<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                               ------------------

                                    FORM 10-Q

(Mark One)

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


For the quarterly period ended September 30, 2001
                               ------------------

                                       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                                54-1873198
      (State or Other Jurisdiction of                  (I.R.S. employer
      Incorporation or Organization)                  Identification No.)

               Potomac Tower                            (703) 469-1000
       1001 Nineteenth Street North             (Registrant's Telephone Number
         Arlington, Virginia 22209                   Including Area Code)
 (Address of Principal Executive Offices)
                (Zip Code)

                                       N/A
                                  (Former Name)

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

As of November 9, 2001, the latest practicable date, there were 7,982,527 shares
of FBR Asset Investment Corporation's common stock outstanding.
<PAGE>

                        FBR ASSET INVESTMENT CORPORATION
                                    FORM 10-Q
                    FOR THE QUARTER ENDED SEPTEMBER 30, 2001
                                      INDEX


<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION                                                                                               Page
                                                                                                                            ----
<S>  <C>
ITEM 1 -   Financial Statements and Notes

    Statements of Financial Condition as of September 30, 2001
       (unaudited) and as of December 31, 2000.....................................................................            1

     Statements of Income for the Three and Nine Months Ended
       September 30, 2001 and 2000 (unaudited).....................................................................            2

     Statements of Changes in  Shareholders'  Equity for the Nine  Months  Ended
       September 30, 2001 (unaudited), and the Year
       Ended December 31, 2000 ....................................................................................            4

    Statements of Cash Flows for the Nine Months Ended
       September 30, 2001 and 2000 (unaudited).....................................................................            5

    Notes to 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 a Vote of Security Holders....................................................           18

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

    Item 6. Exhibits and Reports on Form 8-K.......................................................................           18

SIGNATURES.........................................................................................................           19

</TABLE>
<PAGE>

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS AND NOTES

FBR Asset Investment Corporation
Statements of Financial Condition as of September 30, 2001 (unaudited) and
December 31, 2000

<TABLE>
<CAPTION>
================================================================================================================================


                                                                            As of September 30, 2001     As of December 31, 2000
                                                                            ------------------------     -----------------------
                                                                                  (unaudited)
<S>  <C>
ASSETS
       Mortgage-backed securities, pledged as collateral, at fair value           $1,058,067,378                 $144,867,416
       Mortgage-backed securities, at fair value                                     129,751,427                    9,980,789
       Cash and cash equivalents                                                       1,771,112                   36,810,566
       Investments in equity securities, at fair value                                51,768,538                   28,110,190
       Notes receivable                                                               12,000,000                    4,000,000
       Dividends, interest and fees receivable                                         8,421,120                    1,813,478
       Prepaid expenses and other assets                                                 568,722                      221,628
                                                                                 ---------------                 ------------
        Total assets                                                             $1,262,348,297                  $225,804,067
                                                                                 ===============                 ============

LIABILITIES AND SHAREHOLDER'S EQUITY
   Liabilities:
        Repurchase agreements                                                      $ 983,614,000                 $133,896,000
        Interest rate swap                                                             1,508,718                           --
        Interest payable                                                                 840,619                      844,841
        Dividends payable                                                              6,386,022                    3,731,911
        Management fees payable                                                          726,518                       78,727
        Accounts payable and accrued expenses                                            517,860                      237,218
        Due to clearing broker                                                        77,318,023                           --
        Other                                                                            120,000                      174,786
                                                                                 ---------------                -------------
        Total liabilities                                                          1,071,031,760                  138,963,483
                                                                                 ---------------                -------------


Shareholders' Equity:
        Preferred stock, par value $.01 per share,
        50,000,000 shares authorized                                                          --                           --
        Common stock, par value $.01 per share,
         200,000,000 shares authorized, 7,982,527
         and 3,884,427 shares issued and outstanding as of
         September 30, 2001, and December 31, 2000, respectively                          79,825                       38,844
        Additional paid-in capital                                                   196,682,319                  107,529,063
        Accumulated other comprehensive income (loss)                                 15,468,673                     (748,691)
        Retained deficit                                                             (20,914,280)                 (19,978,632)
                                                                                 ---------------                -------------
         Total shareholders' equity                                                  191,316,537                   86,840,584
                                                                                 ---------------                -------------

          Total liabilities and shareholders' equity                              $1,262,348,297                 $225,804,067
                                                                                 ===============                 ============

==================================================================================================================================
</TABLE>

The accompanying notes are an integral part of these statements.

                                       1
<PAGE>

FBR Asset Investment Corporation
Statements of Income for the Three Months Ended September 30, 2001 and 2000
(unaudited)


<TABLE>
<CAPTION>
==================================================================================================================================


                                                                                               Three Months Ended September 30,
                                                                                               --------------------------------
                                                                                                   2001                2000
                                                                                                   ----                ----
                                                                                                (unaudited)        (unaudited)
<S>  <C>
Income:
Interest                                                                                        $ 8,535,864         $ 4,211,836
Dividends                                                                                         1,046,829           1,381,898
                                                                                                -----------         -----------
       Total income                                                                               9,582,693           5,593,734

Expenses:
Interest expense                                                                                  4,120,112           2,820,747
Management fee expense                                                                              955,446             242,145
Professional fees & other expenses                                                                  144,982             191,542
                                                                                                  --------            ---------
       Total expenses                                                                             5,220,540           3,254,434
                                                                                                  ---------           ---------

Realized gain on sale of available-for-sale equity securities                                           --               57,098

Realized gain on sale of mortgage-backed securities                                               1,281,682                --
                                                                                                -----------         -----------
Net income                                                                                      $ 5,643,835         $ 2,396,398
                                                                                                ===========         ===========


Basic earnings per share                                                                           $   0.88            $   0.58
                                                                                                  =========            ========

Diluted earnings per share                                                                         $   0.86            $   0.58
                                                                                                  =========            ========

Basic weighted-average common and equivalent shares                                               6,407,962           4,157,662
                                                                                                  =========           =========
Diluted weighted-average common and equivalent shares                                             6,547,295           4,157,662
                                                                                                  =========           =========

================================================================================================================================
</TABLE>

The accompanying notes are an integral part of these statements.

