<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 JUNE 30, 1999

[   ]      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 June 30, 1999, 2,328,000 and 2,278,000 shares of Common Stock, $0.01 par
value per share, were issued and outstanding, respectively.

                            ______________________

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

                                     INDEX
                                     -----
<TABLE>
<CAPTION>

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

            Balance Sheets at June 30, 1999 and December 31, 1998...............  3

            Statements of Operations for the three months and six months ended
            June 30, 1999 and for the three months ended June 30, 1998 and for
            the period March 17, 1998 (Commencement of Operations) to June 30,
            1998................................................................  4

            Statement of Stockholders' Equity for the three months ended March
            31, 1999 and for the six months ended June 30, 1999.................  5


            Statements of Cash Flows for the three months and six months ended
            June 30, 1999 and for the three months ended June 30, 1998 and for
            the period March 17, 1998 (Commencement of Operations) to June 30,
            1998................................................................  6

            Notes to the Financial Statements...................................  6


Item 2. Management's Discussion and Analysis of
        Financial Condition and Results of Operations........................... 10


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

Item 1.     Legal Proceedings................................................... 17

Item 2.     Changes in Securities............................................... 18

Item 3.     Defaults upon Senior Securities..................................... 18

Item 4.     Submission of Matters to a Vote of Security Holders................. 18

Item 5.     Other Information................................................... 18

Item 6.     Exhibits and Reports on Form 8-K.................................... 25


Signatures...................................................................... 25
</TABLE>
                                    Page 2
<PAGE>

Part I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
ANWORTH MORTGAGE ASSET CORPORATION
Balance Sheets
 (Amounts in thousands)
                                                                                  June 30, 1999               December 31,1998
                                                                                ----------------              ----------------
                                                                                   (unaudited)
<S>                                                                                 <C>                         <C>
Assets
  Mortgage backed securities                                                        $   171,854                 $    184,245
  Other marketable securities                                                               532                          488
  Cash and cash equivalents                                                               3,441                       13,299
  Accrued interest receivable                                                             1,175                        1,411
  Prepaid expenses and other                                                                 43                           15
                                                                                    -----------                 ------------
                                                                                    $   177,045                 $    199,458
                                                                                    ===========                 ============

Liabilities and Stockholders Equity

Liabilities
  Reverse repurchase agreements                                                     $   147,834                 $    170,033
  Payable for purchase of mortgage-backed securities                                      9,588                       10,047
  Accrued interest payable                                                                1,919                        1,799
  Dividends payable                                                                         296                          279
  Accrued expenses and other                                                                 58                           58
                                                                                    -----------                 ------------
                                                                                        159,695                      182,216
                                                                                    -----------                 ------------

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;  2,328,000
    issued and 2,278,000 and 2,328,000
    outstanding respectively                                                                 23                           23
  Additional paid in capital, net                                                        18,971                       18,971
  Other comprehensive income, unrealized
    gain (loss) on available for sale securities                                         (1,446)                      (1,775)
  Retained earnings                                                                          31                           23
  Treasury stock at cost (50,000 shares)                                                   (229)                           -
                                                                                    -----------                 ------------
                                                                                         17,350                       17,242
                                                                                    -----------                 ------------
                                                                                    $   177,045                 $    199,458
                                                                                    ===========                 ============
</TABLE>
See notes to financial statements.


                                    Page 3
<PAGE>

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

                                                                                                                    Period from
                                                                                                                   March 17, 1998
                                                                                                                  (Commencement of
                                                           Three months ended June 30,       Six months ended      Operations) to
                                                            1999                 1998         June 30, 1999        June 30, 1998
<S>                                                      <C>                  <C>             <C>                   <C>
Interest and dividend income net of
  amortization of premium                                $    2,211           $   2,799       $    4,615            $    2,872
Interest expense                                              1,816               2,318            3,852                 2,360
                                                         ----------           ---------       ----------            ----------

Net interest income                                      $      395           $     481       $      763            $      512

Expenses:
  Management fee                                                 45                  46               89                    53
  Incentive fee                                                   -                   2                -                     2
  Other expense                                                  49                  76               95                    84
                                                         ----------           ---------       ----------            ----------
Net Income                                               $      301           $     357       $      579            $      373
                                                         ==========           =========       ==========            ==========

Basic and diluted earnings per share                     $     0.13           $    0.15       $     0.25            $     0.15
                                                         ==========           =========       ==========            ==========

Dividends declared per share                             $     0.13           $    0.15       $     0.25            $     0.15
                                                         ==========           =========       ==========            ==========

Average number of shares outstanding                          2,279               2,310            2,299                 2,294
                                                         ==========           =========       ==========            ==========


Statement of Comprehensive Income

Net Income                                               $      301           $     357       $      579            $      373
Available for sale securities,
  fair value adjustment                                        (607)               (757)             360                  (757)
                                                         ----------           ---------       ----------            ----------

Comprehensive Income                                     $     (306)          $    (400)      $      939            $     (384)
                                                         ==========           =========       ==========            ==========
</TABLE>
 See notes to financial statements.

