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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 June 30, 2002

OR



|[   ] |  | 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
(State or other Jurisdiction of
Incorporation or Organization) |  | 54-1873198
(I.R.S. employer
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 [   ]

As of August 2, 2002, the latest practicable date, there were 25,054,332
shares of FBR Asset Investment Corporations common stock outstanding.



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FBR ASSET INVESTMENT CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
INDEX

|                              |  |                                                                                       |  |                                                                                                                                                     |    |  |   | 
|----------------------------- |  | ------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------- | -- |  | - | 
|PART I. FINANCIAL INFORMATION |  | Page                                                                                 
|                              |  |                                                                                      
|Item 1.                       |  | Consolidated Financial Statements and Notes                                           |  |                                                                                                                                                     |    | 
|                              |  |                                                                                       |  | Consolidated Statements of Financial Condition as of June 30, 2002
(unaudited) and December 31, 2001                                                |    |  | 1 | 
|                              |  |                                                                                       |  | Consolidated Statements of Income for the Three Months Ended June
30, 2002 and 2001(unaudited)                                                      |    |  | 2 | 
|                              |  |                                                                                       |  | Consolidated Statements of Income for the Six Months Ended
June 30, 2002 and 2001 (unaudited)                                                       |    |  | 3 | 
|                              |  |                                                                                       |  | Consolidated Statements of Changes in Shareholders Equity for the
Six Months Ended June 30, 2002 (unaudited), and the Year Ended
December 31, 2001 |    |  | 4 | 
|                              |  |                                                                                       |  | Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 (unaudited)                                                   |    |  | 5 | 
|                              |  |                                                                                       |  | Notes to Consolidated Financial Statements                                                                                                          |    |  | 6 | 
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and
Results of Operations |  |                                                                                                                                                     | 9  | 
|Item 3.                       |  | Quantitative and Qualitative Disclosures About Market Risk                            |  |                                                                                                                                                     | 15 | 
|PART II. OTHER
INFORMATION    |  |                                                                                       |  |                                                                                                                                                    
|Item 1.                       |  | Legal Proceedings                                                                     |  |                                                                                                                                                     | 18 | 
|Item 2.                       |  | Changes in Securities and Use of Proceeds                                             |  |                                                                                                                                                     | 18 | 
|Item 3.                       |  | Defaults Upon Senior Securities                                                       |  |                                                                                                                                                     | 18 | 
|Item 4.                       |  | Submission of Matters to Vote of Security Holders                                     |  |                                                                                                                                                     | 18 | 
|Item 5.                       |  | Other Information                                                                     |  |                                                                                                                                                     | 18 | 
|Item 6.                       |  | Exhibits and Reports on Form 8-K                                                      |  |                                                                                                                                                     | 19 | 
|SIGNATURE                     |  |                                                                                       |  |                                                                                                                                                     | 20 | 





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PART I  FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS AND NOTES

FBR ASSET INVESTMENT CORPORATION
Consolidated Statements of Financial Condition
as of June 30, 2002 (unaudited) and December 31, 2001

|                                     |                       |                                                                                                                                                                        |                                            |   |               |               |                   |   |               |               | 
|------------------------------------ | --------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------ | - | ------------- | ------------- | ----------------- | - | ------------- | ------------- | 
|                                     |                       |                                                                                                                                                                        |                                            |   | June 30, 2002 |               | December 31, 2001
|                                     |                       |                                                                                                                                                                        |                                            |   |               |               |                  
|                                     |                       |                                                                                                                                                                        |                                            |   | (unaudited)   |               |                   |   |              
|ASSETS                               |                       |                                                                                                                                                                        |                                            |   |               |               |                   |  
|                                     |                       | Mortgage-backed securities, at fair value                                                                                                                              |                                            | $ | 3,826,374,634 |               |                   | $ | 1,238,365,511 |              
|                                     |                       | Cash and cash equivalents                                                                                                                                              |                                            |   | 5,843,662     |               |                   |   | 6,630,379     |              
|                                     |                       | Investments in equity securities, at fair value                                                                                                                        |                                            |   | 38,358,750    |               |                   |   | 61,692,660    |              
|                                     |                       | Notes receivable                                                                                                                                                       |                                            |   | 5,000,000     |               |                   |   | 8,000,000     |              
|                                     |                       | Interest, dividends and fees receivable                                                                                                                                |                                            |   | 28,216,856    |               |                   |   | 10,241,837    |              
|                                     |                       | Receivable from underwriter                                                                                                                                            |                                            |   | 189,924,894   |               |                   |   |              |              
|                                     |                       | Prepaid expenses and other                                                                                                                                             |                                            |   | 83,344        |               |                   |   | 194,831       |              
|                                     |                       |                                                                                                                                                                        |                                            |   |               |               |                   |  
|                                     |                       |                                                                                                                                                                        | Total assets                               |   | $             | 4,093,802,140 |                   |   | $             | 1,325,125,218 | 
|                                     |                       |                                                                                                                                                                        |                                            |   |               |               |                   |  
|LIABILITIES AND SHAREHOLDERS EQUITY |                       |                                                                                                                                                                        |                                            |   |               |               |                   |  
|                                     | Liabilities:          |                                                                                                                                                                        |                                            |   |               |               |                   |   |              
|                                     |                       | Repurchase agreements                                                                                                                                                  |                                            | $ | 3,369,638,266 |               |                   | $ | 1,105,145,000 |              
|                                     |                       | Interest-rate swap                                                                                                                                                     |                                            |   | 1,715,334     |               |                   |   | 1,159,167     |              
|                                     |                       | Interest payable                                                                                                                                                       |                                            |   | 4,505,883     |               |                   |   | 2,177,892     |              
|                                     |                       | Dividends payable                                                                                                                                                      |                                            |   | 23,817,915    |               |                   |   | 10,645,659    |              
|                                     |                       | Management and incentive fees payable                                                                                                                                  |                                            |   | 3,473,081     |               |                   |   | 1,117,458     |              
|                                     |                       | Accounts payable and accrued expenses                                                                                                                                  |                                            |   | 407,571       |               |                   |   | 505,549       |              
|                                     |                       | Income taxes payable                                                                                                                                                   |                                            |   | 130,398       |               |                   |   | 473,403       |              
|                                     |                       | Other                                                                                                                                                                  |                                            |   | 76,211        |               |                   |   | 35,544        |              
|                                     |                       |                                                                                                                                                                        |                                            |   |               |               |                   |  
|                                     |                       |                                                                                                                                                                        | Total liabilities                          |   |               | 3,403,764,659 |                   |   |               | 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 June 30, 2002, and December 31, 2001,
respectively |                                            |   | 250,543       |               |                   |   | 85,025        |              
|                                     |                       | Additional paid-in capital                                                                                                                                             |                                            |   | 664,806,645   |               |                   |   | 206,916,930   |              
|                                     |                       | Accumulated other comprehensive income                                                                                                                                 |                                            |   | 35,663,179    |               |                   |   | 15,154,257    |              
|                                     |                       | Retained deficit                                                                                                                                                       |                                            |   | (10,682,886   | )             |                   |   | (18,290,666   | )            
|                                     |                       |                                                                                                                                                                        |                                            |   |               |               |                   |  
|                                     |                       |                                                                                                                                                                        | Total shareholders equity                 |   |               | 690,037,481   |                   |   |               | 203,865,546   | 
|                                     |                       |                                                                                                                                                                        |                                            |   |               |               |                   |  
|                                     |                       |                                                                                                                                                                        | Total liabilities and shareholders equity |   | $             | 4,093,802,140 |                   |   | $             | 1,325,125,218 | 
|                                     |                       |                                                                                                                                                                        |                                            |   |               |               |                   |  

The accompanying notes are an integral part of these statements.

