<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C.  20549


                                   FORM 10-Q


   [X]  QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1999
                                                  --------------


                         Commission File Number 0-10503
                                                -------


                     CONTINENTAL MORTGAGE AND EQUITY TRUST
                 ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)


            California                                    94-2738844
  -------------------------------               ------------------------------
  (State or Other Jurisdiction of                      (I.R.S. Employer
  Incorporation or Organization)                      Identification No.)



  10670 North Central Expressway, Suite 300, Dallas, TX           75231
  ----------------------------------------------------------------------------
  (Address of Principal Executive Offices)                      (Zip Code)


                                (214) 692-4700
                       --------------------------------
                        (Registrant's Telephone Number,
                             Including Area Code)


Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes  X  No 
                                       ---    ---    


Shares of Beneficial Interest,
       no par value                                        4,022,342
------------------------------                ----------------------------------
         (Class)                                (Outstanding at April 30, 1999)

                                       1
<PAGE>
 
                         PART I.  FINANCIAL INFORMATION



ITEM 1.  FINANCIAL STATEMENTS
-----------------------------

The accompanying Consolidated Financial Statements have not been audited by
independent certified public accountants, but in the opinion of the management
of Continental Mortgage and Equity Trust (the "Trust"), all adjustments
(consisting of normal recurring accruals) necessary for a fair presentation of
consolidated results of operations, consolidated financial position and
consolidated cash flows at the dates and for the periods indicated, have been
included.



                     CONTINENTAL MORTGAGE AND EQUITY TRUST
                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
 
 
                                                       March 31,  December 31,
                                                         1999         1998
                                                       ---------  ------------
<S>                                                    <C>        <C>
(dollars in thousands)
 
                                    Assets
                                    ------
 
Notes and interest receivable
 Performing..........................................   $    674      $  2,069
 Nonperforming.......................................          -         1,257
                                                        --------      --------
                                                             674         3,626
 
Less - allowance for estimated losses................      (250)         (250)
                                                        --------      --------
                                                             424         3,376
 
Foreclosed real estate held for sale, net of
 accumulated depreciation ($698 in 1999 and 1998)....      3,325         3,325
 
Real estate held for investment, net of accumulated
 depreciation ($27,667 in 1999 and $25,590 in 1998)      298,285       294,227
Investment in marketable equity securities of
 affiliate, at market................................     13,759        14,417
Cash and cash equivalents............................        723         2,156
Other assets (including $243 in 1999 and $1,251 in
 1998 from affiliates)...............................     14,899        16,287
                                                        --------      -------- 
                                                        $331,415      $333,788
                                                        ========      ========  
</TABLE>


The accompanying notes are an integral part of these Consolidated Financial
Statements.

                                       2
<PAGE>
 
                     CONTINENTAL MORTGAGE AND EQUITY TRUST
                    CONSOLIDATED BALANCE SHEETS - Continued
<TABLE>  
<CAPTION> 

                                                        March 31,   December 31,
                                                          1999          1998
                                                      ------------ -------------
                                                        (dollars in thousands)
<S>                                                   <C>          <C> 
      Liabilities and Shareholders' Equity
      ------------------------------------
 
Liabilities

Notes and interest payable..........................    $ 235,291    $ 233,693
Other liabilities (including $1,771 in 1999 and                  
 $1,295 in 1998 to affiliates)......................       11,676       12,742
                                                        ---------    --------- 

                                                          246,967      246,435  
                                                                 
Commitments and contingencies                                    
                                                                 
Shareholders' equity                                             
Shares of Beneficial Interest, no par value;                     
 authorized shares, unlimited; issued and out-                   
 standing, 4,021,180 shares in 1999 and 4,021,181                
 shares in 1998.....................................        8,054        8,054
Paid-in capital.....................................      257,093      257,093
Accumulated distributions in excess of accumulated               
 earnings...........................................    (193,100)    (190,906)
Net unrealized gains on marketable equity                        
 securities.........................................       12,401       13,112
                                                        ---------    --------- 
                                                                 
                                                           84,448       87,353  
                                                        ---------    --------- 
                                                                 
                                                        $ 331,415    $ 333,788  
                                                        =========    ========= 
</TABLE>



The accompanying notes are an integral part of these Consolidated Financial
Statements.

