Information about the occupancy rate and the average effective annual rental per
square  foot  for  the  Prudential  Building  for the  last  five  years  is not
meaningful  because  the  building  was  substantially  occupied  by its  owner,
Prudential Insurance Company of America ("Prudential"), during this period.

         PRUDENTIAL BUILDING; LEASE EXPIRATIONS.  The following table sets forth
a summary  schedule of the total lease  expirations for the Prudential  Building
for leases in place as of December 31, 1998,  assuming  that none of the tenants
exercise  renewal  options or  termination  rights,  if any,  at or prior to the
scheduled expirations.

<TABLE>
<CAPTION>

  Year of Lease                                                                                          2009 &
  Expiration                1999     2000      2001       2002     2003   2004  2005  2006  2007   2008  Beyond
  -----------------------  ------   -------   -------  ----------  ----   ----  ----  ----  ----   ----  ------
<S>                            <C>       <C>       <C>         <C>  <C>   <C>   <C>  <C>    <C>    <C>    <C> 
  No. of leases
    Expiring.............       1         2         1           1    --     --    --    --    --     --     ---
  Square footage of 
    Expiring Leases......      --     3,022     2,832     474,570    --     --    --    --   ---     --     ---
  Percent of total
    leased square feet...      --      0.63%     0.59%      98.78%   --     --    --    --    --     --     ---
  Annualized rent of
    Expiring leases......  $3,900   $39,041   $43,324  $7,555,154    --     --    --    --    --     --     ---
  Percent of total
    Annualized rent......    0.05%     0.51%     0.57%      98.87%   --     --    --    --    --     --     ---
  Annualized rent per
    square foot of
    expiring leases......  $   --   $ 12.92   $ 15.30  $    15.92    --     --    --    --    --     --     ---
</TABLE>

         At December 31, 1998, the only tenant of the Prudential  Building which
occupied  10% or  more  of the  rentable  square  footage  in the  building  was
Prudential,  which is  engaged  in the  insurance  business.  Prudential  leases
474,570 rentable square feet on 22 floors. The other two minor leases,  totaling
5,749 square feet, provide support services for Prudential.  As noted above, the
Company has entered into an agreement  with a local  hospital  pursuant to which
the hospital is to lease up to 150,000  square feet in the  Prudential  Building
for a nine-year period should Prudential exercise its termination option.

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

                                       42
<PAGE>

effect on the Company's business,  financial condition and results of operations
and on the Company's outstanding securities.

         SECURITIES SOLD UNDER  AGREEMENTS TO REPURCHASE.  Securities sold under
agreements  to  repurchase  were $138.6  million at  December  31,  1998.  These
obligations are secured by certain of the Company's  investments in subordinated
interests  in  commercial  mortgage-backed  securities,  residual  interests  in
subprime  residential  loan  securitizations,  and U.K.  mortgage  loan residual
securities.

         OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT.  Obligations outstanding
under  lines of credit  amounted  to $34.5  million at December  31,  1998.  The
borrowings  are comprised of $34.5 million  pursuant to a three year  agreement,
which is collateralized by commercial loans.

         OBLIGATIONS   OUTSTANDING   UNDER  LINES  OF  CREDIT  -  REAL   ESTATE.
Obligations outstanding under lines of credit secured by real estate amounted to
$142.6 million at December 31, 1998. These borrowings have a three-year term and
an interest rate that floats in accordance with LIBOR.

         MINORITY  INTEREST.  At December 31, 1998,  minority  interest  totaled
$23.9 million and represented  OCN's ownership  through IMIHC of 1,808,733 units
in the Operating  Partnership.  On May 7, 1998, the Company sold 1,473,733 units
in the Operating  Partnership to IMIHC for $24.5 million.  On February 17, 1998,
the Company sold 175,000 shares of common stock for cash in an aggregate  amount
of  approximately  $3.1 million to certain officers and directors of the Company
and OCN. In  connection  with this stock  issuance,  IMIHC sold a like number of
shares of Common  Stock to the Company and invested in a like number of units in
the  Operating   Partnership  in  order  to  comply  with  the  stock  ownership
restrictions  imposed on REITs under the Code.  See "Note 1 to the  Consolidated
Financial Statements" under Item 8.

         SHAREHOLDERS'  EQUITY.  Shareholders' equity decreased by $50.1 million
from December 31, 1997 to December 31, 1998.  The decrease was due to a net loss
of $58.2 million, a cumulative currency  translation  adjustment of $1.9 million
and $22.4 million in cash dividends paid during 1998,  which were offset in part
by a $14.0 million  capital  contribution  in connection with the sale of the IO
Portfolio  and an  $18.4  million  increase  in  unrealized  gain on  securities
available for sale.  Shareholders'  equity  increased to $271.3 million from May
14, 1997 to December 31, 1997 as a result of the net  proceeds  from the Initial
Public  Offering in May 1997 and net income of $11.8 million  during the period,
which  were  offset in part by the  change in  unrealized  losses on  securities
available for sale of $7.3 million,  the  repurchase of 160,000 shares of Common
Stock  (the  effect of which was  offset by a  concurrent  issuance  of  limited
partnership  units in the Operating  Partnership) for $3.0 million and dividends
declared on the Common Stock of $13.9 million. See the Consolidated Statement of
Changes in Shareholders'  Equity in the Consolidated  Financial Statements under
Item 8.

CAPITAL RESOURCES AND LIQUIDITY

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

         The Company's operating activities provided cash flows of $67.8 million
in 1998. The Company's  investing  activities  used cash flows of $694.5 million
during  1998.  During  1998,  cash flows  from  investing  activities  were used
primarily  to purchase  securities  available  for sale,  originate  or purchase
loans, and purchase commercial real estate. The Company's  financing  activities
provided cash flows of $632.9  million  during 1998 and  primarily  consisted of
proceeds  from  lines of credit and  repurchase  agreements  of $315.6  million,
proceeds  from the  issuance  of the  Redeemable  Notes of $150.0  million,  and
proceeds from the securitization of the Company's  residential loan portfolio of
$173.9 million.

         At December 31, 1998, OAC's total closed transactions since the Initial
Public Offering, net of repayments,  were $870.5 million. Of this amount, $811.8
million has been funded and the remaining $58.7 million is to be funded over the
construction  and  renovation  periods,  which  range from two to 18 months.  In
addition,   for  1999,  the  Company  has  budgeted  $32.6  million  of  capital
expenditures  on its  investments  in real  estate in order to  reposition  such
properties in the market.

         Based  on  its  monthly  interest  and  other  expenses,  monthly  cash
receipts, existing commitments, capital expenditure plans 

                                       43
<PAGE>

and rate of collateral calls through January 31, 1999, the Company believes that
its  existing  sources of funds will be  adequate  for  purposes  of meeting its
short-term (one-year or less) and long-term liquidity needs. However,  there can
be no  assurance  that this  will be the case.  Material  increases  in  monthly
interest expense or in collateral  calls, or material  decreases in monthly cash
receipts,  generally would  negatively  impact the Company's  liquidity.  On the
other hand,  material  decreases in monthly  interest  expense or in  collateral
calls generally would positively affect the Company's liquidity.

OTHER TRENDS AND CONTINGENCIES

         Fluctuations  in interest  rates will  continue to impact the Company's
net interest  income to the extent the Company's fixed rate assets are funded by
variable rate debt or the Company's  variable rate assets reprice on a different
schedule,  or in relation to a different  index than its floating  rate debt. At
December 31, 1998, the Company had interest rate swap agreements with a notional
amount of $200.8  million  and a fair value of ($4.1)  million in order to limit
partially  the  adverse  effects  of  rising  interest  rates  on the  remaining
floating-rate  debt. For a tabular  presentation  of these  agreements and other
information,  see Note 4 to the Consolidated  Financial Statements under Item 8.
When the Company's swap agreements  expire,  the Company will have interest rate
risk to the extent  interest  rates  increase  on any  floating-rate  borrowings
unless the swaps are replaced or other steps are taken to mitigate this risk.

         The  flexibility  in the Company's  leverage is dependent  upon,  among
other things, the value of unencumbered  assets,  which are inherently linked to
prevailing interest rates and changes in the credit of the underlying assets. At
December 31, 1998, the Company had unencumbered residential loans and securities
having a fair value  totaling  approximately  $68.9  million  ($35.5  million of
subordinate and residual mortgage-backed securities, $25.4 million of commercial
mortgage-backed  securities,  and $8.0 million of residential loans). At January
31, 1999, the Company had unencumbered residential loans and securities having a
fair value  totaling  approximately  $53.3 million ($33.1 million of subordinate
and  residual   mortgage-backed   securities,   $12.7   million  of   commercial
mortgage-backed securities, and $7.5 million of residential loans).

         In certain circumstances,  including,  among other things, increases in
interest  rates,  changes in market  spreads,  or decreases in credit quality of
underlying   assets,  the  Company  would  be  required  to  provide  additional
collateral  in  connection   with  its   short-term,   floating-rate   borrowing
facilities.  During the fourth  quarter of 1998, the Company was required to and
did fund requests for  additional  collateral  calls on  outstanding  repurchase
agreements  collateralized  by securities  available  for sale which  aggregated
$13.7 million, $0.8 million and $3.4 million in October,  November and December,
respectively. In October 1998, the Company funded requests for additional margin
deposits in connection with it swaps positions that aggregated $3.3 million.  No
additional  deposits  were made in November  1998,  and the Company  pulled back
margin  deposits  in  connection  with its swaps and  future  positions  of $2.5
million in December 1998.

         During  January  1999,  the  Company  funded  requests  for  additional
collateral  calls  on  outstanding   repurchase  agreements   collateralized  by
securities  available  for sale in the  amount of $2.1  million.  No  additional
deposits  were made in January 1999 in  connection  with its existing  swaps and
future positions.

         At December 31, 1998, the Company had total  consolidated  indebtedness
of $622.0  million,  of which all but $143.0 million of  outstanding  Redeemable
Notes was secured  indebtedness,  as well as $21.2 million of other liabilities.
This  consolidated  indebtedness  consisted of: (i) $138.6 million of repurchase
agreements,  of which $90.8  million was  scheduled to mature in one year;  (ii)
lines of credit  aggregating  $177.0  million,  which mature in 2001 (subject to
extension by the Company under certain conditions until 2002) and are secured by
real  estate,  loans and/or  securities;  (iii)  $143.0  million of  outstanding
Redeemable Notes,  which mature in 2005; and (iv) $163.4 million of match funded
indebtedness  which is secured by $173.6  million  of match  funded  residential
loans,   net,   which  was  incurred  in  November  1998  as  a  result  of  the
securitization  of 1,808 first and second  single  family  residential  mortgage
loans  and the  retention  by the  Company  of an  approximately  $10.1  million
non-investment  grade equity  security in the special  purpose  entity which was
established  to  effect  the  securitization.  See  Note 7 to  the  Consolidated
Financial Statement under Item 8.

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

                                       44
<PAGE>

         The  Company's  recent  decision  to  discontinue   future   investment
activities  effectively means that the Company's future  profitability,  and its
ability to meet its indebtedness obligations,  will be dependent on its existing
assets.  Circumstances  which  result in  decreased  income  from the  Company's
assets,  including  without  limitation  market and  economic  conditions  which
adversely  affect leasing income from the Company's  investments in real estate,
payments on its loans,  and yield on its securities,  could adversely affect the
ability of the Company to meet its indebtedness obligations, as could market and
economic  conditions  which increase the cost of the Company's  variable rate or
short-term liabilities, as noted above.

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

         The  indenture  under  which the  Redeemable  Notes  were  issued  (the
"Indenture")  prohibits the Company from  incurring or issuing debt,  other than
certain permitted indebtedness ("Permitted Indebtedness"),  if certain financial
tests are not  satisfied.  One such test requires that the ratio of adjusted FFO
to adjusted fixed charges for the previous four fiscal quarters  exceeds 1.25 to
1.00. Given that FFO for 1998 was $(41.2) million, reflecting write-downs of the
securities  available for sale portfolio of $79.7 million  predominantly  in the
second half of the year,  the Company does not expect this  financial test to be
satisfied during 1999.  Permitted  Indebtedness,  the incurrence of which is not
limited under the Indenture,  includes:  (i) up to $150 million of debt that may
be incurred under certain  warehouse lines of credit or mortgage loan repurchase
agreements;  (ii) match  funded debt that may be incurred by a special  purpose,
bankruptcy remote  subsidiary of the Company;  (iii) renewals or refinancings of
existing  debt  structured  to meet  certain  conditions;  (iv) debt that may be
incurred  in hedge  transactions;  (v) up to $10  million of  capital  lease and
purchase  money  financing;  and (vi) up to $50 million of additional  debt. The
Company  believes that it can meet it financing  needs from sources of Permitted
Indebtedness  during 1999,  although there can be no assurance that this will be
the case.

         In  addition  to  payment  and,  in the case of the  Company's  secured
indebtedness,  collateralization requirements, the Company is subject to various
other  covenants in the agreements  evidencing its  indebtedness,  including the
maintenance of specified  amounts of equity. At December 31, 1998 and at January
31,  1999,  the  Company  was in  compliance  with  all  obligations  under  the
agreements  evidencing its indebtedness with respect to the Company's equity and
the Operating  Partnership's  equity,  as defined in the  applicable  agreement.
There can be no assurance that  additional  operating  losses will not result in
the  Company's  violation of its financial  and  non-financial  covenants in the
future. In the event of a default in such covenants,  the lender generally would
be able to accelerate  repayment of the  indebtedness and pursue other available
remedies,  which could result in defaults on other  indebtedness of the Company,
unless  the  applicable  lender or  lenders  allowed  the  Company  to remain in
violation of the  agreements.  Were a default to be declared,  the Company would
not be able to continue  to operate  without  the  consent of its  lenders.  The
Company currently is considering various  alternatives to enhance its ability to
meet its payment and other  obligations  under its  indebtedness and the funding
requirements  discussed  above,  including  the sale of  certain  assets and the
potential  tax and  other  consequences  associated  therewith.  There can be no
assurance  that  the  Company  will  have  sufficient  liquidity  to meet  these
obligations on a short-term or long-term basis.

YEAR 2000  DATE CONVERSION

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

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

         OCN has  established  a project plan to achieve Year 2000  readiness of
its mission  critical  and  non-mission  critical  systems,  including  hardware
infrastructure and software  applications.  The project plan is divided into six
phases: identification, evaluation, remediation, validation, risk assessment and
contingency planning.  As of December 31, 1998, OCN had substantially  completed
the systems identification,  evaluation,  remediation,  and validation phases of
the project.

                                       45
<PAGE>

         As part of the idenitifcation and evaluation phases of the project, the
Company has documented  critical operating  functions within each business unit,
as well as strategic  third-party and vendor  relationships.  OCN has retained a
business  continuity  expert to prepare  contingency  plans and assist  with the
testing and  validation  of these  plans.  OCN expects to complete its Year 2000
risks assessment and contingency planning efforts during the first half of 1999.
The cost of OCN's Year 2000 project,  which is budgeted at $2.0 million, will be
borne by OCN. The Company does not expect to incur any costs in connection  with
achieving Year 2000  compliance.  Until the risk assessment  phase is completed,
the Company will not know the complete extent of the risks  associated with Year
2000 issues, including an analysis of the most reasonable likely worst case Year
2000  scenario,  nor can the Company  prepare a  contingency  plan. As a result,
neither is ready at this time.

FUNDS FROM OPERATIONS

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

         FFO for the year ended December 31, 1998, was $41.1 million compared to
$12.0 million for the period May 14, 1997, to December 31, 1997.