                                     Page4
<PAGE>

ANWORTH MORTGAGE ASSET CORPORATION
Statement of Stockholders' Equity
Three Months Ended March 31, 1999 and June 30, 1999

<TABLE>
<CAPTION>
                                                                              Accum.
                                                                               Other                                  Other
                                        Common      Common     Additional     Compre-                  Treasury      Compre-
                                         Stock       Stock      Paid-in       hensive     Retained      Stock        hensive
                                        Shares     Par Value    Capital       Income      Earnings     at Cost       Income
                                     -----------------------------------------------------------------------------------------
<S>                                  <C>           <C>        <C>          <C>           <C>          <C>           <C>
Balance, December 31, 1998            2,328,000     $23,000   $18,971,000  $(1,775,000)  $  23,000    $       -
  Issuance of common stock                                -             -
  Available-for-sale securities,
    Fair value adjustment                                                      936,500                                 936,500
  Net income                                                                               278,500                     278,500
                                                                                                                    ----------
                                                                                                                    $1,215,000
                                                                                                                    ==========
  Repurchase of common stock            (36,700)                                                       (170,000)
  Dividends declared-
    $0.12 per share                                                                       (275,000)

                                     --------------------------------------------------------------------------
Balance, March 31, 1999               2,291,300     $23,000   $18,971,000  $  (838,500)  $  26,500    $(170,000)
                                     ==========================================================================

  Issuance of common stock                                -             -
  Available-for-sale securities,
    Fair value adjustment                                                     (606,500)                               (606,500)
  Net income                                                                               300,500                     300,500
                                                                                                                    ----------
                                                                                                                    $ (306,000)
                                                                                                                    ==========
  Repurchase of common stock            (13,300)                                                        (59,000)
  Dividends declared-
    $0.13 per share                                                                       (296,000)

                                     --------------------------------------------------------------------------
Balance, June 30, 1999                2,278,000     $23,000   $18,971,000  $(1,445,000)  $  31,000    $(229,000)
                                     ==========================================================================

<CAPTION>
                                            Total
                                         -----------
<S>                                      <C>
Balance, December 31, 1998               $17,242,000
  Issuance of common stock                         -
  Available-for-sale securities,
    Fair value adjustment                    936,500
  Net income                                 278,500

  Repurchase of common stock                (170,000)
  Dividends declared-
    $0.12 per share                         (275,000)
                                         -----------
Balance, March 31, 1999                  $18,012,000
                                         ===========

  Issuance of common stock                         -
  Available-for-sale securities,
    Fair value adjustment                   (606,500)
  Net income                                 300,500


  Repurchase of common stock                 (59,000)
  Dividends declared-
    $0.13 per share                         (296,000)
                                         -----------
Balance, June 30, 1999                   $17,351,000
                                         ===========
</TABLE>

See notes to the financial statements

                                     Page 5
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                                  Period from
                                                                                                                 March 17, 1998
                                                                                                                (Commencement of
                                                           Three months ended June 30,      Six months ended     Operations) to
                                                             1999                1998         June 30, 1999      June 30, 1998
<S>                                                       <C>                   <C>         <C>                 <C>
  Net income                                              $     301             $    357        $     579          $       373
  Adjustments to reconcile net income to
  net cash provided by operating activites:
    Amortization                                                421                  337              939                  342
    Decrease (increase) in accrued interest
        receivable                                               37                 (794)             231               (1,490)
    Decrease (increase) in deferred organization
        expense                                                   -                  (52)               -                  (64)
    Increase (decrease) in accrued interest payable             349                1,746              120                1,788
    Increase (decrease) in accrued expenses and
        other                                                   (77)                  81              (26)                 108
                                                          ---------             --------        ---------          -----------
        Net cash provided by operating activities             1,031                1,675            1,843                1,057

Investing Activities:
  Available-for-sale securities:
    Purchases                                               (21,080)             (28,135)         (21,126)            (216,815)
    Principal payments                                       14,423               18,847           32,404               18,848
                                                          ---------             --------        ---------          -----------
        Net cash (used in) investing activities              (6,657)            (109,288)          11,278             (197,967)

Financing Activities:
  Net borrowings from reverse repurchase
        agreements                                            6,514              103,936          (22,199)             187,443
  Proceeds from common stock issued, net                          -                  622                -               19,003
  Repurchase of common stock                                    (60)                                 (230)
  Dividends paid                                               (275)                   -             (550)                   -
                                                          ---------             --------        ---------          -----------
        Net cash provided by financing activities             6,179              104,558          (22,979)             206,446
                                                          ---------             --------        ---------          -----------

Net increase (decrease) in cash and cash equivalents            553               (3,055)          (9,858)               9,536
Cash and cash equivalents at beginning of period              2,888               12,592           13,299                    1
                                                          ---------             --------        ---------          -----------
Cash and cash equivalents at end of period                $   3,441             $  9,537        $   3,441          $     9,537
                                                          =========             ========        =========          ===========
</TABLE>

See notes to financial statements.


NOTES TO FINANCIAL STATEMENTS
June 30, 1999

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

                                     Page 6
<PAGE>

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 June 30, 1999 are not
necessarily indicative of the results that may be expected for the calendar year
ending December 31, 1999.

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 adjustable-rate mortgage pass-through
certificates ("ARMs") 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 and discounts 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 June 30, 1999 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 June 30,
1999, all of the Company's ARM securities have an implied "AAA" rating.

INCOME TAXES

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 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.

                                     Page 7
<PAGE>

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.

NOTE 2.  MORTGAGE BACKED SECURITIES

The following table pertains to the Company's mortgage backed securities
classified as available-for-sale as of June 30, 1999, which are carried at their
fair value:

<TABLE>
<CAPTION>
                                             Federal                    Federal
                                            Home Loan                   National               Total
                                            Mortgage                    Mortgage                MBS
                                           Corporation                Association             Assets
--------------------------------------------------------------------------------------------------------
<S>                                        <C>                        <C>                     <C>
Amortized Cost ($000's)                    $           34,634         $         137,442       $  172,076
Unrealized gains (losses)                                (288)                   (1,183)          (1,470)
                                           -------------------------------------------------------------
Fair value                                 $           34,346         $         136,259       $  170,605
                                           =============================================================
</TABLE>

In addition, at June 30, 1999 the Company held a position in a preferred stock
issued by Thornburg Mortgage Asset Corporation which had a fair value of
$532,000.  The remaining portion of the mortgage backed securities consisted of
a principal payments receivable of $1,249,000.