                                       3
<PAGE>
 
                     CONTINENTAL MORTGAGE AND EQUITY TRUST
                     CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>  
<CAPTION> 
                                                    For the Three Months
                                                       Ended March 31,
                                                   ----------------------
                                                      1999        1998
                                                   ----------  ---------- 
                                                   (dollars in thousands,
                                                     except per share)
 
Revenues
<S>                                                <C>         <C>
  Rents..........................................  $   16,541  $   14,810
  Interest.......................................          96         231
                                                   ----------  ----------  
                                                       16,637      15,041
 
Expenses
  Property operations............................       9,743       8,477
  Interest.......................................       5,471       5,084
  Depreciation...................................       2,076       2,085
  Advisory fee to affiliate......................         625         564
  Net income fee to affiliate....................           -         291
  General and administrative.....................         518         604
                                                   ----------  ----------  
                                                       18,435      17,105
                                                   ----------  ----------  
 
(Loss) from operations...........................      (1,798)     (2,064)
 
Equity in income of partnerships.................          56          35
Gain on sale of real estate and note receivable           152       5,616
                                                   ----------  ----------  
 
Net income (loss)................................  $   (1,590) $    3,587
                                                   ==========  ==========   
Earnings per share
Net income (loss)..............................    $     (.40) $      .89
                                                   ==========  ==========   

Weighted average shares of beneficial interest
  used in computing earnings per share.........     4,021,180   4,013,236
                                                   ==========  ==========   
</TABLE> 


The accompanying notes are an integral part of these Consolidated Financial
Statements.

                                       4
<PAGE>
 
                     CONTINENTAL MORTGAGE AND EQUITY TRUST
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
 
 
                                                                            
                                                                                         Accumulated                               
                                                        Shares of                        Distributions  Accumulated
                                                   Beneficial Interest                   in Excess of      Other 
                                               --------------------------    Paid-in     Accumulated   Comprehensive  Shareholders'
                                                  Shares        Amount       Capital      Earnings        Income         Equity
                                               ------------  ------------  -----------  -------------  -------------  ------------- 

                                                                      (dollars in thousands, except per share)
<S>                                            <C>           <C>           <C>          <C>            <C>            <C>  
Balance, January 1, 1999..................        4,021,181  $      8,054  $   257,093  $    (190,906) $      13,112  $      87,353
 
 
Comprehensive Income
 
 Net (loss)...............................             -             -            -            (1,590)          -            (1,590)

 
 Unrealized (losses) on marketable 
  equity securities.......................             -             -            -              -              (711)          (711)

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

                                                                                                                             (2,301)


Fractional share of beneficial interest
 acquired.................................               (1)         -            -              -              -              -    


Distributions ($.15 per share)............             -             -            -              (604)          -              (604)

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


Balance, March 31, 1999...................        4,021,180  $      8,054  $   257,093  $    (193,180) $      12,401  $      84,448
                                               ============  ============  ===========  =============  =============  ============= 

</TABLE> 


The accompanying notes are an integral part of these Consolidated Financial
Statements.

                                       5
<PAGE>
 
                     CONTINENTAL MORTGAGE AND EQUITY TRUST
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
 
                                                      For the Three Months
                                                         Ended March 31,
                                                     ----------------------
                                                        1999        1998
                                                     ---------   ----------
                                                     (dollars in thousands)
<S>                                                  <C>         <C> 
Cash Flows from Operating Activities
   Rents collected..................................  $ 16,820     $ 14,782
   Interest collected...............................        96          223
   Interest paid....................................    (5,135)      (4,548)
   Payments for property operations.................   (11,429)     (11,775)
   General and administrative expenses paid.........      (505)        (588)
   Advisory, net income and incentive sales fees                
    paid (to)/refunded by affiliate.................       355         (662)
   Distributions from partnerships' operating cash              
    flow............................................        88           21
   Other............................................       173          (35)
                                                      --------     --------
                                                                
      Net cash provided by (used in) operating                  
        activities..................................       463       (2,582)
                                                                
                                                                
Cash Flows from Investing Activities                            
   Acquisitions of real estate......................      (273)     (25,653)
   Real estate improvements.........................    (1,312)        (745)
   Deposits on pending acquisitions and financings..      (128)        (495)
   Deposits on proposed merger......................       (75)        -
   Proceeds from sale of real estate................      -          14,004
   Collections on notes receivable..................        20           26
   Proceeds from sale of note receivable............     1,452         -
                                                      --------     --------
                                                                
      Net cash (used in) investing activities.......      (316)     (12,863)
                                                                
                                                                
Cash Flows from Financing Activities                            
   Proceeds from notes payable......................    10,108       47,912
   Payments on notes payable........................   (11,082)     (26,115)
   Deferred financing costs.........................      (478)      (1,415)
   Advances from affiliate..........................       476            -
   Distributions to shareholders....................      (604)        (601)
   Repurchase of shares of beneficial interest......      -            (240)
                                                      --------     --------
                                                                
      Net cash provided by (used in) financing                  
       activities...................................    (1,580)      19,541
                                                      --------     --------
                                                                
Net increase (decrease) in cash and cash                        
   equivalents......................................    (1,433)        ,096
Cash and cash equivalents, beginning of period......     2,156        3,088
                                                      --------     --------
                                                                
Cash and cash equivalents, end of period............  $    723     $  7,184
                                                      ========     ========
</TABLE>


The accompanying notes are an integral part of these Consolidated Financial
Statements.

