<PAGE>

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

                   U. S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-Q

                            ______________________

(Mark One)
[X]     QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000

[_]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
        ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO _____________


                         Commission File No. 001-13709
                            ______________________

                      ANWORTH MORTGAGE ASSET CORPORATION
            (Exact name of Registrant as specified in its charter)

               MARYLAND                                   52-2059785
  (State or other jurisdiction of                      (I.R.S. Employer
   incorporation or organization)                     Identification No.)


         1299 Ocean Avenue, #200
            Santa Monica, CA                             90401
 (Address of principal executive offices)              (Zip Code)

      Registrant's telephone number, including area code: (310) 394-0115
                            ______________________

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 ___
                                                               ---

As of September 30, 2000, 2,341,969 shares of Common Stock, $0.01 par value per
share, were outstanding.

                            ______________________

================================================================================
<PAGE>

                                     INDEX
                                     -----

<TABLE>
<CAPTION>
Part I.   Financial Information                                                          Page
-------   ---------------------                                                          ----
<S>                                                                                      <C>
Item 1.     Financial Statements

              Balance Sheets at September 30, 2000 and December 31, 1999...............    3

              Statements of Operations for the three months and nine months ended
              September 30, 2000 and September 30, 1999................................    4

              Statement of Stockholders' Equity for the three months ended March 31,
              2000, June 30, 2000 and September 30, 2000...............................    5

              Statements of Cash Flows for the three months and nine months ended
              September 30, 2000 and September 30, 1999................................    6

              Notes to the Financial Statements........................................    7

Item 2.     Management's Discussion and Analysis of
            Financial Condition and Results of Operations..............................   11


Part II.  Other Information
--------  -----------------

Item 1.     Legal Proceedings..........................................................   19

Item 2.     Changes in Securities......................................................   19

Item 3.     Defaults upon Senior Securities............................................   19

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

Item 5.     Other Information..........................................................   19

Item 6.     Exhibits and Reports on Form 8-K...........................................   19


Signatures.............................................................................   20
</TABLE>

                                       2
<PAGE>

Part I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS
ANWORTH MORTGAGE ASSET CORPORATION
Balance Sheets
(Amounts in thousands)

<TABLE>
<CAPTION>
                                                            September 30,   December 31,
                                                                 2000           1999
                                                            -------------   ------------
                                                             (unaudited)
<S>                                                          <C>            <C>
Assets
  Mortgage backed securities                                 $  140,494     $  161,488
  Other marketable securities                                     1,426          1,193
  Cash and cash equivalents                                       1,681          3,303
  Accrued interest and dividends receivable                       1,143          1,111
  Prepaid expenses and other                                         27             49
                                                            -------------   ------------
                                                             $  144,771     $  167,144
                                                            =============   ============

Liabilities and Stockholders' Equity

Liabilities
  Reverse repurchase agreements                              $  126,524     $  147,690
  Accrued interest payable                                        1,049          2,445
  Dividends payable                                                   -            323
  Accrued expenses and other                                        130            154
                                                            -------------   ------------
                                                                127,703        150,612
                                                            -------------   ------------

STOCKHOLDERS' EQUITY

  Preferred stock, par value $.01 per share;
    authorized 20,000,000 shares;
    no shares issued and outstanding                                  -              -
  Common stock; par value $.01 per share;
    authorized 100,000,000 shares;  2,391,969 and
    2,356,669 issued and 2,341,969 and 2,306,669
    outstanding respectively                                         24             23
  Additional paid in capital                                     19,211         19,070
  Accumulated other comprehensive income, unrealized
    gain (loss) on available for sale securities                 (2,231)        (2,351)
  Retained earnings                                                 293             19
  Treasury stock at cost (50,000 shares)                           (229)          (229)
                                                            -------------   ------------
                                                                 17,068         16,532
                                                            -------------   ------------
                                                             $  144,771     $  167,144
                                                            =============   ============
</TABLE>

See notes to financial statements.

                                       3
<PAGE>

ANWORTH MORTGAGE ASSET CORPORATION
Statements of Operations (unaudited)
(Amounts in thousands, except per share data)

<TABLE>
<CAPTION>
                                                        Three months ended September 30,    Nine months ended September 30,
                                                                2000              1999              2000            1999
<S>                                                     <C>                 <C>            <C>                <C>
Interest and dividend income net of
  amortization of premium                                  $   2,549         $   2,349         $   7,822       $   6,965
Interest expense                                               2,241             1,921             6,554           5,773
                                                           ---------         ---------         ---------       ---------
Net interest income                                        $     308         $     428         $   1,268       $   1,192

Expenses:
  Management fee                                                  41                44               123             133
  Incentive fee                                                    -                 -                 1               -
  Other expense                                                   58                70               173             166
                                                           ---------         ---------         ---------       ---------
Net Income                                                 $     209         $     314         $     971       $     893
                                                           =========         =========         =========       =========

Basic and diluted earnings per share                       $    0.09         $    0.14         $    0.42       $    0.39
                                                           =========         =========         =========       =========

Dividends declared per share                               $       -         $    0.14         $    0.30       $    0.39
                                                           =========         =========         =========       =========

Average number of shares outstanding                           2,338             2,278             2,326           2,292
                                                           =========         =========         =========       =========

Statement of Comprehensive Income

Net Income                                                 $     209         $     314         $     971       $     893
Available for sale securities,
  fair value adjustment                                        1,042              (654)              120            (324)
                                                           ---------         ---------         ---------       ---------

Comprehensive Income (Loss)                                $   1,251         $    (340)        $   1,091       $     569
                                                           =========         =========         =========       =========

</TABLE>

See notes to financial statements.

