##### Table of Contents









UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-Q

(Mark One)



|  |                                                                                                              
|- | -------------------------------------------------------------------------------------------------------------
|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the quarterly period ended September 30,
2002

OR



|  |                                                                                                               
|- | --------------------------------------------------------------------------------------------------------------
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from to

Commission File Number 1-15049

FBR ASSET INVESTMENT CORPORATION

(Exact name of registrant as specified in its
charter)


|                                |  |                    
|------------------------------- |  | -------------------
|Virginia                        |  | 54-1873198         
|(State or other Jurisdiction of |  | (I.R.S. employer   
|Incorporation or Organization)  |  | identification no.)

Potomac Tower

1001 Nineteenth Street North


Arlington, Virginia 22209


(Address of principal executive offices)


(zip code)


(703) 469-1000

(Registrants telephone number


including area code)


N/A

(former name)


Indicate by checkmark whether the Registrant
(i) 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 short period
that the Registrant was required to file such reports), and
(ii) has been subject to such filing requirements for the
past 90 days:
Yes x  No o

As of November 8, 2002, the latest
practicable date, 25,054,332 shares of FBR Asset Investment
Corporations common stock were outstanding.









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TABLE OF CONTENTS



|                                                                                        |                                                                                               |                                                                                                                                                           |  |  |  |  |  | 
|--------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|PART I.  FINANCIAL INFORMATION                                                        
|                                                                                        | Item 1. Consolidated Financial Statements and Notes                                          
|                                                                                        |                                                                                               | Consolidated Statements of Financial Condition as of September 30, 2002 (unaudited) and December 31, 2001                                                
|                                                                                        |                                                                                               | Consolidated Statements of Income for the Three Months Ended September 30, 2002 and 2001 (unaudited)                                                     
|                                                                                        |                                                                                               | Consolidated Statements of Income for the Nine Months Ended September 30, 2002 and 2001 (unaudited)                                                      
|                                                                                        |                                                                                               | Consolidated Statements of Changes in Shareholders Equity for the Nine Months Ended September 30, 2002 (unaudited), and the Year Ended December 31, 2001
|                                                                                        |                                                                                               | Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 (unaudited)                                                  
|FBR ASSET INVESTMENT CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
|                                                                                        | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|FBR ASSET INVESTMENT CORPORATION                                                       
|                                                                                        | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                                                        | Item4. Controls and Procedures                                                               
|PART II OTHER INFORMATION                                                              
|                                                                                        | Item 1. Legal Proceedings                                                                    
|                                                                                        | Item 2. Changes in Securities and Use of Proceeds                                            
|                                                                                        | Item 3. Defaults Upon Senior Securities                                                      
|                                                                                        | Item4. Submission of Matters to a Vote of Security Holders                                   
|                                                                                        | Item 5. Other Information                                                                    
|                                                                                        | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURE                                                                              
|CERTIFICATION                                                                          



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##### Table of Contents



FBR ASSET INVESTMENT CORPORATION

FORM 10-Q


FOR THE QUARTER ENDED SEPTEMBER 30,
2002


INDEX


|                              |         |                                                                                                                                                                       |                                                                                           |      |   |    | 
|----------------------------- | ------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ---- | - | -- | 
|                              |         |                                                                                                                                                                       |                                                                                           | Page
|                              |         |                                                                                                                                                                       |                                                                                           |     
|PART I. FINANCIAL INFORMATION |         |                                                                                                                                                                       |                                                                                           |     
|                              | Item 1. |                                                                                                                                                                       | Consolidated Financial Statements and Notes                                               |      |   | 1  | 
|                              |         | Consolidated Statements of Financial Condition as
    of September 30, 2002 (unaudited) and December 31, 2001                                                         |                                                                                           |      | 1 |   
|                              |         | Consolidated Statements of Income for the Three
    Months Ended September 30, 2002 and 2001(unaudited)                                                               |                                                                                           |      | 2 |   
|                              |         | Consolidated Statements of Income for the Nine
    Months Ended September 30, 2002 and 2001 (unaudited)                                                               |                                                                                           |      | 3 |   
|                              |         | Consolidated Statements of Changes in
    Shareholders Equity for the Nine Months Ended
    September 30, 2002 (unaudited), and the Year Ended
    December 31, 2001 |                                                                                           |      | 4 |   
|                              |         | Consolidated Statements of Cash Flows for the
    Nine Months Ended September 30, 2002 and 2001 (unaudited)                                                           |                                                                                           |      | 5 |   
|                              |         | Notes to Consolidated Financial Statements
    (unaudited)                                                                                                            |                                                                                           |      | 6 |   
|                              | Item 2. |                                                                                                                                                                       | Managements Discussion and Analysis of
    Financial Condition and Results of Operations |      |   | 11 | 
|                              | Item 3. |                                                                                                                                                                       | Quantitative and Qualitative Disclosures About
    Market Risk                            |      |   | 17 | 
|                              | Item 4. |                                                                                                                                                                       | Controls and Procedures                                                                   |      |   | 19 | 
|PART II. OTHER INFORMATION    |         |                                                                                                                                                                       |                                                                                           |     
|                              | Item 1. |                                                                                                                                                                       | Legal Proceedings                                                                         |      |   | 20 | 
|                              | Item 2. |                                                                                                                                                                       | Changes in Securities and Use of Proceeds                                                 |      |   | 20 | 
|                              | Item 3. |                                                                                                                                                                       | Defaults Upon Senior Securities                                                           |      |   | 20 | 
|                              | Item 4. |                                                                                                                                                                       | Submission of Matters to Vote of Security Holders                                         |      |   | 20 | 
|                              | Item 5. |                                                                                                                                                                       | Other Information                                                                         |      |   | 20 | 
|                              | Item 6. |                                                                                                                                                                       | Exhibits and Reports on Form 8-K                                                          |      |   | 20 | 
|SIGNATURE                     |         |                                                                                                                                                                       | 21                                                                                        |     
|CERTIFICATIONS                |         |                                                                                                                                                                       | 22                                                                                        |     



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##### Table of Contents












PART I  FINANCIAL
INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES

FBR ASSET INVESTMENT CORPORATION

Consolidated Statements of Financial
Condition


as of September 30, 2002
(unaudited) and December 31, 2001


|                                         |                       |                                                                                                                                                                                         |                                                |                   |               |               |  |   |               |               | 
|---------------------------------------- | --------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------- | ----------------- | ------------- | ------------- |  | - | ------------- | ------------- | 
|                                         |                       | September 30, 2002                                                                                                                                                                      |                                                | December 31, 2001
|                                         |                       |                                                                                                                                                                                         |                                                |                  
|                                         |                       | (unaudited)                                                                                                                                                                             |                                                |                  
|ASSETS                                   |                       |                                                                                                                                                                                         |                                                |                   |               |               |  |  
|                                         |                       | Mortgage-backed securities, at fair value                                                                                                                                               |                                                | $                 | 5,822,504,819 |               |  | $ | 1,238,365,511 |              
|                                         |                       | Cash and cash equivalents                                                                                                                                                               |                                                |                   | 12,670,252    |               |  |   | 6,630,379     |              
|                                         |                       | Deposits                                                                                                                                                                                |                                                |                   | 4,117,157     |               |  |   |              |              
|                                         |                       | Investments in equity securities, at fair value                                                                                                                                         |                                                |                   | 99,307,501    |               |  |   | 61,692,660    |              
|                                         |                       | Notes receivable                                                                                                                                                                        |                                                |                   |              |               |  |   | 8,000,000     |              
|                                         |                       | Interest, dividends and fees receivable                                                                                                                                                 |                                                |                   | 43,764,092    |               |  |   | 10,241,837    |              
|                                         |                       | Prepaid expenses and other                                                                                                                                                              |                                                |                   | 1,214,569     |               |  |   | 194,831       |              
|                                         |                       |                                                                                                                                                                                         |                                                |                   |               |               |  |  
|                                         |                       |                                                                                                                                                                                         | Total assets                                   |                   | $             | 5,983,578,390 |  |   | $             | 1,325,125,218 | 
|                                         |                       |                                                                                                                                                                                         |                                                |                   |               |               |  |  
|LIABILITIES AND SHAREHOLDERS
    EQUITY |                       |                                                                                                                                                                                         |                                                |                   |               |               |  |  
|                                         | Liabilities:          |                                                                                                                                                                                         |                                                |                   |               |               |  |   |              
|                                         |                       | Repurchase agreements                                                                                                                                                                   |                                                | $                 | 5,151,038,600 |               |  | $ | 1,105,145,000 |              
|                                         |                       | Interest-rate swaps                                                                                                                                                                     |                                                |                   | 17,188,593    |               |  |   | 1,159,167     |              
|                                         |                       | Eurodollar futures                                                                                                                                                                      |                                                |                   | 1,712,500     |               |  |   |              |              
|                                         |                       | Interest payable                                                                                                                                                                        |                                                |                   | 9,143,915     |               |  |   | 2,177,892     |              
|                                         |                       | Dividends payable                                                                                                                                                                       |                                                |                   | 31,317,915    |               |  |   | 10,645,659    |              
|                                         |                       | Management and incentive fees payable                                                                                                                                                   |                                                |                   | 6,787,220     |               |  |   | 1,117,458     |              
|                                         |                       | Accounts payable and accrued expenses                                                                                                                                                   |                                                |                   | 273,629       |               |  |   | 505,549       |              
|                                         |                       | Income taxes payable                                                                                                                                                                    |                                                |                   | 2,180,890     |               |  |   | 473,403       |              
|                                         |                       | Due to broker                                                                                                                                                                           |                                                |                   | 35,250,000    |               |  |   |              |              
|                                         |                       | Other                                                                                                                                                                                   |                                                |                   | 658,864       |               |  |   | 35,544        |              
|                                         |                       |                                                                                                                                                                                         |                                                |                   |               |               |  |  
|                                         |                       |                                                                                                                                                                                         | Total liabilities                              |                   |               | 5,255,552,126 |  |   |               | 1,121,259,672 | 
|                                         |                       |                                                                                                                                                                                         |                                                |                   |               |               |  |  
|                                         | Shareholders Equity: |                                                                                                                                                                                         |                                                |                   |               |               |  |   |              
|                                         |                       | Preferred stock, par value $.01 per share,
    50,000,000 shares authorized; none issued                                                                                                |                                                |                   |              |               |  |   |              |              
|                                         |                       | Common stock, par value $.01 per share,
    200,000,000 shares authorized, 25,054,332 and 8,502,527 shares
    issued as of September 30, 2002, and December 31,
    2001, respectively |                                                |                   | 250,543       |               |  |   | 85,025        |              
|                                         |                       | Additional paid-in capital                                                                                                                                                              |                                                |                   | 664,796,186   |               |  |   | 206,916,930   |              
|                                         |                       | Accumulated other comprehensive income                                                                                                                                                  |                                                |                   | 70,315,410    |               |  |   | 15,154,257    |              
|                                         |                       | Retained deficit                                                                                                                                                                        |                                                |                   | (7,335,875    | )             |  |   | (18,290,666   | )            
|                                         |                       |                                                                                                                                                                                         |                                                |                   |               |               |  |  
|                                         |                       |                                                                                                                                                                                         | Total shareholders equity                     |                   |               | 728,026,264   |  |   |               | 203,865,546   | 
|                                         |                       |                                                                                                                                                                                         |                                                |                   |               |               |  |  
|                                         |                       |                                                                                                                                                                                         | Total liabilities and shareholders
    equity |                   | $             | 5,983,578,390 |  |   | $             | 1,325,125,218 | 
|                                         |                       |                                                                                                                                                                                         |                                                |                   |               |               |  |  

The accompanying notes are an integral part of
these statements.

