10-K405

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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549
                                    FORM 10-K
(MARK ONE)

 X   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- ---  ACT OF 1934

     FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1998

                                        OR

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

     FOR THE TRANSITION PERIOD FROM _____ TO _____

                        COMMISSION FILE NUMBER: 001-13637
                           APEX MORTGAGE CAPITAL, INC.
             (Exact name of Registrant as specified in its Charter)

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

865 SOUTH FIGUEROA STREET
LOS ANGELES, CALIFORNIA                                     90017
(Address of principal executive offices)                  (Zip Code)

        Registrant's telephone number, including area code (213) 244-0440

           Securities registered pursuant to Section 12(b) of the Act:

     TITLE OF EACH CLASS                 NAME OF EXCHANGE WHICH REGISTERED
Common Stock ($.01 par value)                 New York Stock Exchange

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
         Yes   X     No _____
              ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]

At March 19, 1999, the aggregate market value of the voting stock held by
non-affiliates was $64,872,147 based on the closing price of the Common Stock
on the New York Stock Exchange.

Number of shares of Common Stock outstanding at March 19, 1999: 5,753,000

DOCUMENTS INCORPORATED BY REFERENCE:
         Portions of the Registrant's definitive Proxy Statement to be filed
         pursuant to Regulation 14A within 120 days from December 31, 1998, are
         incorporated by reference into Part III.

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                           SAFE HARBOR STATEMENT UNDER
              THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995


     CERTAIN INFORMATION CONTAINED IN THIS REPORT CONSTITUTES "FORWARD-LOOKING
STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY
SUCH AS "MAY," "WILL," "SHOULD," "EXPECT," "ANTICIPATE," "ESTIMATE," "INTEND,"
"CONTINUE," OR "BELIEVES" OR THE NEGATIVES THEREOF OR OTHER VARIATIONS THEREON
OR COMPARABLE TERMINOLOGY. SOME IMPORTANT FACTORS THAT WOULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE IN ANY FORWARD-LOOKING STATEMENTS
INCLUDE CHANGES IN INTEREST RATES; DOMESTIC AND FOREIGN BUSINESS, MARKET,
FINANCIAL OR LEGAL CONDITIONS; DIFFERENCES IN THE ACTUAL ALLOCATION OF THE
ASSETS OF THE COMPANY FROM THOSE ASSUMED; AND THE DEGREE TO WHICH ASSETS ARE
HEDGED AND THE EFFECTIVENESS OF THE HEDGE, AMONG OTHERS. IN ADDITION, THE DEGREE
OF RISK IS INCREASED BY THE COMPANY'S LEVERAGING OF ITS ASSETS.


                                      2


                                       
                           APEX MORTGAGE CAPITAL, INC.
                          1998 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS



                                                                            PAGE
                                                                            ----
                                                                         
                                     PART I

ITEM 1.       BUSINESS                                                        4

ITEM 2.       PROPERTIES                                                     21

ITEM 3.       LEGAL PROCEEDINGS                                              21

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS            22

                                     PART II

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
                  STOCKHOLDER MATTERS                                        22

ITEM 6.       SELECTED FINANCIAL DATA                                        23

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
              CONDITION AND RESULTS OF OPERATIONS                            24


ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK     31

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                    33

ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                  ACCOUNTING AND FINANCIAL DISCLOSURE                        33

                                    PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT             34

ITEM 11.      EXECUTIVE COMPENSATION                                         34

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
                  AND MANAGEMENT                                             34

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                 34

                                     PART IV

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
                  ON FORM 8-K                                                35

GLOSSARY                                                                     36


                                     3



     CERTAIN CAPITALIZED AND OTHER TERMS USED HEREIN SHALL HAVE THE MEANINGS
           ASSIGNED TO THEM IN THE GLOSSARY AT THE END OF THIS REPORT.


                                     PART I

ITEM 1.  BUSINESS

                                     GENERAL

     Apex Mortgage Capital, Inc. (the "Company"), a Maryland corporation, was 
formed on September 15, 1997, primarily to acquire United States agency and 
other highly rated, single-family real estate adjustable and fixed rate 
Mortgage Related Assets. The Company commenced operations on December 9, 1997 
following the initial public offering of the Company's Common Stock. The 
Company's principal executive offices are located at 865 South Figueroa 
Street, Suite 1800, Los Angeles, California 90017, and its telephone number 
is (213) 244-0440.

     The Company uses its equity capital and borrowed funds to seek to 
generate income based on the difference between the yield on its Mortgage 
Related Assets and the cost of its borrowings. The Company has elected to be 
taxed as a real estate investment trust ("REIT") under the Internal Revenue 
Code of 1986, as amended (the "Code"). The Company will not generally be 
subject to federal taxes on its income to the extent that it distributes its 
net income to its stockholders and maintains its qualification as a REIT.

     The day-to-day operations of the Company are managed by an external 
management company, TCW Investment Management Company (the "Manager"), 
subject to the direction and oversight of the Company's Board of Directors. A 
majority of the Board of Directors are unaffiliated with The TCW Group, Inc. 
("TCW" and, together with its subsidiaries and Affiliates, the "TCW Group") 
or the Manager. The Manager is a wholly-owned subsidiary of TCW. The Manager 
was established in 1992 and the TCW Group began operations in 1971 through 
one of its affiliates. The Company's investment management team are selected 
members of the TCW Group's Mortgage-Backed Securities Group (the "MBS 
Group"), all of whom have over eleven years of experience in raising and 
managing mortgage capital. The Company has elected to be externally managed 
by the Manager to take advantage of the existing operational systems, 
expertise and economies of scale associated with the Manager's current 
business operations, among other reasons. The Manager's key officers have 
experience in raising and managing mortgage capital, mortgage finance and the 
purchase and administration of Mortgage Related Assets.

                                  RECENT EVENTS

     CHANGES IN INVESTMENT AND INTEREST RATE RISK MANAGEMENT POLICIES. In May 
1998, the Company's Board of Directors approved a change to the Company's 
investment policy permitting the Company to invest in either adjustable-rate 
or fixed-rate mortgage securities. Prior to the modification, the Company's 
investment policy stated that the Company would invest primarily in 
adjustable-rate mortgage securities. At the same, the Board of Directors 
refined the interest rate risk management policy to replace the requirement 
that the weighted average time to reset on the Company's mortgage assets and 
debts remain within ninety days to a duration based policy. The new policy 
targets the difference between the weighted average duration of the Company's 
mortgage assets and the related debt used for funding to one year or less, 
taking into account all hedging transactions.

     AMENDMENT TO 1997 STOCK OPTION PLAN. In December 1998, the Company's 
Board of Directors approved certain amendments to the Company's 1997 Stock 
Option Plan which permit the Board of Director's Compensation Committee, the 
members of which are the Unaffiliated Directors, to make discretionary option 
grants from time to time to the Unaffiliated Directors, subject to 
ratification by the Board of Directors.

     SHARE REPURCHASE PROGRAM. In September 1998, the Company's Board of 
Directors renewed and expanded a program to repurchase up to 1,500,000 shares 
of the Company's Common Stock. As of March 19, 1999, the Company had 
repurchased 947,100 shares of its Common Stock pursuant to the program. The 
average price per share repurchased was $11.16. An additional 552,900 shares 
are currently authorized for potential repurchase in the future. The Company 
may continue to repurchase shares in the future when market conditions 
warrant. See "Item 5.- Market for Registrant's Common Equity and Related 
Stockholder Matters" in this report.


                                      4



     DIVIDEND DECLARATION. On March 18, 1999, the Company's Board of 
Directors declared a dividend distribution of $0.38 per share. The dividend 
is payable on April 9, 1999, to shareholders of record on March 31, 1998.

     REPORTING PERIOD. Unless otherwise noted, this report describes the 
Company's operations and developments through the date hereof. Information 
given for the year ended December 31, 1997 represents the Company's initial 
twenty two days of operations which the reader should bear in mind when 
making comparisons to 1998 data.

                                    STRATEGY

     To achieve its business objective and generate dividend yields that provide
a competitive rate of return for its stockholders, the Company's strategy is to:

- -    purchase primarily single-family adjustable and fixed rate Mortgage Related
     Assets;

- -    manage the credit risk of its Mortgage Related Assets through, among other
     activities (i) carefully selecting Mortgage Related Assets to be acquired,
     (ii) complying with the Company's investment policy, (iii) actively
     monitoring the ongoing credit quality and servicing of its Mortgage Related
     Assets, and (iv) maintaining appropriate capital levels and allowances for
     possible credit losses;

- -    finance purchases of Mortgage Related Assets with the net proceeds of
     equity offerings and, to the extent permitted by the Company's leverage
     policy, to utilize leverage to increase potential returns to stockholders
     through borrowings (primarily reverse repurchase agreements) with interest
     rates that will also reflect changes in short-term market interest rates;

- -    seek to structure its borrowings in accordance with its interest rate risk
     management policy;

- -    utilize interest rate caps, swaps and similar financial instruments to
     mitigate interest rate risks; and

- -    seek to minimize prepayment risk primarily by structuring a diversified
     portfolio with a variety of prepayment characteristics.

     There can be no assurance that the Company will be able to generate
competitive earnings and dividends while holding primarily High Quality Mortgage
Related Assets and maintaining a disciplined risk-control profile.

     The Company may attempt to increase the return to stockholders over time 
by: (i) raising additional capital in order to increase its ability to invest 
in additional Mortgage Related Assets; (ii) lowering its effective borrowing 
costs through direct funding with collateralized lenders, in addition to 
using Wall Street intermediaries, and investigating the possibility of using 
collateralized commercial paper and medium-term note programs; and (iii) 
improving the efficiency of its balance sheet structure by issuing 
uncollateralized subordinated debt and other forms of capital.

MANAGEMENT POLICIES AND PROGRAMS

     The Company is a financial company that uses its equity capital and 
borrowed funds to seek to generate net income based on the difference between 
the interest income on its assets and the cost of its borrowings. The Company 
has elected to be taxed as a REIT under the Code. The Company intends to 
operate in accordance with its operating policies as approved by the 
Company's Board of Directors at least annually.

     The Company has established the following four primary operating 
policies to implement its business strategy of acquiring assets consisting 
primarily of United States agency and other high rated single-family real 
estate mortgage securities and mortgage loans in order to generate dividend 
yields that provide a competitive rate of return for its stockholders. These 
policies supercede the Management Policies and Programs stated in the 
Company's prospectus dated December 3, 1997, Form 10-K for its fiscal year 
ended December 31, 1997, and Forms 10-Q for its quarters ended March 31, June 
30 and September 30, 1998.

- -    Investment Policy
- -    Leverage Policy
- -    Interest Rate Risk Management Policy
- -    REIT Compliance Policy


     Compliance with the policy guidelines shall be determined at the time of 
purchase of the Mortgage Related Assets (based on the most recent valuation 
used by the Company) and will not be affected by events subsequent to such 
purchase. Such events include, without limitation, changes in 
characterization, value or rating of any specific Mortgage Related Assets or 
economic conditions or other events generally affecting any Mortgage Related 
Assets of the type held by the Company.

INVESTMENT POLICY

     The Company intends to acquire investments that it believes will 
maximize returns on capital invested, after considering (i) the amount and 
nature of the anticipated returns from the investment, (ii) the Company's 
ability to pledge the investment to secure collateralized borrowings, and 
(iii) the costs associated with financing, hedging, managing, securitizing 
and reserving for such investments.

     The Company generally expects to primarily invest in Mortgage Related 
Assets that may include Short-Term Investments, Mortgage-Backed Securities, 
High Credit Quality Mortgage Loans, Mortgage Derivative Securities and Other 
Investments.


                                     5


The Company's investment policy is intended to provide guidelines for the
acquisition of its investments. Specifically, the investment policy states that
the Company intends to acquire a portfolio of investments that can be segregated
into specific categories. Each category and its respective investment
limitations are as follows:

50% CATEGORY

     At least 50% of the Company's total assets are expected to consist of 
(i) Short-Term Investments, (ii) Mortgage-Backed Securities that are either 
issued or guaranteed by an agency of the U.S. government, (iii) 
Mortgage-Backed Securities that are rated AAA by at least one nationally 
recognized rating agency or (iv) High Credit Quality Mortgage Loans that are 
funded with Committed Secured Borrowings.

75% CATEGORY

     At least 75% of the Company's total assets are expected to consist of 
investments that qualify for the 50% Category or other Mortgage-Backed 
Securities that have received an investment grade rating by at least one 
nationally recognized rating agency.

90% CATEGORY

     At least 90% of the Company's total assets are expected to consist of 
investments that qualify for the 75% Category or High Credit Quality Mortgage 
Loans that are not funded by Committed Secured Borrowings.

10% CATEGORY

     Not more than 10% of the Company's total assets are expected to consist 
of (i) Mortgage-Backed Securities rated below investment grade, (ii) Mortgage 
Derivative Securities or (iii) Other Investments.

LEVERAGE POLICY

     The Company generally anticipates utilizing leverage to increase returns 
to its shareholders. The Company's goal is to strike a balance between the 
under-utilization of leverage, which reduces potential returns to 
stockholders, and the over-utilization of leverage, which could reduce the 
Company's ability to meet its obligations during periods of adverse market 
conditions. The Company has established a leverage policy to control the type 
and amount of leverage used to fund the acquisition of its Mortgage Related 
Assets. The Company's leverage policy is intended to provide guidelines for 
utilizing secured borrowings in the form of Uncommitted Secured Borrowings 
and Committed Secured Borrowings.

UNCOMMITTED SECURED BORROWINGS

     The Company expects a substantial portion of its borrowings may consist 
of Uncommitted Secured Borrowings including reverse repurchase agreements, 
lines of credit, Dollar-Roll Agreements, and other financing transactions. 
Such funding sources generally do not commit the lender to continue to 
provide financing to the Company. The Company intends to limit the amount of 
Uncommitted Secured Borrowings to 92% of its total assets, less any assets 
that are funded with Committed Secured Borrowings, plus the market value of 
any related hedging transactions. If the amount of such borrowings exceeds 
92%, the Manager will be required to submit to the Company's Board of 
Directors a plan designed to bring the total amount of Uncommitted Secured 
Borrowings below the 92% limitation. It is anticipated that in many 
circumstances this goal will be achieved over time without active management 
through the natural process of mortgage principal repayments and increases in 
the market value of the Company's total assets. The Company anticipates that 
it will only enter into repurchase agreements and other financing 
transactions with counter-parties rated investment grade by a Rating Agency.

COMMITTED SECURED BORROWINGS

     The Company's borrowings may consist of Committed Secured Borrowings, 
including the issuance of CMOs, structured commercial paper programs, secured 
term notes and other financing transactions. Such funding sources generally 
commit the lender to provide financing to the Company for a specified period 
of time or to provide financing to the Company to fund specific assets until 
they mature. The Company intends to limit the amount of Committed Secured 
Borrowings to 97% of the assets funded with such borrowings at the time any 
corresponding transaction is entered into.


                                     6


INTEREST RATE RISK MANAGEMENT POLICY

     The Company has established an interest rate risk management policy that 
is intended to mitigate the negative impact of changing interest rates. The 
Company generally intends to mitigate interest rate risk by targeting the 
difference between the market weighted average duration on its Mortgage 
Related Assets funded with secured borrowings to 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 Related Assets that 
are not funded by secured borrowings.

     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.

     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.

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 investment, leverage and interest rate risk management 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.

     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 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.

OTHER POLICIES

     The Company intends to operate in a manner that will not subject it to 
regulation under the Investment Company Act. The Company does not currently 
intend to (i) originate Mortgage Loans or (ii) offer securities in exchange 
for real property. The Company will not purchase any Mortgage Related Assets 
from its Affiliates other than mortgage securities that may be purchased 
from a taxable subsidiary of the Company that may be formed in connection 
with the securitization of Mortgage Loans.

                                       7


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 (subject to 
approval by a majority of Unaffiliated 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 
(including approval by a majority of Unaffiliated Directors) the policies and 
strategies of the Company.





                                       8


DESCRIPTION OF MORTGAGE RELATED ASSETS

     The Company invests principally in the following types of Mortgage 
Related Assets subject to the operating restrictions described in "Management 
Policies and Programs" below.

PRIMARY MORTGAGE SECURITIES

     PASS-THROUGH CERTIFICATES. Pass-Through Certificates are securities 
representing interests in "pools" of mortgage loans secured by residential 
real property in which payments of both interest and principal on the 
securities are generally made monthly, in effect "passing through" monthly 
payments made by the individual borrowers on the mortgage loans which 
underlie the securities (net of fees paid to the issuer or guarantor of the 
securities). Early repayment of principal on some Mortgage Related Assets 
(arising from prepayments of principal due to sale of the underlying 
property, refinancing, or foreclosure, net of fees and costs which may be 
incurred) may expose the Company to a lower rate of return upon reinvestment 
of principal. This is known as prepayment risk. Also, if a security subject 
to prepayment has been purchased at a premium, the value of the premium would 
be lost in the event of prepayment. Like other fixed income securities, when 
interest rates rise, the value of a Mortgage Related Asset generally will 
decline; however, when interest rates are declining, the value of Mortgage 
Related Assets with prepayment features may not increase as much as other 
fixed income securities. The rate of prepayments on underlying mortgages will 
affect the price and volatility of a Mortgage Related Asset, and may have the 
effect of shortening or extending the effective maturity of the security 
beyond what was anticipated at the time of purchase. When interest rates 
rise, the holdings of Mortgage Related Assets by the Company can reduce 
returns if the owners of the underlying mortgages pay off their mortgages 
later than anticipated. This is known as extension risk.

     Payment of principal and interest on some mortgage pass-through 
securities (but not the market value of the securities themselves) may be 
guaranteed by the full faith and credit of the U.S. Government (in the case 
of securities guaranteed by the Government National Mortgage Association 
("GNMA")) or guaranteed by agencies or instrumentalities of the U.S. 
Government (in the case of securities guaranteed by the federally chartered 
and privately owned corporation organized and existing under the Federal 
National Mortgage Association Charter Act (12 U.S.C., Section 1716 et seq.), 
formerly known as the Federal National Mortgage Association ("Fannie Mae"), 
or the Federal Home Loan Mortgage Corporation ("FHLMC")) which are supported 
only by the discretionary authority of the U.S. Government to purchase the 
agency's obligations. Mortgage Related Assets created by non-governmental 
issuers (such as commercial banks, savings and loan institutions, private 
mortgage insurance companies, mortgage bankers and other secondary market 
issuers) may be supported by various forms of insurance or guarantees, 
including individual loan, title, pool and hazard insurance and letters of 
credit, which may be issued by governmental entities, private insurers or the 
mortgage poolers.

     COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized Mortgage Obligations 
("CMOs") are hybrid mortgage related instruments. Interest and pre-paid 
principal on a CMO are paid, in most cases, on a monthly basis. CMOs may be 
collateralized by whole mortgage loans but are more typically collateralized 
by portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, 
or Fannie Mae. CMOs are structured into multiple classes, with each class 
bearing a different stated maturity. Monthly payments of principal, including 
prepayments, are first returned to investors holding the shortest maturity 
class; investors holding the longer maturity classes receive principal only 
after the first class has been retired. CMOs that are issued or guaranteed by 
the U.S. Government or by any of its agencies or instrumentalities will be 
considered U.S. Government securities by the Company.

OTHER MORTGAGE SECURITIES

     GENERAL. The Company may acquire other mortgage securities such as 
non-High Quality Mortgage Related Assets and other mortgage securities 
collateralized by single-family Mortgage Loans, mortgage warehouse 
participations, Mortgage Derivative Securities, subordinated interests and 
other mortgage-backed and mortgage-collateralized obligations, other than 
pass-through certificates and CMOs.

     MORTGAGE DERIVATIVE SECURITIES. The Company may acquire Mortgage 
Derivative Securities not to exceed 10% of its total assets. Mortgage 
Derivative Securities provide for the holder to receive interest only, 
principal only, or interest and 


                                    9



principal in amounts that are disproportionate to those payable on the 
underlying Mortgage Loans. Payments on Mortgage Derivative Securities are 
highly sensitive to the rate of prepayments on the underlying Mortgage Loans. 
In the event of more rapid (slower) than anticipated prepayments on such 
Mortgage Loans, the rates of return on interests in Mortgage Derivative 
Securities representing the right to receive interest only or a 
disproportionately large amount of interest ("Interest Only Derivatives") 
would be likely to decline (increase). Conversely, the rates of return on 
Mortgage Derivative Securities representing the right to receive principal 
only or a disproportionate amount of principal ("Principal Only Derivatives") 
would be likely to increase (decrease) in the event of rapid (slow) 
prepayments.

     The Company may also invest in Inverse Floaters, a class of CMOs with a 
coupon rate that resets in the opposite direction from the market rate of 
interest to which it is indexed such as the London Inter-Bank Offered Rate 
("LIBOR") or the 11th District Cost of Funds Index ("COFI"). Any rise in the 
index rate (as a consequence of an increase in interest rates) causes a drop 
in the coupon rate of an Inverse Floater while any drop in the index rate 
causes an increase in the coupon of an Inverse Floater. An Inverse Floater 
may behave like a security that is leveraged since its interest rate usually 
varies by a magnitude much greater than the magnitude of the index rate of 
interest. The "leverage-like" characteristics inherent in Inverse Floaters 
are associated with greater volatility in their market prices.

     The Company also may invest in other Mortgage Derivative Securities that 
may in the future be developed.

     SUBORDINATED INTERESTS. The Company also may acquire subordinated 
interests, which are classes of mortgage securities that are junior to other 
classes of such series of mortgage securities in the right to receive 
payments from the underlying Mortgage Loans. The subordination may be for all 
payment failures on the Mortgage Loans securing or underlying such series of 
mortgage securities. The subordination will not be limited to those resulting 
from certain types of risks, such as those resulting from war, earthquake or 
flood, or the bankruptcy of a borrower. The subordination may be for the 
entire amount of the series of mortgage securities or may be limited in 
amount.

     MORTGAGE WAREHOUSE PARTICIPATIONS. The Company also may from time to 
time acquire mortgage warehouse participations as an additional means of 
diversifying its sources of income. The Company anticipates that such 
investments, together with its investments in Other Mortgage Assets, will not 
in the aggregate exceed 10% of its total Mortgage Related Assets. These 
investments are participations in lines of credit to Mortgage Loan 
originators that are secured by recently originated Mortgage Loans that are 
in the process of being sold to investors. Mortgage warehouse participations 
do not qualify as Qualified REIT Real Estate Assets. Accordingly, this 
activity is limited by the REIT Provisions of the Code.

MORTGAGE LOANS

     GENERAL. The Company intends to acquire and accumulate Mortgage Loans as 
part of its investment strategy until a sufficient quantity has been 
accumulated for securitization into High Credit Quality Mortgage Loans. The 
Company anticipates that the Mortgage Loans acquired by it and not yet 
securitized, together with its investments in other Mortgage Related Assets, 
will not constitute more than 25% of the Company's total Mortgage Related 
Assets at any time. All Mortgage Loans will be acquired with the intention of 
securitizing them into High Credit Quality Mortgage Loans. However, there can 
be no assurance that the Company will be successful in securitizing the 
Mortgage Loans. To meet the Company's investment criteria, the Mortgage Loans 
to be acquired by the Company will generally conform to the underwriting 
guidelines established by Fannie Mae, FHLMC or other credit insurers. 
Applicable banking laws generally require that an appraisal be obtained in 
connection with the original issuance of Mortgage Loans by the lending 
institution. The Company does not intend to obtain additional appraisals at 
the time of acquiring Mortgage Loans.

     The Mortgage Loans may be originated by or purchased from various 
suppliers of Mortgage Related Assets throughout the United States, such as 
savings and loan associations, banks, mortgage bankers, home-builders, 
insurance companies and other mortgage lenders. The Company may acquire 
Mortgage Loans directly from originators and from entities holding Mortgage 
Loans originated by others. The Board of Directors of the Company has not 
established any limits upon the geographic concentration of Mortgage Loans to 
be acquired by the Company or the credit quality of suppliers of Mortgage 
Related Assets.

     CONFORMING AND NONCONFORMING MORTGAGE LOANS. The Company may acquire 
both Conforming and Nonconforming Mortgage Loans for securitization. 
Conforming Mortgage Loans comply with the requirements for inclusion in a 
loan guarantee program sponsored by Fannie Mae, FHLMC or GNMA. Nonconforming 
Mortgage Loans are Mortgage Loans that do not qualify in one or more respects 
for purchase by Fannie Mae or FHLMC under their standard programs. The 
Company expects that a majority of Nonconforming Mortgage Loans it purchases 
will be nonconforming primarily because they have original principal balances 
which exceed the requirements for FHLMC or Fannie Mae programs.

     COMMITMENTS TO MORTGAGE LOAN SELLERS. The Company may issue commitments 
to originators and other sellers of Mortgage Loans who follow policies and 
procedures that generally comply with Fannie Mae and FHLMC regulations and 
guidelines and that comply with all applicable federal and state laws and 
regulations for Mortgage Loans secured by single-family (one-to-four units) 
residential properties. In addition, commitments may be issued for agency 
certificates as well as 


                                     10



privately issued pass-through certificates and Mortgage Loans. Although the 
Company may commit to acquire Mortgage Loans prior to funding, all Mortgage 
Loans are to be fully funded prior to their acquisition by the Company. 
Following the issuance of commitments, the Company will be exposed to risks 
of interest rate fluctuations similar to those risks on Mortgage Related 
Assets.

     SECURITIZATION OF MORTGAGE LOANS. The Mortgage Loans will be acquired by 
the Company and held until a sufficient quantity has been accumulated for 
securitization. During the accumulation period, the Company will be subject 
to risks of borrower defaults and bankruptcies, fraud losses and special 
hazard losses (such as those occurring from earthquakes or floods) that are 
not covered by standard hazard insurance. In the event of a default on any 
Mortgage Loan held by the Company, the Company will bear the risk of loss of 
principal to the extent of any deficiency between the value of the collateral 
underlying the Mortgage Loan and the principal amount of the Mortgage Loan. 
No assurance can be given that any such mortgage, fraud or hazard insurance 
will adequately cover a loss suffered by the Company. Also during the 
accumulation period, the costs of financing the Mortgage Loans through 
reverse repurchase agreements and other borrowings and lines of credit with 
warehouse lenders could exceed the interest income on the Mortgage Loans. It 
may not be possible or economical for the Company to complete the 
securitization for all Mortgage Loans that the Company acquires, in which 
case the Company will continue to bear the risks of borrower defaults and 
special hazard losses.

     PROTECTION AGAINST MORTGAGE LOAN RISKS. It is anticipated that each 
Mortgage Loan purchased will have a commitment for mortgage pool insurance 
from a mortgage insurance company with a claims-paying ability rated 
investment grade by either of the Rating Agencies. Mortgage pool insurance 
insures the payment of certain portions of the principal and interest on 
Mortgage Loans. In lieu of mortgage pool insurance, the Company may arrange 
for other forms of credit enhancement such as letters of credit, 
subordination of cash flows, corporate guaranties, establishment of reserve 
accounts or over-collateralization.

     It is expected that when the Company acquires Mortgage Loans, the seller 
will generally represent and warrant to the Company that there has been no 
fraud or misrepresentation during the origination of the Mortgage Loans and 
generally agree to repurchase any Mortgage Loan with respect to which there 
is fraud or misrepresentation. The Company will provide similar 
representations and warranties when the Company sells or pledges the Mortgage 
Loans as collateral for mortgage securities. If a Mortgage Loan becomes 
delinquent and the pool insurer is able to prove that there was a fraud or 
misrepresentation in connection with the origination of the Mortgage Loan, 
the pool insurer will not be liable for the portion of the loss attributable 
to such fraud or misrepresentation. Although the Company will generally have 
recourse to the seller based on the seller's representations and warranties 
to the Company, the Company will generally be at risk for loss to the extent 
the seller does not perform its repurchase obligations.
                                       
                    PRINCIPAL RISKS AND SPECIAL CONSIDERATIONS

     LEVERAGE RISK. The Company employs a leveraging strategy of generally 
borrowing up to 92% of its total assets to finance the acquisition of 
additional Mortgage Related Assets. The Company's borrowing may, at times, 
exceed 92% of its total assets. In the event borrowing costs exceed the 
income on its Mortgage Related Assets, the Company will experience negative 
cash flow and incur losses. Another risk of leverage is the possibility that 
the value of the collateral securing the borrowings will decline. In such 
event, additional collateral or repayment of borrowings would be required. 
The Company could be required to sell Mortgage Related Assets under adverse 
market conditions in order to maintain liquidity. If these sales were made at 
prices lower than the carrying value of the Mortgage Related Assets, the 
Company would experience losses.