                                       2
<PAGE>

FBR Asset Investment Corporation
Statements of Income for the Nine Months Ended September 30, 2001 and 2000
(unaudited)

<TABLE>
<CAPTION>
==================================================================================================================================

                                                                                               Nine Months Ended September 30,
                                                                                               -------------------------------
                                                                                                   2001                2000
                                                                                                   ----                ----
                                                                                                (unaudited)        (unaudited)
<S>  <C>
Income:
Interest                                                                                       $ 14,876,936        $ 14,383,894
Dividends                                                                                         2,310,739           3,447,289
Fee Income                                                                                        1,701,828                --
                                                                                               ------------        ------------
       Total income                                                                              18,889,503          17,831,183

Expenses:
Interest expense                                                                                  7,793,700           8,628,191
Management fee expense                                                                            1,774,337             825,549
Professional fees & other expenses                                                                  590,791             455,953
                                                                                                   --------            -------
       Total expenses                                                                            10,158,828           9,909,693
                                                                                               ------------           ---------

Realized gain on sale of available-for-sale equity securities                                       503,389             636,305
Realized gain on sale of mortgage-backed securities                                               1,106,598              67,358
Recognized loss on available-for-sale equity securities                                           (544,880)         (5,626,022)
                                                                                                  ---------         -----------
Net income                                                                                       $9,795,782         $ 2,999,131
                                                                                                ============        ===========

Basic earnings per share                                                                           $   2.17            $   0.63
                                                                                                   ========            ========

Diluted earnings per share                                                                         $   2.12            $   0.63
                                                                                                   ========            ========

Basic weighted-average common and equivalent shares                                               4,507,217           4,731,163
                                                                                                  =========           =========
Diluted weighted-average common and equivalent shares                                             4,619,342           4,731,163
                                                                                                  =========           =========

==================================================================================================================================
</TABLE>

The accompanying notes are an integral part of these statements.

                                       3
<PAGE>

FBR Asset Investment Corporation
Statements  of  Changes  in  Shareholders'  Equity  for the  Nine  Months  Ended
September 30, 2001 (unaudited), and the Year Ended December 31, 2000
<TABLE>
<CAPTION>
=================================================================================================================================

                                                                                       Accumulated
                                                                                          Other
                                                        Additional       Retained     Comprehensive
                                          Common         Paid in         Earnings         Income                      Comprehensive
                                          Stock          Capital        (Deficit)         (Loss)          Total          Income
                                          -----          -------        ---------         ------          -----          ------
<S>  <C>

Balance, December 31, 1999                 58,063      132,930,479     (15,463,462)   (12,982,359)     104,542,721
                                      ------------     ------------    ------------   -------------    -----------

  Repurchase of common stock              (19,219)    (25,401,416)              --              --     (25,420,635)             --
  Net income                                    --              --       8,364,480              --       8,364,480     $ 8,364,480
  Other comprehensive income
  Change in unrealized loss on
        available-for-sale securities           --              --              --      12,233,668      12,233,668      12,233,668
  Dividends                                     --              --    (12,879,650)              --     (12,879,650)             --
                                      ------------    ------------    ------------      ----------     ------------   ------------
Balance, December 31, 2000                 38,844      107,529,063    (19,978,632)       (748,691)      86,840,584      20,598,148
                                      ------------    ------------    ------------       ---------      ----------    ------------


  Stock option grants                           --         142,500              --              --         142,500              --
  Issuance of common stock                  45,100      97,340,772                                      97,385,872              --
  Repurchase of common stock               (4,119)     (8,330,016)              --              --     (8,334,135)              --
  Net Income                                    --              --       9,795,782              --       9,795,782     $ 9,795,782
  Change in unrealized loss on
        available-for-sale securities           --              --              --      17,726,082      17,326,082      17,326,082
  Change in unrealized loss on
        cashflow hedge                          --              --              --      (1,508,718)    (1,508,718)      (1,508,718)
  Dividends                                     --              --     (10,731,430)             --    (10,731,430)              --
                                      ------------    ------------    ------------     -----------    ------------    ------------
Balance, September 30, 2001                $79,825    $196,682,319    $(20,914,280)    $15,468,673    $191,316,537    $ 26,013,146

===================================================================================================================================

</TABLE>
The accompanying notes are an integral part of these Statements.

                                       4
<PAGE>

FBR Asset Investment Corporation
Statements of Cash Flows for the Nine Months Ended September 30, 2001 and 2000
(unaudited)

<TABLE>
<CAPTION>
===================================================================================================================================


                                                                                          For the Nine Months Ended September 30,
                                                                                                2001                  2000
                                                                                                ----                  ----
                                                                                            (unaudited)            (unaudited)
<S>  <C>
Cash flows from operating activities:
Net income                                                                                   $ 9,795,782             $2,999,131
Adjustments to reconcile net income to net cash provided by operating
    Activities
    Realized and recognized losses on mortgage-backed and
       equity securities                                                                      (1,065,108)             4,922,359
    Compensation expense related to stock option grants                                          142,500                     --
    Amortization                                                                                      --                  4,717
    Premium amortization on mortgage-backed securities                                         1,319,421                206,897
Changes in operating assets and liabilities:
    Due from custodian                                                                                --                806,093
    Dividends, interest and fees receivable                                                  (6,607,642)              1,251,799
    Prepaid expenses                                                                           (347,094)                 72,956
     Management fees payable                                                                     647,790                 52,961
     Accounts payable and accrued expenses                                                       280,643                 38,490
     Interest payable                                                                            (4,222)                988,319
     Other                                                                                      (54,786)              (178,306)
                                                                                        ----------------      -----------------
Net cash provided by operating activities                                                     4,107,284              11,165,416
                                                                                        ----------------      -----------------

Cash flows from investing activities:
Purchase of mortgage-backed securities                                                    (1,104,522,134)           (40,921,815)
Investments in equity securities                                                             (16,444,000)            (1,801,410)
Investments in notes receivable                                                              (12,000,000)            (4,000,000)
Repayment of notes receivable                                                                  4,000,000              7,000,000
Proceeds from sale of mortgage backed securities                                              98,220,114            101,529,084
Proceeds from sale of available-for-sale equity securities                                     4,362,364             14,931,133
Receipt of principal payments on mortgage-backed securities                                   56,734,378             17,566,242
                                                                                          --------------      -----------------
       Net cash (used in) provided by investing activities                                 (969,649,278)             94,303,234
                                                                                          --------------      -----------------