1



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FBR ASSET INVESTMENT CORPORATION
Consolidated Statements of Income for the Three Months
Ended June 30, 2002 and 2001 (unaudited)

|                                                               |                               |                |            |                             |            |             |           |           |           | 
|-------------------------------------------------------------- | ----------------------------- | -------------- | ---------- | --------------------------- | ---------- | ----------- | --------- | --------- | --------- | 
|                                                               |                               |                |            | Three Months Ended June 30,
|                                                               |                               |                |            |                            
|                                                               |                               |                |            | 2002                        |            | 2001       
|                                                               |                               |                |            |                             |            |            
|                                                               |                               |                |            | (unaudited)                 |            | (unaudited)
|Revenue:                                                       |                               |                |            |                             |            |             |           |          
|                                                               | Interest                      |                | $          | 42,845,341                  |            |             | $         | 3,361,619 |          
|                                                               | Dividends                     |                |            | 1,426,254                   |            |             |           | 1,063,843 |          
|                                                               | Fees                          |                |            | 283,167                     |            |             |           | 1,701,828 |          
|                                                               |                               |                |            |                             |            |             |           |          
|                                                               |                               | Total revenue  |            |                             | 44,554,762 |             |           |           | 6,127,290 | 
|                                                               |                               |                |            |                             |            |             |           |          
|Expenses:                                                      |                               |                |            |                             |            |             |           |          
|                                                               | Interest                      |                |            | 14,924,371                  |            |             |           | 1,769,644 |          
|                                                               | Management and incentive fees |                |            | 4,815,936                   |            |             |           | 485,916   |          
|                                                               | Professional fees & other     |                |            | 724,301                     |            |             |           | 195,868   |          
|                                                               |                               |                |            |                             |            |             |           |          
|                                                               |                               | Total expenses |            |                             | 20,464,608 |             |           |           | 2,451,428 | 
|                                                               |                               |                |            |                             |            |             |           |          
|Realized gain on sale of equity securities, net                |                               |                | 7,503,434  |                             |            |             | 523,364   |          
|Realized gain(loss) on sale of mortgage-backed
securities, net |                               |                | 104,640    |                             |            |             | (175,084  | )        
|                                                               |                               |                |            |                             |            |             |           |          
|Net income before taxes                                        |                               |                | 31,698,228 |                             |            |             | 4,024,142 |          
|                                                               |                               |                |            |                             |            |             |           |          
|Income tax provision                                           |                               |                | (111,010   | )                           |            |             |          |          
|                                                               |                               |                |            |                             |            |             |           |          
|Net income                                                     |                               | $              | 31,587,218 |                             |            | $           | 4,024,142 |          
|                                                               |                               |                |            |                             |            |             |           |          
|Basic earnings per share                                       |                               | $              | 1.67       |                             |            | $           | 1.16      |          
|                                                               |                               |                |            |                             |            |             |           |          
|Diluted earnings per share                                     |                               | $              | 1.67       |                             |            | $           | 1.11      |          
|                                                               |                               |                |            |                             |            |             |           |          
|Basic weighted-average common and equivalent shares            |                               |                | 18,892,662 |                             |            |             | 3,472,527 |          
|                                                               |                               |                |            |                             |            |             |           |          
|Diluted weighted-average common and equivalent shares          |                               |                | 18,917,066 |                             |            |             | 3,617,400 |          
|                                                               |                               |                |            |                             |            |             |           |          

The accompanying notes are an integral part of these statements.

2



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FBR ASSET INVESTMENT CORPORATION
Consolidated Statements of Income for the Six Months
Ended June 30, 2002 and 2001 (unaudited)

|                                                               |                               |                |            |                           |            |             |           |           |           | 
|-------------------------------------------------------------- | ----------------------------- | -------------- | ---------- | ------------------------- | ---------- | ----------- | --------- | --------- | --------- | 
|                                                               |                               |                |            | Six Months Ended June 30,
|                                                               |                               |                |            |                          
|                                                               |                               |                |            | 2002                      |            | 2001       
|                                                               |                               |                |            |                           |            |            
|                                                               |                               |                |            | (unaudited)               |            | (unaudited)
|Revenue:                                                       |                               |                |            |                           |            |             |           |          
|                                                               | Interest                      |                | $          | 62,428,365                |            |             | $         | 6,341,072 |          
|                                                               | Dividends                     |                |            | 1,963,754                 |            |             |           | 1,263,910 |          
|                                                               | Fees                          |                |            | 571,509                   |            |             |           | 1,701,828 |          
|                                                               |                               |                |            |                           |            |             |           |          
|                                                               |                               | Total revenue  |            |                           | 64,963,628 |             |           |           | 9,306,810 | 
|                                                               |                               |                |            |                           |            |             |           |          
|Expenses:                                                      |                               |                |            |                           |            |             |           |          
|                                                               | Interest                      |                |            | 21,559,059                |            |             |           | 3,673,588 |          
|                                                               | Management and incentive fees |                |            | 7,663,209                 |            |             |           | 818,891   |          
|                                                               | Professional fees & other     |                |            | 907,496                   |            |             |           | 445,809   |          
|                                                               |                               |                |            |                           |            |             |           |          
|                                                               |                               | Total expenses |            |                           | 30,129,764 |             |           |           | 4,938,288 | 
|                                                               |                               |                |            |                           |            |             |           |          
|Realized gain on sale of equity securities, net                |                               |                | 14,718,235 |                           |            |             | 503,389   |          
|Realized gain(loss) on sale of mortgage-backed
securities, net |                               |                | 104,640    |                           |            |             | (175,084  | )        
|Recognized loss on available-for sale equity
securities        |                               |                |           |                           |            |             | (544,880  | )        
|                                                               |                               |                |            |                           |            |             |           |          
|Net income before taxes                                        |                               |                | 49,656,739 |                           |            |             | 4,151,947 |          
|                                                               |                               |                |            |                           |            |             |           |          
|Income tax provision                                           |                               |                | (165,629   | )                         |            |             |          |          
|                                                               |                               |                |            |                           |            |             |           |          
|Net income                                                     |                               | $              | 49,491,110 |                           |            | $           | 4,151,947 |          
|                                                               |                               |                |            |                           |            |             |           |          
|Basic earnings per share                                       |                               | $              | 3.17       |                           |            | $           | 1.17      |          
|                                                               |                               |                |            |                           |            |             |           |          
|Diluted earnings per share                                     |                               | $              | 3.17       |                           |            | $           | 1.14      |          
|                                                               |                               |                |            |                           |            |             |           |          
|Basic weighted-average common and equivalent shares            |                               |                | 15,598,868 |                           |            |             | 3,543,369 |          
|                                                               |                               |                |            |                           |            |             |           |          
|Diluted weighted-average common and equivalent shares          |                               |                | 15,620,415 |                           |            |             | 3,642,150 |          
|                                                               |                               |                |            |                           |            |             |           |          

The accompanying notes are an integral part of these statements.

3



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FBR ASSET INVESTMENT CORPORATION
Consolidated Statements of Changes in Shareholders Equity
for the Six Months Ended June 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, December 31,
2000  |                                                                               | $ | 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 |   |         |   | 457,889,715 |   |          |   |              |   |        |   |            |            |               |   | 458,055,233 |            |   |   |            |           
|Net income                  |                                                                               |   |        |   |         |   |            |   |          |   | 49,491,110    |   |        |   |            |            |               |   | 49,491,110  |            |   | $ | 49,491,110 |           
|Other comprehensive income: |                                                                               |   |         |   |         |   |             |   |          |   |               |   |        |   |             |            |               |   |             |            |   |   |            |           
|                            | Reclassification
adjustment for gains
from disposition
included in net
income |   |         |  |         |   |             |  |          |   |               |  |        |   |             | (5,845,938 | )             |   |             | (5,845,938 | ) |   |            | (5,845,938 | )
|                            | Change in unrealized
gain(loss) on
available-for sale
securities              |   |         |  |         |   |             |  |          |   |               |  |        |   |             | 26,911,027 |               |   |             | 26,911,027 |   |   |            | 26,911,027 |  
|                            | Change in unrealized loss
on cash flow hedge                                  |   |         |  |         |   |             |  |          |   |               |  |        |   |             | (556,167   | )             |   |             | (556,167   | ) |   |            | (556,167   | )
|Dividends                   |                                                                               |   |        |   |         |   |            |   |          |   | (41,883,330   | ) |        |   |            |            |               |   | (41,883,330 | )          |   |   |           |           
|                            |                                                                               |   |         |   |         |   |             |   |          |   |               |   |        |   |             |            |               |   |             |            |   |   |            |           
|Balance, June 30, 2002      |                                                                               | $ | 250,543 |   |         | $ | 664,806,645 |   |          | $ | (10,682,886   | ) |        | $ | 35,663,179  |            |               | $ | 690,037,481 |            |   | $ | 70,000,032 |           
|                            |                                                                               |   |         |   |         |   |             |   |          |   |               |   |        |   |             |            |               |   |             |            |   |   |            |           

The accompanying notes are an integral part of these statements.