     INTEREST RATE RISK. There is the possibility that the value of the 
Company's Mortgage Related Assets may fall since fixed income securities 
generally fall when interest rates rise. The longer the term of a fixed 
income instrument, the more sensitive it will be to fluctuations in value 
from interest rate changes. Changes in interest rates may have a significant 
effect on the Company's operations, because it may hold Mortgage Related 
Assets with long terms to maturity. Rising interest rates will negatively 
impact the Company's borrowings since the value of the collateral securing 
the borrowing will decline in value, requiring additional collateral or 
repayments of borrowing. This could reduce the level of borrowings and reduce 
returns. Also, when interest rates rise, the Company's holding of Mortgage 
Related Assets can reduce returns if the owners of the underlying mortgages 
pay-off their mortgages later than anticipated. This is known as EXTENSION 
RISK. When interest rates drop, the Company's holdings of the Mortgage 
Related Assets can reduce returns if the owners of the underlying mortgages 
pay off their mortgages sooner than anticipated since the funds prepaid will 
have to be invested at the then lower prevailing rate. This is known as 
PREPAYMENT RISK. In addition, when interest rates drop, not only can the 
value of Mortgage Related Assets drop, but the yield can drop, particularly 
where the yield on the security is tied to interest rates, such as adjustable 
mortgages.

     LIQUIDITY RISK. There is the possibility that the Company may lose money 
or be prevented from earning capital gains if it cannot sell a Mortgage 
Related Asset at a time and price that is most beneficial to the Company. The 
Company is subject to liquidity risk because it invests in mortgage 
securities which have experienced periods of illiquidity.


                                     11


     CREDIT RISK. Credit risk is the possibility that the Company could lose 
money if an issuer is unable to meet its financial obligations, such as the 
payment of principal and/or interest on an instrument, or goes bankrupt. The 
Company may invest a portion of its assets in Mortgage Related Assets which 
are not guaranteed by the U.S. Government or investment grade, which may make 
the Company subject to substantial credit risk. This is especially true 
during periods of economic uncertainty or during economic down turns.

     FAILURE TO MAINTAIN REIT STATUS RISK. Failure to maintain REIT status 
risk refers to the possibility that the Company may become subject to federal 
income tax as a regular corporation. The Company intends at all times to 
maintain substantially all of its investments in, and otherwise conduct its 
business in a manner consistent with, the REIT Provisions of the Code. If the 
Company fails to qualify as a REIT, it would be treated as a regular 
corporation for federal tax purposes. This would result in the Company being 
subject to federal income tax that would further result in a substantial 
reduction of cash available for distribution to shareholders.

     FAILURE TO MAINTAIN INVESTMENT COMPANY ACT EXEMPTION RISK. The Company 
intends to conduct its business so as not to become a "regulated investment 
company" under the Investment Company Act. As a result, the Company's 
ownership of certain Mortgage Related Assets may be limited by the Investment 
Company Act. This could have the effect of adversely affecting the Company's 
operations and returns to shareholders. In addition, if the Company fails to 
qualify for the exemption from registration as an investment company, its 
ability to use leverage would be substantially reduced. This could reduce 
income to the Company and returns to shareholders.

                                       12


                         FEDERAL INCOME TAX CONSEQUENCES

     The following discussion summarizes certain federal income tax 
consequences for the Company. This discussion is based on current law. The 
following discussion is not exhaustive of all possible tax considerations. It 
does not give a detailed discussion of any state, local or foreign tax 
considerations, nor does it discuss all of the aspects of federal, state, 
local or foreign income taxation that may be relevant to a stockholder of the 
Company in light of such stockholder's particular circumstances.

     Prospective investors in the Company are urged to consult with their own 
tax advisors regarding the specific consequences to each of them of the 
purchase, ownership and sale of stock in an entity electing to be taxed as a 
REIT, including the federal, state, local, foreign and other tax 
considerations of such purchase, ownership, sale and election and the 
potential changes in applicable tax laws.

GENERAL

     The Code provides special tax treatment for organizations that qualify 
and elect to be taxed as REITs. In brief, if certain specific conditions 
imposed by the Code are met, entities that invest primarily in real estate 
assets, including Mortgage Loans, that otherwise would be taxed as 
corporations are generally not taxed at the corporate level on their taxable 
income that is distributed to their stockholders. This treatment eliminates 
most of the "double taxation" (at the corporate level and then again at the 
stockholder level when the income is distributed) that typically results from 
the use of corporate investment vehicles. A qualifying REIT, however, may be 
subject to certain excise and other taxes, as well as normal corporate tax, 
on Taxable Income that is not currently distributed to its stockholders.

     The Company has made an election to be taxed as a REIT under the Code 
commencing with its taxable year ended December 31, 1997. There can be no 
assurance, however, that all qualification requirements for such treatment 
will be met.

     In the event that the Company does not qualify as a REIT in any year, it 
will be subject to federal income tax as a domestic corporation and its 
stockholders will be taxed in the same manner as stockholders of ordinary 
corporations. To the extent that the Company would, as a consequence, be 
subject to potentially significant tax liabilities, the amount of earnings 
and cash available for distribution to its stockholders would be reduced.

REQUIREMENTS FOR QUALIFICATION AS A REIT

     To qualify for tax treatment as a REIT under the Code, the Company must 
meet certain tests. The Company has adopted a policy to comply with the REIT 
Provisions of the Code.

TERMINATION OR REVOCATION OF REIT STATUS

     The Company's election to be treated as a REIT will be terminated 
automatically if it fails to meet the Code's requirements. If this occurs, 
the Company will not be eligible again to elect REIT status until the fifth 
taxable year that begins after the year for which its election was terminated 
unless all of the following relief provisions apply: (i) the Company did not 
willfully fail to file a timely return with respect to the termination 
taxable year; (ii) inclusion of incorrect information in such return was not 
due to fraud with intent to evade tax; and (iii) the Company establishes that 
failure to meet requirements was due to reasonable cause and not willful 
neglect. The Company may also voluntarily revoke its election, although it 
has no intention of doing so, in which event it will be prohibited, without 
exception, from electing REIT status for the year to which the revocation 
relates and the following four taxable years.


                                      13



     If the Company fails to qualify for taxation as a REIT in any taxable 
year, and the relief provisions do not apply, the Company would be subject to 
tax (including any applicable alternative minimum tax) on its taxable income 
at regular corporate rates. Distributions to stockholders of the Company with 
respect to any year in which it fails to qualify as a REIT would not be 
deductible by the Company nor would they be required to be made. Failure to 
qualify as a REIT would result in the Company's reduction of its 
distributions to stockholders in order to pay the resulting taxes. If, after 
forfeiting REIT status, the Company later qualifies and elects to be taxed as 
a REIT again, the Company could face significant adverse tax consequences.

TAXATION OF THE COMPANY

     In any year in which the Company qualifies as a REIT, it generally will 
not be subject to federal income tax on that portion of its Taxable Income or 
net capital gain which is distributed to its stockholders. The Company will, 
however, be subject to tax at normal corporate rates upon any net income or 
net capital gain not distributed with respect to undistributed income. The 
Company intends to distribute substantially all of its Taxable Income to its 
stockholders on a pro rata basis in each year.

     In addition, the Company will also be subject to a tax of 100% of net 
income from any prohibited transaction under the Code and will be subject to 
a 100% tax on the amount by which it fails either the 75% or 95% Gross Income 
Tests, reduced by approximated expenses, if the failure to satisfy such tests 
is due to reasonable cause and not willful neglect and if certain other 
requirements are met. The Company may also be subject to the alternative 
minimum tax on certain items of tax preference with respect to undistributed 
income.

     The Company may securitize Mortgage Loans and sell such mortgage 
securities through a taxable subsidiary. However, if the Company itself were 
to sell such mortgage securities on a regular basis, there is a substantial 
risk that they would be deemed dealer property and that all of the profits 
from such sales would be subject to tax at the rate of 100% as income from 
prohibited transactions under the Code. The Company therefore, intends to 
make any such sales through a taxable subsidiary. The taxable subsidiary will 
not be subject to this 100% tax on income from prohibited transactions under 
the Code, which is only applicable to REITs.

     The Company may elect to retain and pay income tax on all or a portion 
of its net long-term capital gains for any taxable year, in which case the 
Company's stockholders would include in their income as long-term capital 
gains their proportionate share of such undistributed capital gains. The 
stockholders would be treated as having paid their proportionate share of the 
capital gains tax paid by the Company, which amounts would be credited or 
refunded to the stockholders.

     The Company will also be subject to a nondeductible 4% excise tax if it 
fails to make timely dividend distributions for each calendar year. The 
Company intends to declare its fourth regular annual dividend during the 
final quarter of the year and to make such dividend distribution no later 
than 31 days after the end of the year in order to avoid imposition of the 
excise tax. Such a distribution would be taxed to the stockholders in the 
year that the distribution was declared, not in the year paid. Imposition of 
the excise tax on the Company would reduce the amount of cash available for 
distribution to its stockholders.

TAXABLE SUBSIDIARIES

     The Company may, in the future, cause the creation and sale of mortgage 
securities through a taxable corporation. The Company and one or more persons 
or entities will own all of the capital stock of that taxable corporation, 
sometimes referred to as a "taxable subsidiary." In order to ensure that the 
Company will not violate the prohibition on ownership of more than 10% of the 
voting stock of a single issuer and the prohibition on investing more than 5% 
of the value of its assets in the stock or securities of a single issuer, the 
Company will own only shares of nonvoting preferred stock of that taxable 
subsidiary corporation and will not own any of the taxable subsidiary's 
common stock. In addition, the dividends that the taxable subsidiary pays to 
the Company will not qualify as income from Qualified REIT Real Estate Assets 
for purposes of the 75% Gross Income Test, and will have to be limited, along 
with the Company's other interest, dividends, gains on the sale of 
securities, hedging income, and other income not derived from Qualified REIT 
Real Estate Assets to less than 25% of the Company's gross revenues in each 
year. If the taxable subsidiary creates a taxable mortgage pool, such pool 
itself will constitute a separate taxable subsidiary of the taxable 
subsidiary. The taxable subsidiary would be unable to offset the income 
derived from such a taxable mortgage pool with losses derived from any other 
activities. The Company's ability to 


                                      14



establish and maintain taxable subsidiaries may be adversely affected by a 
recent legislative proposal. See "Recent Proposed Legislation" below.

TAXATION OF STOCKHOLDERS

     For any taxable year in which the Company is treated as a REIT for 
federal income purposes, amounts distributed by the Company to its 
stockholders out of current or accumulated earnings and profits will be 
includable by the stockholders as ordinary income for federal income tax 
purposes unless properly designated by it as capital gain dividends. In the 
latter case, the distributions will be taxable to the stockholders as 
long-term capital gains.

     Distributions of the Company will not be eligible for the dividends 
received deduction for corporations. Stockholders may not deduct any net 
operating losses or capital losses of the Company.

     Any loss on the sale or exchange of shares of the Common Stock held by a 
stockholder for six months or less will be treated as a long-term capital 
loss to the extent of any capital gain dividend received on the Common Stock 
held by such stockholders during the six-month period.

     If the Company makes distributions to its stockholders in excess of its 
current and accumulated earnings and profits, those distributions will be 
considered first a tax-free return of capital, reducing the tax basis of a 
stockholder's shares until the tax basis is zero. Such distributions in 
excess of the tax basis will be taxable as a gain realized from the sale of 
the Company's Common Stock.

     The Company will notify stockholders after the close of the Company's 
taxable year as to the portions of the distributions which constitute 
ordinary income, return of capital and capital gain. Dividends and 
distributions declared in the last quarter of any year payable to 
stockholders of record on a specified date in such month may be deemed to 
have been received by the stockholders and paid by the Company on December 31 
of the record year, provided that such dividends are paid before February 1 
of the following year.

TAXATION OF TAX-EXEMPT ENTITIES

     In general, a Tax-Exempt Entity that is a stockholder of the Company is 
not subject to tax on distributions. The IRS has ruled that amounts 
distributed by a REIT to an exempt employees' pension trust do not constitute 
UBTI and thus should be nontaxable to such a Tax-Exempt Entity. However, if a 
Tax-Exempt Entity has financed the acquisition of any of its stock in the 
Company with "acquisition indebtedness" within the meaning of the Code, 
distributions on such stock could be treated as UBTI. Under certain 
conditions, if a tax-exempt employee pension or profit sharing trust were to 
acquire more than 10% of the Company's Common Stock, a portion of the 
dividends on such Common Stock could be treated as UBTI.

     For social clubs, voluntary employee benefit associations, supplemental 
unemployment benefit trusts, and qualified group legal services plans exempt 
from federal income taxation under Code Sections 501(c)(7), (c)(9), (c)(17) 
and (c)(20), respectively, income from an investment in the Company will 
constitute UBTI unless the organization is able to properly deduct amounts 
set aside or placed in reserve for certain purposes so as to offset the UBTI 
generated by its investment in the Company. Such entities should review Code 
Section 512(a)(3) and should consult their own tax advisors concerning these 
"set aside" and reserve requirements.

STATE AND LOCAL TAXES

     The Company and its stockholders may be subject to state or local 
taxation in various jurisdictions, including those in which it or they 
transact business or reside. The state and local tax treatment of the Company 
and its stockholders may not conform to the federal income tax consequences 
discussed above. Consequently, prospective stockholders should consult their 
own tax advisors regarding the effect of state and local tax laws on an 
investment in the Common Stock.

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES APPLICABLE TO FOREIGN 
HOLDERS

     The following discussion summarizes certain United States tax 
consequences of the acquisition, ownership and disposition of the Common 
Stock by a purchaser of the Common Stock that, for United States income tax 
purposes, is not a 


                                    15



"United States Holder" (a "Foreign Holder"). For purposes of discussion, a 
United States Holder means: a citizen or resident of the United States; a 
corporation, partnership, or other entity created or organized in the United 
States or under the laws of the United States or of any political subdivision 
thereof (unless, in the case of a partnership, the IRS provides otherwise by 
regulations); an estate whose income is includable in gross income for United 
States income tax purposes regardless of its source; or, a trust if a court 
within the United States is able to exercise primary supervision over the 
administration of the trust and one or more United States persons have the 
authority to control all substantial decisions of the trust. This discussion 
does not consider any specific facts or circumstances that may apply to a 
particular Foreign Holder. Prospective investors are urged to consult their 
tax advisors regarding the United States tax consequences of acquiring, 
holding and disposing of Common Stock, as well as any tax consequences that 
may arise under the laws of any foreign, state, local or other taxing 
jurisdiction.

     DIVIDENDS. Dividends paid by the Company out of earnings and profits to 
a Foreign Holder will generally be subject to federal income tax withholding 
at the rate of 30%, unless reduced or eliminated by an applicable tax treaty 
or unless such dividends are treated as effectively connected with a United 
States trade or business conducted by the Foreign Holder. A Foreign Holder 
eligible for a reduction in withholding under an applicable treaty must so 
notify the Company by completing the appropriate IRS form. Distributions paid 
by the Company in excess of its earnings and profits will be treated as a 
tax-free return of capital to the extent of the holder's adjusted basis in 
his Common Stock, and thereafter as gain from the sale or exchange of a 
capital asset as described below. If it cannot be determined at the time a 
distribution is made whether such distribution will exceed the Company's 
earnings and profits (which, under most circumstances, will correspond to the 
Company's net income before the deduction for dividends paid), the 
distribution will be subject to withholding at the same rate as dividends. 
However, any amounts withheld will be refundable or creditable against the 
Foreign Holder's United States tax liability if the Company subsequently 
determines that such distribution was, in fact, in excess of the earnings and 
profits of the Company. If the receipt of the dividend is treated as being 
effectively connected with the conduct of a trade or business within the 
United States by a Foreign Holder, the dividend received will be subject to 
the United States federal income tax on net income that applies to United 
States persons generally (and, in addition with respect to foreign corporate 
holders and under certain circumstances, the 30% branch profits tax).

     For any year in which the Company qualifies as a REIT, distributions to 
a Foreign Holder that are attributable to gain from the sales or exchanges by 
the Company of "United States real property interests" will be treated as if 
such gain were effectively connected with a United States business and will 
thus be subject to tax at the normal capital gain rates applicable to United 
States stockholders (subject to applicable alternative minimum tax) under the 
provisions of the Foreign Investment in Real Property Tax Act of 1980 
("FIRPTA"). Also, distributions subject to FIRPTA may be subject to a 30% 
branch profits tax in the hands of a foreign corporate stockholder not 
entitled to a treaty exemption. The Company is required to withhold 35% of 
any distribution that could be designated by the Company as a capital gains 
dividend. This amount may be credited against the Foreign Holder's FIRPTA tax 
liability.

     GAIN ON DISPOSITION. A Foreign Holder will generally not be subject to 
United States federal income tax on a gain recognized on a sale or other 
disposition of the Common Stock unless (i) the gain is effectively connected 
with the conduct of a trade or business within the United States by the 
Foreign Holder, (ii) in the case of a Foreign Holder who is a nonresident 
alien individual and holds the Common Stock as a capital asset, such holder 
is present in the United States for 183 or more days (computed in part by 
reference to days present in the two prior years) in the taxable year and 
certain other requirements are met, or (iii) the Foreign Holder is subject to 
tax under the FIRPTA rules discussed below. Gain that is effectively 
connected with the conduct of a United States Holder will be subject to the 
United States federal income tax on net income that applies to United States 
persons generally (and, with respect to corporate holders and under certain 
circumstances, the branch profits tax) but will not be subject to 
withholding. Foreign Holders should consult applicable treaties, which may 
provide for different rules.

     Gain recognized by a Foreign Holder upon a sale of its Common Stock will 
generally not be subject to tax under FIRPTA if the Company is a 
"domestically controlled REIT," which is defined generally as a REIT in which 
at all times during a specified testing period less than 50% in value of its 
shares were held directly or indirectly by non-U.S. persons. Because only a 
minority of the Company's stockholders are expected to be Foreign Holders, 
the Company anticipates that it will qualify as a domestically controlled 
REIT. Accordingly, a Foreign Holder should not be subject to U.S. tax from 
gains recognized upon disposition of the Common Stock. However, because the 
Common Stock is publicly traded, no assurance can be given that the Company 
will continue to be a domestically controlled REIT.

     INFORMATION REPORTING AND BACKUP WITHHOLDING. United States information 
reporting requirements and backup withholding tax will generally not apply to 
dividends paid on the Common Stock to a Foreign Holder at an address outside 
the United States. Payments by a United States office of a broker of the 
proceeds of a sale of the Common Stock is subject to both backup withholding 
at a rate of 31% and information reporting unless the holder certifies its 
Foreign Holder status 


                                     16



under penalties of perjury or otherwise establishes an exemption. Information 
reporting requirements (but not backup withholding) will also apply to 
payments of the proceeds of sales of the Common Stock by foreign offices of 
United States brokers, or foreign brokers with certain types of relationships 
to the United States, unless the broker has documentary evidence in its 
records that the holder is a Foreign Holder and certain other conditions are 
met, or the holder otherwise establishes an exemption.

     Backup withholding is not an additional tax. Any amounts withheld under 
the backup withholding rules will be refunded or credited against the Foreign 
Holder's United States federal income tax liability, provided that the 
required information is furnished to the IRS.

     These information reporting and backup withholding rules are under 
review by the United States Treasury and their application to the Common 
Stock could be changed by future regulations.

RECENT PROPOSED LEGISLATION

     The Clinton Administration has recently released a description of a 
proposed legislative changes which, if enacted, may adversely affect the 
ability of the Company to establish and maintain taxable subsidiaries. Under 
the Clinton proposal, and subject to certain exceptions, the Code would be 
amended to prohibit a REIT from owning more than 10 percent of the stock of a 
taxable corporation, measured either by vote or by value, rather than more 
than 10 percent of the voting stock of a taxable corporation as under current 
law. The Clinton proposal would also restrict the deductibility of certain 
expenses incurred by a taxable subsidiary. If this proposal is adopted, it 
may be more difficult for the Company to establish taxable subsidiaries 
through which to engage in non-qualifying activities, such as the holding of 
property primarily for sale in the ordinary course of business or certain 
hedging activities. It is impossible to predict at this time whether the 
Clinton proposal, or some other proposal which would similarly affect the 
Company's ability to utilize taxable subsidiaries, will ultimately be adopted.

                              ERISA CONSIDERATIONS

     In considering an investment in the Common Stock, a fiduciary of a 
profit-sharing, pension stock bonus plan or individual retirement account 
("IRA"), including a plan for self-employed individuals and their employees 
or any other employee benefit plan subject to prohibited transaction 
provisions of the Code or the fiduciary responsibility provisions of ERISA 
(an "ERISA Plan") should consider (a) whether the ownership of Common Stock 
is in accordance with the documents and instruments governing such ERISA 
Plan, (b) whether the ownership of Common Stock is consistent with the 
fiduciary's responsibilities and satisfies the requirements of Part 4 of 
Subtitle B of Title I of ERISA (where applicable) and, in particular, the 
diversification, prudence and liquidity requirements of Section 404 of ERISA, 
(c) ERISA's prohibitions in improper delegation of control over, or 
responsibility for, "plan assets" and ERISA's imposition of co-fiduciary 
liability on a fiduciary who participates in, permits (by action or inaction) 
the occurrence of, or fails to remedy a known breach of duty by another 
fiduciary and (d) the need to value the assets of the ERISA Plan annually.

     In regard to the "plan assets" issue noted in clause (c) above, 
O'Melveny & Myers LLP, the Company's counsel, at the time of the Company's 
public offering was of the opinion that the Common Stock should qualify as a 
"publicly offered security," and, therefore, the acquisition of such Common 
Stock by ERISA Plans should not cause the Company's assets to be treated as 
assets of such investing ERISA Plans for purposes of the fiduciary 
responsibility provisions of ERISA or the prohibited transaction provisions 
of the Code. Fiduciaries of ERISA Plans and IRAs should consult with and rely 
upon their own advisors in evaluating the consequences under the fiduciary 
provisions of ERISA and the Code of an investment in Common Stock in light of 
their own circumstances.

                                   COMPETITION

     The Company believes that the principal competition in the business of 
acquiring and holding Mortgage Related Assets are financial institutions such 
as banks, savings and loans, life insurance companies, institutional 
investors such as mutual funds and pension funds, and certain other mortgage 
REITs. The Company anticipates that it will be able to compete effectively 
and generate competitive rates of return for stockholders due to the 
Manager's experience in managing mortgage capital, access to and experience 
in secondary mortgage markets, relative freedom to securitize its Mortgage 
Related Assets, relatively low level of operating costs, ability to utilize 
prudent amounts of leverage through accessing the wholesale market for 
collateralized borrowings, freedom from certain forms of regulation and the 
tax advantages of its REIT status.


                                       17


                                    EMPLOYEES

     As of December 31, 1998, the Company had no employees. The Manager 
manages the day to day operations of the Company, subject to the direction 
and oversight of the Company's Board of Directors and under the terms of a 
Management Agreement discussed below.

                            THE MANAGEMENT AGREEMENT

     The Company has entered into a Management Agreement with the Manager for 
an initial two-year term expiring on December 31, 1999. The Manager is 
primarily involved in two activities: (i) asset/liability 
management--acquisition, financing, hedging, management and disposition of 
Mortgage Related Assets, including credit and prepayment risk management; and 
(ii) capital management--oversight of the Company's structuring, analysis, 
capital raising and investor relations activities. In conducting these 
activities, the Manager formulates operating strategies for the Company, 
arranges for the acquisition of Mortgage Related Assets by the Company, 
arranges for various types of financing for the Company, monitors the 
performance of the Company's Mortgage Related Assets and provides certain 
administrative and managerial services in connection with the operation of 
the Company. The Manager is required to manage the business affairs of the 
Company in conformity with the policies that are approved and monitored by 
the Company's Board of Directors. The Manager is required to prepare regular 
reports for the Company's Board of Directors that will review the Company's 
acquisitions of Mortgage Related Assets, portfolio composition and 
characteristics, credit quality, performance and compliance with the policies 
approved by the Company's Board of Directors.

     At all times, the Manager is subject to the direction and oversight of 
the Company's Board of Directors and will have only such functions and 
authority as the Company may delegate to it. The Manager is responsible for 
the day-to-day operations of the Company.

     Following the initial two-year term, the Management Agreement may be 
renewed for additional one-year terms at the discretion of the Unaffiliated 
Directors, unless previously terminated by the Company or the Manager upon 
written notice. Except in the case of a termination or non-renewal by the 
Company for cause, upon termination or non-renewal of the Management 
Agreement by the Company, the Company is obligated to pay the Manager a 
termination or non-renewal fee, which may be significant. The termination or 
non-renewal fee shall be equal to the fair market value of the Management 
Agreement without regard to the Company's termination right, as determined by 
an independent appraisal. The selection of the independent appraiser shall be 
subject to the approval of the Unaffiliated Directors. Neither the fair 
market value of the Management Agreement nor the various factors which the 
appraiser may find relevant in its determination of the fair market value can 
be determined at this time.

     The fair market value of the Management Agreement will be affected by 
significant variables, including (i) the historical management fees paid to 
the Manager, (ii) any projections of future management fees to be paid to the 
Manager determined by the independent appraiser, (iii) the relative 
valuations of agreements similar to the Management Agreement and (iv) other 
factors, all of which may be unrelated to the performance of the Manager.

     The Management Agreement may be assigned by the Manager to an Affiliate 
of TCW without the consent of the Company. The Management Agreement may be 
assigned to a non-Affiliate of TCW only with the approval of a majority of 
the Unaffiliated Directors.

MANAGER COMPENSATION

     The Manager will receive annual base management compensation based on 
the Average Net Invested Capital of the Company, payable monthly in arrears, 
equal to 3/4 of 1% of Average Net Invested Capital. The term "Average Net 
Invested Capital" means for any period (i) the arithmetic average of the sum 
of the gross proceeds of the offerings of its equity securities by the 
Company, after deducting any underwriting discounts and commissions and other 
expenses and costs relating to such offerings, plus the Company's retained 
earnings (taking into account any losses incurred) and any non-cash charges 
or reserves, including depreciation, mark-to-market adjustments and 
unrealized credit loss, computed by taking the average of such values at the 
end of each month during such period, plus (ii) any unsecured debt approved 
by the Unaffiliated Directors to be included in Average Net Invested Capital, 
minus (iii) the cumulative amounts paid by the Company to repurchase its 
shares. Accordingly, incurring collateralized debt to finance specific 
investment purchases does not ordinarily increase Average Net Invested 
Capital.


                                       18



     The Manager shall also be entitled to receive as incentive compensation 
for each fiscal quarter, an amount equal to 30% of the Net Income of the 
Company, before incentive compensation, in excess of the amount that would 
produce an annualized Return on Equity equal to the Ten-Year U.S. Treasury 
Rate plus 1%. The incentive compensation calculation and payment will be made 
quarterly in arrears. The term "Return on Equity" is calculated for any 
quarter by dividing the Company's Net Income for the quarter by its Average 
Net Worth for the quarter. For purposes of calculating the incentive 
compensation payable, the definition "Return on Equity" is not related to the 
actual distributions received by stockholders or to an individual investor's 
actual return on investment. For such calculations, the "Net Income" of the 
Company means the taxable income of the Company (including net capital gains, 
if any) before the Manager's incentive compensation, net operating loss 
deductions arising from losses in prior periods and deductions permitted by 
the Code in calculating taxable income for a REIT plus the effects of 
adjustments, if any, necessary to record hedging and interest transactions in 
accordance with generally accepted accounting principles. A deduction for all 
of the Company's interest expenses for borrowed funds is taken into account 
in calculating Net Income. "Average Net Worth" for any period means the 
arithmetic average of the sum of the gross proceeds from any offering of its 
equity securities by the Company, before deducting any underwriting discounts 
and commissions and other expenses and costs relating to the offerings, plus 
the Company's retained earnings (without taking into account any losses 
incurred in prior periods) computed by taking the average of such values at 
the end of each month during such period, minus the cumulative amounts paid 
by the Company to repurchase its shares.

     The ability of the Company to achieve an annualized Return on Equity in 
excess of the Ten-Year U.S. Treasury Rate plus 1%, and of the Manager to earn 
the incentive compensation described in the preceding paragraph, is dependent 
upon the level and volatility of interest rates, the Company's ability to 
react to changes in interest rates and to utilize successfully the operating 
strategies described herein, and other factors, many of which are not within 
the Company's or the Manager's control. The Manager's base compensation shall 
be calculated by the Manager within 15 days after the end of each month, and 
such calculation shall be promptly delivered to the Company. The Company is 
obligated to pay the base compensation within 30 days after the end of each 
month. The Manager shall compute the quarterly incentive compensation within 
45 days after the end of each fiscal quarter, and the Company shall pay the 
incentive compensation with respect to each fiscal quarter within 15 days 
following the delivery to the Company of the Manager's written statement 
setting forth the computation of the incentive compensation for such quarter. 
The Company's Board of Directors shall review and approve the calculation of 
base and incentive compensations paid to the Manager quarterly, one quarter 
in arrears, during each scheduled quarterly Board of Directors meeting. 
Quarterly incentive compensation will be subject to an annual adjustment 
commencing in the second full year of the Company's operation. The Company 
believes that this compensation arrangement benefits its stockholders because 
it ties the Manager's compensation to Return on Equity and, in periods of low 
earnings, the Manager's incentive compensation is reduced or eliminated, 
thereby lowering the Company's operating expenses.