                                       6
<PAGE>
 
                     CONTINENTAL MORTGAGE AND EQUITY TRUST
               CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued

<TABLE> 
<CAPTION> 
                                                          For the Three Months
                                                             Ended March 31,
                                                         ----------------------
                                                            1999        1998
                                                         ---------   ---------- 
                                                         (dollars in thousands)
<S>                                                      <C>         <C> 
Reconciliation of net income (loss) to net cash          
      provided by (used in) operating activities         
                                                         
Net income (loss)....................................... $  (1,590)  $    3,587
Adjustments to reconcile net income (loss) to net                   
      cash provided by (used in) operating activities               
      Gain on sale of real estate and note receivable...      (152)     (5,616)
      Depreciation......................................     2,076       2,085
      Equity in (income) of partnerships................       (56)        (35)
 (Increase) in interest receivable......................      -             (9)
 Decrease in other assets...............................     2,196         587
 (Decrease) in other liabilities........................    (2,141)     (3,219)
 Increase in interest payable...........................        42          17
      Distributions from partnerships' operating cash               
             flow.......................................        88          21
                                                         ---------   ---------
      Net cash provided by (used in) operating                      
             activities................................. $     463   $  (2,582)
                                                         =========   =========
Noncash investing and financing activities                          
                                                                    
      Notes payable from acquisition of real estate..... $   2,700   $    -
                                                                    
      Unrealized gains (losses) on marketable equity                
             securities.................................      (711)        589
</TABLE> 


The accompanying notes are an integral part of these Consolidated Financial
Statements.

                                       7
<PAGE>
 
                     CONTINENTAL MORTGAGE AND EQUITY TRUST
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTE 1.  BASIS OF PRESENTATION
------------------------------

The accompanying Consolidated 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 Article 10 of Regulation
S-X.  Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.  Operating results for the three month period ended March 31, 1999
are not necessarily indicative of the results that may be expected for the year
ending December 31, 1999.  Dollar amounts in tables are in thousands.  For
further information, refer to the Consolidated Financial Statements and Notes
thereto included in the Trust's Annual Report on Form 10-K for the year ended
December 31, 1998 ("1998 Form 10-K").

NOTE 2.  MORTGAGE NOTES RECEIVABLE
----------------------------------

In February 1999, the Trust sold, to the underlying lienholder, its mortgage
note receivable secured by the Cypress Creek Office Building in Ft. Lauderdale,
Florida, for $1.6 million, receiving net cash of $111,000 after paying off $1.4
million in mortgage debt and the payment of various closing costs.  The
purchaser has no recourse to the Trust if the note should not be collected in
full.  A gain of $152,000 was recognized on the sale.

In February 1996, the Trust funded a $1.5 million second lien mortgage secured
by the Signature Athletic Club in Dallas, Texas.  The note matured in October
1998.  The Trust had also guaranteed the underlying first lien mortgage secured
by the property, which also matured in October 1998.  The Trust ceased
recognizing interest income on the note in June 1996.  In February 1999, the
Trust obtained ownership of the partnership that owns the property.  The
partnership refinanced the property in the amount $2.7 million, receiving no net
cash after paying off the matured $2.6 million first lien and the payment of
various closing costs.  The mortgage bears interest at 8.5% per annum, requires
monthly payments of principal and interest of $23,000 and matures in February
2004.  The Trust incurred no loss as the fair value of the property exceeded the
carrying value of the Trust's note receivable and assumed first lien mortgage.
The Club is included in real estate held for investment in the accompanying
Consolidated Balance Sheet.

NOTE 3.  REAL ESTATE
--------------------

In January 1999, the Trust purchased a ground lease under the 1010 Common Office
Building for $273,000 in cash, including a real estate brokerage commission of
$10,000 paid to Carmel Realty, Inc. ("Carmel Realty"), an affiliate of Basic
Capital Management, Inc. ("BCM"), the Trust's advisor, and an acquisition fee of
$3,000 paid to BCM.

                                       8
<PAGE>
 
                     CONTINENTAL MORTGAGE AND EQUITY TRUST
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


NOTE 4.  NOTES PAYABLE
----------------------

In March 1999, the Trust refinanced the mortgage debt secured by the Eagle Rock
Apartments in Los Angeles, California, in the amount of $3.3 million, paying net
cash of $83,000 to pay off $3.3 million in mortgage debt and the payment of
various closing costs, including a mortgage brokerage and equity refinancing fee
of $33,000 to BCM.  The new mortgage bears interest at 7.33% per annum, requires
monthly payments of principal and interest of $22,609 and matures in April 2009.

Also in March 1999, the Trust refinanced the mortgage debt secured by the Trails
of Windfern Apartments in Houston, Texas, in the amount of $3.8 million,
receiving net cash of $414,000 after paying off $3.3 million in mortgage debt
and the payment of various closing costs, including a mortgage brokerage and
equity refinancing fee of $38,000 to BCM.  The new mortgage bears interest at
7.23% per annum, requires monthly payments of principal and interest of $25,871
and matures in April 2009.