The following table summarizes the Company's securities as of June 30, 1999 at
their fair value:

<TABLE>
<CAPTION>
                                                        Fixed              REIT
                                                        Rate            Preferred
                                     ARMS                MBS              Stock        Total
---------------------------------------------------------------------------------------------------
<S>                                  <C>                <C>             <C>            <C>
Amortized Cost ($000's)              $  156,003         $   16,072      $     507      $    172,582
Unrealized gains                            166                                25               191
Unrealized losses                        (1,146)              (490)                          (1,636)
                                     --------------------------------------------------------------
Estimated fair value                 $  155,023         $   15,582      $     532      $    171,137
                                     ==============================================================
</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 LIBOR.

At June 30, 1999, the repurchase agreements had the following remaining
-----------------------------------------------------------------------
maturities:
----------

<TABLE>
<S>                                                                      <C>
          Within 59 days                                                 $ 63,829,000
          60 to 89 days                                                             0
          90 to 119 days                                                   55,480,000
          Over 120                                                         28,525,153
                                                                         ------------
                                                                         $147,834,153
                                                                         ============
</TABLE>

                                    Page 8
<PAGE>

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 stockholder.

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 June 30, 1999 and June 30, 1998, the Company paid the
Manager $45,000 and $46,000, respectively, in base management fee.

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 June 30,
1999, 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 strike price of such options.  The Company will recognize compensation
expense at the time the average market price of the stock exceeds the effective
strike price.

For the quarter ended June 30, 1999, the Company recorded $2,000 in operating
expense associated with this plan.

                                    Page 9
<PAGE>

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 June 30, 1999, the entire 50,000
shares had been repurchased at an average cost of $4.58 per share.



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

Anworth Mortgage Asset Corporation (the "Company") was formed in October 1997 to
invest 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 for the Company which are included in Item 5 of this report. Effective
upon the filing of this quarterly report, the Company will begin to modify 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
                                    Page 10
<PAGE>

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 policies included in Item 5 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.

Prior to the adoption of the operating policies attached at Item 5 of this
report, the Company's investment policy was to invest at least 70% of total
assets in "Primary" adjustable-rate Mortgage Securities and Short-Term
Investments (investments with an average life of one year or less). "Primary" as
used herein means either (i) securities that are rated within one of the two
highest rating categories by at least one of either Standard & Poor's or
Moody's, or (ii) securities that are unrated but are either obligations of the
United States or obligations guaranteed by the United States government or an
agency or instrumentality of the United States government. The remainder of the
Company's investment portfolio, comprising not more than 30% of its total
assets, may have consisted of mortgage assets which are unrated, or, if rated,
are less than Primary. See Item 5 below for a description of the new operating
policies.

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 June 30, 1999, the Company held total assets of $177 million, consisting
primarily of $156 million of ARM, $16 million of fixed-rate mortgage backed
securities and $0.5 million of REIT preferred stock.  At June 30, 1999, 91% of
the qualified real estate assets held by the Company were Primary assets.  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 with an average reset of 3.5 years.  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
June 30, 1999 classified by type of issuer.

ARM SECURITIES BY ISSUER
(Dollar amounts in thousands)

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Agency                                                   Carrying            Portfolio
                                                           Value             Percentage
---------------------------------------------------------------------------------------
<S>                                                      <C>                 <C>
FNMA                                                     $    34,346             20
---------------------------------------------------------------------------------------
FHLMC                                                        136,259             80
---------------------------------------------------------------------------------------
  Total Portfolio                                        $   170,605            100
=======================================================================================
</TABLE>

                                    Page 11
<PAGE>

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

ARM ASSETS BY INDEX
(Dollar amounts in thousands)

<TABLE>
<CAPTION>
---------------------------------------------------------------
Index                                      Carrying   Portfolio
                                            Value    Percentage
---------------------------------------------------------------
<S>                                        <C>       <C>
Six-month LIBOR                            $ 11,101      6.5%
---------------------------------------------------------------
Six-month Certificate of
   Deposit                                    6,279      3.7%
---------------------------------------------------------------
One-year Constant
  Maturity Treasury                         131,698     77.2%
---------------------------------------------------------------
Cost of Funds Index                           5,945      3.5%
---------------------------------------------------------------
Fixed rate                                   15,582      9.1%
---------------------------------------------------------------
                                           $170,605    100.0%
===============================================================
</TABLE>

The ARM portfolio had a weighted average coupon of 6.86% at June 30, 1999.  The
weighted average one-month constant prepayment rates ("CPR") of the Company's
MBS portfolio were 39%, 28% and 27%, respectively, for the months of April, May
and June, 1999.  At June 30, 1999 the unamortized net premium paid for the
mortgage-backed securities was $3.9 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 $1.47 million less than the amortized cost
of the securities, resulting in a negative adjustment of 0.85% of the amortized
cost of the portfolio as of June 30, 1999. This 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.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1999