EXPENSES

     Subject to the limitations set forth below, the Company will generally 
pay all its operating expenses, except those specifically required to be 
borne by the Manager under the Management Agreement. The operating expenses 
required to be borne by the Manager include the compensation of the Company's 
officers and the cost of office space, equipment and other personnel required 
for the Company's day-to-day operations. The expenses that are paid by the 
Company will include (but not necessarily be limited to) the cost of money 
borrowed by the Company (including interest), taxes and license fees, 
issuance and transaction costs incident to the acquisition, disposition and 
financing of investments, costs related to hedging transactions, legal, 
investigatory, accounting and auditing fees and expenses, consultants' 
advisory services with respect to REIT and other compliance matters, the 
compensation and expenses of the Company's Unaffiliated Directors, the costs 
of making distributions and printing and mailing proxies and reports to 
stockholders, costs incurred by employees of the Manager for travel on behalf 
of the Company, costs incident to the issuance of mortgage securities, costs 
incident to the accumulation and servicing of Mortgage Loans, costs 
associated with any computer software or hardware that is used solely for the 
Company, costs to obtain liability insurance to indemnify the Manager, the 
Company's directors and officers, and the Company's underwriters, the 
compensations and expenses of the Company's custodian, transfer agent and 
registrar, and any extraordinary or non-recurring costs or charges incurred 
by the Company, if any. Certain Company operating expenses shall be limited 
to an amount per year equal to the greater of 2% of the Average Net Invested 
Capital of the Company or 25% of its Net Income for that year. The operating 
expenses that are subject to this limitation are:

          (i) all insurance costs incurred by the Company or any subsidiary of
     the Company, including any costs to obtain liability or other insurance to
     indemnify the Manager and underwriters of any securities of the Company;

          (ii) expenses connected with payments of dividends or interest or
     distributions in any other form made or caused to be made by the Board of
     Directors to holders of the securities of the Company or any subsidiary of
     the Company;


                                     19



          (iii) all expenses of third parties pertaining to communications to
     holders of equity securities or debt securities of the Company or any
     subsidiary of the Company and the other bookkeeping and clerical work
     necessary to maintain relations with holders of such securities and in
     complying with the continuous reporting and other requirements of
     governmental bodies or agencies (these expenses include any costs of
     computer services utilized in connection with these communications and
     reporting requirements, the cost of printing and mailing certificates for
     such securities and proxy solicitation materials and reports to holders of
     the Company's or any subsidiary's securities and reports to third parties
     required under any indenture to which the Company or any subsidiary of the
     Company is a party);

          (iv) custodian's, transfer agent's and registrar's fees and charges;

          (v) compensation, fees and expenses paid to Unaffiliated Directors of
     the Company or any subsidiary of the Company, the cost of director and
     officer liability insurance and premiums for fidelity and errors and
     omissions insurance;

          (vi) legal, accounting and auditing fees and expenses relating to the
     Company's or any subsidiary's operations (excluding litigation-related fees
     and expenses);

          (vii) expenses relating to any office or office facilities maintained
     by the Company or any subsidiary of the Company, exclusive of the office of
     the Manager;

          (viii) travel and related expenses of directors, officers and
     employees of the Manager and of directors, officers and employees of the
     Company or any subsidiary of the Company who are also directors, officers
     or employees of the Manager, incurred in connection with attending meetings
     of the Board of Directors or holders of securities of the Company or any
     subsidiary of the Company or performing other business activities that
     relate to the Company or any subsidiary of the Company, including expenses
     allocable to such meetings or business activities;

          (ix) costs associated with computer hardware and software, third party
     information services and office expenses that relate solely to the business
     activities of the Company; and

          (x) all other expenses regarded as ordinary operating expenses in
     accordance with generally accepted accounting principles, exclusive of
     certain specifically excluded expenses as described below.

     Expenses excluded from the expense limitation and wholly payable by the 
Company are (but are not limited to) those incurred in connection with the 
accumulation and servicing of Mortgage Loans, the issuance and administration 
of mortgage securities from pools of Mortgage Loans, the raising of capital, 
the acquisition of Mortgage Related Assets, interest and hedging expenses, 
taxes and license fees, non-cash costs, litigation, investigations in 
connection with litigation or threatened litigation, base and incentive 
management compensation and extraordinary and non-recurring expenses. The 
determination of Net Income for purposes of calculating the expense 
limitation will be the same as for calculating the Manager's incentive 
compensation except that it will include any incentive compensation payable 
for such period.

     Expenses in excess of the expense limitation will be paid and shall not 
be recoverable (by reclassification as compensation or otherwise) by the 
Manager, unless the Unaffiliated Directors determine that, based upon unusual 
or non-recurring factors, a higher level of expenses is justified for such 
fiscal year. In that event, such expenses may be recovered by the Manager in 
succeeding years to the extent that expenses in succeeding quarters are below 
the limitation of expenses. Expense reimbursement will be made monthly, 
subject to adjustment at the end of each year.

CERTAIN RELATIONSHIPS; CONFLICTS OF INTEREST

     In addition to its base management compensation under the Management 
Agreement, the Manager has the opportunity to earn incentive compensation for 
each fiscal quarter in an amount equal to 30% of the Net Income of the 
Company (before payment of such incentive compensation) in excess of the 
amount that would produce on annualized Return on Equity equal to the 
Ten-Year U.S. Treasury Rate plus 1%. Quarterly incentive compensation will be 
subject to an annual adjustment commencing in the second full year of the 
Company's operation. In evaluating Mortgage Related Assets for investment and 
in other operating strategies, an undue emphasis on the maximization of 
income at the expense of other criteria, such as preservation of capital, in 
order to achieve a higher incentive fee could result in increased risk to the 
value of the Company's Mortgage Related Asset portfolio.


                                       20



     The Company, on the one hand, and the Manager and its Affiliates, on the 
other, do not presently expect to, but may in the future, enter into a number 
of relationships other than those governed by the Management Agreement, some 
of which may give rise to conflicts of interest between the Manager and its 
Affiliates and the Company. The market in which the Company will seek to 
purchase Mortgage Related Assets is characterized by rapid evolution of 
products and services and, thus, there may in the future be relationships 
between the Company and the Manager and its Affiliates in addition to those 
described herein. Any such relationships or transactions will require the 
approval of the Company's Board of Directors, including a majority of the 
Unaffiliated Directors.

     The Manager and its Affiliates may act as investment adviser or manager 
for other entities, which may or may not include services similar to those it 
renders to the Company. Pursuant to the terms of the Management Agreement, 
the Manager and its Affiliates will agree on the allocation of mortgage 
securities between the Company and other accounts over which the Manager and 
its Affiliates have control. The Manager will base allocation decisions on 
the procedures the Manager considers fair and equitable, including, without 
limitation, such considerations as investment objectives, restrictions and 
time horizon, availability of cash and the amount of existing holdings.

LIMITS OF RESPONSIBILITY

     Pursuant to the Management Agreement, the Manager does not assume any 
responsibility other than to undertake the services called for thereunder and 
is not responsible for any action of the Company's Board of Directors in 
following or declining to follow its advice or recommendations. The Manager, 
its directors and its officers will not be liable to the Company, any issuer 
of mortgage securities, any subsidiary of the Company, the Unaffiliated 
Directors, the Company's stockholders or any subsidiary's stockholders for 
acts performed in accordance with and pursuant to the Management Agreement, 
except by reason of acts constituting bad faith, willful misconduct, gross 
negligence or reckless disregard of their duties under the Management 
Agreement.

     The Company has agreed to indemnify the Manager, its directors and its 
officers with respect to all expenses, losses, damages, liabilities, demands, 
charges and claims arising from any acts or omissions of the Manager made in 
good faith in the performance of its duties under the Management Agreement. 
The Management Agreement does not limit or restrict the right of the Manager 
or any of its officers, directors, employees or Affiliates from engaging in 
any business or rendering services of any kind to any other person, including 
the purchase of, or rendering advice to others purchasing Mortgage Related 
Assets that meet the Company's policies and criteria. The Manager may also 
advise or manage other mortgage related entities subject to certain 
limitations, including REITs, that invest in residential and commercial 
mortgages and other residential and non-residential mortgage securities. The 
ability of the Manager and its officers and employees to engage in other 
business activities could reduce the time and effort spent on the Company. 
The Management Agreement does not specify a minimum amount of time or 
attention that the Manager or its officers or employees must devote to the 
Company's business.

ITEM 2.   PROPERTIES

     The Company does not own or lease any real property. The Company's 
principal executive offices are located at 865 South Figueroa Street, Los 
Angeles, California 90017, telephone (213) 244-0440. Such offices are 
provided by the Manager in accordance with the Management Agreement.

ITEM 3.   LEGAL PROCEEDINGS

     There are no legal proceedings pending against the Company. The 
litigation regarding the Company's use of the name "Apex Mortgage Capital" 
reported in last year's Form 10-K was settled.


                                      21



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

     The Annual Meeting of Shareholders of the Company was held on July 7, 
1998. At the meeting, the ratification of the appointment of Deloitte & 
Touche LLP, as auditors of the Company was submitted to a shareholder vote 
and approval by a majority of the Company's outstanding voting securities 
(votes for: 6,342,792; votes against: 15,365; abstentions: 21,150). 6,453,000 
shares of the Company were outstanding on the record date and 6,379,307 
shares of the Company entitled to vote were present in person or by proxy at 
the meeting. No matters were submitted to shareholders in the fourth quarter 
of 1998.

                                     PART II


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


EQUITY MARKET ACTIVITY

     The Company's Common Stock began trading on December 4, 1997 and is 
traded on the New York Stock Exchange under the trading symbol AXM. As of 
March 19, 1999, the Company had 5,753,000 shares of Common Stock issued and 
outstanding which were held of record by 39 shareholders.

     The following table sets forth the high, low and closing sales prices 
per share of Common Stock as reported on the New York Stock Exchange 
composite tape and the cash dividend declared per share of Common Stock.



                                                                              Cash
                                                    Stock Price            Dividends
                                            --------------------------      Declared
1998                                        High       Low       Close     Per Share
- ----                                        ----       ---       -----     ---------
                                                               
Fourth Quarter ended December 31, 1998     $11.13     $ 7.25    $ 9.63       $0.30
Third Quarter ended September 30, 1998     $12.06     $ 9.06    $ 9.56       $0.27
Second Quarter ended June 30, 1998         $12.75     $10.44    $10.50       $0.25
First Quarter ended March 31, 1998         $14.06     $11.50    $12.38       $0.25

1997
- ----

Fourth Quarter ended December 31, 1997     $15.00     $14.00    $14.00       $0.04


     On March 18, 1999, the Company's Board of Directors declared a dividend 
distribution of $0.38 per share. The dividend is payable on April 9, 1999, to 
shareholders of record on March 31, 1999.

     The Company intends to pay quarterly dividends and to make distributions 
to its stockholders of all or substantially all of its taxable income each 
year (subject to certain adjustments) so as to qualify for the tax benefits 
accorded to a REIT under the Code. All distributions will be made by the 
Company at the discretion of the Board of Directors and will depend on the 
taxable earnings of the Company, financial condition of the Company, 
maintenance of REIT status and such other factors as the Board of Directors 
may deem relevant from time to time.

SHARE REPURCHASE PROGRAM

     On January 13, 1998, the Company's board of directors authorized a 
program to repurchase up to 750,000 shares of the Company's Common Stock. On 
September 16, 1998, the Company's board of directors authorized a program to 
repurchase up to an additional 750,000 shares of the Company's Common Stock 
having completed the original repurchase program of 750,000 shares.


                                       22



     The Company repurchased 947,100 shares during the year ended December 
31, 1998. The average price per share repurchased during the year ended 
December 31, 1998 was $11.16. The repurchased shares are held in treasury at 
cost in the financial statements herein.

     An additional 552,900 shares are currently authorized for potential 
repurchase in the future. The Company may continue to repurchase shares in 
the future when market conditions warrant.

ITEM 6.   SELECTED FINANCIAL DATA

     The following selected financial data are derived from audited financial 
statements for the year ended December 31, 1998 and the period from 
commencement of operations on December 9, 1997 to December 31, 1997. The 
selected financial data should be read in conjunction with the more detailed 
information contained in the financial statements and notes thereto and 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations" included elsewhere in this report.



                                                                                         PERIOD FROM
                                                                        YEAR ENDED      DECEMBER 9, 1997 TO
                                                                     DECEMBER 31, 1998   DECEMBER 31, 1997
                                                                -------------------------------------------
                                                                                  
STATEMENT OF OPERATIONS DATA:

Days in period                                                                365                  22

Interest income                                                       $41,785,000            $428,000
Interest expense                                                      $36,007,000            $111,000
Net interest income                                                    $5,778,000            $317,000
General and administrative expenses                                    $2,104,000            $167,000
Net income                                                             $5,547,000            $150,000
Average number of shares outstanding                                    6,190,000           6,700,100
Basic and diluted net income per share                                      $0.90               $0.02
Dividends declared per share                                                $1.07               $0.04




                                                              AT DECEMBER 31, 1998      AT DECEMBER 31, 1997
                                                              ----------------------------------------------
                                                                                  
BALANCE SHEET DATA:

Mortgage-backed securities                                           $825,995,000           $265,880,000
Other Investments                                                     $20,139,000                      0
Total assets                                                         $865,478,000           $271,307,000
Reverse repurchase agreements                                        $767,908,000            $87,818,000
Total liabilities                                                    $777,448,000           $178,310,000
Stockholders' equity                                                  $88,030,000            $92,997,000
Book value per share                                                       $15.30                 $13.88
Fair Value of Off Balance Sheet Hedging Instruments                   $(9,994,000)                     0
Book value per share net of Hedging Instruments                            $13.56                 $13.88



                                       23




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


GENERAL

     Apex Mortgage Capital, Inc. commenced operations on December 9, 1997, 
after its initial public offering of Common Stock. The Company received net 
proceeds of $92,918,000, after all underwriting discounts and offering costs.

     The Company uses its equity capital and borrowed funds to seek to 
generate income based on the difference between the yield on its Mortgage 
Assets and the cost of its borrowings. The Company will elect to be taxed as 
a REIT under the Code. The Company will not generally be subject to federal 
taxes on its income to the extent that it distributes its net income to its 
stockholders and maintains its qualification as a REIT.

FINANCIAL CONDITION

MORTGAGE-BACKED SECURITIES

At December 31, 1998, the Company held $825,995,000 of Mortgage-Backed 
Securities as compared to $265,880,000 at December 31, 1997. The original 
maturity of a significant portion of the Mortgage-Backed Securities ranges 
from fifteen to thirty years; the actual maturity is subject to change based 
on the prepayments of the underlying mortgage loans.

The following table is a schedule of Mortgage-Backed Securities held listed 
by security type (dollars in thousands):



                                               December 31, 1998            December 31, 1997
                                          ------------------------------------------------------
                                          Carrying       Percent of      Carrying     Percent of
      Mortgage-Backed Securities             Value        Portfolio         Value      Portfolio
                                                                          
      ------------------------------------------------------------------------------------------
      Adjustable Rate(1)                   $ 62,338            7.5%      $240,819          90.6%
      Fixed Rate                            763,657           92.5%        25,061           9.4%
                                           --------          ------      --------         ------
           Totals                          $825,995          100.0%      $265,880         100.0%
                                           --------          ------      --------         ------
                                           --------          ------      --------         ------


      (1) At December 31, 1998, the interest rate indices for 95% and 5% of
          the adjustable rate mortgage securities were based on the one-year
          U.S. Treasury rate and the six-month London Inter-Bank Offered
          Rate, respectively. At December 31, 1997, the interest rate index
          for all adjustable rate mortgage securities was based on the
          one-year U.S. Treasury rate.


                                      24



     The following table shows various weighted average characteristics of 
the Mortgage-Backed Securities held by the Company at December 31, 1998 
(dollars in thousands):



                                                 Percent of                                          Weighted
                                                  Total Par     Amortized    Market     Current      Average
Security Type                       Par Amount      Amount     Cost Basis     Price      Coupon      Life(1)
- -------------------------------------------------------------------------------------------------------------
                                                                                   
15 Year Agency/AAA Pass-throughs    $253,581        30.9%        100.42%     101.23%      6.50%         3.7
20 Year Agency Pass-throughs         209,566        25.6%        100.45%     101.06%      6.50%         6.1
30 Year Agency Pass-throughs           8,076         1.0%        102.19%     101.99%      7.50%         3.2
AAA CMOs                             286,887        35.0%         99.52%     100.01%      6.82%         2.7
                                    --------       ------        -------     -------      -----         ---
Total Fixed Rate Holdings           $758,110        92.5%        100.11%     100.74%      6.63%         3.9

Adjustable Rate Holdings              61,590         7.5%        101.25%     101.21%      6.79%         1.0
                                    --------       ------        -------     -------      -----         ---

Total Portfolio                     $819,700       100.0%        100.20%     100.77%      6.64%         3.7
                                    --------       ------        -------     -------      -----         ---
                                    --------       ------        -------     -------      -----         ---



     The following table shows various weighted average characteristics of the
Mortgage-Backed Securities held by the Company at December 31, 1997 (dollars in
thousands):



                                                 Percent of                                          Weighted
                                                  Total Par     Amortized    Market     Current      Average
Security Type                       Par Amount      Amount     Cost Basis     Price      Coupon      Life(1)
- -------------------------------------------------------------------------------------------------------------
                                                                                   
Fixed Rate Agency CMO                $24,826         9.5%        100.78%     100.95%      7.50%         0.9

Adjustable Rate Holdings             237,929        90.5%        101.12%     101.21%      6.90%         0.6

Total Portfolio                     $262,755       100.0%        101.11%     101.19%      6.66%         0.6


(1) The weighted average life of the fixed rate mortgage securities is based 
    upon market prepayment expectations as of the dates shown. The actual 
    weighted average life could be longer or shorter depending on the actual 
    prepayment rates experienced over the life of the securities. The weighted 
    average life shown for the adjustable rate mortgage assets represents the 
    average time until the next coupon reset date. All averages are shown in 
    years.

OTHER INVESTMENTS

     At December 31, 1998, the Company held $20,139,000 of other investments. 
There were no such other investments held at December 31, 1997. The Company's 
other investments consist primarily of equity securities issued by other real 
estate investment trusts and securities generally collateralized by mortgage 
assets.

     The Company's investments in other real estate investment trusts of 
$16,422,000 at December 31, 1998 consist of publicly traded preferred and 
common stock securities issued by companies involved in the mortgage finance 
industry. The Company generally expects to receive dividend income on the 
majority of these investments which is included in other income in the 
statement of operations.

         The Company's other investments also include securities of 
$3,717,000 at December 31, 1998 that are issued by special purpose companies 
that invest primarily in mortgage assets. Such securities are generally 
issued on a private placement basis and accordingly have a limited secondary 
market. The Company generally expects to receive quarterly 


                                    25



cash flows from these investments. Interest from income securities is accrued 
and included in other income in the statement of operations using the 
effective interest method applied prospectively based on current market 
assumptions.

HEDGING INSTRUMENTS

     The Company utilizes interest rate caps, swaps and similar financial 
instruments to mitigate the risk of the cost of its variable-rate liabilities 
exceeding the earnings on its mortgage assets during a period of rising 
interest rates. The Company is currently utilizing both interest rate cap and 
interest rate swap agreements.

     Interest rate cap agreements consisted of LIBOR based agreements as 
follows:



                                 At December 31, 1998       At December 31, 1997
                                 -----------------------------------------------
                                                      
Notional Amount                      $900,000,000               $500,000,000
Average Contract Rate                   10.4%                       10.0%
Average Final Maturity             January 24, 2002           December 24, 2001


     Under these agreements, the Company will receive cash payments to the 
extent of the excess of three-month LIBOR over the agreements' contract rate 
times the notional amount. The interest rate cap agreements no longer qualify 
for hedge accounting now that the Company has entered into additional hedging 
transactions as discussed below. Accordingly, the Company now records the cap 
agreements at fair market value, which is zero in the current market 
environment.

     During the year ended December 31, 1998, the Company entered into 
interest rate swap agreements with current notional amounts as stated below. 
Under these agreements, the Company receives a floating rate and pays a fixed 
rate.




 Current
Notional 
 Amount                                                           Termination     Unrealized
  (000)            Type            Fixed Rate    Floating Rate         Date      Gains (Losses)
- -----------------------------------------------------------------------------------------------
                                                                  
$ 95,000    Interest Rate Swap       5.880%        1Mo LIBOR          5/29/00      $ (1,058)
  30,000    Interest Rate Swap       5.905%        1Mo LIBOR          6/30/00          (378)
  28,204    Interest Rate Swap       5.765%        1Mo LIBOR          7/25/00          (282)
  61,599    Interest Rate Swap       5.775%        1Mo LIBOR          8/25/00          (653)
  47,170    Interest Rate Swap       5.710%        1Mo LIBOR          8/28/00          (456)
  60,000    Interest Rate Swap       5.900%        1Mo LIBOR          5/18/01        (1,086)
  97,118    Interest Rate Swap       5.883%        1Mo LIBOR          6/25/01        (1,564)
 117,755    Interest Rate Swap       5.905%        1Mo LIBOR          5/25/01        (1,720)
  53,394    Interest Rate Swap       5.750%        1Mo LIBOR          7/14/01          (709)
  65,000    Interest Rate Swap       5.791%        1Mo LIBOR          6/25/01        (1,045)
  48,350    Interest Rate Swap       5.960%        1Mo LIBOR          5/15/02        (1,043)
- --------                                                                            --------
$703,590                                                                            $(9,994)
- --------                                                                            --------
- --------                                                                            --------


     The weighted average coupon the Company pays on the interest rate swap 
agreements at December 31, 1998 was 5.85%. The weighted average life of the 
agreements at December 31, 1998 was 1.9 years.

     The Company is generally required to deposit collateral with the swap 
agreement counter-parties in an amount at least equal to the amount of any 
unrealized losses. At December 31, 1998 the Company had securities with a 
fair market value of $17,327,000 on deposit with its counter-parties. If the 
unrealized losses on the interest rate swap agreements were to increase, the 
Company would be required to deposit additional collateral.

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


                                     26



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

LIABILITIES

     The Company has entered into reverse repurchase agreements to finance 
certain of its mortgage-backed securities. These agreements are secured by a 
portion of the Company's mortgage-backed securities and bear interest rates 
that have historically moved in close relationship to LIBOR.

     At December 31, 1998, the Company had outstanding $767,908,000 of 
reverse repurchase agreements with a weighted average current borrowing rate 
of 5.34% and a maturity of 2.9 months. The reverse repurchase agreements were 
collateralized by mortgage-backed securities with an estimated fair value of 
$800,260,000.

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

     The Company had $9,540,000 and $90,492,000 of other liabilities at 
December 31, 1998 and December 31, 1997, respectively, consisting primarily 
of accrued interest payable and payables for unsettled securities at December 
31, 1998 and December 31, 1997, respectively. The Company anticipates 
settling all other liabilities within one year by entering into additional 
reverse repurchase agreements.

RESULTS OF OPERATIONS - 1998 COMPARED TO 1997

     The results of operations for the year ended December 31, 1998 represent 
a full year of income from operations, net gains on the sale of investments 
and include a large impact from leverage. In contrast, the results of 
operations for the twenty-two day period ended December 31, 1997 largely 
consisted of income from short-term investments and mortgage-backed 
securities with little or no leverage applied. Because of this disparity in 
operating periods, a direct comparative analysis of the year ended December 
31, 1998 to the twenty-two day period ended December 31, 1997 would generally 
not be relevant to investors. Therefore, the results from operations for the 
two periods are discussed separately in this report.

RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998

     For the year ended December 31, 1998, the Company's net income was 
$5,547,000, or $0.90 per share on both a basic and diluted basis, based on a 
weighted average of 6,190,000 shares outstanding. Net interest income for the 
period was $5,778,000 consisting of interest income on mortgage assets and 
cash balances less interest expense on reverse repurchase agreements. The 
Company reported other income of $826,000 from dividend and interest income 
on other investments. The Company reported gains on investment transactions, 
net of $1,047,000 primarily from the sale of mortgage-backed securities and 
other investments. The Company incurred operating expenses of $2,104,000 for 
the period consisting of management fees, audit, tax, legal, printing, 
insurance and other expenses.

         The following table reflects the average balances for each category 
of the Company's interest earning assets as well as the Company's interest 
bearing liabilities, with the corresponding effective rate of interest 
annualized for the twelve months ended December 31, 1998 (dollars in 
thousands):


                                     27

                                       
                         AVERAGE BALANCE AND RATE TABLE
                             (Dollars in thousands)



                                                     For the Year Ended
                                                      December 31, 1998
                                                -----------------------------
                                                Average            Effective
                                                Balance               Rate
                                                --------           ---------
                                                             
Interest Earning Assets:
     Mortgage Assets                            $670,559             6.13%
     Cash and Cash Equivalents                    13,923             5.10%
                                                --------             -----
     Total Interest Earning Assets               684,482             6.10%
                                                --------             -----

Interest Bearing Liabilities:
     Reverse Repurchase Agreements               624,865             5.76%
                                                --------             -----
Net Interest Earning Assets and Spread          $ 59,617             0.34%
                                                --------             -----
                                                --------             -----



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

     The following table reflects the average balances for each category of 
the Company's other investments for the year ended December 31, 1998 (dollars 
in thousands):

                       AVERAGE BALANCE AND RATE TABLE
                            (Dollars in thousands)



                                                     For the Year Ended
                                                      December 31, 1998
                                                -----------------------------
                                                Average            Effective
                                                Balance               Rate
                                                --------           ---------
                                                             
Other Investments:
     Equity Securities                           $3,718              17.10%
     Other Securities                             1,324              14.37%
                                                 ------              ------
     Total Other Investments                      5,042              16.38%
                                                 ------              ------
                                                 ------              ------


RESULTS OF OPERATIONS FOR THE PERIOD ENDED DECEMBER 31, 1997

     For fiscal period from commencement of operations on December 9, 1997 
through December 31, 1997, the Company's net income was $150,000, or $0.02 
per share based on 6,700,100 shares outstanding. Net interest income for the 
period was $317,000 consisting of interest income on Mortgage Assets and cash 
balances less interest expense on reverse repurchase agreements. The Company 
incurred operating expenses of $167,000 for the period consisting of 
management fees, audit, tax, legal, printing, insurance and other expenses.

     The following table reflects the average balances for each category of 
the Company's interest earning assets as well as the Company's interest 
bearing liabilities, with the corresponding effective rate of interest 
annualized for the partial period ended December 31, 1997 (dollars in 
thousands):


                                     28



                         AVERAGE BALANCE AND RATE TABLE
                             (Dollars in thousands)



                                                     Twenty-two Days Ended
                                                       December 31, 1997
                                                -----------------------------
                                                Average            Effective
                                                Balance               Rate
                                                --------           ---------
                                                             
Interest Earning Assets:
     Mortgage Assets                            $ 60,828             6.10%
     Cash and Cash Equivalents                    56,539             5.40%
                                                --------             -----
     Total Interest Earning Assets               117,367             5.97%
                                                --------             -----

Interest Bearing Liabilities:
     Reverse Repurchase Agreements                29,895             5.75%
                                                --------             -----
Net Interest Earning Assets and Spread          $ 87,472             0.22%
                                                --------             -----
                                                --------             -----



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

LIQUIDITY AND CAPITAL RESOURCES

     The Company's primary sources of funds as of December 31, 1998 consisted 
of reverse repurchase agreements totaling $767,908,000. The Company expects 
to continue to borrow funds in the form of reverse repurchase agreements. At 
December 31, 1998, the Company had borrowing arrangements with twenty-three 
different investment banking firms. Increases in short-term interest rates 
could negatively impact the valuation of the Company's mortgage assets which 
could limit the Company's borrowing ability or cause its lenders to initiate 
margin calls.

     The Company will also rely on the cash flow from operations, primarily 
monthly principal and interest payments to be received on the mortgage 
assets, for liquidity.

     The Company believes that equity capital, combined with the cash flow 
from operations and the utilization of borrowings, will be sufficient to 
enable the Company to meet anticipated liquidity requirements. If the 
Company's cash resources are at any time insufficient to satisfy the 
Company's liquidity requirements, the Company may be required to liquidate 
mortgage assets or sell debt or additional equity securities. If required, 
the sale of mortgage assets at prices lower than the carrying value of such 
assets would result in losses.