         FFO differs from cash made  available  to holders of the Common  Stock,
which is based on the Company's net taxable income.  Distributions  of dividends
to  shareholders  amounted to $22.4 million for the year ended December 31, 1998
and $13.9 million for the period May 14, 1997 to December 31, 1997.

         The following  table  reconciles  FFO and net income during the periods
indicated.

<TABLE>
<CAPTION>
                                                                    For the Period
                                                     For the         May 14, 1997
                                                   Year Ended             to
                                               December 31, 1998   December 31, 1997
                                               -----------------   -----------------
                                                       (Dollars in Thousands)
<S>                                            <C>                 <C>            
Net income .................................   $       (58,186)    $        11,792
   Depreciation and amortization ...........             3,606                 179
   Loss on sale of IO portfolio ............            13,958                  --
   Loss on sale of property ................               115                  --
   Extraordinary gain on repurchase of debt               (615)                 --
                                               ---------------     ---------------
FFO ........................................   $       (41,122)    $        11,971
                                               ===============     ===============
</TABLE>

INFLATION

         Inflation has remained relatively low during the past few years and has
had a minimal impact on the operating performance of the Company's investment in
real estate.  Nonetheless,  certain of the tenants'  leases  contain  provisions
designed to lessen the 

                                       46
<PAGE>

impact of inflation.  Such provisions  include  clauses  enabling the Company to
receive  percentage  rentals  based on tenants'  gross  sales,  which  generally
increase as prices rise, and/or  escalation  clauses,  which generally  increase
rental rates during the terms of the leases. In addition, many of the leases are
for terms of less than ten  years,  which may  enable  the  Company  to  replace
existing  leases  with new leases at higher base  and/or  percentage  rentals if
rents of the existing leases are below the then-existing market rate. Office and
retail space in the properties is generally  leased to tenants under lease terms
which  provide for the tenants to pay for  increases  in  operating  expenses in
excess of specified amounts.

         Notwithstanding the foregoing,  inflation may have a negative impact on
some  of  the  Company's  other  operating  items.   Interest  and  general  and
administrative  expenses  may  be  adversely  affected  by  inflation  as  these
specified  costs could  increase at a rate higher than rents.  Also,  for tenant
leases with stated rent  increases,  inflation may have a negative effect as the
stated  rent  increases  in these  leases  could be lower than the  increase  in
inflation at any given time.

REIT STATUS

         The Company has  qualified  and intends to continue to qualify  through
calendar 1998 (but not  thereafter)  as a REIT under Sections 856 through 860 of
Code. Qualification for treatment as a REIT requires the Company to meet certain
criteria,  including certain requirements regarding the nature of its ownership,
assets,  income,  and distributions of taxable income. A REIT generally will not
be subject to federal  income  taxation  on that  portion of its income  that is
distributed  to its  shareholders  if it distributes at least 95% of its taxable
income and meets certain other income and asset tests. The Company has until the
filing of its tax  return to satisfy  the  distribution  requirement.  Since the
Company plans to distribute  100% of its taxable  income,  no provision has been
made for  federal  income  taxes for the  Company  and its  subsidiaries  in the
accompanying  Consolidated Financial Statements.  As taxable income is finalized
and the tax return is filed,  an additional  distribution  may be required which
may be significant.  The Company may be subject to tax at normal corporate rates
on net income or capital gains not distributed. For additional information about
an anticipated  excise tax liability to be incurred by the Company in connection
with the distribution requirements, See "Recent Developments" under Item 1.

RISK OF LOSS OF INVESTMENT COMPANY ACT EXEMPTION

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

         At  December  31,  1998,  the  Company  believes  that  its  Qualifying
Interests,  including subordinate and residual interests,  comprised over 85% of
the Company's  total assets and over 92% when  combined  with other  real-estate
related  assets.  As a  result,  the  Company  believes  that  it was and is not
required to register as an investment  company under the Investment Company Act.
The Company  does not intend,  however,  to seek an exemptive  order,  no-action
letter  or other  form of  interpretive  guidance  from the  Commission  on this
position,  and if the Commission were to take a different position,  the Company
could be  required  either  (i) to change the  manner in which it  conducts  its
operations in order to avoid investment company registration or (ii) to register
as an investment  company,  either of which could have a material adverse effect
on the  Company  and its  securities,  could  subject  the  Company to  monetary
penalties and injunctive  relief in an action brought by the  Commission,  could
cause the Company to be unable to enforce contracts with third parties and could
cause third parties to seek recission of relevant transactions.

                                       47
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

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

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

         The following  table  quantifies the potential  changes in net interest
income and net portfolio  value should interest rates go up or down (shocked) by
100 to 400 basis  points,  assuming  the yield curves of the rate shocks will be
parallel to each other.  Net  portfolio  value is  calculated  as the sum of the
value of off-balance  sheet  instruments  and the present value of cash in-flows
generated  from  interest-earning  assets  net of cash  out-flows  in respect of
interest-bearing liabilities. The cash flows associated with the loan portfolios
and securities available for sale are calculated based on prepayment and default
rates  that  vary by  asset.  Projected  losses,  as well  as  prepayments,  are
generated  based upon the actual  experience  with the subject  pool, as well as
similar, more seasoned pools. To the extent available, loan characteristics such
as loan-to-value ratio,  interest rate, credit history,  prepayment penalty term
and  product  types  are used to  produce  the  projected  loss  and  prepayment
assumptions that are included in the cash flow projections of the securities.

         When interest  rates are shocked,  these  projected loss and prepayment
assumptions are further adjusted.  For example, under current market conditions,
a 100 basis point decline in the market  interest rate is estimated to result in
a 200  basis  point  increase  in the  prepayment  rate  of a  typical  subprime
residential  loan.  Most  commercial and  multi-family  loans are not subject to
prepayments  as a result of  prepayment  penalties  and  contractual  terms that
prohibit prepayments during specified periods. However, for those commercial and
multi-family  loans where  prepayments are not currently  precluded by contract,
declines in interest  rates are  associated  with steep  increases in prepayment
speeds in  computing  cash flows.  A risk  premium is then  calculated  for each
asset, which, when added to the interest rate being modeled, results in a matrix
of  discount  rates that are  applied to the cash flows  computed  by the model.
Since the net portfolio value consists of both fixed and adjustable  components,
an inverse  relationship  between the market value of the net  portfolio and net
interest income is possible. This could happen if more assets reprice during the
first  year.  In this case,  more  liabilities  would be funded at the new lower
rates over a longer  period of time  during  the year.  The base  interest  rate
scenario  assumes  interest  rates at December 31, 1998.  Actual  results  could
differ significantly from those estimated in the table.

                                       48
<PAGE>

                                       Projected Percentage Change In
================================================================================
Change in Interest Rate         Net Interest Income (1)     Net Portfolio Value
================================================================================

      -400 Basis Points                  (10.52)%                  23.17%
      -300 Basis Points                   (7.89)                   16.31
      -200 Basis Points                   (5.26)                   10.04
      -100 Basis Points                   (2.63)                    3.82
     Base Interest Rate                    0                        0
      +100 Basis Points                    2.63                    (3.70)
      +200 Basis Points                    5.26                    (8.27)
      +300 Basis Points                    7.89                   (12.84)
      +400 Basis Points                   10.52                   (19.90)

(1)  Represents the estimated  percentage change in net interest income over the
     next twelve  months,  assuming that balances are rolled over and reinvested
     at the shocked level of interest  rate.  For purposes of this  calculation,
     net  interest  income  includes   interest  expense   associated  with  the
     investments in real estate.

ASSET AND LIABILITY MANAGEMENT

         Asset  and  liability  management  involves  managing  the  timing  and
magnitude of the repricing of assets and liabilities. It is the objective of the
Company to attempt to control risks associated with interest rate movements.  In
general,  management's  strategy is to match asset and liability balances within
maturity  categories to limit the Company's exposure to earnings  variations and
variations in the value of assets and  liabilities as interest rates change over
time.

         The  Company   utilizes  a  variety  of  off-balance   sheet  financing
techniques  to  assist  it in  the  management  of  interest  rate  risk.  These
techniques may include  interest rate futures and interest rate swaps,  pursuant
to  which  the  parties   exchange  the   difference   between   fixed-rate  and
floating-rate  interest payments on a specified principal amount (referred to as
the  "notional  amount")  for a specified  period  without  the  exchange of the
underlying principal amount.  Interest rate swaps are utilized by the Company to
protect  against the increase in  borrowing  cost from  floating  rate debt or a
short-term,  fixed-rate liability,  such as reverse repurchase agreements, in an
increasing  interest-rate  environment.  At December 31,  1998,  the Company had
entered into interest rate swap agreements with an aggregate  notional amount of
$200.8 million.  See Note 4 to the Consolidated  Financial Statements under Item
8.

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

                                       49
<PAGE>

         The following  table sets forth the estimated  maturity or repricing of
the  Company's  interest-earning  assets  and  interest-bearing  liabilities  at
December  31,  1998.  The  amounts  of assets  and  liabilities  shown  within a
particular  period were determined in accordance  with the contractual  terms of
the assets and liabilities,  except: (i)  adjustable-rate  loans, and securities
are included in the period in which their interest rates are first  scheduled to
adjust  and  not  in  the  period  in  which  they   mature,   (ii)   fixed-rate
mortgage-related securities reflect estimated prepayments,  which were estimated
based on  analyses  of broker  estimates,  the  results  of a  prepayment  model
utilized by the Company and empirical data, (iii) non-performing  discount loans
reflect the  estimated  timing of  resolutions  which result in repayment to the
Company, and (iv) fixed-rate loans reflect scheduled  contractual  amortization,
with  no  estimated  prepayment.  Management  believes  that  these  assumptions
approximate  actual  experience  and considers  them  reasonable;  however,  the
interest rate  sensitivity of the Company's  assets and liabilities in the table
could vary substantially if different assumptions were used or actual experience
differs from the historical experience on which the assumptions are based.

<TABLE>
<CAPTION>
                                                                        December 31, 1998
                                                  ------------------------------------------------------------
                                                                          More than 1
                                                   Within       4 to 12     Year to      3 Years
                                                  3 Months      Months      3 Years      and Over      Total
                                                  ---------    ---------   ---------    ---------    ---------
<S>                                                  <C>          <C>         <C>         <C>          <C>    
Rate-Sensitive Assets:                                                       (Dollars In Thousands)
  Interest-earning cash and repurchase
    Agreements.................................   $  49,880    $      --   $      --    $      --    $  49,880
  Securities available for sale................      26,215       40,811      81,741      202,387      351,154
  Loan portfolio, net (1)......................      42,355       86,744      59,346       58,506      246,951
  Match funded loan agreements.................       2,061       60,778      57,962       52,809      173,610
  Discount loan portfolio, net (1).............          --        5,618          --           --        5,618
                                                  ---------    ---------   ---------    ---------    ---------
    Total rate-sensitive assets................     120,511      193,951     199,049      313,702      827,213
                                                  ---------    ---------   ---------    ---------    ---------
Rate-Sensitive Liabilities:
  Securities sold under agreements
    to repurchase..............................     138,612           --          --           --      138,612
  Bonds-match funded loan agreements...........     163,404           --          --           --      163,404
  Obligations outstanding under lines of credit     177,029           --          --           --      177,029
  Notes, debentures and other
    interest-bearing obligations...............          --           --          --      143,000      143,000
                                                  ---------    ---------   ---------    ---------    ---------
    Total rate-sensitive liabilities...........     479,045           --          --      143,000      622,045
  Interest rate sensitivity gap before
    Off-balance sheet financial instruments....    (358,534)     193,951     199,049      170,702      205,168
Off-Balance Sheet Financial Instruments:
  Interest rate swaps..........................     200,780           --     (92,000)    (108,780)          --
                                                  ---------    ---------   ---------    ---------    ---------
Interest rate sensitivity gap..................    (157,754)     193,951     107,049       61,922    $ 205,168
                                                  ---------    ---------   ---------    ---------    =========
Cumulative interest rate sensitivity gap.......   $(157,754)   $  36,197   $ 143,246    $ 205,168
                                                  ==========   =========   =========    =========
Cumulative interest rate sensitivity gap as a
    percentage of total rate-sensitive assets..      (19.07%)       4.38%      17.32%       24.80%
</TABLE>

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

         As of December 31, 1998,  the cumulative  volume of assets  maturing or
repricing  within one year exceeded  liabilities by $36.2  million,  or 4.38% of
assets,  implying moderate  current-year  income sensitivity to movements in the
level of interest rates.

                                       50
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                 INDEX
                                                                                                   Page
                                                                                                   ----

<S>                                                                                                <C>
    Report of Management........................................................................... 52

    Report of Independent Certified Public Accountants............................................. 53

    Consolidated Statement of Financial Condition at December 31, 1998 and 1997.................... 54

    Consolidated Statement of Operations for the Year Ended December 31, 1998 and for the Period
      May 14, 1997 to December 31, 1997............................................................ 55

    Consolidated Statement of Comprehensive Income (loss) for the year ended December 31, 1998
      and for the Period May 14, 1997 to December 31, 1997......................................... 56

    Consolidated Statement of Changes in Shareholders' Equity for the Year Ended December 31, 1998
      and for the Period May 14, 1997 to December 31, 1997......................................... 57

    Consolidated Statement of Cash Flows for the Year Ended December 31, 1998 and for the Period
      May 14, 1997 to December 31, 1997............................................................ 58

    Notes to Consolidated Financial Statements at December 31, 1998 and 1997....................... 59
</TABLE>



                                       51
<PAGE>

REPORT OF MANAGEMENT


The  management of Ocwen Asset  Investment  Corp.  ("Ocwen" or the "Company") is
responsible  for  the  preparation  and  fair   presentation  of  the  financial
statements and other financial  information contained in this annual report. The
accompanying  consolidated financial statements have been prepared in conformity
with generally accepted accounting  principles applied on a consistent basis and
include amounts based on management's best estimates and judgments. Nonfinancial
information  included in this annual report has also been prepared by management
and is consistent with the consolidated financial statements.  In the opinion of
management,  the consolidated  financial statements fairly reflect the Company's
financial position, results of operations and cash flows.

To assure that  financial  information  is reliable and assets are  safeguarded,
management  has  established  and  maintains  an  effective  system of  internal
accounting  controls and procedures that provide reasonable  assurance as to the
integrity  and  reliability  of  the  consolidated  financial  statements,   the
protection of assets against loss from  unauthorized  use or disposition and the
prevention and detection of errors and irregularities on a timely basis.

PricewaterhouseCoopers  LLP  conducts  its audit of the  consolidated  financial
statements  in accordance  with  generally  accepted  auditing  standards.  Such
standards include the evaluation of internal  accounting controls to establish a
basis for developing the scope of its examination of the consolidated  financial
statements.  In addition to the use of independent certified public accountants,
Ocwen maintains a professional staff of internal auditors who conduct financial,
procedural and special audits of the Company. To ensure their independence, both
PricewaterhouseCoopers  LLP and the internal  auditors have direct access to the
Audit Committee of the Board of Directors.

The Audit  Committee,  which  consists  solely of  independent  directors of the
Company,  makes  recommendations  to  the  Board  of  Directors  concerning  the
appointment  of the  independent  certified  public  accountants  and meets with
PricewaterhouseCoopers  LLP and the internal  auditors to discuss the results of
their audits, the Company's internal accounting controls and financial reporting
matters.


    /s/ WILLIAM C. ERBEY                      /s/ MARK S. ZEIDMAN
    --------------------                      -------------------
    William C. Erbey                          Mark S. Zeidman
    Chairman and Chief Executive Officer      Senior Vice President and
                                              Chief Financial Officer

                                       52
<PAGE>

               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



To the Board of Directors and Shareholders of Ocwen Asset Investment Corp.

