UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-Q

|(Mark One)                                                    |                                                                                         
|------------------------------------------------------------- | ----------------------------------------------------------------------------------------
|ý                                                             | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
|For the quarterly period ended March 31, 2005                
|or                                                           
|o                                                             | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|For the transition period
from                             to

Commission File Number: 000-50938

Fieldstone Investment Corporation(Exact name of registrant as specified in its charter)

|Maryland(State or other jurisdiction of
incorporation or organization)                     |  | 74-2874689(I.R.S. Employer Identification No.)
|------------------------------------------------------------------------------------------ |  | ----------------------------------------------
|11000 Broken Land Parkway, Suite 600,
Columbia, MD(Address of principal executive offices) |  | 21044(Zip Code)                               
|(410) 772-7200(Registrant's telephone number, including area code)                        

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange
Act)    o Yes    ý No

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On May 12, 2005, the issuer
had 48,835,876 shares of common stock outstanding.



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Table of Contents

|        |  |                                                                                       |  | Page
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|Part I  |  | FINANCIAL INFORMATION                                                                 |  | 3   
|Item 1. |  | Financial Statements                                                                  |  | 3   
|        |  | Consolidated Statements of Condition                                                  |  | 3   
|        |  | Consolidated Statements of Operations                                                 |  | 4   
|        |  | Consolidated Statements of Cash Flows                                                 |  | 5   
|        |  | Notes to Consolidated Financial Statements                                            |  | 6   
|Item 2. |  | Management's Discussion and Analysis of Financial Condition and
Results of Operations |  | 15  
|        |  | Executive Overview                                                                    |  | 16  
|        |  | Key Components of Financial Results of Operations                                     |  | 16  
|        |  | Critical Accounting Policies                                                          |  | 17  
|        |  | Results of Operations                                                                 |  | 20  
|        |  | Consolidated Statements of Condition                                                  |  | 26  
|        |  | Business Segment Results                                                              |  | 31  
|        |  | Liquidity and Capital Resources                                                       |  | 35  
|        |  | Commitments and Contingencies                                                         |  | 37  
|        |  | Other Operational and Investment Portfolio Data                                       |  | 39  
|        |  | Impact of New Accounting Standards                                                    |  | 46  
|        |  | Effect of Inflation                                                                   |  | 46  
|Item 3. |  | Quantitative and Qualitative Disclosures About Market Risk                            |  | 46  
|Item 4. |  | Controls and Procedures                                                               |  | 47  
|Part II |  | OTHER INFORMATION                                                                     |  | 48  
|Item 1. |  | Legal Proceedings                                                                     |  | 48  
|Item 2. |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 48  
|Item 3. |  | Defaults Upon Senior Securities                                                       |  | 48  
|Item 4. |  | Submission of Matters to a Vote of Security Holders                                   |  | 48  
|Item 5. |  | Other Information                                                                     |  | 48  
|Item 6. |  | Exhibits                                                                              |  | 48  

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PART I

ITEM 1. FINANCIAL STATEMENTS.

FIELDSTONE INVESTMENT CORPORATION AND SUBSIDIARIES    Consolidated Statements of Condition    March 31, 2005 and December 31, 2004    (In thousands, except
share and per share data)