                                       4
<PAGE>

<TABLE>
<CAPTION>

ANWORTH MORTGAGE ASSET CORPORATION

Statement of Stockholders' Equity
For the three months ended March 31, 2000, June 30, 2000 and September 30, 2000
(Amounts in thousands)                                                      Accum.
                                                                            Other
                                      Common     Common     Additional     Compre-                 Treasury
                                       Stock      Stock       Paid-in      hensive      Retained     Stock
                                      Shares    Par Value     Capital   Income(Loss)    Earnings    at Cost    Total
<S>                                   <C>       <C>         <C>         <C>             <C>        <C>        <C>
Balance, December 31, 1999            2,307     $     23      $19,070      $(2,351)      $   19     $ (229)   $16,532

  Issuance of common stock                9            1           23                                              24
  Available-for-sale securities,
    Fair value adjustment                                                     (592)                              (592)
  Net income                                                                                393                   393

Other comprehensive income (loss)

Dividends declared-
    $0.15 per share                                                                        (347)                 (347)
                                      -------------------------------------------------------------------------------
Balance, March 31, 2000               2,316     $     24      $19,093      $(2,943)      $   65     $ (229)   $16,010
                                      -------------------------------------------------------------------------------

  Issuance of common stock               12            1           59                                              59
  Available-for-sale securities,
    Fair value adjustment                                                     (330)                              (330)
  Net income                                                                                368                   368

Other comprehensive income (loss)

Dividends declared-
    $0.15 per share                                                                        (349)                 (349)
                                      -------------------------------------------------------------------------------
Balance, June 30, 2000                2,328     $     24      $19,152      $(3,273)      $   84     $ (229)   $15,758
                                      -------------------------------------------------------------------------------
  Issuance of common stock               14            -           59                                              59
  Available-for-sale securities,
    Fair value adjustment                                                    1,042                              1,042
  Net income                                                                                209                   209

Other comprehensive income (loss)

Dividends declared-
    $0.00 per share                                                                           -                     -
                                      -------------------------------------------------------------------------------
Balance, September 30, 2000           2,342     $     24      $19,211      $(2,231)      $  293     $ (229)   $17,068
                                      ===============================================================================
</TABLE>

See notes to financial statements.

                                       5
<PAGE>

ANWORTH MORTGAGE ASSET CORPORATION
Statements of Cash Flows (unaudited)
(Amounts in thousands)

<TABLE>
<CAPTION>
                                                           Three months ended September 30,   Nine months ended September 30,
                                                                 2000           1999                2000            1999
<S>                                                        <C>               <C>              <C>                 <C>
Net income                                                    $     209      $     314            $      971      $      893
Adjustments to reconcile net income to
net cash provided by operating activites:
  Amortization                                                      158            329                   514           1,268
  Decrease (increase) in accrued interest receivable                (25)            65                     6             296
  Increase (decrease) in accrued interest payable                  (282)            89                (1,395)            209
  Increase (decrease) in accrued expenses and other                  49             25                   (40)             (1)
                                                              ---------      ---------            ----------      ----------
        Net cash provided by operating activities                   109            822                    56           2,665

Investing Activities:
  Available-for-sale securities:
    Purchases                                                        (6)          (472)                 (676)        (21,598)
    Principal payments                                            8,482         12,941                21,043          45,345
                                                              ---------      ---------            ----------      ----------
        Net cash provided by (used in) investing activities       8,476         12,469                20,367          23,747

Financing Activities:
  Net borrowings from reverse repurchase agreements             (10,176)        (4,509)              (21,166)        (26,708)
  Proceeds from common stock issued, net                             59              -                   142               -
  Repurchase of common stock                                          -              -                     -            (230)
  Dividends paid                                                   (349)          (296)               (1,020)           (846)
                                                              ---------      ---------            ----------      ----------
        Net cash provided by (used in) financing activities     (10,466)        (4,805)              (22,044)        (27,784)
                                                              ---------      ---------            ----------      ----------
Net increase (decrease) in cash and cash equivalents             (1,881)         8,486                (1,621)         (1,372)
Cash and cash equivalents at beginning of period                  3,562          3,441                 3,302          13,299
                                                              ---------      ---------            ----------      ----------
Cash and cash equivalents at end of period                    $   1,681      $  11,927            $    1,681      $   11,927
                                                              =========      =========            ==========      ==========
</TABLE>

See notes to financial statements.

                                       6
<PAGE>

NOTES TO FINANCIAL STATEMENTS
September 30, 2000 (unaudited)

NOTE 1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Anworth Mortgage Asset Corporation (the "Company") was incorporated in Maryland
on October 20, 1997. The Company commenced its operations of purchasing and
managing an investment portfolio of mortgage-backed ("MBS") securities on March
17, 1998, upon completion of its initial public offering of the Company's common
stock.

A summary of the company's significant accounting policies follows:

BASIS OF PRESENTATION

The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Therefore, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.

In the opinion of management, all material adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation have been
included. The operating results for the quarter ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the calendar year
ending December 31, 2000.

CASH AND CASH EQUIVALENTS

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

MORTGAGE BACKED SECURITIES

The Company has invested primarily in fixed- and adjustable-rate mortgage pass-
through certificates ("MBSs") and hybrid ARMs. Hybrid ARM securities have an
initial interest rate that is fixed for a certain period, usually three to five
years, and then adjusts annually for the remainder of the term of the loan.

Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"), requires the Company to
classify its investments as either trading investments, available-for-sale
investments or held-to-maturity investments. It is the Company's policy to
classify each of its MBS as available-for-sale and then to monitor the
security's performance over time before making a final determination as to the
permanent classification. At this time all of the Company's MBS are classified
as available-for-sale. All assets that are classified as available-for-sale are
carried at fair value.

Interest income is accrued based on the outstanding principal amount of the MBS
and their contractual terms. Premiums associated with the purchase of MBS are
amortized into interest income over the estimated lives of the asset using the
effective yield method.

MBS transactions are recorded on the date the securities are purchased or sold.

CREDIT RISK

At September 30, 2000 the Company has limited its exposure to credit losses on
its portfolio of mortgage backed securities by purchasing primarily securities
from Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National
Mortgage Association ("FNMA"). The payment of principal and interest on the
FHLMC and FNMA ARM securities are guaranteed by those respective agencies. At
September 30, 2000, over 99% of the Company's mortgage backed securities have an
implied "AAA" rating.

INCOME TAXES

                                       7
<PAGE>

The Company intends to elect to be taxed as a Real Estate Investment Trust and
to comply with the provisions of the Internal Revenue Code with respect thereto.
Accordingly, the Company will not be subject to Federal income tax to the extent
that its distributions to stockholders satisfy the REIT requirements.

EARNINGS PER SHARE

Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
EPS assumes the conversion, exercise or issuance of all potential common stock
equivalents unless the effect is to reduce a loss or increase the income per
share. Stock options that could potentially dilute basic EPS in the future were
not included in the computation of diluted EPS because to do so would have been
antidilutive.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities 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.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, reporting Comprehensive Income. This statement requires companies to
classify items of other comprehensive income, such as unrealized gains and
losses on available-for-sale securities, by their nature in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of a statement of financial position. The Company adopted this statement
in the first quarter of 1998.