In our opinion, the accompanying  consolidated  statement of financial condition
and the related consolidated  statements of operations,  of comprehensive income
(loss), of changes in shareholders'  equity and of cash flows present fairly, in
all material  respects,  the financial  position of Ocwen Asset Investment Corp.
(the  "Company")  and its  subsidiaries  at  December  31, 1998 and 1997 and the
results of their operations and their cash flows for the year ended December 31,
1998,  and the period May 14, 1997 to December  31,  1997,  in  conformity  with
generally accepted  accounting  principles.  These financial  statements are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements  in  accordance  with  generally  accepted  auditing
standards which require that we plan and perform the audits to obtain reasonable
assurance   about  whether  the  financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement, assessing the accounting
principles used and significant estimates made by management, and evaluating the
overall financial statement  presentation.  We believe that our audits provide a
reasonable basis for the opinion expressed above.



/s/ PRICEWATERHOUSECOOPERS LLP
------------------------------
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
January 28, 1999

                                       53
<PAGE>

<TABLE>
<CAPTION>
                                        OCWEN ASSET INVESTMENT CORP.
                                CONSOLIDATED STATEMENT OF FINANCIAL CONDITION

                                                                             December 31,      December 31,
                                                                                 1998              1997
                                                                             -------------    -------------
ASSETS:
<S>                                                                          <C>              <C>          
   Cash and amounts due from depository institutions .....................   $   3,484,929    $     331,047
   Interest-bearing deposits .............................................      49,880,276       48,346,076
   Securities available for sale, at fair value ..........................     351,153,971      146,026,907
   Commercial and multi-family loan portfolio, net .......................      65,282,965        9,481,436
   Residential loan portfolio, net .......................................       8,058,445        6,350,043
   Match funded residential loans, net ...................................     173,609,873               --
   Discount loan portfolio, net ..........................................       5,618,022       26,978,888
   Investment in real estate, net ........................................     208,058,721       45,430,039
   Principal and interest receivable .....................................       7,475,795        2,518,272
   Deposits on pending asset acquisitions ................................              --        1,000,000
   Other assets ..........................................................      15,702,816        1,540,633
                                                                             -------------    -------------
     Total assets ........................................................   $ 888,325,813    $ 288,003,341
                                                                             =============    =============

LIABILITIES:
   Securities sold under agreements to repurchase ........................   $ 138,611,824    $          --
   Obligations outstanding under line of credit ..........................      34,472,404               --
   Obligations outstanding under line of credit - secured by real estate .     142,556,880               --
   11.5% Redeemable Notes due 2005 .......................................     143,000,000               --
   Bonds - match funded loan agreement ...................................     163,403,966               --
   Dividends and distributions payable ...................................              --        7,458,750
   Accrued expenses, payables and other liabilities ......................      21,190,288        6,344,783
                                                                             -------------    -------------
     Total liabilities ...................................................     643,235,362       13,803,533
                                                                             -------------    -------------

Minority interest ........................................................      23,914,058        2,941,541
                                                                             -------------    -------------

Commitments and Contingencies (Note 15)

SHAREHOLDERS' EQUITY:
   Preferred stock, $.01 par value; 25,000,000 shares authorized;
     0 shares issued and outstanding .....................................              --               --
   Common Stock, $.01 par value; 200,000,000 shares authorized;
     18,965,000 shares issued and outstanding ...........................         189,650          189,650
   Additional paid-in capital ............................................     294,492,203      280,503,838
   Cumulative dividends declared .........................................     (36,277,546)     (13,898,849)
   Retained earnings (deficit) ...........................................     (46,394,403)      11,791,518
   Accumulative other comprehensive income:
     Unrealized gain (loss) on securities available for sale .............      11,038,151       (7,327,890)
     Cumulative translation adjustment ...................................      (1,871,662)              --
                                                                             -------------    -------------
       Total other comprehensive income (loss) ...........................       9,166,489       (7,327,890)
                                                                             -------------    -------------
       Total shareholders' equity ........................................     221,176,393      271,258,267
                                                                             -------------    -------------
                                                                             $ 888,325,813    $ 288,003,341
                                                                             =============    =============

           THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                       54
<PAGE>

                                   OCWEN ASSET INVESTMENT CORP.
                               CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                       
                                                         For the Year Ended   For the Period May 14,
                                                             December 31,           1997 to 
                                                                1998           December 31, 1997
                                                         ------------------    ---------------------
INTEREST INCOME:
<S>                                                      <C>                   <C>               
   Repurchase agreements and interest bearing deposits   $        1,212,517    $        5,538,946
   Securities held for trading .......................              106,892                    --
   Securities available for sale .....................           43,446,423             6,362,909
   Commercial and Multi-family loans .................            5,736,214               245,147
   Match funded residential loans ....................            1,915,071                    --
   Residential loans .................................            8,424,325                66,010
   Discount loans ....................................            2,116,564             1,248,703
                                                         ------------------    ------------------
                                                                 62,958,006            13,461,715
                                                         ------------------    ------------------
INTEREST EXPENSE:
   Securities sold under agreements to repurchase ....           11,682,824                    --
   Obligations outstanding under lines of credit .....            6,515,925                    --
   11.5% Redeemable Notes due 2005 ...................            7,798,597                    --
   Bonds-match funded loan agreements ................            1,530,467                    --
                                                         ------------------    ------------------
                                                                 27,527,813                    --
                                                         ------------------    ------------------
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES .           35,430,193            13,461,715
   Provision for loan losses .........................              641,677                    --
                                                         ------------------    ------------------
   NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES           34,788,516            13,461,715
                                                         ------------------    ------------------

REAL ESTATE-OPERATING INCOME:
   Rental income .....................................           22,701,796             1,320,090
   Other .............................................               37,801               902,665
                                                         ------------------    ------------------
                                                                 22,739,597             2,222,755
                                                         ------------------    ------------------
REAL ESTATE-OPERATING EXPENSES:
   Rental operation ..................................           10,803,153               549,369
   Depreciation and amortization .....................            3,606,490               179,088
   Interest ..........................................            7,190,002                    --
                                                         ------------------    ------------------
                                                                 21,599,645               728,457
                                                         ------------------    ------------------
REAL ESTATE INCOME, NET ..............................            1,139,952             1,494,298
                                                         ------------------    ------------------
OTHER EXPENSES:
   Management fees ...................................            5,892,468             1,796,311
   Due diligence expenses ............................            1,817,924               326,025
   Servicing fees ....................................            2,399,778                    --
   Foreign currency (gain) loss ......................             (116,953)              568,565
   Other .............................................            3,323,672               464,164
                                                         ------------------    ------------------
                                                                 13,316,889             3,155,065
                                                         ------------------    ------------------

LOSSES ON SECURITIES, DERIVATIVES, AND REAL ESTATE ...          (86,267,429)                   --
                                                         ------------------    ------------------

(LOSS) INCOME BEFORE MINORITY INTEREST ...............          (63,655,850)           11,800,948

Minority interest in net loss (income) of consolidated
    subsidiary .......................................            4,854,884                (9,430)
                                                         ------------------    ------------------
   NET (LOSS) INCOME BEFORE EXTRAORDINARY ITEM .......          (58,800,966)           11,791,518

Extraordinary gain on repurchase of debt .............              615,047                    --
                                                         ------------------    ------------------
   NET (LOSS) INCOME .................................   $      (58,185,919)   $       11,791,518
                                                         ==================    ==================
BASIC (LOSS) EARNINGS PER SHARE:
   (Loss) income before extraordinary item ...........   $            (3.10)   $             0.62
   Extraordinary item ................................                 0.03                    --
                                                         ------------------    ------------------
   Net (loss) income .................................   $            (3.07)   $             0.62
                                                         ==================    ==================
DILUTED (LOSS) EARNINGS PER SHARE:
   (Loss) income before extraordinary item ...........   $            (3.10)   $             0.60
   Extraordinary item ................................                 0.03                    --
                                                         ------------------    ------------------
   Net (loss) income .................................   $            (3.07)   $             0.60
                                                         ==================    ==================

      THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                       55
<PAGE>

<TABLE>
<CAPTION>
                                            OCWEN ASSET INVESTMENT CORP.
                                CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

                                                                             For the Year         For the Period
                                                                                Ended             May 14, 1997 to
                                                                           December 31, 1998     December 31, 1997
                                                                          ------------------    ------------------
<S>                                                                       <C>                   <C>               
Net (loss) income .....................................................   $      (58,185,919)   $       11,791,518
Other comprehensive income:
   Unrealized gain (loss) on securities available for sale ............            8,967,096            (7,327,890)
   Unrealized foreign currency translation adjustment .................           (1,871,662)                   --
   Reclassification adjustment for losses included in net income ......            9,398,945                    --
                                                                          ------------------    ------------------
   Other comprehensive income .........................................           16,494,379            (7,327,890)
                                                                          ------------------    ------------------
Comprehensive (loss) income ...........................................   $      (41,691,540)   $        4,463,628
                                                                          ==================    ==================




Disclosure of reclassification adjustment:
   Unrealized holding losses arising during the year on securities sold   $      (70,251,978)
   Add:  Adjustment for losses included in net loss ...................           79,650,923 
                                                                          ------------------
   Net reclassification adjustment for losses recognized in other
     Comprehensive income in prior years ..............................   $        9,398,945
                                                                          ==================

                THE ACCOMPANYING NOTES ARE INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>

                                       56
<PAGE>

<TABLE>
<CAPTION>
                                                                OCWEN ASSET INVESTMENT CORP.
                                                 CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
                                                  FOR THE YEAR ENDED DECEMBER 31, 1998 AND FOR THE PERIOD
                                                             MAY 14, 1997 TO DECEMBER 31, 1997


                                                                                                    Accumulated
                                   Common Stock          Additional      Cumulative      Retained       Other
                           ----------------------------    Paid-in        dividends      earnings   Comprehensive
                              Shares         Amount        Capital        declared       (deficit)   Income (loss)      Total
                           -------------  -------------  -------------  -------------  -------------  ------------  -------------
<S>                           <C>               <C>        <C>            <C>             <C>           <C>           <C>        
Issuance of common
  stock ..................    19,125,000  $     191,250  $ 283,496,750  $          --  $          --  $         --  $ 283,688,000

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

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

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

Change in unrealized gain
  (loss) on securities
  available for sale .....                                                                              (7,327,890)    (7,327,890)
                           -------------  -------------  -------------  -------------  -------------  ------------  -------------
Balance at December
  31, 1997 ...............    18,965,000        189,650    280,503,838    (13,898,849)    11,791,518    (7,327,890)   271,258,267
                           -------------  -------------  -------------  -------------  -------------  ------------  -------------

Capital contribution .....                                  13,988,365                                                 13,988,365

Net (loss) ...............                                                               (58,185,921)                 (58,185,921)

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

Change in unrealized
  gain (loss) on
  Securities available
  for sale ...............                                                                              18,366,041     18,366,041

Change in cumulative
  translation adjustment .                                                                              (1,871,662)    (1,871,662)
                           -------------  -------------  -------------  -------------  -------------  ------------  -------------
Balance at December
  31, 1998................    18,965,000  $     189,650  $ 294,492,203  $ (36,277,546) $ (46,394,403) $  9,166,489  $ 221,176,393
                           =============  =============  =============  =============  =============  ============  =============

                                   THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>

                                       57
<PAGE>

<TABLE>
<CAPTION>
                                            OCWEN ASSET INVESTMENT CORP.
                                        CONSOLIDATED STATEMENT OF CASH FLOWS

                                                                                    For the Year    For the Period 
                                                                                       Ended        May 14, 1997 to
                                                                                    December 31       December 31,
                                                                                        1998             1997
                                                                                   -------------    -------------
<S>                                                                                <C>              <C>          
Cash flows from operating activities:
   Net (loss) income ...........................................................   $ (58,185,919)   $  11,791,518
     Adjustments to reconcile net income to net cash provided by
     operating activities:
       Premium amortization (discount accretion), net ..........................      15,012,575        6,236,654
       Depreciation ............................................................       3,606,490          179,088
       Foreign exchange (gain) loss ............................................        (116,953)         568,565
       Extraordinary gain on extinguishment of debt ............................        (615,047)              --
       Provision for loan losses ...............................................         641,677               --
       Proceeds received on sale of securities held for trading ................      39,408,287               --
       Net losses on securities, derivative, and real estate ...................      86,267,429               --
       Increase in interest receivable .........................................      (4,957,523)      (2,518,272)
       Increase in other assets ................................................     (14,316,713)      (1,540,633)
       Increase (decrease) in accrued expenses, payables and other liabilities .       5,934,062        6,344,783
       Minority interest in earnings (losses) ..................................      (4,854,884)           9,430
                                                                                   -------------    -------------
Net cash provided by operating activities ......................................      67,823,481       21,071,133
                                                                                   -------------    -------------
Cash flows from investing activities:
  Purchase of securities available for sale ....................................    (357,279,884)    (166,334,140)
  Maturities and principal payments received on securities available for sale ..      42,872,223        6,654,881
  Principal payments received from discount loans ..............................       2,174,388          932,366
  Principal payments received from loans .......................................      36,036,537          333,454
  Purchase of loans ............................................................    (267,570,853)     (16,091,515)
  Purchase of discount loans ...................................................              --      (28,465,429)
  Proceeds received from sale of investment in real estate .....................       1,397,201               --
  Investment in real estate ....................................................    (152,252,879)     (45,609,127)
  Deposits on pending asset acquisitions .......................................         126,605       (1,000,000)
                                                                                   -------------    -------------
Net cash used by investing activities ..........................................    (694,496,662)    (249,579,510)
                                                                                   -------------    -------------
Cash flows from financing activities:
  Proceeds from issuance of common stock, net of offering costs ................              --      283,688,000
  Dividend payments on common stock ............................................     (29,775,046)      (6,502,500)
  Proceeds received from sale of securities to affiliates ......................      13,957,595               --
  Proceeds from issuance of Notes ..............................................     150,000,000               --
  Repurchase of Notes ..........................................................      (6,309,944)              --
  Proceeds from issuance of bonds ..............................................     173,900,353               --
  Principal payment on bonds ...................................................     (12,071,246)
  Proceeds from sale of operating partnership units ............................      27,593,302               --
  Increase in securities sold under agreements to repurchase ...................     114,410,572               --
  Increase in obligations outstanding under lines of credit ....................     201,230,536               --
                                                                                   -------------    -------------
Net cash provided by financing activities ......................................     632,936,122      277,185,500
                                                                                   -------------    -------------
Change in cumulative translation adjustment ....................................      (1,574,859)              --
Net increase in cash and cash equivalents ......................................       4,688,082       48,677,123
Cash and cash equivalents at beginning of period ...............................      48,677,123               --
                                                                                   -------------    -------------
Cash and cash equivalents at end of period .....................................   $  53,365,205    $  48,677,123
                                                                                   =============    =============
Reconciliation of cash and cash equivalents at end of period:
  Cash and amounts due from depository institutions ............................   $   3,484,929    $     331,047
  Interest earning deposits ....................................................      49,880,276       48,346,076
                                                                                   -------------    -------------
     Total .....................................................................   $  53,365,205    $  48,677,123
                                                                                   =============    =============
  Supplement schedule of non-cash financing activities:
     Interest paid .............................................................      24,960,903               --
  Non-cash activities:
     Loans transferred through the foreclosure of discount loans to
       Investment in real estate ...............................................      19,395,998               --
     Change in unrealized gain (loss) on securities available for sale .........      18,336,041       (7,327,890)

               THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
                                       58
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

NOTE 1   ORGANIZATION

         Ocwen Asset Investment Corp. ("OAC" or the "Company") has elected to be
taxed as a Real Estate  Investment Trust ("REIT") under Sections 865 through 860
of the Internal  Revenue Code of 1986,  as amended (the  "Code").  As such,  the
Company will generally not be subject to federal income taxation on that portion
of its income that is distributed to shareholders if it distributes at least 95%
of its taxable income to its  shareholders by the due date of its federal income
tax return and complies with various other requirements.