|                                                    |                                                                                                                                                                              | March 31, 2005 |                                            | December 31, 2004 |          
|--------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------- | ------------------------------------------ | ----------------- | ---------
|
|Assets                                              |                                                                                                                                                                             
|Cash                                                |                                                                                                                                                                              | $              | 34,810                                     |                   | 61,681   
|Restricted cash                                     |                                                                                                                                                                              |                | 5,947                                      |                   | 4,022    
|Mortgage loans held for sale, net                   |                                                                                                                                                                              |                | 272,450                                    |                   | 357,050  
|Mortgage loans held for investment                  |                                                                                                                                                                              |                | 5,132,289                                  |                   | 4,774,756
|Allowance for loan lossesloans held for investment |                                                                                                                                                                              |                | (26,379                                    | )                 | (22,648  
|                                                    |                                                                                                                                                                              |                |                                            |                   |          
|                                                    |                                                                                                                                                                              |                | Mortgage loans held for investment, net    |                   |          
|                                                    |                                                                                                                                                                              |                |                                            |                   |          
|Accounts receivable                                 |                                                                                                                                                                              |                | 11,254                                     |                   | 9,326    
|Accrued interest receivable                         |                                                                                                                                                                              |                | 23,234                                     |                   | 22,420   
|Trustee receivable                                  |                                                                                                                                                                              |                | 99,167                                     |                   | 91,082   
|Prepaid expenses and other assets                   |                                                                                                                                                                              |                | 22,368                                     |                   | 20,172   
|Derivative assets, net                              |                                                                                                                                                                              |                | 41,371                                     |                   | 20,161   
|Deferred tax asset, net                             |                                                                                                                                                                              |                | 15,884                                     |                   | 15,880   
|Furniture and equipment, net                        |                                                                                                                                                                              |                | 9,433                                      |                   | 9,815    
|                                                    |                                                                                                                                                                              |                |                                            |                   |          
|                                                    |                                                                                                                                                                              |                | Total assets                               |                   | $        
|                                                    |                                                                                                                                                                              |                |                                            |                   |          
|Liabilities and Shareholders' Equity                |                                                                                                                                                                             
|Warehouse financingloans held for sale             |                                                                                                                                                                              | $              | 174,081                                    |                   | 188,496  
|Warehouse financingloans held for investment       |                                                                                                                                                                              |                | 421,687                                    |                   | 521,506  
|Securitization financing                            |                                                                                                                                                                              |                | 4,422,465                                  |                   | 4,050,786
|Reserve for lossesloans sold                       |                                                                                                                                                                              |                | 35,099                                     |                   | 33,302   
|Dividends payable                                   |                                                                                                                                                                              |                |                                           |                   | 21,501   
|Accounts payable and accrued expenses               |                                                                                                                                                                              |                | 19,880                                     |                   | 21,788   
|                                                    |                                                                                                                                                                              |                |                                            |                   |          
|                                                    |                                                                                                                                                                              |                | Total liabilities                          |                   |          
|                                                    |                                                                                                                                                                              |                |                                            |                   |          
|Commitments and contingencies                       |                                                                                                                                                                              |                |                                           |                   |         
|Shareholders' equity:                               |                                                                                                                                                                              |                |                                            |                   |          
|                                                    | Common stock $0.01 par value; 90,000,000 shares authorized; 48,835,876 and 48,855,876 shares issued and outstanding as of March 31, 2005 and December 31, 2004, respectively |                |                                            | 488               |          
|                                                    | Paid-in capital                                                                                                                                                              |                |                                            | 496,534           |          
|                                                    | Accumulated earnings                                                                                                                                                         |                |                                            | 76,791            |          
|                                                    | Unearned compensation                                                                                                                                                        |                |                                            | (5,197            | )        
|                                                    |                                                                                                                                                                              |                |                                            |                   |          
|                                                    |                                                                                                                                                                              |                | Total shareholders' equity                 |                   |          
|                                                    |                                                                                                                                                                              |                |                                            |                   |          
|                                                    |                                                                                                                                                                              |                | Total liabilities and shareholders' equity |                   | $        
|                                                    |                                                                                                                                                                              |                |                                            |                   |          

See
accompanying notes to consolidated financial statements.

3

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FIELDSTONE INVESTMENT CORPORATION AND SUBSIDIARIES        Consolidated Statements of Operations        Three Months Ended March 31, 2005 and 2004        (Unaudited; in thousands,
except share and per share data)