4



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##### 



FBR ASSET INVESTMENT CORPORATION
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 (unaudited)

|                                                                                  |                                                                                    |   |                           |                |             |   |              |              |  
|--------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | - | ------------------------- | -------------- | ----------- | - | ------------ | ------------ | -
|                                                                                  |                                                                                    |   | Six Months Ended June 30,
|                                                                                  |                                                                                    |   |                          
|                                                                                  |                                                                                    |   | 2002                      |                | 2001       
|                                                                                  |                                                                                    |   |                           |                |            
|                                                                                  |                                                                                    |   | (unaudited)               |                | (unaudited)
|Cash flows from operating activities:                                             |                                                                                    |   |                           |                |             |   |              |             
|Net income                                                                        |                                                                                    | $ | 49,491,110                |                |             | $ | 4,151,947    |             
|Adjustments to reconcile net income to net cash provided by
operating activities: |                                                                                    |   |                           |                |             |   |              |             
|                                                                                  | Realized and recognized gains (loss) on mortgage-backed and
equity securities, net |   |                           | (14,822,875    | )           |   |              | 216,575      |  
|                                                                                  | Compensation expense related to restricted stock and stock option grants           |   |                           | 46,291         |             |   |              | 142,500      |  
|                                                                                  | Premium amortization on mortgage-backed securities                                 |   |                           | 8,433,987      |             |   |              | 523,322      |  
|Changes in operating assets and liabilities:                                      |                                                                                    |   |                           |                |             |   |              |             
|                                                                                  | Dividends, interest and fees receivable                                            |   |                           | (17,975,020    | )           |   |              | (1,750,596   | )
|                                                                                  | Prepaid expenses and other assets                                                  |   |                           | 111,487        |             |   |              | 109,059      |  
|                                                                                  | Management and incentive fees payable                                              |   |                           | 2,355,624      |             |   |              | 268,195      |  
|                                                                                  | Accounts payable and accrued expenses                                              |   |                           | (97,978        | )           |   |              | (88,749      | )
|                                                                                  | Interest payable                                                                   |   |                           | 2,327,991      |             |   |              | (670,490     | )
|                                                                                  | Income taxes payable                                                               |   |                           | (343,005       | )           |   |              |             |  
|                                                                                  | Other liabilities                                                                  |   |                           | 40,667         |             |   |              | (174,786     | )
|                                                                                  |                                                                                    |   |                           |                |             |   |              |             
|                                                                                  | Net cash provided by operating activities                                          |   |                           | 29,568,279     |             |   |              | 2,726,977    |  
|                                                                                  |                                                                                    |   |                           |                |             |   |              |             
|Cash flows from investing activities:                                             |                                                                                    |   |                           |                |             |   |              |             
|Purchase of mortgage-backed securities                                            |                                                                                    |   | (3,050,855,120            | )              |             |   | (120,134,678 | )           
|Investments in equity securities                                                  |                                                                                    |   | (4,650,004                | )              |             |   | (7,144,000   | )           
|Investments in notes receivable                                                   |                                                                                    |   | (33,137,333               | )              |             |   | (12,000,000  | )           
|Repayment of notes receivable                                                     |                                                                                    |   | 36,137,333                |                |             |   | 4,000,000    |             
|Proceeds from sale of equity securities                                           |                                                                                    |   | 38,402,020                |                |             |   | 4,362,364    |             
|Proceeds from sale of mortgage-backed securities                                  |                                                                                    |   | 161,353,087               |                |             |   | 8,304,470    |             
|Receipt of principal payments on mortgage-backed
securities                       |                                                                                    |   | 318,528,781               |                |             |   | 20,603,167   |             
|                                                                                  |                                                                                    |   |                           |                |             |   |              |             
|                                                                                  | Net cash used in investing activities                                              |   |                           | (2,534,221,236 | )           |   |              | (102,008,677 | )
|                                                                                  |                                                                                    |   |                           |                |             |   |              |             
|Cash flows from financing activities:                                             |                                                                                    |   |                           |                |             |   |              |             
|Repurchase of common stock                                                        |                                                                                    |   |                          |                |             |   | (8,334,135   | )           
|Proceeds from issuance of common stock                                            |                                                                                    |   | 268,084,048               |                |             |   |             |             
|Proceeds from (repayments of) repurchase agreements, net                          |                                                                                    |   | 2,264,493,266             |                |             |   | 80,128,000   |             
|Dividends paid                                                                    |                                                                                    |   | (28,711,074               | )              |             |   | (5,820,177   | )           
|                                                                                  |                                                                                    |   |                           |                |             |   |              |             
|                                                                                  | Net cash provided by financing activities                                          |   |                           | 2,503,866,240  |             |   |              | 65,973,688   |  
|                                                                                  |                                                                                    |   |                           |                |             |   |              |             
|Net decrease in cash and cash equivalents                                         |                                                                                    |   | (786,717                  | )              |             |   | (33,308,012  | )           
|Cash and cash equivalents, beginning of the period                                |                                                                                    |   | 6,630,379                 |                |             |   | 36,810,566   |             
|                                                                                  |                                                                                    |   |                           |                |             |   |              |             
|Cash and cash equivalents, end of the period                                      |                                                                                    | $ | 5,843,662                 |                |             | $ | 3,502,554    |             
|                                                                                  |                                                                                    |   |                           |                |             |   |              |             
|Supplemental disclosure:                                                          |                                                                                    |   |                           |                |             |   |              |             
|                                                                                  | Cash payments for interest                                                         |   | $                         | 19,231,068     |             |   | $            | 4,344,078    |  
|                                                                                  | Cash payments for income taxes                                                     |   | $                         | 508,634        |             |   | $            |             |  

The accompanying notes are an integral part of these statements.

5



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##### 



FBR ASSET INVESTMENT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 for interim
financial information and with the instructions to Form 10-Q. Therefore, they
do not include all information required by generally accepted accounting
principles 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 six months ended June 30, 2002 and 2001, the weighted
average coupon rate on the Companys mortgage-backed securities was 5.53% and
5.72% for 2002, and 5.80% and 6.06% for 2001, respectively.

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

|                                                          |  |               |               |                   |  |   |               |  
|--------------------------------------------------------- |  | ------------- | ------------- | ----------------- |  | - | ------------- | -
|Total Mortgage Assets                                     |  | June 30, 2002 |               | December 31, 2001
|                                                          |  |               |               |                  
|Mortgage-backed securities, available-for-sale,
principal |  | $             | 3,739,726,447 |                   |  | $ | 1,211,550,848 |  
|Unamortized net premium                                   |  |               | 59,853,424    |                   |  |   | 25,385,118    |  
|                                                          |  |               |               |                   |  |   |               |  
|Amortized cost                                            |  |               | 3,799,579,871 |                   |  |   | 1,236,935,966 |  
|Gross unrealized gains                                    |  |               | 28,622,266    |                   |  |   | 4,092,851     |  
|Gross unrealized losses                                   |  |               | (1,827,503    | )                 |  |   | (2,663,306    | )
|                                                          |  |               |               |                   |  |   |               |  
|Estimated fair value                                      |  | $             | 3,826,374,634 |                   |  | $ | 1,238,365,511 |  
|                                                          |  |               |               |                   |  |   |               |  

As of June 30, 2002 and December 31, 2001, $3.7 billion and $1.2 billion
of the mortgage-backed securities were pledged as collateral for the repurchase
agreements.