1



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##### Table of Contents



FBR ASSET INVESTMENT CORPORATION




Consolidated Statements of Income for the
Three Months


Ended September 30, 2002 and 2001
(unaudited)


|                                                             |                               |                    |            |             |            |   |           |           |           | 
|------------------------------------------------------------ | ----------------------------- | ------------------ | ---------- | ----------- | ---------- | - | --------- | --------- | --------- | 
|                                                             |                               |                   
|                                                             |                               | Three Months Ended
|                                                             |                               | September 30,     
|                                                             |                               |                   
|                                                             |                               | 2002               |            | 2001       
|                                                             |                               |                    |            |            
|                                                             |                               | (unaudited)        |            | (unaudited)
|Revenue:                                                     |                               |                    |            |             |            |   |           |          
|                                                             | Interest                      |                    | $          | 56,738,689  |            |   | $         | 8,535,864 |          
|                                                             | Dividends                     |                    |            |            |            |   |           | 1,046,829 |          
|                                                             | Fees                          |                    |            | 5,286,491   |            |   |           |          |          
|                                                             |                               |                    |            |             |            |   |           |          
|                                                             |                               | Total revenue      |            |             | 62,025,180 |   |           |           | 9,582,693 | 
|                                                             |                               |                    |            |             |            |   |           |          
|Expenses:                                                    |                               |                    |            |             |            |   |           |          
|                                                             | Interest                      |                    |            | 22,510,562  |            |   |           | 4,120,112 |          
|                                                             | Management and incentive fees |                    |            | 6,787,220   |            |   |           | 955,446   |          
|                                                             | Professional fees & other     |                    |            | 771,256     |            |   |           | 144,982   |          
|                                                             |                               |                    |            |             |            |   |           |          
|                                                             |                               | Total expenses     |            |             | 30,069,038 |   |           |           | 5,220,540 | 
|                                                             |                               |                    |            |             |            |   |           |          
|Realized gain on sale of equity securities                   |                               |                    | 1,918,788  |             |            |   |          |          
|Realized gain on sale of mortgage-backed
    securities, net |                               |                    | 2,904,593  |             |            |   | 1,281,682 |          
|                                                             |                               |                    |            |             |            |   |           |          
|Net income before taxes                                      |                               |                    | 36,779,523 |             |            |   | 5,643,835 |          
|Income tax provision                                         |                               |                    | (2,114,597 | )           |            |   |          |          
|                                                             |                               |                    |            |             |            |   |           |          
|Net income                                                   |                               | $                  | 34,664,926 |             |            | $ | 5,643,835 |          
|                                                             |                               |                    |            |             |            |   |           |          
|Basic earnings per share                                     |                               | $                  | 1.38       |             |            | $ | 0.88      |          
|                                                             |                               |                    |            |             |            |   |           |          
|Diluted earnings per share                                   |                               | $                  | 1.38       |             |            | $ | 0.86      |          
|                                                             |                               |                    |            |             |            |   |           |          
|Basic weighted-average common and equivalent
    shares      |                               |                    | 25,054,332 |             |            |   | 6,407,962 |          
|                                                             |                               |                    |            |             |            |   |           |          
|Diluted weighted-average common and equivalent
    shares    |                               |                    | 25,078,986 |             |            |   | 6,547,295 |          
|                                                             |                               |                    |            |             |            |   |           |          

The accompanying notes are an integral part of
these statements.

2



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##### Table of Contents



FBR ASSET INVESTMENT CORPORATION




Consolidated Statements of Income for the Nine
Months


Ended September 30, 2002 and 2001
(unaudited)


|                                                             |                               |                   |            |             |             |   |           |            |            | 
|------------------------------------------------------------ | ----------------------------- | ----------------- | ---------- | ----------- | ----------- | - | --------- | ---------- | ---------- | 
|                                                             |                               |                  
|                                                             |                               | Nine Months Ended
|                                                             |                               | September 30,    
|                                                             |                               |                  
|                                                             |                               | 2002              |            | 2001       
|                                                             |                               |                   |            |            
|                                                             |                               | (unaudited)       |            | (unaudited)
|Revenue:                                                     |                               |                   |            |             |             |   |           |           
|                                                             | Interest                      |                   | $          | 119,167,054 |             |   | $         | 14,876,936 |           
|                                                             | Dividends                     |                   |            | 1,963,754   |             |   |           | 2,310,739  |           
|                                                             | Fees                          |                   |            | 5,858,000   |             |   |           | 1,701,828  |           
|                                                             |                               |                   |            |             |             |   |           |           
|                                                             |                               | Total revenue     |            |             | 126,988,808 |   |           |            | 18,889,503 | 
|                                                             |                               |                   |            |             |             |   |           |           
|Expenses:                                                    |                               |                   |            |             |             |   |           |           
|                                                             | Interest                      |                   |            | 44,069,621  |             |   |           | 7,793,700  |           
|                                                             | Management and incentive fees |                   |            | 14,450,428  |             |   |           | 1,774,337  |           
|                                                             | Professional fees & other     |                   |            | 1,678,753   |             |   |           | 590,791    |           
|                                                             |                               |                   |            |             |             |   |           |           
|                                                             |                               | Total expenses    |            |             | 60,198,802  |   |           |            | 10,158,828 | 
|                                                             |                               |                   |            |             |             |   |           |           
|Realized gain on sale of equity securities                   |                               |                   | 16,637,023 |             |             |   | 503,389   |           
|Realized gain on sale of mortgage-backed
    securities, net |                               |                   | 3,009,233  |             |             |   | 1,106,598 |           
|Recognized loss on available-for sale equity
    securities  |                               |                   |           |             |             |   | (544,880  | )         
|                                                             |                               |                   |            |             |             |   |           |           
|Net income before taxes                                      |                               |                   | 86,436,262 |             |             |   | 9,795,782 |           
|Income tax provision                                         |                               |                   | (2,280,226 | )           |             |   |          |           
|                                                             |                               |                   |            |             |             |   |           |           
|Net income                                                   |                               | $                 | 84,156,036 |             |             | $ | 9,795,782 |           
|                                                             |                               |                   |            |             |             |   |           |           
|Basic earnings per share                                     |                               | $                 | 4.48       |             |             | $ | 2.17      |           
|                                                             |                               |                   |            |             |             |   |           |           
|Diluted earnings per share                                   |                               | $                 | 4.47       |             |             | $ | 2.12      |           
|                                                             |                               |                   |            |             |             |   |           |           
|Basic weighted-average common and equivalent
    shares      |                               |                   | 18,785,325 |             |             |   | 4,507,217 |           
|                                                             |                               |                   |            |             |             |   |           |           
|Diluted weighted-average common and equivalent
    shares    |                               |                   | 18,807,979 |             |             |   | 4,619,342 |           
|                                                             |                               |                   |            |             |             |   |           |           

The accompanying notes are an integral part of
these statements.

3



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##### Table of Contents



FBR ASSET INVESTMENT CORPORATION




Consolidated Statements of Changes in
Shareholders Equity


for the Nine Months Ended September 30,
2002 (unaudited),


and the Year Ended December 31,
2001


|                            |                                                                                   |        |         |            |  |           |             |               |  |       |             |               |  |   |            |             |   |   |             |             |   |   |             |             |  
|--------------------------- | --------------------------------------------------------------------------------- | ------ | ------- | ---------- |  | --------- | ----------- | ------------- |  | ----- | ----------- | ------------- |  | - | ---------- | ----------- | - | - | ----------- | ----------- | - | - | ----------- | ----------- | -
|                            |                                                                                   |        |         |            |  |           |             | Accumulated   |  |       |             |              
|                            |                                                                                   |        |         |            |  |           |             | Other         |  |       |             |              
|                            |                                                                                   |        |         | Additional |  | Retained  |             | Comprehensive |  |       |             | Comprehensive
|                            |                                                                                   | Common |         | Paid in    |  | Earnings  |             | Income        |  |       |             | Income       
|                            |                                                                                   | Stock  |         | Capital    |  | (Deficit) |             | (Loss)        |  | Total |             | (Loss)       
|                            |                                                                                   |        |         |            |  |           |             |               |  |       |             |              
|Balance, January 1, 2001    |                                                                                   | $      | 38,844  |            |  | $         | 107,529,063 |               |  | $     | (19,978,632 | )             |  | $ | (748,691   | )           |   | $ | 86,840,584  |             |   |   |            |            
|Issuance of common stock    |                                                                                   |        | 50,300  |            |  |           | 107,575,383 |               |  |       |            |               |  |   |           |             |   |   | 107,625,683 |             |   |   |             |            
|Repurchase of common stock  |                                                                                   |        | (4,119  | )          |  |           | (8,330,016  | )             |  |       |            |               |  |   |           |             |   |   | (8,334,135  | )           |   |   |             |            
|Options granted             |                                                                                   |        |        |            |  |           | 142,500     |               |  |       |            |               |  |   |           |             |   |   | 142,500     |             |   |   |             |            
|Net income                  |                                                                                   |        |        |            |  |           |            |               |  |       | 23,065,074  |               |  |   |           |             |   |   | 23,065,074  |             |   | $ | 23,065,074  |            
|Other comprehensive income: |                                                                                   |        |         |            |  |           |             |               |  |       |             |               |  |   |            |             |   |   |             |             |   |   |             |            
|                            | Change in unrealized gain(loss) on
    available-for-sale securities              |        |         |           |  |           |             |              |  |       |             |              |  |   |            | 17,062,115  |   |   |             | 17,062,115  |   |   |             | 17,062,115  |  
|                            | Change in unrealized loss on cash flow hedge                                      |        |         |           |  |           |             |              |  |       |             |              |  |   |            | (1,159,167  | ) |   |             | (1,159,167  | ) |   |             | (1,159,167  | )
|Dividends                   |                                                                                   |        |        |            |  |           |            |               |  |       | (21,377,108 | )             |  |   |           |             |   |   | (21,377,108 | )           |   |   |            |            
|                            |                                                                                   |        |         |            |  |           |             |               |  |       |             |               |  |   |            |             |   |   |             |             |   |   |             |            
|Balance, December 31, 2001  |                                                                                   |        | 85,025  |            |  |           | 206,916,930 |               |  |       | (18,290,666 | )             |  |   | 15,154,257 |             |   |   | 203,865,546 |             |   | $ | 38,968,022  |            
|                            |                                                                                   |        |         |            |  |           |             |               |  |       |             |               |  |   |            |             |   |   |             |             |   |   |             |            
|Issuance of common stock    |                                                                                   |        | 165,518 |            |  |           | 457,879,256 |               |  |       |            |               |  |   |           |             |   |   | 458,044,774 |             |   |   |             |            
|Net income                  |                                                                                   |        |        |            |  |           |            |               |  |       | 84,156,036  |               |  |   |           |             |   |   | 84,156,036  |             |   | $ | 84,156,036  |            
|Other comprehensive income: |                                                                                   |        |         |            |  |           |             |               |  |       |             |               |  |   |            |             |   |   |             |             |   |   |             |            
|                            | Reclassification adjustment for gains from
    disposition included in net income |        |         |           |  |           |             |              |  |       |             |              |  |   |            | (6,645,704  | ) |   |             | (6,645,704  | ) |   |             | (6,645,704  | )
|                            | Change in unrealized gain(loss) on available-for
    sale securities              |        |         |           |  |           |             |              |  |       |             |              |  |   |            | 79,548,783  |   |   |             | 79,548,783  |   |   |             | 79,548,783  |  
|                            | Change in unrealized loss on cash flow hedges                                     |        |         |           |  |           |             |              |  |       |             |              |  |   |            | (17,741,926 | ) |   |             | (17,741,926 | ) |   |             | (17,741,926 | )
|Dividends                   |                                                                                   |        |        |            |  |           |            |               |  |       | (73,201,245 | )             |  |   |           |             |   |   | (73,201,245 | )           |   |   |            |            
|                            |                                                                                   |        |         |            |  |           |             |               |  |       |             |               |  |   |            |             |   |   |             |             |   |   |             |            
|Balance, September 30, 2002 |                                                                                   | $      | 250,543 |            |  | $         | 664,796,186 |               |  | $     | (7,335,875  | )             |  | $ | 70,315,410 |             |   | $ | 728,026,264 |             |   | $ | 139,317,189 |            
|                            |                                                                                   |        |         |            |  |           |             |               |  |       |             |               |  |   |            |             |   |   |             |             |   |   |             |            

The accompanying notes are an integral part of
these statements.