Cash flows from financing activities:
Repurchase of common stock                                                                    (8,334,135)           (22,629,989)
Proceeds from issuance of common stock                                                        97,385,872                    --
Borrowings / (Repayments) of repurchase agreements                                           849,718,000            (81,776,000)
Dividends paid                                                                                (8,267,197)            (9,615,811)
                                                                                          ---------------     ------------------
       Net cash provided by (used in) financing activities                                    930,502,540          (114,021,800)
                                                                                          ---------------     ------------------

Net decrease in cash and cash equivalents                                                   (35,039,454)             (8,553,150)
Cash and cash equivalents, beginning of the period                                            36,810,566             13,417,467
                                                                                          --------------      -----------------
Cash and cash equivalents, end of the period                                                  $1,771,112             $4,864,317
                                                                                          --------------      -----------------
Supplemental disclosure:

    Cash payments for interest                                                             $   7,797,922          $   7,639,872

Securities purchased, not yet settled                                                      $  77,318,023                     --

==================================================================================================================================
</TABLE>

The accompanying notes are an integral part of these statements.

                                       5
<PAGE>

FBR ASSET INVESTMENT CORPORATION
Notes to Financial Statements (unaudited)

Note 1   Basis of Presentation

The  financial  statements  of FBR Asset  Investment  Corp.  ("FBR Asset" or the
"Company") have been prepared in accordance with generally  accepted  accounting
principles 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,  2000 and  included  on Form 10-K  filed by the  Company  with the
Securities and Exchange Commission.

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

Note 2   Investments in Mortgage-Backed Securities

For the three and nine months ended  September  30, 2001,  the weighted  average
coupon rate on the mortgage-backed securities was 6.46% and 6.29%, respectively.

The following table  summarizes the Company's  mortgage-backed  securities as of
September 30, 2001, and December 31, 2000:


<TABLE>
<CAPTION>
                                                                                                                 Total Mortgage
September 30, 2001                                        Freddie Mac         Fannie Mae        Ginnie Mae           Assets
-------------------                                       -----------     -   -----------       -----------          ------
<S>  <C>
Mortgage-backed securities,
 Available-for-sale, face                                $384,112,199       $ 774,955,798                __      $1,159,067,997

Unamortized net premium                                     8,156,121          15,002,882                __          23,159,003
                                                         ------------       -------------                        --------------

Amortized cost                                            392,268,320         789,958,680                __       1,182,227,000
Gross unrealized gains                                                                                   __
                                                            1,977,556           3,683,991                             5,661,547
Gross unrealized losses                                      (66,543)             (3,200)                __             (69,743)
                                                             ---------            --------                              --------
Estimated fair value                                     $394,179,333       $ 793,639,471                __      $1,187,818,804
                                                         ============       =============                        ==============
</TABLE>

<TABLE>
<CAPTION>
                                                                                                                 Total Mortgage
December 31, 2000                                         Freddie Mac         Fannie Mae        Ginnie Mae           Assets
-----------------                                         -----------     -   -----------       -----------          ------
<S>  <C>
Mortgage-backed securities,
 available-for-sale, face                                 $85,927,247        $ 58,134,867      $ 9,660,054         $153,722,168

Unamortized net premium                                       413,946             669,906          573,054            1,656,906
                                                              -------             -------          -------            ---------

Amortized cost                                             86,341,193          58,804,773       10,233,108          155,379,074
Gross unrealized gains                                        138,622             424,165               __              562,787
Gross unrealized losses                                     (380,578)           (411,713)        (301,365)          (1,093,656)
                                                            ----------          ----------       ---------          -----------
Estimated fair value                                      $86,099,237         $58,817,225      $9,931,743          $154,848,205
                                                          ===========         ===========      ===========         ============
</TABLE>


                                       6
<PAGE>

Note 3   Repurchase Agreements


At  September  30,  2001,  the  Company  had $983.6  million  outstanding  under
repurchase  agreements with a weighted average borrowing rate of 3.12% as of the
end of the period and a  remaining  weighted-average  term to maturity of 7 days
(remaining   maturities   between  1  and  26  days)  At  September   30,  2001,
mortgage-backed   securities  pledged  against  repurchase   agreements  had  an
estimated fair value of $1,058.1  million,  for the three months ended September
30, 2001, the weighted average borrowing rate was 3.63% and the weighted average
repurchase  agreement  balance was $450.2  million.  For the nine  months  ended
September  30,  2001,  the  weighted  average  borrowing  rate was 4.27% and the
weighted average repurchase agreement balance was $243.9 million.

Note 4   Interest Rate Swaps

FBR Asset enters into  interest  rate swap  agreements  to offset the  potential
adverse  effects of rising  interest rates under certain  short-term  repurchase
agreements. The interest rate swap agreements are structured such that FBR Asset
receives  payments based on a variable interest rate and makes payments based on
a fixed interest rate. The variable interest rate on which payments are received
is calculated based on the three-month LIBOR. FBR Asset's repurchase  agreements
generally  have  maturities  of 30 to 90 days  and  carry  interest  rates  that
correspond  to  LIBOR  rates  for  those  same  periods.   The  swap  agreements
effectively  fix FBR Asset's  borrowing cost and are not held for speculative or
trading purposes.

On July 27, 2001 the Company  entered into an interest rate swap  agreement that
matures  on July 27,  2004,  at a  notional  amount of $50  million.  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. At
September 30, 2001, the fair value of the interest rate swap was ($1.5 million).

The Company  adopted FAS 133 on January 1, 2001.  Under FAS 133,  changes in the
fair value of derivatives are recorded each period in current  earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge  transaction  and, if so, the type of hedge  transaction.  For cash-flow
hedge  transactions,  effective  changes  in the fair  value  of the  derivative
instrument are reported in other comprehensive  income while ineffective changes
are  recorded  through the income  statement.  The gains and losses on cash flow
hedge  transactions  that  are  reported  in  other  comprehensive   income  are
reclassified  to earnings in the periods in which  earnings  are effected by the
hedged cash flows. If a cash flow hedging relationship is terminated the related
gain or loss in other comprehensive  income is amortized over the remaining life
of the original hedging relationship.