Commitments

As of June 30, 2002 and subsequently, FBR Asset has made commitments to
purchase $2.4 billion in hybrid ARM securities.

NOTE 3. Equity Investments

At June 30, 2002, FBR Assets equity investments had an aggregate cost
basis of $27.8 million, a fair value of $38.4 million, and unrealized gains of
$10.6 million. At December 31, 2001, FBR Assets equity investments had an
aggregate cost basis of $46.8 million, fair value of $61.7 million and
unrealized gains of $14.9 million.

6



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##### 



|                                    |       |        |               |            |                   |            |           |            |  |            |            |            |  |  |           |  |  |   |            |            |  |   |            |            | 
|----------------------------------- | ----- | ------ | ------------- | ---------- | ----------------- | ---------- | --------- | ---------- |  | ---------- | ---------- | ---------- |  |  | --------- |  |  | - | ---------- | ---------- |  | - | ---------- | ---------- | 
|                                    |       |        | June 30, 2002 |            | December 31, 2001
|                                    |       |        |               |            |                  
|Equity Investments                  |       | Shares |               | Cost Basis |                   | Fair Value |           | Shares     |  | Cost Basis |            | Fair Value
|                                    |       |        |               |            |                   |            |           |            |  |            |            |           
|Annaly Mortgage Management, Inc.    |       |        |              |            |                   | $          |          |            |  | $          |           |            |  |  | 800,000   |  |  | $ | 7,144,000  |            |  | $ | 12,800,000 |           
|Anworth Mortgage Asset Corporation  |       |        | 500,000       |            |                   |            | 3,890,625 |            |  |            | 6,995,000  |            |  |  | 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 |            |  |            | 10,443,750 |            |  |  | 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 |            |  |            | 16,270,000 |            |  |  | 1,000,000 |  |  |   | 9,300,000  |            |  |   | 9,300,000  |           
|                                    |       |        |               |            |                   |            |           |            |  |            |            |            |  |  |           |  |  |   |            |            |  |   |            |           
|                                    | Total |        |               |            |                   |            | $         | 27,775,000 |  |            | $          | 38,358,750 |  |  |           |  |  |   | $          | 46,808,785 |  |   | $          | 61,692,660 | 
|                                    |       |        |               |            |                   |            |           |            |  |            |            |            |  |  |           |  |  |   |            |            |  |   |            |           



---

|(1) |  | Oxford Financial shares are not currently registered for public trading.
As of June 30, 2002, the investment was 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 June 30, 2002, the Company had $3.4 billion outstanding under
repurchase agreements with a weighted average borrowing rate of 1.82% and a
remaining weighted-average term to maturity of 38 days. For the three and six
months ending June 30, 2002, the weighted average borrowing rate was 1.85% for
both periods, and the weighted average repurchase agreement balances were $3.1
billion and $2.2 billion, respectively. For the three and six months ended June
30, 2001, the weighted average borrowing rate was 4.57% and 5.17%, and the
weighted average repurchase agreement balances were $155.4 million and $143.2
million, respectively.

NOTE 5. Interest-rate Swaps

At June 30, 2002, FBR Asset was party to an interest-rate swap agreement
that matures on July 27, 2004 and has a notional amount of $50.0 million. The
fair value of the interest-rate swap agreement was $ (1.7) million at June 30,
2002, and $(1.2) million at December 31, 2001. Under this agreement, the
Company will pay a fixed interest rate of 4.97% on the notional amount and
receive a variable rate calculated based on the three-month LIBOR, which was
1.86% at June 30, 2002.

NOTE 6. Notes Receivable

On May 28, 2002, FBR Asset disbursed a $5,000,000 loan to First States
Group, L.P. (First States), bearing interest at 13.00% per annum. This loan
was paid in full on July 16, 2002, together with all accrued interest and a
negotiated exit fee of $37,500. As of July 16, 2002, FBR Asset has no notes
receivable.

NOTE 7. Income Taxes

FBR Asset has elected to be taxed as a 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
investments. 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 six months ended June 30, 2002, FBR Asset recorded
$165,629 of income tax provision from income attributable to the taxable REIT
subsidiaries.

7



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##### 



NOTE 8. 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. The proceeds after expenses to the company were
$138.5 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 Friedman, Billings, Ramsey
& Co., Inc. 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 (excluding over-allotment option) of common stock at a price of $33.35
per share. The lead underwriter for the offering was Friedman, Billings, Ramsey
& Co., Inc. The net proceeds after expenses to the company of $189.9 million
were received upon settlement on July 3, 2002.

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, and 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.

Options

On February 14, 2002, a subsidiary of Friedman Billings Ramsey Group, Inc.
(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 June 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,
24,404 and 21,547 shares were included during the three and six-month periods
ended June 30, 2002, respectively, to calculate diluted earnings per share. On
December 24, 2001, we granted 14,000 shares of restricted stock. On June 24,
2002, we granted an additional 2,000 shares of restricted stock. During 2002,
we have recorded $46,291 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 June 30,
2002, 444,000 options were available for future grant.

NOTE 9. Subsequent Events

On July 9, 2002, we entered into an interest rate swap agreement with
Lehman Brothers Special Financing, Inc. (Lehman) that matures on July 11,
2003 and has a notional amount of $1 billion. Under this agreement, we pay a
fixed interest rate of 2.255% and receive a variable rate calculated based on
the three-month LIBOR.

On July 10, 2002, we entered into an interest rate swap agreement with PNC
Bank, National Association (PNC) that matures on July 12, 2003 and has a
notional amount of $1 billion. Under this agreement, we pay a fixed interest
rate of 2.202% and receive a variable rate calculated based on the three month
LIBOR.

On July 31, 2002, we entered into an interest rate swap agreement with
Merrill Lynch Capital Services, Inc. (Merrill) that matures on July 31, 2003
and has a notional amount of $1 billion. Under this agreement, we pay a fixed
interest rate of 1.990% and receive a variable rate calculated based on the
three month LIBOR.

8



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##### 



NOTE 10. Related Party Transactions

The Company has a management agreement with Friedman, Billings, Ramsey
Investment Management, Inc. (FBRIM), expiring on December 17, 2002. FBRIM
performs portfolio management services on behalf of the Company. These services
include, but are not limited to, consulting with the Company on purchase and
sale opportunities, collection of information, and submission of 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.

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 $3.1 million in management
fees during the first six 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 by
reference to the preceding 12-month period. 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 June 30, 2002, multiplied by a rate equal to
the ten-year U.S. Treasury rate plus five percent per annum. The Company
recorded $4.5 million in incentive fees during the first six months of 2002
and $1.7 million for the year ending December 31,2001.

FBRIM engaged Fixed Income Discount Advisory Company, Inc. (FIDAC) to
manage the Companys mortgage asset investment program (the Mortgage
Portfolio) as a sub-adviser. On March 22, 2002, FBRIM terminated the
sub-advisory agreement with FIDAC. The sub-advisory agreement ended on April
30, 2002.

As of June 30, 2002, FBR Group, through various subsidiaries and
affiliates, owned 2,744,700 shares or 10.95% 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 and its registered broker-dealer subsidiary, Pegasus Capital
Corporation (Pegasus) entered into an agreement in August 2001 with Friedman,
Billings, Ramsey & Co., Inc. (FBR) regarding the Companys extension of
credit to or investment in entities that are or may be FBRs investment banking
clients. During the first six months of 2002, pursuant to this agreement, the
Company earned $0.6 million in fees from FBR from two 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 from three investment banking transactions
and one unfunded commitment.

FBR served as lead underwriter for three follow-on public offerings by the
Company during the six months ended June 30, 2002, and earned approximately
$10.1 million in underwriting fees in connection with the offerings. See Note
8. Shareholders Equity.

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.

9



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##### 



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 June 30, 2002

The Company had net income for the three months ended June 30, 2002, of
$31.6 million, or $1.67 per basic and diluted share, compared to $4.0 million,
or $1.16 per basic share and $1.11 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 and realized gains on
the sale of equity securities.