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

         The Company's consolidated financial statements include the accounts of
the Company and its  subsidiaries.  The Company directly owns two qualified REIT
subsidiaries,  Ocwen  General,  Inc. (the "General  Partner") and Ocwen Limited,
Inc. (the "Limited  Partner").  General Partner and Limited Partner own 0.9% and
90.4%, respectively,  of Ocwen Partnership,  L.P. (the "Operating Partnership").
Additionally,  through the General  Partner  and  Limited  Partner,  the Company
established  additional  partnerships  in Florida and California for real estate
investment  purposes.  The minority  interest at December 31, 1998  represents a
8.7% interest  (1,808,733 units) in the Operating  Partnership held by Investors
Mortgage Insurance Holding Company ("IMIHC"), a wholly owned subsidiary of Ocwen
Financial  Corporation  ("OCN").  IMIHC also owns 1,540,000 shares, or 8.12%, of
the outstanding Common Stock.

         The Company has entered into a management  agreement with Ocwen Capital
Corporation  ("OCC"), a wholly-owned  subsidiary of OCN, under which OCC advises
the  Company  on various  facets of its  business  and  manages  its  day-to-day
operations,  subject to the supervision of the Company's Board of Directors. For
its services,  OCC receives a quarterly base management fee of 0.25% per quarter
on Average  Invested Assets.  The term "Average  Invested Assets" for any period
means the  average of the  aggregate  book  value of the assets of the  Company,
including  the  assets of all of its direct and  indirect  subsidiaries,  before
reserves  for  depreciation  or bad  debts or other  similar  noncash  reserves,
computed  by  taking  the daily  average  of such  values  during  such  period;
provided, however, effective January 1, 1998, with respect to residential loans,
the phase means  average net equity  invested.  In addition,  OCC is entitled to
receive an annual  incentive  fee in an amount equal to 25% of the dollar amount
by which Funds From  Operations  ("FFO"),  as adjusted,  exceeds certain defined
levels per the management  agreement.  During 1998 and 1997, OCC earned from the
Company $5.9 million and $1.8 million,  respectively in base management fees. No
incentive  compensation  was  paid  for 1998 and  1997.  In  addition,  for such
periods,  OCC was  reimbursed  $1.8 million and $0.3 million,  respectively  for
out-of-pocket costs and salary allocations for real estate due diligence tasks.

         The  Company  also has entered  into  servicing  agreements  with Ocwen
Federal  Bank,  FSB (the  "Bank"),  a  wholly-owned  subsidiary  of OCN, for the
servicing of all of the Company's  mortgage loans. In addition,  the Bank in its
capacity  as  servicer  or  special   servicer   receives   fees  from   certain
mortgage-backed  securities in which the Company owns a subordinate  or residual
interest.  As a  special  servicer,  the  Bank  provides  asset  management  and
resolution  services  with respect to defaulted  mortgage  loans  subject to the
Company's  right to direct the  foreclosure,  the  management  and  disposal  of
foreclosed  properties  and  all  other  actions  that a  servicer  may  take in
connection with a defaulted loan.  During 1998, the Bank earned from the Company
$2.4 million in  servicing  fees.  No servicing  fees were earned by the Bank in
1997.

                                       59
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

NOTE 2   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         The  accounting   and  reporting   policies  of  the  Company  and  its
subsidiaries  follow Generally  Accepted  Accounting  Principals  ("GAAP").  The
policies which materially  affect the  determination of the Company's  financial
position, results of operations and cash flows are summarized below.

PRINCIPLES OF CONSOLIDATION

         The Company's consolidated financial statements include the accounts of
OAC  and  its  subsidiaries  as  described  in  Note 1  above.  All  significant
intercompany transactions and balances have been eliminated.

USE OF ESTIMATES

         The  preparation  of  financial  statements  in  conformity  with  GAAP
requires  management to make estimates and assumptions  that affect the reported
amounts  of assets and  liabilities  and  disclosure  of  contingent  assets and
liabilities at the date of the financial  statements and the reported amounts of
revenues and expenses during the reporting  period.  Actual results could differ
from those estimates.  Material  estimates that are particularly  susceptible to
significant  change  in the near or  medium  term  relate  to the  valuation  of
securities  available for sale and  determination of the allowance for losses on
loans and discount loans.

SECURITIES AVAILABLE FOR SALE

         Securities  are  classified as available for sale when in  management's
judgement  they may be sold in  response  to or in  anticipation  of  changes in
interest rates and resulting  prepayment  risk, or other factors.  Available for
sale securities are carried at fair value.  Unrealized gains and losses on these
securities,  along  with  any  unrealized  gains  and  losses  on  related  risk
management  instruments,  are reported as a separate  component  of  accumulated
other comprehensive income in shareholders' equity.  Securities that the Company
has the  positive  intent and  ability to hold to  maturity  are  classified  as
held-to-maturity  and are carried at  amortized  cost.  At December 31, 1998 and
1997, the Company had no securities classified as held-to-maturity. Interest and
dividend income on securities,  including amortization of premiums and accretion
of discounts, are reported in earnings.  Interest income is recognized using the
interest  method.  The  specific  identification  method  is used  to  determine
realized  gains  and  losses  on sales of  securities,  which  are  reported  in
earnings.  The  carrying  value of  individual  securities  is  reduced  through
write-downs in earnings to reflect other-than-temporary impairments in value.

LOAN PORTFOLIO

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

DISCOUNT LOAN PORTFOLIO

         Certain  mortgage  loans,  for which the  borrower is not current as to
principal  and  interest  payments or for which there is a reason to believe the
borrower will be unable to continue to make its scheduled principal and interest
payments,  are acquired at a discount.  The acquisition cost for a pool of loans
is  allocated  to each loan  within the pool based  upon the  Company's  pricing
methodology. The acquisition cost for a pool of discount loans is allocated on a
relative  fair value  basis to each loan within the pool.  The Company  believes
that it is able to reasonably  estimate the amounts and timing of collections on
all of its discounted  loans.  For those  commercial real estate loans which are
current and for which the  Company  believes  that  collecting  the  acquisition
amount of the loan and  discount is  probable,  the  discount  is accreted  into
interest  income  as a yield  adjustment  using  the  interest  method  over the
contractual  maturity  of the loan.  For those  commercial  discount  loans that
become nonperforming, the Company ceases accretion of the discount. Gains on the
repayment or discharge of the discount loans,  including any remaining discount,
are reported as interest income.

                                       60
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

         Discount loans are reported at their outstanding  principal balance net
of any charge-offs and premiums or discounts. The Company periodically evaluates
loans in the discount loan  portfolio for  impairment.  Individually  identified
impaired loans are measured based on one of the following:  the present value of
payments  expected  to be  received  (using a  discount  rate that  equates  the
Company's  estimate of expected  future  cash flows to the  acquisition  price),
observable  market prices,  or the estimated  fair value of the collateral  (for
loans  that are  solely  dependent  on the  collateral  for  repayment).  If the
recorded  investment in the impaired loan exceeds the measure of estimated  fair
value, a valuation  allowance is established as a component of the allowance for
loan losses. At December 31, 1998, the Company did not have any impaired loans.

ALLOWANCE FOR LOAN LOSSES

         The allowance  for estimated  loan losses is maintained at a level that
management,  based upon evaluation of known and inherent risks in the portfolio,
considers  adequate  to  provide  for  inherent  losses.  Management's  periodic
evaluation of the allowance for estimated  loan losses is based upon an analysis
of the portfolio,  historical loss experience,  economic  conditions and trends,
collateral  values  and  other  relevant  factors.  Future  adjustments  to  the
allowance may be necessary if economic conditions and trends,  collateral values
and other relevant  factors differ  substantially  from the assumptions  used in
making the evaluation.

INVESTMENT IN REAL ESTATE

         Investment  in  real  estate  is  recorded  at  cost  less  accumulated
depreciation.  The Company  reviews its investment in real estate for impairment
whenever  events or changes in  circumstances  indicate that the carrying amount
may not be recoverable.  Depreciation is computed on a straight-line  basis over
the estimated useful lives of the assets as follows:

   Buildings and improvements                39 years
   Tenant improvements                       Lesser of lease term or useful life
   Furniture, fixtures and equipment         7 years

         Expenditures  for repairs and  maintenance are charged to operations as
incurred.  Significant  renovations are capitalized.  Fees and costs incurred in
the   successful   negotiation  of  leases  are  deferred  and  amortized  on  a
straight-line  basis over the terms of the respective leases.  Rental revenue is
reported on a straight-line basis over the terms of the respective leases.

FOREIGN CURRENCY TRANSACTIONS AND TRANSLATION

         The Company's  investment in foreign  assets are  translated  into U.S.
dollars at current  exchange  rates,  and  related  revenues  and  expenses  are
translated  at average  exchange  rates for the  period.  Transaction  gains and
losses that arise from exchange rate fluctuations on transactions denominated in
a currency other than U.S. dollars are included in the results of operations.

         The assets,  liabilities  and results of  operations  of the  Company's
foreign subsidiaries which have functional currencies other than U.S. dollar are
translated  into  U.S.   dollars  at  current  exchange  rates  for  assets  and
liabilities  and  average  exchange  rates for the  period  for the  results  of
operations.  Resulting  translation  adjustments  are  included  as  a  separate
component of accumulated other comprehensive  income in shareholders'  equity as
cumulative translation adjustments.

INCOME TAXES

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

                                       61
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

CONSOLIDATED STATEMENT OF CASH FLOWS

         For purposes of reporting cash flows, cash and cash equivalents include
non-interest  earning deposits,  interest earning deposits and all highly liquid
investments  purchased  with an original  maturity date of three months or less.
Cash flows  associated  with hedges of  identifiable  transactions or events are
classified in the same category as the cash flows from the item being hedged.

BASIC AND DILUTED EARNINGS PER SHARE

         Basic earnings per share is calculated  based upon the weighted average
number of shares of Common Stock outstanding  during the year.  Diluted earnings
per share is  calculated  based upon the  weighted  average  number of shares of
Common Stock  outstanding and all dilutive  potential common shares  outstanding
during the year.  The  computation  of diluted  earnings per share  includes the
impact of the exercise of the  outstanding  options to purchase Common Stock and
assumes  that the proceeds  from such  issuance  are used to  repurchase  common
shares at fair  value.  Common  Stock  equivalents  would be  excluded  from the
diluted  calculation  if a net loss was incurred for the period as they would be
antidilutive.

RISKS AND UNCERTAINTIES

         In the normal course of business,  the Company encounters primarily two
significant types of economic risk:  credit and market.  Credit risk is the risk
of default on the  company's  loan  portfolio  that  results  from a  borrowers'
inability or unwillingness to make contractually required payments.  Market risk
reflects  changes in the value of securities  available for sale and investments
in real  estate  due to  changes  in  interest  rates or other  market  factors,
including  the rate of  prepayments  of principal,  the value of the  collateral
underlying loans and the valuation of real estate held by the Company.

         Additionally, the Company encounters significant tax risks. If OAC were
to fail to  qualify  as a REIT in any  taxable  year,  OAC would be  subject  to
federal income tax (including  any  applicable  alternative  minimum tax) on its
taxable income at regular  corporate  rates,  and  distributions to shareholders
would  not be  deductible  by OAC in  computing  its  taxable  income.  Any such
corporate tax liability could be substantial and would reduce the amount of cash
available for distribution to shareholders,  which in turn could have an adverse
impact on the value of, and trading  prices for,  the  Company's  common  stock.
Unless entitled to relief under certain Code provisions,  the Company could also
be disqualified from taxation as a REIT for the four taxable years following the
year during which OAC ceased to qualify as a REIT.

RECLASSIFICATION

         Certain amounts included in the 1997 consolidated  financial statements
have been reclassified in order to conform to the 1998 presentation.

RECENT ACCOUNTING STANDARDS

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

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

                                       62
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

NOTE 3   FAIR VALUE OF FINANCIAL INSTRUMENTS

         Other  than  investment  in  real  estate,  substantially  all  of  the
Company's assets are considered financial  instruments.  For the majority of the
Company's financial instruments,  principally loans, fair values are not readily
available  since there are no  available  trading  markets as  characterized  by
current exchanges between willing parties.  Accordingly, fair values can only be
derived or estimated using various valuation  techniques,  such as computing the
present value of estimated  future cash flows using discount rates  commensurate
with the risks involved.  However,  the  determination  of estimated future cash
flows is inherently subjective and imprecise.  In addition,  for those financial
instruments   with   option-related   features,   prepayment   assumptions   are
incorporated  into the  valuation  techniques.  It  should be noted  that  minor
changes in assumptions or estimation  methodologies could have a material effect
on these derived or estimated fair values.

         The fair values  reflected  below are  indicative  of the interest rate
environments   as  of  December  31,  1998  and  1997,  and  do  not  take  into
consideration the effects of interest rate  fluctuations.  In different interest
rate environments,  fair value results can differ significantly,  especially for
certain fixed-rate  financial  instruments and non-accrual  assets. In addition,
the fair values  presented do not attempt to estimate the value of the Company's
anticipated  future business  activities.  In other words, they do not represent
the Company's value as a going concern. Furthermore, the differences between the
carrying amounts and the fair values presented may not be realized.

         Reasonable comparability of fair values among institutions is difficult
due to the wide range of permitted  valuation  techniques and numerous estimates
that  must be made in the  absence  of  secondary  market  prices.  This lack of
objective pricing standards introduces a degree of subjectivity to these derived
or estimated fair values.  Therefore,  while disclosure of estimated fair values
of financial  instruments is required,  readers are cautioned in using this data
for purposes of evaluating the financial condition of the Company.

         The following  table sets forth the carrying  amounts and the estimated
fair values of the  Company's  financial  instruments  at December  31, 1998 and
1997.

<TABLE>
<CAPTION>
                                                                        1998                       1997
                                                             -------------------------    -----------------------
                                                               Carrying        Fair        Carrying       Fair
                                                                Amount         Value        Amount        Value
                                                             -----------   -----------    ----------   ----------
                                                                               (Dollars In Thousands)
<S>                                                          <C>           <C>            <C>          <C>       
Cash and cash equivalents .................................  $    53,365   $    53,365    $   48,677   $   48,677
Securities available for sale .............................      351,154       351,154       146,027      146,027
Loan portfolio, net .......................................       73,341        73,341        15,831       15,831
Match funded loan agreements ..............................      173,610       173,610            --           --
Discount loan portfolio ...................................        5,618         5,618        26,979       26,979
Securities sold under agreements to repurchase ............      138,612       138,612            --           --
Obligations outstanding under line of credit ..............       34,472        34,472            --           --
Obligations outstanding under lines of credit-real estate..      142,557       142,557            --           --
11.5% Redeemable Notes due 2005 ...........................      143,000       108,680            --           --
Bonds-match funded loan agreement .........................      163,404       163,404            --           --
Loan commitments ..........................................       58,666        58,666        74,300       74,300
</TABLE>

        The methodologies  used and key assumptions made to estimate fair value
follow:

CASH AND CASH EQUIVALENTS

         Cash and cash equivalents have been valued at their carrying amounts as
these are reasonable  estimates of fair value given the relatively  short period
of time between origination of the instruments and their expected maturity.