In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Heding Activities, which is effective for all fiscal quarters
beginning after June 15, 1999. SFAS No. 133 established a framework of
accounting rules that standardize accounting for all derivative instruments. The
Statement requires that all derivative financial instruments be carried on the
balance sheet at fair value. The Company has not yet acquired any derivative
instruments.

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. This Statement, which is effective for the first
fiscal quarter beginning after December 15, 1998, provides guidance to mortgage
banking entities who securitize mortgage loans such that their accounting for
securities loans will be the same as their accounting for marketable securities.
The Company has not yet acquired any mortgage loans and therefore expects no
changes to its financial position or results of operations as a result of
adopting SFAS No. 134.

NOTE 2.  MORTGAGE BACKED SECURITIES

The following table pertains to the Company's mortgage backed securities
classified as available-for-sale as of September 30, 2000, which are carried at
their fair value:

<TABLE>
<CAPTION>
                                            Federal              Federal
                                           Home Loan             National           Other             Total
                                            Mortgage             Mortgage          Mortgage            MBS
($000's)                                  Corporation          Association        Securities         Assets
-----------------------------------------------------------------------------------------------------------
<S>                                     <C>                    <C>                <C>              <C>
Amortized Cost                                $25,134            $117,036             $491         $142,661
Unrealized gains                                   49                  46                0               95
Unrealized losses                                (314)             (1,948)               0           (2,262)
                                        -------------------------------------------------------------------
Fair value                                    $24,869            $115,134             $491         $140,494
                                        -------------------------------------------------------------------
</TABLE>

In addition, at September 30, 2000 the Company held a position in a preferred
stock issued by Thornburg Mortgage Inc. which had a fair value of $1,426,000.

The following table summarizes the Company's securities as of  September 30,
2000 at their fair value:

<TABLE>
<CAPTION>
                                                            Fixed           REIT
                                                            Rate          Preferred
($000's)                                    ARMS             MBS            Stock          Total
--------------------------------------------------------------------------------------------------
<S>                                     <C>                <C>             <C>             <C>
Amortized Cost                            $122,100         $20,561          $1,491        $144,152
Unrealized gains                                95               0               0              95
Unrealized losses                           (1,642)           (620)            (65)         (2,327)
                                        ----------------------------------------------------------
Estimated fair value                      $120,553         $19,941          $1,426        $141,920
                                        ----------------------------------------------------------
</TABLE>


NOTE 3.  REVERSE REPURCHASE AGREEMENTS

The Company has entered into reverse repurchase agreements to finance most of
its MBS. The reverse repurchase agreements are short-term borrowings that are
secured by the market value of the Company's MBS and bear interest rates that
have historically moved in close relationship to London Interbank Offered Rate
("LIBOR"). At September 30, 2000 the Company's reverse repurchase agreements had
an average term to maturity of 43 days.

                                       8
<PAGE>

At September 30, 2000, the repurchase agreements had the following remaining
maturities:
--------------------------------------------------------------------------------
Within 59 days                                                   $103,963,000
60 to 89 days                                                               0
90 to 119 days                                                     14,773,000
Over 120 days                                                       7,788,000
                                                                -------------
                                                                 $126,524,000
                                                                -------------


NOTE 4.  INITIAL PUBLIC OFFERING

On March 12, 1998 the Company completed its initial public offering of common
stock, $0.01 par value. The Company issued 2,200,000 shares of common stock at a
price of $9 per share and received net proceeds of $18,414,000, net of
underwriting discount of $0.63 per share. Offering costs in connection with the
public offering, including the underwriting discount and other expenses, which
total $491,182, have been charged against the proceeds of the offering. Prior to
March 17, 1998, the Company had no operations other than activities relating to
its organization, registration under the Securities Act of 1933 and the issuance
of 100 shares of its common stock to its initial shareholder.

The Company granted the underwriters of the initial public offering of the
Company's common stock a 30-day option to purchase additional shares of common
stock solely to cover over-allotments, if any, at the public offering price of
$9 per share. On April 14, 1998, the underwriters purchased an additional
127,900 shares under the terms of this option. As a result, the Company received
additional net proceeds of $1,070,523, net of the underwriting discount of $0.63
per share, on April 14, 1998.


NOTE 5.  TRANSACTIONS WITH AFFILIATES

The Company entered into a Management Agreement (the "Agreement") with Anworth
Mortgage Advisory Corporation (the "Manager"), effective March 12, 1998. Under
the terms of the Agreement, the Manager, subject to the supervision of the
Company's Board of Directors, is responsible for the management of the day-to-
day operations of the Company and provides all personnel and office space.

The Company pays the Manager an annual base management fee equal to 1% of the
first $300 million of Average Net Invested Assets (as defined in the Agreement),
plus 0.8% of the portion above $300 million (the "Base Management
Compensation").

In addition to the Base Management Compensation, the Manager shall receive as
incentive compensation for each fiscal quarter an amount equal to 20% of the Net
Income of the Company, before incentive compensation, for such fiscal quarter in
excess of the amount that would produce an annualized Return on Equity
(calculated by multiplying the Return on Equity for such fiscal quarter by four)
equal to the Ten-Year U.S. Treasury Rate for such fiscal quarter plus 1% (the
"Incentive Management Compensation").

For the quarters ended September 30, 2000 and September 30, 1999, the Company
paid the Manager $41,000 and $44,000, respectively, in base management fee. For
the quarters ended September 30, 2000 and September 30, 1999, the Company paid
the Manager no incentive compensation.

The Company has adopted the Anworth Mortgage Asset Corporation 1997 Stock Option
and Awards Plan (the "Stock Option Plan") which authorizes the grant of options
to purchase an aggregate of up to 300,000 of the outstanding shares of the
company's Common Stock. The plan authorizes the Board of Directors, or a
committee of the Board of Directors, to grant incentive stock options ("ISOs")
as defined under section 422 of the Internal Revenue Code of 1986, as amended,
options not so qualified ("NQSOs"), dividend equivalent rights ("DERs") and
stock appreciation rights ("SARs"). The exercise price for any option granted
under the Stock Option Plan may not be less than 100% of the fair market value
of the shares of Common Stock at the time the option is granted. As of March 31,
2000, the Company had granted a total of 198,000 options, with strike prices of
either $9 per share or $4.60 per share, and 148,500 DER's. Options granted to
officers either become exercisable at a rate of 33.3% each year following their
date of grant or become exercisable three years after their date of grant.
Options granted to directors either became exercisable six months after their
date of grant or become exercisable three years after their date of grant. All
options will expire ten years after their date of grant. The DER's are payable
only when their associated stock options are exercised, thereby reducing the
effective

                                       9
<PAGE>

strike price of such options. The Company recognizes compensation expense at the
time the market price of the stock exceeds the effective strike price.