Note 5   Notes Receivable

On March 30,  2001,  the  Company  loaned $12  million to Prime  Aurora,  L.L.C.
("Prime  Aurora"),  a  wholly-owned  subsidiary  of  Prime  Group  Realty,  L.P.
("PGRLP").  The loan bears  interest  at 16% per annum.  The  Company was paid a
commitment  fee of $120,000 at closing.  The loan matured on June 29, 2001,  and
was extended  through  September  30, 2001,  upon payment of an extension fee of
$120,000. On September 30, 2001 the loan was further extended until November 30,
2001,  upon  payment  of  an  additional extension fee of $120,000. Prime Aurora
granted  to  the  Company  a  first  lien mortgage on approximately 97 acres  of
unimproved land owned by Prime Aurora and located in Aurora,  Illinois. Although
management  believes  the  note  is  adequately secured, no  assurances  can  be
provided  that  the  value  of the property  encumbered by this mortgage will be
sufficient  to  secure  the  loan.  PGRLP  has  unconditionally  guaranteed  all
obligations of Prime Aurora in connection with the loan.


Note 6   Comprehensive Income

Comprehensive income includes net income as currently reported by the Company on
the  statement  of  income  adjusted  for  other  comprehensive   income.  Other
comprehensive  income for the  Company is the  changes in  unrealized  gains and
losses related to the Company's  mortgage-backed  securities  ("MBS") and equity
securities  accounted  for as  available  for sale with  changes  in fair  value
recorded through  shareholders equity and changes in unrealized gains and losses
related to the Company's use of cash flow hedges.

Note 7    Income Taxes

The Company has elected to be taxed as a REIT under the Internal  Revenue  Code.
To qualify for tax treatment as a REIT, the Company must meet certain income and
asset tests and  distribution  requirements.  The Company  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 the  Company's  results or  financial
condition. Furthermore, because the Company's investments include stock in other

                                       7
<PAGE>

REITs, failure of those REITs to maintain their REIT status could jeopardize the
Company's  qualification  as a REIT. No provision has been made for income taxes
in the accompanying financial statements, as the Company believes it has met the
requirements, for all periods presented.

Note 8    Shareholders' Equity

On August 2, 2001,  the  Company  completed a  secondary  offering of  4,500,000
shares of common stock at a price of $23.00 per share.  The lead underwriter for
the offering was Friedman,  Billings,  Ramsey & Co., Inc. and the co-manager was
Stifel,  Nicolaus & Company.  The proceeds  after  expenses to the Company  were
$97,185,872.

From January 1, 2001 to June 30, 2001, the Company repurchased 411,900 shares of
it's common  stock at an average  price of $20.23 per share.  On March 16, 2001,
the Company  declared a dividend of $0.60 per share  payable  April 16, 2001, to
shareholders  of record as of March 30,  2001.  On June 14,  2001,  the  Company
declared a dividend of $0.65 per share payable July 16, 2001, to shareholders of
record as of June 29,  2001.  On  September  19,  2001,  the Company  declared a
dividend of $0.80 per share payable  October 15, 2001, to shareholders of record
as of September 28, 2001. Treasury stock, at cost, has been deducted from common
stock and additional paid-in capital for presentation purposes.

As of  September  30,  2001,  and  December  31,  2000,  1,001,900  and 996,900,
respectively,  options to purchase common stock were outstanding.  These options
have terms of eight to ten  years.  986,900 of these  options  have an  exercise
price of $20 per share while the remaining 15,000 options have an exercise price
of $15 per share. As a result,  139,333 and 112,125 shares,  respectively,  were
included to calculate  diluted  earnings per share for the three and  nine-month
periods presented.

Note 9    Equity Investments

At September 30, 2001,  FBR Asset's  equity  investments  had an aggregate  cost
basis of $40.4 million,  a fair value of $51.8 million and  unrealized  gains of
$11.4 million.
<TABLE>
<CAPTION>

                                                                        Amount of       Carrying Value at     Carrying Value at
Equity Investments                                                    Investment(1)       Sept. 30, 2001      December 31, 2000
                                                                      --------------      --------------      -----------------
<S><C>
Capital Automotive REIT......................................           $19,740,850         $24,934,327           $23,068,463
Annaly Mortgage Management, Inc..............................             7,144,000          11,560,000                    --
Prime Retail, Inc., pfd......................................               493,920             478,240               543,939
Resource Asset Investment Trust..............................             3,704,181           5,495,971             4,245,164
Saxon Capital Acquisition Corporation........................             9,300,000           9,300,000                    --

Encompass Services Corporation...............................                                                         252,624
                                                                        -----------         -----------               -------
       Total.................................................           $40,382,951         $51,768,538           $28,110,190
                                                                        ===========         ===========           ===========
</TABLE>

(1)    As of September 30, 2001.


Note 10 Subsequent Events

None


                                       8
<PAGE>

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 risk,  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 is not obligated to update any such
factors or to reflect the impact of actual future events or developments on such
forward-looking statements.

Overview

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

The Company  intends to expand its mezzanine loan program  substantially  in the
future.

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  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

The following  discussion sets forth the  significant  components of FBR Asset's
net income for the three-month periods ended September 30, 2001 and 2000.

Net Income

The Company had net income for the three months  ended  September  30, 2001,  of
$5.6 million or $0.88 per basic share, compared to net income of $2.4 million or
$0.58 per basic share for the  corresponding  period in 2000.  Fully diluted net
income per share for the second quarter of 2001 was $0.86 per share; compared to
$0.58 per share for the third quarter of 2000.  The increase is primarily due to
an increase in interest income from mortgage-backed securities.

The Company's total income  increased to $9.6 million for the three months ended
September 30, 2001,  from $5.6 million for the three months ended  September 30,
2000. The company invested the proceeds from its secondary offering completed on
August 2, 2001, in mortgage-backed securities,  thereby substantially increasing
the portfolio size and interest income generated from the portfolio.

For the three months ended September 30, 2001, the weighted average annual yield
on the Company's mortgage-backed securities was 6.46%. As of September 30, 2001,
the Company had  investments  in 53  mortgage-backed  securities.  For the three
months ended  September  30,  2000,  the  weighted  average  annual yield on the
Company's  mortgage-backed  securities was 7.04%.  As of September 30, 2000, the
Company had investments in 37 mortgage-backed securities.