Further in March 1999, the Trust refinanced the mortgage debt secured by the
Ashley Crest Apartments in Houston, Texas, in the amount of $2.9 million,
receiving net cash of $54,000 after paying off $2.6 million in mortgage debt and
the payment of various closing costs, including a mortgage brokerage and equity
refinancing fee of $29,000 to BCM.  The new mortgage bears interest at 7.12% per
annum, requires monthly payments of principal and interest of $19,191 and
matures in April 2009.

NOTE 5.  OPERATING SEGMENTS
---------------------------

Significant differences among the accounting policies of the Trust's operating
segments as compared to the Trust's consolidated financial statements
principally involve the calculation and allocation of administrative expenses.
Management evaluates the performance of each of its operating segments and
allocates resources to them based on their net operating income and cash flow.
The Trust based reconciliation of expenses that are not reflected in the
segments is $518,000 and $604,000 for the three months ended March 31, 1999 and
1998, respectively, of administrative expenses.  There are no intersegment
revenues and expenses and the Trust conducts all of its business within the
United States.

                                       9
<PAGE>
 
                     CONTINENTAL MORTGAGE AND EQUITY TRUST
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


NOTE 5.  OPERATING SEGMENTS (Continued)
-------  ------------------            

Presented below are the Trust's reportable segments operating income for the
three months ended March 31, and segment assets at March 31.
<TABLE>
<CAPTION>
 
                                          Commercial
  1999                           Land     Properties  Apartments   Total
--------                       ---------  ----------  ----------  --------
<S>                            <C>        <C>         <C>         <C>
Rents........................  $     -    $    7,180    $  9,361  $ 16,541
Property operating expenses..        125       4,048       5,570     9,743
                               ---------  ----------  ----------  --------
Net operating income (loss)..  $    (125) $    3,132  $    3,791  $  6,798
                               =========  ==========  ==========  ========
 
Depreciation.................  $     -    $    1,188  $      888  $  2,076
Interest on debt.............        405       2,476       2,489     5,370
Real estate improvements.....        -         1,239          73     1,312
Segment assets...............     26,239     148,450     126,921   301,610
 
  1998
--------
Rents........................  $       5  $    6,228  $    8,577  $ 14,810
Property operating expenses..         95       2,992       5,390     8,477
                               ---------  ----------  ----------  --------
Net operating income (loss)..  $     (90) $    3,236  $    3,187  $  6,333
                               =========  ==========  ==========  ========
 
Depreciation.................  $     -      $  1,319    $    766  $  2,085
Interest on debt.............        197       1,319       2,370     5,024
Real estate improvements.....        -           455         290       745
Segment assets...............     20,277     145,121     116,095   281,493
 
Property sales:
<CAPTION> 

                                          Commercial
                                           Property    Apartment    Total
                                          ----------  ----------  --------
<S>                                       <C>         <C>         <C>
Sales price.............................  $    2,050  $   12,125  $ 14,175
Cost of sales...........................       2,050       6,509     8,559
                                          ----------  ----------  --------
Gain on sales...........................  $      -    $    5,616  $  5,616
                                          ==========  ==========  ========
</TABLE>

NOTE 6.  COMMITMENTS AND CONTINGENCIES
--------------------------------------

The Trust is involved in various lawsuits arising in the ordinary course of
business.  Management of the Trust is of the opinion that the outcome of these
lawsuits would have no material impact on the Trust's financial condition,
results of operations or liquidity.

NOTE 7.  SUBSEQUENT EVENTS
--------------------------

In April 1999, the Trust refinanced the mortgage debt secured by the Brookfield
Corporate Center in Chantilly, Virginia, in the amount of $2.9 million,
receiving net cash of $62,000 after paying off $2.7 million in mortgage debt and
the payment of various costs, including a mortgage brokerage and equity
refinancing fee of $29,000 to BCM.  The new mortgage bears interest at 7.71% per
annum, requires monthly payments of principal and interest of $21,678 and
matures in May 2009.

Also in April 1999, the Trust sold the 74,000 sq. ft. 3400 Carlisle Office
Building in Dallas, Texas, for $6.1 million, receiving net cash

                                       10
<PAGE>
 
                     CONTINENTAL MORTGAGE AND EQUITY TRUST
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)


NOTE 7.  SUBSEQUENT EVENTS (Continued)
--------------------------            

of $1.1 million after paying off $4.6 million in mortgage debt, including a
$166,000 prepayment penalty, and the payment of various closing costs, including
a real estate brokerage commission of $193,000 to Carmel Realty.  A gain will be
recognized on the sale.

Further in April 1999, the Trust refinanced the mortgage debt secured by the
Fountain Lake Apartments in Texas City, Texas, in the amount of $2.6 million,
receiving net cash of $89,000 after paying off $2.4 million in mortgage debt and
the payment of various closing costs, including a mortgage brokerage and equity
refinancing fee of $26,000 to BCM.  The new mortgage bears interest at 7.56% per
annum, requires monthly payments of principal and interest of $19,018 and
matures in May 2002.