For the quarter ended September 30, 2000, the Company recorded no operating
expense associated with this plan because there was no dividend declared during
the quarter.


NOTE 6.  SHARE REPURCHASE

In December of 1998, the Board of Directors authorized the repurchase of 50,000
shares of the Company's common stock. As of September 30, 2000, the entire
50,000 shares had been repurchased at an average cost of $4.58 per share.

                                       10
<PAGE>

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

Certain information contained in this Quarterly Report on Form 10-Q constitutes
"Forward-Looking Statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act, which can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," or "continue" or the negatives thereof or
other variations thereon or comparable terminology. Investors are cautioned that
all forward-looking statements involve risks and uncertainties including, but
not limited to, risks related to the future level and relationship of various
interest rates, prepayment rates and the timing of new programs. The statements
in the "Risk Factors" of the Company's Prospectus dated March 12, 1998
constitute cautionary statements identifying important factors, including
certain risks and uncertainties, with respect to such forward-looking statements
that could cause the actual results, performance or achievements of the Company
to differ materially from those reflected in such forward-looking statements.

GENERAL

The Company invests in mortgage assets, including mortgage pass-through
certificates, collateralized mortgage obligations, mortgage loans and other
securities representing interests in, or obligations backed by, pools of
mortgage loans which can be readily financed and short-term investments
(collectively, Mortgage-Backed Securities).

The Company's principal business objective is to generate net income for
distribution to stockholders from the spread between the interest income on its
Mortgage-Backed Securities and the costs of borrowing to finance its acquisition
of Mortgage-Backed Securities. The Company commenced operations on March 17,
1998 upon the closing of its initial public offering. Since that date the
Company has deployed its capital and built its balance sheet through the
acquisition of mortgage assets and the financing of those assets in the credit
markets. The Company seeks to generate income through its use of leverage and
active management of the asset/liability yield spread.

The Company will seek to generate growth in earnings and dividends per share in
a variety of ways, including through (i) issuing new Common Stock and increasing
the size of the balance sheet when opportunities in the market for Mortgage-
Backed Securities are likely to allow growth in earnings per share, (ii) seeking
to improve productivity by increasing the size of the balance sheet at a rate
faster than the rate of increase in operating expenses, (iii) continually
reviewing the mix of Mortgage-Backed Security types on the balance sheet in an
effort to improve risk-adjusted returns, and (iv) attempting to improve the
efficiency of the Company's balance sheet structure through the issuance of
uncollateralized subordinated debt, preferred stock and other forms of capital,
to the extent management deems such issuances appropriate.

The Company is organized for tax purposes as a real estate investment trust
("REIT") and therefore generally passes through substantially all of its
earnings to stockholders without paying federal or state income tax at the
corporate level.

At its June 17, 1999 meeting the Board of Directors approved new operating
policies which were included in Item 5 of the Company's quarterly report on form
10-Q for the quarter ended June 30, 1999. Effective upon the filing of that
quarterly report, the Company modified its policy of investing primarily in
adjustable rate mortgage assets. The new policy allows the Company to invest
substantially more of its assets in fixed rate mortgage securities. Depending on
mortgage market conditions, these purchases may or may not be accompanied by the
purchase of hedging instruments intended to mitigate the attendant interest rate
risk. The Company will target an overall one year duration for the portfolio,
taking all assets and hedging instruments into account. See "Statement of
Operating Policies" below.

The Company has established the new policies in response to the current interest
rate environment. The Company believes that, given the current shape of the
yield curve and current conditions in the mortgage markets, it may be able to
increase earnings by implementing these new policies. These policies may be
modified or waived by the Board of Directors at any time without consent of the
Company's stockholders. The ultimate effect of any such changes is uncertain.

Under the new policies, (i) at least 60% of the Company's total assets are
expected to be adjustable or fixed rate Mortgage Securities and Short-Term
Investments which will either be rated within one of the two highest rating
categories by at least one nationally recognized statistical rating organization
(such as Moody's, Fitch or Standard & Poors), or if not rated will be
obligations guaranteed by the United States government or its agencies, Fannie
Mae or Freddie Mac (Category I securities); (ii) at least 90% of the

                                       11
<PAGE>

Company's assets are expected to be investments that qualify for Category I
above or Mortgage Assets including (a) unrated Mortgage Loans and, (b) Mortgage
Securities rated at least Investment Grade by at least one nationally recognized
statistical rating organization (Category II securities); and (iii) all other
assets shall be less than 10% of the Company's assets, among these being
securities such as (a) Mortgage Securities rated below Investment Grade, (b)
leveraged Mortgage Derivative Securities, and ( c ) shares of other REITS or
mortgage related companies (Category III securities).

The Company will generally not acquire inverse floaters, Remic residuals or
first loss subordinated bonds. The Company may acquire mortgage derivative
securities, including, but not limited to, interest only, principal only or
other mortgage securities that receive a disproportionate share of interest
income or principal, either as an independent stand-alone investment opportunity
or to assist in the management of prepayment and other risks, but only on a
limited basis due to the greater risk of loss associated with mortgage
derivative securities.

FINANCIAL CONDITION

At September 30, 2000, the Company held total assets of $145 million, consisting
primarily of $120 million of ARMs, $20 million of fixed-rate mortgage backed
securities and $1.4 million of REIT preferred stock. This balance sheet size
represents an approximate 16% decrease from the balance sheet size at September
30, 1999. At September 30, 2000, the Company was well within its asset
allocation guidelines, with over 98% of total assets in Category I or II. Of the
ARM securities owned by the Company, 84% were adjustable-rate pass-through
certificates which reset at least once a year. The remaining 16% were 3/1 and
5/1 hybrid ARMS. Hybrid ARM securities have an initial interest rate that is
fixed for a certain period, usually three to five years, and then adjust
annually for the remainder of the term of the loan.

The following table presents a schedule of mortgage backed securities owned at
September 30, 2000, classified by type of issuer.