                                       63
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

SECURITIES AVAILABLE FOR SALE

         The Company marks its  securities  available for sale portfolio to fair
value at the end of each month based upon the lower of dealer  marks or internal
values, subject to an internal review process. For those securities which do not
have an available market  quotation,  the Company will request market values and
underlying  assumptions from the various dealers that  underwrote,  or currently
finance the securities, or have had prior experience with the valuation of these
types of  securities.  When marks are  obtained  from two or more  dealers,  the
average dealer mark will be utilized.

         The Company will then compare  dealer marks with its internal  estimate
of value,  together with the underlying  assumptions,  current market conditions
and any additional factors that may contribute to the assigned values. The lower
of  dealer  marks or  internal  values  will  generally  be used  for  valuation
purposes.

         Residual  securities  are  anticipated to cash flow for the life of the
security once the over  collateralization  levels are achieved,  which typically
occurs  during the first nine to twelve  months.  Certain  events can  prevent a
security from cash flowing beyond that date,  such as delinquency and cumulative
loss triggers.  To the extent that the triggers are achieved and cash flows from
a security cease,  uncertainty exists as to the remaining expected yield on such
security.  As a result,  Ocwen places all securities that do not provide current
cash flow after one year of issuance on non-accrual  status.  To the extent that
the  residual  resumes its cash flow,  income will be reported for that month at
the lower of the actual  cash flow or the income  generated  by the  prospective
yield method.

         On a quarterly basis the Company evaluates each individual  security in
its available for sale  portfolio to determine  whether a decline in value below
amortized cost is other than temporary.  In making this assessment,  the Company
considers several factors, including but not limited to the following:

(1)      Determining  whether the present  value of estimated  future cash flows
         discounted  at a  risk-free  rate  (the  rate on  monetary  assets of a
         comparable  duration which are essentially  risk free,  i.e.,  Treasury
         rate) is less than the amortized cost basis of the instrument;

(2)      Examining  whether  the  duration  of the  decline in market  value has
         exceeded six consecutive months; and

(3)      Identifying  the  reasons  for  significant  declines  in value  (i.e.,
         greater than 20%).

         For each security where the Company  concludes that all or a portion of
the decrease in value is other than  temporary,  such amount is recognized as an
impairment charge in the statement of operations,  establishing a new cost basis
for the security.

LOANS, MATCH FUNDED LOANS, AND DISCOUNT LOANS

         The fair  value  of the  loan  portfolio,  which  includes  commercial,
multi-family,  residential loans and loan commitments, approximates the carrying
value as these  instruments  have variable market interest rates. The fair value
of the discount loan portfolio is estimated  based upon current market yields at
which recent pools of similar  mortgages  have traded taking into  consideration
the timing and amount of expected cash flows.

BORROWINGS

         The fair value of securities  sold under  agreements to repurchase  and
obligations outstanding under lines of credit approximates the carrying value as
these instruments have variable market interest rates.

         The fair value of the 11.5%  Redeemable  Notes and  bonds-match  funded
loan agreement are based on quotes obtained from securities dealers.

                                       64
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

NOTE 4   RISK MANAGEMENT INSTRUMENTS

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

         The  interest  rates  swaps are used to hedge  current  LIBOR rate debt
incurred to fund the Company's  acquisitions  of real estate and subordinate and
residual  securities.  None of the  Company's  interest  rate swaps are held for
trading purposes.  As of December 31, 1998, the Company held interest rate swaps
with a notional amount of  approximately  $200.8 million.  The fair value of the
interest rate swaps are not recognized in the consolidated financial statements.

         To qualify for hedge  accounting  the interest  rate swap must meet two
criteria:

         o   the  Company is exposed  to  interest  rate risk as the result of a
             debt it has  incurred;  and
         o   the interest rate swap reduces the Company's exposure to such risk.

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

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

         The following  table  indicates the interest rate swaps  outstanding at
December  31,  1998,  pursuant to which the  Company  receives  payments  from a
counterparty  based on a floating rate of interest  equal to LIBOR and agrees to
pay a fixed rate of interest to such party on a specified notional amount.

              Notional    LIBOR                 Floating Rate at
   Maturity    Amount     Index     Fixed Rate    End of Period    Fair Value
   --------  ---------   -------    ----------    -------------    ----------
                           (Dollars In Thousands)
     2003    $ 100,000   1-month      5.75%          5.56%         $ (2,086)
     2001       17,000   1-month      6.00           5.55              (339)
     2001       75,000   1-month      6.00           5.62            (1,479)
     2002        8,780   1-month      6.04           5.55              (240)
             ---------                                             -------- 
             $ 200,780                                             $ (4,144)
             =========                                             ======== 

         During  1998,  the Company  incurred a $2.6  million  charge on futures
contracts  used to hedge the Company's  portfolio of single  family  residential
loans,  as the future  contracts  were  terminated  because  they were no longer
effective as hedges.

         At December 31, 1998, the Company had a foreign  currency swap contract
to hedge  currency  exposure  in  connection  with its  investment  in  residual
interests backed by residential mortgage loans originated in the United Kingdom,
which are held by a wholly-owned  subsidiary of the Company.  Under the terms of
the agreement,  the Company  exchanged 14.7 million  British Pounds Sterling for
$23.5  million on January  29, 1999 based on the  exchange  rate on the date the
contract became  effective.  At December 31, 1998, the fair value of the foreign
currency swap contract was ($0.8) million. In addition, the Company entered into
a foreign  exchange  currency  swap  agreement on November 12, 1998 to hedge its
exposure in connection  with its  investment in the shopping  center  located in
Halifax, Nova Scotia, which is held by a wholly-owned subsidiary of the Company.
Under the terms of the agreement,  the Company  exchanged 20.0 million  Canadian
dollars for $12.9  million on January 15, 1999 based on the exchange rate on the
date the contract became effective.  At December 31, 1998, the fair value of the
Canadian currency contract was $0.02 million.  Gains and losses on these foreign
currency  translation  instruments  are included in the  cumulative  translation
adjustment.

                                       65
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

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

NOTE 5   SECURITIES AVAILABLE FOR SALE

         The following table sets forth the amortized cost, fair value and gross
unrealized  gains and losses on the Company's  securities  available for sale at
the dates indicated.

<TABLE>
<CAPTION>
                                                         Gross       Gross
                                         Amortized    Unrealized   Unrealized       Fair
DECEMBER 31, 1998                           Cost         Gains       Losses         Value 
                                         ---------     ---------    ---------     ---------
                                                       (Dollars In Thousands)
<S>                                      <C>           <C>          <C>           <C>      
Mortgage-related securities:
   Single family residential:
     Subprime residuals ...............  $ 209,071     $   9,653    $      --     $ 218,724
     Subordinates .....................     15,390            --           --        15,390
                                         ---------     ---------    ---------     ---------
                                           224,461         9,653           --       234,114
                                         ---------     ---------    ---------     ---------
   Multi-family and commercial:
     AAA-rated interest only ..........        454            --          (13)          441
     A-rated interest only ............        236            --          (14)          222
     Non-rated interest only ..........      3,135            --           --         3,135
     Non-rated principal only .........        276            --           --           276
     Subordinates .....................    111,554         1,412           --       112,966
                                         ---------     ---------    ---------     ---------
                                           115,655         1,412          (27)      117,040
                                         ---------     ---------    ---------     ---------
                                         $ 340,116     $  11,065    $     (27)    $ 351,154
                                         =========     =========    =========     =========

                                                         Gross       Gross
                                         Amortized    Unrealized   Unrealized       Fair
DECEMBER 31, 1997                           Cost         Gains       Losses         Value 
                                         ---------     ---------    ---------     ---------
                                                       (Dollars In Thousands)
<S>                                      <C>           <C>          <C>           <C>      
Mortgage-related securities:
   Single family residential:
     FHLMC interest only ..............  $  26,011     $     216    $  (5,049)    $  21,178
     FNMA interest only ...............     27,290           184       (4,901)       22,573
     AAA-rated interest only ..........      1,091            --         (361)          730
     Subordinates .....................      8,668           807          (31)        9,444
                                         ---------     ---------    ---------     ---------
                                            63,060         1,207      (10,342)       53,925
                                         ---------     ---------    ---------     ---------
   Multi-family and commercial:
     AAA-rated interest only ..........        913            --          (47)          866
     A-rated interest only ............        504            --          (24)          480
     Non-rated interest only ..........      4,976            --         (173)        4,803
     Non-rated principal only .........      1,017            --          (57)          960
     Subordinates .....................     82,885         2,536         (428)       84,993
                                         ---------     ---------    ---------     ---------
                                            90,295         2,536         (729)       92,102
                                         ---------     ---------    ---------     ---------
                                         $ 153,355     $   3,743    $ (11,071)    $ 146,027
                                         =========     =========    =========     =========
</TABLE>

                                       66
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

         The following table  summarizes the maturities of securities  available
for sale at December 31, 1998.  Maturities are based on weighted-average  unpaid
principal  balance  and  reflect  anticipated  future  prepayments  based  on  a
consensus of dealers in the market.

                                                  Amortized Cost   Fair Value
                                                  --------------   ----------
                                                      (Dollars In Thousands)
Due within one year ..........................    $   55,987       $   58,102
Due after 1 through 5 years ..................       183,992          188,859
Due after 5 through 10 years .................        63,505           66,425
Due after 10 years ...........................        36,632           37,768
                                                  ----------       ----------
                                                  $  340,116       $  351,154
                                                  ==========       ==========

         Premiums  amortized against and discounts accreted to income during the
years ended December 31, 1998 and 1997 are as follows:

                                                                For the Period
                                                                May 14, 1997 to
                                               December 31,      December 31,
                                                   1998              1997
                                               ------------    ----------------
                                                  (Dollars In Thousands)
Premiums amortized against interest income ..  $     63,768    $         8,033
Discounts accreted to interest income .......        48,756              1,709
                                               ------------    ---------------
Net premium amortization ....................  $     15,012    $         6,324
                                               ============    ===============

         During 1998, the Company recorded a charge of $79.7 million against its
portfolio of securities available for sale. The charge results from increases in
projected prepayment speeds during this period and a resulting shortening of the
weighted average lives of certain individual  securities in the portfolio.  As a
result, a determination was made to write down the recorded  investment in those
securities  where the  reduction in fair value was  considered  to be other than
temporary.  To the extent  that  longer  term  interest  rates  increase  or the
relationship  between  short-term and long-term rates revert to their historical
spreads,  the value of the  portfolio  could  recover.  To the  extent  that the
current  environment  persists,  or  that  rates  decrease  further,  additional
impairment  losses may be  recognized.  During 1998,  the cash proceeds from the
sale of securities  was $53.4 million at a gross realized loss of $14.0 million.
In 1997, no securities were sold.

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

NOTE 6   LOAN PORTFOLIO

         The following  table sets forth the  components  of the Company's  loan
portfolio at the dates indicated.

<TABLE>
<CAPTION>
                                                         December 31,      December 31,
                                                             1998               1997
                                                        --------------    --------------
<S>                                                     <C>               <C>           
   Single family residential..................          $    8,419,265    $    6,465,080
   Multi-family residential...................              20,544,269         1,357,333
   Commercial real estate:
     Office...................................              24,123,894            44,383
     Hotel....................................              21,304,912         8,423,608
                                                        --------------    --------------
       Total loans............................              74,392,340        16,290,404
   Deferred fees..............................                (409,254)         (458,925)
   Allowance for loan losses..................                (641,676)               --
                                                        --------------    --------------
     Loans, net...............................          $   73,341,410    $   15,831,479
                                                        ==============    ==============
</TABLE>

                                       67
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

         The   following   table   represents   a  summary   of  the   Company's
non-performing loans (past due 90 days or more) at the dates indicated.

                                               December 31,    December 31,
                                                   1998            1997
                                               ------------    ------------
Non-performing loans:
Single family residential...................   $  4,165,201    $    268,689
Multi-family................................             --              --
Commercial..................................             --              --
                                               ------------    ------------
                                               $  4,165,201    $    268,689
                                               ============    ============

         If non-accrual loans had been current in accordance with their original
terms,  additional  interest income of  approximately  $0.3 million for the year
ended December 31, 1998 would have been earned.  No interest has been accrued on
loans  greater than 89 days past due. At December 31, 1997,  there were no loans
on nonaccrual status.

         At and for the years ended  December 31, 1998 and 1997, the Company had
no investment in impaired  loans as defined in accordance  with SFAS No. 114, as
amended by SFAS No. 118.

         The allowance for loan losses was  established  in 1998.  The provision
for  loan  losses  during  1998  amounted  to $0.6  million,  or 1.0% of the net
commercial and multi-family loan portfolio.

         The  following   table  sets  forth  the  geographic   distribution  of
properties securing the Company's loans at December 31, 1998:

<TABLE>
<CAPTION>
                                Single family      Multi-family        Commercial   
                                 Residential       Residential        Real Estate          Total
                               ---------------   ---------------    ---------------   ---------------
<S>                            <C>               <C>                <C>               <C>            
         New York..........    $       661,886   $    16,345,675    $     1,805,504   $    18,813,045
         California........          1,551,675         4,198,594                 --         5,750,269
         Massachusetts.....             53,835                --         31,571,140        31,624,975
         Delaware..........                 --                --         12,052,162        12,052,162
         Florida...........            824,136                --                 --           824,136
         Other.............          5,327,753                --                 --         5,327,753
                               ---------------   ---------------    ---------------   ---------------
         Total.............    $     8,419,265   $    20,544,269    $    45,428,806   $    74,392,340
                               ===============   ===============    ===============   ===============
</TABLE>

         The following table sets forth certain information at December 31, 1998
regarding the dollar amount of loans  maturing in the Company's  loan  portfolio
based on scheduled  contractual  amortization,  as well as the dollar  amount of
loans which have fixed or adjustable interest rates. Loan balances have not been
reduced for (i) undisbursed loan proceeds,  unearned discounts and the allowance
for loan losses or (ii) nonperforming loans.

<TABLE>
<CAPTION>
                                                                                 Maturing in
                                         -----------------------------------------------------------------------------------------
                                                            After One Year    After Five Years
                                              One            Through Five        Through Ten        After Ten
                                         Year or Less           Years               Years              Years              Total
                                         ------------       ------------        ------------       ------------       ------------
                                                                   (Dollars In Thousands)
<S>                                      <C>                <C>                 <C>                <C>                <C>         
Single family residential loans.......   $        916       $      2,544        $      2,054       $      2,905       $      8,419
Multi-family residential loans........         20,544                 --                  --                 --             20,544
Commercial real estate................         45,429                 --                  --                 --             45,429
                                         ------------       ------------        ------------       ------------       ------------
   Total..............................   $     66,889       $      2,544        $      2,054       $      2,905       $     74,392
                                         ============       ============        ============       ============       ============
</TABLE>

         Scheduled  contractual  principal repayments may not reflect the actual
maturities  of loans  because of  prepayments  and, in the case of  conventional
mortgage  loans,  due-on-sale  clauses.  The  average  life of  mortgage  loans,
particularly  fixed-rate  loans,  tends to increase  when current  mortgage loan
rates are  substantially  higher  than  rates on  existing  mortgage  loans and,
conversely,  decrease when rates on existing mortgages are substantially  higher
than current mortgage loan rates.