4



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##### Table of Contents



FBR ASSET INVESTMENT CORPORATION




Consolidated Statements of Cash Flows for the
Nine Months


Ended September 30, 2002 and 2001
(unaudited)


|                                                                                      |                                                                                 |                   |                |                |   |   |                |              |  
|------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------- | ----------------- | -------------- | -------------- | - | - | -------------- | ------------ | -
|                                                                                      |                                                                                 |                  
|                                                                                      |                                                                                 | Nine Months Ended
|                                                                                      |                                                                                 | September 30,    
|                                                                                      |                                                                                 |                  
|                                                                                      |                                                                                 | 2002              |                | 2001          
|                                                                                      |                                                                                 |                   |                |               
|                                                                                      |                                                                                 | (unaudited)       |                | (unaudited)   
|Cash flows from operating
    activities:                                             |                                                                                 |                   |                |                |   |   |                |             
|Net income                                                                            |                                                                                 | $                 | 84,156,036     |                |   | $ | 9,795,782      |             
|Adjustments to reconcile net income to net cash
    provided by operating activities: |                                                                                 |                   |                |                |   |   |                |             
|                                                                                      | Realized and recognized gains on mortgage-backed
    and equity securities, net |                   |                | (19,646,256    | ) |   |                | (1,065,108   | )
|                                                                                      | Compensation expense related to restricted stock
    and stock option grants    |                   |                | 162,993        |   |   |                | 142,500      |  
|                                                                                      | Premium amortization on mortgage-backed securities                              |                   |                | 14,370,229     |   |   |                | 1,319,421    |  
|Changes in operating assets and liabilities:                                          |                                                                                 |                   |                |                |   |   |                |             
|                                                                                      | Dividends, interest and fees receivable                                         |                   |                | (33,522,255    | ) |   |                | (6,607,642   | )
|                                                                                      | Prepaid expenses and other assets                                               |                   |                | (432,470       | ) |   |                | (347,094     | )
|                                                                                      | Management and incentive fees payable                                           |                   |                | 5,669,762      |   |   |                | 647,790      |  
|                                                                                      | Accounts payable and accrued expenses                                           |                   |                | (231,921       | ) |   |                | 280,643      |  
|                                                                                      | Interest payable                                                                |                   |                | 6,966,023      |   |   |                | (4,222       | )
|                                                                                      | Income taxes payable                                                            |                   |                | 1,707,487      |   |   |                |             |  
|                                                                                      | Due to broker                                                                   |                   |                | 35,250,000     |   |   |                |             |  
|                                                                                      | Other                                                                           |                   |                | 36,052         |   |   |                | (54,786      | )
|                                                                                      |                                                                                 |                   |                |                |   |   |                |             
|                                                                                      | Net cash provided by operating activities                                       |                   |                | 94,485,680     |   |   |                | 4,107,284    |  
|                                                                                      |                                                                                 |                   |                |                |   |   |                |             
|Cash flows from investing
    activities:                                             |                                                                                 |                   |                |                |   |   |                |             
|Purchase of mortgage-backed securities                                                |                                                                                 |                   | (5,505,690,316 | )              |   |   | (1,104,522,134 | )           
|Investments in equity securities                                                      |                                                                                 |                   | (74,900,030    | )              |   |   | (16,444,000    | )           
|Investments in notes receivable                                                       |                                                                                 |                   | (33,137,333    | )              |   |   | (12,000,000    | )           
|Proceeds from repayment of notes receivable                                           |                                                                                 |                   | 41,137,333     |                |   |   | 4,000,000      |             
|Proceeds from sale of equity securities                                               |                                                                                 |                   | 44,211,458     |                |   |   | 4,362,364      |             
|Proceeds from sale of mortgage-backed securities                                      |                                                                                 |                   | 326,153,636    |                |   |   | 98,220,114     |             
|Receipt of principal payments on mortgage-backed
    securities                       |                                                                                 |                   | 666,650,209    |                |   |   | 56,734,378     |             
|Payment of Eurodollar futures deposits                                                |                                                                                 |                   | (4,117,157     | )              |   |   |               |             
|                                                                                      |                                                                                 |                   |                |                |   |   |                |             
|                                                                                      | Net cash used in investing activities                                           |                   |                | (4,539,692,200 | ) |   |                | (969,649,278 | )
|                                                                                      |                                                                                 |                   |                |                |   |   |                |             
|Cash flows from financing
    activities:                                             |                                                                                 |                   |                |                |   |   |                |             
|Repurchase of common stock                                                            |                                                                                 |                   |               |                |   |   | (8,334,135     | )           
|Proceeds from issuance of common stock                                                |                                                                                 |                   | 457,881,782    |                |   |   | 97,385,872     |             
|Proceeds from (repayments of) repurchase
    agreements, net                          |                                                                                 |                   | 4,045,893,600  |                |   |   | 849,718,000    |             
|Dividends paid                                                                        |                                                                                 |                   | (52,528,989    | )              |   |   | (8,267,197     | )           
|                                                                                      |                                                                                 |                   |                |                |   |   |                |             
|                                                                                      | Net cash provided by financing activities                                       |                   |                | 4,451,246,393  |   |   |                | 930,502,540  |  
|                                                                                      |                                                                                 |                   |                |                |   |   |                |             
|Net increase (decrease) in cash and cash
    equivalents                              |                                                                                 |                   | 6,039,873      |                |   |   | (35,039,454    | )           
|Cash and cash equivalents, beginning of the period                                    |                                                                                 |                   | 6,630,379      |                |   |   | 36,810,566     |             
|                                                                                      |                                                                                 |                   |                |                |   |   |                |             
|Cash and cash equivalents, end of the period                                          |                                                                                 | $                 | 12,670,252     |                |   | $ | 1,771,112      |             
|                                                                                      |                                                                                 |                   |                |                |   |   |                |             
|Supplemental disclosure:                                                              |                                                                                 |                   |                |                |   |   |                |             
|                                                                                      | Cash payments for interest                                                      |                   | $              | 37,103,598     |   |   | $              | 7,797,922    |  
|                                                                                      | Cash payments for income taxes                                                  |                   | $              | 572,739        |   |   | $              |             |  

The accompanying notes are an integral part of
these statements.

5



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##### Table of Contents






FBR ASSET INVESTMENT CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


NOTE 1. Basis of Presentation

The consolidated financial statements of FBR
Asset Investment Corporation (FBR Asset or the
Company) have been prepared in accordance with
accounting principles generally accepted in the United States of
America and with the instructions to Form 10-Q. Therefore,
they do not include all information required by accounting
principles generally accepted in the United States of America
for complete financial statements. The interim financial
statements reflect all adjustments (consisting only of normal
recurring adjustments) which are, in the opinion of management,
necessary for a fair presentation of the results for the periods
presented. The results of operations for interim periods are not
necessarily indicative of the results for the entire year. These
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year
ended December 31, 2001 and included on Form 10-K
filed by the Company with the Securities and Exchange Commission.

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

NOTE 2. Investments in Mortgage-Backed
Securities

For the three and nine months ended
September 30, 2002 and 2001, the weighted average coupon
rate on the Companys mortgage-backed securities was 5.34%
and 5.53% for 2002, and 6.63% and 6.71% for 2001, respectively.

The following table summarizes the Companys
mortgage-backed securities:

|                                                              |  |                    |               |                   |  |   |               |  
|------------------------------------------------------------- |  | ------------------ | ------------- | ----------------- |  | - | ------------- | -
|Total Mortgage Assets                                         |  | September 30, 2002 |               | December 31, 2001
|                                                              |  |                    |               |                  
|Mortgage-backed securities, available-for-sale,
    principal |  | $                  | 5,650,527,780 |                   |  | $ | 1,211,550,848 |  
|Unamortized net premium                                       |  |                    | 87,933,661    |                   |  |   | 25,385,118    |  
|                                                              |  |                    |               |                   |  |   |               |  
|Amortized cost                                                |  |                    | 5,738,461,441 |                   |  |   | 1,236,935,966 |  
|Gross unrealized gains                                        |  |                    | 84,131,150    |                   |  |   | 4,092,851     |  
|Gross unrealized losses                                       |  |                    | (87,772       | )                 |  |   | (2,663,306    | )
|                                                              |  |                    |               |                   |  |   |               |  
|Estimated fair value                                          |  | $                  | 5,822,504,819 |                   |  | $ | 1,238,365,511 |  
|                                                              |  |                    |               |                   |  |   |               |  

As of September 30, 2002 and
December 31, 2001, respectively, $5.5 billion and
$1.2 billion of the mortgage-backed securities were pledged
as collateral for the repurchase agreements.

Investment Commitments

As of September 30, 2002 and subsequently,
FBR Asset has made commitments to purchase $348 million in
hybrid ARM securities.

NOTE 3. Equity Investments

At September 30, 2002, FBR Assets
equity investments had an aggregate cost basis of
$94.1 million, a fair value of $99.3 million,
unrealized losses of $1.7 million, and unrealized gains of
$6.9 million. At December 31, 2001, FBR Assets
equity investments had an aggregate cost basis of
$46.8 million, a fair value of $61.7 million and
unrealized gains of $14.9 million.

Equity investment transactions are recorded on
the date the securities are purchased or sold. Any amounts
payable for unsettled trades are recorded as due to
broker in FBR Assets Statement of Financial
Condition. At September 30, 2002, FBR Asset recorded a
liability of $35.2 million related to its acquisition of
Americredit Corp. common stock. This trade settled on
October 1, 2002.

6



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##### Table of Contents



FBR ASSET INVESTMENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)  (Continued)


NOTE 3. Equity
Investments  (Continued)

|                                    |       |                    |           |                   |  |            |            |            |  |            |            |            |  |  |           |  |  |   |            |            |  |   |            |            | 
|----------------------------------- | ----- | ------------------ | --------- | ----------------- |  | ---------- | ---------- | ---------- |  | ---------- | ---------- | ---------- |  |  | --------- |  |  | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                    |       |                    |           |                  
|                                    |       | September 30, 2002 |           | December 31, 2001
|                                    |       |                    |           |                  
|Equity Investments                  |       | Shares             |           | Cost Basis        |  | Fair Value |            | Shares     |  | Cost Basis |            | Fair Value
|                                    |       |                    |           |                   |  |            |            |            |  |            |            |           
|American Financial Realty Trust (1) |       |                    | 3,763,441 |                   |  | $          | 35,000,001 |            |  | $          | 35,000,001 |            |  |  |          |  |  | $ |           |            |  | $ |           |           
|Americredit Corp.                   |       |                    | 5,000,000 |                   |  |            | 35,250,000 |            |  |            | 40,350,000 |            |  |  |          |  |  |   |           |            |  |   |           |           
|Annaly Mortgage Management, Inc.    |       |                    |          |                   |  |            |           |            |  |            |           |            |  |  | 800,000   |  |  |   | 7,144,000  |            |  |   | 12,800,000 |           
|Anworth Mortgage Asset Corporation  |       |                    |          |                   |  |            |           |            |  |            |           |            |  |  | 500,000   |  |  |   | 3,890,625  |            |  |   | 4,550,000  |           
|Capital Automotive REIT             |       |                    |          |                   |  |            |           |            |  |            |           |            |  |  | 920,115   |  |  |   | 12,835,604 |            |  |   | 18,301,087 |           
|MCG Capital Corporation             |       |                    | 625,000   |                   |  |            | 9,934,375  |            |  |            | 8,237,500  |            |  |  | 625,000   |  |  |   | 9,934,375  |            |  |   | 11,125,000 |           
|Oxford Financial Corp. (1)          |       |                    | 500,000   |                   |  |            | 4,650,000  |            |  |            | 4,650,000  |            |  |  |          |  |  |   |           |            |  |   |           |           
|Resource Asset Investment Trust     |       |                    |          |                   |  |            |           |            |  |            |           |            |  |  | 344,575   |  |  |   | 3,704,181  |            |  |   | 5,616,573  |           
|Saxon Capital Acquisition Corp. (2) |       |                    | 1,000,000 |                   |  |            | 9,300,000  |            |  |            | 11,070,000 |            |  |  | 1,000,000 |  |  |   | 9,300,000  |            |  |   | 9,300,000  |           
|                                    |       |                    |           |                   |  |            |            |            |  |            |            |            |  |  |           |  |  |   |            |            |  |   |            |           
|                                    | Total |                    |           |                   |  |            | $          | 94,134,376 |  |            | $          | 99,307,501 |  |  |           |  |  |   | $          | 46,808,785 |  |   | $          | 61,692,660 | 
|                                    |       |                    |           |                   |  |            |            |            |  |            |            |            |  |  |           |  |  |   |            |            |  |   |            |           






|    |                                                                                                                                                                                             
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | American Financial Realty and Oxford Financial
    shares are not currently registered for public trading. As of
    September 30, 2002, these investments are carried at cost.             
|   
|(2) | Saxon Capital shares were registered with the SEC
    and began trading on the New York Stock Exchange in January
    2002. As of December 31, 2001, the investment was carried
    at cost.