MORTGAGE SECURITIES BY ISSUER
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Agency                                                          Carrying                               Portfolio
                                                                  Value                                Percentage
-------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                                       <C>
FNMA                                                            $115,134                                  81.9
-------------------------------------------------------------------------------------------------------------------
FHLMC                                                             24,869                                  17.7
-------------------------------------------------------------------------------------------------------------------
Private Placement                                                    491                                   0.4
-------------------------------------------------------------------------------------------------------------------
  Total Portfolio                                               $140,494                                   100
===================================================================================================================
</TABLE>


The following table classifies the Company's portfolio of mortgage backed
securities, by type of interest rate index.

MORTGAGE ASSETS BY INDEX
(Dollar amounts in thousands)

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
           Index                                                  Carrying                          Portfolio
                                                                    Value                          Percentage
-------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>                               <C>
Six-month LIBOR                                                   $  7,999                           5.7%
-------------------------------------------------------------------------------------------------------------------
Six-month Certificate of
   Deposit                                                           4,303                           3.1%
-------------------------------------------------------------------------------------------------------------------
One-year Constant
  Maturity Treasury                                                102,828                          73.2%
-------------------------------------------------------------------------------------------------------------------
Cost of Funds Index                                                  4,930                           3.5%
-------------------------------------------------------------------------------------------------------------------
Fixed rate                                                         20,434                           14.5%
-------------------------------------------------------------------------------------------------------------------
                                                                 $140,494                          100.0%
===================================================================================================================
</TABLE>

                                       12
<PAGE>

The ARM portfolio had a weighted average coupon of 7.44% at September 30, 2000.
The weighted average one-month constant prepayment rates ("CPR") of the
Company's MBS portfolio were 25%, 14% and 19%, respectively, for the months of
July, August and September 2000. At September 30, 2000 the unamortized net
premium paid for the mortgage-backed securities was $2.9 million.

The Company analyzes its mortgage-backed securities and the extent to which
prepayments impact the yield of the securities. When actual prepayments exceed
expectations, the Company amortizes the premiums paid on mortgage assets over a
shorter time period, resulting in a reduced yield to maturity on the Company's
mortgage assets. Conversely, if actual prepayments are less than the assumed
constant prepayment rate, the premium would be amortized over a longer time
period, resulting in a higher yield to maturity. The Company monitors its yield
expectations versus its actual prepayment experience on a monthly basis in order
to adjust the amortization of the net premium.

The fair value of the Company's portfolio of mortgage-backed securities
classified as available-for-sale was $2.23 million less than the amortized cost
of the securities, resulting in a negative adjustment of 1.55% of the amortized
cost of the portfolio as of September 30, 2000. In the case of the ARMs, the
price decline reflects the possibility of faster future prepayments which would
have the effect of shortening the average life of the Company's MBS and
decreasing their yield. In the case of the fixed-rate MBS, fair value tends to
decline when interest rates are rising and tends to rise when interest rates are
declining.

The fair value of the Company's REIT preferred stock was $65,000 less than its
cost, resulting in a negative adjustment of 4.4% of the cost of the securities
as of September 30, 2000. The price decline reflects an increase in interest
rates which caused the price of the security to fall.


RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000

For the quarter ended September 30, 2000, the Company's net income was $209,000,
or $0.09 per share (basic and diluted EPS), based on an average of 2,338,000
shares outstanding. Net interest income for the quarter totaled $308,000. Net
interest income is comprised of the interest income earned on mortgage
investments, net of premium amortization, less interest expense from borrowings.
For the quarter ended September 30, 1999, the Company's net income was $314,000.
The decline in net income was due primarily to the acceleration of prepayments
on the Company's MBS, causing the Company to amortize the premium at which the
bonds were purchased over a shorter period, as described above, coupled with an
increase in the Company's cost of funds during the period, as described below.

During the third quarters of 2000 and 1999, the Company incurred operating
expenses of $99,000 and $114,000 respectively, consisting in 2000 of a base
management fee of $41,000 and other operating expenses of $58,000 and in 1999 of
a base management fee of $44,000 and other operating expenses of $70,000. The
decrease in other operating expenses in the third quarter of 2000 versus the
third quarter of 1999 was caused by decreased accruals for general operating
expense.

The Company's return on average equity was 1.09% or, on an annualized basis,
4.4%, for the quarter ended September 30, 2000. The table below shows the
components of return on average equity.

COMPONENTS OF RETURN ON AVERAGE EQUITY/(1)/

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended                Net Interest Income/              G&A Expense/(2)//                Net Income/
                                            Equity                          Equity                        Equity
-------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>                                <C>                              <C>
June 30, 1998                                2.52%                         0.65%                          1.87%
-------------------------------------------------------------------------------------------------------------------------
September 30, 1998                           1.92%                         0.64%                          1.28%
-------------------------------------------------------------------------------------------------------------------------
December 31, 1998                            1.62%                         0.23%                          1.40%
-------------------------------------------------------------------------------------------------------------------------
March 31, 1999                               1.94%                         0.47%                          1.46%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       13
<PAGE>

<TABLE>
<S>                                          <C>                           <C>                        <C>
-------------------------------------------------------------------------------------------------------------------------
June 30, 1999                                2.20%                         0.49%                      1.70%
-------------------------------------------------------------------------------------------------------------------------
September 30, 1999                           2.27%                         0.61%                      1.66%
-------------------------------------------------------------------------------------------------------------------------
December 31, 1999                            2.21%                         0.54%                      1.67%
-------------------------------------------------------------------------------------------------------------------------
March 31, 2000                               2.59%                         0.53%                      2.06%
-------------------------------------------------------------------------------------------------------------------------
June 30, 2000                                2.55%                         0.50%                      2.05%
-------------------------------------------------------------------------------------------------------------------------
September 30, 2000                           1.61%                         0.52%                      1.09%
-------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Average equity excludes unrealized gain (loss) on available-for-sale MBS.
(2) Excludes performance fees.