                                       68
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

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

<TABLE>
<CAPTION>
                                                               For the           For the Period
                                                             Year Ended          May 14, 1997 to
                                                             December 31,          December 31,
                                                                1998                   1997
                                                           ---------------       ---------------
<S>                                                        <C>                   <C>            
Balance at beginning of period.......................      $    16,290,404       $            --
Originations:
   Single family residential loans...................                   --                    --
   Multi-family residential loans....................           19,186,936             1,357,333
   Commercial real estate loans......................           37,005,198             8,423,608
                                                           ---------------       ---------------
      Total loans originated.........................           56,192,134             9,780,941
                                                           ---------------       ---------------
Purchases:
   Single family residential loans...................          211,378,718             6,881,425
Secured borrowing (match funded loans)...............         (183,470,633)                   --
Principal repayments, net............................          (25,998,283)             (371,962)
                                                           ---------------       ---------------
Net increase (decrease) in net loans.................           58,101,936            16,290,404
                                                           ---------------       ---------------
Balance at end of period.............................      $    74,392,340       $    16,290,404
                                                           ===============       ===============
</TABLE>

NOTE 7   MATCH FUNDED RESIDENTIAL LOANS

         On November 13, 1998, the Company  securitized  and  transferred to OAC
Mortgage Residential Securities, Inc., a real estate mortgage investment conduit
(the "Trust"),  $173.6 million (1,808 mortgage  loans) of its  residential  loan
portfolio.  On that date,  the Trust issued two classes of notes  secured by the
related group of mortgage loans.  Loan Group I consisted of approximately  1,078
mortgage  loans  with an  aggregate  principal  balance of  approximately  $91.2
million  and  original  terms of up to 30 years and which are  secured  by first
liens on  single  family  residential  properties.  Loan  Group II  consists  of
approximately  730  mortgage  loans  with  an  aggregate  principal  balance  of
approximately  $91.0 million and original  terms of up to 30 years and which are
secured by first or second liens on single family residential  properties.  Upon
the transfer, the Company received approximately $173.9 million of proceeds. The
transfer did not qualify as a sale under FASB 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities."  Accordingly,
the amount of proceeds  from the  transfer  are  reported as a liability  in the
consolidated statement of financial condition. At December 31, 1998, the Company
had not established an allowance for loan losses.

     The  following  table  sets forth the  current  unpaid  principal  balance,
excluding the premium amount of $1.9 million, and the geographic distribution of
properties securing the Company's match funded residential loans at December 31,
1998:
                                                    Single family
                                                     Residential
                                                   ----------------
                                                     (Dollars In
                                                      Thousands)
    Michigan................................       $         44,303
    California..............................                 17,460
    Florida.................................                  9,180
    Other...................................                101,070
                                                   ----------------
    Total...................................       $        172,013
                                                   ================

NOTE 8   DISCOUNT LOAN PORTFOLIO

         The Company has acquired, through private sales and auctions,  mortgage
loans at a discount because the borrowers are either not current as to principal
and interest  payments or there is doubt as to the borrowers'  ability to pay in
full the contractual  principal and interest.  The Company estimates the amounts
it will realize through foreclosure,  collection or other resolution efforts and
the length of time required to complete the  collection  process in  determining
the amounts it will bid to acquire such loans.

         The resolution alternatives applied to the discount loan portfolio are:
(i) the borrower brings the loan current in accordance with original or modified
terms;  (ii) the  borrower  repays the loan or a  negotiated  amount;  (iii) the
borrower agrees to a deed-in-lieu of foreclosure, in which case it is classified
as  investment  in real  estate and held for sale by the Company  and;  (iv) the
Company

                                       69
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

forecloses  on the loan and the property is either  acquired at the  foreclosure
sale by a third  party or by the  Company,  in which  case it is  classified  as
investment  in real  estate  and held for  sale.  Upon  receipt  of title to the
property, the loans are transferred to investment in real estate.

         The Company's  discount loan portfolio consists of the following at the
dates indicated:

                                                      December 31,
LOAN TYPE:                                    ----------------------------
Commercial real estate loans:                    1998              1997
                                              ----------------------------
                                                   (Dollars In Thousands)
   Office ..................................  $    6,859        $   11,893
   Retail ..................................          --            30,636
                                              ----------        ----------
     Total discount loans ..................       6,859            42,529
   Discount (1) ............................      (1,241)          (15,550)
                                              ----------        ----------
     Discount loans, net ...................  $    5,618        $   26,979
                                              ==========        ==========
LOAN STATUS:
   Current .................................  $    6,859        $    7,964
   Past due 31 to 89 days ..................          --                --
   Past due 90 days or more ................          --            34,565
                                              ----------        ----------
                                              $    6,859        $   42,529
                                              ==========        ==========

 (1)     Discount generally represents the difference between the purchase price
         of discounted  loans and their  contractual  face amount at the date of
         acquisition.

         At December 31, 1998, the Company had not  established an allowance for
loan loss on the discount loan portfolio.

NOTE 9   INVESTMENT IN REAL ESTATE

         The  investment  in real estate at December  31, 1998 was  comprised of
four  commercial  office  properties  in San  Francisco,  California;  an office
building in  Jacksonville,  Florida;  and three  shopping  plazas located in (i)
Bradenton,  Florida;  (ii) Halifax,  Nova Scotia; and (iii) Havre,  Montana. The
following table sets forth the Company's  investment in real estate at the dates
indicated:

<TABLE>
<CAPTION>
                                                                      December 31,
                                                       -------------------------------------
                                                             1998                 1997
                                                       -------------------------------------
<S>                                                    <C>                  <C>             
   Land............................................    $     29,199,040     $      5,250,105
   Office buildings................................         146,120,303           21,741,969
   Retail..........................................          31,597,052           18,602,922
   Building improvements...........................           1,223,185               14,131
   Tenant improvements and lease commissions.......           3,682,602                   --
                                                       ----------------     ----------------
                                                            211,822,182           45,609,127
   Accumulated depreciation........................          (3,763,461)            (179,088)
                                                       -----------------    ----------------
     Investment in real estate, net................    $    208,058,721     $     45,430,039
                                                       ================     ================
</TABLE>

         During 1998, the Company recorded an impairment charge of $3.9 million,
related to the shopping center in Halifax,  Nova Scotia.  This impairment charge
is included in the consolidated  statement of operations in the line item losses
on securities, derivatives and real estate.

                                       70
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

NOTE 10  SECURITIES   SOLD  UNDER   AGREEMENTS  TO  REPURCHASE  AND  OBLIGATIONS
         OUTSTANDING UNDER LINES OF CREDIT

         SECURITIES SOLD UNDER  AGREEMENTS TO REPURCHASE.  Securities sold under
agreements to repurchase were $138.6 million,  with a weighted  average interest
rate of 7.97%, at December 31, 1998. These obligations are secured by certain of
the   Company's   investments   in   subordinated    interests   in   commercial
mortgage-backed  securities,  residual  interests in subprime  residential  loan
securitizations, and U.K. mortgage loan residual securities. The following table
summarizes  the maturity  dates of OAC's  securities  sold under  agreements  to
repurchase  and the  fair  value  of the  related  collateral  securities  as of
December 31, 1998:

<TABLE>
<CAPTION>
                             Outstanding   Commercial Securities   Residential Securities
Maturity Date                 Borrowing          Fair Value              Fair Value
-------------                 ---------    ---------------------   ----------------------
                                            (Dollars in Millions)
<S>                           <C>               <C>                      <C>     
0-30 days .................   $    27.8          $     34.1              $   14.4
90-120 days ...............        49.7                39.9                  45.9
6-12 months ...............        13.3                17.6                     -
15 months and over ........        47.8                   -                 138.3
                              ---------          ----------              --------
Total .....................   $   138.6          $     91.6              $  198.6
                              =========          ==========              ========
</TABLE>

         The  Company   periodically  enters  into  sales  of  securities  under
agreements  to  repurchase  the  same  securities.   Obligations  to  repurchase
securities  sold are reflected as a liability in the  accompanying  consolidated
statement of financial condition.

<TABLE>
<CAPTION>
                                                                                                    December 31,
                                                                                            ---------------------------
         Other information concerning securities sold under agreements to repurchase:         1998             1997
                                                                                            ----------        -------
                                                                                               (Dollars In Thousands)
<S>                                                                                         <C>               <C>    
              Balance at end of year................................................        $   138,612       $    --
              Accrued interest payable at end of year...............................                428            --
              Weighted average interest rate at end of year.........................               8.42%           --
              Average balance during the year.......................................            159,001            --
              Weighted average interest rate during the year........................               7.97%           --
              Maximum month-end balance.............................................            223,820            --
</TABLE>

         Interest  expense with respect to these  obligations for the year ended
December 31, 1998 was $11.7 million. During 1998, the underlying securities sold
under  agreements to repurchase  were delivered into a third-party  account that
recognizes the Company's rights and interests in these securities.

         OBLIGATIONS OUTSTANDING UNDER LINES OF CREDIT.  Obligations outstanding
under  lines of credit  amounted  to $34.5  million at December  31,  1998.  The
borrowings are pursuant to a three year agreement,  which is  collateralized  by
commercial loans aggregating  $57.0 million.  The weighted average interest rate
at December 31, 1998 was 7.3%. Interest expense during 1998 was $7.2 million.

         OBLIGATIONS   OUTSTANDING   UNDER  LINES  OF  CREDIT  -  REAL   ESTATE.
Obligations outstanding under lines of credit secured by real estate amounted to
$142.6 million at December 31, 1998. These borrowings have a three-year term and
an  interest  rate that  floats in  accordance  with  LIBOR.  Set forth below is
information  regarding  OAC's  indebtedness  relating to its  investment in real
estate at December 31, 1998:

                                       71
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>
                     Property           Principal Amount    Interest Rate    Maturity Date
                     --------           ----------------    -------------    -------------
                                     (Dollars In Millions)
<S>                                     <C>                     <C>            <C>
         Bush Street Property......     $   75.0(1)             7.3%        April, 2001 (3)
         Other.....................     $   67.6(2)             7.3%         June, 2001 (3)

</TABLE>

1)       Plus up to $5.0 million of additional advances for capital improvements
         to the Bush Street Property.
2)       Represents the portion of the outstanding  balance under a $200 million
         loan that is secured by real estate.  As of December  31,  1998,  OAC's
         investments  in  Cortez  Plaza,  450  Sansome  Street,  10 U.N.  Plaza,
         Prudential  Plaza and 690  Market  Street  secured  this  loan,  and an
         additional  $34.5  million  was  borrowed  and  secured  by  commercial
         mortgage loans under this line of credit.
3)       Subject to certain conditions, the Company may extend the maturity date
         by one year.

Interest expense during 1998 was $6.5 million.

NOTE 11  11.5% REDEEMABLE NOTES AND BONDS-MATCH FUNDED LOAN AGREEMENTS

         In July,  1998,  the Company  completed the issuance of $150 million of
11.5%  Redeemable  Notes due 2005 under Rule 144A of the Securities Act of 1933,
as amended. Interest on the Notes is payable semi-annually on January 1 and July
1,  beginning  January  1,  1999,  at a rate per annum of 11.5%.  The Notes will
mature on July 1, 2005 and will be redeemable,  at the option of the Company, in
whole or part,  on or after July 1, 2002,  at the  redemption  prices  specified
below (expressed as percentages of the principal amount thereof),  in each case,
together  with  accrued  and  unpaid  interest,  if any,  thereon to the date of
redemption,  upon not less than 30 nor more than 60 days'  notice,  if  redeemed
during the twelve-month period beginning on July 1 of the years indicated below:

                                                            REDEMPTION
          YEAR                                                 RATE
          ----                                              ----------
          2002....................................           105.750%
          2003....................................           102.875
          2004 and thereafter.....................           100.000

         During  the first 36 months  after  the date of  original  issue of the
Notes,  the Company may use the net  proceeds  of one or more  offerings  of its
common stock to redeem up to 25% of the aggregate  principal amount of the Notes
at a redemption price of 111.50% of the principal  amount thereof,  plus accrued
and unpaid  interest to the date of redemption,  provided  that,  after any such
redemption,  the aggregate  principal amount of the Notes outstanding must equal
at least $112.5 million.  On September 30, 1998, the Company  repurchased in the
open market $7.0 million of the $150.0 million  outstanding Notes. This resulted
in the Company realizing an extraordinary gain of $0.6 million.  At December 31,
1998, the outstanding balance of the Notes was $143.0 million.  Interest expense
on the Note for the year ended December 31, 1998 was $7.8 million.

         On November 13, 1998, the Company  securitized  and  transferred to the
trust $173.6 million of its residential loan portfolio.  Upon the transfer,  the
Company received  approximately $173.4 million of proceeds. The transfer did not
qualify as a sale under FAS 125  "Accounting  for  Transfers  and  Servicing  of
Financial Assets and Extinguishments of Liabilities." Accordingly, the amount of
proceeds  from the  transfer  are  reported as a liability  in the  consolidated
statement of Financial Condition.

         At December 31, 1998,  bonds-match  funded loan agreements  amounted to
$163.4  million and with a weighted  average  interest  rate of 8.09%.  Interest
expense for the year ended December 31,1998 was $1.5 million.

NOTE 12  STOCK OPTION PLAN

         In 1997,  the Company  adopted a  non-qualified  stock option plan (the
"Option Plan"),  which provides  options to purchase shares of Common Stock (or,
at the election of the Company,  limited partnership  interests ("Units") in the
Operating  Partnership that may be redeemed for cash, or, at the election of the
General  Partner,  shares of Common Stock on a one-for-one  basis).  The maximum
aggregate  number  of  shares of Common  Stock  that may be issued  pursuant  to
options  granted under the Option Plan is  5,000,000.  The purpose of the Option
Plan is to provide a means of performance-based compensation as an incentive for
OCC to enhance the value of the Common Stock.

                                       72
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

         At the closing of the Initial Public  Offering,  the Company granted to
OCC 1,912,500  options  under the Option Plan at an exercise  price per share of
$16,  the price at which the Common  Stock was  offered in the IPO.  The options
vest one quarter each year upon the first four anniversaries of the closing date
of the Initial Public Offering.  The options  terminate on the tenth anniversary
of the closing date of the Initial Public Offering.

              The following table sets for the information relating to the stock
options granted to OCC as of December 31, 1998.

<TABLE>
<CAPTION>
      Options Granted    Exercise Price   Option Exercised   Forfeited or Terminated  Options Vested
      ---------------    --------------   ----------------   -----------------------  --------------
<S>      <C>               <C>               <C>                <C>                     <C>         
         1,912,500         $   16.00             --                    --                 478,125
</TABLE>

         During  1998 and 1997,  the  Company  recorded  $0.2  million  and $0.1
million of  compensation  expense,  respectively,  related to the stock  options
granted to OCC in 1997. The compensation  expense is based on the estimated fair
value of the options and was determined using the  Black-Scholes  option pricing
model.  The  fair  value  of the  options  was  estimated  using  the  following
assumptions:

   Expected dividend yield.................................      15.625%
   Expected stock price volatility.........................      17.910%
   Risk-free interest rate.................................       5.391%
   Expected remaining life of options......................      3 years

NOTE 13  BASIC AND DILUTED EARNINGS PER SHARE

         The Company is required to present both basic and diluted  earnings per
share  ("EPS")  on the  face  of  its  statement  of  operations.  Basic  EPS is
calculated  by dividing net income by the weighted  average  number of shares of
Common Stock outstanding  during the year. Diluted EPS is calculated by dividing
net income by the weighted average number of shares of Common Stock  outstanding
and the dilutive potential Common Stock related to outstanding stock options.