In May 1999, the Trust sold the 104,001 sq. ft. Hampton Court Office Building in
Dallas, Texas, for $11.3 million, receiving net cash of $5.6 million after
paying off $6.2 million in mortgage debt, including a $252,000 prepayment
penalty, and the payment of various closing costs, including a real estate
brokerage commission of $281,000 to Carmel Realty.  A gain will be recognized on
the sale.

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


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

Introduction
------------

The Trust invests in real estate through direct ownership and partnerships and
invests in mortgage loans, including first, wraparound and junior mortgage
loans.  The Trust was organized on August 27, 1980 and commenced operations on
December 3, 1980.

Liquidity and Capital Resources
-------------------------------

Cash and cash equivalents totaled $723,000 at March 31, 1999, compared to $2.2
million at December 31, 1998.  The principal reasons for the decrease in cash
are discussed in the paragraphs below.

The Trust's principal sources of cash have been and will continue to be property
operations, proceeds from property sales and borrowings. Management expects that
net cash provided by operating activities and from external sources, such as
property sales, financings and refinancings, will be sufficient to meet the
Trust's various cash needs in 1999, including, but not limited to, debt service
obligations, shareholder distributions and property maintenance and
improvements.

The Trust's cash flow from property operations (rents collected less payments
for expenses applicable to rental income) increased to $5.4

                                       11
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------------------------------------------------------------------
         RESULTS OF OPERATIONS (Continued)
         ---------------------            

Liquidity and Capital Resources (Continued)
-------------------------------            

million in the first quarter of 1999 from $3.0 million in the first quarter of
1998. Of this net increase, $268,000 was due to the acquisition of three income
producing properties in 1998 and one property in 1999, $1.6 million was due to
the payment in 1998 of expenses accrued at December 31, 1997, and $411,000 was
due to increased occupancy rates at the Trust's commercial and residential
properties. These increases were partially offset by a decrease of $89,000 due
to the sale of three commercial properties and an apartment complex in 1998. The
Trust's management believes that this trend of increasing cash flow from
property operations will continue as it benefits from the properties purchased
in 1998 and assuming the economy remains stable or improves.

Interest collected on mortgage notes receivable decreased to $38,000 in 1999
from $69,000 in 1998.  The decrease was primarily due to the collection of two
notes receivable in 1998 and the sale of five notes receivable in 1998 and one
note receivable in 1999.  Miscellaneous interest income collected decreased to
$58,000 in 1999 from $154,000 in 1998 due to a decrease in short-term
investments.  Interest is expected to continue to decrease as a source of cash
as the Trust has determined that generally, it will not actively seek to
originate new mortgage loans other than those resulting from the Trust
providing purchase money financing in connection with a property sale.

Interest paid increased to $5.1 million in 1999 from $4.5 million in 1998.  This
increase was primarily attributable to interest paid on mortgages secured by
three leveraged property purchases in 1998; four borrowings in 1998 secured by
mortgages on encumbered properties; and interest paid on new notes resulting
from the refinancing of four properties in 1998 and three properties in 1999
where the loan balance was increased.  Interest paid on notes payable is
expected to continue to increase as additional properties are purchased on a
leveraged basis and financing is obtained on remaining unencumbered properties.

General and administrative expenses paid decreased to $505,000 in 1999 from
$588,000 in 1998.  The decrease was due to a decrease in legal fees.

Under its advisory agreement, all or a portion of the annual advisory fee must
be refunded by BCM, the Trust's advisor, if the operating expenses of the Trust
exceed certain limits specified in the Trust's Declaration of Trust.  The Trust
received a refund of $981,000 of its 1998 advisory fee in March 1999 as compared
to $606,000 of its 1997 advisory fee in March 1998.

In January 1999, the Trust purchased a ground lease under the 1010 Common Office
Building for $273,000 in cash.

In February 1999, the Trust sold, to the underlying lienholder, its mortgage
note receivable secured by the Cypress Creek Office Building in Ft. Lauderdale,
Florida, for $1.6 million, receiving net cash of $111,000 after paying off $1.4
million in mortgage debt and the payment of various closing costs.

                                       12
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------------------------------------------------------------------
         RESULTS OF OPERATIONS (Continued)
         ---------------------            

Liquidity and Capital Resources (Continued)
-------------------------------            

In March 1999, the Trust refinanced the mortgage debt secured by the Eagle Rock
Apartments in Los Angeles, California, in the amount of $3.3 million, paying net
cash of $83,000 to pay off $3.3 million in mortgage debt and the payment of
various closing costs.

Also in March 1999, the Trust refinanced the mortgage debt secured by the Trails
of Windfern Apartments in Houston, Texas, in the amount of $3.8 million,
receiving net cash of $414,000 after paying off $3.3 million in mortgage debt
and the payment of various closing costs.