For the three months ended September 30, 2001, the weighted average annual yield
on FBR Asset's equity  securities and promissory  notes was 12.55%,  compared to
14.23% for the three months  ended  September  30,  2000,  based on interest and
dividend  income  accrued on, and the  weighted  average  cost basis of,  equity
securities and  promissory  notes.  The average annual yield on all  investments
decreased to 7.02% from 8.90%. The decrease is primarily  related to a reduction
in  interest  income  received  from  the  Company's  notes  receivable  due  to
repayments and a reduction in yields on mortgage-backed  securities purchased in
2001 from their levels in 2000.

The Company incurred interest expense of $4.1 million for the three months ended
September 30, 2001, which represents 78.9% of the total expenses for the period.
The Company incurred interest expense of $2.8 million for the three months ended
September  30,  2000.  Which  represented  86.7% of the total  expenses for that
period.  The $1.3  million  increase in  interest  expense  reflects  the 175.9%
increase in weighted average  borrowings  under repurchase  agreements to $450.2
million from $163.2 million.

                                       9
<PAGE>

Management  fees for the three months ended  September  30, 2001,  were $955,446
compared to $242,145 for the three months ended  September 30, 2000. The Company
recorded $416,303 in incentive compensation for the three months ended September
30, 2001,  payable to its  portfolio  manager  based on the  performance  of the
Company over the preceding 12-month period.

Professional  fees and other expenses consist  primarily of legal and accounting
fees.  Professional  fees and other  expenses were $144,982 for the three months
ended  September 30, 2001, and $191,543 for the three months ended September 30,
2000. The decreased  fees are  attributable a reduction in legal fees from notes
receivable.

The following  discussion sets forth the  significant  components of FBR Asset's
net income for the nine-month periods ended September 30, 2001 and 2000.

Net Income

The Company had net income for the nine months ended September 30, 2001, of $9.8
million or $2.17 per basic  share,  compared  to net  income of $3.0  million or
$0.63 per basic share for the  corresponding  period in 2000.  Fully diluted net
income per share for the nine  months  ended  September  30,  2001 was $2.12 per
share,  compared  to $0.63  per share for the  first  nine  months of 2000.  The
increase  is  primarily  due to gains on the sale of  available-for-sale  equity
securities and fee income.

The Company's total income  increased to $18.9 million for the nine months ended
September 30, 2001,  from $17.8 million for the nine months ended  September 30,
2000.  The increase is primarily  related to fee income  received  under the fee
sharing agreement with FBR.

For the nine months ended September 30, 2001, the weighted  average annual yield
on the Company's mortgage-backed securities was 6.29%. For the nine months ended
September  30,  2000,  the  weighted  average  annual  yield  on  the  Company's
mortgage-backed securities was 6.65%.

For the nine months ended September 30, 2001, the weighted  average annual yield
on FBR Asset's equity securities and  promissory  notes was 11.26%,  compared to
13.19% for the nine months  ended  September  30,  2000,  based on interest  and
dividend  income  accrued on, and the  weighted  average  cost basis of,  equity
securities and a promissory notes.  The average annual yield on all  investments
decreased to 6.94% from 8.25%. The decrease reflects the decreased investment in
promissory notes during the first nine months of 2001 from the comparable period
in 2000.

The Company incurred  interest expense of $7.8 million for the nine months ended
September 30, 2001, which represents 76.7% of the total expenses for the period.
The Company incurred  interest expense of $8.6 million for the nine months ended
September  30,  2000,  which  represents  87.1% of the total  expenses  for that
period.  The $0.8 million decrease in interest expense reflects a lower weighted
average  borrowing  cost of 4.27%  compared to 5.44% for the  similar  period of
2000.

Management  fees for the nine months ended September 30, 2001, were $1.8 million
compared to $825,549 for the nine months ended  September 30, 2000.  The Company
recorded  $811,456  in  incentive  compensation  during  the nine  months  ended
September  30, 2001,  payable to it's  portfolio  manager based on the Company's
performance over the preceding 12-month period.

Professional  fees and other expenses consist  primarily of legal and accounting
fees.  Professional  fees and other  expenses  were $590,791 for the nine months
ended  September 30, 2001, and $455,954 for the nine months ended  September 30,
2000. The increased fees are primarily attributable to a charge for stock option
grants in 2001.

Interest and Dividend Income

The following tables set forth information  regarding the total amount of income
from  interest  and dividend earning assets and the resultant average yields for
the  three  and  nine  months  ended September 30, 2001 and 2000. Information is
based on daily average balances during the period.


                                       10
<PAGE>

<TABLE>
<CAPTION>
                                                                                 Three Months Ended September 30, 2001
                                                                                 -------------------------------------
                                                                                                                    Weighted
                                                                                                Weighted             Average
                                                                       Interest/Dividend        Average            Annualized
                                                                            Income              Balance               Yield
                                                                            ------              -------               -----
<S>  <C>
Mortgage securities available for sale                                     $7,892,502         $485,077,565              6.46%
Investment in equity securities and
   Promissory notes/(1)/(3)/                                                1,657,495           52,382,955             12.55%

Cash and cash equivalents                                                      32,696            3,957,576              3.28%
                                                                               ------         ------------              ----
        Total                                                              $9,582,693         $541,418,096              7.02%
                                                                           ==========         ============              ====
</TABLE>


<TABLE>
<CAPTION>
                                                                                 Three Months Ended September 30, 2000
                                                                                 -------------------------------------
                                                                                                                     Weighted
                                                                                                Weighted             Average
                                                                       Interest/Dividend         Average            Annualized
                                                                            Income               Balance              Yield
                                                                            ------               -------              ------
<S>  <C>
Mortgage securities available for sale                                     $3,208,446          $180,802,170             7.04%
Investment in equity securities
    And promissory notes/(2)/(3)/                                           2,320,665            64,686,711            14.23%
Cash and cash equivalents                                                      64,623             3,993,878             6.42%
                                                                               ------             ---------             ----
        Total                                                              $5,593,734          $249,482,759             8.90%
                                                                          ===========          ============             ====
</TABLE>


(1)  Includes accrued interest and amortized commitment fees on convertible loan
     to Prime Group Realty, L.P. Such amounts are included as interest income in
     the Company's statements of income included in its financial statements.
(2)  Includes  accrued  interest and amortized  commitment  fees on  convertible
     loans to Prime Capital Funding 1, LLC and Prime Retail, Inc. Such amounts
     are included as interest income in the Company's statements of income
     included in its financial statements.
(3)  The Company accrues dividend income based on the ex-dividend date.