<TABLE>
<CAPTION>
                                                                        1998                 1997
                                                                  --------------       --------------
<S>                                                               <C>                  <C>           
   Net (loss) income before extraordinary item.................   $  (58,800,966)      $   11,791,518
   Extraordinary item..........................................          615,047                   --
                                                                  --------------       --------------
   Net (loss) income...........................................   $  (58,185,919)      $   11,791,518
                                                                  ==============       ==============

BASIC EPS:
   Weighted average shares of common stock.....................       18,965,000           19,108,789
   Basic EPS before extraordinary item.........................   $        (3.10)       $        0.62
   Extraordinary item..........................................             0.03                   --
                                                                  --------------       --------------
   Basic EPS...................................................   $        (3.07)      $         0.62
                                                                  ==============       ==============

DILUTED EPS:
   Weighted average shares of common stock.....................       18,965,000           19,108,789
   Effect of dilutive securities:
     Stock options.............................................               --              455,981
                                                                  --------------       --------------
                                                                      18,965,000           19,564,770

   Diluted EPS before extraordinary item.......................   $        (3.10)       $        0.60
   Extraordinary item..........................................             0.03                   --
                                                                  --------------       --------------
   Diluted EPS.................................................   $        (3.07)      $         0.60
                                                                  ==============       ==============
</TABLE>

                                       73
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

NOTE 14  TAXATION

         The Company has sought to qualify as a REIT under  Sections 856 through
860 of the Code,  as amended.  A REIT will  generally  not be subject to federal
income  taxation  on that  portion  of its  income  that is  distributed  to its
shareholders  if it  distributes  at least 95% of its  taxable  income and meets
certain  other income and asset  tests.  The Company has until the filing of its
tax return to satisfy the distribution  requirement.  Since the Company plans to
distribute  100% of its taxable  income,  no provision has been made for federal
income  taxes  for  the  Company  and  its   subsidiaries  in  the  accompanying
consolidated  financial  statements.  As taxable income is finalized and the tax
return  is filed,  an  additional  distribution  may be  required,  which may be
significant.

         At December  31,  1998,  the Company  had not  declared  the final 1998
dividend to meet the 95% distribution requirement. Accordingly, an excise tax of
$0.4 million had been recorded in the consolidated financial statements.

         In addition,  the Company has  announced  plans to  terminate  its REIT
status in 1999, subject to shareholder approval.

NOTE 15  COMMITMENTS AND CONTINGENCIES

         At December  31,  1998,  the Company had $58.7  million in  outstanding
commitments  to  fund  construction,  multi-family  and  commercial  loans.  The
following table details the amounts committed at such date.

                                                               December 31, 1998
                                                               -----------------
(Dollars In Thousands)
Multi-family ...............................................       $   24,741
Hotels .....................................................           24,991
Offices ....................................................            8,934
                                                                   ----------
  Total committed amount ...................................       $   58,666
                                                                   ==========

NOTE 16  QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

         The following tables sets forth the quarterly financial information for
the years indicated.

<TABLE>
<CAPTION>
                                                     4th         3rd         2nd         1st
                                                   Quarter     Quarter     Quarter     Quarter
                                                  --------    --------    --------    --------
                                                                      1998
  (Dollars In Thousands)                                                                      
<S>                                               <C>         <C>         <C>         <C>     
 Interest  income .............................   $ 19,870    $ 20,289    $ 15,326    $  7,472
 Interest expense .............................     10,690      10,598       5,547         694
 Net interest income ..........................      9,180       9,691       9,779       6,778
 Provision for loan losses ....................         85         351         101         105
 Net interest income after provision for loan
  Losses ......................................      9,095       9,340       9,678       6,673
 Real estate income, net ......................         48         543        (255)        804
 Other expenses ...............................      6,744       3,212       2,266       1,094
 Loss on securities, derivatives, and real
  estate ......................................     53,544      15,646          --      17,077
 Minority interest in net loss (income) of
  Operating Partnership .......................      4,456         721        (511)        190
                                                  --------    --------    --------    --------
    Net (loss) income before extraordinary item   $(46,689)   $ (8,254)   $  6,646    $(10,504)
                                                  ========    ========    ========    ========
 Extraordinary item ...........................         --         615          --          --
    Net (loss) income .........................   $(46,689)   $ (7,639)   $  6,646    $(10,504)
                                                  ========    ========    ========    ========
Earnings per share:
 Basic ........................................   $  (2.46)   $  (0.40)   $   0.35    $  (0.55)
 Diluted ......................................   $  (2.46)   $  (0.40)   $   0.35    $  (0.55)

</TABLE>

                                       74
<PAGE>

                          OCWEN ASSET INVESTMENT CORP.
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                           DECEMBER 31, 1998 AND 1997

<TABLE>
<CAPTION>

                                                            4th                 3rd               2nd
                                                           Quarter            Quarter            Quarter
                                                       --------------      --------------     --------------
                                                                                1997
(Dollars In Thousands)
<S>                                                    <C>                 <C>                <C>           
  Interest  income ................................... $        5,467      $        5,512     $        2,483
  Interest expense ...................................             --                  --                 --
  Net interest income ................................          5,467               5,512              2,483
  Provision for loan losses ..........................             --                  --                 --
  Net interest income after provision for loan
   losses ............................................          5,467               5,512              2,483
  Real estate income, net ............................          1,427                  64                 --
  Other expenses .....................................          1,504               1,226                423
  Loss on securities, derivatives and real
   estate.............................................             --                  --                 --
  Minority interest in net loss (income) of
   Operating Partnership .............................             (9)                 --                 --
                                                       --------------      --------------     --------------
  Net (loss) income before extraordinary item......... $        5,381      $        4,350     $        2,060
                                                       ==============      ==============     ==============
  Net (loss) income .................................. $        5,381      $        4,350     $        2,060
                                                       ==============      ==============     ==============
 Earnings per share:
  Basic............................................... $         0.28      $         0.23     $         0.11
  Diluted............................................. $         0.28      $         0.23     $         0.11

</TABLE>
(1)      The Company commenced operations on May 14, 1997.

                                       75
<PAGE>

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS

         The  following  table sets forth  certain  information  concerning  the
directors of the Company.

     Name                          Age (1)           Director Since
     ----                          -------           --------------
     William C. Erbey .......        49                   1997
     Christine A. Reich .....        37                   1997
     Benjamin W. Navarro ....        36                   1998
     Stuart L. Silpe ........        42                   1998
     Peter W. Small .........        56                   1997

(1)      As of March 15, 1999.

         The  principal  occupation  for the last five years of each director of
the Company, as well as some other information, is set forth below.

         WILLIAM  C.  ERBEY.  Mr.  Erbey has  served as the  Chairman  and Chief
Executive Officer of the Company since February 1997 and as the Treasurer of the
Company from February 1997 to May 1988.  Mr. Erbey has served as the Chairman of
the Board of  Directors  of OCN since  September  1996,  as the Chief  Executive
Officer of OCN since January 1988,  and as the Chief  Investment  Officer of OCN
since  January  1992.  Mr.  Erbey  has  served as the  Chairman  of the Board of
Directors of the Bank since February 1988 and as the Chief Executive  Officer of
the Bank since  June 1990.  He also  serves as a  director  and  officer of many
subsidiaries  of the Company and OCN.  From 1983 to 1995,  Mr. Erbey served as a
Managing  General Partner of The Oxford  Financial  Group, a private  investment
partnership that was the predecessor of OCN. From 1975 to 1983, Mr. Erbey served
at General Electric Capital  Corporation  ("GECC") in various  capacities,  most
recently  as the  President  and Chief  Operating  Officer of  General  Electric
Mortgage  Insurance  Corporation.  Mr. Erbey also served as the Program  General
Manager of GECC's Commercial  Financial Services Department and as the President
of Acquisition Funding Corporation.  He received a Bachelor of Arts in Economics
from Allegheny College and a Master's degree from the Harvard Graduate School of
Business Administration.

         CHRISTINE  A.  REICH.  Ms.  Reich  has  served as the  President  and a
director  of the  Company  since  February  1997.  Ms.  Reich has  served as the
President of OCN since May 1998, as a Managing Director of OCN from June 1994 to
May 1988, as the Chief  Financial  Officer of OCN from January 1990 to May 1997,
as a Senior Vice  President  of OCN from  January  1993 until June 1994 and as a
Vice  President of OCN from January 1990 until January 1993.  From 1987 to 1990,
Ms. Reich  served as an officer of a subsidiary  of OCN. Ms. Reich has served as
the  President  of the Bank since May 1998 and as a  director  of the Bank since
June 1993.  Ms.  Reich  also  serves as an  officer  and/or a  director  of many
subsidiaries  of the Company and OCN.  Prior to 1987,  Ms. Reich was employed by
KPMG Peat Marwick  LLP,  most  recently in the position of Manager.  She holds a
Bachelor of Science in Accounting from the University of Southern California.

         BENJAMIN  W.  NAVARRO.  Mr.  Navarro  has served as a  director  of the
Company since March 1998. Mr. Navarro is Managing  Director of Sherman Financial
Group,  LLC, a company he founded in 1997 to purchase and securitize  distressed
consumer  debt.  Formerly,  Mr.  Navarro served as Co-Head of Mortgage Sales and
Trading for Citicorp,  with  responsibility for the firm's purchases,  sales and
securitizations  of  residential  and  commercial   mortgages  to  institutional
clients.  Prior to joining  Citicorp in 1988, Mr. Navarro was with Goldman Sachs
for three  years,  where he worked on both the Whole  Loan and Agency MBS desks.
Mr. Navarro  started his career at Chemical Bank,  where he completed the credit
training program and spent two years making loans to mortgage banks and thrifts.
Mr. Navarro received a Bachelor's degree in Finance from the University of Rhode
Island.

                                       76
<PAGE>

         STUART L.  SILPE.  Mr.  Silpe has served as a director  of the  Company
since  November  1998.  Mr.  Silpe is currently a  consultant  to the  financial
services  industry.  Previously he served as Executive Director of the Financial
Institutions  Group at CIBC Oppenheimer in New York. Mr. Silpe has had almost 20
years of mortgage finance experience, working with commercial banks, savings and
loans, mortgage banks, specialty finance companies and REITs. Mr. Silpe has held
senior positions with several major financial institutions including: Prudential
Securities,  from 1991 to 1995,  Morgan Stanley and Merrill Lynch. At Prudential
Securities,  he was  Director,  Real Estate and  Financial  Services  Group with
business development responsibilities for depository institutions.  Mr. Silpe is
a graduate of the Wharton School at the University of Pennsylvania  and of Emory
University.

         PETER M. SMALL. Mr. Small has served as a director of the Company since
April  1997.  Mr.  Small  served as  President  and Chief  Executive  Officer of
Spaulding and Slye Company,  a commercial real estate company,  for 15 years and
served as Chairman  of its Board of  directors  from 1992 to 1996.  While he was
President of Spaulding and Slye Company,  Mr. Small directed the  development of
over  100  commercial  projects  and  later  repositioned  the  company  from  a
development company to a service company providing consulting,  asset management
and real  estate  services to major  corporations  and  financial  institutions.
Currently, Mr. Small manages a property portfolio,  advises and invests in young
companies  and  consults and speaks  about  planning  and  managing  real estate
organizations  in  changing  environments.  He serves as a director  of Bariston
Partners,  LLC,  Benchmark  Assisted Living,  LLC, Spaulding and Slye Properties
Company  and the United Way of  Massachusetts  Bay.  Mr.  Small also serves as a
Trustee of Bowdoin College, where he received a Bachelor of Arts in History.

EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS

         The following table sets forth certain information with respect to each
person who currently serves as an executive  officer of the Company but does not
serve on the Company's Board of Directors. Executive officers of the Company are
elected annually by the Board of Directors and generally serve at the discretion
of the Board.  There are no arrangements or  understandings  between the Company
and any person pursuant to which such person was elected as an executive officer
of the Company. Other than William C. Erbey and John R. Erbey, who are brothers,
no director or executive  officer is related to any other  director or executive
officer  of the  Company  or  any of its  subsidiaries  by  blood,  marriage  or
adoption.

Name                    Age (1)                       Position
--------------          -------           --------------------------------------
John R. Barnes ...        56              Senior Vice President
John R. Erbey ....        58              Senior Managing Director and Secretary
Mark S. Zeidman ..        47              Senior Vice President and Chief
                                          Financial Officer

(1)      As of March 15, 1999.

         The background for the last five years of each executive officer of the
Company  who is not a director,  as well as certain  other  information,  is set
forth below.

         JOHN R. BARNES. Mr. Barnes has served as a Senior Vice President of the
Company since February 1997. Mr. Barnes has served as a Senior Vice President of
OCN and the Bank  since May 1994 and served as a Vice  President  of OCN and the
Bank  from  October  1989 to May 1994.  He also  serves  as an  officer  of many
subsidiaries of the Company and OCN. Mr. Barnes was a Tax Partner in the firm of
Deloitte Haskins & Sells from 1986 to 1989 and in the firm of Arthur Young & Co.
from 1979 to 1986. Mr. Barnes was the Partner in Charge of the Cleveland  Office
Tax Department of Arthur Young & Co. from 1979 to 1984. He is a graduate of Ohio
State University.

JOHN R. ERBEY.  Mr. Erbey has served as Senior Managing  Director of the Company
since May 1998,  as  Secretary  of the Company  since  February  1997,  and as a
Managing  Director of the Company from February 1997 to May 1998.  Mr. Erbey has
served as Senior Managing Director of OCN since May 1998 and as Secretary of OCN
since June 1989. Mr. Erbey has served as a director of the Bank since 1990, as a
Senior  Managing  Director of the Bank since May 1998,  and as  Secretary of the
Bank since July 1989.  He also  serves as an officer  and/or a director  of many
subsidiaries  of the Company and OCN. From 1971 to 1989,  Mr. Erbey was a member
of the Law  Department of  Westinghouse  Electric  Corporation  and held various
management   positions,   including  Associate  General  Counsel  and  Assistant
Secretary  from 1984 to 1989.  Previously,  he held the  positions  of Assistant
General Counsel of the Industries and International  Group and Assistant General
Counsel  of the  Power  Systems  Group  of  Westinghouse.  He is a  graduate  of
Allegheny College and Vanderbilt University School of Law.

                                       77
<PAGE>

         MARK S. ZEIDMAN.  Mr.  Zeidman has served as Senior Vice  President and
Chief  Financial  Officer of the Company since June 1997.  Mr.  Zeidman also has
served as Senior Vice President and Chief Financial  Officer of OCN and the Bank
since May 1997 and serves as an officer of many  subsidiaries of the Company and
OCN.  From 1986 until May 1997,  Mr.  Zeidman was employed by Nomura  Securities
International,  Inc.,  most recently as Managing  Director.  Prior to 1986,  Mr.
Zeidman held positions with Shearson Lehman Brothers and Coopers & Lybrand.  Mr.
Zeidman is a  Certified  Public  Accountant.  He holds a Bachelor of Arts degree
from the University of Pennsylvania,  a Master of Business  Administration  from
the Wharton School of Business and a Masters of  International  Affairs from the
School of International Affairs at Columbia University.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

         Section  16(a) of the Exchange Act of 1934,  as amended (the  "Exchange
Act"), requires the Company's executive officers and directors,  and persons who
own more than 10% of the Common Stock,  to file reports of ownership and changes
in  ownership  with the  Commission.  Officers,  directors  and greater than 10%
shareholders are required by Commission  regulations to furnish the Company with
copies of all  Section  16(a)  forms  they  file.  Specific  due dates for these
reports have been established by the Commission,  and the Company is required to
report any  failure to timely  file such  reports by those due dates  during the
1998 fiscal year.