The following table shows the Company's average daily balances of cash
equivalents and mortgage assets, the yields earned on each type of earning
assets, the yield on average daily earning assets and interest income.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------------
                                            Average                         Yield on         Yield on       Yield on
                             Average         Daily                           Average      Average Daily     Average    Dividend
                              Daily      Amortized Cost      Average          Daily       Amortized Cost     Daily       and
                              Cash        of Mortgage         Daily           Cash         of Mortgage      Earning    Interest
in thousands               Equivalents       Assets       Earning Assets   Equivalents        Assets         Assets     Income
--------------------------------------------------------------------------------------------------------------------------------
<S>                        <C>           <C>              <C>             <C>             <C>               <C>        <C>
For the quarter ended
  June 30, 1998             $6,878          $175,340        $182,218          5.59              6.17          6.14       $2,799
--------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  September 30, 1998        $5,476          $196,014        $201,490          5.56              5.92          5.91       $2,978
--------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
    December 31, 1998       $6,736          $187,444        $194,181          5.00              5.62          5.60       $2,717
--------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  March 31, 1999            $8,384          $170,633        $179,017          4.87              5.40          5.37       $2,404
--------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  June 30, 1999             $6,168          $157,679        $163,846          4.76              5.44          5.41       $2,216
--------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  September 30, 1999        $7,507          $161,379        $168,886          5.15              5.55          5.53       $2,337
--------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  December 31, 1999         $3,751          $162,974        $166,724          5.29              6.10          6.08       $2,536
--------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  March 31, 2000            $2,316          $163,000        $165,316          4.86              6.38          6.36       $2,627
--------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  June 30, 2000             $2,186          $156,317        $158,503          6.30              6.74          6.74       $2,669
--------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  September 30, 2000        $2,075          $148,340        $150,415          6.60              6.78          6.78       $2,549
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The table below shows the Company's average daily borrowed funds and average
daily cost of funds as compared to average one- and average three-month LIBOR.

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                           Average       Average      Average
                                                                          One-month      Cost of      Cost of
                                                                            LIBOR         Funds        Funds
                       Average             Average   Average   Average     Relative     Relative      Relative
                        Daily               Daily      One-     Three-    to Average   to Average    to Average
                       Borrowed  Interest  Cost of    Month     Month    Three-month    One-month   Three-month
in thousands            Funds    Expense    Funds     LIBOR     LIBOR       LIBOR         LIBOR        LIBOR
-------------------------------------------------------------------------------------------------------------------
<S>                    <C>       <C>       <C>       <C>       <C>       <C>           <C>          <C>
For the quarter
ended
June 30, 1998         $162,829   $2,318   5.70%     5.66%     5.69%       (0.03)%        0.04%         0.01%
-------------------------------------------------------------------------------------------------------------------
For the quarter
ended
September 30, 1998     182,954    2,611   5.71%     5.62%     5.62%        0.00%         0.09%         0.09%
-------------------------------------------------------------------------------------------------------------------
For the quarter
-------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       14
<PAGE>

<TABLE>
<S>                       <C>         <C>       <C>       <C>       <C>         <C>          <C>            <C>
-------------------------------------------------------------------------------------------------------------------
  ended
  December 31, 1998       174,611     2,407     5.51%     5.36%     5.27%        0.09%         0.15%         0.24%
-------------------------------------------------------------------------------------------------------------------
  For the quarter
  ended
  March 31, 1999          157,555     2,036     5.24%     4.95%     5.00%       (0.05)%        0.29%         0.24%
-------------------------------------------------------------------------------------------------------------------
  For the quarter
  ended
  June 30, 1999           144,828     1,816     5.09%     4.96%     5.08%       (0.12)%        0.13%         0.01%
-------------------------------------------------------------------------------------------------------------------
  For the quarter
  ended
  September 30, 1999      149,183     1,921     5.22%     5.28%     5.44%       (0.16)%       (0.06)%       (0.22)%
-------------------------------------------------------------------------------------------------------------------
  For the quarter
  ended
  December 31, 1999       145,923     2,119     5.89%     5.77%     6.13%       (0.36)%       (0.12)%       (0.24)%
-------------------------------------------------------------------------------------------------------------------
  For the quarter
  ended
  March 31, 2000          144,696     2,132     5.98%     5.93%     6.12%       (0.19)%       (0.05)%       (0.14)%
-------------------------------------------------------------------------------------------------------------------
  For the quarter
  ended
  June 30, 2000           138,799     2,181     6.37%     6.47%     6.65%       (0.18)%       (0.10)%       (0.28)%
-------------------------------------------------------------------------------------------------------------------
  For the quarter
  ended
  September 30, 2000      131,880     2,240     6.89%     6.62%     6.70%       (0.08)%        0.17%         0.19%
-------------------------------------------------------------------------------------------------------------------
</TABLE>

For the quarter ended September 30, 2000, the yield on the Company's total
assets, including the impact of the amortized premiums and discounts, was 6.78%.
The Company's weighted average cost of funds at September 30, 2000 was 6.66%.

In general, the Company's operating margin can be estimated from the tables
above by comparing the yield on average earning assets to the average daily cost
of funds. The table below summarizes this operating margin.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                               Yield on
                                Average            Average
                                 Daily              Daily             Average
                                Earning            Cost of           Operating
                                Assets              Funds             Margin
------------------------------------------------------------------------------
<S>                            <C>                 <C>               <C>
For the quarter ended
  June 30, 1998                   6.14%              5.70%              0.44%
------------------------------------------------------------------------------
For the quarter ended
  September 30, 1998              5.91%              5.71%              0.20%
------------------------------------------------------------------------------
For the quarter ended
    December 31, 1998             5.60%              5.51%              0.09%
------------------------------------------------------------------------------
For the quarter ended
  March 31, 1999                  5.37%              5.24%              0.13%
------------------------------------------------------------------------------
For the quarter ended
  June 30, 1999                   5.41%              5.09%              0.32%
------------------------------------------------------------------------------
For the quarter ended
  September 30, 1999              5.53%              5.22%              0.31%
------------------------------------------------------------------------------
For the quarter ended
  December 31, 1999               6.08%              5.89%              0.19%
------------------------------------------------------------------------------
For the quarter ended
  March 31, 2000                  6.36%              5.98%              0.38%
------------------------------------------------------------------------------
For the quarter ended
June 30, 2000                     6.74%              6.37%              0.37%
------------------------------------------------------------------------------
For the quarter ended
September 30, 2000                6.78%              6.89%              0.11%
------------------------------------------------------------------------------
</TABLE>

                                       15
<PAGE>

The Company pays the Manager an annual base management fee, generally based on
Average Net Invested Assets, as defined in the Management Agreement, payable
monthly in arrears as follows: 1.0% of the first $300 million of Average Net
Invested Assets, plus 0.8% of the portion above $300 million.