     The Company may in the future increase its capital resources by making 
additional offerings of equity and debt securities, including classes of 
preferred stock, common stock, commercial paper, medium-term notes, CMOs and 
senior or subordinated notes. All debt securities, other borrowings, and 
classes of preferred stock will be senior to the Common Stock in a 
liquidation of the Company. The effect of additional equity offerings may be 
the dilution of stockholders' equity of the Company or the reduction of the 
price of shares of the Common Stock, or both. The Company is unable to 
estimate the amount, timing or nature of additional offerings as they will 
depend upon market conditions and other factors.

INFLATION

     Virtually all of the Company's assets and liabilities are financial in 
nature. As a result, interest rates and other factors drive the Company's 
performance far more than does inflation. Changes in interest rates do not 
necessarily correlate with inflation rates or changes in inflation rates. The 
Company's financial statements are prepared in accordance with generally 
accepted accounting principles and the Company's dividends are determined by 
the Company's net income as calculated for tax purposes; in each case, the 
Company's activities and balance sheet are measured with reference to 
historical cost and or fair market value without considering inflation.


                                      29



YEAR 2000 MATTERS

     The year 2000 issue is the result of computer programs using two digits 
rather than four to define the applicable year. Any computer system that the 
Company relies on with time sensitive software may recognize a date entered 
as "00" as the year 1900 rather than the year 2000. This could result in a 
system failure or miscalculations causing disruption of operations, 
including, among other things, a temporary inability to process transactions 
or engage in normal business activities. The Company believes that most of 
its exposure to Year 2000 issues involves the readiness of external third 
parties such as, but not limited to, loan servicers, security master 
servicers, security paying agents and trustees, its stock transfer agent, its 
securities custodian, the counterparties on its various financing agreements 
and hedging contracts and vendors ("External Service Providers").

     The Company relies on the Manager for its computer services and the 
Manager has been addressing this issue at no cost to the Company. 
Specifically, the Manager's internally developed computer systems have been 
implemented within the past five years. These systems have been developed 
with software tools that utilize a century date format (ccyymmdd). Although 
it has been a standard procedure to use this format for all date fields, the 
Manager is nonetheless in the process of unit testing its internally 
developed applications for numerous date conditions, including: the first and 
last day of the year 2000, the leap year day and the day after, the first day 
of the year 2001, functions with date ranges from 1999 which cross over into 
year 2000, functions which have both "from date" and "to date" in the year 
2000, date arithmetic and validation using standard routines through the year 
2199.

     The Manager has been, and is currently in contact with, each of its 
External Service Providers to evaluate their readiness for the year 2000. The 
Manager has requested each of its External Service Providers to either (i) 
prepare a description of its process for identifying date sensitive areas, 
its approach for implementing changes, its testing methodology, along with 
its timetable for completion, or (ii) certify as to its year 2000 compliance.

     Due to the technical architecture of the Manager's internally developed 
applications, its emphasis on using major providers and its ongoing 
communication with those providers, the Manager anticipates it will be well 
positioned to begin the year 2000. There can be no assurance, however, that 
the Company's External Service Providers will resolve their own Year 2000 
issues in a timely manner, or that any failure by these External Service 
Providers to resolve such issues would not have an adverse effect on the 
Company's operations and financial condition. Each External Service Provider 
is in turn subject to the Year 2000 issues of various third parties with 
which it does business, making the Company's exposure to the noncompliance of 
any External Service Provider difficult to assess. In a worst case scenario, 
a significant portion of the Company's External Service Providers and 
contractual counter-parties could fail to fulfill their respective 
obligations which would significantly impair the Company's ability to meet 
its obligations under its financing and hedging agreements. This would in 
turn cause the Company to liquidate assets at potentially substantial losses 
and possibly render the Company insolvent. The Company believes it is 
devoting the necessary resources to address the Year 2000 issues over which 
it has control. With respect to the Year 2000 issues of External Service 
Providers, over which the Company has no control, the Company's contingency 
plan is to identify replacement vendors, where possible.


                                       30



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

                                   MARKET RISK

     The Company's two primary components of market risk are interest rate 
risk and equity price risk as discussed below.

INTEREST RATE RISK

EFFECT ON NET INCOME. The Company invests in fixed-rate mortgage assets that 
are expected to be funded with short-term borrowings. During periods of 
rising interest rates, the borrowing costs associated with funding such 
fixed-rate assets are subject to increase while the income earned on such 
assets may remain substantially unchanged. This would result in a narrowing 
of the net interest spread between the related assets and borrowings and may 
even result in losses. The Company may enter into derivative transactions 
seeking to mitigate the negative impact of a rising interest rate 
environment. Hedging techniques will be based, in part, on assumed levels of 
prepayments of the Company's mortgage assets. If prepayments are slower or 
faster than assumed, the life of the mortgage assets will be longer or 
shorter which would reduce the effectiveness of the Company's hedging 
techniques and may result in losses on such transactions. Hedging techniques 
involving the use of derivative securities are highly complex and may produce 
volatile returns. The hedging activity of the Company will also be limited by 
the asset and sources of income requirements applicable to the Company as a 
REIT.

     During the year, the Company increased its current allocation to 
fixed-rate mortgage assets from 9.4% of the portfolio at December 31, 1997 to 
92.5% at December 31, 1998. The Company may increase this allocation as 
market conditions warrant. As mentioned above, there are certain risks 
associated with investing in fixed-rate mortgage assets in combination with 
hedging instruments. The two main risks the Company faces are that of 
extension risk and prepayment risk.

EXTENSION RISK. Fixed-rate assets are generally acquired with a projected 
weighted average life based on certain assumptions regarding prepayments. In 
general, when a fixed-rate mortgage asset is acquired with borrowings, the 
Company will enter into an interest rate swap agreement or other hedging 
instrument that effectively fixes the Company's borrowing costs for a period 
close to the anticipated average life of the related asset. This strategy is 
designed to protect the Company from rising interest rates because the 
borrowing costs are fixed for the duration of the asset. However, if 
prepayment rates decrease in a rising interest rate environment, the life of 
the mortgage asset could extend beyond the term of the swap agreement or 
other hedging instrument. This situation could negatively impact the Company 
as borrowing costs would no longer be fixed after the end of the hedging 
instrument while the income earned on the asset would remain fixed. This 
situation may also cause the market value of the Company's mortgage assets to 
decline with little or no offsetting gain from the related hedging 
transactions. In certain situations, the Company may be forced to sell assets 
and incur losses to maintain adequate liquidity.

PREPAYMENT RISK. Fixed-rate assets in combination with hedging instruments 
are also subject to prepayment risk. In falling interest rate scenarios, the 
fixed-rate mortgage assets may prepay faster such that the average life 
becomes shorter than its related hedging instrument. If this were to happen, 
the Company would potentially need to reinvest at rates lower than that of 
the related hedging instrument. This situation may result in the narrowing of 
interest rate spreads or may cause losses.

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


                                    31



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

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

EFFECT ON FAIR VALUE. Another component of interest rate risk is the effect 
changes in interest rates will have on the market value of the Company's 
assets. This is the risk that the market value of the Company's assets will 
increase or decrease at different rates than that of the Company's 
liabilities including its hedging instruments.

     The Company primarily assesses its interest rate risk by estimating the 
duration of its assets and the duration of its liabilities including all 
hedging instruments. Duration essentially measures the market price 
volatility of financial instruments as interest rates change. The Company 
generally calculates duration using various financial models and empirical 
data.

     The following sensitivity analysis table shows the estimated impact on 
the fair value of the Company's interest rate sensitive investments net of 
its hedging instruments and reverse repurchase agreement liabilities assuming 
rates instantaneously fall one hundred basis points and rise one hundred 
basis points. (Dollars are in thousands except per share amounts.)

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


                                                  Fair Value for Scenario Shown
                                                --------------------------------
                                                  Interest              Interest
                                                 Rates Fall           Rates Rise
                                                 100 Basis             100 Basis
                                                   Points   Unchanged    Points
- -------------------------------------------------------------------------------
                                                              
Interest Rate Sensitive Instruments...........   $47,143     $51,810    $44,787

Change in Fair Value..........................   $(4,667)         --    $(7,023)
Change as a Percent of Fair Value.............    (0.56%)         --     (0.85%)
Change as a Percent of Stockholders' Equity...    (5.30%)         --     (7.98%)
Change on a Per Share Basis...................   $ (0.81)         --    $ (1.22)



     It is important to note that the impact of changing interest rates on 
fair value can change significantly when interest rates change beyond one 
hundred basis points from current levels. Therefore, the volatility in fair 
value for the Company could increase significantly when interest rates 
change beyond one hundred basis points. In addition, there are other 
factors that impact the fair value of the Company's interest rate sensitive 
investments and hedging instruments such as the shape of the yield curve, 
market expectations as to future interest rate changes and other market 
conditions. Accordingly, there may be differences between the fair value 
changes shown above and actual changes in fair value as interest rates change 
and those differences may be material.

The contract terms of the Company's liabilities exclusive of hedging 
instruments are subject to change as interest rates change. In general, the 
Company utilizes short-term borrowings in the form of reverse repurchase 
agreements to finance certain of its mortgage-backed securities. These 
agreements are secured by a portion of the Company's mortgage-backed 
securities and bear interest rates that have historically moved in close 
relationship to LIBOR.

                                    32



EQUITY PRICE RISK

     Another component of market risk for the Company is equity price risk. This
is the risk that the market value of the Company's equity investments will
decrease. The following table shows the impact on the Company's fair value as
the price of its equity securities change assuming price decreases of 10% and
increases of 10%. Actual price decreases or increases may be greater or smaller.
(Dollars are in thousands except per share amounts.)




                                                   Fair Value for Scenario Shown
                                              --------------------------------------
                                               Prices                        Prices
                                              Decrease     Unchanged        Increase
                                                 10%                           10%
                                              ---------------------------------------
                                                                       
Equity Investments                            $14,780       $16,422         $18,064

Change in Fair Value                           (1,642)            -           1,642
Change as a Percent of Fair Value                 (10%)           -              10%
Change as a Percent of Stockholders' Equity      (1.9%)           -             1.9%
Change on a Per Share Basis                     $(0.29)            -        $   0.29



     Although there is no direct link between changes in fair value and 
changes in earnings in many cases, a decline in fair value for the Company 
may translate into decreased earnings over the remaining life of the 
investment portfolio.

     If the fair market value of the Company's portfolio were to decline 
significantly, the Company's overall liquidity may be impaired which could 
result in the Company being required to sell assets at losses.

     THE COMPANY'S ANALYSIS OF RISKS IS BASED ON MANAGEMENT'S EXPERIENCE, 
ESTIMATES, MODELS AND ASSUMPTIONS. THESE ANALYSES RELY ON MODELS OF FINANCIAL 
INFORMATION WHICH UTILIZE ESTIMATES OF FAIR VALUE AND INTEREST RATE 
SENSITIVITY. ACTUAL ECONOMIC CONDITIONS OR IMPLEMENTATION OF INVESTMENT 
DECISIONS BY THE MANAGER MAY PRODUCE RESULTS THAT DIFFER SIGNIFICANTLY FROM 
THE ESTIMATES AND ASSUMPTIONS USED IN THE COMPANY'S MODELS AND THE 
PROJECTED RESULTS SHOWN IN THE ABOVE TABLES AND IN THIS REPORT. THESE 
ANALYSES CONTAIN CERTAIN "FORWARD-LOOKING STATEMENTS" AND ARE SUBJECT TO THE 
SAFE HARBOR CONTAINED IN THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements of the Company and the related notes, together 
with the Independent Auditors' Report thereon, are set forth on pages F-3 
through F-15 on this Form 10-K.

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

     None.


                                      33



                                    PART III


ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


     The information required by Item 10 is incorporated herein by reference 
to the definitive Proxy Statement to be filed within 120 days from December 
31, 1998 pursuant to general instruction G(3).

ITEM 11.  EXECUTIVE COMPENSATION

     The information required by Item 11 is incorporated herein by reference 
to the definitive Proxy Statement to be filed within 120 days from December 
31, 1998 pursuant to general instruction G(3).

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by Item 12 is incorporated herein by reference 
to the definitive Proxy Statement to be filed within 120 days from December 
31, 1998 pursuant to general instruction G(3).

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by Item 13 is incorporated herein by reference 
to the definitive Proxy Statement to be filed within 120 days from December 
31, 1998 pursuant to general instruction G(3).


                                      34



                                     PART IV


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


(a)  Documents filed as part of this report:

     1.   The following financial statements of the Company are included in Part
          II, Item 8 of this Annual Report on Form 10-K:

          Independent Auditors' Report;
          Balance Sheets as of December 31, 1998 and December 31, 1997;
          Statements of Operations for the Year Ended December 31, 1998 and 
          the Period from December 9, 1997 (Commencement of Operations) to 
          December 31, 1997
          Statements of Stockholders' Equity Period from December 9, 1997 
          (Commencement of Operations) to December 31, 1997 and Year Ended 
          December 31, 1998
          Statements of Cash Flows for the Year Ended December 31, 1998 
          and the Period from December 9, 1997 (Commencement of Operations) 
          to December 31, 1997
          Notes to Financial Statements.

     2.   Schedules to financial statements:

          All financial statement schedules have been omitted because they are
          either inapplicable or the information required is provided in the
          Company's Financial Statements and Notes thereto, included in Part II,
          Item 8 of this Annual Report on Form 10-K.

     3.   Exhibits:

          Exhibit
          Number                       Exhibit
          -------                      -------
          10.1        Amendment to Management Agreement between the Registrant
                      and TCW Investment Management Company.

          10.6        Amended and Restated 1997 Stock Option Plan.

          24.1.1      Powers of Attorney.

          27          Financial Data Schedule.



(b) Reports on Form 8-K.

    None.


                                     35


                                    GLOSSARY

     As used in this Annual Report on Form 10-K, the capitalized and other 
terms listed below have the meanings indicated.

     "Affiliate" means, when used with reference to a specified person, any 
person that directly, or indirectly through one or more intermediaries, 
controls or is controlled by, or is under common control with the specified 
person.

     "Average Net Invested Capital" means for any period (i) the arithmetic 
average of the sum of the gross proceeds of the offerings of its equity 
securities by the Company, after deducting any underwriting discounts and 
commissions and other expenses and costs relating to such offerings, plus (A) 
the Company's retained earnings (taking into account any losses incurred) and 
(B) any non-cash charges or reserves, including depreciation, mark-to-market 
adjustments and unrealized credit loss, computed by taking the average of 
such values at the end of each month during such period, plus (ii) any 
unsecured debt approved by the Unaffiliated Directors to be included in 
Average Net Invested Capital, minus (iii) the cumulative amounts paid by the 
Company to repurchase its shares.

     "Average Net Worth" means for any period the arithmetic average of the 
sum of the gross proceeds from the offerings of its equity securities by the 
Company, before deducting any underwriting discounts and commissions and 
other expenses and costs relating to the offerings, plus the Company's 
retained earnings (without taking into account any losses incurred in prior 
periods) computed by taking the average of such values at the end of each 
month during such period, minus the cumulative amounts paid by the Company to 
repurchase its shares.

     "Bankruptcy Code" means Title 11 of the United States Code, as amended

     "CMOs" means debt obligations (bonds) that are collateralized by 
mortgage loans or mortgage certificates other than Mortgage Derivative 
Securities and subordinated interests. 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 that are characteristics designed for the investment objectives 
of different bond purchasers.

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

     "COFI" is the 11th District Cost of Funds Index, the index made 
available monthly by the Federal Home Loan Bank Board of the cost of funds to 
members of the Federal Home Loan Bank 11th District.

     "Committed Secured Borrowings" means (i) CMOs, (ii) structured 
commercial paper programs, (iii) secured term notes and (iv) other secured 
financing transactions that generally commit the lender to provide financing 
to the Company for a specified period of time or to provide financing to the 
Company to fund specific assets until they mature.

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

     "Company" means Apex Mortgage Capital, Inc., a Maryland corporation.

     "Conforming Mortgage Loans" means conventional Mortgage Loans that 
either comply with requirements for inclusion in credit support programs 
sponsored by Fannie Mae, FHLMC, 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 unit) residences.

     "Dollar-Roll Agreement" means an agreement to sell a security for 
delivery on a specified future date and a simultaneous agreement to 
repurchase the same or substantially similar security on a specified future 
date.

     "ERISA" means the Employee Retirement Income Security Act of 1974, as 
amended.

     "ERISA Plan" means a pension, profit-sharing, retirement or other 
employee benefit plan that is subject to ERISA.

     "Fannie Mae" means the federally chartered and privately owned 
corporation organized and existing under the Federal National Mortgage 
Association Charter Act (12 U.S.C., Section 1716 et seq.), formerly known as 
the Federal National Mortgage Association.

     "FHA" means the United States Federal Housing Administration.


                                      36



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

     "FHLMC" means the Federal Home Loan Mortgage Corporation.

     "FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980, as
amended.

     "Foreign Holder" means a purchaser of the Common Stock that, for United
States income tax purposes, is not a United States person.

     "GNMA" means the Government National Mortgage Association.

     "High Credit Quality Mortgage Loans" means individual loans secured by 
residential real property that are either underwritten to credit standards 
that generally comply with the credit standards approved by Fannie, Freddie 
Mac or GNMA or pools of loans that have other credit support features that 
generally reduce the associated credit risk to that of investment grade 
securities.

     "High Quality" means either (i) securities that are rated investment 
grade or above by at least one of the Rating Agencies, or (ii) securities 
that are unrated but are obligations of the United States or obligations 
guaranteed by the United States government or an agency or instrumentality 
thereof.

     "Interest Only Derivatives" means Mortgage Derivative Securities 
representing the right to receive interest only or a disproportionately large 
amount of interest.

     "Inverse Floaters" means a class of CMOs with a coupon rate that moves 
inversely to a designated index, such as LIBOR or COFI. Income floaters have 
coupon rates that typically change at a multiple of the changes at the 
relevant index rate. Any rise in the index rate (as a consequence of an 
increase in interest rates) causes a drop in the coupon rate of an Inverse 
Floater while any drop in the index rate causes an increase in the coupon of 
an Inverse Floater.

     "Investment Company Act" means the Investment Company Act of 1940, as 
amended.

     "IRAs" means Individual Retirement Accounts.

     "IRS" means the Internal Revenue Service.

     "Keogh Plans" means H.R. 10 Plans.

     "LIBOR" means the London-Inter-Bank Offered Rate.

     "Management Agreement" means the agreement by and between the Company 
and the Manager whereby the Manager agrees to perform certain services to the 
Company in exchange for certain compensation.

     "Manager" means TCW Investment Management Company, a California 
corporation.

     "MBS Group" means the TCW Group's Mortgage-Backed Securities Group.

     "Mortgage-Backed Securities" means securities representing interests in, 
or secured by mortgages on residential real property that are not Mortgage 
Derivative Securities.

     "Mortgage Derivative Securities" means mortgage backed securities that 
are (i) Interest Only Derivatives, (ii) Principal Only Derivatives, (iii) 
inverse interest only derivatives, (iv) Inverse Floaters and (v) other 
mortgage related derivative instruments.

     "Mortgage Loans" means Conforming and Nonconforming Mortgage Loans, FHA 
Loans and VA Loans.

     "Mortgage Related Assets" means (i) Short-Term Investments, (ii) 
Mortgage-Backed Securities, (iii) High Credit Quality Mortgage Loans, (iv) 
Mortgage Derivative Securities and (v) Other Investments.

     "Net Income" means the taxable income of the Company before the 
Manager's incentive compensation, net operating loss deductions arising from 
losses in prior periods and deductions permitted by the Code in calculating 
taxable income for 


                                    37



a REIT, including a deduction for the Company's interest expenses for 
borrowed funds, plus the effects of adjustments, if any, necessary to record 
hedging and interest transactions in accordance with generally accepted 
accounting principles.

     "Nonconforming Mortgage Loans" means conventional Mortgage Loans that do 
not conform to one or more requirements of Fannie Mae, FHA, FHLMC, 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 Investments" means (i) equity and debt securities issued by other 
primarily mortgage related finance companies, (ii) interests in mortgage 
related collateralized bond obligations, (iii) other subordinated interests 
in pools of Mortgage Related Assets, (iv) commercial mortgage loans and 
securities, and (v) residential mortgage loans other than High Credit Quality 
Mortgage Loans.

     "Principal Only Derivatives" means Mortgage Derivative Securities 
representing the right to receive principal only or a disproportionate amount 
of principal.

     "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 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.

     "Rating Agencies" means any nationally recognized rating agency.

     "REIT" means a real estate investment trust as defined under Section 856 
of the Code.

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

     "Return on Equity" means an amount calculated for any quarter by 
dividing the Company's Net Income for the quarter by its Average Net Worth 
for the quarter.

     "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.

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

     "Taxable Income" means for any year the taxable income of the Company 
for such year (excluding any net income derived either from property held 
primarily for sale to customers or from foreclosure property) subject to 
certain adjustments provided in the REIT Provisions of the Code.

     "TCW" means The TCW Group, Inc.

     "TCW Group" means TCW and its subsidiaries and Affiliates.

     "Ten-Year U.S. Treasury Rate" means the arithmetic average of the weekly 
average yield to maturity for actively traded current coupon U.S. Treasury 
fixed interest rate securities (adjusted to a constant maturity of ten years) 
published by the Federal Reserve Board during a quarter, or, if such rate is 
not published by the Federal Reserve Board, any Federal Reserve Bank or 
agency or department of the federal government selected by the Company. If 
the Company determines in good faith that the Ten-Year U.S. Treasury Rate 
cannot be calculated as provided above, then the rate shall be the arithmetic 
average of the per annum average yields to maturities, based upon closing 
asked prices on each business day during a quarter, for each actively traded 
marketable U.S. Treasury fixed interest rate security with a final maturity 
date not less than eight nor more than twelve years from the date of the 
closing asked prices as chosen and quoted for each business day in each such 
quarter in New York City by at least three recognized dealers in U.S. 
government securities selected by the Company.


                                     38



     "UBTI" means "unrelated trade or business income" as defined in Section 
512 of the Code.

     "Unaffiliated Directors" means those directors that are not affiliated, 
directly or indirectly, with the Manager or the TCW Group, 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 the TCW Group, and are not employed by or officers of the Company.

     "Uncommitted Secured Borrowings" means (i) reverse repurchase 
agreements, (ii) lines of credit, (iii) Dollar-Roll Agreements, and (iv) 
other secured financing transactions that generally do not commit the lender 
to continue to provide financing to the Company.

     "United States Holder" means a purchaser of the Common Stock that, for 
United States income tax purposes, is a United States person (i.e., is not a 
Foreign Holder).

     "VA" means the United States Veterans Administration.

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


                                      39



                                   SIGNATURES

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

                                          Apex Mortgage Capital, Inc.
                                          (Registrant)


Dated: March 31, 1999                     /s/ Philip A. Barach
                                          -------------------------------------
                                          Philip A. Barach
                                          President and Chief Executive Officer
                                          (Principal Executive Officer)


Dated: March 31, 1999                     /s/ Daniel K. Osborne
                                          -------------------------------------
                                          Daniel K. Osborne
                                          Executive Vice President
                                          Chief Operating Officer and
                                          Chief Financial Officer
                                          (Principal Accounting Officer)


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



Signature                               Capacity                               Date
- ---------                               --------                               ----
                                                                    
/s/Marc I. Stern                   Chairman of the Board                  March 31, 1999
- ---------------------------
Marc I. Stern

/s/Jeffrey E. Gundlach             Vice Chairman of the Board             March 31, 1999
- ---------------------------        Chief Investment Officer
Jeffrey E. Gundlach                

/s/Philip A. Barach                President and                          March 31, 1999
- ---------------------------        Chief Executive Officer
Philip A. Barach                   (Principal Executive Officer)

/s/Peter G. Allen*                 Director                               March 31, 1999
- ---------------------------
Peter G. Allen

/s/John C. Argue*                  Director                               March 31, 1999
- ---------------------------
John C. Argue

/s/John A. Gavin*                  Director                               March 31, 1999
- ---------------------------
John A. Gavin

/s/Carl C. Gregory III*            Director                               March 31, 1999
- ---------------------------
Carl C. Gregory III

  *By: /s/Daniel K. Osborne
       ---------------------
       Daniel K. Osborne
       Attorney-in-Fact



                                      40



                           APEX MORTGAGE CAPITAL, INC.


                              FINANCIAL STATEMENTS

                                       AND

                          INDEPENDENT AUDITORS' REPORT



                           FOR INCLUSION IN FORM 10-K

                                   FILED WITH

                       SECURITIES AND EXCHANGE COMMISSION

                                DECEMBER 31, 1998


                                       F-1



                           APEX MORTGAGE CAPITAL, INC.

                          INDEX TO FINANCIAL STATEMENTS





                                                                        PAGE
                                                                        ----
                                                                     
Independent Auditors' Report                                            F-3
Balance Sheets                                                          F-4
Statements of Operations                                                F-5
Statements of Stockholders' Equity                                      F-6
Statements of Cash Flows                                                F-7
Notes to Financial Statements                                           F-8



                                      F-2



INDEPENDENT AUDITORS' REPORT


To the Stockholders of
  Apex Mortgage Capital, Inc.


We have audited the accompanying balance sheets of Apex Mortgage Capital, 
Inc. (the "Company") as of December 31, 1998 and 1997 and the related 
statements of operations, stockholders' equity, and cash flows for the year 
ended December 31, 1998 and for the period from December 9, 1997 
(commencement of operations) to December 31, 1997. These financial statements 
are the responsibility of the Company's management. Our responsibility is to 
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing 
standards. Those standards require that we plan and perform the audit to 
obtain reasonable assurance about whether the financial statements are free 
of material misstatement. An audit includes examining, on a test basis, 
evidence supporting the amounts and disclosures in the financial statements. 
An audit also includes assessing the accounting principles used and 
significant estimates made by management, as well as evaluating the overall 
financial statement presentation. We believe that our audits provide a 
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in 
all material respects, the financial position of Apex Mortgage Capital, Inc. 
as of December 31, 1998 and 1997 and the results of its operations and its 
cash flows for the year ended December 31, 1998 and for the period from 
December 9, 1997 (commencement of operations) to December 31, 1997 in 
conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP

Los Angeles, California
March 8, 1999


                                    F-3




                           APEX MORTGAGE CAPITAL, INC.

                                 BALANCE SHEETS



                                                                                     DECEMBER 31, 1998       DECEMBER 31, 1997
                                                                                                       
ASSETS

         Cash and cash equivalents                                                      $ 12,679,000            $  3,085,000
         Mortgage-backed securities available-for-sale, at fair value (Note 3)           825,995,000             265,880,000
         Other investments available-for-sale, at fair value (Note 3)                     20,139,000                       -
         Interest Rate Caps (Note 4)                                                               -                 174,000
         Accrued interest receivable                                                       5,151,000               1,316,000
         Principal payments receivable                                                       937,000                       -
         Other assets                                                                        577,000                 852,000
                                                                                        ------------            ------------
                                                                                        $865,478,000            $271,307,000
                                                                                        ------------            ------------
                                                                                        ------------            ------------

LIABILITIES AND STOCKHOLDERS' EQUITY

     Liabilities

         Reverse repurchase agreements (Note 5)                                         $767,908,000            $ 87,818,000
         Payable for unsettled securities                                                    838,000              88,638,000
         Accrued interest payable                                                          6,173,000                 110,000
         Dividend payable                                                                  1,777,000                 268,000
         Accrued expenses and other liabilities                                              752,000               1,476,000
                                                                                        ------------            ------------
                                                                                         777,448,000             178,310,000
                                                                                        ------------            ------------

     Commitments and contingencies (Note 10)

     Stockholders' Equity

         Preferred Stock, par value $0.01 per share; 50,000,000 shares authorized;
              no shares outstanding
         Common Stock, par value $0.01 per share; 100,000,000 shares
              authorized; 6,700,100 shares outstanding (Notes 8 and 9)                        67,000                  67,000
         Additional paid-in-capital                                                       92,978,000              92,860,000
         Accumulated other comprehensive income                                            6,689,000                 188,000
         Accumulated dividend distributions in excess of net income                       (1,135,000)               (118,000)
         Treasury stock, at cost (947,100 shares) (Note 7)                               (10,569,000)                      -
                                                                                        ------------            ------------
                                                                                          88,030,000              92,997,000
                                                                                        ------------            ------------
                                                                                        $865,478,000            $271,307,000
                                                                                        ------------            ------------
                                                                                        ------------            ------------



See accompanying notes to financial statements

                                      F-4



                           APEX MORTGAGE CAPITAL, INC.