For the quarter ended June 30, 1999, the Company's net income was $301,000, or
$0.13 per share (basic and diluted EPS), based on an average of 2,278,697
average shares outstanding. Net interest income for the quarter totaled
$395,000. Net interest income is comprised of the interest income earned on
mortgage investments, net of premium amortization, less interest expense from
borrowings. During the second quarters of 1999 and 1998, the Company incurred
operating expenses of $94,000 and $124,000 respectively, consisting in 1999 of a
base management fee of $45,000 and other operating expenses of $49,000 and in
1998 of a base management fee of $46,000 and other operating expenses of
$78,000. The significant reduction in other operating expenses in the second
quarter of 1999 versus the second quarter of 1998 was caused by the Company's
discontinuing to accrue compensation expense related to DER's that were issued
in March of 1998; the options associated with these DER's have a strike price
that currently is significantly above the current market price and the Company
believes that the possibility of near-term exercise of these options and DER's
is unlikely. The Company commenced operations on March 17, 1998; therefore the
quarter ended June 30, 1999 is the first quarter in which comparing results of
operations to the corresponding period in 1998 is meaningful.

The Company's return on average equity was 1.7% or, on an annualized basis,
7.0%, for the quarter ended June 30, 1999. The table below shows the components
of return on average equity.

                                    Page 12
<PAGE>

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>
Jun 30, 1998                                2.52%                           0.65%                         1.87%
-----------------------------------------------------------------------------------------------------------------------
Sep 30, 1998                                1.92%                           0.64%                         1.28%
-----------------------------------------------------------------------------------------------------------------------
Dec 31, 1998                                1.62%                           0.23%                         1.40%
-----------------------------------------------------------------------------------------------------------------------
Mar 31, 1999                                1.94%                           0.47%                         1.46%
-----------------------------------------------------------------------------------------------------------------------
Jun 30, 1999                                2.20%                           0.49%                         1.70%
-----------------------------------------------------------------------------------------------------------------------
</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
                                             Daily                          Yield on       Average      Yield on
                             Average       Amortized        Average         Average         Daily        Average   Dividend
                              Daily         Cost of          Daily           Daily        Amortized       Daily      and
                              Cash         Mortgage         Earning          Cash          Cost of       Earning   Interest
In thousands               Equivalents      Assets          Assets        Equivalents      Mortgage       Assets    Income
                                                                                            Assets
---------------------------------------------------------------------------------------------------------------------------
<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
---------------------------------------------------------------------------------------------------------------------------
</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
Sept 30, 1998           182,954    2,611    5.71%     5.62%     5.62%       0.00%         0.09%        0.09%
---------------------------------------------------------------------------------------------------------------
For the quarter
ended
Dec 31, 1998            174,611    2,407    5.51%     5.36%     5.27%       0.09%         0.15%        0.24%
---------------------------------------------------------------------------------------------------------------
For the quarter
ended
Mar 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%
---------------------------------------------------------------------------------------------------------------
</TABLE>

                                    Page 13
<PAGE>

For the quarter ended June 30, 1999, the yield on the Company's total assets,
including the impact of the amortization of premiums and discounts, was 5.41%.
The Company's weighted average cost of funds at June 30, 1999, was 5.06%.

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
second quarter of 1999, the Manager earned no performance fee. During the second
quarter of 1999, the Company's return on stockholder's investment was 1.5% or,
on an annualized basis, 6.3%.  The ten-year U.S. Treasury rate for the
corresponding period was 5.5%.

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

ANNUALIZED OPERATING EXPENSE RATIOS

<TABLE>
<CAPTION>
                                Management Fee & Other                                          Total G&A Expenses/
For The                                Expenses/                  Performance Fee/                 Total Assets
Quarter Ended                        Total Assets                   Total Assets
-----------------------------------------------------------------------------------------------------------------------
<S>                             <C>                               <C>                           <C>
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%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

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 ARM securities
to date, but losses may be experienced in the future.  At June 30, 1999, the
Company had limited its exposure to credit losses on its portfolio of  MBS by
purchasing only 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 June 17, 1999 the Company declared a dividend of $0.13 per share payable on
July 12, 1999 to holders of record as of July 1, 1999.

                                    Page 14
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of funds for the quarter ended June 30, 1999
consisted of reverse repurchase agreements, which totaled $148 million at June
30, 1999. The Company's other significant source of funds for the quarter ended
June 30, 1999 consisted of payments of principal and interest from its ARM
securities portfolio in the amount of $14.4 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 June 30, 1999 had a weighted
average interest cost during the quarter of 5.1% compared with 5.7% for the
quarter ended June 30, 1998.  As of June 30, 1999, 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 June 30,
1999, had borrowed funds under reverse repurchase agreements with  eight 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
June 30, 1999, 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 June 30, 1999 was $17.4 million, or $7.62 per
share.   If the Company had used historical amortized cost accounting, the
Company's equity base at June 30, 1999 would have been $18.8 million, or $8.25
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 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 $1.4 million, or 0.84% of the amortized cost of mortgage backed
securities at  June 30, 1999.

                                    Page 15
<PAGE>

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 would experience 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 June 30, 1999, 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 1999 revenue for the quarter ended June
30, 1999 qualifies for both the 75% source of income test and the 95% source of
income test under the REIT rules. The Company also met all REIT requirements
regarding the ownership of its common stock and the distributions of its net
income. Therefore, as of June 30, 1999, 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 entities that are
"primarily engaged in the business of purchasing or

                                    Page 16
<PAGE>

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 directly 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.

YEAR 2000

The Company is subject to risks associated with the "Year 2000" problem, a term
which refers to uncertainties about the ability of various data processing
hardware and software to interpret dates correctly as we approach the Year 2000.