Further in March 1999, the Trust refinanced the mortgage debt secured by the
Ashley Crest Apartments in Houston, Texas, in the amount of $2.9 million,
receiving net cash of $54,000 after paying off $2.6 million in mortgage debt and
the payment of various closing costs.

In April 1999, the Trust refinanced the mortgage debt secured by the Brookfield
Corporate Center in Chantilly, Virginia, in the amount of $2.9 million,
receiving net cash of $91,000 after paying off $2.7 million in mortgage debt and
the payment of various closing costs.

Also in April 1999, the Trust sold the 3400 Carlisle Office Building in Dallas,
Texas, for $6.1 million, receiving net cash of $1.1 million after paying off
$4.6 million in mortgage debt, including a $166,000 prepayment penalty, and the
payment of various closing costs.

Further in April 1999, the Trust refinanced the mortgage debt secured by the
Fountain Lake Apartments in Texas City, Texas, in the amount of $2.6 million,
receiving net cash of $89,000 after paying off $2.4 million in mortgage debt and
the payment of various closing costs.

In May 1999, the Trust sold the Hampton Court Office Building in Dallas, Texas,
for $11.3 million, receiving net cash of $5.6 million after paying off $6.2
million in mortgage debt, including a $252,000 prepayment penalty, and the
payment of various closing costs.

In April 1998, the Trust's Board of Trustees authorized the Trust to repurchase
a total of 200,000 of its shares of beneficial interest.  No shares have been
purchased under this authorization.

In the first quarter of 1999, the Trust paid distributions of $.15 per share, or
a total of $604,000.

Management reviews the carrying value of the Trust's properties and mortgage
notes receivable at least annually and whenever events or a change in
circumstances indicate that impairment may exist. Impairment is considered to
exist if, in the case of a property, the future cash flow from the property
(undiscounted and without interest) is less than the carrying amount of the
property. For notes receivable impairment is

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

Liquidity and Capital Resources (Continued)
-------------------------------            

considered to exist if it is probable that all amounts due under the terms of
the note will not be collected.  If impairment is found to exist, a provision
for loss is recorded by a charge against earnings. The mortgage note receivable
review includes an evaluation of the collateral property securing such note.
The property review generally includes selective property inspections, a review
of the property's current rents compared to market rents, a review of the
property's expenses, a review of maintenance requirements, a review of the
property's cash flow, discussions with the manager of the property and a review
of properties in the surrounding area.

Results of Operations
---------------------

The Trust had a net loss of $1.6 million, which includes a gain on sale of a
mortgage note receivable of $152,000, in the three months ended March 31, 1999,
compared to net income of $3.6 million in the three months ended March 31, 1998,
which included a gain on sale of real estate of $5.6 million.  Fluctuations in
these and other components of the Trust's revenues and expenses between the 1998
and 1999 periods are discussed below.

Rents increased to $16.5 million in the three months ended March 31, 1999 from
$14.8 million in 1998. Of this increase, $1.7 million was attributable to the
acquisition of one apartment and two commercial properties in 1998 and one
commercial property in 1999. The remainder of the increase was due to increased
rental and occupancy rates at the Trust's apartments and commercial properties.
These increases were partially offset by a decrease of $382,000 due to the sale
of three commercial properties and an apartment in 1998. Rents are expected to
increase during the remaining quarters of 1999 due to a full year of revenue
from properties acquired in 1998 and 1999.

Interest income was $96,000 in the three months ended March 31, 1999 compared to
$231,000 in 1998.  The decrease was due to the collection of two notes
receivable and the sale of five notes receivable in 1998 and the sale of a note
receivable in 1999 and by a decrease in short-term investment income.  Interest
income in the remaining quarters of 1999 is expected to be insignificant.

Property operating expenses increased to $9.7 million in the three months ended
March 31, 1999 from $8.5 million in 1998. Of this increase, $1.5 million was due
to the acquisition of one apartment and three commercial properties subsequent
to March 31, 1998. This increase was partially offset by a decrease of $357,000
due to the sale of three commercial properties and an apartment in 1998.
Property operating expenses are expected to increase during the remaining
quarters of 1999 due to a full year of operations of properties acquired in
1998 and 1999.

                                       14
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------------------------------------------------------------------
         RESULTS OF OPERATIONS (Continued)
         ---------------------            

Results of Operations (Continued)
---------------------            

Interest expense increased to $5.5 million in the three months ended March 31,
1999, from $5.1 million in 1998. Of this increase, $526,000 was due to interest
expense recorded on mortgages secured by three leveraged property purchases in
1998 and one in 1999. An additional $195,000 was due to interest expense
recorded on borrowings in 1998, secured by mortgages on four previously
unencumbered land parcels and the refinancing of four mortgages in 1998 where
the loan balance was increased. These increases were partially offset by a
decrease of $259,000 due to the sale of three commercial properties and an
apartment in 1998 and a decrease of $62,000 due to normal principal amortization
and decreases in variable interest rates. Interest expense is expected to
increase in the remaining quarters of 1998 as a result of a full year of
interest expense on properties acquired or refinanced in 1998 and in the first
quarter of 1999.