                            STATEMENTS OF OPERATIONS



                                                                              PERIOD FROM
                                                                           DECEMBER 9, 1997
                                                                             (COMMENCEMENT
                                                        YEAR ENDED         OF OPERATIONS) TO
                                                     DECEMBER 31, 1998     DECEMBER 31, 1997
                                                     -----------------     -----------------
                                                                     
Interest Income:
     Mortgage-backed securities                         $41,075,000          $   227,000
     Cash and cash equivalents                              710,000              201,000
                                                        -----------          -----------
                                                         41,785,000              428,000

INTEREST EXPENSE                                         36,007,000              111,000
                                                        -----------          -----------
NET INTEREST INCOME                                       5,778,000              317,000
                                                        -----------          -----------

GAIN ON INVESTMENT TRANSACTIONS, NET                      1,047,000                    -

OTHER INCOME                                                826,000                    -

GENERAL AND ADMINISTRATIVE EXPENSES:
     Management fee (Note 8)                                644,000               43,000
     Incentive fee (Note 8)                                 619,000                    -
     Audit and tax fees                                      75,000               45,000
     Insurance expense                                      267,000               20,000
     Directors' fees                                         70,000               15,000
     Stock option expense                                   118,000                7,000
     Other                                                  311,000               37,000
                                                        -----------          -----------
                                                          2,104,000              167,000
                                                        -----------          -----------

NET INCOME                                              $ 5,547,000          $   150,000
                                                        -----------          -----------
                                                        -----------          -----------

Net Income Per Share:
     Basic                                              $      0.90          $      0.02
                                                        -----------          -----------
                                                        -----------          -----------
     Diluted                                            $      0.90          $      0.02
                                                        -----------          -----------
                                                        -----------          -----------

Weighted Average Number of Shares Outstanding:
  (net of treasury shares)
     Basic                                                6,190,000            6,700,100
                                                        -----------          -----------
                                                        -----------          -----------
     Diluted                                              6,190,000            6,700,100
                                                        -----------          -----------
                                                        -----------          -----------

Dividends Declared Per Share                            $      1.07          $      0.04
                                                        -----------          -----------
                                                        -----------          -----------


See accompanying notes to financial statements


                                     F-5


                           APEX MORTGAGE CAPITAL, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
 PERIOD FROM DECEMBER 9, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997
                        AND YEAR ENDED DECEMBER 31, 1998





                                                                                  ACCUMULATED
                                                COMMON STOCK       ADDITIONAL        OTHER
                                           ----------------------    PAID-IN     COMPREHENSIVE
                                            SHARES      AMOUNT       CAPITAL        INCOME
                                           ---------  -----------  -----------  ---------------
                                                                    
Balance, December 9, 1997                        100   $      --    $   2,000      $      --

Issuance of common stock:

  Initial public offering,
    net of offering costs                  6,700,000      67,000   92,851,000             --

Issuance of stock options
   to non-employees (Note 9)                      --          --        7,000             --

Net unrealized gain on
   mortgage-backed securities
   available-for-sale                             --          --           --        188,000

Net income                                        --          --           --             --

Other Comprehensive Income

Dividends declared                                --          --           --             --
                                          ----------   ---------   -----------     ----------

Balance, December 31, 1997                 6,700,100      67,000   92,860,000        188,000

Repurchases of common stock                       --          --           --             --

Issuance of stock options
   to non-employees (Note 9)                      --          --      118,000             --

Net income                                        --          --           --             --

Other comprehensive income:
  Unrealized gain (loss) on
    investments available-for-sale
    during the year                               --          --           --      6,501,000

Comprehensive income

Dividends declared                                --          --           --             --
                                          ----------   ---------   -----------     ----------

Balance, December 31, 1998                 6,700,100   $  67,000   $92,978,000     $6,689,000
                                          ----------   ---------   -----------     ----------
                                          ----------   ---------   -----------     ----------


                                           ACCUMULATED
                                             DIVIDEND
                                           DISTRIBUTION                  TREASURY
                                           IN EXCESS OF  COMPREHENSIVE   STOCK, AT
                                            NET INCOME       INCOME        COST          TOTAL
 
                                           ------------  --------------  ---------       ---------
 
                                                                             
Balance, December 9, 1997                   $       --     $       --    $         --    $     2,000
 
Issuance of common stock:
  Initial public offering,
    net of offering costs                           --             --              --     92,918,000
  
Issuance of stock options
   to non-employees (Note 9)                        --             --              --          7,000
 
Net unrealized gain on
   mortgage-backed securities
   available-for-sale                               --        188,000              --        188,000
  
Net income                                     150,000        150,000              --        150,000

                                                           ----------
Other Comprehensive Income                                 $  338,000
                                                           ----------
                                                           ----------

Dividends declared                            (268,000)                            --       (268,000)
                                           ------------                  ------------    -----------

Balance, December 31, 1997                    (118,000)                            --     92,997,000
 
Repurchases of common stock                                        --     (10,569,000)   (10,569,000)

Issuance of stock options
   to non-employees (Note 9)                                       --                        118,000
 
Net income                                   5,547,000      5,547,000              --      5,547,000
 
Other comprehensive income:
  Unrealized gain (loss) on
    investments available-for-sale
    during the year                                         6,501,000              --      6,501,000
 
                                                          -----------
Comprehensive income                                      $12,048,000
                                                          -----------
                                                          -----------
Dividends declared                          (6,564,000)                            --     (6,564,000)
                                           ------------                  ------------    -----------

Balance, December 31, 1998                 $(1,135,000)                  $(10,569,000)   $88,030,000
                                           ------------                  ------------    -----------
                                           ------------                  ------------    -----------



                                     F-6

                                       
                          APEX MORTGAGE CAPITAL, INC.

                           STATEMENTS OF CASH FLOWS




                                                                                                          PERIOD FROM
                                                                                                       DECEMBER 9, 1997
                                                                                                         (COMMENCEMENT
                                                                                YEAR ENDED             OF OPERATIONS) TO
                                                                            DECEMBER 31, 1998          DECEMBER 31, 1997
                                                                            -----------------          -----------------
                                                                                                 
OPERATING ACTIVITIES:
     Net Income                                                              $     5,547,000           $       150,000
     Adjustments to reconcile net income to net cash
      provided by operating activities:
             Amortization                                                          3,533,000                    15,000
             Gain on investment transactions, net                                 (1,047,000)                        -
             Change in assets and liabilities:                                                                       -
                Accrued interest receivable                                       (3,835,000)               (1,316,000)
                Other assets                                                         275,000                  (852,000)
                Accrued interest payable                                           6,063,000                   110,000
                Accrued expenses and other liabilities                              (724,000)                1,476,000
                                                                            -----------------          -----------------
                Net cash provided by (used in) operating activities                9,812,000                  (417,000)
                                                                            -----------------          -----------------
INVESTING ACTIVITIES:
     Purchase of other investments                                               (19,716,000)                        -
     Purchase of interest rate cap agreements                                        (80,000)                 (175,000)
     Purchase of mortgage-backed securities                                   (1,511,359,000)             (177,061,000)
     Proceeds from sales of other investments                                      1,662,000                         -
     Proceeds from sales of mortgage-backed securities                           594,201,000                         -
     Principal payments on mortgage-backed securities                            270,608,000                         -
                                                                            -----------------          -----------------
                Net cash used in investing activities                           (664,684,000)             (177,236,000)
                                                                            -----------------          -----------------

FINANCING ACTIVITIES:
     Net proceeds from reverse repurchase agreements                             680,090,000                87,818,000
     Dividend distributions                                                       (5,055,000)                        -
     Proceeds from stock offering, Net                                                     -                92,918,000
     Purchase of treasury stock                                                  (10,569,000)                        -
                                                                            -----------------          -----------------
                Net cash provided by financing activities                        664,466,000               180,736,000
                                                                            -----------------          -----------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                                          9,594,000                 3,083,000

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD                                   3,085,000                     2,000
                                                                            -----------------          -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD                                   $    12,679,000           $     3,085,000
                                                                            -----------------          -----------------
                                                                            -----------------          -----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
     Cash paid for interest                                                  $    29,944,000           $         2,000
                                                                            -----------------          -----------------
                                                                            -----------------          -----------------
NONCASH INVESTING AND FINANCING ACTIVITIES:
     Net unrealized gain on investments
      available-for-sale                                                     $     6,501,000           $       188,000
                                                                            -----------------          -----------------
                                                                            -----------------          -----------------
     Securities purchased, not yet settled                                   $    87,800,000           $    88,638,000
                                                                            -----------------          -----------------
                                                                            -----------------          -----------------
     Principal payments, not yet received                                    $       937,000                         -
                                                                            -----------------          -----------------
                                                                            -----------------          -----------------
     Dividends declared, not yet paid                                        $     1,777,000           $       268,000
                                                                            -----------------          -----------------
                                                                            -----------------          -----------------



See accompanying notes to financial statements


                                       F-7





                           APEX MORTGAGE CAPITAL, INC.


                          NOTES TO FINANCIAL STATEMENTS




NOTE 1 - THE COMPANY

         Apex Mortgage Capital, Inc. (the "Company") was incorporated in
         Maryland on September 15, 1997. The Company commenced its operations of
         acquiring and managing a portfolio of mortgage assets on December 9,
         1997, upon receipt of the net proceeds from the initial public offering
         of the Company's common stock. The Company uses its equity capital and
         borrowed funds to seek to generate income based on the difference
         between the yield on its mortgage-backed securities and the cost of its
         borrowings. The Company is structured for tax purposes as a real estate
         investment trust ("REIT") under the Internal Revenue Code of 1986, as
         amended (the "Code").



NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


     CASH AND CASH EQUIVALENTS

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

     MORTGAGE-BACKED SECURITIES

         The Company's mortgage-backed securities consist of securities backed
         by single-family residential real estate mortgage loans.
         Mortgage-backed securities are recorded at cost on the date the assets
         are purchased. Realized gains and losses on sales of the securities are
         determined on a specific identification basis. Substantially all of the
         Company's mortgage-backed securities are expected to qualify as real
         estate assets under the REIT Provisions of the Code.

         Interest income is accrued based on the outstanding principal amount of
         the mortgage-backed securities and their contractual terms. Premiums
         and discounts are amortized into interest income over the lives of the
         securities using the effective yield method adjusted for the effects of
         estimated prepayments.

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

     OTHER INVESTMENTS

         The Company's other investments consist primarily of equity securities
         issued by other real estate investment trusts and securities generally
         collateralized by mortgage assets.

         Dividend income on equity securities is recorded on the declaration
         date. Interest income on other securities is accrued using the
         effective interest method applied prospectively based on current market
         assumptions. Both dividend and interest income earned on other
         investments is included in other income.

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


                                      F-8



     INTEREST RATE HEDGING TRANSACTIONS

         The Company enters into interest rate swap and interest rate cap
         agreements in order to mitigate the impact of rising interest rates on
         the cost of its short-term borrowings. Amounts payable or receivable
         from such agreements are accounted for on an accrual basis and
         recognized as a net adjustment to interest expense. Premiums paid for
         cap agreements accounted for as hedges are recorded as interest rate
         caps and amortized over the lives of such agreements as an adjustment
         to interest expense.

     STOCK BASED COMPENSATION

         The Company grants stock options to its directors and officers and to
         certain directors, officers and employees of its investment manager and
         the investment manager itself, as discussed in Note 9. Options granted
         to directors of the Company are accounted for using the intrinsic
         method, and generally no compensation expense is recognized in the
         statement of operations for such options. Other options are accounted
         for using the fair value method; such options are measured at their
         fair value when they are granted and are recognized as a general and
         administrative expense during the periods when the options vest and the
         related services are performed.

     FEDERAL AND STATE INCOME TAXES

         The Company has elected to be taxed as a REIT and generally is not be
         subject to federal and state taxes on its income to the extent it
         distributes annually 95% of its predistribution taxable income to
         stockholders and meets certain other asset, income and stock ownership
         tests. As such, no accrual for income taxes has been included in the
         financial statements.

     NET INCOME PER SHARE

         Basic net income per share is calculated on the basis of the weighted
         average number of common shares outstanding during each period. Diluted
         net income per share includes the additional dilutive effect of common
         stock equivalents and outstanding stock options is calculated using the
         treasury stock method.

         Stock options that could potentially dilute net income per share
         in the future were not included in the computation of diluted net
         income per share in 1998 and 1997 because they would have been
         antidilutive for the period presented.


     DEFERRED ORGANIZATION COSTS

         Costs incurred in connection with the organization of the Company are
         deferred and amortized over five years using the straight line method.
         Unamortized amounts are included on the balance sheet in other assets.
         Amortization expense is included in other general and administrative
         expenses in the statement of operations.

     INCOME RECOGNITION

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

     CREDIT RISK

         At December 31, 1998, the Company has limited its exposure to credit
         losses on its portfolio of mortgage-backed securities by purchasing
         securities that are either rated "AAA" by at least one nationally
         recognized rating agency or are issued by the Federal Home Loan
         Mortgage Corporation ("FHLMC"), Fannie Mae (formerly known as the
         Federal National Mortgage Corporation) or the Government National
         Mortgage Association ("GNMA"). The payment of principal and interest on
         the FHLMC, Fannie Mae and GNMA securities are guaranteed by those
         respective agencies. At December 31, 1998, all of the Company's
         mortgage-backed securities have an actual or implied "AAA" rating.

     USE OF ESTIMATES

         The preparation of financial statements in conformity with generally
         accepted accounting principles requires management to make estimates
         and assumptions that affect the reported amounts of assets and
         liabilities at the date of the financial statements and the reported
         amounts of revenues and expenses during the reporting period. Actual
         results could differ from those estimates.


                                        F-9



     COMPREHENSIVE INCOME

         During the year ended December 31, 1998, the Company adopted SFAS No.
         130, REPORTING COMPREHENSIVE INCOME. This statement establishes
         standards for reporting and display of comprehensive income and its
         components in a full set of general-purpose financial statements.
         Comprehensive income is defined as "the change in equity of a business
         enterprise during a period from transactions and other events and
         circumstances from non-owner sources. It includes all changes in equity
         during a period except those resulting from investments by owners and
         distributions to owners."

     RECENTLY ISSUED ACCOUNTING STANDARDS

         In June 1998, the Financial Accounting Standards Board issued SFAS No.
         133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. The
         Statement establishes accounting and reporting standards requiring that
         every derivative instrument (including certain derivative instruments
         embedded in other contracts) be recorded in the balance sheet as either
         an asset or liability measured at its fair value. The Statement
         requires that changes in the derivative's fair value be recognized
         currently in earnings unless specific hedge accounting criteria are
         met. Special accounting for qualifying hedges allows a derivative's
         gains and losses to offset related results on the hedged item in the
         income statement, and requires that a company must formally document,
         designate, and assess the effectiveness of transactions that receive
         hedge accounting. SFAS No. 133 is effective for fiscal years beginning
         after June 15, 1999. A company may also implement the Statement as of
         the beginning of any fiscal quarter after issuance (that is, fiscal
         quarters beginning June 16, 1998 and thereafter). Statement 133 cannot
         be applied retroactively. Statement 133 must be applied to (a)
         derivative instruments and (b) certain derivative instruments embedded
         in hybrid contracts that were issued, acquired, or substantively
         modified after December 31, 1997 (and, at the Company's election,
         before January 1, 1998). The Company will adopt the reporting
         requirements of SFAS No. 133 by the first quarter of 2000. An earlier
         adoption may be made if circumstances warrant. The Company expects the
         impact of the adoption of the reporting requirements of SFAS No. 133 to
         include the recording of the approximate fair value of the Company's
         interest rate swaps as comprehensive income.

NOTE 3 - MORTGAGE-BACKED SECURITIES AND OTHER INVESTMENTS

         At December 31, 1998, mortgage-backed securities consisted of the
         following:


                                         Adjustable Rate          Fixed Rate
                                                Mortgage            Mortgage
        (in thousands)                        Securities          Securities            Total
                                     ---------------------------------------------------------
                                                                        
        Principal Amount                $  61,590               $ 758,110           $ 819,700
        Unamortized Premium                   772                     800               1,572
                                     ---------------------------------------------------------
        Amortized Cost                     62,362                 758,910             821,272
        Unrealized Gains                       86                   4,762               4,848
        Unrealized Losses                    (110)                    (15)               (125)
                                     ---------------------------------------------------------
        Fair Value                      $  62,338               $ 763,657           $ 825,995
                                     ---------------------------------------------------------
                                     ---------------------------------------------------------


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


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


         The contractual final maturity of the mortgage loans supporting the
         mortgage-backed securities is generally between 15 and 30 years at
         origination. Because of prepayments on the underlying mortgage loans,
         the actual weighted-average maturity is expected to be less.


                                       F-10




         The adjustable rate mortgage-backed securities are typically subject to
         periodic and lifetime caps that limit the amount an adjustable rate
         mortgage-backed security's interest rate can change during any given
         period and over the life of the asset. At December 31, 1998, the
         average periodic cap on the adjustable rate mortgage assets was 2.0%
         per annum and the average lifetime cap was equal to 11.3%. At December
         31, 1997, the average periodic cap on the adjustable rate mortgage
         assets was 2.0% per annum and the average lifetime cap was equal to
         11.4%.

         During the year ended December 31, 1998 the Company realized $972,000
         in gains on the sale of $594,201,000 of mortgage-backed securities
         which were classified as available-for-sale.

         At December 31, 1998, other investments consisted of the following:



        (in thousands)
                               Equity Securities    Other Securities        Total
                               --------------------------------------------------
                                                               
        Amortized Cost             $ 14,154             $  4,019         $ 18,173
        Unrealized Gains              2,268                    0            2,268
        Unrealized Losses                 0                 (302)            (302)
                               --------------------------------------------------
        Fair Value                 $ 16,422             $  3,717         $ 20,139
                               --------------------------------------------------
                               --------------------------------------------------

         The Other securities generally have an original maturity of five years
         subject to certain acceleration provisions. The expected average
         remaining maturity at December 31, 1998 was approximately four years.

         During the year ended December 31, 1998, the Company realized $303,000
         in gains on the sale of $1,662,000 of Other Investments which were
         classified as available-for-sale.

NOTE 4 - INTEREST RATE CAP AGREEMENTS

         Interest rate cap agreements include the carrying value of purchased
         interest rate caps, entered into by the Company in order to mitigate
         the impact of rising interest rates on the cost of its short-term
         borrowings. As discussed in Note 10, the Company has entered into
         certain interest rate swap transactions. The execution of these swaps
         eliminated the need for the cap protection previously purchased.
         Accordingly, the interest rate cap agreements no longer qualify for
         hedge accounting and were written down to zero during the year ended
         December 31, 1998 which approximates their fair value. A $228,000
         charge for the write off is included in Gain on Investment
         Transactions, net in the Statement of Operations.

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


                                 At December 31, 1998      At December 31, 1997
                                 ----------------------------------------------
                                                      
         Notional Amount            $900,000,000               $500,000,000
         Average Contract Rate          10.4%                      10.0%
         Average Final Maturity    January 24, 2002          December 24, 2001


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


NOTE 5 - REVERSE REPURCHASE AGREEMENTS

         The Company has entered into reverse repurchase agreements to finance
         certain of its mortgage-backed securities. These agreements are secured
         by a portion of the Company's mortgage-backed securities and bear
         interest rates that have historically moved in close relationship to
         LIBOR.

         At December 31, 1998, the Company had outstanding $767,908,000 of
         reverse repurchase agreements with a weighted average current borrowing
         rate of 5.34% and a maturity of 2.9 months. The reverse repurchase
         agreements were collateralized by mortgage-backed securities with an
         estimated fair value of $800,260,000.


                                      F-11




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

         For the year ended December 31, 1998, the average reverse repurchase
         agreement balance was $624,865,000 with a weighted average interest
         cost of 5.58%. The maximum reverse repurchase agreement balance
         outstanding during the year ended December 31, 1998 was $823,296,000.

         For the period ended December 31, 1997, the average reverse repurchase
         agreement balance was $29,895,000 with a weighted average interest cost
         of 5.75%. The maximum reverse repurchase agreement balance outstanding
         during the period ended December 31, 1997 was $87,818,000.


NOTE 6 - FAIR VALUE OF FINANCIAL INSTRUMENTS

         The following table presents the amortized cost and estimated fair
         values of the Company's financial instruments. SFAS No. 107,
         DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, defines the fair
         value of a financial instrument as the amount at which the instrument
         could be exchanged in a current transaction between willing parties,
         other than in a forced or liquidation sale (dollars in thousands):



                                          At December 31, 1998                 At December 31, 1997
                                       ----------------------------      -----------------------------
                                       Carrying Value    Fair Value      Carrying Value     Fair Value
                                       --------------    ----------      --------------     ----------
                                                                                 
        Mortgage-backed Securities        $821,272      $825,995            $265,692         $265,880
        Interest Rate Caps                       -             -                 174            174
        Other Investments                   18,173        20,139                   -              -
        Interest Rate Swaps                      -       (9,994)                   -              -


         The Company bases its fair value estimates for mortgage-backed
         securities, other investments and interest rate swaps primarily on
         third party price indications provided by dealers who make markets in
         these financial instruments when such indications are available.
         However, the fair value reported reflects estimates and may not
         necessarily be indicative of the amounts the Company could realize in a
         current market exchange. Cash and cash equivalents, interest receivable
         and reverse repurchase agreements are reflected in the financial
         statements at their costs, which approximates their fair value because
         of the short-term nature of these instruments.



NOTE 7 - STOCK REPURCHASE PROGRAM

         On January 13, 1998, the Company's Board of Directors authorized a
         program to repurchase up to 750,000 shares of the Company's common
         stock. On September 16, 1998, the Company's Board of Directors
         authorized a program to repurchase up to an additional 750,000 shares
         of the Company's common stock having completed the original repurchase
         program of 750,000 shares.

         The Company repurchased 947,100 shares during the year ended December
         31, 1998. The average price per share repurchased during the year ended
         December 31, 1998 was $11.16. The repurchased shares are held in
         treasury at cost in the financial statements herein.

         An additional 552,900 shares are currently authorized for potential
         repurchase in the future. The Company may continue to repurchase shares
         in the future when market conditions warrant.


                                       F-12



NOTE 8 - TRANSACTIONS WITH AFFILIATES

         The Company has entered into a Management Agreement (the "Management
         Agreement") with TCW Investment Management Company (the "Manager"), a
         wholly owned subsidiary of The TCW Group, Inc., under which the Manager
         will manage its day-to-day operations, subject to the direction and
         oversight of the Company's Board of Directors. The Company will pay the
         Manager annual base management compensation, payable monthly in
         arrears, equal to 3/4 of 1% of the average net invested capital as
         further defined in the Management Agreement.

         The Company paid the Manager $644,000 in base management compensation
         during the year ended December 31, 1998. The Company paid the Manager
         $43,000 in base management compensation for the period ended December
         31, 1997.

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

         The Company accrued $619,000 for incentive compensation to the Manager
         for the year ended December 31, 1998. The Company did not pay or accrue
         incentive compensation to the Manager for the period ended December 31,
         1997.

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

         The Company's other investments include securities that are issued by
         special purpose companies that invest primarily in mortgage-related
         assets. An affiliate of the Manager serves as the investment manager to
         these companies and is paid fees in connection with such services. The
         Company does not anticipate paying any management fees directly to any
         affiliate of the Manager in connection with these investments.


NOTE 9 - STOCK OPTIONS

         The Company has adopted a stock option plan (the "Amended and Restated
         1997 Stock Option Plan") that provides for the grant of both qualified
         incentive stock options that meet the requirements of Section 422 of
         the Code, and non-qualified stock options, stock appreciation rights
         and dividend equivalent rights. Stock options may be granted to
         directors, officers and key employees of the Company, the Manager, its
         directors, officers and key employees.

         The exercise price for any stock option granted under the Amended and
         Restated 1997 Stock Option Plan may not be less than 100% of the fair
         market value of the shares of common stock at the time the option is
         granted. Each option must terminate no more than ten years from the
         date it is granted. Subject to anti-dilution provisions for stock
         splits, stock dividends and similar events, the Amended and Restated
         1997 Stock Option Plan authorizes the grant of options to purchase an
         aggregate 1,000,000 shares of common stock.

         The Company recognized compensation expense of (i) $118,000 during the
         year ended December 31, 1998 for stock options granted to
         non-employees, and (ii) $7,000 during the period ended December 31,
         1997 for stock options granted to non-employees.

         For the year ended December 31, 1998, options to purchase 112,000
         shares of the Company's common stock were granted to directors of the
         Company and options to purchase 58,000 shares were granted to officers
         of the Company and officers and key employees of the Manager. The
         exercise price of the options granted during 1998 was $10.38 per share.
         All of the options granted during 1998 include dividend equivalent
         rights that entitle the option holder to receive a cash payment equal
         to the dividends declared on the Company's common stock multiplied by
         the number of options held until the options are exercised or expire.

         The fair value of each option granted during 1998 was estimated to be
         $5.32 as of the grant date using the Black-Scholes option pricing model
         with the following assumptions: dividend yield of 0% per annum (to
         account for the dividend equivalent rights); expected volatility of
         30%; risk free interest rate of 4.57% per annum; and an expected life
         of 10 years.


                                       F-13




         The options granted during 1998 expire in December 2008 and vest in two
         equal installments during the month of December in 1999 and 2000.

         For the year ended December 31, 1997, options to purchase 210,000
         shares of the Company's common stock were granted to directors of the
         Company and options to purchase 190,000 shares were granted to officers
         of the Company and officers and key employees of the Manager. The
         exercise price of the options granted during 1997 was $15 per share.

         The fair value of each option granted during 1997 was estimated to be
         $1.05 as of the grant date using the Black-Scholes option pricing model
         with the following assumptions: dividend yield of 11% per annum;
         expected volatility of 30%; risk free interest rate of 5.82% per annum;
         and an expected life of 10 years.

         The options granted during 1997 expire in December 2007 and vest in
         three equal installments during the month of February in 1999, 2000 and
         2001.

         If the Company had recorded stock option grants to Company directors at
         fair value and related compensation expense, the pro forma effect on
         the Company's net income and earnings per share would have been as
         follows:


                                                               Year Ended            Period Ended
                                                            December 31, 1998      December 31, 1997
                                                           ------------------------------------------
                                                                                
        Net income - as reported                              $5,547,000               $150,000
        Net income - pro forma                                 5,411,000                143,000

        Basic and diluted earnings per share - as reported         $0.90                  $0.02
        Basis and diluted earnings per share - pro forma           $0.87                  $0.02


         Information regarding stock option activity during the year ended 
         December 31, 1998 and the period ended December 31, 1997 is as follows:


                                                                          Weighted
                                                                           Average
                                                         Shares         Exercise Price
                                                       ---------------------------------
                                                                       
        Options Granted During 1997                      400,000             $15.00
        Exercised                                            -                  -
        Expired                                              -                  -
                                                       ---------------------------------
        Options Outstanding at December 31, 1997         400,000              15.00

        Options Granted During 1998                      170,000              10.38
        Exercised                                            -                  -
        Expired                                              -                  -
        Options Outstanding at December 31, 1998         570,000             $13.62
                                                       ---------------------------------
                                                       ---------------------------------



                                       F-14



NOTE 10 - CONTRACTUAL COMMITMENTS

         During the year ended December 31, 1998 the Company entered into
         interest rate swap agreements with original notional amounts as stated
         below. Under these agreements, the Company receives a floating rate and
         pays a fixed rate. (Amounts are in thousands)


            Current                                                                         Termination          Unrealized
        Notional Amount               Type              Fixed Rate       Floating Rate         Date            Gains (Losses)
        ---------------------------------------------------------------------------------------------------------------------
                                                                                                   
           $ 95,000            Interest Rate Swap         5.880%           1Mo LIBOR          5/29/00             $ (1,058)
             30,000            Interest Rate Swap         5.905%           1Mo LIBOR          6/30/00                 (378)
             28,204            Interest Rate Swap         5.765%           1Mo LIBOR          7/25/00                 (282)
             61,599            Interest Rate Swap         5.775%           1Mo LIBOR          8/25/00                 (653)
             47,170            Interest Rate Swap         5.710%           1Mo LIBOR          8/28/00                 (456)
             60,000            Interest Rate Swap         5.900%           1Mo LIBOR          5/18/01               (1,086)
             97,118            Interest Rate Swap         5.883%           1Mo LIBOR          6/25/01               (1,564)
            117,755            Interest Rate Swap         5.905%           1Mo LIBOR          5/25/01               (1,720)
             53,394            Interest Rate Swap         5.750%           1Mo LIBOR          7/14/01                 (709)
             65,000            Interest Rate Swap         5.791%           1Mo LIBOR          6/25/01               (1,045)
             48,350            Interest Rate Swap         5.960%           1Mo LIBOR          5/15/02               (1,043)
         ------------                                                                                             -----------
            $703,590                                                                                               $(9,994)
         ------------                                                                                             -----------
         ------------                                                                                             -----------


         The Company is generally required to deposit collateral with the swap
         agreement counter-parties in an amount at least equal to the amount of
         any unrealized losses. At December 31, 1998, the Company had securities
         with a fair market value of $17,327,000 on deposit with its
         counter-parties. If unrealized losses on the interest rate swap
         agreements were to increase, the Company would be required to deposit
         additional collateral.