<TABLE>
<CAPTION>
                                                      Nine Months Ended September 30, 2001
                                                      ------------------------------------
                                                                                        Weighted
                                                                    Weighted             Average
                                           Interest/Dividend        Average            Annualized
                                                Income              Balance               Yield
                                                ------              -------               -----
<S>  <C>
Mortgage securities available for sale        $12,915,373         $274,625,343              6.29%
Investment in equity securities and
   Promissory notes/(1)/(3)/                    3,739,658           44,386,192             11.26%

Cash and cash equivalents                         532,644           12,167,853              5.85%
                                              -----------         ------------              ----
        Total                                 $17,187,675         $331,179,388              6.94%
                                              ===========         ============              ====
</TABLE>





<TABLE>
<CAPTION>
                                                          Nine Months Ended September 30, 2000
                                                          ------------------------------------
                                                                                             Weighted
                                                                        Weighted             Average
                                               Interest/Dividend         Average            Annualized
                                                    Income               Balance              Yield
                                                    ------               -------              -----
<S>  <C>
Mortgage securities available for sale            $10,422,497          $208,911,319             6.65%
Investment in equity securities
    And promissory notes/(2)/(3)/                   7,073,242            71,435,252            13.19%
Cash and cash equivalents                             335,444             7,437,900             6.01%
                                                 ------------          ------------             ----
        Total                                     $17,831,183          $287,784,471             8.25%
                                                 ============          ============             ====
</TABLE>

                                       11
<PAGE>

(1)  Includes  accrued  interest and amortized  commitment  fees on  convertible
     loans to Prime Group Realty,  L.P. and Prime  Capital  Funding I, LLC. Such
     amounts are  included as interest  income in the  Company's  statements  of
     income included in its financial statements.
(2)  Includes  accrued  interest and amortized  commitment  fees on  convertible
     loans  to  Prime Capital Funding 1, LLC and Prime Retail, Inc. Such amounts
     are  included  as  interest  income  in the Company's  statements of income
     included in its financial statements.
(3)  The Company accrues dividend income based on the ex-dividend date.



Changes in Financial Condition

Mortgage-Backed Securities Available for Sale

The Company invests in mortgage-backed  securities that are agency  pass-through
securities  representing a 100% interest in the underlying  conforming  mortgage
loans.  Conforming loans comply with the underwriting  requirements for purchase
by Fannie Mae,  Freddie Mac and Ginnie Mae. These securities bear little risk of
credit loss due to defaults  because they are  guaranteed by Ginnie Mae,  Fannie
Mae or Freddie Mac.

The Company held mortgage-backed  securities of $1.2 billion as of September 30,
2001. The Company held mortgage-backed  securities of $154.8 million on December
31, 2000.

Premium and discount  balances  associated with the purchase of  mortgage-backed
securities  are amortized as a decrease or increase in interest  income over the
life of the security.  At September 30, 2001, the amount of unamortized premium,
net of discounts recorded in the Company's  statement of financial condition was
$23.1 million. At December 31, 2000, the amount of unamortized  premium,  net of
discounts  recorded in the Company's  statement of financial  condition was $1.6
million.

The Company received mortgage  principal payments equal to $56.7 million for the
nine months ended September 30, 2001. The Company  received  mortgage  principal
payments equal to $23.7 million for the year ended December 31, 2000.

At  September  30,  2001,  $11.4  million  of net  unrealized  gains  on  equity
securities,  $5.6 million of net unrealized gains on mortgage-backed  securities
and a $1.5 million loss on swap value, were included in the Company's  statement
of financial  condition as accumulated other  comprehensive  income. At December
31, 2000,  $0.2 million of net unrealized  losses on equity  securities and $0.5
million of net unrealized losses on mortgage-backed  securities were included in
the   Company's   statement  of  financial   condition  as   accumulated   other
comprehensive loss.

Repurchase Agreements

To date, the Company's debt has consisted mainly of borrowings collateralized by
a pledge of most 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 $983.6 million  outstanding  under  repurchase  agreements  with
several  financial  institutions  on September 30, 2001.  The Company had $133.9
million  outstanding  under  repurchase  agreements  on December  31,  2000.  At
September 30, 2001, the ratio of the amounts due under  repurchase  agreement to
shareholder's equity was 5.14 to 1.

At September 30, 2001, the term to maturity of the Company's borrowings had been
limited to 26 days with a weighted  average  remaining  maturity of 7 days and a
weighted average cost of funds on outstanding borrowings of 3.12%.

Notes Receivable

On March 30,  2001,  the  Company  loaned $12  million to Prime  Aurora,  L.L.C.
("Prime  Aurora"),  a  wholly-owned  subsidiary  of  Prime  Group  Realty,  L.P.
("PGRLP").  The loan bears  interest  at 16% per annum.  The  Company was paid a
commitment  fee of $120,000 at closing.  The loan matured on June 29, 2001,  and
was extended  through  September  30, 2001,  upon payment of an extension fee of
$120,000. On September 30, 2001 the loan was further extended until November 30,
2001,  upon payment of an  additional  extension  fee of $120,000.  Prime Aurora
granted  to the  Company a first  lien  mortgage  on  approximately  97 acres of
unimproved  land owned by Prime  Aurora and  located  in  Aurora,  Illinois.  No
assurances  can be provided  that the value of the property  encumbered  by this
mortgage  will be  sufficient  to  secure  the loan.  PGRLP has  unconditionally
guaranteed all obligations of Prime Aurora in connection with the loan.