In order for the Manager to earn a performance fee, the rate of return on the
stockholders' investment, as defined in the Management Agreement, must exceed
the average ten-year U.S. Treasury rate during the quarter plus 1%. During the
third quarter of 2000, the Manager earned no incentive fee. During the third
quarter of 2000, the Company's return on stockholder's investment was 1.0% or,
on an annualized basis, 4.0%. The ten-year U.S. Treasury rate for the
corresponding period was 5.9%.

The following table shows operating expenses as a percent of total assets:

ANNUALIZED OPERATING EXPENSE RATIOS

--------------------------------------------------------------------------------
                  Management Fee & Other                     Total G&A Expenses/
For The               Expenses/            Performance Fee/       Total Assets
Quarter Ended         Total Assets           Total Assets
--------------------------------------------------------------------------------
Jun 30, 1998             0.23%                  0.00%                0.23%
--------------------------------------------------------------------------------
Sep 30,1998              0.24%                  0.00%                0.24%
--------------------------------------------------------------------------------
Dec 31,1998              0.09%                  0.00%                0.09%
--------------------------------------------------------------------------------
Mar 31, 1999             0.21%                  0.00%                0.21%
--------------------------------------------------------------------------------
Jun 30, 1999             0.21%                  0.00%                0.21%
--------------------------------------------------------------------------------
Sep 30, 1999             0.27%                  0.00%                0.27%
--------------------------------------------------------------------------------
Dec 31, 1999             0.24%                  0.00%                0.24%
--------------------------------------------------------------------------------
Mar 31, 2000             0.25%                  0.00%                0.25%
--------------------------------------------------------------------------------
Jun 30, 2000             0.25%                  0.00%                0.25%
--------------------------------------------------------------------------------
Sep 30, 2000             0.27%                  0.00%                0.27%
--------------------------------------------------------------------------------


HEDGING

The Company did not enter into any interest rate agreements to date. As part of
its asset/liability management process, the Company may enter into interest rate
agreements such as interest rate caps, floors and swaps. These agreements would
be entered into to reduce interest rate risk and would be designed to provide
income and capital appreciation to the Company in the event of certain changes
in interest rates. The Company reviews the need for interest rate agreements on
a regular basis consistent with its Capital Investment Policy.

The Company has not experienced credit losses on its portfolio of mortgage
backed securities to date, but losses may be experienced in the future. At
September 30, 2000, the Company had limited its exposure to credit losses on its
portfolio of MBS by purchasing primarily Agency Certificates, which, although
not rated, carry an implied "AAA" rating.

COMMON DIVIDEND

As a REIT, the Company is required to declare dividends amounting to 85% of each
year's taxable income by the end of each calendar year and to have declared
dividends amounting to 95% of its taxable income for each year by the time it
files its applicable tax return. The Company therefore, generally passes through
substantially all of its earnings to shareholders without paying federal income
tax at the corporate level. Since the Company, as a REIT, pays its dividends
based on taxable earnings, the dividends may at times be more or less than
reported earnings.

On October 16, 2000 the Company declared a dividend of $0.10 per share payable
on November 14, 2000 to holders of record as of October 31, 2000.

The following table shows the dividends paid by the Company since it first began
paying dividends in June of 1998:

                                       16
<PAGE>

    -------------------------------------------------------------
    For the quarter ended                     Dividend per share
    -------------------------------------------------------------
    June 30, 1998                             $0.15
    -------------------------------------------------------------
    September 30, 1998                        $0.10
    -------------------------------------------------------------
    December 31, 1998                         $0.12
    -------------------------------------------------------------
    March 31, 1999                            $0.12
    -------------------------------------------------------------
    June 30, 1999                             $0.13
    -------------------------------------------------------------
    September 30, 1999                        $0.14
    -------------------------------------------------------------
    December 31, 1999                         $0.14
    -------------------------------------------------------------
    March 31, 2000                            $0.15
    -------------------------------------------------------------
    June 30, 2000                             $0.15
    -------------------------------------------------------------
    September 30, 2000                        $0.10
    -------------------------------------------------------------



LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of funds for the quarter ended September 30, 2000
consisted of reverse repurchase agreements, which totaled $127 million at
September 30, 2000. The Company's other significant source of funds for the
quarter ended September 30, 2000 consisted of payments of principal and interest
from its mortgage securities portfolio in the amount of $8.5 million. In the
future, the Company expects its primary sources of funds will consist of
borrowed funds under reverse repurchase agreement transactions with one- to
twelve-month maturities and of monthly payments of principal and interest on its
ARM securities portfolio. The Company's liquid assets generally consist of
unpledged ARM assets, cash and cash equivalents.

The borrowings incurred during the quarter ended September 30, 2000 had a
weighted average interest cost during the quarter of 6.9% compared with 5.2% for
the quarter ended September 30, 1999. As of September 30, 2000, all of the
Company's reverse repurchase agreements were fixed-rate term reverse repurchase
agreements with original maturities that range from three months to one year.
The Company has borrowing arrangements with ten different financial institutions
and on September 30, 2000, had borrowed funds under reverse repurchase
agreements with ten of these firms. Because the Company borrows money based on
the fair value of its MBS and because increases in short-term interest rates can
negatively impact the valuation of MBS, the Company's borrowing ability could be
limited and lenders may initiate margin calls in the event short-term interest
rates increase or the value of the Company's MBS declines for other reasons.
During the quarter ended September 30, 2000, the Company had adequate cash flow,
liquid assets and unpledged collateral with which to meet its margin
requirements during the period. Further, the Company believes it will continue
to have sufficient liquidity to meet its future cash requirements from its
primary sources of funds for the foreseeable future without needing to sell
assets.

STOCKHOLDERS' EQUITY

The Company uses "available-for-sale" treatment for its Mortgage-Backed
Securities; these assets are carried on the balance sheet at fair value rather
than historical amortized cost. Based upon such "available-for-sale" treatment,
the Company's equity base at September 30, 2000 was $17.1 million, or $7.29 per
share. If the Company had used historical amortized cost accounting, the
Company's equity base at September 30, 2000 would have been $19.3 million, or
$8.24 per share.

With the Company's "available-for-sale" accounting treatment, unrealized
fluctuations in fair values of assets do not impact GAAP or taxable income but
rather are reflected on the balance sheet by changing the carrying value of the
asset and reflecting the change in stockholders' equity under "Other
comprehensive income, unrealized gain (loss) on available for sale securities."
By accounting for its assets in this manner, the Company hopes to provide useful
information to stockholders and creditors and to preserve flexibility to sell
assets in the future without having to change accounting methods.