NOTE 11 - SUMMARIZED QUARTERLY RESULTS (UNAUDITED)

         The following is a presentation of the quarterly results of operations
         (amounts are in thousands except per share amounts):


                                                   Year Ended December 31, 1998
                                       -------------------------------------------------
                                        Fourth        Third        Second         First
                                       Quarter       Quarter      Quarter       Quarter
                                       --------------------------------------------------
                                                                  
Interest Income                        $ 13,738     $ 13,642     $  9,498     $  4,907
Interest Expense                         11,726       11,271        8,999        4,011
                                       --------     --------     --------     --------
     Net Interest Income                  2,012        2,371          499          896
                                       --------     --------     --------     --------
Gain on Investment Transaction, net         571            7          469            -

Other Income                                640          186            -            -

General and Administrative Expenses        (841)        (572)        (359)        (332)

                                       --------     --------     --------     --------
     Net Income                        $  2,382     $  1,992     $    609     $    564
                                       --------     --------     --------     --------
                                       --------     --------     --------     --------

Basic and Diluted EPS                  $   0.41     $   0.33     $   0.10     $   0.09
                                       --------     --------     --------     --------
                                       --------     --------     --------     --------

Average Number of Shares Outstanding      5,761        6,022        6,387        6,603
  (net of treasury shares)
                                       --------     --------     --------     --------
                                       --------     --------     --------     --------

Dividend Declared Per Share            $   0.30     $   0.27     $   0.25     $   0.25
                                       --------     --------     --------     --------
                                       --------     --------     --------     --------


                                       F-15

EX-10.1

                                                                  EXHIBIT 10.1
                                       
                            APEX MORTGAGE CAPITAL, INC.
                      FIRST AMENDMENT TO MANAGEMENT AGREEMENT


     This First Amendment to the Management Agreement between APEX MORTGAGE
CAPITAL, INC., a Maryland corporation (the "COMPANY"), and TCW INVESTMENT
MANAGEMENT COMPANY, a California corporation (the "MANAGER") executed December
9, 1997 is entered into as of December 16, 1998 by the Company and the Manager
pursuant to section 26 of the Management Agreement.

     The Management Agreement is amended as follows:
  
          1.4  "Average Net Invested Capital" means for any period (i) the
          arithmetic average of the sum of the gross proceeds of the offerings
          of its equity securities by the Company, after deducting any
          underwriting discounts and commissions and other expenses and costs
          relating to such offering, plus (A) the Company's retained earnings
          (taking into account any losses incurred) and (B) any non-cash charges
          or reserves, including depreciation, mark-to-market adjustments and
          unrealized credit loss, computed by taking the average of such values
          at the end of each month during such period, plus (ii) any unsecured
          debt approved by a majority of the Unaffiliated Directors to be
          included in Average Net Invested Capital, minus (iii) the cumulative 
          amounts paid by the Company to repurchase its shares.

          1.5  "Average Net Worth" means for any period the arithmetic average
          of the sum of the gross proceeds from the offerings of its equity
          securities by the Company, before deducting any underwriting discounts
          and commissions and other expenses and costs relating to the
          offerings, plus the Company's retained earnings (without taking into
          account any losses incurred in prior periods) computed by taking the
          average of such values at the end of each month during such period,
          minus the cumulative amounts paid by the Company to repurchase its
          shares. 
  
     IN WITNESS WHEREOF, the parties have executed this First Amendment to the
Management Agreement as of the effective date.

                         APEX MORTGAGE CAPITAL, INC.

  
                         By: /s/ Daniel K. Osborne
                             --------------------------------------
                             Daniel K. Osborne
                             Executive Vice President

                         TCW INVESTMENT MANAGEMENT COMPANY


                         By: /s/ Alvin R. Albe, Jr.
                             --------------------------------------
                             Alvin R. Albe, Jr.
                             President

EX-10.6

                                                                 EXHIBIT 10.6
                                       
                            APEX MORTGAGE CAPITAL, INC.
                                          
                                AMENDED AND RESTATED

                               1997 STOCK OPTION PLAN








                                       
                                 TABLE OF CONTENTS




                                                                                 PAGE
                                                                           
1.   The Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1

     1.1       Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  1

     1.2       Administration and Authorization; Power and Procedure . . . . . . .  1
               1.2.1     Committee . . . . . . . . . . . . . . . . . . . . . . . .  1
               1.2.2     Plan Awards; Interpretation; Powers of Committee. . . . .  1
               1.2.3     Binding Determinations. . . . . . . . . . . . . . . . . .  2
               1.2.4     Reliance on Experts . . . . . . . . . . . . . . . . . . .  2
               1.2.5     Delegation. . . . . . . . . . . . . . . . . . . . . . . .  2

     1.3       Participation . . . . . . . . . . . . . . . . . . . . . . . . . . .  2
     1.4       Shares Available for Awards; Share Limits . . . . . . . . . . . . .  3
               1.4.1     Shares Available. . . . . . . . . . . . . . . . . . . . .  3
               1.4.2     Share Limits. . . . . . . . . . . . . . . . . . . . . . .  3
               1.4.3     Limitation on Ownership . . . . . . . . . . . . . . . . .  3
               1.4.4     Share Reservation; Replenishment and Reissue of
                         Unvested Awards . . . . . . . . . . . . . . . . . . . . .  3

     1.5       Grant of Awards . . . . . . . . . . . . . . . . . . . . . . . . . .  4
     1.6       Award Period. . . . . . . . . . . . . . . . . . . . . . . . . . . .  4

     1.7       Limitations on Exercise and Vesting of Awards . . . . . . . . . . .  4
               1.7.1     Provisions for Exercise . . . . . . . . . . . . . . . . .  4
               1.7.2     Procedure . . . . . . . . . . . . . . . . . . . . . . . .  4
               1.7.3     Fractional Shares/Minimum Issue . . . . . . . . . . . . .  4

     1.8       Acceptance of Notes to Finance Exercise . . . . . . . . . . . . . .  4
               1.8.1     Principal . . . . . . . . . . . . . . . . . . . . . . . .  5
               1.8.2     Term. . . . . . . . . . . . . . . . . . . . . . . . . . .  5
               1.8.3     Recourse; Security; Compliance. . . . . . . . . . . . . .  5
               1.8.4     Termination of Employment . . . . . . . . . . . . . . . .  5

     1.9       No Transferability; Limited Exception to Transfer Restrictions. . .  5
               1.9.1     Limit On Exercise and Transfer. . . . . . . . . . . . . .  5
               1.9.2     Exceptions. . . . . . . . . . . . . . . . . . . . . . . .  6
               1.9.3     Further Exceptions to Limits On Transfer. . . . . . . . .  6

2.   Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6

     2.1       Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6

     2.2       Option Price. . . . . . . . . . . . . . . . . . . . . . . . . . . .  6
               2.2.1     Pricing Limits. . . . . . . . . . . . . . . . . . . . . .  6
               2.2.2     Payment Provisions. . . . . . . . . . . . . . . . . . . .  6

                                       i



                                                                           
     2.3       Limitations on Grant and Terms of Incentive Stock Options . . . . .  7
               2.3.1     $100,000 Limit. . . . . . . . . . . . . . . . . . . . . .  7
               2.3.2     Option Period . . . . . . . . . . . . . . . . . . . . . .  7
               2.3.3     Other Code Limits . . . . . . . . . . . . . . . . . . . .  7

     2.4       Limits on 10% Holders . . . . . . . . . . . . . . . . . . . . . . .  7

     2.5       Option Repricing/Cancellation and Regrant/Waiver of 
               Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . .  8

     2.6       Effects of Termination of Employment; Termination of Subsidiary
               Status; Discretionary Provisions. . . . . . . . . . . . . . . . . .  8
               2.6.1     Options - Resignation or Dismissal. . . . . . . . . . . .  8
               2.6.2     Options - Death or Disability . . . . . . . . . . . . . .  8
               2.6.3     Options - Retirement. . . . . . . . . . . . . . . . . . .  8
               2.6.4     Certain SARs. . . . . . . . . . . . . . . . . . . . . . .  9
               2.6.5     Other Awards. . . . . . . . . . . . . . . . . . . . . . .  9
               2.6.6     Committee Discretion. . . . . . . . . . . . . . . . . . .  9
     
     2.7       Options and Rights in Substitution for Stock Options Granted by
               Other Corporations. . . . . . . . . . . . . . . . . . . . . . . . .  9

3.   Stock Appreciation Rights (Including Limited Stock Appreciation Rights. . . .  9

     3.1       Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  9

     3.2       Exercise of Stock Appreciation Rights . . . . . . . . . . . . . . .  9
               3.2.1     Exercisability. . . . . . . . . . . . . . . . . . . . . .  9
               3.2.2     Effect on Available Shares. . . . . . . . . . . . . . . . 10
               3.2.3     Stand-Alone SARs. . . . . . . . . . . . . . . . . . . . . 10
               3.2.4     Proportionate Reduction . . . . . . . . . . . . . . . . . 10

     3.3       Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
               3.3.1     Amount. . . . . . . . . . . . . . . . . . . . . . . . . . 10
               3.3.2     Form of Payment . . . . . . . . . . . . . . . . . . . . . 10

     3.4       Limited Stock Appreciation Rights . . . . . . . . . . . . . . . . . 10

4.   Restricted Stock Awards . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

     4.1       Grants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

     4.2       Restrictions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
               4.2.1     Pre-Vesting Restraints. . . . . . . . . . . . . . . . . . 11
               4.2.2     Dividend and Voting Rights. . . . . . . . . . . . . . . . 11
               4.2.3     Cash Payments . . . . . . . . . . . . . . . . . . . . . . 11

     4.3       Return to the Corporation . . . . . . . . . . . . . . . . . . . . . 12

5.   Performance Share Awards; Stock Units; Stock Bonuses. . . . . . . . . . . . . 12

     5.1       Grants of Performance Share Awards. . . . . . . . . . . . . . . . . 12

     5.2       Special Performance-Based Share Awards. . . . . . . . . . . . . . . 12
               5.2.1     Eligible Class. . . . . . . . . . . . . . . . . . . . . . 13
               5.2.2     Maximum Award . . . . . . . . . . . . . . . . . . . . . . 13



                                       ii



                                                                           
               5.2.3     Committee Certification . . . . . . . . . . . . . . . . . 13
               5.2.4     Terms and Conditions of Awards. . . . . . . . . . . . . . 13
               5.2.5     Stock Payout Features . . . . . . . . . . . . . . . . . . 13
               5.2.6     Adjustments for Material Changes. . . . . . . . . . . . . 13

     5.3       Grants of Stock Bonuses . . . . . . . . . . . . . . . . . . . . . . 13

     5.4       Deferred Payments . . . . . . . . . . . . . . . . . . . . . . . . . 14

     5.5       Cash Bonus Awards . . . . . . . . . . . . . . . . . . . . . . . . . 14
               5.5.1     Performance Goals . . . . . . . . . . . . . . . . . . . . 14

     5.6       Alternative Payments. . . . . . . . . . . . . . . . . . . . . . . . 14

6.   Other Provisions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

     6.1       Rights of Eligible Persons, Participants and Beneficiaries. . . . . 14
               6.1.1     Employment Status . . . . . . . . . . . . . . . . . . . . 14
               6.1.2     No Employment Contract. . . . . . . . . . . . . . . . . . 14
               6.1.3     Plan Not Funded . . . . . . . . . . . . . . . . . . . . . 14

     6.2       Adjustments; Acceleration . . . . . . . . . . . . . . . . . . . . . 15
               6.2.1     Adjustments . . . . . . . . . . . . . . . . . . . . . . . 15
               6.2.2     Acceleration of Awards Upon Change in Control . . . . . . 16
               6.2.3     Possible Early Termination of Accelerated Awards. . . . . 16
               6.2.4     Golden Parachute Limitations. . . . . . . . . . . . . . . 16

     6.3       Effect of Termination of Employment . . . . . . . . . . . . . . . . 17

     6.4       Compliance with Laws. . . . . . . . . . . . . . . . . . . . . . . . 17
               6.4.1     General . . . . . . . . . . . . . . . . . . . . . . . . . 17
               6.4.2     Restrictions on Transfer. . . . . . . . . . . . . . . . . 17

     6.5       Tax Withholding . . . . . . . . . . . . . . . . . . . . . . . . . . 18
               6.5.1     Provision for Tax Withholding Offset. . . . . . . . . . . 18
               6.5.2     Tax Loans . . . . . . . . . . . . . . . . . . . . . . . . 18

     6.6       Plan Amendment, Termination and Suspension. . . . . . . . . . . . . 18
               6.6.1     Board Authorization . . . . . . . . . . . . . . . . . . . 18
               6.6.2     Stockholder Approval. . . . . . . . . . . . . . . . . . . 19
               6.6.3     Amendments to Awards. . . . . . . . . . . . . . . . . . . 19
               6.6.4     Limitations on Amendments to Plan and Awards. . . . . . . 19

     6.7       Privileges of Stock Ownership . . . . . . . . . . . . . . . . . . . 19

     6.8       Effective Date of the Plan. . . . . . . . . . . . . . . . . . . . . 19

     6.9       Term of the Plan. . . . . . . . . . . . . . . . . . . . . . . . . . 19

     6.10      Governing Law/Construction/Severability . . . . . . . . . . . . . . 19
               6.10.1    Choice of Law . . . . . . . . . . . . . . . . . . . . . . 19
               6.10.2    Severability. . . . . . . . . . . . . . . . . . . . . . . 20
               6.10.3    Plan Construction . . . . . . . . . . . . . . . . . . . . 20

     6.11      Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20




                                       iii



                                                                           
     6.12      Effect of Change of Subsidiary Status . . . . . . . . . . . . . . . 20
     6.13      Non-Exclusivity of Plan . . . . . . . . . . . . . . . . . . . . . . 20

7.   Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

8.   Non-Employee Director Options . . . . . . . . . . . . . . . . . . . . . . . . 25

     8.1       Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

     8.2       Option Grants . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
               8.2.1     Time of Initial Award . . . . . . . . . . . . . . . . . . 25
               8.2.2     Subsequent Automatic Awards . . . . . . . . . . . . . . . 26
               8.2.3     Subsequent Discretionary Awards . . . . . . . . . . . . . 26

     8.3       Option Price. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

     8.4       Option Period and Exercisability. . . . . . . . . . . . . . . . . . 26

     8.5       Termination of Directorship . . . . . . . . . . . . . . . . . . . . 26

     8.6       Adjustments; Accelerations; Terminations. . . . . . . . . . . . . . 26

     8.7       Acceleration Upon a Change in Control Event . . . . . . . . . . . . 27





                                       iv



                                       
                            APEX MORTGAGE CAPITAL, INC.
                    AMENDED AND RESTATED 1997 STOCK OPTION PLAN


                                  1.     THE PLAN

1.1    PURPOSE.  The purpose of this Plan is to promote the success of the
       Company and the interests of its stockholders by attracting, motivating,
       retaining and rewarding directors, officers and employees and other
       Eligible Persons associated with the management of the Company with
       awards and incentives for high levels of performance and improving the
       financial performance of the Company, by aligning the interests of the
       those persons and the Company's stockholders, and by attracting,
       motivating and retaining experienced and knowledgeable independent
       directors through the benefits provided under Section 8.  "Corporation"
       means Apex Mortgage Capital, Inc. and "Company" means the Corporation and
       its Subsidiaries, collectively.  These terms and other capitalized terms
       are defined in Section 7.

1.2    ADMINISTRATION AND AUTHORIZATION; POWER AND PROCEDURE

       1.2.1  COMMITTEE.  This Plan will be administered by and all Awards to
              Eligible Persons will be authorized by the Committee, other than
              the Initial Awards which have been authorized by the Corporation's
              stockholder(s) in connection with approving this Plan.  Action of
              the Committee with respect to the administration of this Plan will
              be taken pursuant to a majority vote or by written consent of its
              members.

       1.2.2  PLAN AWARDS; INTERPRETATION; POWERS OF COMMITTEE.  Subject to the
              express provisions of this Plan, the Committee will have the
              authority to:

              (a)    determine the particular Eligible Persons who will receive
                     Awards;

              (b)    grant Awards to Eligible Persons, determine the price at
                     which securities will be offered or awarded and the amount
                     of securities to be offered or awarded to any of such
                     Eligible Persons, and determine the other specific terms
                     and conditions of such Awards consistent with the express
                     limits of this Plan, and establish the installments (if
                     any) in which such Awards will become exercisable or will
                     vest, or determine that no delayed exercisability or
                     vesting is required, and establish the events of
                     termination or reversion of such Awards;

              (c)    approve the forms of Award Agreements (which need not be
                     identical either as to type of Award or among
                     Participants);

              (d)    construe and interpret this Plan and any agreements
                     defining the rights and obligations of the Company and
                     Eligible Persons under this Plan, further

                                       



                     define the terms used in this Plan, and prescribe, amend 
                     and rescind rules and regulations relating to the 
                     administration of this Plan;

              (e)    cancel, modify, or waive the Corporation's rights with
                     respect to, or modify, discontinue, suspend, or terminate
                     any or all outstanding Awards held by Eligible Persons,
                     subject to any required consent under Section 6.6;

              (f)    accelerate or extend the exercisability or extend the term
                     of any or all such outstanding Awards within the maximum 10
                     year term of Awards under Section 1.6; and

              (g)    make all other determinations and take such other action as
                     contemplated by this Plan or as may be necessary or
                     advisable for the administration of this Plan and the
                     effectuation of its purposes.

              Notwithstanding the foregoing, the provisions of Sections 8.2.1
              and 8.2.2 relating to Non-Employee Director Awards will be
              automatic and, to the maximum extent possible, self-effectuating.

       1.2.3  BINDING DETERMINATIONS.  Any action taken by, or inaction of, the
              Corporation, any Subsidiary, the Board or the Committee relating
              or pursuant to this Plan will be within the absolute discretion of
              that entity or body and will be conclusive and binding upon all
              persons.  No member of the Board or Committee, or officer of the
              Corporation or any Subsidiary, will be liable for any such action
              or inaction of the entity or body, of another person or, except in
              circumstances involving bad faith, of himself or herself.  Subject
              only to compliance with the express provisions hereof, the Board
              and Committee may act in their absolute discretion in matters
              within their authority related to this Plan.

       1.2.4  RELIANCE ON EXPERTS.  In making any determination or in taking or
              not taking any action under this Plan, the Committee or the Board,
              as the case may be, may obtain and may rely upon the advice of
              experts, including professional advisors to the Corporation.  No
              director, officer or agent of the Company will be liable for any
              such action or determination taken or made or omitted in good
              faith.

       1.2.5  DELEGATION.  The Committee may delegate ministerial, 
              non-discretionary functions to individuals who are officers or
              employees of the Company.

1.3    PARTICIPATION.  Awards may be granted by the Committee only to those
       persons that the Committee determines to be Eligible Persons.  An
       Eligible Person who has been granted an Award may, if otherwise eligible,
       be granted additional Awards if the Committee so determines.

                                       2



1.4    SHARES AVAILABLE FOR AWARDS; SHARE LIMITS

       1.4.1  SHARES AVAILABLE.  Subject to the provisions of Section 6.2, the 
              capital stock that may be delivered under this Plan will be 
              shares of the Corporation's authorized but unissued Common Stock 
              and any shares of its Common Stock held as treasury shares 
              (the "Shares").  The Shares may be delivered for any lawful 
              consideration.

       1.4.2  SHARE LIMITS.  The maximum number of Shares that may be delivered
              pursuant to Awards granted to Eligible Persons under this Plan
              will not exceed 1,000,000 Shares (the "Share Limit").  The number
              of Shares subject to Awards outstanding at any time will not
              exceed the number of Shares remaining available for issuance under
              the Plan.  The maximum number of Shares subject to those Options
              and Stock Appreciation Rights that are granted during any calendar
              year to any one individual, subject to Section 1.4.3, will be
              limited to 200,000 Shares.  Each of the foregoing numerical limits
              is subject to adjustment as contemplated by this Section 1.4 and
              Section 6.2.

       1.4.3  LIMITATION ON OWNERSHIP.

              (a)    No Awards will be granted under the Plan to any person who,
                     after the grant of such Award, would be deemed to
                     beneficially own more than 9.8% (in value or in number of
                     Shares, whichever is more restrictive) of the outstanding
                     Shares of Common Stock of the Corporation.  For purposes of
                     this Section 1.4.3, "ownership" is determined in accordance
                     with the Real Estate Investment Trust provisions of the
                     Code, the constructive ownership provisions of Section 544
                     of the Code (as modified by Section 856(1)(b) of the Code),
                     and Rule 13d-3 promulgated under the Exchange Act.

              (b)    If, after an Award is granted, circumstances of ownership
                     (or the Corporation's knowledge thereof) change so that the
                     exercise of such Award would cause the Participant to
                     beneficially own more Shares than are permitted pursuant to
                     paragraph (a) above, then upon any exercise of such Award
                     that causes such result, the Corporation shall have the
                     right to deliver to the Participant, in lieu of Shares, a
                     check or cash in the amount equal to the Fair Market Value
                     of the Shares otherwise deliverable on the date of exercise
                     (minus any amounts withheld pursuant to Section 6.5).
  
       1.4.4  SHARE RESERVATION; REPLENISHMENT AND REISSUE OF UNVESTED AWARDS. 
              No Award may be granted under this Plan unless, on the date of
              grant, the sum of (a) the maximum number of Shares issuable at any
              time pursuant to such Award, plus (b) the number of Shares that
              have previously been issued pursuant to Awards granted under this
              Plan, other than reacquired Shares available for reissue
              consistent with any applicable legal limitations, plus (c) the
              maximum number of Shares that may be issued at any time after such
              date of grant pursuant to Awards that are outstanding on such
              date, does not exceed the Share Limit.  Shares that

                                       3



              are subject to or underlie Awards that expire or for any reason 
              are canceled or terminated, are forfeited, fail to vest, or for 
              any other reason are not paid or delivered under this Plan, as 
              well as reacquired Shares, will again, except to the extent 
              prohibited by law, be available for subsequent Awards under the 
              Plan.  Except as limited by law, if an Award is or may be settled 
              only in cash, such Award need not be counted against any of the 
              limits under this Section 1.4.

1.5    GRANT OF AWARDS.  Subject to the express provisions of this Plan, the
       Committee will determine the number of Shares subject to each Award, the
       price (if any) to be paid for the Shares or the Award and, in the case of
       performance share awards, in addition to matters addressed in
       Section 1.2.2, the specific objectives, goals and performance criteria
       (such as an increase in sales, market value, earnings or book value over
       a base period, the years of service before vesting, the relevant job
       classification or level of responsibility or other factors) that further
       define the terms of the performance share award.  Each Award will be
       evidenced by an Award Agreement signed by the Corporation and, if
       required by the Committee, by the Participant.

1.6    AWARD PERIOD.  The Award Period of any Option, SAR, warrant or similar
       right shall expire and any other Award shall either vest or be forfeited
       not more than 10 years after the date of grant; PROVIDED, HOWEVER, that
       any payment of cash or delivery of Shares pursuant to an Award may be
       delayed until a future date if specifically authorized by the Committee
       in writing.

1.7    LIMITATIONS ON EXERCISE AND VESTING OF AWARDS.

       1.7.1  PROVISIONS FOR EXERCISE.  Unless the Committee otherwise expressly
              provides, no Award will be exercisable or will vest until at least
              six months after the initial Award Date, and once exercisable an
              Award will remain exercisable until the expiration or earlier
              termination of the Award.

       1.7.2  PROCEDURE.  Any exercisable Award will be deemed to be exercised
              when the Corporation receives written notice of such exercise from
              the Participant, together with any required payment made in
              accordance with Section 2.2.2 or 8.4, as the case may be, and any
              other requirements of exercise, including any document required by
              Section 6.4, are satisfied.

       1.7.3  FRACTIONAL SHARES/MINIMUM ISSUE.  Fractional share interests will
              be disregarded, but may be accumulated. The Committee, however,
              may determine in the case of Eligible Persons that cash, other
              securities, or other property will be paid or transferred in lieu
              of any fractional share interests.  No fewer than 100 Shares may
              be purchased on exercise of any Award at one time unless the
              number purchased is the total number at the time available for
              purchase under the Award.

1.8    ACCEPTANCE OF NOTES TO FINANCE EXERCISE.  The Corporation, in its sole
       discretion, may accept one or more notes from any Eligible Person in
       connection with the exercise or receipt of any outstanding Award; but any
       such note will be subject to the following terms and conditions:

                                       4



       1.8.1  PRINCIPAL.  The principal of the note will not exceed the amount
              required to be paid to the Corporation upon the exercise or
              receipt of one or more Awards under the Plan and the note will be
              delivered directly to the Corporation in consideration of such
              exercise or receipt.

       1.8.2  TERM.  The initial term of the note will be determined by the
              Committee; but the term of the note, including extensions, will
              not exceed a period of five years.

       1.8.3  RECOURSE; SECURITY; COMPLIANCE.  The note will provide for full
              recourse to the Participant and will bear interest at a rate
              determined by the Committee but not less than the interest rate
              necessary to avoid the imputation of interest under the Code.  If
              required by the Committee or by applicable law, the note will be
              secured by a pledge of any Shares or rights financed thereby in
              compliance with applicable law.  The terms, repayment provisions,
              and collateral release provisions of the note and the pledge
              securing the note will conform with applicable rules and
              regulations of the Federal Reserve Board as then in effect.

       1.8.4  TERMINATION OF EMPLOYMENT.  If the employment of the Participant
              terminates, the unpaid principal balance of the note will become
              due and payable on the 10th business day after the Severance Date;
              but if a sale of such Shares would cause the Participant to incur
              liability under Section 16(b) of the Exchange Act, the unpaid
              balance will become due and payable on the 10th business day after
              the first day on which a sale of such Shares could have been made
              without incurring such liability assuming for these purposes that
              there are no other transactions (or deemed transactions) in
              securities of this Corporation by the Participant after such
              termination.

1.9    NO TRANSFERABILITY; LIMITED EXCEPTION TO TRANSFER RESTRICTIONS.

       1.9.1  LIMIT ON EXERCISE AND TRANSFER.  Unless otherwise expressly
              provided in (or pursuant to) this Section 1.9, by applicable law
              and by the Award Agreement, as the same may be amended, (a) all
              Awards are non-transferable and will not be subject in any manner
              to sale, transfer, anticipation, alienation, assignment, pledge,
              encumbrance or charge, (b) Awards may be exercised only by the
              Participant, and (c) amounts payable or Shares issuable pursuant
              to an Award will be delivered only to (or for the account of) the
              Participant.

       1.9.2  EXCEPTIONS.  The Committee may permit Awards to be exercised by
              and paid only to certain persons or entities related to the
              Participant pursuant to such conditions and procedures as the
              Committee may establish.  Any permitted transfer will be subject
              to the condition that the Committee receive evidence satisfactory
              to it that the transfer is being made to related persons for
              estate and/or tax planning purposes and without consideration
              (other than nominal consideration).  Incentive Stock Options and
              Restricted Stock Awards, however, will be subject to any and all
              additional transfer restrictions under the Code.

                                       5



       1.9.3  FURTHER EXCEPTIONS TO LIMITS ON TRANSFER.  The exercise and
              transfer restrictions in Section 1.9.1 will not apply to:

              (a)    transfers to the Corporation,

              (b)    the designation of a beneficiary to receive benefits if the
                     Participant dies or, if the Participant has died, transfers
                     to or exercise by the Participant's beneficiary, or, in the
                     absence of a validly designated beneficiary, transfers by
                     will or the laws of descent and distribution,

              (c)    transfers pursuant to a QDRO if approved or ratified by the
                     Committee,

              (d)    if the Participant has suffered a disability, permitted
                     transfers or exercises on behalf of the Participant by the
                     Participant's legal representative, or

              (e)    the authorization by the Committee of "cashless exercise"
                     procedures with third parties who provide financing for the
                     purpose of (or who otherwise facilitate) the exercise of
                     Awards consistent with applicable laws and the express
                     authorization of the Committee.
                                          
                                   2.     OPTIONS

2.1    GRANTS.  One or more Options may be granted under this Section to any
       Eligible Person.  Each Option granted will be designated by the Committee
       in the applicable Award Agreement as either an Incentive Stock Option,
       subject to Section 2.3, or a Non-Qualified Stock Option.