NOTE 4. Repurchase Agreements

At September 30, 2002, the Company had
borrowings of $5.2 billion outstanding under repurchase
agreements with a weighted average borrowing rate of 1.77% and a
remaining weighted-average term to maturity of 34 days. For
the three and nine months ending September 30, 2002, the
weighted average borrowing rates were 1.79% and 1.82%,
respectively, and the weighted average repurchase agreement
balances were $4.4 billion and $2.9 billion,
respectively. For the three and nine months ended
September 30, 2001, the weighted average borrowing rates
were 3.63% and 4.27%, respectively, and the weighted average
repurchase agreement balances were $450.2 million and
$243.9 million, respectively.

NOTE 5. Derivative Financial Instruments
and Hedging Activities

The Company utilizes derivative financial
instruments to hedge the interest rate risk associated with its
borrowings. At September 30, 2002, FBR Asset was party to
four interest rate swap agreements and two Eurodollar futures
contracts. These derivative contracts are with primary broker
dealers. Under the interest rate swap agreements, the Company
receives a floating rate based on three-month LIBOR and pays a
fixed rate, as summarized below. Eurodollar futures contracts
are a proxy for the forward AA/ AAA LIBOR-based credit curve and
allow the Company the ability to lock in three month LIBOR
forward rates.

The notional amount of each agreement is matched
against a like amount of current and anticipated borrowings
under repurchase agreements to hedge the variability in interest
payments associated with the repurchase agreements. The interest
rate swap agreements and Eurodollar futures contracts are highly
effective hedges and qualify as cash flow hedges under SFAS
No. 133, Accounting for Derivative Instruments and
for Hedging Activities, as amended (FAS 133).
Accordingly, changes in the fair value of these derivatives are
reported in other comprehensive income to the extent the hedge
was perfectly effective, while changes in value attributable to
hedge ineffectiveness are reported in earnings. The gains and
losses on cash flow hedge transactions that are reported in
other comprehensive income are reclassified to earnings in the
periods in which the earnings are effected by the hedged cash
flows.

7



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##### Table of Contents



FBR ASSET INVESTMENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)  (Continued)


NOTE 5. Derivative Financial Instruments
and Hedging Activities  (Continued)

Derivative Financial Instruments at
September 30, 2002:

Interest
Rate Swaps

| |  |                  |               |            |  |             |        |                  |  |            |        |     |  |  |               |     |  |   |             |  
| |  | ---------------- | ------------- | ---------- |  | ----------- | ------ | ---------------- |  | ---------- | ------ | --- |  |  | ------------- | --- |  | - | ----------- | -
| |  | Current Notional |               | Average    |  | Three-month |        |                  |  |           
| |  | Amount           |               | Fixed Rate |  | LIBOR Rate  |        | Termination Date |  | Fair Value
| |  |                  |               |            |  |             |        |                  |  |           
| |  | $                | 3,000,000,000 |            |  |             | 2.195% | (1)              |  |            | 1.843% | (1) |  |  | July 24, 2003 | (1) |  | $ | (14,279,394 | )
| |  |                  | 50,000,000    |            |  |             | 4.970% |                  |  |            | 1.828% |     |  |  | July 27, 2004 |     |  |   | (2,909,199  | )
| |  |                  |               |            |  |             |        |                  |  |            |        |     |  |  |               |     |  |   |             |  
| |  | $                | 3,050,000,000 |            |  |             |        |                  |  |            |        |     |  |  |               |     |  | $ | (17,188,593 | )
| |  |                  |               |            |  |             |        |                  |  |            |        |     |  |  |               |     |  |   |             |  



---



| |     |                                                        
| | --- | -------------------------------------------------------
| | (1) | Average of three, one billion dollar notional
    swaps

Eurodollar
Futures Contracts

| |  |                  |                |                      |  |               |                |                  |  |            |     |  |  |  |                    |  |  |   |            |  
| |  | ---------------- | -------------- | -------------------- |  | ------------- | -------------- | ---------------- |  | ---------- | --- |  |  |  | ------------------ |  |  | - | ---------- | -
| |  | Current Notional |                |                      |  | Average       |                |                  |  |           
| |  | Amount           |                | Contract Description |  | Floating Rate |                | Termination Date |  | Fair Value
| |  |                  |                |                      |  |               |                |                  |  |           
| |  |                  | $2,000,000,000 |                      |  |               | June 2003      |                  |  |            | N/A |  |  |  | June 18, 2003      |  |  | $ | (850,000   | )
| |  |                  | $2,000,000,000 |                      |  |               | September 2003 |                  |  |            | N/A |  |  |  | September 17, 2003 |  |  |   | (862,500   | )
| |  |                  |                |                      |  |               |                |                  |  |            |     |  |  |  |                    |  |  |   |            |  
| |  |                  |                |                      |  |               |                |                  |  |            |     |  |  |  |                    |  |  | $ | (1,712,500 | )
| |  |                  |                |                      |  |               |                |                  |  |            |     |  |  |  |                    |  |  |   |            |  

Derivative Financial Instruments at
December 31, 2001:

Interest
Rate Swaps

| |  |                  |             |            |  |             |        |                  |  |            |        |  |  |  |               |  |  |   |            |  
| |  | ---------------- | ----------- | ---------- |  | ----------- | ------ | ---------------- |  | ---------- | ------ |  |  |  | ------------- |  |  | - | ---------- | -
| |  | Current Notional |             |            |  | Three-month |        |                  |  |           
| |  | Amount           |             | Fixed Rate |  | LIBOR Rate  |        | Termination Date |  | Fair Value
| |  |                  |             |            |  |             |        |                  |  |           
| |  |                  | $50,000,000 |            |  |             | 4.970% |                  |  |            | 2.280% |  |  |  | July 27, 2004 |  |  | $ | (1,159,167 | )

The total change in the fair value of the
Companys derivative financial instruments was
$(17.2) million and $(17.7) million for the three and
nine months ended September 30, 2002, respectively. The
Companys derivative financial instruments at
September 30, 2002 are deemed to be perfectly effective as
hedges and accordingly these changes in value have been reported
in other comprehensive income.

As part of the Companys interest rate risk
management, on October 15, 2002, the Company closed out its
Eurodollar futures contracts. These transactions resulted in a
deferred gain of approximately $0.4 million. This deferred
gain is currently recorded in other comprehensive income and
will be amortized into income over the original hedge period of
July through December 2003.

NOTE 6. Income Taxes

FBR Asset has elected to be taxed as a real
estate investment trust or REIT under the Internal Revenue Code.
To qualify for tax treatment as a REIT, FBR Asset must meet
certain income and asset tests and distribution requirements.
FBR Asset generally will not be subject to federal income tax at
the corporate level to the extent that it distributes at least
90 percent of its taxable income to its shareholders and
complies with certain other requirements. Failure to meet these
requirements could have a material adverse impact on FBR
Assets results or financial condition. Furthermore,
because FBR Assets investments include stock in other
REITs, failure of those REITs to maintain their REIT status
could jeopardize FBR Assets qualification as a REIT.
During 2001, FBR asset acquired a registered broker-dealer in a
taxable REIT subsidiary, established another taxable REIT
subsidiary and created a holding company to hold the two
subsidiaries. The income generated from the taxable REIT
subsidiaries is taxed at normal corporate rates and will
generally not be distributed to our shareholders. During the
nine months ended September 30, 2002, FBR Asset recorded
$2,280,226 of income tax provision from income attributable to
the taxable REIT subsidiaries.

8



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##### Table of Contents



FBR ASSET INVESTMENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)  (Continued)


NOTE 7. Shareholders
Equity

Equity Offerings

On January 28, 2002, the Company completed a
follow-on offering of 5,520,000 shares (including over-allotment
option) of common stock at a price of $26.50 per share. The lead
underwriter for the offering was Friedman, Billings, Ramsey
& Co., Inc. (FBR), a wholly owned subsidiary of
Friedman, Billings, Ramsey Group, Inc. (FBR Group).
The net proceeds after expenses to the Company were
$138.6 million.

On April 3, 2002, the Company completed a
follow-on offering of 4,600,000 shares (including over-allotment
option) of common stock at a price of $27.90 per share. The lead
underwriter for the offering was FBR. The net proceeds after
expenses to the Company were $121.7 million.

On June 28, 2002, the Company completed a
follow-on offering of 6,000,000 shares of common stock at a
price of $33.35 per share. The lead underwriter for the
offering was FBR. The net proceeds after expenses to the Company
were $189.9 million.

Dividends

On March 14, 2002, the Board of Directors
declared a cash dividend of $1.25 per share payable
April 15, 2002 to shareholders of record as of
March 28, 2002. On June 12, 2002 the Board of
Directors declared a cash dividend of $1.25 per share payable
July 15, 2002 to shareholders of record as of June 24,
2002, and on September 12, 2002, the Board of Directors
declared a cash dividend of $1.25 per share payable
October 15, 2002 to shareholders of record as of
September 27, 2002.

Options

On February 14, 2002, a subsidiary of FBR
Group exercised its remaining options to purchase 415,805 shares
of FBR Asset common stock for $8.3 million, or $20 per
share. FBR Group also advised FBR Asset that it has no current
intention to sell any of the shares acquired via option
exercises or any of its other shares held for investment
purposes.

As of September 30, 2002 and
December 31, 2001, 66,095 and 481,900 options to purchase
common stock were outstanding, respectively. These options have
terms of eight to ten years and an exercise price of $20 per
share. As a result, 24,654 and 22,654 shares were included
during the three and nine-month periods ended September 30,
2002, respectively, to calculate diluted earnings per share.
During 2002, we issued 16,000 shares of restricted stock and
have recorded $162,993 in compensation expense related to these
grants. On May 23, 2002, the shareholders approved an
increase of 450,000 shares available for issuance under the
stock incentive plan. As of September 30, 2002, 444,000
options were available for future grant.

NOTE 8. Related Party
Transactions

As of September 30, 2002, FBR Group, through
various subsidiaries and affiliates, owned 2,844,700 shares or
11.35% of the outstanding common stock of the Company. As of
December 31, 2001, FBR Group, through various subsidiaries
and affiliates, owned 2,349,186 shares or 27.63% of the
outstanding common stock of the Company.

The Company has a management agreement with
Friedman, Billings, Ramsey Investment Management, Inc.
(FBRIM), a wholly owned subsidiary of FBR Group,
expiring on December 17, 2002. FBRIM performs portfolio
management services on behalf of the Company. These services
include, but are not limited to, making investment purchases and
sales, collecting market information, submitting reports
pertaining to the Companys assets, interest rates, and
general economic conditions, and periodic review and evaluation
of the performance of the Companys portfolio of assets.

9



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##### Table of Contents



FBR ASSET INVESTMENT CORPORATION


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)  (Continued)




NOTE 8. Related Party
Transactions  (Continued)


FBRIM is entitled to a quarterly base
management fee equal to the sum of (1) 0.20 percent
per annum (adjusted to reflect a quarterly period) of the
average book value of the mortgage assets of the Company during
each calendar quarter and (2) 0.75 percent per annum
(adjusted to reflect a quarterly period) of the average book
value of the remainder of the Companys invested assets
during each calendar quarter. The Company recorded
$5.7 million in management fees during the first nine
months of 2002 and $1.8 million for the year ended
December 31, 2001.