                                       12
<PAGE>

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 and maturities;  distributions  or principal  payments on
mortgage-backed  and  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,  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 for at least the next twelve
months. 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  as it did on August 2, 2001,  with the  completion of a
secondary  offering of common stock that provided  proceeds  after  expenses  of
$97.2  million.  There  can be no  assurance  that the  Company  will be able to
generate  sufficient funds from future  operations,  or raise sufficient debt or
equity on acceptable terms, to take advantage of investment  opportunities  that
become  available.  Should the  Company's  needs ever  exceed  these  sources of
liquidity,   management  believes  the  Company's   mortgage-backed  and  equity
securities could be sold, in most circumstances, to provide cash.

For the nine months ended September 30, 2001, the Company's operating activities
resulted in net cash flows of $5.9 million. The primary source of operating cash
flow was interest on mortgage-backed  securities,  interest on notes receivable,
dividends, and fee income from investments.  For the nine months ended September
30, 2000, the Company's  operating  activities  provided net cash flows of $11.2
million.

For the nine months ended September 30, 2001, the Company's investing activities
resulted in net cash used of $971.8  million  compared  to net cash  provided by
investing  activities for the nine months ended  September  30,  2000,  of $94.3
million.  The  change  is  primarily  attributable  to  increased  purchases  of
mortgage-backed and available-for-sale  equity securities during the nine months
ended September 30, 2001, compared to the nine months ended September 30, 2000.

For the nine months ended September 30, 2001, net cash provided by the Company's
financing  activities was $930.8 million  compared to net cash used for the nine
months ended  September 30, 2000, of $114.0  million.  The increase is primarily
attributable to an increase in borrowings  under  repurchase  agreements used to
finance purchases of mortgage backed securities.

Shareholders' Equity

As of September  30, 2001,  the value of the equity  securities in the Company's
portfolio had  increased  from the adjusted cost basis of $40.4 million to $51.8
million.  As of December 31,  2000,  the value of the equity  securities  in the
Company's  portfolio  had declined from the adjusted cost basis of $28.3 million
to $28.1 million.  Increases and declines are generally  recorded as accumulated
other comprehensive  income in the statement of financial  condition,  except to
the extent they are deemed to be other than temporary.

If the Company  determines that declines are other than temporary,  it records a
charge against income for the difference  between an investment's cost basis and
its market  value.  For the nine months ended  September  30, 2001,  the Company
recorded a charge to reflect  the  decline in value of its  investment  in Prime
Retail,  Inc.'s  preferred  stock of $0.5  million.  For the nine  months  ended
September 30, 2000,  FBR Asset recorded a charge to reflect the decline in value
of its investments in Prime Retail, Inc.'s common and preferred stock, Encompass
Service Corporation and Resource Asset Investment Trust for an aggregate of $5.6
million.

                                       13
<PAGE>

FBR ASSET INVESTMENT CORPORATION
Summary of Current Investments & Cash and Cash Equivalents
The following table summarizes FBR Asset's investments as of September 30, 2001,
and December 31, 2000.


<TABLE>
<CAPTION>
                                                                         As of September 30, 2001
                                                                         ------------------------
                                                                 Amount                      Percentage
                                    Shares      Percent            Of           Carrying      Increase
                                     Owned   Ownership/(3)     Investment         Value      (Decrease)
                                     -----   -------------     ----------         -----      ----------
<S>  <C>
Mortgage-Backed Securities              N/A          N/A   $1,182,227,000   $1,187,818,804      0.47%
                                                           --------------   --------------      -----
Equity Investments/(1)(2)/
Capital Automotive REIT
   (CARS)                         1,415,115         6.53%      19,740,850       24,934,327     26.31%
Annaly Mortgage Management, Inc.
   (NLY)                            800,000         1.34%       7,144,000       11,560,000     61.81%
Prime Retail, Inc., pfd
   (PRT pfd)                         78,400         3.41%         493,920          478,240     (3.17%)
Resource Asset Investment
   Trust (RAS)                      344,575         2.77%       3,704,181        5,495,971     48.37%
Saxon Capital Acquisition
   Corporation                    1,000,000         3.57%       9,300,000        9,300,000      0.00%
Encompass Services
   Corporation (ESR)/(4)/            49,900         0.08%
                                                               ----------    -------------     ------
     Total Equity Investments                                 $40,382,951   $   51,768,538     28.19%
                                                              -----------    -------------     ------
Promissory Notes/(2)/
   Prime Capital Funding I, LLC         N/A          N/A               --               --        N/A
Prime Group Realty, L.P.                N/A          N/A       12,000,000       12,000,000        N/A
                                                             ------------    -------------
    Total Promissory Notes                                 $   12,000,000   $   12,000,000        N/A
                                                             ------------    -------------
Cash and Cash Equivalents               N/A          N/A   $    1,771,112   $    1,771,112        N/A
                                                             ------------    -------------
Total Investments & Cash
   And Cash Equivalents                                    $1,236,381,063   $1,253,358,454      1.37%
                                                           ===============  ==============
</TABLE>


<TABLE>
<CAPTION>
                                                 As of December 31, 2000
                                                 -----------------------
                                          Amount                         Percentage
                                            of           Carrying         Increase
                                        Investment         Value         (Decrease)
                                        ----------         -----         ----------
<S>  <C>
Mortgage-Backed Securities            $155,379,074     $154,848,205        (0.34%)
                                      ------------     ------------
Equity Investments/(1)(2)/
Capital Automotive REIT
   (CARS)                               23,298,100       23,068,463        (0.99%)
Annaly Mortgage Management, Inc.
   (NLY)                                        --               --           --
Prime Retail, Inc., pfd
   (PRT pfd)                             1,038,800          543,939       (47.64%)
Resource Asset Investment
   Trust (RAS)                           3,704,181        4,245,164        14.60%
Saxon Capital Acquisition
   Corporation                                  --               --           --
Encompass Services
   Corporation (ESR)/(4)/                  286,931          252,624       (11.96%)
                                       -----------      -----------       --------
     Total Equity Investments         $ 28,328,012     $ 28,110,190        (0.77%)
                                      ------------     ------------       --------
Promissory Notes/(2)/
   Prime Capital Funding I, LLC          4,000,000        4,000,000          N/A
Prime Group Realty, L.P.                                                     N/A
                                       -----------       ----------          ---
    Total Promissory Notes             $ 4,000,000      $ 4,000,000          N/A
                                       -----------      -----------
Cash and Cash Equivalents              $36,810,566     $ 36,810,566          N/A
                                       -----------     ------------
Total Investments & Cash
   And Cash Equivalents               $224,517,652     $223,768,961        (0.33%)
                                      ============     ============        -------
</TABLE>


(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 the securities of these companies
     or their affiliates.
(3)  As of June 30,  2001. For Prime  Retail,  Inc.,  represents the  percentage
     ownership of 10.5% Series A Cumulative Preferred Stock
(4)  Formerly Building One Services Corporation (BOSS)


                                       14

<PAGE>

FBR ASSET INVESTMENT CORPORATION
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk generally  represents the risk of loss that can result from a change
in the prices of equity  securities in the equity market,  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
interest rate risk primarily through the use of 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 the floating rate
portion  increase under this scenario.  The reverse is true for  mortgage-backed
securities and the swap if interest rates decline.