2.2    OPTION PRICE.

       2.2.1  PRICING LIMITS.  The purchase price per Share of the Shares
              covered by each Option will be not be less than 100% (110% in the
              case of a Participant described in Section 2.4) of the Fair Market
              Value of the Common Stock on the date of grant.

       2.2.2  PAYMENT PROVISIONS.  The purchase price of any Shares purchased on
              exercise of an Option granted under this Section will be paid in
              full at the time of each purchase in one or a combination of the
              following methods:  (a) in cash or by electronic funds transfer;
              (b) by certified or cashier's check payable to the order of the
              Corporation; (c) if permitted by the Committee, by a promissory
              note of the Participant consistent with the requirements of
              Sections 1.8 and 6.4; (d) by notice and third party payment in
              such manner as may be authorized by the Committee; or (e) by the
              delivery of shares of Common Stock of the Corporation already
              owned by the Participant, but the Committee may in its absolute
              discretion limit the Participant's ability to exercise an Award by
              delivering such shares, and any shares delivered that were
              initially acquired upon exercise of a stock option must have been
              owned by the Participant at least six months as of the date of
              delivery.  Shares of Common Stock used to satisfy the exercise
              price of an Option will be

                                       6



              valued at their Fair Market Value on the date of exercise. 
              Without limiting the generality of the foregoing, the Committee 
              may provide that the Option can be exercised and payment made by 
              delivering a properly executed exercise notice together with 
              irrevocable instructions to a broker to promptly deliver to the 
              Corporation the amount of sale proceeds necessary to pay the 
              exercise price and, unless otherwise prohibited by the Committee 
              or applicable law, any applicable tax withholding under 
              Section 6.5.  The Corporation will not be obligated to deliver 
              certificates for the shares unless and until it receives full 
              payment of the exercise price therefor and any related 
              withholding obligations have been satisfied.

2.3    LIMITATIONS ON GRANT AND TERMS OF INCENTIVE STOCK OPTIONS.

       2.3.1  $100,000 LIMIT.  To the extent that the aggregate "Fair Market
              Value" of Shares with respect to which incentive stock options
              first become exercisable by a Participant in any calendar year
              exceeds $100,000, taking into account both Shares subject to
              Incentive Stock Options under this Plan and stock subject to
              incentive stock options under all other plans of the Company or
              any parent corporation, such options will be treated as
              Nonqualified Stock Options.  For this purpose, the "Fair Market
              Value" of the stock subject to options will be determined as of
              the date the options were awarded.  In reducing the number of
              options treated as incentive stock options to meet the $100,000
              limit, the most recently granted options will be reduced first. 
              To the extent a reduction of simultaneously granted options is
              necessary to meet the $100,000 limit, the Committee may, in the
              manner and to the extent permitted by law, designate which Shares
              are to be treated as Shares acquired pursuant to the exercise of
              an Incentive Stock Option.

       2.3.2  OPTION PERIOD.  Except as provided in Section 1.6, each Option and
              all rights thereunder will expire no later than 10 years after the
              Award Date.

       2.3.3  OTHER CODE LIMITS.  Incentive Stock Options may only be granted to
              Eligible Employees of the Corporation or a Subsidiary who satisfy
              the eligibility requirements of the Code.  There will be imposed
              in any Award Agreement relating to Incentive Stock Options such
              other terms and conditions as from time to time are required in
              order that the Option be an "incentive stock option" as that term
              is defined in Section 422 of the Code.

2.4    LIMITS ON 10% HOLDERS.  No Incentive Stock Option may be granted to any
       person who, at the time the Option is granted, owns (or is deemed to own
       under Section 424(d) of the Code) shares of outstanding Common Stock
       possessing more than 10% of the total combined voting power of all
       classes of stock of the Corporation, unless the exercise price of such
       Option is at least 110% of the Fair Market Value of the stock subject to
       the Option and such Option by its terms is not exercisable after the
       expiration of five years from the date such Option is granted.

                                       7



2.5    OPTION REPRICING/CANCELLATION AND REGRANT/WAIVER OF RESTRICTIONS. 
       Subject to Section 1.4 and Section 6.6 and the specific limitations on
       Awards contained in this Plan, the Committee from time to time may
       authorize, generally or in specific cases only, for the benefit of any
       Eligible Person any adjustment in the exercise or purchase price, the
       vesting schedule, the number of Shares subject to, the restrictions upon
       or the term of, an Award granted under this Section by cancellation of an
       outstanding Award and a subsequent regranting of an Award, by amendment,
       by substitution of an outstanding Award, by waiver or by other legally
       valid means.  Such amendment or other action may result among other
       changes in an exercise or purchase price that is higher or lower than the
       exercise or purchase price of the original or prior Award, provide for a
       greater or lesser number of Shares subject to the Award, or provide for a
       longer or shorter vesting or exercise period.

2.6    EFFECTS OF TERMINATION OF EMPLOYMENT; TERMINATION OF SUBSIDIARY STATUS;
       DISCRETIONARY PROVISIONS.

       2.6.1  OPTIONS - RESIGNATION OR DISMISSAL.  If the Participant's
              employment by (or other service specified in the Award Agreement
              to) the Company or the Manager, as the case may be, terminates for
              any reason (the date of such termination being referred to as the
              "Severance Date") other than Retirement, Total Disability or
              death, or "for Cause" (as determined in the discretion of the
              Committee), the Participant will have, unless otherwise provided
              in the Award Agreement and subject to earlier termination pursuant
              to or as contemplated by Section 1.6 or 6.2, 90 days after the
              Severance Date to exercise any Option to the extent exercisable on
              the Severance Date.  In the case of a termination "for Cause", the
              Option will terminate on the Severance Date.  The Option, to the
              extent not exercisable on the Severance Date, will terminate in
              all cases, unless the Award Agreement or the Committee otherwise
              provides.

       2.6.2  OPTIONS - DEATH OR DISABILITY.  If the Participant's employment by
              (or specified service to) the Company or the Manager, as the case
              may be, terminates as a result of Total Disability or death, the
              Participant, Participant's Personal Representative or the
              Participant's Beneficiary, as the case may be, will have, unless
              otherwise provided in the Award Agreement and subject to earlier
              termination pursuant to or as contemplated by Section 1.6 or 6.2,
              until 12 months after the Severance Date to exercise any Option to
              the extent exercisable on the Severance Date.  Any Option to the
              extent not exercisable on the Severance Date will terminate.

       2.6.3  OPTIONS - RETIREMENT.  If the Participant's employment by (or
              specified service to) the Company or the Manager, as the case may
              be, terminates as a result of Retirement, the Participant,
              Participant's Personal Representative or the Participant's
              Beneficiary, as the case may be, will have, unless otherwise
              provided in the Award Agreement and subject to earlier termination
              pursuant to or as contemplated by Section 1.6 or 6.2, until 12
              months after the Severance Date to exercise any Nonqualified Stock
              Option (three months after the Severance Date if an Incentive
              Stock Option states it is it be retained) to the extent
              exercisable on

                                       8



              the Severance Date.  The Option, to the extent not exercisable 
              on the Severance Date, will terminate.

       2.6.4  CERTAIN SARS.  Any SAR granted concurrently or in tandem with an
              Option will have the same post-Severance Date provisions and
              exercisability periods as the Option to which it relates, unless
              the Committee otherwise provides.

       2.6.5  OTHER AWARDS.  The Committee will establish in respect of each
              other Award granted hereunder the Participant's rights and
              benefits (if any) if the Participant's employment is terminated
              and in so doing may make distinctions based upon the cause of
              termination and the nature of the Award.

       2.6.6  COMMITTEE DISCRETION.  Notwithstanding the foregoing provisions of
              this Section 2.6, in the event of, or in anticipation of, a
              termination of employment with the Company or the Manager, as the
              case may be, for any reason, other than a discharge for Cause, the
              Committee, by express provisions in or by amendment to the Award
              Agreement, may increase the portion of the Participant's Award
              available to the Participant, or Participant's Beneficiary or
              Personal Representative, as the case may be, and/or, subject to
              the provisions of Section 1.6, extend the exercisability period,
              upon such terms as the Committee deems appropriate.

2.7    OPTIONS AND RIGHTS IN SUBSTITUTION FOR STOCK OPTIONS GRANTED BY OTHER
       CORPORATIONS.  Options and Stock Appreciation Rights may be granted to
       Eligible Persons under this Plan in substitution for employee stock
       options granted by other entities to persons who are or who will become
       Eligible Persons in respect of the Company, in connection with a
       distribution, merger or reorganization by or with the granting entity or
       an affiliated entity, or the acquisition by the Company, directly or
       indirectly, of all or a substantial part of the stock or assets of the
       employing entity.
                                          
                         3.     STOCK APPRECIATION RIGHTS 
                    (INCLUDING LIMITED STOCK APPRECIATION RIGHTS)
       
3.1    GRANTS.  The Committee may grant to any Eligible Person Stock
       Appreciation Rights either concurrently with the grant of another Award
       or in respect of an outstanding Award, in whole or in part, or
       independently of any other Award.  Any Stock Appreciation Right granted
       in connection with an Incentive Stock Option will contain such terms as
       may be required to comply with the provisions of Section 422 of the Code
       and the regulations promulgated thereunder, unless the holder otherwise
       agrees.

3.2    EXERCISE OF STOCK APPRECIATION RIGHTS.

       3.2.1  EXERCISABILITY.  Unless the Award Agreement or the Committee
              otherwise provides, a Stock Appreciation Right related to another
              Award will be exercisable at such time or times, and to the
              extent, that the related Award will be exercisable.

                                       9



       3.2.2  EFFECT ON AVAILABLE SHARES.  To the extent that a Stock
              Appreciation Right is exercised, only the actual number of
              delivered Shares will be charged against the maximum amount of
              Common Stock that may be delivered pursuant to Awards under this
              Plan.  The number of shares subject to the Stock Appreciation
              Right and the related Option of the Participant will, however, be
              reduced by the number of underlying shares as to which the
              exercise related, unless the Award Agreement otherwise expressly
              provides.

       3.2.3  STAND-ALONE SARS.  A Stock Appreciation Right granted
              independently of any other Award will be exercisable pursuant to
              the terms of the Award Agreement but in no event earlier than six
              months after the Award Date, except in the case of death or Total
              Disability.

       3.2.4  PROPORTIONATE REDUCTION  If an SAR extends to less than all the
              Shares covered by the related Award and if a portion of the
              related Award is thereafter exercised, the number of Shares
              subject to the unexercised SAR shall be reduced only if and to the
              extent that the remaining number of Shares covered by the related
              Award is less than the remaining number of Shares subject to such
              SAR.

3.3    PAYMENT.

       3.3.1  AMOUNT.  Unless the Committee otherwise provides, upon exercise of
              a Stock Appreciation Right and the attendant surrender of an
              exercisable portion of any related Award, the Participant will be
              entitled to receive subject to Section 6.5 payment of an amount
              determined by multiplying

              (a)    the difference obtained by subtracting the exercise price
                     per Share under the related Award (if applicable) or the
                     initial share value specified in the Award from the Fair
                     Market Value of a share of Common Stock on the date of
                     exercise of the Stock Appreciation Right, by

              (b)    the number of Shares with respect to which the Stock
                     Appreciation Right has been exercised.

       3.3.2  FORM OF PAYMENT.  The Committee, in its sole discretion, will
              determine the form in which payment will be made of the amount
              determined under Section 3.3.1 above, either solely in cash,
              solely in Shares (valued at Fair Market Value on the date of
              exercise of the Stock Appreciation Right), or partly in Shares and
              partly in cash, provided that the Committee has determined that
              such exercise and payment are consistent with applicable law.  If
              the Committee permits the Participant to elect to receive cash or
              Shares (or a combination thereof) upon exercise, the election will
              be subject to such conditions as the Committee may impose.

3.4    LIMITED STOCK APPRECIATION RIGHTS.  The Committee may grant to any
       Eligible Person Stock Appreciation Rights exercisable only upon or in
       respect of a change in control or any other specified event ("Limited
       SARs") and such Limited SARs may relate to or

                                       10



       operate in tandem or combination with or substitution for Options, other 
       SARs or other Awards (or any combination thereof), and may be payable 
       in cash or Shares based on the spread between the base price of the SAR 
       and a price based upon or equal to the Fair Market Value of the Shares 
       during a specified period or at a specified time before, after or 
       including the date of such event.
                                          
                           4.     RESTRICTED STOCK AWARDS

4.1    GRANTS.  The Committee may grant one or more Restricted Stock Awards to
       any Eligible Person.  Each Restricted Stock Award Agreement will specify
       the number of Shares to be issued to the Participant, the date of such
       issuance, the consideration for such Shares (but not less than the
       minimum lawful consideration under applicable state law) payable by the
       Participant, the extent (if any) to which and the time (if ever) at which
       the Participant will be entitled to dividends, voting and other rights in
       respect of the Shares prior to vesting, and the restrictions (which may
       be based on performance criteria, passage of time or other factors or any
       combination thereof) imposed on such Shares and the conditions of release
       or lapse of such restrictions.  Such restrictions will not lapse earlier
       than six months after the Award Date, except to the extent the Committee
       may otherwise expressly provide.  Stock certificates evidencing shares of
       Restricted Stock pending the lapse of the restrictions ("Restricted
       Shares") will bear a legend making appropriate reference to the
       restrictions hereunder and will be held by the Corporation or by a third
       party designated by the Committee until the restrictions on such
       Restricted Shares have lapsed and the Restricted Shares have vested in
       accordance with the provisions of the Award and Section 1.7.  Upon
       issuance of the Restricted Stock Award, the Participant may be required
       to provide such further assurance and documents as the Committee may
       require to enforce the restrictions.

4.2    RESTRICTIONS.

       4.2.1  PRE-VESTING RESTRAINTS.  Except as provided in Sections 4.1 and
              1.9, Restricted Shares comprising any Restricted Stock Award may
              not be sold, assigned, transferred, pledged or otherwise disposed
              of or encumbered, either voluntarily or involuntarily, until the
              restrictions on such Restricted Shares have lapsed and the Shares
              have become vested.

       4.2.2  DIVIDEND AND VOTING RIGHTS.  Unless otherwise provided in the
              applicable Award Agreement, a Participant receiving a Restricted
              Stock Award will be entitled to cash dividend and voting rights
              for all Shares issued even though they are not vested, but such
              rights will terminate immediately as to any Restricted Shares
              which cease to be eligible for vesting.

       4.2.3  CASH PAYMENTS.  If the Participant has been paid or received cash
              (including any dividends) in connection with the Restricted Stock
              Award, the Award Agreement will specify the extent (if any) to
              which the cash must be returned (with or without an earnings
              factor) as to any Restricted Shares that cease to be eligible for
              vesting.

                                       11



4.3    RETURN TO THE CORPORATION.  Unless the Committee otherwise expressly
       provides, Restricted Shares that remain subject to restrictions as of a
       Severance Date with respect to the Participant or are subject to other
       conditions to vesting that have not been satisfied by the time specified
       in the applicable Award Agreement will not vest and will be returned to
       the Corporation in such manner and on such terms as set forth in the
       Award Agreement or as the Committee otherwise expressly provides.
                                          
            5.     PERFORMANCE SHARE AWARDS; STOCK UNITS; STOCK BONUSES

5.1    GRANTS OF PERFORMANCE SHARE AWARDS.  The Committee may grant Performance
       Share Awards to Eligible Employees based upon such factors as the
       Committee deems relevant in light of the specific type and terms of the
       award.  An Award Agreement will specify the maximum number of Shares (if
       any) subject to the Performance Share Award, the consideration (but not
       less than the minimum lawful consideration) to be paid for any such
       Shares as may be issuable to the Participant, the duration of the Award
       and the conditions upon which delivery of any Shares or cash to the
       Participant will be based.  The amount of cash or Shares or other
       property that may be deliverable pursuant to such Award will be based
       upon the degree of attainment over a specified period of not more than 10
       years (a "performance cycle") as may be established by the Committee of
       such measure(s) of the performance of the Company (or any part thereof)
       or the Participant as may be established by the Committee.  The Committee
       may provide for full or partial credit, prior to completion of such
       performance cycle or the attainment of the performance achievement
       specified in the Award, in the event of the Participant's death,
       Retirement, or Total Disability, a Change in Control Event or in such
       other circumstances as the Committee (consistent with Section 6.10.3(b),
       if applicable) may determine.

5.2    SPECIAL PERFORMANCE-BASED SHARE AWARDS.  Options or SAR's granted with an
       exercise price not less than Fair Market Value at the applicable date of
       grant for Section 162(m) purposes to Eligible Employees which otherwise
       satisfy the conditions to deductibility under Section 162(m) of the Code
       are deemed "Qualifying Awards".  Without limiting the generality of the
       foregoing, and in addition to Qualifying Awards granted under other
       provisions of this Plan, other performance-based awards within the
       meaning of Section 162(m) of the Code ("Performance-Based Awards"),
       whether in the form of restricted stock, performance stock, phantom stock
       or other rights, the vesting of which depends on the performance of the
       Company on a consolidated, segment, subsidiary, or division basis, with
       reference to revenue growth, net earnings (before or after taxes or
       before or after taxes, interest, depreciation, and/or amortization), cash
       flow, return on equity, return on assets or return on net investment, or
       cost containment or reduction, or any combination thereof (the "business
       criteria") relative to preestablished performance goals, may be granted
       under this Plan.  To the extent so applicable, these terms are used as
       applied under generally accepted accounting principles and in the
       Company's financial reporting.  The applicable business criterion or
       criteria and the specific performance goals must be approved by the
       Committee in advance of any applicable deadlines under the Code and while
       the performance relating to such goals remains substantially uncertain. 
       The applicable performance measurement period may be not less than one
       (except as provided in Section 1.6) nor more than 10 years.   Other types
       of performance and non-performance awards may also be granted under the
       other provisions of this Plan.  The

                                       12



       following provisions relate to all Performance-Based Awards (other than 
       Qualifying Awards) granted under this Plan:

       5.2.1  ELIGIBLE CLASS.  The eligible class of persons for Awards under
              this Section is executive officers of the Corporation.

       5.2.2  MAXIMUM AWARD.  Subject to Section 1.4.2, in no event will grants
              in any calendar year to any one individual under this Section 5.2
              relate to more than 250,000 shares or, (if payable solely in cash)
              a cash amount of more than $1,000,000.

       5.2.3  COMMITTEE CERTIFICATION.  To the extent required by Section
              162(m), before any Performance-Based Award under this Section 5.2
              is paid, the Committee must certify that the material terms of the
              Performance-Based Award were satisfied.

       5.2.4  TERMS AND CONDITIONS OF AWARDS.  The Committee will have
              discretion to determine the restrictions or other limitations of
              the individual Awards under this Section 5.2 (including the
              authority to reduce Awards, payouts or vesting or to pay no
              Awards, in its sole discretion, if the Committee preserves such
              authority at the time of grant by language to this effect in its
              authorizing resolutions or otherwise).

       5.2.5  STOCK PAYOUT FEATURES.  In lieu of cash payment of an Award, the
              Committee may require or allow all or a portion of the Award to be
              paid in the form of Shares, Restricted Shares, an Option, or
              another Award.

       5.2.6  ADJUSTMENTS FOR MATERIAL CHANGES.  Performance goals or other
              features of an Award under this Section 5.2 may provide that they
              (a) shall be adjusted to reflect a change in corporate
              capitalization, a corporate transaction (such as a reorganization,
              combination, separation, or merger) or a complete or partial
              corporate liquidation, or (b) shall be calculated either without
              regard for or to reflect any change in accounting policies or
              practices affecting the Company and/or the business criteria or
              performance goals or targets, or (c) shall be adjusted for any
              other circumstance or event, or (d) any combination of (a) through
              (c), but only to the extent in each case that such adjustment or
              determination in respect of Performance-Based Awards would be
              consistent with the requirements of Section 162(m) to qualify as
              performance-based compensation.

5.3    GRANTS OF STOCK BONUSES.  The Committee may grant a Stock Bonus to any
       Eligible Person to reward exceptional or special services, contributions
       or achievements in the manner and on such terms and conditions (including
       any restrictions on such Shares) as determined from time to time by the
       Committee.  The number of Shares so awarded will be determined by the
       Committee.  The Award may be granted independently or in lieu of a cash
       bonus.

                                       13



5.4    DEFERRED PAYMENTS; STOCK UNITS.  The Committee may authorize for the
       benefit of any Eligible Person the deferral of any payment of cash or
       Shares that may otherwise become due or of cash otherwise payable under
       this Plan or otherwise, in the form of stock units payable in cash or
       Shares or by other means, and may provide for accretion thereof based
       upon such deferment, at the election or at the request of the
       Participant, subject to any other applicable terms of this Plan.  Such
       deferral will be subject to such further conditions, restrictions or
       requirements as the Committee may impose, subject to any then vested
       rights of Participants.

5.5    CASH BONUS AWARDS.

       5.5.1  PERFORMANCE GOALS.  The Committee may establish a program of
              annual incentive awards that are payable in cash to Eligible
              Persons based upon the extent to which performance goals are met
              during the performance period.  The performance goals may depend
              upon the performance of the Company on a consolidated, subsidiary
              division basis with reference to revenues, net earnings (before or
              after interest, taxes, depreciation, or amortization), cash flow,
              return on equity or on assets or net investment, cost containment
              or reduction, or achievement of strategic goals (or any
              combination of such factors).  In addition, the award may depend
              upon the Eligible Employee's individual performance.

5.6    ALTERNATIVE PAYMENTS.  In lieu of cash payment of an Award, the Committee
       may require or allow all or a portion of the Award to be paid or credited
       in the form of Shares, Restricted Shares, an Option or other Award.
                                          
                              6.     OTHER PROVISIONS

6.1    RIGHTS OF ELIGIBLE PERSONS, PARTICIPANTS AND BENEFICIARIES.

       6.1.1  EMPLOYMENT STATUS.  Status as an Eligible Person will not be
              construed as a commitment that any Award will be made under this
              Plan to an Eligible Person or to Eligible Persons generally.

       6.1.2  NO EMPLOYMENT CONTRACT.  Nothing contained in this Plan (or in any
              other documents related to this Plan or to any Award) will confer
              upon any Eligible Person or other Participant any right to
              continue in the employ or other service of the Company or the
              Manager, as the case may be, or constitute any management or other
              contract or agreement of employment or other service, nor will
              interfere in any way with the right of the Company or the Manager,
              as the case may be, to otherwise change a person's compensation or
              other benefits or to terminate the employment or service of such
              person, with or without cause.  This Plan or any related document
              will not, however, adversely affect any independent contractual
              right of such person without the Participant's consent.

       6.1.3  PLAN NOT FUNDED.  Awards payable under this Plan will be payable
              in Shares or from the general assets of the Corporation, and
              (except as provided in Section 1.4.3) no special or separate
              reserve, fund or deposit will be made to

                                       14



              assure payment of such Awards.  No Participant, Beneficiary or 
              other person will have any right, title or interest in any fund 
              or in any specific asset (including Shares) of the Company by 
              reason of any Award hereunder.  Neither the provisions of this 
              Plan (or of any related documents), nor the creation or adoption 
              of this Plan, nor any action taken pursuant to the provisions of 
              this Plan will create, or be construed to create, a trust of any 
              kind or a fiduciary relationship between the Company and any 
              Participant, Beneficiary or other person.  To the extent that a 
              Participant, Beneficiary or other person acquires a right to 
              receive payment pursuant to any Award hereunder, such right will 
              be no greater than the right of any unsecured general creditor 
              of the Company.

6.2    ADJUSTMENTS; ACCELERATION.

6.2.1  ADJUSTMENTS.  The following provisions will apply in the case of (i) any
       extraordinary dividend or other extraordinary distribution occurs in
       respect of the Common Stock (whether in the form of cash, Common Stock,
       other securities, or other property), (ii) any reclassification,
       recapitalization, stock split (including a stock split in the form of a
       stock dividend), or reverse stock split, (iii) any reorganization,
       merger, combination, consolidation, split-up, spin-off, combination,
       material repurchase or exchange of Common Stock or other securities of
       the Corporation, (iv) any similar, unusual or extraordinary corporate
       transaction (or event in respect of the Common Stock) or (v) a sale of
       substantially all the assets of the Corporation as an entirety. In such
       event, the Committee will, in such manner and to such extent (if any) as
       it deems appropriate and equitable:

              (a)    (i)    proportionately adjust any or all of (1) the number
              and type of Shares (or other securities) that thereafter may be
              made the subject of Awards (including the specific maximum and
              numbers of shares set forth elsewhere in this Plan), (2) the
              number, amount and type of Shares (or other securities or
              property) subject to any or all outstanding Awards, (3) the grant,
              purchase, or exercise price of any or all outstanding Awards, (4)
              the securities, cash or other property deliverable upon exercise
              of any outstanding Awards, or (5) the performance standards
              appropriate to any outstanding Awards, or

                     (ii)   in the case of an extraordinary dividend or other
                            distribution, recapitalization, reclassification,
                            merger, reorganization, consolidation, combination,
                            sale of assets, split up, exchange, or spin off,
                            make provision for a cash payment or for the
                            substitution or exchange of any or all outstanding
                            Awards or the cash, securities or property
                            deliverable to the holder of any or all outstanding
                            Awards based upon the distribution or consideration
                            payable to holders of the Common Stock of the
                            Corporation upon or in respect of such event.

              (c)    In each case, with respect to Awards of Incentive Stock
                     Options, no such adjustment will be made that would cause
                     the Plan to violate

                                       15



                     Section 424(a) of the Code or any successor provisions 
                     without the written consent of holders materially 
                     adversely affected thereby.

              (d)    In any of such events, the Committee may take such action
                     sufficiently prior to such event if necessary to permit the
                     Participant to realize the benefits intended to be conveyed
                     with respect to the underlying shares in the same manner as
                     is available to stockholders generally.

       6.2.2  ACCELERATION OF AWARDS UPON CHANGE IN CONTROL.  Unless prior to a
              Change in Control Event the Committee determines that, upon its
              occurrence, benefits under any or all Awards will not accelerate
              or determines that only certain or limited benefits under any or
              all Awards will be accelerated and the extent to which they will
              be accelerated, and/or establishes a different time in respect of
              such Event for such acceleration, then upon the occurrence of a
              Change in Control Event

              (a)    each Option and Stock Appreciation Right will become
                     immediately exercisable,

              (b)    Restricted Stock will immediately vest free of
                     restrictions, and

              (c)    each Performance Share Award will become payable to the
                     Participant.

However, in the case of a transaction intended to be accounted for as a pooling
of interests transaction, the Committee shall have no discretion with respect to
the foregoing acceleration of Awards.  The Committee may override the
limitations on acceleration in this Section 6.2.2 by express provision in the
Award Agreement and may accord any Eligible Person a right to refuse any
acceleration, whether pursuant to the Award Agreement or otherwise, in such
circumstances as the Committee may approve.

Any acceleration of Awards will comply with applicable legal requirements and,
if the circumstances require, may be deemed by the Committee to occur an instant
before the event.

       6.2.3  POSSIBLE EARLY TERMINATION OF ACCELERATED AWARDS. If any Option or
              other right to acquire Shares under this Plan (other than under
              Section 8) has been fully accelerated as required or permitted by
              Section 6.2.2 but is not exercised at or prior to (a) a
              dissolution of the Corporation, or (b) an event described in
              Section 6.2.1 that the Corporation does not survive, or (c) the
              consummation of an event described in Section 6.1 involving a
              Change of Control approved by the Board, the Option or right will
              terminate, subject to any provision that has been expressly made
              by the Committee through a plan of reorganization approved by the
              Board or otherwise for the survival, substitution, assumption,
              exchange or other settlement of the Option or right.

       6.2.4  GOLDEN PARACHUTE LIMITATIONS.  Unless otherwise specified in an
              Award Agreement or expressly approved by the Committee, no Award
              will be accelerated under this Plan to an extent or in a manner
              that would not be fully

                                       16



              deductible by the Company for federal income tax purposes because 
              of Section 280G of the Code, nor will any payment hereunder be 
              accelerated if any portion of such accelerated payment would not 
              be deductible by the Company because of Section 280G of the Code. 
              If a holder would be entitled to benefits or payments hereunder 
              and under any other plan or program that would constitute 
              "parachute payments" as defined in Section 280G of the Code, then 
              the holder may by written notice to the Company designate the 
              order in which such parachute payments will be reduced or 
              modified so that the Company is not denied federal income tax 
              deductions for any "parachute payments" because of Section 280G 
              of the Code.

6.3    EFFECT OF TERMINATION OF EMPLOYMENT.  The Committee will establish in
       respect of each Award granted to an Eligible Person the effect of a
       termination of employment or service on the rights and benefits
       thereunder and in so doing may make distinctions based upon the cause of
       termination.