For the three months ended June 30, 2002, the weighted average annual
yield on the Companys mortgage-backed securities was 4.93%. As of June 30,
2002, the Company had investments in 126 mortgage-backed securities. For the
three months ended June 30, 2001, the weighted average annual yield on the
Companys mortgage-backed securities was 5.80%. As of June 30, 2001, the
Company had investments in 22 mortgage-backed securities.

The Companys interest and dividend income increased to $44.3 million for
the three months ended June 30, 2002, from $4.4 million for the three months
ended June 30, 2001. The increase is primarily related to the increase in the
weighted average balance of the Companys mortgage-backed securities portfolio
from $182.3 million for the three months ended June 30, 2001 to $3.4 billion
for the three months ended June 30, 2002. For the three months ended June 30,
2002, the weighted average annual yield on the Companys equity investments and
promissory notes was 19.13%, compared to 14.73% for the three months ended June
30, 2001.

For the three months ended June 30, 2002, fee income from one investment
banking transaction was $0.3 million. For the three months ended June 30,
2001, fee income from one investment banking transaction was $1.7 million.

The Company incurred interest expense of $14.9 million for the three
months ended June 30, 2002. This represents 72.9% of the total expenses for the
period. The Company incurred interest expense of $1.8 million for the three
months ended June 30, 2001, representing 72.2% of the total expenses for that
period. The $13.1 million increase in interest expense reflects the increase in
weighted average borrowings under repurchase agreements to $3.1 billion from
$155.4 million; partially offset by a reduction in our average borrowing rate
from 4.57% to 1.85%.

Management fees paid or accrued for the three months ended June 30, 2002,
were $2.0 million compared to $218,840 for the three months ended June 30,
2001. The increase is due to a larger asset base during the three months ended
June 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 June 30, 2002, the Company
recorded as an expense $2.8 million of incentive fees, based on the performance
of the Company over the preceding 12-month period, compared to $267,076 for the
three months ended June 30, 2001. The increase in incentive fees can be
attributed to the increase in funds from operations for the proceeding 12-month
period ended June 30, 2002 of $74.2 million, from $12.2 million for the
proceeding 12-month period ended June 30, 2001.

Professional fees and other expenses consist primarily of director, legal,
listing and accounting fees. Professional fees and other expenses were $724,301
for the three months ended June 30, 2002, compared to $195,868 for the three
months ended June 30, 2001. The increase is mainly attributed to fees related
to the Companys listing on the New York Stock Exchange and fees for prior year
re-audits.

10



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##### 



Six months ended June 30, 2002

The Company had net income for the six months ended June 30, 2002, of
$49.5 million, or $3.17 per basic and diluted share, compared to $4.2 million,
or $1.17 per basic share and $1.14 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 and realized gains on
the sale of equity securities.

For the six months ended June 30, 2002, the weighted average annual yield
on the Companys mortgage-backed securities was 4.92%. As of June 30, 2002, the
Company had investments in 126 mortgage-backed securities. For the six months
ended June 30, 2001, the weighted average annual yield on the Companys
mortgage-backed securities was 6.06%. As of June 30, 2001, the Company had
investments in 22 mortgage-backed securities.

The Companys interest and dividend income increased to $64.4 million for
the six months ended June 30, 2002, from $7.6 million for the six months ended
June 30, 2001. The increase is primarily related to the increase in the
weighted average balance of the Companys mortgage-backed securities portfolio
from $167.2 million for the six months ended June 30, 2001 to $2.5 billion for
the six months ended June 30, 2002. For the six months ended June 30, 2002, the
weighted average annual yield on the Companys equity investments and
promissory notes was 15.50%, compared to 10.18% for the six months ended June
30, 2001.

For the six months ended June 30, 2002, fee income from two investment
banking transactions was $0.6 million, compared to $1.7 million on one
investment banking transaction in 2001.

The Company incurred interest expense of $21.6 million for the six months
ended June 30, 2002. This represents 71.6% of the total expenses for the
period. The Company incurred interest expense of $3.7 million for the six
months ended June 30, 2001, representing 74.4% of the total expenses for that
period. The $17.9 million increase in interest expense reflects the increase in
weighted average borrowings under repurchase agreements to $2.2 billion from
$143.2 million; partially offset by a reduction in our average borrowing rate
from 5.17% to 1.85%.

Management fees paid or accrued for the six months ended June 30, 2002,
were $3.1 million compared to $423,738 for the six months ended June 30, 2001.
The increase in management fees is attributed to a larger asset base used in
calculating the fees for the six months ended June 30, 2002 compared to the
same period in 2001. During the six months ended June 30, 2002, the Company
recorded as an expense $4.6 million of incentive fees, based on the performance
of the Company over the preceding 12-month period, compared to $395,153 for the
six months ended June 30, 2001. The increase in incentive fees can be
attributed to the increase in funds from operations for the proceeding 12-month
period used to calculate the incentive fees during the six months ended June
30, 2002 as compared to the funds from operations used to calculate the
incentive fees during the six months ended June 30, 2001.

Professional fees and other expenses consist primarily of director, legal,
listing and accounting fees. Professional fees and other expenses were $907,496
for the six months ending June 30, 2002, compared to $445,809 for the six
months ended June 30, 2001. The increase is mainly attributed to listing fees
and an increase in auditing fees.

11



---



##### 



Mortgage-backed Securities

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

|                            |  |               |               |              |  |          |               |         |  |          |      |                |  |           |      |            |  |          |      |  |  |           |  | 
|--------------------------- |  | ------------- | ------------- | ------------ |  | -------- | ------------- | ------- |  | -------- | ---- | -------------- |  | --------- | ---- | ---------- |  | -------- | ---- |  |  | --------- |  | 
|                            |  | June 30, 2002 |               |              |  |         
|                            |  |               |               |              |  |          |               |         |  |          |      |                |  | Weighted  |      |            |  |          |      |  |  |          
|                            |  |               |               |              |  |          |               |         |  |          |      |                |  | Average   |      | Expected   |  | Relevant
|                            |  |               |               |              |  |          |               |         |  | Nominal  |      | Life           |  | Effective |      | Prepayment
|Descriptive Title(1)        |  | Face Amount   |               | Market Value |  | Yield(2) |               | (years) |  | Duration |      | Assumptions(3)
|                            |  |               |               |              |  |          |               |         |  |          |      |               
|HYBRID ARMS                 |  | $             | 3,539,198,277 |              |  | $        | 3,618,265,995 |         |  |          | 4.82 | %              |  |           | 3.02 |            |  |          | 1.21 |  |  | 18.50 CPR
|FIXED RATE SECURITIES       |  |               | 200,528,170   |              |  |          | 208,108,639   |         |  |          | 5.71 | %              |  |           | 4.41 |            |  |          | 2.33 |  |  | 13.50 CPR
|                            |  |               |               |              |  |          |               |         |  |          |      |                |  |           |      |            |  |          |      |  |  |          
|Mortgage Portfolio
Total(1) |  | $             | 3,739,726,447 |              |  | $        | 3,826,374,634 |         |  |          | 4.87 | %              |  |           | 3.10 |            |  |          | 1.27 |  |  | 18.30 CPR
|                            |  |               |               |              |  |          |               |         |  |          |      |                |  |           |      |            |  |          |      |  |  |          

|                            |  |             |               |              |  |                   |               |          |  |          |      |                |  |           |      |            |  |          |      |  |  |           |  | 
|--------------------------- |  | ----------- | ------------- | ------------ |  | ----------------- | ------------- | -------- |  | -------- | ---- | -------------- |  | --------- | ---- | ---------- |  | -------- | ---- |  |  | --------- |  | 
|                            |  |             |               |              |  | December 31, 2001 |               |          |  |          |      |                |  |           |      |            |  |         
|                            |  |             |               |              |  |                   |               | Weighted |  |          |      |                |  |           |      |           
|                            |  |             |               |              |  |                   |               |          |  |          |      |                |  | Average   |      | Expected   |  | Relevant
|                            |  |             |               |              |  |                   |               |          |  | Nominal  |      | 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
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 $3.4 billion outstanding under repurchase agreements with
several financial institutions on June 30, 2002. The Company had $1.1 billion
outstanding under repurchase agreements on December 31, 2001. At June 30, 2002,
the debt-to-equity ratio, based on book values, of our portfolio of
mortgage-backed securities was 7.84 to 1.