As a result of this mark-to-market accounting treatment, the book value and book
value per share of the Company are likely to fluctuate far more than if the
Company used historical amortized cost accounting. As a result, comparisons with
companies that use historical cost accounting for some or all of their balance
sheet may be misleading.

Unrealized changes in the fair value of Mortgage-Backed Securities have one
significant and direct effect on the Company's potential earnings and dividends:
positive mark-to-market changes will increase the Company's equity base and
allow the Company to

                                       17
<PAGE>

increase its borrowing capacity while negative changes will tend to limit
borrowing capacity under the Company's Capital Investment Policy. A very large
negative change in the net market value of the Company's Mortgage-Backed
Securities might impair the Company's liquidity position, requiring the Company
to sell assets with the likely result of realized losses upon sale. "Other
comprehensive income, unrealized gain (loss) on available for sale securities"
was $(2.2) million, or (1.5)% of the amortized cost of mortgage backed
securities at September 30, 2000.

EFFECTS OF INTEREST RATE CHANGES

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

The Company intends to fund the purchase of a substantial portion of its
adjustable-rate mortgage securities with borrowings that may have interest rates
based on indices and repricing terms similar to, but of somewhat shorter
maturities than, the interest rate indices and repricing terms of the mortgage
assets. Thus, the Company anticipates that in most cases the interest rate
indices and repricing terms of its mortgage assets and its funding sources will
not be identical, thereby creating an interest rate mismatch between assets and
liabilities. During periods of changing interest rates, such interest rate
mismatches could negatively impact the Company's net income, dividend yield and
the market price of the Common Stock.

Prepayments are the full or partial repayment of principal prior to the original
term to maturity of a mortgage loan and typically occur due to refinancing of
mortgage loans. Prepayment rates on mortgage securities vary from time to time
and may cause changes in the amount of the Company's net interest income.
Prepayments of adjustable-rate mortgage loans usually can be expected to
increase when mortgage interest rates fall below the then-current interest rates
on such loans and decrease when mortgage interest rates exceed the then-current
interest rate on such loans, although such effects are not predictable.
Prepayment experience also may be affected by the conditions in the housing and
financial markets, general economic conditions and the relative interest rates
on fixed-rate and adjustable-rate mortgage loans underlying mortgage securities.
The purchase prices of mortgage securities are generally based upon assumptions
regarding the expected amounts and rates of prepayments. Where slow prepayment
assumptions are made, the Company may pay a premium for mortgage securities. To
the extent such assumptions materially and adversely differ from the actual
amounts of prepayments, the Company could experience reduced earnings or losses.
The total prepayment of any mortgage asset that had been purchased at a premium
by the Company would result in the immediate write-off of any remaining
capitalized premium amount and consequent reduction of the Company's net
interest income by such amount. Finally in the event that the Company is unable
to acquire new mortgage assets to replace the prepaid mortgage assets, its
financial condition, cash flows and results of operations could be materially
adversely affected.

OTHER MATTERS

As of September 30, 2000, the Company calculates its Qualified REIT Assets, as
defined in the Internal Revenue Code of 1986, as amended (the "Code"), to be
greater than 90% of its total assets, as compared to the Code requirement that
at least 75% of its total assets must be Qualified REIT Assets. The Company also
calculates that greater than 98% of its 2000 revenue qualifies for both the 75%
source of income test and the 95% source of income test under the REIT rules.
The Company believes it met all REIT requirements regarding the ownership of its
common stock and the distributions of its net income. Therefore, as of September
30, 2000, the Company believes that it will continue to qualify as a REIT under
the provisions of the Code.

The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act of 1940, as
amended (the "Investment Company Act). If the Company were to become regulated
as an investment company, then the Company's use of leverage would be
substantially reduced. The Investment Company Act exempts

                                       18
<PAGE>

entities 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 interpretation of the staff of the SEC,
in order to qualify for this exemption, the Company must maintain at least 55%
of its assets d irectly in Qualifying Interests. In addition, unless certain
mortgage securities represent all of the certificates issued with respect to an
underlying pool of mortgages, such mortgage securities may be treated as
securities separate from the underlying mortgage loans and, thus, may not be
considered Qualifying Interests for purposes of the 55% requirement. The Company
calculates that it is in compliance with this requirement.


PART II. OTHER INFORMATION

Item 1. Legal Proceedings
At September 30, 2000, there were no pending legal proceedings to which the
Company was a party or of which any of its property was subject.

Item 2. Changes in Securities
Not applicable

Item 3. Defaults Upon Senior Securities
Not applicable

Item 4. Submission of Matters to a Vote of Security Holders
(a) The Company's Annual Meeting of Stockholders was held on June 21,2000.

(c) Proposal 1. Election of Board of Directors to serve until the 2001 Annual
Meeting.



          Director                    For              Withheld
          --------                    ---              --------
          Lloyd McAdams            2,292,561            11,760
          Joe E. Davis             2,292,661            11,760
          Charles H. Black         2,287,035            17,286


   Proposal 2. To ratify PricewaterhouseCoopers LLP as independent accountants
of the Company for the year ending December 31, 2000.


                  For               Against         Abstain
                  ---               -------         -------
               2,292,556             5,600           6,165


Item 5. Other Information

On September 22, 1999 the Company filed with the Securities and Exchange
Commission a Prospectus describing the Company's Dividend Reinvestment and Stock
Purchase Plan. The Prospectus relates to the offer and sale of 450,000
authorized but unissued shares of Common Stock under the Plan, of which no more
than 225,000 may be issued through the Optional and Initial Cash Purchases. The
Dividend Reinvestment and Stock Purchase Plan provides both existing
stockholders of the Company's common stock and interested new investors with a
convenient and cost effective method to purchase shares of the common stock. A
copy of the Prospectus is available from the Securities and Exchange Commission
or by writing or phoning the Company at 1299 Ocean Avenue, Suite 200, Santa
Monica, CA 90401, phone 310-394-0115.


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

(a) Exhibits
Exhibit 27 - Financial Date Schedule

(b) Reports on Form 8-K
None

                                       19
<PAGE>

SIGNATURES


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


ANWORTH MORTGAGE ASSET CORPORATION



Dated: November 13, 2000



By: /s/ Lloyd McAdams
_________________________
Lloyd McAdams
President
(authorized officer of registrant)



Dated: November 13, 2000



By: /s/ Pamela J. Watson
_________________________
Pamela J. Watson,
Chief Financial Officer and Treasurer
(principal accounting officer)

                                       20