6.4    COMPLIANCE WITH LAWS.

       6.4.1  GENERAL.      This Plan, the granting, vesting and exercise of
              Awards under this Plan and the offer, issuance and delivery of
              Shares and/or the payment of money under this Plan or under Awards
              granted hereunder are subject to compliance with all applicable
              federal and state laws, rules and regulations (including but not
              limited to state and federal securities law, federal margin
              requirements) and to such approvals by any listing, regulatory or
              governmental authority as may, in the opinion of counsel for the
              Corporation, be necessary or advisable in connection therewith. 
              Any securities delivered under this Plan will be subject to such
              restrictions, and to any restrictions the Committee may require to
              preserve a pooling of interests under generally accepted
              accounting principles, and the person acquiring such securities
              will, if requested by the Corporation, provide such assurances and
              representations to the Corporation as the Corporation may deem
              necessary or desirable, to assure compliance with all applicable
              legal requirements.

       6.4.2  RESTRICTIONS ON TRANSFER.  If the offer or sale of any Shares
              under the Plan is not registered under the Securities Act, but an
              exemption is available which requires an investment representation
              or other representation, each Participant will be required to
              represent that the Shares are being acquired for investment, and
              not with a view to the sale or distribution thereof, and to make
              such other representations as are deemed necessary or appropriate
              in the opinion of the Committee and the Corporation's counsel. 
              Any determination by the Corporation and its counsel in connection
              with any other the matters set forth in this Section 6.4 will be
              conclusive and binding on all persons.  Stock certificates
              evidencing Shares acquired under the Plan pursuant to an
              unregistered transaction will bear the following restrictive
              legend and such other restrictive legends as are required or
              deemed advisable under the provisions of any applicable law:

                                       17



                     "THE SALE OF THE SECURITIES REPRESENTED HEREBY HAVE NOT
                     BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
                     AMENDED (THE "ACT"). ANY TRANSFER OF SUCH SECURITIES WILL
                     BE INVALID UNLESS A REGISTRATION STATEMENT UNDER THE ACT IS
                     IN EFFECT AS TO SUCH TRANSFER OR IN THE OPINION OF COUNSEL
                     FOR THE ISSUER SUCH REGISTRATION IS UNNECESSARY IN ORDER
                     FOR SUCH TRANSFER TO COMPLY WITH THE ACT."

                            If, in the opinion of the Corporation and its
                            counsel, any legend placed on a stock certificate
                            representing Shares sold under the Plan is no longer
                            required, the holder of such certificate may
                            exchange such certificate for a certificate
                            representing the same number of Shares without such
                            legend.

6.5    TAX WITHHOLDING.

       6.5.1  PROVISION FOR TAX WITHHOLDING OFFSET.  Upon any exercise, vesting,
              or payment of any Award or upon the disposition of Shares acquired
              pursuant to the exercise of an Incentive Stock Option prior to
              satisfaction of the holding period requirements of Section 422 of
              the Code, the Company shall have the right at its option to (a)
              require the Participant (or Personal Representative or
              Beneficiary, as the case may be) to pay or provide for payment of
              the amount of any taxes which the Company may be required to
              withhold with respect to such Award event or payment or (b) deduct
              from any amount payable in cash the amount of any taxes which the
              Company may be required to withhold with respect to such cash
              payment.  In any case where a tax is required to be withheld in
              connection with the delivery of Shares under this Plan, the
              Committee may in its sole discretion (subject to Section 6.4)
              grant (either at the time of the Award or thereafter) to the
              Participant the right to elect, pursuant to such rules and subject
              to such conditions as the Committee may establish, to have the
              Corporation reduce the number of Shares to be delivered by (or
              otherwise reacquire) the appropriate number of Shares valued at
              their then Fair Market Value, to satisfy such withholding
              obligation.

       6.5.2  TAX LOANS.  If so provided in the Award Agreement, the Company
              may, to the extent permitted by law, authorize a loan to an
              Eligible Person in the amount of any taxes that the Company may be
              required to withhold with respect to Shares received (or disposed
              of, as the case may be) pursuant to a transaction described in
              Section 6.5.1.  Such a loan will be for a term, at a rate of
              interest and pursuant to such other terms and conditions as the
              Company, under applicable law may establish and such loan need not
              comply with the provisions of Section 1.8.

6.6    PLAN AMENDMENT, TERMINATION AND SUSPENSION.

       6.6.1  BOARD AUTHORIZATION.  The Board may, at any time, terminate or,
              from time to time, amend, modify or suspend this Plan, in whole or
              in part.  No Awards may be

                                       18



              granted during any suspension of this Plan or after termination 
              of this Plan, but the Committee will retain jurisdiction as to 
              Awards then outstanding in accordance with the terms of this Plan.

       6.6.2  STOCKHOLDER APPROVAL.  To the extent then required under Sections
              422 and 424 of the Code or any other applicable law, or deemed
              necessary or advisable by the Board, any amendment to this Plan
              shall be subject to stockholder approval.

       6.6.3  AMENDMENTS TO AWARDS.  Without limiting any other express
              authority of the Committee under but subject to the express limits
              of this Plan, the Committee by agreement or resolution may waive
              conditions of or limitations on Awards to Participants that the
              Committee in the prior exercise of its discretion has imposed,
              without the consent of a Participant, and may make other changes
              to the terms and conditions of Awards that do not affect in any
              manner materially adverse to the Participant, the Participant's
              rights and benefits under an Award.

       6.6.4  LIMITATIONS ON AMENDMENTS TO PLAN AND AWARDS.  No amendment,
              suspension or termination of this Plan or change of or affecting
              any outstanding Award will, without written consent of the
              Participant, affect in any manner materially adverse to the
              Participant any rights or benefits of the Participant or
              obligations of the Corporation under any Award granted under this
              Plan prior to the effective date of such change.  Changes
              contemplated by Section 6.2 will not be deemed to constitute
              changes or amendments for purposes of this Section 6.6.

6.7    PRIVILEGES OF STOCK OWNERSHIP.  Except as otherwise expressly authorized
       by the Committee or this Plan, a Participant will not be entitled to any
       privilege of stock ownership as to any Shares not actually delivered to
       and held of record by the Participant.  No adjustment will be made for
       dividends or other rights as a stockholder for which a record date is
       prior to such date of delivery.

6.8    EFFECTIVE DATE OF THE PLAN.  This Plan is effective as of December 3,
       1997 (the "Effective Date").  The Plan was approved by the Corporation's
       stockholder(s) on October 17, 1997.

6.9    TERM OF THE PLAN.  No Award may be granted under this Plan more than ten
       years after the Effective Date (the "termination date").  Unless
       otherwise expressly provided in this Plan or in an applicable Award
       Agreement, any Award granted prior to the termination date may extend
       beyond such date, and all authority of the Committee with respect to
       Awards hereunder, including the authority to amend an Award, will
       continue during any suspension of this Plan and in respect of Awards
       outstanding on the termination date.

6.10   GOVERNING LAW/CONSTRUCTION/SEVERABILITY.

       6.10.1 CHOICE OF LAW.  This Plan, the Awards, all documents evidencing
              Awards and all other related documents will be governed by, and
              construed in accordance with the laws of the State of California.

                                       19




       6.10.2 SEVERABILITY.  If a court of competent jurisdiction holds any
              provision invalid and unenforceable, the remaining provisions of
              this Plan will continue in effect.

       6.10.3 PLAN CONSTRUCTION.

              (a)    RULE 16B-3.  It is the intent of the Corporation that the
                     Awards hereunder satisfy and be interpreted in a manner
                     that, in the case of Participants who are or may be subject
                     to Section 16 of the Exchange Act, satisfies the applicable
                     requirements of Rule 16b-3 so that such persons (unless
                     they otherwise agree) will be entitled to the benefits of
                     Rule 16b-3 or other exemptive rules under Section 16 of the
                     Exchange Act in respect of those transactions and will not
                     be subjected to avoidable liability thereunder.  If any
                     provision of this Plan or of any Award would otherwise
                     frustrate or conflict with the intent expressed above, that
                     provision to the extent reasonable will be interpreted as
                     to avoid such conflict.  If the conflict remains
                     irreconcilable, the Committee may disregard the provision
                     if it concludes that to do so furthers the interest of the
                     Corporation, is fair to the affected Participant and is
                     consistent with the purposes of this Plan as to such
                     persons in the circumstances.

              (b)    SECTION 162(M).  It is the further intent of the Company
                     that, to the extent the Corporation or Awards under this
                     Plan may be or become subject to Section 162(m), Options or
                     SARs with an exercise or base price not less than Fair
                     Market Value on the date of grant and performance awards
                     under Section 5.2 of this Plan that are granted to or held
                     by a person subject to Section 162(m) of the Code will
                     qualify as performance-based compensation under
                     Section 162(m) of the Code, and this Plan will be
                     interpreted consistent with such intent.

6.11   CAPTIONS.  Captions and headings are given to the sections and
       subsections of this Plan solely as a convenience to facilitate reference.
       Such headings will not be deemed in any way material or relevant to the
       construction or interpretation of this Plan or any provision thereof.

6.12   EFFECT OF CHANGE OF SUBSIDIARY STATUS.  For purposes of this Plan and any
       Award hereunder, if an entity ceases to be a Subsidiary a termination of
       employment and service will be deemed to have occurred with respect to
       each Eligible Person in respect of such Subsidiary who does not continue
       as an Eligible Person in respect of another entity within the Company. 

6.13   NON-EXCLUSIVITY OF PLAN.  Nothing in this Plan will limit or be deemed to
       limit the authority of the Board or the Committee to grant awards or
       authorize any other compensation, with or without reference to the Common
       Stock, under any other plan or authority.


                                          20


                                 7.  DEFINITIONS

"AWARD" means an award of any Option, Stock Appreciation Right, Restricted 
Stock, Stock Bonus, performance share award, stock unit, dividend equivalent 
or deferred payment right or other right or security that would constitute a 
"derivative security" under Rule 16a-1(c) of the Exchange Act, or any 
combination thereof, whether alternative or cumulative, authorized by and 
granted under this Plan.

"AWARD AGREEMENT" means any writing setting forth the terms of an Award that has
been authorized by the Committee.

"AWARD DATE" means the date upon which the Committee took the action granting an
Award or such later date as the Committee designates as the Award Date at the
time of the Award or, in the case of Awards under Section 8, the applicable
dates set forth therein.

"AWARD PERIOD" means the period beginning on an Award Date and ending on the
expiration date of such Award.

"BENEFICIARY" means the person, persons, trust or trusts designated by a
Participant or, in the absence of a designation, entitled by will or the laws of
descent and distribution, to receive the benefits specified in the Award
Agreement and under this Plan if the Participant dies, and means the
Participant's executor or administrator if no other Beneficiary is designated
and able to act under the circumstances.

"BOARD" means the Board of Directors of the Corporation.

"CHANGE IN CONTROL EVENT" means any of the following: 

              (a)    Approval by the stockholders of the Corporation of the
                     dissolution or liquidation of the Corporation;

              (b)    Approval by the stockholders of the Corporation of an
                     agreement to merge or consolidate, or otherwise reorganize,
                     with or into one or more entities that are not Subsidiaries
                     or other affiliates, as a result of which less than 50% of
                     the outstanding voting securities of the surviving or
                     resulting entity immediately after the reorganization are,
                     or will be, owned, directly or indirectly, by stockholders
                     of the Corporation immediately before such reorganization
                     (assuming for purposes of such determination that there is
                     no change in the record ownership of the Corporation's
                     securities from the record date for such approval until
                     such reorganization and that such record owners hold no
                     securities of the other parties to such reorganization),
                     but including in such determination any securities of the
                     other parties to such reorganization held by affiliates of
                     the Corporation);

              (c)    Approval by the stockholders of the Corporation of the sale
                     of substantially all of the Corporation's business and/or
                     assets as an entity to a person or entity that is not a
                     Subsidiary or other affiliate; or; 

                                       21




              (d)    Any "person" (as such term is used in Sections 13(d) and
                     14(d) of the Exchange Act but excluding any person
                     described in and satisfying the conditions of Rule 
                     13d-1(b)(1) thereunder) becomes the beneficial owner (as
                     defined in Rule 13d-3 under the Exchange Act), directly or
                     indirectly, of securities of the Corporation representing
                     more than 50% of the combined voting power of the
                     Corporation's then outstanding securities entitled to then
                     vote generally in the election of directors of the
                     Corporation; or

              (e)    During any period not longer than two consecutive years,
                     individuals who at the beginning of such period constituted
                     the Board cease to constitute at least a majority thereof,
                     unless the election, or the nomination for election by the
                     Corporation's stockholders, of each new Board member was
                     approved by a vote of at least three-fourths of the Board
                     members then still in office who were Board members at the
                     beginning of such period (including for these purposes, new
                     members whose election or nomination was so approved).

"CODE" means the Internal Revenue Code of 1986, as amended from time to time.

"COMMISSION" means the Securities and Exchange Commission.

"COMMITTEE" means one or more committees appointed by the Board to administer
this Plan, each of which will be comprised of two or more directors meeting such
criteria as the Board may establish from time to time in order to satisfy any
applicable legal or regulatory requirements.

"COMMON STOCK" means the Common Stock of the Corporation and such other
securities or property as may become the subject of Awards, or become subject to
Awards, pursuant to an adjustment made under Section 6.2 of this Plan.

"COMPANY" means, collectively, the Corporation and its Subsidiaries.

"CORPORATION" means Apex Mortgage Capital, Inc., a Maryland corporation, and its
successors.

"ELIGIBLE EMPLOYEE" means an officer (whether or not a director) or employee of
the Company.

"ELIGIBLE PERSON" means an Eligible Employee, or any Other Eligible Person, as
determined by the Committee.

"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended from time
to time. 

"FAIR MARKET VALUE" on any date means (a) if the stock is listed or admitted to
trade on a national securities exchange, the closing price of the stock on the
Composite Tape, as published in the Western Edition of The Wall Street Journal,
of the principal national securities exchange on which the stock is so listed or
admitted to trade, on such date, or, if there is no trading of the stock on such
date, then the closing price of the stock as quoted on such Composite Tape on
the 

                                       22



next preceding date on which there was trading in such shares; (b) if the 
stock is not listed or admitted to trade on a national securities exchange, 
the last price for the stock on such date, as furnished by the National 
Association of Securities Dealers, Inc. ("NASD") through the NASDAQ National 
Market Reporting System or a similar organization if the NASD is no longer 
reporting such information; (c) if the stock is not listed or admitted to 
trade on a national securities exchange and is not reported on the National 
Market Reporting System, the mean between the bid and asked price for the 
stock on such date, as furnished by the NASD or a similar organization; or 
(d) if the stock is not listed or admitted to trade on a national securities 
exchange, is not reported on the National Market Reporting System and if bid 
and asked prices for the stock are not furnished by the NASD or a similar 
organization, the value as established by the Committee at such time for 
purposes of this Plan.

"INCENTIVE STOCK OPTION" means an Option that is designated and intended as an
incentive stock option within the meaning of Section 422 of the Code, the award
of that contains such provisions (including but not limited to the receipt of
stockholder approval of this Plan, if the award is made prior to such approval)
and is made under such circumstances and to such persons as may be necessary to
comply with that section.

"INITIAL AWARDS" means the Options granted immediately prior to the 
effectiveness of the registration statement relating to the Corporation's 
initial public offering, which Options are granted to officers and employees 
of the Corporation and the Manager and which are exercisable for an aggregate 
of 300,000 shares of Common Stock.

"MANAGER" means TCW Investment Management Company.

"NONQUALIFIED STOCK OPTION" means an Option that is designated as a 
Nonqualified Stock Option and will include any Option intended as an 
Incentive Stock Option that fails to meet the applicable legal requirements 
thereof.  Any Option granted hereunder that is not designated as an incentive 
stock option will be deemed to be designated a nonqualified stock option 
under this Plan and not an incentive stock option under the Code.

"NON-EMPLOYEE DIRECTOR" means a member of the Board of Directors of the 
Corporation who is not an officer or employee of the Company.  For purposes 
of this Plan, the Chairman of the Board will be deemed an officer of the 
Company.

"OPTION" means an option to purchase Common Stock granted under this Plan.  
The Committee will designate any Option granted to an Eligible Person as a 
Nonqualified Stock Option or an Incentive Stock Option.

"OTHER ELIGIBLE PERSON" means any Non-Employee Director, the Manager, any 
director, officer or employee of the Manager, or any other individual 
consultant or advisor who renders or has rendered BONA FIDE services (other 
than services in connection with the offering or sale of 

                                       23



securities of the Company in a capital raising transaction) to the Company. A 
non-employee providing BONA FIDE services to the Company may only be selected 
as an Other Eligible Person if such person's participation in this Plan would 
not adversely affect (a) the Corporation's eligibility to use Form S-8 or 
Form S-3 to register under the Securities Act the offering of shares issuable 
under this Plan by the Company or (b) the Corporation's compliance with any 
other applicable laws; PROVIDED, HOWEVER, in the case of clause (a) above, 
such person may be selected as an Other Eligible Person if the Committee 
determines that the offering and issuance of Shares to such person in the 
circumstances satisfies the requirements of any applicable exemption from 
registration under federal and state securities laws and regulations.

"PARTICIPANT" means an Eligible Person who has been granted an Award under this
Plan and a Non-Employee Director who has been received an Award under Section 8
of this Plan.

"PERFORMANCE SHARE AWARD" means an Award of a right to receive Shares under
Section 5.1, or to receive Shares or other compensation (including cash) under
Section 5.2, the issuance or payment of that is contingent upon, among other
conditions, the attainment of performance objectives specified by the Committee.

"PERSONAL REPRESENTATIVE" means the person or persons who, upon the disability
or incompetence of a Participant, has acquired on behalf of the Participant, by
legal proceeding or otherwise, the power to exercise the rights or receive
benefits under this Plan by virtue of having become the legal representative of
the Participant.

"PLAN" means this Apex Mortgage Capital, Inc. Amended and Restated 1997 Stock
Option Plan, as amended from time to time.

"QDRO" means a qualified domestic relations order.

"RESTRICTED SHARES" or "Restricted Stock" means Shares awarded to a Participant
under this Plan, subject to payment of such consideration, if any, and such
conditions on vesting (which may include, among others, the passage of time,
specified performance objectives or other factors) and such transfer and other
restrictions as are established in or pursuant to this Plan and the related
Award Agreement, for so long as such Shares remain unvested under the terms of
the applicable Award Agreement.

"RETIREMENT" means retirement with the consent of the Company or the Manager, as
the case may be, or, from active service as an employee or officer of the
Company or the Manager, as the case may be, on or after attaining age 55 with
ten or more years of service or age 65, or, in the case of a Non-Employee
Director, retirement or failure to stand for reelection, with the consent of the
Board of Directors, on or after age 55 with ten or more years of service, or in
any case after age 65.


                                       24



"RULE 16B-3" means Rule 16b-3 as promulgated by the Commission pursuant to the
Exchange Act, as amended from time to time. 

"SECURITIES ACT" means the Securities Act of 1933, as amended from time to time.

"STOCK APPRECIATION RIGHT" or "SAR" means a right authorized under this Plan to
receive a number of Shares or an amount of cash, or a combination of Shares and
cash, the aggregate amount or value of which is determined by reference to a
change in the Fair Market Value of the Common Stock.

"STOCK BONUS" means an Award of Shares granted under this Plan for no
consideration other than past services and without restriction other than such
transfer or other restrictions as the Committee may deem advisable to assure
compliance with law.

"STOCK UNIT" means a bookkeeping entry which serves a unit of measurement
relative to a Share for purposes of determining the payment of a deferred
benefit or right under the Plan.

"SUBSIDIARY" means any corporation or other entity a majority of whose
outstanding voting stock or voting power is beneficially owned directly or
indirectly by the Corporation.

"TOTAL DISABILITY" means a disability where Participant is unable to effectively
engage in the material activities required for Participant's position with the
Company or the Manager, as the case may be, by reason of any medically
determinable physical or mental impairment that can be expected to result in
death or that has lasted or can be expected to last for a period of 90
consecutive days or for shorter periods aggregating 180 days in any consecutive
12 month period.

                        8.   NON-EMPLOYEE DIRECTOR OPTIONS

8.1    PARTICIPATION.  Awards under this Section 8 will be made only to 
       Non-Employee Directors and will be evidenced by Award Agreements in the
       form adopted by the Committee.

8.2    OPTION GRANTS.

       8.2.1  TIME OF INITIAL AWARD. After approval of this Plan by the
              stockholder(s) of the Corporation, and upon the closing of the
              Corporation's initial public offering, each person who is then a
              Non-Employee Director will automatically be granted (without any
              action by the Board or Committee) a Non-qualified Stock Option
              (the Award Date of which will be the date of the closing of such
              initial public offering) to purchase 25,000 shares of Common Stock
              at the price that the Corporations Common Stock is offered in such
              initial public offering.


                                       25



       8.2.2  SUBSEQUENT AUTOMATIC AWARDS.  If any person who is not then an
              officer or employee of the Company becomes a director of the
              Corporation, such person will automatically be granted (without
              any action by the Board or Committee) a Non-qualified Stock Option
              (the Award Date of which will be the date such person takes
              office) to purchase 25,000 Shares.

       8.2.3  SUBSEQUENT DISCRETIONARY AWARDS.  The Committee shall have the
              authority to grant additional Options to Non-Employee Directors
              from time to time; provided, however that no more than 50,000
              shares, subject to adjustment as contemplated by Section 6.2, in
              the aggregate, shall be subject to Options made to any one 
              Non-Employee Director under this Section 8.2 and provided further
              that any such discretionary Option shall be subject to 
              contemporaneous approval or ratification by a majority of the 
              members of the Board of Directors and a majority of the Directors
              who are not recipients of such grants.

8.3    OPTION PRICE.  The purchase price per share of the Common Stock covered
       by each Option granted pursuant to Section 8.2.2 or Section 8.2.3 will be
       100% of the Fair Market Value of the Common Stock on the Award Date.  The
       exercise price of any Option granted under this Section will be paid in
       full at the time of each purchase in cash or by check or in Shares valued
       at the Fair Market Value on the date of exercise of the Option, or partly
       in such shares and partly in cash, but any such shares used in payment
       must be owned by the Participant at least six months prior to the date of
       exercise.  Any notice and third party cashless exercise payment
       procedures authorized by the Committee with respect to Options under
       Section 2 may be utilized with respect to Options granted under Section
       8.2 unless the Committee or applicable law otherwise provide.

8.4    OPTION PERIOD AND EXERCISABILITY.  Each Option granted under this Section
       8 and all rights or obligations thereunder will expire on the day before
       the 10th anniversary of the Award Date and will be subject to earlier
       termination as provided below. Each Option granted under Section 8.2
       shall become exercisable no earlier than six months after the Award Date.
       Unless the Board or Committee otherwise provides in the applicable Award
       Agreement, an Option will vest as follows:  one-third on each of the
       first, second and third anniversaries of the date of grant.

8.5    TERMINATION OF DIRECTORSHIP.  If a Non-Employee Director's services as a
       member of the Board of Directors terminate by reason of death, Total
       Disability or Retirement, an Option granted pursuant to this Section 8
       held by such Participant will immediately become and will remain
       exercisable for nine months after the date of such termination or until
       the expiration of the stated term of such Option, whichever first occurs.
       If a Non-Employee Director's services as a member of the Board of
       Directors terminate for any other reason, any portion of an Option
       granted pursuant to this Section that is not then exercisable will
       terminate and any portion of such Option that is then exercisable may be
       exercised for six months after the date of such termination or until the
       expiration of the stated term whichever first occurs.

8.6    ADJUSTMENTS; ACCELERATIONS; TERMINATIONS.  Options granted under this
       Section 8 will be subject to adjustments, accelerations and terminations
       as provided in Section 6.2, but 


                                        26



       only to the extent that in the case of a Change in Control Event such 
       effect and any Board or Committee action in respect thereof is effected
       pursuant to the terms of a reorganization agreement approved by 
       stockholders of the Corporation or is otherwise consistent with the 
       effect on Options held by persons other than executive officers or 
       directors of the Corporation (or, if there are none, consistent in 
       respect of the underlying shares with the effect on stockholders 
       generally).

8.7    ACCELERATION UPON A CHANGE IN CONTROL EVENT.  Upon the occurrence of a
       Change in Control Event and acceleration under Section 6.2.2, each Option
       granted under Section 8.2 hereof will become immediately exercisable in
       full.  To the extent that any Option granted under this Section 8 is not
       exercised prior to (a) a dissolution of the Corporation or (b) a merger
       or other corporate event that the Corporation does not survive, and no
       provision is (or consistent with the provisions of this Plan can be) made
       for the assumption, conversion, substitution or exchange of the Option,
       the Option will terminate upon the occurrence of such event.


                                       27

EX-24.1-1

                                                                 EXHIBIT 24.1.1
                                       
                                  POWER OF ATTORNEY



     KNOW ALL MEN BY THESE PRESENTS, that I, John C. Argue, constitute and
appoint Philip A. Barach and Daniel K. Osborne, and each of them, as my true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign any Form 10-K or Form 10-Q of Apex Mortgage Capital, Inc.,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing in as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact or agents or any
of them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.





/s/ John C. Argue
- -----------------
John C. Argue

                                       



                                  POWER OF ATTORNEY



     KNOW ALL MEN BY THESE PRESENTS, that I, Peter G. Allen, constitute and
appoint Philip A. Barach and Daniel K. Osborne, and each of them, as my true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign any Form 10-K or Form 10-Q of Apex Mortgage Capital, Inc.,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing in as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact or agents or any
of them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.





/s/ Peter G. Allen
- ------------------
Peter G. Allen

                                       


                                       
                                  POWER OF ATTORNEY



     KNOW ALL MEN BY THESE PRESENTS, that I, John A. Gavin, constitute and 
appoint Philip A. Barach and Daniel K. Osborne, and each of them, as my true 
and lawful attorneys-in-fact and agents with full power of substitution and 
resubstitution, for me and in my name, place and stead, in any and all 
capacities, to sign any Form 10-K or Form 10-Q of Apex Mortgage Capital, 
Inc., and to file the same, with all exhibits thereto, and other documents in 
connection therewith, with the Securities and Exchange Commission, granting 
unto said attorneys-in-fact and agents, and each of them, full power and 
authority to do and perform each and every act and thing in as I might or 
could do in person, hereby ratifying and confirming all that said 
attorneys-in-fact or agents or any of them, or their or his substitute or 
substitutes, may lawfully do or cause to be done by virtue hereof.





/s/ John A. Gavin
- -----------------
John A. Gavin

                                       



                                  POWER OF ATTORNEY



     KNOW ALL MEN BY THESE PRESENTS, that I, Carl C. Gregory III, constitute and
appoint Philip A. Barach and Daniel K. Osborne, and each of them, as my true and
lawful attorneys-in-fact and agents with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign any Form 10-K or Form 10-Q of Apex Mortgage Capital, Inc.,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing in as I might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact or agents or any
of them, or their or his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.





/s/ Carl C. Gregory
- -------------------
Carl C. Gregory III

EX-27

 


<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION OF THE REGISTRANT AS OF DECEMBER
31, 1998 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS OF THE REGISTRANT FOR THE
PERIOD FROM JANUARY 1, 1998 TO DECEMBER 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.

<MULTIPLIER> 1,000
       
                             
<PERIOD-TYPE>                   YEAR
<FISCAL-YEAR-END>                          DEC-31-1998
<PERIOD-START>                             JAN-01-1998
<PERIOD-END>                               DEC-31-1998
<CASH>                                          12,679
<SECURITIES>                                   846,134
<RECEIVABLES>                                    6,088
<ALLOWANCES>                                         0
<INVENTORY>                                          0
<CURRENT-ASSETS>                                   577
<PP&E>                                               0
<DEPRECIATION>                                       0
<TOTAL-ASSETS>                                 865,478
<CURRENT-LIABILITIES>                          777,448
<BONDS>                                              0
<PREFERRED-MANDATORY>                                0
<PREFERRED>                                          0
<COMMON>                                            67
<OTHER-SE>                                      87,963
<TOTAL-LIABILITY-AND-EQUITY>                   865,478
<SALES>                                              0
<TOTAL-REVENUES>                                43,658
<CGS>                                                0
<TOTAL-COSTS>                                        0
<OTHER-EXPENSES>                                 2,104
<LOSS-PROVISION>                                     0
<INTEREST-EXPENSE>                              36,007
<INCOME-PRETAX>                                  5,547
<INCOME-TAX>                                         0
<INCOME-CONTINUING>                              5,547
<DISCONTINUED>                                       0
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                     5,547
<EPS-PRIMARY>                                     0.90
<EPS-DILUTED>                                     0.90