FBRIM is also entitled to receive incentive
compensation based on the performance of the Company. FBRIM is
entitled to an incentive fee calculated based upon the preceding
four quarters. FBRIM is entitled to an incentive fee calculated
as: Funds from operations, plus net realized gains or losses
from asset sales, less the threshold amount (all computed on a
weighted average outstanding share basis), multiplied by
25 percent. The threshold amount is calculated as the
weighted average issuance price per share of all shares of the
Company, which was $25.30 at September 30, 2002, multiplied
by a rate equal to the average of the weekly closing rate of the
ten-year U.S. Treasury note during the previous 52-week
period plus five percent per annum. The Company recorded
$8.7 million in incentive fees during the first nine months
of 2002 and $1.7 million for the year ending
December 31, 2001.

The Company and its registered broker-dealer
subsidiary, Pegasus Capital Corporation (Pegasus)
entered into an agreement in August 2001 with FBR regarding the
Companys extension of credit to or investment in entities
that are or may be FBR investment banking clients. During the
first nine months of 2002, pursuant to this agreement, the
Company earned $5.9 million in fees from FBR in connection
with four investment banking transactions. Fees are recognized
when the related investment banking transaction is completed. In
2001, pursuant to this agreement, the Company earned
$2.9 million in fees from FBR in connection with three
investment banking transactions and one unfunded commitment.

FBR served as lead underwriter for three
follow-on public offerings by the Company during the nine months
ended September 30, 2002, and earned approximately
$10.1 million (net of expenses) in underwriting fees in
connection with the offerings.

10



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##### Table of Contents






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

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended,
including, without limitation, statements containing the words
believes, plans,
anticipates, expects and words of
similar meaning. Such forward-looking statements related to
future events and the future financial performance of the
Company involve known and unknown risks, uncertainties and other
factors which may cause the actual results, or performance and
achievements of the Company, to be materially different from the
results or achievements expressed or implied by such
forward-looking statements. The Company has filed certain of
these risk factors as Exhibit 99.01 to its Annual Report on
Form 10-K for the year ended December 31, 2001. The
Company is not obligated to update any such factors or to
reflect the impact of actual future events or developments on
such forward-looking statements.

Overview

The Company has invested, and intends to continue
investing, in whole-pool mortgage-backed securities that are
guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, senior
secured and mezzanine loans, real property, and joint ventures
formed to own real property. The Company invests in some of
these assets indirectly through its investments in REITs and
other companies.

In addition, subject to maintaining its REIT
qualification, the Company invests from time to time in non-real
estate related assets, including but not limited to, purchasing
equity securities of and making senior secured, mezzanine and
other loans to companies that are not involved primarily in the
real estate business or in a real estate-related business.

Results of Operations

Net Income

Three months ended September 30,
2002

The Company had net income for the three months
ended September 30, 2002, of $34.7 million, or $1.38
per basic and diluted share, compared to $5.6 million, or $0.88
per basic share and $0.86 per diluted share for the
corresponding period in 2001. The increase is primarily due to a
wider net interest rate spread on the larger base of
mortgage-backed securities, realized gains on the sale of
mortgage-backed and equity securities, and fee income from
investment banking transactions.

For the three months ended September 30,
2002, the weighted average annual yield on the Companys
mortgage-backed securities was 4.73%. As of September 30, 2002,
the Company had investments in 164 mortgage-backed securities
that had a fair value of $5.8 billion. For the three months
ended September 30, 2001, the weighted average annual yield
on the Companys mortgage-backed securities was 6.46%. As
of September 30, 2001, the Company had investments in 53
mortgage-backed securities that had a fair value of
$1.2 billion.

The Companys interest and dividend income
increased to $56.7 million for the three months ended
September 30, 2002, from $9.6 million for the three
months ended September 30, 2001. The increase is primarily
related to the increase in the weighted average balance of the
Companys mortgage-backed securities portfolio from
$485.1 million for the three months ended
September 30, 2001 to $5.5 billion for the three
months ended September 30, 2002 offset by a substantial
decrease in yields. For the three months ended
September 30, 2002, the weighted average annual yield on
the Companys equity investments and promissory notes was
1.03%, compared to 12.55% for the three months ended
September 30, 2001. The reduction is due to the timing of
dividends on the Companys investments in equity securities
as well a reduction in investments in senior secured and
mezzanine loans during the quarter ended September 30, 2002.

For the three months ended September 30,
2002, the Company earned fee income of $5.3 million in
connection with two investment banking transactions. For the
three months ended September 30, 2001, the Company did not
earn any such fee income.

11



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##### Table of Contents





Results of Operations 
(Continued)


The Company incurred interest expense of
$22.5 million for the three months ended September 30,
2002. This represents 74.9% of the total expenses for the
period. The Company incurred interest expense of
$4.1 million for the three months ended September 30,
2001, representing 78.9% of the total expenses for that period.
The $18.4 million increase in interest expense reflects the
increase in weighted average borrowings under repurchase
agreements to $4.4 billion from $450.2 million; partially
offset by a substantial reduction in our average effective
borrowing rate (including interest rate swaps) from 3.63% to
2.00%. Interest expense relating to interest rate swap
agreements increased from $121,000 to $2.4 million, which
increased the Companys weighted average borrowing rate for
the three months ended September 30, 2002 by 21 basis
points.

Management fees for the three months ended
September 30, 2002, were $2.6 million compared to
$539,143 for the three months ended September 30, 2001. The
increase is due to a larger asset base during the three months
ended September 30, 2002 compared to the same period in
2001 as the Companys management fees are calculated based
on the value of its mortgage-backed and other invested assets.
During the three months ended September 30, 2002, the
Company recorded incentive fee expense of $4.2 million,
based on the performance of the Company over the preceding four
quarters, compared to $416,303 for the three months ended
September 30, 2001. The increase in incentive fees can be
attributed to the increase in funds from operations and return
on capital for the preceding four quarters used to calculate the
incentive fees during the three months ended September 30,
2002 as compared to similar amounts used to calculate incentive
fees during the three months ended September 30, 2001.

Professional fees and other expenses consist
primarily of director, legal, listing and accounting fees.
Professional fees and other expenses were $771,256 for the three
months ended September 30, 2002, compared to $144,982 for
the three months ended September 30, 2001. The increase is
mainly attributed to an increase in legal and audit fees,
compensation expense associated with restricted stock awards,
and increased directors and officer insurance premiums.

During the three months ended September 30,
2002, FBR Asset recorded $2,114,597 of income tax provision from
income attributable to its taxable REIT subsidiaries. During the
three months ended September 30, 2001, FBR Asset did not
record any income tax provision. The increase is due to the
recording of taxes relating to fee income earned by Pegasus in
connection with two investment banking transactions during the
three months ended September 30, 2002.

Nine months ended September 30,
2002

The Company had net income for the nine months
ended September 30, 2002, of $84.2 million, or $4.48
per basic share and $4.47 per diluted share, compared to
$9.8 million, or $2.17 per basic share and $2.12 per
diluted share for the corresponding period in 2001. The increase
is primarily due to a wider net interest rate spread on the
larger base of mortgage-backed securities, realized gains on the
sale of available for sale equity and mortgage-backed
securities, and an increase in fee income.

For the nine months ended September 30,
2002, the weighted average annual yield on the Companys
mortgage-backed securities was 4.83%. As of September 30,
2002, the Company had investments in 164 mortgage-backed
securities that had a fair value of $5.8 billion. For the
nine months ended September 30, 2001, the weighted average
annual yield on the Companys mortgage-backed securities
was 6.29%. As of September 30, 2001, the Company had
investments in 53 mortgage-backed securities that had a fair
value of $1.2 billion.

The Companys interest and dividend income
increased to $121.1 million for the nine months ended
September 30, 2002 from $17.2 million for the nine
months ended September 30, 2001. The increase is primarily
related to the increase in the weighted average balance of the
Companys mortgage-backed securities portfolio from
$274.6 million for the nine months ended September 30,
2001 to $3.5 billion for the nine months ended
September 30, 2002 offset by a substantial decrease in
yields. For the nine months ended September 30, 2002, the
weighted average annual yield on the Companys equity
investments and promissory notes was 10.24%, compared to 11.26%
for the nine months ended September 30, 2001. The reduction
is due to the timing of dividends on the Companys
investments in equity securities as well as a reduction in
investments in senior secured and mezzanine loans during the
nine months ended September 30, 2002.

For the nine months ended September 30,
2002, the Company earned fee income of $5.9 million in
connection with four investment banking transactions. For the
nine months ended September 30, 2001, the Company earned
fee income of $1.7 million in connection with one
investment banking transaction in 2001.

12



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##### Table of Contents





Results of Operations 
(Continued)


The Company incurred interest expense of
$44.1 million for the nine months ended September 30,
2002. This represents 73.2% of the total expenses for the
period. The Company incurred interest expense of
$7.8 million for the nine months ended September 30,
2001, representing 76.7% of the total expenses for that period.
The $36.3 million increase in interest expense reflects the
increase in weighted average borrowings under repurchase
agreements to $2.9 billion from $243.9 million; partially
offset by a substantial reduction in our average effective
borrowing rate (including interest swaps) from 4.27% to 1.92%.
Interest expense related to its interest rate swap agreements
increased from $215,771 to $3.1 million, which increased
the Companys weighted average borrowing rate for the nine
months ended September 30, 2002 by 10 basis points.

Management fees for the nine months ended
September 30, 2002, were $5.7 million compared to $962,880
for the nine months ended September 30, 2001. The increase
in management fees is attributed to a larger asset base used in
calculating the fees for the nine months ended
September 30, 2002 compared to the same period in 2001.
During the nine months ended September 30, 2002, the
Company recorded incentive fee expense of $8.7 million,
based on the performance of the Company over the preceding four
quarters, compared to $811,457 for the nine months ended
September 30, 2001. The increase in incentive fees can be
attributed to the increase in funds from operations and return
on capital for the preceding four quarters used to calculate the
incentive fees during the nine months ended September 30,
2002 as compared to similar amounts used to calculate the
incentive fees during the nine months ended September 30,
2001.

Professional fees and other expenses consist
primarily of director, legal, listing and accounting fees.
Professional fees and other expenses were $1.7 million for the
nine months ending September 30, 2002, compared to $590,791
for the nine months ended September 30, 2001. The increase
is mainly attributed to increased legal and audit fees,
compensation expense associated with restricted stock awards,
listing fees, and increased directors and officer insurance
premiums.

During the nine months ended September 30,
2002, FBR Asset recorded $2,280,226 of income tax provision from
income attributable to its taxable REIT subsidiaries. During the
nine months ended September 30, 2001, FBR Asset did not
record any income tax provision. The increase is due to the
recording of taxes relating to fee income earned by Pegasus in
connection with four investment banking transactions during the
nine months ended September 30, 2002.