|                                                    |                                                    | Three Months Ended
March 31, |                      
|--------------------------------------------------- | -------------------------------------------------- | ---------------------------- | ---------------------
|
|Revenues:                                           |                                                    |                              |                      
|                                                    | Interest income:                                   |                              |                      
|                                                    |                                                    | Loans held for investment    |                      
|                                                    |                                                    | Loans held for sale          |                      
|                                                    |                                                    |                              |                      
|                                                    |                                                    |                              | Total interest income
|                                                    |                                                    |                              |                      
|                                                    | Interest expense:                                  |                              |                      
|                                                    |                                                    | Loans held for investment    |                      
|                                                    |                                                    | Loans held for sale          |                      
|                                                    |                                                    |                              |                      
|                                                    |                                                    |                              |                      
|                                                    |                                                    |                              |                      
|                                                    |                                                    |                              |                      
|Provision for loan lossesloans held for investment |                                                    |                              | 4,494                
|                                                    |                                                    |                              |                      
|Net interest income after provision for loan losses |                                                    |                              | 43,693               
|Gains on sales of mortgage loans, net               |                                                    |                              | 9,669                
|Other income (expense)portfolio derivatives        |                                                    |                              | 20,342               
|Fees and other income                               |                                                    |                              | 393                  
|                                                    |                                                    |                              |                      
|                                                    |                                                    |                              |                      
|                                                    |                                                    |                              |                      
|Expenses:                                           |                                                    |                              |                      
|                                                    | Salaries and employee benefits                     |                              |                      
|                                                    | Occupancy                                          |                              |                      
|                                                    | Depreciation and amortization                      |                              |                      
|                                                    | Servicing fees                                     |                              |                      
|                                                    | General and administrative                         |                              |                      
|                                                    |                                                    |                              |                      
|                                                    |                                                    |                              |                      
|                                                    |                                                    |                              |                      
|                                                    |                                                    |                              |                      
|Provision for income tax (expense) benefit          |                                                    |                              | 941                  
|                                                    |                                                    |                              |                      
|                                                    |                                                    |                              |                      
|                                                    |                                                    |                              |                      
|Earnings (loss) per share of common stock:          |                                                    |                              |                      
|                                                    | Basic                                              |                              | $                    
|                                                    | Diluted                                            |                              | $                    
|                                                    | Basic weighted average common shares outstanding   |                              |                      
|                                                    | Diluted weighted average common shares outstanding |                              |                      

See
accompanying notes to consolidated financial statements.

4

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FIELDSTONE INVESTMENT CORPORATION AND SUBSIDIARIES    Consolidated Statements of Cash Flows    Three Months Ended March 31, 2005 and 2004    (Unaudited; in thousands)

|                                                                                  |                                                                       | Three Months Ended
March 31,              |       
|--------------------------------------------------------------------------------- | --------------------------------------------------------------------- | ----------------------------------------- | ------
|
|Cash flows from operating activities:                                             |                                                                       |                                           |       
|                                                                                  | Net income (loss)                                                     |                                           | $     
|Adjustments to reconcile net income to net cash provided by operating activities: |                                                                       |                                           |       
|                                                                                  | Depreciation and amortization                                         |                                           |       
|                                                                                  | Amortization of deferred origination costsloans held for investment  |                                           |       
|                                                                                  | Amortization of securitization issuance costs                         |                                           |       
|                                                                                  | Amortization of bond discount                                         |                                           |       
|                                                                                  | Provision for lossesloans sold                                       |                                           |       
|                                                                                  | Provision for loan lossesloans held for investment                   |                                           |       
|                                                                                  | Increase in restricted cash                                           |                                           |       
|                                                                                  | Increase in accounts receivable                                       |                                           |       
|                                                                                  | Increase in accrued interest receivable                               |                                           |       
|                                                                                  | Increase in receivable due from trustee                               |                                           |       
|                                                                                  | Funding of mortgage loans held for sale                               |                                           |       
|                                                                                  | Proceeds from sales of mortgage loans held for sale                   |                                           |       
|                                                                                  | Increase in prepaid expenses and other assets                         |                                           |       
|                                                                                  | Increase in deferred tax asset, net                                   |                                           |       
|                                                                                  | (Increase) decrease in derivative assets, net                         |                                           |       
|                                                                                  | Increase (decrease) in accounts payable and accrued expenses          |                                           |       
|                                                                                  | Stock compensation expense                                            |                                           |       
|                                                                                  |                                                                       |                                           |       
|                                                                                  |                                                                       | Net cash provided by operating activities |       
|                                                                                  |                                                                       |                                           |       
|Cash flows from investing activities:                                             |                                                                       |                                           |       
|                                                                                  | Funding of mortgage loans held for investment                         |                                           |       
|                                                                                  | Payments of mortgage loans held for investment                        |                                           |       
|                                                                                  | Purchase of furniture and equipment, net                              |                                           |       
|                                                                                  | Proceeds from sale of real estate owned                               |                                           |       
|                                                                                  |                                                                       |                                           |       
|                                                                                  |                                                                       | Net cash used in investing activities     |       
|                                                                                  |                                                                       |                                           |       
|Cash flows from financing activities:                                             |                                                                       |                                           |       
|                                                                                  | Costs relating to the issuance of common stock                        |                                           |       
|                                                                                  | Proceeds from warehouse financingloans held for sale                 |                                           |       
|                                                                                  | Repayment of warehouse financingloans held for sale                  |                                           |       
|                                                                                  | Proceeds from warehouse financingloans held for investment           |                                           |       
|                                                                                  | Repayment of warehouse financingloans held for investment            |                                           |       
|                                                                                  | Proceeds from securitization financing                                |                                           |       
|                                                                                  | Repayment of securitization financing                                 |                                           |       
|                                                                                  | Dividends paid                                                        |                                           |       
|                                                                                  | Proceeds from exercise of stock options                               |                                           |       
|                                                                                  |                                                                       |                                           |       
|                                                                                  |                                                                       | Net cash provided by financing activities |       
|                                                                                  |                                                                       |                                           |       
|                                                                                  |                                                                       | Net decrease in cash                      |       
|Cash at the beginning of the period                                               |                                                                       |                                           | 61,681
|                                                                                  |                                                                       |                                           |       
|Cash at the end of the period                                                     |                                                                       | $                                         | 34,810
|                                                                                  |                                                                       |                                           |       
|Supplemental disclosures:                                                         |                                                                       |                                           |       
|                                                                                  | Cash paid for interest                                                |                                           | $     
|                                                                                  | Cash paid (received) for taxes                                        |                                           |       
|Noncash investing and financing activities:                                       |                                                                       |                                           |       
|                                                                                  | Transfer from mortgage loans held for sale to real estate owned       |                                           |       
|                                                                                  | Transfer from mortgage loans held for investment to real estate owned |                                           |       