Depreciation was $2.1 million in the three months ended March 31, 1999,
comparable to 1998.

Advisory fee to affiliate increased to $625,000 in the three months ended 
March 31, 1999, from $564,000 in 1998. This increase is due to an increase in
the Trust's gross assets, the basis for the advisory fee, as a result of
property acquisitions in 1998. The advisory fee is expected to continue to
increase as the Trust makes additional property acquisitions.

The Trust recorded a net income fee of $291,000 in the three months ended March
31, 1998, as a result of the gain on the sale of the Edgewood Apartments of $5.6
million as discussed below.  No such fee was earned by the advisor in 1999.

General and administrative expenses decreased to $518,000 in the three months
ended March 31, 1999 from $604,000 in 1998.  The decrease is due to a decrease
in legal expenses.

The Trust's equity in earnings of partnerships of $56,000 in the three months
ended March 31, 1999 was comparable to the $35,000 in 1998.

The Trust recognized a gain on the sale of a note receivable of $152,000 in the
three months ended March 31, 1999. The Trust recognized a gain on the sale of
real estate of $5.6 million on the sale of Edgewood Apartments in the three
months ended March 31, 1998.

Tax Matters
-----------

As more fully discussed in the Trust's 1998 Form 10-K, the Trust has elected and
in the opinion of management, qualified to be taxed as a Real Estate Investment
Trust ("REIT") as defined under Sections 856 through 860 of the Internal Revenue
Code of 1986, as amended, (the "Code"). To continue to qualify for federal
taxation as a REIT under

                                       15
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------------------------------------------------------------------
         RESULTS OF OPERATIONS (Continued)
         ---------------------            

Tax Matters (Continued)
-----------            

the Code, the Trust is required to hold at least 75% of the value of its total
assets in real estate assets, government securities and cash and cash
equivalents at the close of each quarter of each taxable year.  The Code also
requires a REIT to distribute at least 95% of its REIT taxable income plus 95%
of its net income from foreclosure property, as defined in Section 857 of the
Code, on an annual basis to shareholders.

Inflation
---------

The effects of inflation on the Trust's operations are not quantifiable.
Revenues from apartment operations tend to fluctuate proportionately with
increases and decreases in housing costs.  Fluctuations in the rate of inflation
also affect the sales values of properties and, correspondingly, the ultimate
gains to be realized by the Trust from property  sales.  To the extent that
inflation affects interest rates, the Trust's earnings from short-term
investments, the cost of new borrowings, as well as the cost of variable
interest rate debt will be affected.

Environmental Matters
---------------------

Under various federal, state and local environmental laws, ordinances and
regulations, the Trust may be potentially liable for removal or remediation
costs, as well as certain other potential costs relating to hazardous or toxic
substances (including governmental fines and injuries to persons and property)
where property-level managers have arranged for the removal, disposal or
treatment of hazardous or toxic substances.  In addition, certain environmental
laws impose liability for release of asbestos-containing materials into the air,
and third parties may seek recovery from the Trust for personal injury
associated with such materials.

The Trust's management is not aware of any environmental liability relating to
the above matters that would have a material adverse effect on the Trust's
business, assets or results of operations.

Year 2000
---------

BCM, the Trust's advisor, has informed management that its computer hardware
operating system and computer software have been certified as year 2000
compliant.

Further, Carmel Realty Services, Ltd. ("Carmel, Ltd."), an affiliate of BCM
that performs property management services for the Trust's properties, has
informed management that effective January 1, 1999, it began using year 2000
compliant computer hardware and property management software for the Trust's
commercial properties. With regards to the Trust's apartments, Carmel, Ltd. has
informed management that its subcontractors are also using year 2000 compliant
computer hardware and property management software.

                                       16
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------------------------------------------------------------------------
         RESULTS OF OPERATIONS (Continued)
         ---------------------            

Year 2000 (Continued)
---------            

The Trust has not incurred, nor does it expect to incur, any costs related to
its computer hardware and accounting and property management software being
modified, upgraded or replaced in order to make it year 2000 compliant.  Such
costs have been or will be borne by either BCM, Carmel, Ltd. or the property
management subcontractors of Carmel, Ltd.

Management has completed its evaluation of the Trust's computer controlled
building systems, such as security, elevators, heating and cooling, etc., to
determine what systems are not year 2000 compliant. Management believes that
necessary modifications are insignificant to such systems and will not require
significant expenditures, as such enhanced operating systems are readily
available.