Mortgage-backed Securities

The mortgage-backed securities owned at
September 30, 2002 and December 31, 2001 are
summarized below:

|                      |  |             |               |              |  |           |               |            |  |          |       |                |  |  |      |  |  |  |      |  |  |  |           | 
|--------------------- |  | ----------- | ------------- | ------------ |  | --------- | ------------- | ---------- |  | -------- | ----- | -------------- |  |  | ---- |  |  |  | ---- |  |  |  | --------- | 
|                     
|September 30, 2002   
|                      |  | Weighted    |               | Expected     |  | Relevant 
|                      |  | Nominal     |               | Average Life |  | Effective |               | Prepayment
|Descriptive Title(1)  |  | Face Amount |               | Market Value |  | Yield(2)  |               | (years)    |  | Duration |       | Assumptions(3)
|                      |  |             |               |              |  |           |               |            |  |          |       |               
|HYBRID ARMS           |  | $           | 5,618,770,045 |              |  | $         | 5,789,144,573 |            |  |          | 4.74% |                |  |  | 2.55 |  |  |  | 1.37 |  |  |  | 30.37 CPR | 
|FIXED RATE SECURITIES |  |             | 31,868,844    |              |  |           | 33,360,246    |            |  |          | 5.34% |                |  |  | 2.27 |  |  |  | 1.00 |  |  |  | 56.71 CPR | 
|                      |  |             |               |              |  |           |               |            |  |          |       |                |  |  |      |  |  |  |      |  |  |  |           | 
|Mortgage Portfolio(1) |  | $           | 5,650,638,889 |              |  | $         | 5,822,504,819 |            |  |          | 4.75% |                |  |  | 2.55 |  |  |  | 1.37 |  |  |  | 30.53 CPR | 
|                      |  |             |               |              |  |           |               |            |  |          |       |                |  |  |      |  |  |  |      |  |  |  |           | 

|                            |  |             |               |              |  |           |               |            |  |          |       |                |  |  |      |  |  |  |      |  |  |  |           | 
|--------------------------- |  | ----------- | ------------- | ------------ |  | --------- | ------------- | ---------- |  | -------- | ----- | -------------- |  |  | ---- |  |  |  | ---- |  |  |  | --------- | 
|                           
|December 31, 2001          
|                            |  | Weighted    |               | Expected     |  | Relevant 
|                            |  | Nominal     |               | Average Life |  | Effective |               | Prepayment
|Descriptive Title(1)        |  | Face Amount |               | Market Value |  | Yield(2)  |               | (years)    |  | Duration |       | Assumptions(3)
|                            |  |             |               |              |  |           |               |            |  |          |       |               
|FLOATING RATE CMOs(4)       |  | $           | 176,421,204   |              |  | $         | 180,143,735   |            |  |          | 3.34% |                |  |  | 5.86 |  |  |  | 1.21 |  |  |  | 43.14 CPR | 
|HYBRID ARMS                 |  |             | 785,648,800   |              |  |           | 805,192,368   |            |  |          | 4.90% |                |  |  | 3.72 |  |  |  | 2.40 |  |  |  | 40.12 CPR | 
|FIXED RATE SECURITIES       |  |             | 249,480,844   |              |  |           | 253,029,408   |            |  |          | 6.51% |                |  |  | 5.33 |  |  |  | 2.77 |  |  |  | 17.62 CPR | 
|                            |  |             |               |              |  |           |               |            |  |          |       |                |  |  |      |  |  |  |      |  |  |  |           | 
|Mortgage Portfolio Total(1) |  | $           | 1,211,550,848 |              |  | $         | 1,238,365,511 |            |  |          | 5.01% |                |  |  | 4.37 |  |  |  | 2.30 |  |  |  | 35.93 CPR | 
|                            |  |             |               |              |  |           |               |            |  |          |       |                |  |  |      |  |  |  |      |  |  |  |           | 






|    |                                                                                                                                                                                                                                   
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All of the mortgage-backed securities are backed
    by pools of fixed and adjustable rate mortgages and are
    principal and/or interest paying instruments.                                                                    
|   
|(2) | The nominal yield is the internal rate of return
    of the security based on the given market price. It is the
    single discount rate that equates a security price (inclusive of
    accrued interest) with its projected cash

13



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Results of Operations 
(Continued)




|    |                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    | flows. For a mortgage product, it represents the
    yield for a given yield curve environment based on prepayments
    for that environment.                                                                                                                                                                                   
|   
|(3) | Constant Prepayment Rate (CPR). Annualized
    equivalents of single monthly mortality (SMM). CPR attempts to
    predict the percentage of principal that will prepay over the
    next 12 months based on historical principal paydowns. CPR
    is measured on 1 month, 3 month, 6 month,
    12 month, or since issue basis.
|   
|(4) | CMOs are Collateralized Mortgage Obligations.                                                                                                                                                                                                                                                                                   

Repurchase Agreements

To date, the Companys debt has consisted
solely of borrowings collateralized by a pledge of the
Companys mortgage-backed securities. The Company has
obtained, and believes it will be able to continue to obtain,
short-term financing in amounts and at interest rates consistent
with the Companys financing objectives.

The Company had $5.2 billion outstanding
under repurchase agreements with several financial institutions
on September 30, 2002. The Company had $1.1 billion
outstanding under repurchase agreements on December 31,
2001. At September 30, 2002, the leverage ratio of our
portfolio of mortgage-backed securities equal to 8.2 to 1 on a
debt to equity basis.

At September 30, 2002, the weighted average
remaining maturity of the Companys borrowings was
34 days and had a weighted average cost of funds on
outstanding borrowings of 1.77%.

Capital Resources and Liquidity

Liquidity is a measurement of the Companys
ability to meet potential cash requirements including ongoing
commitments to repay borrowings, fund investments, loan
acquisition and lending activities, and for other general
business purposes. The primary sources of funds for liquidity
consist of repurchase agreements, principal and interest
payments on mortgage-backed securities, dividends on equity
securities, and proceeds from sales of those securities.
Potential future sources of liquidity for the Company include
existing cash balances, borrowing capacity through margin
accounts, and future issuances of common stock, preferred stock
or debt. The Company believes that its existing cash balances,
borrowing capacity through margin accounts and borrowing
capacity under collateralized repurchase agreements will be
sufficient to meet its investment objectives and fund operating
expenses. The Company may, however, seek debt or equity
financings, in public or private transactions, to provide
capital for corporate purposes and/or strategic business
opportunities. There can be no assurance that the Company will
be able to generate sufficient funds from future operations, or
raise sufficient debt or equity on acceptable terms, to take
advantage of investment opportunities that become available.
Should the Companys needs ever exceed these sources of
liquidity, management believes the Companys
mortgage-backed and equity securities could be sold, in most
circumstances, to provide cash.

For the nine months ended September 30,
2002, the Companys operating activities resulted in net
cash flow of $94.5 million. The primary source of operating
cash flow was interest on mortgage-backed securities, interest
on notes receivable, fee income, gains from the sale of
mortgage-backed and equity securities, and dividends. For the
nine months ended September 30, 2001, the Companys
operating activities provided net cash flows of
$4.1 million. The increase is primarily due to an increase
in income from the Companys larger mortgage-backed
security portfolio and an increase in fee income and gains from
the sale of mortgage-backed and equity securities.

For the nine months ended September 30,
2002, the Companys investing activities resulted in net
cash used of $4.5 billion compared to net cash used by
investing activities for the nine months ended
September 30, 2001, of $969.6 million. The change is
primarily attributable to increased purchases of mortgage-backed
securities during the first nine months of 2002 compared to the
similar period in 2001.

For the nine months ended September 30,
2002, net cash provided in the Companys financing
activities was $4.5 billion compared to net cash provided
for the nine months ended September 30, 2001, of
$930.5 million. The increase in cash from financing
activities is primarily attributable to an increase in
borrowings under repurchase agreements used to fund
mortgage-backed securities purchases and proceeds from the
Companys follow-on common stock offerings.

14



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##### Table of Contents





Results of Operations 
(Continued)


Equity Securities

The value of the equity securities in the
Companys portfolio had a cost basis of $94.1 million
compared to a market value of $99.3 million as of
September 30, 2002. As of December 31, 2001, the value
of the equity securities in the Companys portfolio had an
adjusted cost basis equal to $46.8 million compared to a
market value equal to $61.7 million. Increases and declines
are generally recorded as accumulated other comprehensive income
in the statement of financial condition, except to the extent
that declines are deemed to be other than temporary. If the
Company determines that declines are other than temporary, we
recognize a loss on the investment and reduce the
investments carrying value to its current fair value.

15



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##### Table of Contents






FBR ASSET INVESTMENT CORPORATION

Summary of Investments and Cash and Cash
Equivalents


The following table summarizes FBR
Assets investments as of September 30, 2002, and
December 31, 2001.


|                                                    |                                            |                          |   |                         |   |            |   |            |   |        |               |              |            |            |               |            |            |  |   |           |  |  |   |       |  |   |               |            |            |   |               |            |            | 
|--------------------------------------------------- | ------------------------------------------ | ------------------------ | - | ----------------------- | - | ---------- | - | ---------- | - | ------ | ------------- | ------------ | ---------- | ---------- | ------------- | ---------- | ---------- |  | - | --------- |  |  | - | ----- |  | - | ------------- | ---------- | ---------- | - | ------------- | ---------- | ---------- | 
|                                                    |                                            |                          |   |                        
|                                                    |                                            | As of September 30, 2002 |   | As of December 31, 2001
|                                                    |                                            |                          |   |                        
|                                                    |                                            | Shares                   |   | Percent                 |   | Cost of    |   |            |   | Shares |               | Percent      |            | Cost of    |               |           
|                                                    |                                            | Owned                    |   | Ownership(3)            |   | Investment |   | Fair Value |   | Owned  |               | Ownership(3) |            | Investment |               | Fair Value
|                                                    |                                            |                          |   |                         |   |            |   |            |   |        |               |              |            |            |               |           
|Mortgage-Backed Securities                          |                                            |                          |  |                         |   |            |  |            |   | $      | 5,738,461,441 |              |            | $          | 5,822,504,819 |            |            |  |  |           |  |  |  |       |  | $ | 1,236,935,966 |            |            | $ | 1,238,365,511 |           
|                                                    |                                            |                          |   |                         |   |            |   |            |   |        |               |              |            |            |               |            |            |  |   |           |  |  |   |       |  |   |               |            |            |   |               |           
|Equity Investments (1)(2)                           |                                            |                          |   |                         |   |            |   |            |   |        |               |              |            |            |               |            |            |  |   |           |  |  |   |       |  |   |               |            |            |   |               |           
|                                                    | American Financial Realty Trust (AFRT) (4) |                          |   | 3,763,441               |   |            |   | 8.96%      |   |        |               | 35,000,001   |            |            |               | 35,000,001 |            |  |   |          |  |  |   |      |  |   |               |           |            |   |               |           |           
|                                                    | Americredit Corp.                          |                          |   | 5,000,000               |   |            |   | 3.27%      |   |        |               | 35,250,000   |            |            |               | 40,350,000 |            |  |   |          |  |  |   |      |  |   |               |           |            |   |               |           |           
|                                                    | Annaly Mortgage Management, Inc. (NLY)     |                          |   |                        |   |            |   |           |   |        |               |             |            |            |               |           |            |  |   | 800,000   |  |  |   | 1.36% |  |   |               | 7,144,000  |            |   |               | 12,800,000 |           
|                                                    | Anworth Mortgage Asset Corporation (ANH)   |                          |   |                        |   |            |   |           |   |        |               |             |            |            |               |           |            |  |   | 500,000   |  |  |   | 4.50% |  |   |               | 3,890,625  |            |   |               | 4,550,000  |           
|                                                    | Capital Automotive REIT (CARS)             |                          |   |                        |   |            |   |           |   |        |               |             |            |            |               |           |            |  |   | 920,115   |  |  |   | 3.54% |  |   |               | 12,835,604 |            |   |               | 18,301,087 |           
|                                                    | MCG Capital Corporation (MCGC)             |                          |   | 625,000                 |   |            |   | 2.00%      |   |        |               | 9,934,375    |            |            |               | 8,237,500  |            |  |   | 625,000   |  |  |   | 2.21% |  |   |               | 9,934,375  |            |   |               | 11,125,000 |           
|                                                    | Oxford Finance Corp.(4)                    |                          |   | 500,000                 |   |            |   | 9.62%      |   |        |               | 4,650,000    |            |            |               | 4,650,000  |            |  |   |          |  |  |   |      |  |   |               |           |            |   |               |           |           
|                                                    | Resource Asset Investment Trust (RAS)      |                          |   |                        |   |            |   |           |   |        |               |             |            |            |               |           |            |  |   | 344,575   |  |  |   | 2.77% |  |   |               | 3,704,181  |            |   |               | 5,616,573  |           
|                                                    | Saxon Capital Acquisition Corp. (SAXN)     |                          |   | 1,000,000               |   |            |   | 3.56%      |   |        |               | 9,300,000    |            |            |               | 11,070,000 |            |  |   | 1,000,000 |  |  |   | 3.57% |  |   |               | 9,300,000  |            |   |               | 9,300,000  |           
|                                                    |                                            |                          |   |                         |   |            |   |            |   |        |               |              |            |            |               |            |            |  |   |           |  |  |   |       |  |   |               |            |            |   |               |           
|                                                    |                                            | Total Equity Investments |   |                         |   |            |   |            |   |        |               |              | 94,134,376 |            |               |            | 99,307,501 |  |   |           |  |  |   |       |  |   |               |            | 46,808,785 |   |               |            | 61,692,660 | 
|                                                    |                                            |                          |   |                         |   |            |   |            |   |        |               |              |            |            |               |            |            |  |   |           |  |  |   |       |  |   |               |            |            |   |               |           
|Promissory Notes                                    |                                            |                          |   |                         |   |            |   |            |   |        |               |              |            |            |               |            |            |  |   |           |  |  |   |       |  |   |               |            |            |   |               |           
|                                                    | Prime Group Realty, L.P.                   |                          |   |                        |   |            |   |           |   |        |               |             |            |            |               |           |            |  |   |          |  |  |   |      |  |   |               | 8,000,000  |            |   |               | 8,000,000  |           
|                                                    |                                            |                          |   |                         |   |            |   |            |   |        |               |              |            |            |               |            |            |  |   |           |  |  |   |       |  |   |               |            |            |   |               |           
|                                                    |                                            | Total Promissory Notes   |   |                         |  |            |   |            |  |        |               |              |           |            |               |            |           |  |   |           |  |  |   |       |  |   |               |            | 8,000,000  |   |               |            | 8,000,000  | 
|                                                    |                                            |                          |   |                         |   |            |   |            |   |        |               |              |            |            |               |            |            |  |   |           |  |  |   |       |  |   |               |            |            |   |               |           
|Cash and Cash Equivalents                           |                                            |                          |  |                         |   |            |  |            |   |        | 12,670,252    |              |            |            | 12,670,252    |            |            |  |  |           |  |  |  |       |  |   | 6,630,379     |            |            |   | 6,630,379     |           
|                                                    |                                            |                          |   |                         |   |            |   |            |   |        |               |              |            |            |               |            |            |  |   |           |  |  |   |       |  |   |               |            |            |   |               |           
|Total Investments and Cash and Cash
    Equivalents |                                            |                          |  |                         |   |            |  |            |   | $      | 5,845,266,069 |              |            | $          | 5,934,482,572 |            |            |  |  |           |  |  |  |       |  | $ | 1,298,375,130 |            |            | $ | 1,314,688,550 |           
|                                                    |                                            |                          |   |                         |   |            |   |            |   |        |               |              |            |            |               |            |            |  |   |           |  |  |   |       |  |   |               |            |            |   |               |           