         To the Company's  knowledge,  based solely upon review of the copies of
such reports furnished to the Company and written  representations that no other
reports were required,  all Section 16(a) filing requirements  applicable to its
officers, directors and greater than 10% shareholders were complied during 1998,
except that Benjamin W. Navarro  inadvertently failed to timely file a Form 3 to
report beneficial ownership of no shares of Common Stock at the time he became a
director of the Company.  Mr.  Navarro made the required  filing  promptly after
becoming  aware  of  this,  and such  failure  to file did not give  rise to any
liability under Section 16(b) of the Exchange Act.

ITEM 11. EXECUTIVE COMPENSATION.

         The  Company  has not  paid,  and does not  intend to pay,  any  annual
compensation to the Company's executive officers for their services as executive
officers.  Moreover,  the Company has not granted, and does not intend to grant,
any options to purchase shares of stock to the executive  officers or directors.
Notwithstanding that the Company has no employees and does not pay its executive
officers  any  compensation,  the Board of Directors  has formed a  Compensation
Committee,  comprised  of the  Independent  Directors,  to address any  upcoming
compensation  matters. In particular,  the Board of Directors has the discretion
to change the base management fee payable to the Manager, if necessary, in order
to align  the fee more  closely  to the  actual  costs of  providing  management
services to the Company.

         The Company  pays the  Independent  Directors an annual fee of $20,000,
plus an  additional  fee of $1,000 for each  additional  meeting of the Board of
Directors  attended in person after the first four  meetings.  In  addition,  an
annual fee of $2,000 is paid to the chair of any  committee  of the  Board.  The
Company  currently  pays no cash  compensation  to its  directors  which are not
Independent   Directors.   The  Company   reimburses  all  directors  for  their
out-of-pocket  expenses  in  connection  with  their  service  on the  Board  of
Directors.

                                       78
<PAGE>

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

         The  following  table  sets forth  certain  information  regarding  the
beneficial  ownership of the Common  Stock as of the date  indicated by (i) each
director and executive officer of the Company,  (ii) all directors and executive
officers of the Company as a group and (iii) all persons known by the Company to
own beneficially 5% or more of the outstanding  Common Stock. The table is based
upon  information  supplied to the Company by directors,  officers and principal
stockholders and filings under the Exchange Act.

                                                       Shares of Common
                                                      Stock Beneficially
                                                         Owned as of
                                                        March 9, 1999
                                       -----------------------------------------
Name of Beneficial Owner                    Amount (1)             Percent (1)
-----------------------------------    -------------------         -------------

FMR Corp.                                  2,464,700(2)              13.0%
  82 Devonshire Street
  Boston, MA 02109

Wellington Management Company, LLP         1,663,200(3)               8.8
  75 State Street
  Boston, MA 02109

Ocwen Financial Corporation                1,653,300(4)               8.7
   1675 Palm Beach Lakes Blvd
   West Palm Beach, FL 33401

Directors and Executive Officers:
   William C. Erbey                        1,653,300(5)               8.7
   Benjamin W. Navarro                        10,000                   *
   Christine A. Reich                         15,500(6)                *
   Stuart L. Silpe                                 0                   *
   Peter M. Small                             60,000                   *
   John R. Barnes                                  0                   *
   John R. Erbey                               2,000                   *
   Mark S. Zeidman                             1,200(7)                *

All Directors and Executive Officers 
  as a Group (8 persons)                   1,742,000                  9.2

*        Less than 1%

(1)      For  purposes of this table,  pursuant to rules  promulgated  under the
         Exchange Act an individual is considered to beneficially own any shares
         of Common Stock if he or she directly or  indirectly  has or shares (i)
         voting power,  which includes the power to vote or to direct the voting
         of the shares,  or (ii) investment  power,  which includes the power to
         dispose or direct  the  disposition  of the  shares.  Unless  otherwise
         indicated,  (i) an individual has sole voting power and sole investment
         power with respect to the indicated shares and (ii) individual holdings
         amount to less than 1% of the outstanding shares of Common Stock.

(2)      Based  on  information  contained  in a  Schedule  13G  filed  with the
         Commission as of February 12, 1999 by FMR Corp.  Fidelity  Management &
         Research Company ("Fidelity"),  a wholly-owned  subsidiary of FMR Corp.
         and an investment adviser registered under the Investment  Advisers Act
         of 1940,  is the  beneficial  owner of 2,464,700  shares as a result of
         acting as investment adviser to various investment companies registered
         under the  Investment  Company Act of 1940.  Fidelity has sole power to
         dispose of all such  shares,  but has no voting  power over any of such
         shares.

                                       79
<PAGE>

(3)      Based  on  information  contained  in a  Schedule  13G  filed  with the
         Commission as of February 9, 1999 by Wellington Management Company, LLP
         ("WMC") in its  capacity as  investment  adviser.  WMC may be deemed to
         beneficially  own 1,663,200  shares which are held of record by clients
         of WMC.  Includes  1,051,700  shares as to which shared voting power is
         claimed  and  1,663,200  shares as to which  shared  disposal  power is
         claimed.

(4)      Based on  records  available  to the  Company,  as well as  information
         contained  in a Schedule  13G filed  with the  Commission  by OCN,  the
         Manager, IMIHC and William C. Erbey on February 10, 1999. Includes: (a)
         113,300 shares held by FF Plaza Partners ("FF Plaza"), a partnership of
         which Mr.  Erbey,  his spouse and  Delaware  Permanent  Corporation,  a
         corporation  wholly-owned by Mr. Erbey, are general  partners;  and (b)
         1,540,000  shares  owned  directly by IMIHC and as to which OCN and Mr.
         Erbey share  voting and  investment  power.  Does not  include  options
         granted  to the  Manager  to  acquire  478,125  shares.  Mr.  Erbey has
         disclaimed beneficial ownership of the 1,540,000 shares owned of record
         by IMIHC and the  options  granted to the  Manager  to acquire  478,125
         shares.

(5)      Includes: (a) 113,300 shares held by FF Plaza; and (b) 1,540,000 shares
         owned  directly by IMIHC and as to which William C. Erbey shares voting
         and investment  power.  Does not include options granted to the Manager
         to  acquire  478,125  shares.  Mr.  Erbey  has  disclaimed   beneficial
         ownership  of the  1,540,000  shares  owned of  record by IMIHC and the
         options granted to the Manager to acquire 478,125 shares.

(6)      The shares are held by the CPR Family Limited  Partnership  pursuant to
         which  Christine A. Reich and her husband  share voting and  investment
         power. Ms. Reich has disclaimed beneficial ownership of such shares.

(7)      Includes 200 shares held by Mr.  Zeidman's  daughter.  Mr.  Zeidman has
         disclaimed beneficial ownership of such shares.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

CERTAIN RELATIONSHIPS

         The Manager,  subject to the  supervision  of the Board of Directors of
the  Company,  manages  the  Company  pursuant to a  Management  Agreement.  The
Management  Agreement  provides for an annual base  management  fee of 0.25% per
quarter (1% per annum),  calculated  and paid  quarterly  based upon the Average
Invested  Assets of the Company for such  quarter.  The term  "Average  Invested
Assets"  for any period  means the  average of the  aggregate  book value of the
assets of the  Company,  including  the assets of all of its direct and indirect
subsidiaries,  before  reserves for  depreciation  or bad debts or other similar
noncash  reserves,  computed by taking the daily  average of such values  during
such  period;  provided,  however,  effective  January 1, 1998,  with respect to
residential  loans,  the phase means average net equity  invested.  The Board of
Directors is authorized to adjust the base  management fee if necessary to align
the fee more closely with the actual costs of management  services.  The Manager
also is entitled to receive incentive  compensation for each fiscal quarter. See
"Business-Management Fees" under Item 1.

         For the year ended 1998,  the Company  paid the Manager $5.9 million in
base  management  fees and no  incentive  compensation.  In  addition,  for such
period,  the Manager was  reimbursed  $1.8  million for out of pocket  costs and
salary allocations for due diligence tasks.

         In  addition  to being  Chairman  of the Board of  Directors  and Chief
Executive  Office of the Company,  William C. Erbey is Chairman of the Board and
Chief Executive  Officer of the Manager,  the Bank and of OCN.  William C. Erbey
owns or has voting  power over  approximately  32.0% of the  outstanding  common
stock of OCN.  Christine  A. Reich is not only  President of and a member of the
Board of  Directors of the  Company,  but also is President of the Manager,  the
Bank and OCN. Similarly, each of the Company's executive officers also serves as
an executive officer of the Manager and of OCN.

CERTAIN TRANSACTIONS

         In 1998, the Company entered into a number of transactions with OCN and
the Bank,  in  addition to the  services  rendered by the Manager to the Company
pursuant to the Management  Agreement,  as discussed above. In this regard,  the
Bank  services  all  of the  Company's  mortgage  loans  pursuant  to  servicing
agreements (one for commercial loans and one for residential  loans),  the forms
of which were approved by the  Independent  Directors.  In addition to servicing
the Company's  mortgage  loans,  the Bank is the special  servicer for the loans
underlying most of the mortgage-backed  securities owned by the Company, and the
Independent  Directors  have  approved  those  transactions  in their  quarterly
meetings.

                                       80
<PAGE>

         On February 17, 1998, the Company issued an aggregate of 175,000 shares
of Common  Stock to William C.  Erbey,  Christine  A.  Reich,  Jordan C. Paul (a
former  executive  officer of the Company and OCN) and Barry N. Wish (a director
of OCN),  who acquired  113,300  shares,  2,500 shares,  2,500 shares and 56,700
shares, respectively.  The per share purchase price for the Common Stock was the
weighted  average  sales price per share of Common Stock on the last trading day
before the transaction.  In connection with this stock issuance, IMIHC exchanged
175,000 shares of Common Stock for a like number of limited partnership units in
the  Operating   Partnership  in  order  to  comply  with  the  stock  ownership
restrictions imposed on REITs under the Code.

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

         On May 7, 1998,  the Company sold its entire  portfolio of AAA-rated IO
and Inverse IO classes of mortgage  related  securities  backed by single family
residential  loans to William  C.  Erbey and Barry N. Wish,  for a cash price of
$54.6 million,  which represented the IO Portfolio's amortized cost plus accrued
interest and exceeded the IO  portfolio's  market value by  approximately  $14.0
million (which  represented 82% of the $17.1 million aggregated loss recorded by
the Company on such  securities  during the first quarter of 1998).  Because the
IOs were sold to a principal  shareholder and another  related party,  the $14.0
million by which  amortized cost exceeded  market value was recorded as a charge
to earnings for the quarter  ended March 31, 1998 in accordance  with GAAP.  The
$14.0  million  received in excess of market value upon sale of the IO Portfolio
has been reflected on the Company's books as a capital contribution, effectively
reestablishing the Company's equity positions.

         Additionally,  during 1998 the Bank and the Company were  co-bidders on
16  pools  of  residential  mortgages  with an  aggregate  principal  amount  of
approximately $95.8 million, of which the Company acquired $49.1 million.

                                       81
<PAGE>

                                     PART IV

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

  (a)    Exhibits

         3.1      Amended and Restated Articles of Incorporation (1)

         3.2      Bylaws (3)

         4.1      Form of Common Stock certificate (1)

         4.2      Form  of  indenture  between  the  Company  and  Norwest  Bank
                  Minnesota, National Association, as trustee thereunder for the
                  11.5% Redeemable Notes due 2005 (2)

         10.1     First Amended and Restated Management Agreement (4)

         10.2     Form of Registration Rights Agreement (1)

         10.3     Third Amended and Restated Agreement of Limited Partnership of
                  Ocwen Partnership L.P. (4)

         10.4     Form of Stock Option Plan (1)

         10.5     Purchase and Sale Agreement between Ocwen Capital  Corporation
                  and Pacific Resources  Development,  Inc. as of March 31, 1998
                  (4)

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

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

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

         10.9     Loan Agreement  between OAC and Merrill Lynch Mortgage Capital
                  Inc. as of March 30, 1998 (4)

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

         10.11    Amended and Restated Loan Agreement by and among,  inter alia,
                  OAIC California Partnership, L.P., OAIC California Partnership
                  II, L.P.,  Salomon  Brothers Realty Corp. and LaSalle National
                  Bank, dated as of June 10, 1998. (4)

         27       Financial Data Schedule for the period ended December 31, 1997
                  (3)

         99.1     Investment Guidelines (4)

         99.2     Risk Factors (3)

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

                                       82
<PAGE>

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

                  (2)      Incorporated    by   reference   to   the   Company's
                           Registration   Statement   on  Form  S-4   (File  No.
                           333-64047),  as amended, as declared effective by the
                           Commission on February 12, 1999.

                  (3)      Filed herewith.

                  (4)      Incorporated by reference to the Company's  Quarterly
                           Report on Form 10-Q for the  quarterly  period  ended
                           June 30, 1998.

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

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

         (b)               Financial Statements and Schedules

         The  following   consolidated   financial  statements  of  Ocwen  Asset
Investment  Corp.  and  report  of   PricewaterhouseCoopers,   LLP,  independent
certified public accountants, are included in Item 8 hereof.

                  (1)      Report of Independent Certified Public Accountants

                  (2)      Consolidated  Statements  of  Financial  Condition at
                           December 31, 1998 and December 31, 1997

                  (3)      Consolidated  Statement of Operations for each of the
                           two years in the period ended December 31, 1998

                  (4)      Consolidated  Statements  of Comprehensive Income for
                           each of the two years in the  period  ended  December
                           31, 1998

                  (5)      Consolidated  Statement  of Changes in  Stockholders'
                           Equity for each of the two years in the period  ended
                           December 31, 1998

                  (6)      Consolidated  Statement of Cash Flows for each of the
                           two years in the period ended December 31, 1998

                  (7)      Notes to Consolidated Financial Statements

         Financial  statement  schedules have been omitted  because they are not
applicable or the required  information is shown in the  consolidated  financial
statements or notes thereto.

                                       83
<PAGE>

REPORTS ON FORM 8-K FILED DURING THE QUARTER ENDED DECEMBER 31, 1998

(1)  A Form 8-K filed on  October  27,  1998,  which  contained  a news  release
     announcing  the  Company's  financial  results for the three  months  ended
     September 30, 1998.
(2   A Form 8-K filed on December  22,  1998,  which  contained  a news  release
     proposing  changes to the  Company's tax status and deferring its quarterly
     dividend.

                                       84
<PAGE>

                                   SIGNATURES

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

                  OCWEN ASSET INVESTMENT CORP.



                  By: /s/ WILLIAM C. ERBEY
                  ------------------------------------
                  William C. Erbey
                  Chairman and Chief Executive Officer


         Date:  March 15, 1999

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


/s/ WILLIAM C. ERBEY                                      Date:  March 15,  1999
-----------------------
William C. Erbey
Chairman of the Board and Chief Executive Officer
(principal executive officer)

/s/ CHRISTINE A. REICH                                    Date:  March 15,  1999
-----------------------
Christine A. Reich
President and Director

/s/ BENJAMIN W. NAVARRO                                   Date:  March 15,  1999
-----------------------
Benjamin W. Navarro
Director

/s/ STUART L. SILPE                                       Date:  March 15,  1999
-----------------------
Stuart L. Silpe
Director

/s/ PETER M. SMALL                                        Date:  March 15,  1999
-----------------------
Peter M. Small
Director

/s/ MARK S. ZEIDMAN                                       Date:  March 15,  1999
-----------------------
Mark S. Zeidman
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)

                                       85