At June 30, 2002, the weighted average remaining maturity of the Companys
borrowings was 38 days and had a weighted average cost of funds on outstanding
borrowings of 1.82%.

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

12



---



##### 



equity securities, and proceeds from sales of those securities. To date,
proceeds from the issuance of common stock and repurchase agreements have
provided the Company with sufficient funding for its investment needs.
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 six months ended June 30, 2002, the Companys operating activities
resulted in net cash flow of $29.6 million. The primary source of operating
cash flow was interest on mortgage-backed securities, interest on notes
receivable, fee income, and dividends. For the six months ended June 30, 2001,
the Companys operating activities provided net cash flows of $2.7 million.
The increase is primarily due to an increase in income from the Companys
larger mortgage-backed security portfolio and an increase in gains from the
sale of equity securities.

For the six months ended June 30, 2002, the Companys investing activities
resulted in net cash used of $2.5 billion compared to net cash used by
investing activities for the six months ended June 30, 2001, of $102.0 million.
The change is primarily attributable to increased purchases of mortgage-backed
securities during the first six months of 2002 compared to the similar period
in 2001.

For the six months ended June 30, 2002, net cash provided in the Companys
financing activities was $2.5 billion compared to net cash provided for the six
months ended June 30, 2001, of $66.0 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.

Equity Securities

The value of the equity securities in the Companys portfolio had a cost
basis of $27.8 million compared to a market value of $38.4 million as of June
30, 2002. As of December 31, 2001, the value of the equity securities in the
Companys portfolio had an adjusted cost basis of $46.8 million compared to a
market value of $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 based on its current market value versus its
cost basis.

13



---



##### 



FBR ASSET INVESTMENT CORPORATION
Summary of Investments and Cash and Cash Equivalents
The following table summarizes FBR Assets investments as of June 30, 2002, and December 31, 2001.



|                                                                |                                          |                          |   |                     |  |              |   |            |   |              |               |           |            |   |               |            |            | 
|--------------------------------------------------------------- | ---------------------------------------- | ------------------------ | - | ------------------- |  | ------------ | - | ---------- | - | ------------ | ------------- | --------- | ---------- | - | ------------- | ---------- | ---------- | 
|                                                                |                                          |                          |   | As of June 30, 2002
|                                                                |                                          |                          |   |                    
|                                                                |                                          |                          |   | Shares              |  | Percent      |   | Cost of    |   |              |               |          
|                                                                |                                          |                          |   | Owned               |  | Ownership(3) |   | Investment |   | Market Value
|                                                                |                                          |                          |   |                     |  |              |   |            |   |             
|Mortgage-Backed Securities                                      |                                          |                          |  |                     |  |              |  |            |   | $            | 3,799,579,871 |           |            | $ | 3,826,374,634 |           
|                                                                |                                          |                          |   |                     |  |              |   |            |   |              |               |           |            |   |               |           
|Equity
Investments(1)(2)
Annaly Mortgage Management, Inc. (NLY) |                                          |                          |  |                     |  |              |  |            |   |              |              |           |            |   |              |           
|                                                                | Anworth Mortgage Asset
Corporation (ANH) |                          |   | 500,000             |  |              |   | 4.21       | % |              |               | 3,890,625 |            |   |               | 6,995,000  |           
|                                                                | Capital Automotive REIT
(CARS)           |                          |   |                    |  |              |   |           |   |              |               |          |            |   |               |           |           
|                                                                | MCG Capital Corporation
(MCGC)           |                          |   | 625,000             |  |              |   | 2.00       | % |              |               | 9,934,375 |            |   |               | 10,443,750 |           
|                                                                | Oxford Finance Corp.(4)                  |                          |   | 500,000             |  |              |   | 9.62       | % |              |               | 4,650,000 |            |   |               | 4,650,000  |           
|                                                                | Resource Asset Investment Trust
(RAS)    |                          |   |                    |  |              |   |           |   |              |               |          |            |   |               |           |           
|                                                                | Saxon Capital Acquisition Corp.
(SAXN)   |                          |   | 1,000,000           |  |              |   | 3.56       | % |              |               | 9,300,000 |            |   |               | 16,270,000 |           
|                                                                |                                          |                          |   |                     |  |              |   |            |   |              |               |           |            |   |               |           
|                                                                |                                          | Total Equity Investments |   |                     |  |              |   |            |   |              |               |           | 27,775,000 |   |               |            | 38,358,750 | 
|Promissory
Notes(2)
First States Group, L.P.                    |                                          |                          |  |                     |  |              |  |            |   |              | 5,000,000     |           |            |   | 5,000,000     |           
|                                                                | Prime Group Realty, L.P.                 |                          |   |                    |  |              |   |           |   |              |               |          |            |   |               |           |           
|                                                                |                                          |                          |   |                     |  |              |   |            |   |              |               |           |            |   |               |           
|                                                                |                                          | Total Promissory Notes   |   |                     |  |              |   |            |   |              |               |           | 5,000,000  |   |               |            | 5,000,000  | 
|                                                                |                                          |                          |   |                     |  |              |   |            |   |              |               |           |            |   |               |           
|Cash and Cash Equivalents                                       |                                          |                          |  |                     |  |              |  |            |   |              | 5,843,662     |           |            |   | 5,843,662     |           
|                                                                |                                          |                          |   |                     |  |              |   |            |   |              |               |           |            |   |               |           
|Total Investments and Cash and
Cash Equivalents                 |                                          |                          |  |                     |  |              |  |            |   | $            | 3,838,198,533 |           |            | $ | 3,875,577,046 |           
|                                                                |                                          |                          |   |                     |  |              |   |            |   |              |               |           |            |   |               |           

[Additional columns below]

[Continued from above table, first column(s) repeated]

|                                                                |                                          |                          |         |                         |  |              |      |            |   |              |               |            |            |   |               |            |            | 
|--------------------------------------------------------------- | ---------------------------------------- | ------------------------ | ------- | ----------------------- |  | ------------ | ---- | ---------- | - | ------------ | ------------- | ---------- | ---------- | - | ------------- | ---------- | ---------- | 
|                                                                |                                          |                          |         | As of December 31, 2001
|                                                                |                                          |                          |         |                        
|                                                                |                                          |                          |         | Shares                  |  | Percent      |      | Cost of    |   |              |               |           
|                                                                |                                          |                          |         | Owned                   |  | Ownership(3) |      | Investment |   | Market Value
|                                                                |                                          |                          |         |                         |  |              |      |            |   |             
|Mortgage-Backed Securities                                      |                                          |                          |        |                         |  |              |     |            |   | $            | 1,236,935,966 |            |            | $ | 1,238,365,511 |           
|                                                                |                                          |                          |         |                         |  |              |      |            |   |              |               |            |            |   |               |           
|Equity
Investments(1)(2)
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                 |  |              |      | 2.21       | % |              |               | 9,934,375  |            |   |               | 11,125,000 |           
|                                                                | Oxford Finance Corp.(4)                  |                          |         |                        |  |              |      |           |   |              |               |           |            |   |               |           |           
|                                                                | Resource Asset Investment Trust
(RAS)    |                          |         | 344,575                 |  |              |      | 2.77       | % |              |               | 3,704,181  |            |   |               | 5,616,573  |           
|                                                                | Saxon Capital Acquisition Corp.
(SAXN)   |                          |         | 1,000,000               |  |              |      | 3.57       | % |              |               | 9,300,000  |            |   |               | 9,300,000  |           
|                                                                |                                          |                          |         |                         |  |              |      |            |   |              |               |            |            |   |               |           
|                                                                |                                          | Total Equity Investments |         |                         |  |              |      |            |   |              |               |            | 46,808,785 |   |               |            | 61,692,660 | 
|Promissory
Notes(2)
First States Group, L.P.                    |                                          |                          |        |                         |  |              |     |            |   |              |              |            |            |   |              |           
|                                                                | Prime Group Realty, L.P.                 |                          |         |                        |  |              |      |           |   |              |               | 8,000,000  |            |   |               | 8,000,000  |           
|                                                                |                                          |                          |         |                         |  |              |      |            |   |              |               |            |            |   |               |           
|                                                                |                                          | Total Promissory Notes   |         |                         |  |              |      |            |   |              |               |            | 8,000,000  |   |               |            | 8,000,000  | 
|                                                                |                                          |                          |         |                         |  |              |      |            |   |              |               |            |            |   |               |           
|Cash and Cash Equivalents                                       |                                          |                          |        |                         |  |              |     |            |   |              | 6,630,379     |            |            |   | 6,630,379     |           
|                                                                |                                          |                          |         |                         |  |              |      |            |   |              |               |            |            |   |               |           
|Total Investments and Cash and
Cash Equivalents                 |                                          |                          |        |                         |  |              |     |            |   | $            | 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) |  | Oxford is a private corporation                                                                                                                                                                                                                                                                                 

14



---



##### 



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 is 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.