---



|    |                                                                                                                                                                                                                                                                                                                                     
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The symbols in parentheses next to the company
    names are the symbols of those companies on NASDAQ or a national
    securities exchange. Each of these companies is a reporting
    company under the Securities Exchange Act of 1934. Information
    is available about these companies on the SECs website,
    www.sec.gov.
|   
|(2) | FBR has underwritten or privately placed
    securities of these companies or their affiliates.                                                                                                                                                                                                                                     
|   
|(3) | Based on the most recent publicly available
    information.                                                                                                                                                                                                                                                                        
|   
|(4) | American Financial Realty and Oxford Financial
    shares are not currently registered for public trading. As of
    September 30, 2002 these investments are carried at cost.                                                                                                                                                      

16



---



##### Table of Contents






ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Market risk generally represents the risk of loss
through a change in realizable value that can result from a
change in the prices of equity securities, a change in the value
of financial instruments as a result of changes in interest
rates, a change in the volatility of interest rates or, a change
in the credit rating of an issuer. The Company is exposed to the
following market risks as a result of its investments in
mortgage-backed securities and equity investments. None of these
investments are held for trading purposes.

Interest Rate Risk

The Company is subject to interest-rate risk as a
result of its investments in mortgage-backed securities and its
financing with repurchase agreements, all of which are interest
rate sensitive financial instruments. The Company is exposed to
interest rate risk that fluctuates based on changes in the level
or volatility of interest rates and mortgage prepayments and in
the shape and slope of the yield curve. The Company attempts to
hedge a portion of its exposure to rising interest rates
primarily through the use of paying fixed and receiving floating
interest rate swaps and Eurodollar futures contracts. These
interest rate swap agreements and Eurodollar futures contracts
are with primary broker-dealers.

The Companys primary risk is related to
changes in both short and long term interest rates, which affect
the Company in several ways. As interest rates increase, the
market value of the mortgage-backed securities may be expected
to decline, prepayment rates may be expected to go down and
durations may be expected to extend. An increase in interest
rates is beneficial to the market value of the Companys
swap position as the cash flows from receiving the floating rate
portion increases over the fixed rate paid under this scenario.
If interest rates decline, the reverse is true for
mortgage-backed securities, paying fixed and receiving floating
interest rate swaps, and Eurodollar futures contracts.

The Company records its interest-rate swap
agreements at fair value. The differential between amounts paid
and received under the interest rate swap agreements is recorded
as an adjustment to the interest expense incurred under the
repurchase agreements. In addition, the Company records the
ineffectiveness of its hedges, if any, in interest expense. In
the event of early termination of an interest rate swap
agreement, the Company receives or makes a payment based on the
fair value of the instrument, and the related deferred gain or
loss recorded in other comprehensive income is amortized into
income or expense over the original hedge period.

The Company records its Eurodollar futures at
fair value. The differential between amounts paid and received
under the futures contract is recorded as an adjustment to
interest expense. In the event of early termination of a
contract, the Company receives or makes a payment based on the
fair value of the Eurodollar futures contract, and the related
deferred gain or loss recorded in other comprehensive income is
amortized into income or expense over the original hedge period.

The table that follows shows the expected change
in market value for the Companys current mortgage-backed
securities, eurodollar future contracts and interest-rate swaps
under several interest-rate shocks. Interest rates
are defined by the U.S. Treasury yield curve. The changes in
rates are assumed to occur instantaneously. It is further
assumed that the changes in rates occur uniformly across the
yield curve and that the level of LIBOR changes by the same
amount as the yield curve. Actual changes in market conditions
are likely to be different from these assumptions.

Changes in value are measured as percentage
changes from their respective values presented in the column
labeled Value at 9/30/02. Actual results could
differ significantly from these estimates.

The change in value of the mortgage-backed
securities also incorporates assumptions regarding prepayments,
which are based on a third partys proprietary model. This
model forecasts prepayment speeds based, in part, on each
securitys issuing agency (Ginnie Mae, Fannie Mae or
Freddie Mac), coupon, age, prior exposure to refinancing
opportunities, the interest rate distribution of the underlying
loans, and an overall analysis of historical prepayment patterns
under a variety of past interest rate conditions.

17



---



##### Table of Contents



Interest Rate
Risk  (Continued)


|                     |                                        |                                                |        |                |               |         |        |                |               |         |       |        |       |    |        |               |               |  |       |         |       |   
|-------------------- | -------------------------------------- | ---------------------------------------------- | ------ | -------------- | ------------- | ------- | ------ | -------------- | ------------- | ------- | ----- | ------ | ----- | -- | ------ | ------------- | ------------- |  | ----- | ------- | ----- | --
|                     |                                        |                                                |        | Value at       |               |         |        | Value at       |               |        
|                     |                                        |                                                |        | September 30,  |               |         |        | September 30,  |               |        
|                     |                                        |                                                |        | 2002 with 100  |               |         |        | 2002 with 100  |               |        
|                     |                                        | Value at                                       |        | basis point    |               |         |        | basis point    |               |        
|                     |                                        | September 30,                                  |        | increase in    |               | Percent |        | decrease in    |               | Percent
|                     |                                        | 2002(1)                                        |        | interest rates |               | Change  |        | interest rates |               | Change 
|                     |                                        |                                                |        |                |               |         |        |                |               |        
|Assets               |                                        |                                                |        |                |               |         |        |                |               |         |       |        |       |    |        |               |               |  |       |        
|                     | Mortgage-backed securities             |                                                | $      | 5,822,504,819  |               |         | $      | 5,789,140,819  |               |         |       | (0.57  | )%    |    | $      | 5,837,643,331 |               |  |       | 0.26    | %    
|                     | Other                                  |                                                |        | 161,073,571    |               |         |        | 161,073,571    |               |         |       |        |       |    |        | 161,073,571   |               |  |       |         |      
|                     |                                        |                                                |        |                |               |         |        |                |               |         |       |        |       |    |        |               |               |  |       |        
|                     |                                        | Total Assets                                   |        | $              | 5,983,578,390 |         |        | $              | 5,950,214,390 |         |       |        | (0.56 | )% |        | $             | 5,998,716,902 |  |       |         | 0.25  | % 
|                     |                                        |                                                |        |                |               |         |        |                |               |         |       |        |       |    |        |               |               |  |       |        
|Liabilities          |                                        |                                                |        |                |               |         |        |                |               |         |       |        |       |    |        |               |               |  |       |        
|                     | Interest-rate swap(2)                  |                                                | $      | 17,188,593     |               |         | $      | (5,782,180     | )             |         |       | 133.64 | %     |    | $      | 40,559,261    |               |  |       | (135.97 | )%   
|                     | Eurodollar futures                     |                                                |        | 1,712,500      |               |         |        | (3,287,500     | )             |         |       | 291.97 | %     |    |        | 6,712,500     |               |  |       | (291.97 | )%   
|                     | Other                                  |                                                |        | 5,236,651,033  |               |         |        | 5,236,651,033  |               |         |       |        |       |    |        | 5,236,651,033 |               |  |       |         |      
|                     |                                        |                                                |        |                |               |         |        |                |               |         |       |        |       |    |        |               |               |  |       |        
|                     |                                        | Total Liabilities                              |        |                | 5,255,552,126 |         |        |                | 5,227,581,353 |         |       |        | 0.53  | %  |        |               | 5,283,922,794 |  |       |         | (0.54 | )%
|                     |                                        |                                                |        |                |               |         |        |                |               |         |       |        |       |    |        |               |               |  |       |        
|Shareholders Equity |                                        |                                                |        |                |               |         |        |                |               |         |       |        |       |    |        |               |               |  |       |        
|                     | Common stock                           |                                                |        | 250,543        |               |         |        | 250,543        |               |         |       |        |       |    |        | 250,543       |               |  |       |         |      
|                     | Paid-in-capital                        |                                                |        | 664,796,186    |               |         |        | 664,796,186    |               |         |       |        |       |    |        | 664,796,186   |               |  |       |         |      
|                     | Accumulated other comprehensive income |                                                |        | 70,315,410     |               |         |        | 64,922,183     |               |         |       | (7.67  | )%    |    |        | 57,083,254    |               |  |       | (18.82  | )%   
|                     | Retained deficit                       |                                                |        | (7,335,875     | )             |         |        | (7,335,875     | )             |         |       |        |       |    |        | (7,335,875    | )             |  |       |         |      
|                     |                                        |                                                |        |                |               |         |        |                |               |         |       |        |       |    |        |               |               |  |       |        
|                     |                                        | Total Shareholders Equity                     |        |                | 728,026,264   |         |        |                | 722,633,037   |         |       |        | (0.74 | )% |        |               | 714,794,108   |  |       |         | (1.82 | )%
|                     |                                        |                                                |        |                |               |         |        |                |               |         |       |        |       |    |        |               |               |  |       |        
|                     |                                        | Total Liabilities and
    Shareholders Equity |        | $              | 5,983,578,390 |         |        | $              | 5,950,214,390 |         |       |        | (0.56 | )% |        | $             | 5,998,716,902 |  |       |         | 0.25  | % 
|                     |                                        |                                                |        |                |               |         |        |                |               |         |       |        |       |    |        |               |               |  |       |        
|Book Value per Share |                                        |                                                | $29.06 |                |               |         | $28.84 |                |               |         | (0.76 | )%     |       |    | $28.53 |               |               |  | (1.82 | )%     
|                     |                                        |                                                |        |                |               |         |        |                |               |         |       |        |       |    |        |               |               |  |       |        






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Includes accrued interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   
|(2) | The carrying value of the interest rate swaps and
    eurodollar futures in the Companys financial statements
    equals $(18.9) million. See Note 5 to Notes to Financial
    Statements. The fair value of the interest rate swap is based on
    quoted market prices as of September 30, 2002. At
    September 30, 2002, the closing price of the June 2003
    Eurodollar futures contract was 98.335 and the closing price of
    the September 2003 contract was 98.02. As of September 30,
    2002, weighted average interest payments received under the swap
    agreements were based on an interest rate of 1.843% while
    interest payments made were based on a weighted average interest
    rate of 2.195%.