To address these risks the Company has implemented a plan whereby it will
evaluate its internal systems and, to a much larger extent, evaluate the
readiness of the systems used by the Company's External Counterparties.  The
Company will develop contingency plans for implementation in the event of
failure of any systems on which its business relies.

Internal Systems - Currently, the Company uses a general ledger software
application to prepare its books and records, as well as spreadsheet software to
maintain subsidiary ledgers.  Throughout the fourth quarter of 1998 and into the
first and second quarters of 1999 the Company created parallel files within
these applications to test these packages' ability to interpret the year 2000 in
various data fields on which calculations are made.  The application was found
to perform calculations correctly when computing results using dates after
December 31, 1999.

To date, the Company has not incurred any additional expense in connection with
the evaluation of internal systems.  Since the Company is externally managed,
the testing and potential software replacement referred to above should not
result in additional cost to the Company.

External Counterparties -  The Company been communicating with its External
Counterparties regarding the state of readiness of their Year 2000 plans.
During the fourth quarter of 1998, the Company compiled a list of these
counterparties and solicited information from each one regarding their Year 2000
plans.  Many of these counterparties are prominent broker-dealers and investment
banks or government mortgage agencies who are known by the Company to be
involved in Year 2000 review processes currently being performed by securities
industry regulators (such as the New York Stock Exchange or the Securities and
Exchange Commission) and self-regulatory organizations.  The Company intends to
measure the progress of each of these counterparties over the course of the
third quarter of 1999 and report to shareholders regarding progress made by
these counterparties.

Contingency Plans - During the third quarter of 1999, after gathering data
through the processes described above, the Company will develop plans to address
any potential failure in internal or external systems.

In its normal course of business the Company relies heavily on the accurate
functioning of many computer applications.  The Company's ability to perform its
normal business functions depends heavily on the Company's ability to perform
mathematical calculations quickly and accurately and its ability to send and
receive funds quickly and accurately.  While the Company believes that
completion of its Year 2000 Plan will reduce some of the uncertainty that
currently surrounds the Year 2000 problem, the Company acknowledges that Year
2000-related breakdowns in either the internal or external systems on which the
Company depends could cause significant disruptions in the Company's operations.


PART II. OTHER INFORMATION

Item 1. Legal Proceedings
At June 30, 1999, there were no pending legal proceedings to which the Company
was a party or of which any of its property was subject.

                                    Page 17
<PAGE>

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 17, 1999.

(c)  Proposal 1.  Election of Board of Directors to serve until the 2000 Annual
Meeting.

<TABLE>
<CAPTION>
     Director                       For                   Withheld
     --------                       ---                   --------
     <S>                         <C>                      <C>
     Lloyd McAdams               2,046,161                     0
     Joe E. Davis                2,046,161                     0
     Charles H. Black            2,045,611                   550
</TABLE>

     Proposal 2.  To ratify McGladrey & Pullen LLP as independent accountants of
the Company for the year ending December 31, 1999.

<TABLE>
<CAPTION>
                  For               Against                Abstain
                  ---               -------                -------
               <S>                  <C>                    <C>
               2,019,241            15,520                 11,400
</TABLE>


Item 5. Other Information

At its June 17, 1999 meeting the Board of Directors approved new operating
policies for the Company. Effective upon the filing of this quarterly report,
the Company will begin to modify 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 these 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.

The following Statement of Operating Policies shall become effective upon the
filing of this Quarterly Report on Form 10-Q:

                        STATEMENT OF OPERATING POLICIES

MISSION STATEMENT

          The principal business objective of the Company is to provide
investors with a competitive yield through the management of Mortgage Assets and
their risks, the use of leverage, the active management of the asset/liability
yield spread, and employment of the Company's risk management strategies. The
Company's structure is intended to provide shareholders with a vehicle to
participate in the mortgage finance market, while providing professional
management of mortgage market risks. The Company's Mortgage Assets will be held
primarily for

                                    Page 18
<PAGE>

investment. The Company intends generally to buy and hold Mortgage Assets to
maturity and, therefore, will seek to have a low portfolio turnover rate.

          The Company's Board of Directors has adopted the investment policies
set forth below as its investment policies to be followed by Management. The
Board of Directors acknowledges that depending upon market conditions,
government regulation and other factors, it may be necessary or desirable from
time to time to revise the operating policies, in whole or in part, within the
framework of the REIT Provisions of the Code. The operating policies may be
changed at any time by the Board of Directors (subject to approval by a majority
of Unaffiliated Directors) without the consent of the Company's stockholders.

          Capitalized terms used herein have the meanings ascribed to such terms
in the "Definitions" section at the end of this Statement of Operating Policies.


OPERATING STRATEGY

 .    To achieve its objectives the Company's strategy is to purchase primarily
     single-family adjustable and fixed rate Mortgage Assets and;

 .    Finance purchases of Mortgage Assets with the net proceeds of equity
     offerings and, to the extent permitted by the Company's capital and
     leverage policy, to utilize leverage to increase potential returns to its
     stockholders through borrowings (including but not limited to reverse
     repurchase agreements and dollar rolls);

 .    Manage the credit risk of its Mortgage Assets according to the Company's
     credit risk management policy;

 .    Manage the interest rate risk of its Mortgage Assets and borrowings
     according to the Company's interest rate risk management policy;

 .    Utilize interest rate caps, swaps, futures and similar financial
     instruments to mitigate interest rate risks;

 .    Seek to minimize prepayment risk primarily through structuring a
     diversified portfolio with respect to prepayment characteristics;

 .    Maintain its REIT status by complying with the Company's REIT compliance
     policy.