The Trust has or will have in place the year 2000 compliant systems that will
allow it to operate.  The risks the Trust faces are that certain of its vendors
will not be able to supply goods or services and that financial institutions and
taxing authorities will not be able to accurately apply payments made to them.
Management believes that other vendors are readily available and that financial
institutions and taxing authorities will, if necessary, apply monies received
manually.  The likelihood of the above having a significant impact on the
Trust's operations is negligible.


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


                          PART II.  OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS
-------------------------

Olive Litigation.  In February 1990, the Trust, together with Income Opportunity
Realty Investors, Inc. ("IORI"), National Income Realty Trust and
Transcontinental Realty Investors, Inc. ("TCI"), three real estate entities
with, at the time, the same officers, directors or trustees and advisor as the
Trust, entered into a settlement (the "Settlement") of a class and derivative
action entitled Olive et al. v. National Income Realty Trust et al. pending
before the United States District Court for the Northern District of California
and relating to the operation and management of each of the entities.  On April
23, 1990, the court granted final approval of the terms of the Settlement.

On January 27, 1997, the parties entered into an Amendment to the Settlement,
effective January 9, 1997 (the "Olive Amendment").  The Olive Amendment provided
for the settlement of additional matters raised by plaintiffs' counsel in 1996.
The Court issued an order approving the Olive Amendment on July 3, 1997.

                                       17
<PAGE>
 
ITEM 1. LEGAL PROCEEDINGS (Continued)
-------------------------            

The Olive Amendment provided for the addition of four new unaffiliated members
to the Trust's Board of Trustees and set forth new requirements for the approval
of any transactions with certain affiliates until April 28, 1999. In addition,
the Trust, IORI, TCI and their shareholders released the defendants from any
claims relating to the plaintiffs' allegations.

Under the Olive Amendment, all shares of the Trust owned by any affiliates were
required to be voted at all shareholder meetings of the Trust held until April
28, 1999 in favor of all new members of the Board of Trustees added under the
Olive Amendment.  The Olive Amendment also required that, until April 28, 1999,
all shares of the Trust owned by any affiliates in excess of forty percent (40%)
of the Trust's outstanding shares were to be voted in proportion to the votes
cast by all non-affiliated shareholders of the Trust.

The Settlement and the Olive Amendment terminated on April 28, 1999.


ITEM 5.  OTHER INFORMATION
--------------------------

On October 25, 1996, the Board of Trustees approved a proposal to convert the
Trust from a California business trust into a Nevada corporation.  On February
10, 1998, the incorporation proposal was considered by the Board of Trustees and
was unanimously approved. However, after evaluating the various alternative
methods to accomplish conversion, the Board of Trustees approved a proposed
merger of the Trust and TCI, as discussed below.


Proposed Merger with Transcontinental Realty Investors, Inc.
------------------------------------------------------------

On September 25, 1998, the Trust and TCI jointly announced the agreement of
their respective Boards for the Trust to be acquired by TCI. Under the proposal,
TCI would acquire all of the Trust's outstanding shares of beneficial interest,
in a tax free exchange, for shares of TCI's common stock. TCI will issue 1.181
shares of its common stock for each outstanding share of beneficial interest of
the Trust. Upon the exchange of shares the Trust would merge into TCI. The share
exchange and merger are subject to a vote of shareholders of both entities.
Approval requires the vote of a majority of the shareholders holding a majority
of the Trust's outstanding shares of beneficial interest. As of April 30, BCM,
the Trust's advisor and its affiliates held shares representing approximately
44.7% of the outstanding shares of TCI and approximately 57.4% of the
outstanding shares of the Trust. A date for the special meeting of the
shareholders to vote on the merger proposal has been set for June
29, 1999. TCI has the same Board and advisor as the Trust.

                                       18
<PAGE>
 
ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------

(a) Exhibits:


Exhibit
Number                        Description
-------   -----------------------------------------------------


27.0      Financial Data Schedule


 (b)      Reports on Form 8-K as follows:

          None.

                                       19
<PAGE>
 
                                SIGNATURE PAGE



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.



                                       CONTINENTAL MORTGAGE AND EQUITY TRUST
                                
                                
                                
Date:       May 14, 1999               By:    /s/ Randall M. Paulson
     -------------------------            -----------------------------------
                                          Randall M. Paulson
                                          President
                                
                                
                                
Date:       May 14, 1999               By:    /s/ Thomas A. Holland
     -------------------------            -----------------------------------
                                          Thomas A. Holland
                                          Executive Vice President and
                                          Chief Financial Officer
                                          (Principal Financial and
                                          Accounting Officer)

                                       20
<PAGE>
 
                     CONTINENTAL MORTGAGE AND EQUITY TRUST

                                  EXHIBITS TO
                         QUARTERLY REPORT ON FORM 10-Q

                   For the Three Months Ended March 31, 1999



Exhibit                                                                 Page
Number                           Description                           Number
-------     ---------------------------------------------------        ------

 27.0       Financial Data Schedule.

                                       21