The Company  records its interest rate swap agreements at fair value (See Note 4
of  "Notes to  Financial  Statements-Interest  Rate  Swaps").  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 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 9/30/01."  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, Ginnie 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
<PAGE>

<TABLE>
<CAPTION>
                                                                                                        Value at
                                                                                                         9/30/01
                                                                                                         with 100
                                                                Value at 9/30/01                       basis point
                                                                 with 100 basis                        decrease in
                                             Value at            point increase         Percent          interest         Percent
                                           9/30/01/(1)/        in interest rates         Change            rates           Change
                                           ------------        -----------------         ------            -----           ------
<S>  <C>
Assets
   Mortgage securities                    $1,187,818,804         $1,151,361,093          (3.07%)     $1,197,284,692          0.80%
   Other                                      74,529,493             74,529,493                          74,529,491
                                          --------------        ---------------                     ---------------
     Total Assets                         $1,262,348,297         $1,225,890,586          (2.89%)     $1,271,814,183          0.75%
                                          ==============        ===============                     ===============

Liabilities
   Interest rate swap                         (1,629,718)              (340,759)                         (2,962,222)
   Other                                   1,072,661,478          1,072,661,478                       1,072,661,477
                                         ---------------         --------------                       -------------
     Total Liabilities                    $1,071,031,760         $1,072,320,719                      $1,069,669,255
                                         ---------------         --------------                      --------------
Shareholders' Equity
   Common stock                               $   79,825              $  79,825                          $   79,825
   Paid-in-capital                           196,682,319            196,682,319                         196,682,319
   Accumulated other
     comprehensive income                     15,468,673            (22,277,997)       (244.02%)         26,267,064        69.81%
Retained deficit                             (20,914,280)           (20,914,280)                        (20,914,280)
                                           -------------          -------------                       -------------
     Total Shareholders' Equity            $ 191,316,537          $ 153,569,867         (19.73%)       $202,114,928         5.64%
                                           -------------          -------------                       -------------
     Total Liabilities and
   Shareholders' Equity                   $1,262,348,297         $1,225,890,586          (2.89%)     $1,271,814,183         0.75%
                                          ==============        ===============                     ===============
</TABLE>

(1)    Includes Accrued Interest.

As shown  above,  the  portfolio  generally  will benefit less from a decline in
interest rates than it will be adversely  affected by a similar-scale  increase.
This effectively may limit investors' 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 real estate related 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 FBR Asset would have on the value of the total  assets and the
book value of the Company as of September 30, 2001.


                                       16
<PAGE>

<TABLE>
<CAPTION>
                                                                       Value at
                                                                    Sept. 30, 2001                       Value at
                                                                          with                    Sept. 30, 2001 with
                                                 Value at            10% increase     Percent      10% decrease in       Percent
                                              Sept. 30, 2001           in price        Change           price             Change
                                              ---------------          --------        -------          -----             ------
<S>  <C>
Assets
   Equity securities                            $ 51,768,538         $ 56,945,392      10.00%          $ 46,591,684       -10.00%
   Other                                       1,210,579,759        1,210,579,759                     1,210,579,759
                                            ----------------     ----------------                    --------------
     Total Assets                             $1,262,348,297       $1,267,525,151       0.41%        $1,257,171,443        -0.41%

Liabilities                                   $1,071,031,760       $1,071,031,760                    $1,071,031,760

Shareholders' Equity
   Common stock                                  $    79,825          $    79,825                       $    79,825
    Paid-in-capital                              196,682,319          196,682,319                       196,682,319
   Accumulated comprehensive
     Income                                       15,468,673           20,645,527      33.47             10,291,819       -33.47
   Retained deficit                              (20,914,280)         (20,914,280)                      (20,914,280)
                                             ---------------     ----------------                      ------------

   Total
   Shareholders' Equity                        $ 191,316,537        $ 196,493,391       2.71%         $ 186,139,683        -2.71%

   Total Liabilities and Shareholders'
     Equity                                   $1,262,348,297       $1,267,525,151       0.41%       $ 1,257,171,443        -0.41%
                                              ==============      ===============                   ===============
Book value per share                               $   23.97            $   24.62       2.71%             $   23.32        -2.71%
                                                   =========           ==========                         =========
</TABLE>

Except to the extent that the Company sells its equity investments or a decrease
in market value is deemed to be other than temporary, an increase or decrease in
the  market  value of  those  assets  will not  directly  affect  the  Company's
earnings,  however an increase or  decrease in interest  rates would  affect the
market value of the assets owned by the companies in which the Company  invests.
Consequently, if those companies' earnings are affected by changes in the market
value of their assets, that could in turn impact their ability to pay dividends,
which could in turn affect the Company's  earnings.  If the Company had sold all
of its equity investments on September 30, 2001, the company would have realized
a gain of  approximately  $11.4  million  which  would  have  been  included  in
earnings.


                                       17
<PAGE>

                        FBR ASSET INVESTMENT CORPORATION
                                     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

             None

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
American Stock Exchange and its symbol is "FB."

ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K

             (a)      Exhibits

             None

             (b)      Reports on Form 8-K

             Current report on Form 8-K filed October 25, 2001.

                                       18
<PAGE>

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)


Date:  November 14, 2001                    By:      /s/ Kurt R. Harrington
                                                     ----------------------
                                            Kurt R. Harrington
                                            Chief Financial Officer and
                                            Treasurer (Principal Financial and
                                            Accounting Officer)



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