MANAGEMENT POLICIES

          The Company has established the following policies to implement its
mission statement.  These policies supercede the operating policies and programs
stated in the Company's prospectus dated March 12, 1998.

          Asset Acquisition Policy

          The Company intends to acquire assets when it believes that such
assets will improve expected shareholder returns after taking into account all
associated financing and hedging costs. The Company has established the
following guidelines relative to the type of assets that it will acquire:

Category I
----------

          At least 60% of the Company's total assets are expected to be
adjustable or fixed rate Mortgage Securities and Short-Term Investments.  In
addition, the Mortgage Securities in this category 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, its
agencies, Fannie Mae or Freddie Mac.

                                    Page 19
<PAGE>

Category II
-----------

          At least 90% of the Company's assets are expected to be investments
that qualify for Category I or Mortgage Assets including (i) unrated Mortgage
Loans and, (ii) Mortgage Securities rated at least Investment Grade by at least
one nationally recognized statistical rating organization.

Category III
------------

          All other assets shall be less than 10% of the Company's assets.
Among the types of assets which genrally will be assigned to this category are:
(i) Mortgage Securities rated below Investment Grade, (ii) leveraged Mortgage
Derivative Securities, and (iii) shares of other REITS or mortgage related
companies.

          Capital and Leverage Policy

          The Company shall finance its purchase of Mortgage Assets with Common
Stock equity of its and primarily by borrowing against existing Mortgage Assets
and using the proceeds to acquire additional Mortgage Assets. The borrowings may
be in the form of reverse repurchase agreements, dollar roll agreements, loan
agreements, lines of credit and other credit facilities, and the Company's
borrowings generally shall be secured by Mortgage Assets owned by the Company.

          The Company shall employ a leveraging strategy to increase its
investment assets by borrowing against existing Mortgage Assets and using the
proceeds to acquire additional Mortgage Assets. The Company shall generally
maintain a ratio of debt-to-equity of between 8:1 and 12: 1, although the ratio
may vary from time to time depending on market conditions and other factors
deemed relevant by Management and the Board of Directors. The Company will enter
into the collateralized borrowings described herein only with financially sound
institutions and will monitor the financial condition of such institutions on a
regular, periodic basis.

          Upon repayment of each reverse repurchase agreement or other credit
instrument, or repurchase pursuant to a dollar-roll agreement, the collateral
therefor may immediately be pledged to secure a new reverse repurchase agreement
or may be sold pursuant to a new dollar roll agreement or may be pledged to
secure other types of borrowings.

          Credit Risk Management Policy

          Management shall review credit risk and other risks of loss associated
with each investment.  The Company shall seek to reduce certain risks from
sellers and servicers through representations and warranties. The Company's
Board of Directors shall monitor the overall portfolio risk and appropriate
levels of provision for loss through reports provided to it by the Manager.

          Management shall review the quality of Mortgage Loans at the time of
acquisition and on an ongoing basis. Because of the risks of borrower defaults
and bankruptcies and special hazard losses that are not covered by standard
hazard insurance, the Company should generally obtain credit enhancements such
as mortgage pool or special hazard insurance for its Mortgage Loans or establish
appropriate reserve accounts.

          Interest-Rate Risk Management.

          To the extent consistent with its election to qualify as a REIT, the
Company shall attempt to protect its portfolio of Mortgage Assets and related
debt against the effects of major interest rate changes.

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<PAGE>

          The Company intends to manage the interest rate risk of its Mortgage
Assets and borrowings by targeting the difference between the market weighted
average effective duration of its Mortgage Assets financed with borrowings and
the market weighted average duration of such borrowings to one year or less,
taking into account all hedging transactions. The Company generally does not
intend to have any specific duration target for the portion of its Mortgage
Assets that are not funded by borrowings.

          The Company may implement its interest rate risk management policy by
utilizing various hedging transactions, including interest rate swaps, interest
rate swaptions, interest rate caps, interest rate floors, financial futures
contracts, options on financial futures contracts, and other structured
transactions. The Company does not intend to enter into such transactions for
speculative purposes.

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

          Prepayment Risk Management

          The Company shall attempt to minimize the effects of faster or slower
than anticipated prepayment rates through structuring a diversified portfolio
with a variety of prepayment characteristics.  The Company will attempt to
invest in Mortgage Assets that on a portfolio basis do not have significant
purchase price premiums.  Under normal market conditions, the Company expects to
keep the aggregate capitalized purchase premium of the portfolio to 3% or less.
Prepayment risk shall be monitored by Management and the Company's Board of
Directors through periodic review of the impact of a variety of prepayment
scenarios on the Company's revenues, net earnings, dividends, cash flow and net
balance sheet market value.

          REIT Compliance Policy

          The Company intends to operate its business in compliance with the
REIT Provisions of the Code. Accordingly, all of the provisions outlined in the
Company's operating policies are subordinate to the REIT Provisions of the Code
if any conflicts arise.

          To qualify for tax treatment as a REIT, the Company must meet certain
tests as fully described in sections 856 and 857 of the Code. A summary of the
requirements for qualification as a REIT is described immediately below.  In the
event of non-compliance with any of the following tests the Board of Directors
shall be immediately notified.

          STOCK OWNERSHIP TESTS. The capital stock of the Company must be held
by at least 100 persons and no more than 50% of the value of such capital stock
may be owned, directly or indirectly, by five or fewer individuals at all times
during the last half of the taxable year. Tax-Exempt Entities, other than
private foundations and certain unemployment compensation trusts, are generally
not treated as individuals for these purposes. The stock ownership requirements
must be satisfied in the Company's second taxable year and in each subsequent
taxable year.