As shown above, the mortgage-backed securities
portfolio generally will benefit less from a decline in interest
rates than it will be adversely affected by a same scale
increase in interest rates. This may effectively limit an
investors upside potential in a market rally.

The value of the Companys investments in
other companies is also likely to be affected by significant
changes in interest rates. First, many of the companies are
exposed to risks similar to those identified above as being
applicable to the Companys direct investments. Second, the
REITs in which the Company has invested tend to trade on a yield
basis. As interest rates increase, the yield required by
investors in REITs, thrifts and other financial institutions
increases with the result that market values decline. Finally,
changes in interest rates often affect market prices of equity
securities. Because each of the companies in which the Company
invests has its own interest rate risk management process, it is
not feasible for us to quantify the potential impact that
interest rate changes would have on the stock price or the
future dividend payments by any of the companies in which the
Company has invested.

18



---



##### Table of Contents



Equity Price Risk

The Company is exposed to equity price risk as a
result of its investments in equity securities of REITs and
other companies. Equity price risk changes as the volatility of
equity prices changes or the values of corresponding equity
indices change.

While it is impossible to exactly project what
factors may affect the prices of equity sectors and how much the
effect might be, the table below illustrates the impact a ten
percent increase and a ten percent decrease in the price of the
equities held by the Company would have on the value of the
total assets and the book value of the Company as of
September 30, 2002.

|                     |                                                |                    |               |                    |               |         |               |                    |               |         |      |       |      |   |               |               |               |  |       |        |       |   
|-------------------- | ---------------------------------------------- | ------------------ | ------------- | ------------------ | ------------- | ------- | ------------- | ------------------ | ------------- | ------- | ---- | ----- | ---- | - | ------------- | ------------- | ------------- |  | ----- | ------ | ----- | --
|                     |                                                |                    |               | Value at           |               |         |               | Value at           |               |        
|                     |                                                |                    |               | September 30, 2002 |               |         |               | September 30, 2002 |               |        
|                     |                                                | Value at           |               | with 10% Increase  |               | Percent |               | with 10% Decrease  |               | Percent
|                     |                                                | September 30, 2002 |               | in Price           |               | Change  |               | in Price           |               | Change 
|                     |                                                |                    |               |                    |               |         |               |                    |               |        
|Assets               |                                                |                    |               |                    |               |         |               |                    |               |         |      |       |      |   |               |               |               |  |       |       
|                     | Equity securities                              |                    | $             | 99,307,501         |               |         | $             | 109,238,251        |               |         |      | 10.00 | %    |   | $             | 89,376,751    |               |  |       | (10.00 | )%   
|                     | Other                                          |                    |               | 5,884,270,889      |               |         |               | 5,884,270,889      |               |         |      |       |      |   |               | 5,884,270,889 |               |  |       |        |      
|                     |                                                |                    |               |                    |               |         |               |                    |               |         |      |       |      |   |               |               |               |  |       |       
|                     |                                                | Total Assets       |               | $                  | 5,983,578,390 |         |               | $                  | 5,993,509,140 |         |      |       | 0.17 | % |               | $             | 5,973,647,640 |  |       |        | (0.17 | )%
|                     |                                                |                    |               |                    |               |         |               |                    |               |         |      |       |      |   |               |               |               |  |       |       
|Liabilities          |                                                | $                  | 5,255,552,126 |                    |               | $       | 5,255,552,126 |                    |               |         |      |       |      | $ | 5,255,552,126 |               |               |  |       |       
|Shareholders Equity |                                                |                    |               |                    |               |         |               |                    |               |         |      |       |      |   |               |               |               |  |       |       
|                     | Common stock                                   |                    |               | 250,543            |               |         |               | 250,543            |               |         |      |       |      |   |               | 250,543       |               |  |       |        |      
|                     | Paid-in-capital                                |                    |               | 664,796,186        |               |         |               | 664,796,186        |               |         |      |       |      |   |               | 664,796,186   |               |  |       |        |      
|                     | Accumulated comprehensive income               |                    |               | 70,315,410         |               |         |               | 80,246,160         |               |         |      | 14.12 | %    |   |               | 60,384,660    |               |  |       | (14.12 | )%   
|                     | Retained deficit                               |                    |               | (7,335,875         | )             |         |               | (7,335,875         | )             |         |      |       |      |   |               | (7,335,875    | )             |  |       |        |      
|                     |                                                |                    |               |                    |               |         |               |                    |               |         |      |       |      |   |               |               |               |  |       |       
|                     | Total Shareholders Equity                     |                    |               | 728,026,264        |               |         |               | 737,957,014        |               |         |      | 1.36  | %    |   |               | 718,095,514   |               |  |       | (1.36  | )%   
|                     |                                                |                    |               |                    |               |         |               |                    |               |         |      |       |      |   |               |               |               |  |       |       
|                     | Total Liabilities and Shareholders
    Equity |                    | $             | 5,983,578,390      |               |         | $             | 5,993,509,140      |               |         |      | 0.17  | %    |   | $             | 5,973,647,640 |               |  |       | (0.17  | )%   
|                     |                                                |                    |               |                    |               |         |               |                    |               |         |      |       |      |   |               |               |               |  |       |       
|Book value per share |                                                |                    | $29.06        |                    |               |         | $29.45        |                    |               |         | 1.36 | %     |      |   | $28.66        |               |               |  | (1.36 | )%    
|                     |                                                |                    |               |                    |               |         |               |                    |               |         |      |       |      |   |               |               |               |  |       |       

Except to the extent that the Company sells its
equity investments or a decrease in market value is deemed to be
other than temporary, an increase or decrease in the market
value of those assets will not directly affect the
Companys earnings, however an increase or decrease in
interest rates would affect the market value of the assets owned
by the companies in which the Company invests. Consequently, if
those companies earnings are affected by changes in the
market value of their assets, that could in turn impact their
ability to pay dividends, which could in turn affect the
Companys earnings. If the Company had sold all of its
equity investments on September 30, 2002, the Company would
have realized a gain of approximately $5.2 million that
would have been included in earnings.




ITEM 4. CONTROLS AND
PROCEDURES

Within the 90 days prior to the filing date
of this report, the Company carried out an evaluation, under the
supervision and with the participation of the Companys
management, including the Companys principal executive
officer, Eric F. Bilings and the Companys principal
financial officer, Kurt R. Harrington, of the effectiveness of
the design and operation of the Companys disclosure
controls and procedures pursuant to Rule 13a-14 under the
Securities Exchange Act of 1934. Based upon that evaluation,
Eric F. Billings and Kurt R. Harrington concluded that the
Companys disclosure controls and procedures are effective
in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be
included in the Companys periodic SEC filings.

Since the date of the evaluation, there have been
no significant changes in the Companys internal controls
or in other factors that could significantly affect these
controls.

19



---



##### Table of Contents






PART II

OTHER INFORMATION





ITEM 1. LEGAL PROCEEDINGS

None




ITEM 2. CHANGES IN SECURITIES AND USE OF
PROCEEDS

Not applicable




ITEM 3. DEFAULTS UPON SENIOR
SECURITIES

None




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

None




ITEM 5. OTHER INFORMATION

The registrants stock became registered
under the Securities Exchange Act of 1934 on September 27,
1999. The common stock is listed on the New York Stock Exchange
and its symbol is FB.




ITEM 6. EXHIBITS AND REPORTS ON FORM
8-K

(a) Exhibits

None

(b) Reports on Form 8-K



| |    |                                                                                                                                                                                                                                                                                                                         
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | Current Report on Form 8-K, filed on
    July 25, 2002, pursuant to Item 9, disclosing the
    Companys operating results for the second quarter ending
    June 30, 2002.                                                                                                                                             
|
| | 2. | Current Report on Form 8-K, filed on
    August 12, 2002, pursuant to Item 9, disclosing the
    filing of the certifications of the Companys chief
    executive officer and chief financial officer required by 18
    U.S.C. Section 1350, as adopted pursuant to
    Section 906 of the Sarbanes-Oxley Act of 2002.

20



---



##### Table of Contents






SIGNATURE

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



| |                                 
| | --------------------------------
| | FBR ASSET INVESTMENT CORPORATION
| | (Registrant)                    



| |     |                       
| | --- | ----------------------
| | By: | /s/ KURT R. HARRINGTON

| |                                               
| | ----------------------------------------------
| |                                               
| | Kurt R. Harrington                            
| | Chief Financial Officer, Treasurer
    and    
| | Principal Financial and Accounting
    Officer

Date: November 14, 2002

21



---



##### Table of Contents






Certification

I, Eric F. Billings, certify that:



| |    |                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1. | I have reviewed this quarterly report on
    Form 10-Q of FBR Asset Investment Corporation;                                                                                                                                                                                                                                                       
|
| | 2. | Based on my knowledge, this quarterly report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    quarterly report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this quarterly
    report, fairly present in all material respects the financial
    condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this
    quarterly report;                   
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                             



| |    |                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this quarterly report is being prepared;



| |    |                                                                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and



| |    |                                                                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. | presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and



| |    |                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this quarterly report whether or not
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

Date:
November 14, 2002

| |                                     
| | ------------------------------------
| | /s/ ERIC F. BILLINGS                
| |                                     
| | Eric F. Billings                    
| | Chairman and Chief Executive Officer

22



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##### Table of Contents



Certification

I, Kurt R. Harrington, certify that:

1. I have reviewed this quarterly report on
Form 10-Q of FBR Asset Investment Corporation;



| |    |                                                                                                                                                                                                                                                                                                                                                   
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2. | Based on my knowledge, this quarterly report does
    not contain any untrue statement of a material fact or omit to
    state a material fact necessary to make the statements made, in
    light of the circumstances under which such statements were
    made, not misleading with respect to the period covered by this
    quarterly report;
|
| | 3. | Based on my knowledge, the financial statements,
    and other financial information included in this quarterly
    report, fairly present in all material respects the financial
    condition, results of operations and cash flows of the
    registrant as of, and for, the periods presented in this
    quarterly report;                   
|
| | 4. | The registrants other certifying officers
    and I are responsible for establishing and maintaining
    disclosure controls and procedures (as defined in Exchange Act
    Rules 13a-14 and 15d-14) for the registrant and we have:                                                                                                             



| |    |                                                                                                                                                                                                                                                                                                                
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | designed such disclosure controls and procedures
    to ensure that material information relating to the registrant,
    including its consolidated subsidiaries, is made known to us by
    others within those entities, particularly during the period in
    which this quarterly report is being prepared;



| |    |                                                                                                                                                                                                          
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this
    quarterly report (the Evaluation Date); and



| |    |                                                                                                                                                                                
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | c. | presented in this quarterly report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;



| |    |                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. | The registrants other certifying officers
    and I have disclosed, based on our most recent evaluation, to
    the registrants auditors and the audit committee of
    registrants board of directors (or persons performing the
    equivalent function):



| |    |                                                                                                                                                                                                                                                                                                                   
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a. | all significant deficiencies in the design or
    operation of internal controls which could adversely affect the
    registrants ability to record, process, summarize and
    report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and



| |    |                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------
| | b. | any fraud, whether or not material, that involves
    management or other employees who have a significant role in the
    registrants internal controls; and



| |    |                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. | The registrants other certifying officers
    and I have indicated in this quarterly report whether or not
    there were significant changes in internal controls or in other
    factors that could significantly affect internal controls
    subsequent to the date of our most recent evaluation, including
    any corrective actions with regard to significant deficiencies
    and material weaknesses.

Date:
November 14, 2002

| |                        
| | -----------------------
| | /s/ KURT R. HARRINGTON 
| |                        
| | Kurt R. Harrington     
| | Chief Financial Officer

23