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. The reverse is true for mortgage-backed securities and
paying fixed and receiving floating interest rate swaps, if interest-rates
decline.

The Company records its interest-rate swap agreements at fair value. The
differential between amounts paid and received under the swap agreements is
recorded as an adjustment to the interest expense incurred under the repurchase
agreements. In the event of early termination of a swap agreement, a gain or
loss is recorded and the company receives or makes a payment based on the fair
value of the swap agreement.

The table that follows shows the expected change in market value for the
Companys current mortgage-backed securities 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 6/30/02. 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 proprietary model. This
model forecasts prepayment speeds based, in part, on each securitys issuing
agency (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.

15



---



##### 



|                                  |                                               |                                            |             |                  |               |                   |             |                |               |                   |       |         |       |                |             |               |               |  |      |        |       |   
|--------------------------------- | --------------------------------------------- | ------------------------------------------ | ----------- | ---------------- | ------------- | ----------------- | ----------- | -------------- | ------------- | ----------------- | ----- | ------- | ----- | -------------- | ----------- | ------------- | ------------- |  | ---- | ------ | ----- | --
|                                  |                                               |                                            |             |                  |               |                   |             | Value at       |               |                   |       |         |       | Value at       |             |               |               | 
|                                  |                                               |                                            |             |                  |               |                   |             | June 30, 2002  |               |                   |       |         |       | June 30, 2002  |             |               |               | 
|                                  |                                               |                                            |             |                  |               |                   |             | with 100 basis |               |                   |       |         |       | with 100 basis |             |               |               | 
|                                  |                                               |                                            |             | Value at         |               | point increase    |             | Percent        |               | point decrease    |       | Percent
|                                  |                                               |                                            |             | June 30, 2002(1) |               | in interest-rates |             | Change         |               | in interest-rates |       | Change 
|                                  |                                               |                                            |             |                  |               |                   |             |                |               |                   |       |        
|Assets                            |                                               |                                            |             |                  |               |                   |             |                |               |                   |       |         |       |                |             |               |               |  |      |       
|                                  | Mortgage-backed securities                    |                                            | $           | 3,826,374,634    |               |                   | $           | 3,788,604,634  |               |                   |       | (0.99   | )%    |                | $           | 3,836,432,634 |               |  |      | 0.26   | %    
|                                  | Other                                         |                                            |             | 267,427,506      |               |                   |             | 267,427,506    |               |                   |       |         |       |                |             | 267,427,506   |               |  |      |        |      
|                                  |                                               |                                            |             |                  |               |                   |             |                |               |                   |       |         |       |                |             |               |               |  |      |       
|                                  |                                               | Total Assets                               |             | $                | 4,093,802,140 |                   |             | $              | 4,056,032,140 |                   |       |         | (0.92 | )%             |             | $             | 4,103,860,140 |  |      |        | 0.25  | % 
|                                  |                                               |                                            |             |                  |               |                   |             |                |               |                   |       |         |       |                |             |               |               |  |      |       
|Liabilities                       |                                               |                                            |             |                  |               |                   |             |                |               |                   |       |         |       |                |             |               |               |  |      |       
|                                  | Interest-rate swap(2)                         |                                            | $           | 1,715,334        |               |                   | $           | 745,335        |               |                   |       | 56.55   | %     |                | $           | 2,711,071     |               |  |      | (58.05 | )%   
|                                  | Other                                         |                                            |             | 3,402,049,325    |               |                   |             | 3,402,049,325  |               |                   |       |         |       |                |             | 3,402,049,325 |               |  |      |        |      
|                                  |                                               |                                            |             |                  |               |                   |             |                |               |                   |       |         |       |                |             |               |               |  |      |       
|                                  |                                               | Total Liabilities                          |             |                  | 3,403,764,659 |                   |             |                | 3,402,794,660 |                   |       |         | 0.03  | %              |             |               | 3,404,760,396 |  |      |        | (0.03 | )%
|                                  |                                               |                                            |             |                  |               |                   |             |                |               |                   |       |         |       |                |             |               |               |  |      |       
|Shareholders Equity
Common stock |                                               |                                            | 250,543     |                  |               |                   | 250,543     |                |               |                   |       |         |       |                | 250,543     |               |               |  |      |       
|                                  | Paid-in-capital                               |                                            |             | 664,806,645      |               |                   |             | 664,806,645    |               |                   |       |         |       |                |             | 664,806,645   |               |  |      |        |      
|                                  | Accumulated other
comprehensive income
(loss) |                                            |             | 35,663,179       |               |                   |             | (1,136,822     | )             |                   |       | (103.19 | )%    |                |             | 44,725,442    |               |  |      | 25.41  | %    
|Retained deficit                  |                                               |                                            | (10,682,886 | )                |               |                   | (10,682,886 | )              |               |                   |       |         |       |                | (10,682,886 | )             |               |  |      |       
|                                  |                                               |                                            |             |                  |               |                   |             |                |               |                   |       |         |       |                |             |               |               |  |      |       
|                                  |                                               | Total Shareholders
Equity                 |             |                  | 690,037,481   |                   |             |                | 653,597,480   |                   |       |         | (5.28 | )%             |             |               | 699,099,744   |  |      |        | 1.31  | % 
|                                  |                                               |                                            |             |                  |               |                   |             |                |               |                   |       |         |       |                |             |               |               |  |      |       
|                                  |                                               | Total Liabilities and
Shareholders Equity |             | $                | 4,093,802,140 |                   |             | $              | 4,056,032,140 |                   |       |         | (0.92 | )%             |             | $             | 4,103,860,140 |  |      |        | 0.25  | % 
|                                  |                                               |                                            |             |                  |               |                   |             |                |               |                   |       |         |       |                |             |               |               |  |      |       
|Book Value per Share              |                                               | $                                          | 27.54       |                  |               | $                 | 26.09       |                |               |                   | (5.27 | )%      |       | $              | 27.90       |               |               |  | 1.31 | %     
|                                  |                                               |                                            |             |                  |               |                   |             |                |               |                   |       |         |       |                |             |               |               |  |      |       



---

|(1) |  | Includes accrued interest.                                                                                                                                                                                                                                                                                                                                                                                                              
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The carrying value of the interest-rate swap in the companys financial
statements is $(1.7) 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 June 30, 2002. As of June 30, 2002, interest payments received under
the swap agreement were based on an interest-rate of 1.86% while interest
payments made were based on an interest-rate of 4.97%.

As shown above, the 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.

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 affect 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 June 30, 2002.