          ASSET TESTS. The Company must generally meet the following asset tests
at the close of each quarter of each taxable year. At least 75% of the value of
the Company's total assets must consist of Qualified REIT Real Estate Assets,
U.S. Government securities, cash and cash items (the "75% Asset Test"). The
value of securities held by the Company but not taken into account for purposes
of the 75% Asset Test must not exceed (i) 5% of the  value of the Company's
total assets in the case of securities of any one  non-government issuer, or
(ii) 10% of the outstanding voting securities of  any such issuer.

          INCOME TESTS. The Company must generally meet certain gross income
tests for each taxable year. At least 75% of the Company's gross income must be
derived from certain specified real estate sources, including interest income
and gain from the disposition of Qualified REIT Real Estate Assets or Qualified

                                    Page 21
<PAGE>

Temporary Investment Income (the "75% Gross Income Test"). At least 95% of the
Company's gross income for each taxable year must be derived from sources of
income qualifying for the 75% Gross Income Test, dividends, interest unrelated
to real estate, and gains from the sale of stock or other securities (including
certain interest rate swap and cap agreements entered into to hedge variable
rate debt incurred to acquire Qualified REIT Real Estate Assets) not held for
sale in the ordinary course of business (the "95% Gross Income Test").

          DIVIDEND DISTRIBUTION REQUIREMENTS. The Company must generally
distribute to its stockholders an amount equal to at least 95% of the Company's
taxable income before deductions of dividends paid and excluding net capital
gains. The Company has until January 31 following the end of the fiscal year to
pay the dividends out to shareholders and is permitted to offer a special
dividend in order to meet the 95% requirement.

          FUTURE REVISIONS IN POLICIES AND STRATEGIES

          The Company's Board of Directors has established the policies and
strategies set forth in this report. The Board of Directors has the power to
modify or waive such policies and strategies without the consent of the
stockholders.  The Company's Board of Directors will at least annually establish
and approve the policies and strategies of the Company.

          Distribution Policy

          The Company shall distribute substantially all of its taxable income
to stockholders in each year (which does not ordinarily equal net income as
calculated in accordance with GAAP). The Company shall declare four regular
quarterly distributions. In addition, taxable income, if any, not distributed
through regular quarterly dividends may be distributed annually, at or near year
end, in a special dividend. The distribution policy is subject to revision at
the discretion of the Board of Directors. All distributions will be made by the
Company at the discretion of the Board of Directors and.will depend on the
earnings of the Company, the financial condition of the Company, maintenance of
REIT status and such other factors as the Board of Directors deems relevant.


                                  DEFINITIONS

   "Agency Certificates" means GNMA Certificates, Fannie Mae Certificates and
Freddie Mac Certificates.

   "ARM" means a Mortgage Loan or any mortgage loan underlying a Mortgage
Security that features adjustments of the underlying interest rate at
predetermined times based on an agreed margin to an established index.  An ARM
is usually subject to periodic and lifetime interest rate and/or payment caps.

   "CMOs" means debt obligations (bonds) that are collateralized by mortgage
loans or mortgage certificates. CMOs are structured so that principal and
interest payments received on the collateral are sufficient to make principal
and interest payments on the bonds. Such bonds may be issued by United States
government agencies or private issuers in one or more classes with fixed or
variable interest rates, maturities and degrees of subordination which are
characteristics designed for the investment objectives of different bond
purchasers.

   "Code" means the Internal Revenue Code of 1986, as amended.

   "Collateral" means Mortgage Assets, debt service funds and reserve funds,
insurance policies, servicing agreements or master servicing agreements.

   "Common Stock" means the Company's shares of Common Stock, $0.01 par value
   per share.

   "Company" means Anworth Mortgage Asset Corporation, a Maryland corporation.

                                    Page 22
<PAGE>

   "Conforming Mortgage Loans" means conventional Mortgage Loans that either
comply with requirements for inclusion in credit support programs sponsored by
Freddie Mac, Fannie Mae or GNMA or are FHA or VA Loans, all of which are secured
by first mortgages or deeds of trust on single-family (one to four units)
residences.

   "Excess Servicing Rights" means contractual rights to receive a portion of
monthly mortgage payments, of interest remaining after those payments of
interest have already been applied, to the extent required, to Pass-Through
Certificates and the administration of mortgage servicing. The mortgage interest
payments are secured by an interest in real property.

   "Fannie Mae" means the Fannie Mae corporation.

   "Fannie Mae Certificates" means guaranteed mortgage pass-through certificates
issued by Fannie Mae either in certified or book-entry form.

   "FHA" means the United States Federal Housing Administration.

   "FHA Loans" means Mortgage Loans insured by the FHA.

   "Freddie Mac" means the Freddie Mac corporation.

   "Freddie Mac Certificates" means mortgage participation certificates issued
by Freddie Mac, either in certificated or book-entry form.

   "GNMA" means the Government National Mortgage Association.

   "GNMA Certificates" means fully modified pass-through mortgage backed
certificates guaranteed by GNMA and issued either in certificated or book-entry
form.

   "Investment Grade" means a security rating of BBB or better by Standard &
Poor's or Baa or better by Moody's Investors Service, Inc., or, as to unrated
Pass-Through Certificates and CMOs backed by single-family,  multi-family, or
commercial properties, a determination that the security is of comparable
quality to a rated Investment Grade security on the basis of credit enhancement
features that meet Investment Grade credit criteria approved by the Company's
Board of Directors, including approval by a majority of the Unaffiliated
Directors.

   "Issuers" means those entities that issue Mortgage Securities, including
trusts or subsidiaries organized by the Company and Affiliates of the Manager.

   "Manager" means Anworth Mortgage Advisory Corporation, a California
   corporation.

   "Mortgage Assets" means (i) Mortgage Securities, (ii) Mortgage Loans and
(iii) Short-Term Investments.

   "Mortgage Derivative Securities" means Mortgage Securities which provide for
the holder to receive interest only, principal only, or interest and principal
in amounts that are disproportionate to those payable on the underlying Mortgage
Loans.

   "Mortgage Loans" means Conforming and Nonconforming Mortgage Loans, FHA Loans
and VA Loans. All Mortgage Loans to be acquired by the Company will be secured
by first mortgages or deeds of trust on single-family (one-to-four units)
residential properties.

   "Mortgage Securities" means (i) Pass-Through Certificates, (ii) CMOs, and
(iii) Other Mortgage Securities.

   "Mortgage Warehouse Participations" means participations in lines of credit
to mortgage originators that are secured by recently originated Mortgage Loans
which are in the process of being either securitized or sold to permanent
investors.

                                    Page 23
<PAGE>

   "Nonconforming Mortgage Loans" means conventional Mortgage Loans that do not
conform to one or more requirements of FHA, Freddie Mac, Fannie Mae, GNMA or VA
for participation in one or more of such agencies' mortgage loan credit support
programs, such as the principal amounts financed or the underwriting guidelines
used in making the loan.

   "Other Mortgage Securities" means securities representing interests in, or
secured by mortgages on, real property other than Pass-Through Certificates and
CMOs and may include non-primary certificates and other securities
collateralized by single-family, multifamily or commercial loans, Mortgage
Warehouse Participations, Mortgage Derivative Securities, Subordinated Interests
and other mortgage-backed and mortgage-collateralized obligations.

   "Pass-Through Certificates" means securities (or interests therein) other
than Mortgage Derivative Securities and Subordinated Interests evidencing
undivided ownership interests in a pool of mortgage loans, the holders of which
receive a "pass-through" of the principal and interest paid in connection with
the underlying mortgage loans in accordance with the holders' respective,
undivided interests in the pool. Pass-Through Certificates include Agency
Certificates, as well as other certificates evidencing interests in loans
secured by single-family, multi-family, commercial and/or other real estate
related properties.

   "Qualified REIT Real Estate Assets" means Pass-Through Certificates, Mortgage
Loans, Agency Certificates, and other assets of the type described in Section
856(c)(6)(B) of the Code.

   "Qualified REIT Subsidiary" means a corporation whose stock is entirely owned
by the REIT at all times during such corporation's existence.

   "Qualified Temporary Investment Income" means income attributable to stock or
debt instruments acquired with new capital of the Company received during the
one-year period beginning on the day such proceeds were received.

   "REIT" means Real Estate Investment Trust.

   "REIT Provisions of the Code" means Sections 856 through 860 of the Code.

   "REMIC" means Real Estate Mortgage Investment Conduit. The Company will limit
the REMIC interests that it acquires to interests issued by REMICs, at least 95
percent of whose assets consist of Qualified REIT Real Estate Assets.

   "Service" means the Internal Revenue Service.

   "Servicers" means those entities that perform the servicing functions with
respect to Mortgage Loans or Excess Servicing Rights owned by the Company.

   "Servicing Agreements" means the various agreements the Company will enter
into with Servicers.

   "Short-Term Investments" means short-term bank certificates of deposit,
short-term United States treasury securities, short-term United States
government agency securities, commercial paper, repurchase agreements, short-
term CMOs, short-term asset-backed securities and other similar types of short-
term investment instruments, all of which will have maturities or average lives
of less than one (1) year.

   "Subordinated Interests" means a class of Mortgage Securities that is
subordinated to one or more other classes of Mortgage Securities, all of which
classes share the same Collateral. The Company will only acquire Subordinated
Interests that are beneficial interests in grantor trusts holding Mortgage
Loans, or are regular interests issued by REMICs, or that otherwise constitute
Qualified REIT Real Estate Assets (provided the Company has obtained a favorable
opinion of counsel to that effect).

                                    Page 24
<PAGE>

   "Tax Exempt Entity" means a qualified pension, profit-sharing or other
employee retirement benefit plans, bank commingled trust funds for such plans,
and IRAs, and other similar entities intended to be exempt from federal income
taxation.

   "Unaffiliated Directors", means those directors that are not affiliated,
directly, or indirectly, with the Manager, whether by ownership of, ownership
interest in, employment by, any material business or professional relationship
with, or serving as an officer or director of the Manager or an affiliated
business entity of the Manager.

   "VA" means the United States Veterans Administration.

   "VA Loans" means Mortgage Loans partially guaranteed by the VA under the
Servicemen's Readjustment Act of 1944, as amended.


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

(a) Exhibits
Exhibit 27 - Financial Date Schedule

(b) Reports on Form 8-K
None


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: July 29, 1999
By: /s/ Lloyd McAdams
_________________________
Lloyd McAdams
President
(authorized officer of registrant)


Dated: July 29, 1999
By: /s/ Pamela J. Watson
_________________________
Pamela J. Watson,
Chief Financial Officer and Treasurer
(principal accounting officer)

                                    Page 25
<PAGE>

FINANCIAL DATA SCHEDULE

This schedule contains summary financial information extracted from the June 30,
1999 Form 10-Q and is qualified in its entirety by reference to such
financial statements.

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