16



---



##### 



|                     |                                            |              |               |               |               |             |               |               |               |             |      |         |      |               |               |               |               |  |       |        |       |   
|-------------------- | ------------------------------------------ | ------------ | ------------- | ------------- | ------------- | ----------- | ------------- | ------------- | ------------- | ----------- | ---- | ------- | ---- | ------------- | ------------- | ------------- | ------------- |  | ----- | ------ | ----- | --
|                     |                                            |              |               |               |               |             |               | Value at      |               |             |      |         |      | Value at      |               |               |               | 
|                     |                                            |              |               |               |               |             |               | June 30, 2002 |               |             |      |         |      | June 30, 2002 |               |               |               | 
|                     |                                            |              |               |               |               |             |               | with 10%      |               |             |      |         |      | with 10%      |               |               |               | 
|                     |                                            |              |               | Value at      |               | Increase in |               | Percent       |               | Decrease in |      | Percent
|                     |                                            |              |               | June 30, 2002 |               | Price       |               | Change        |               | Price       |      | Change 
|                     |                                            |              |               |               |               |             |               |               |               |             |      |        
|Assets               |                                            |              |               |               |               |             |               |               |               |             |      |         |      |               |               |               |               |  |       |       
|                     | Equity securities                          |              | $             | 38,358,750    |               |             | $             | 42,194,625    |               |             |      | 10.00   | %    |               | $             | 34,522,875    |               |  |       | (10.00 | )%   
|                     | Other                                      |              |               | 4,055,443,390 |               |             |               | 4,055,443,390 |               |             |      |         |      |               |               | 4,055,443,390 |               |  |       |        |      
|                     |                                            |              |               |               |               |             |               |               |               |             |      |         |      |               |               |               |               |  |       |       
|                     |                                            | Total Assets |               | $             | 4,093,802,140 |             |               | $             | 4,097,638,015 |             |      |         | 0.09 | %             |               | $             | 4,089,966,265 |  |       |        | (0.09 | )%
|                     |                                            |              |               |               |               |             |               |               |               |             |      |         |      |               |               |               |               |  |       |       
|Liabilities          |                                            | $            | 3,403,764,659 |               |               | $           | 3,403,764,659 |               |               |             |      |         |      | $             | 3,403,764,659 |               |               |  |       |       
|Shareholders Equity |                                            |              |               |               |               |             |               |               |               |             |      |         |      |               |               |               |               |  |       |       
|                     | Common stock                               |              |               | 250,543       |               |             |               | 250,543       |               |             |      |         |      |               |               | 250,543       |               |  |       |        |      
|                     | Paid-in-capital                            |              |               | 664,806,645   |               |             |               | 664,806,645   |               |             |      |         |      |               |               | 664,806,645   |               |  |       |        |      
|                     | Accumulated comprehensive
income           |              |               | 35,663,179    |               |             |               | 39,499,054    |               |             |      | 10.76   | %    |               |               | 31,827,304    |               |  |       | (10.76 | )%   
|                     | Retained deficit                           |              |               | (10,682,886   | )             |             |               | (10,682,886   | )             |             |      |         |      |               |               | (10,682,886   | )             |  |       |        |      
|                     |                                            |              |               |               |               |             |               |               |               |             |      |         |      |               |               |               |               |  |       |       
|                     | Total Shareholders
Equity                 |              |               | 690,037,481   |               |             |               | 693,873,356   |               |             |      | 0.56    | %    |               |               | 686,201,606   |               |  |       | (0.56  | )%   
|                     |                                            |              |               |               |               |             |               |               |               |             |      |         |      |               |               |               |               |  |       |       
|                     | Total Liabilities and
Shareholders Equity |              | $             | 4,093,802,140 |               |             | $             | 4,097,638,015 |               |             |      | 0.09    | %    |               | $             | 4,089,966,265 |               |  |       | (0.09  | )%   
|                     |                                            |              |               |               |               |             |               |               |               |             |      |         |      |               |               |               |               |  |       |       
|Book value per share |                                            | $            | 27.54         |               |               | $           | 27.69         |               |               |             | 0.54 | %       |      | $             | 27.39         |               |               |  | (0.54 | )%    
|                     |                                            |              |               |               |               |             |               |               |               |             |      |         |      |               |               |               |               |  |       |       

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 June 30, 2002, the
Company would have realized a gain of approximately $10.6 million that would
have been included in earnings.

17



---



##### 



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 VOTE OF SECURITY HOLDERS

The Company held its Annual meeting of Shareholders on May 23, 2002, at
which shareholders took the following actions:



| | 1. |  | The election of five directors nominated to serve until the next
Annual Meeting. The results of the voting in connection with the
preceding items were as follows:
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                    |  |     |            |         |  |         |   |  |  |  |        | 
|------------------- |  | --- | ---------- | ------- |  | ------- | - |  |  |  | ------ | 
|                    |  | For |            | Against |  | Abstain
|                    |  |     |            |         |  |        
|Emanuel J. Friedman |  |     | 11,209,401 |         |  |         |  |  |  |  | 30,492 | 
|Eric F. Billings    |  |     | 11,209,401 |         |  |         |  |  |  |  | 30,492 | 
|Peter A. Gallagher  |  |     | 11,209,401 |         |  |         |  |  |  |  | 30,492 | 
|Stephen D. Harlan   |  |     | 11,209,401 |         |  |         |  |  |  |  | 30,492 | 
|Russel C. Lindner   |  |     | 11,209,401 |         |  |         |  |  |  |  | 30,492 | 



| | 2. |  | Proposal to approve an amendment to the Companys Articles of
Incorporation to state that nothing within the Articles of Incorporation
shall preclude the settlement of transactions entered into through the
facilities of the New York Stock Exchange.
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|               |  |               |         |                  |  |  |        | 
|-------------- |  | ------------- | ------- | ---------------- |  |  | ------ | 
|Votes in Favor |  | Votes Against |         | Votes Abstaining
|10,752,610     |  |               | 475,360 |                  |  |  | 11,923 | 



| | 3. |  | Proposal to approve an amendment to the FBR Asset Investment
Corporation Stock Incentive Plan to increase the number of shares
available for issuance under the plan from 155,000 to 605,000.
| | -- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|               |  |               |           |                  |  |  |        | 
|-------------- |  | ------------- | --------- | ---------------- |  |  | ------ | 
|Votes in Favor |  | Votes Against |           | Votes Abstaining
|10,176,071     |  |               | 1,045,110 |                  |  |  | 18,712 | 



| | 4. |  | Proposal to ratify the appointment of KPMG, LLP as independent auditors
for the fiscal year ended December 31, 2002.
| | -- |  | --------------------------------------------------------------------------------------------------------------------

|               |               |                  |        |  |  |  |       | 
|-------------- | ------------- | ---------------- | ------ |  |  |  | ----- | 
|Votes in Favor | Votes Against | Votes Abstaining
|11,145,970     |               |                  | 84,982 |  |  |  | 9,041 | 

ITEM 5. OTHER INFORMATION

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

18



---



##### 



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 June 28, 2002, pursuant to Item
5 disclosing (a) the Underwriter Agreement dated June 27, 2002, between the
Company and the several underwriters relating to an underwritten public
offering of 6,000,000 shares of the Companys common stock and (b) the
consent of KPMG LLP to the incorporation by reference in the Companys
registration statements (Nos. 333-90572 and 333-76906) on Form S-3 of KPMG
LLPs audit report for the fiscal year ended December 31, 2001.



| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 3. Current Report on Form 8-K, filed on May 3, 2002, pursuant to Item 9
disclosing information presented by the Company at the MicroCapital LLC
Investor Conference.



| |                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 4. Current Report on Form 8-K, filed on April 24, 2002, pursuant to Item
9 disclosing the Companys operating results for the first quarter ended
March 31, 2002.



| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 5. Current Report on Form 8-K, filed on April 11, 2002, pursuant to Item
9 disclosing information reported by Friedman, Billings, Ramsey Group, Inc.
on Form 8-K relating to a presentation made at the Sidoti & Co. Investor
Conference.



| |                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 6. Current Report on Form 8-K, filed on April 5, 2002, pursuant to Item
5 disclosing the Underwriting Agreement, dated April 3, 2002, between the
Company and the several underwriters relating to an underwritten public
offering of 4,000,000 shares of the Companys common stock and up to an
additional 600,000 shares to cover over-allotments.

19



---



##### 



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. HarringtonChief Financial Officer, Treasurer and
Principal Financial and Accounting Officer

Date: August 9, 2002

20