See accompanying notes to consolidated financial statements.

5

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FIELDSTONE INVESTMENT CORPORATION AND SUBSIDIARIES    Notes to Consolidated Financial Statements    March 31, 2005 and 2004    (Unaudited)

(1)   Organization



Fieldstone Mortgage Company (FMC) was incorporated in the State of Maryland on April 27, 1995 under the name Fieldstone Management Company. Fieldstone
Investment Corporation (FIC) was incorporated in the State of Maryland on August 20, 2003, as a wholly owned subsidiary of Fieldstone Holdings Corp. (FHC). FHC was incorporated in the State of
Delaware in February 1998 as a C Corporation. In July 1998, FHC purchased 100% of the shares of FMC. Prior to 2003, FHC operated as a taxable C corporation. Effective
January 1, 2003, FHC elected to be taxed as an S Corporation.

In
November 2003, FHC merged with and into FIC, with FIC as the surviving entity, in a transaction that was accounted for as a merger of entities under common control whereby the
historical cost basis of the assets and liabilities was retained. Effective with the merger in November 2003, FIC elected to be taxed as a Real Estate Investment Trust (REIT), and FMC, its
wholly owned subsidiary, elected to be taxed as a Taxable REIT Subsidiary (TRS).

On
February 3, 2004, FIC formed two wholly owned subsidiaries, Fieldstone Mortgage Ownership Corp. (FMOC) and Fieldstone Servicing Corp. (FSC), as Maryland corporations, which are
treated as qualified REIT subsidiaries. FMOC holds securities and ownership interests in owner trusts and other financing vehicles, including securities issued by FIC or on FIC's behalf. FMOC holds
the residual interest in FIC's securitized pools of mortgage loans, as well as any derivatives designated as economic interest rate hedges related to securitized debt. FSC holds the rights to direct
the servicing of the mortgage loans held for investment.

FMC
originates, purchases, and sells, non-conforming and conforming residential mortgage loans and engages in other activities related to mortgage banking. FMC originates
mortgage loans through wholesale and retail business channels through its network of over 4,700 independent mortgage brokers and its branch offices located in 26 states throughout the country.

The
accompanying unaudited consolidated financial statements include the accounts of Fieldstone Investment Corporation and its subsidiaries (together, the Company) and have been prepared
in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. All significant intercompany balances and transactions have been
eliminated in consolidation. Certain amounts in the prior period's unaudited consolidated financial statements have been reclassified to conform to the current period presentation.

In
the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a
fair presentation. The results of operations and other data for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for any other interim
periods or the fiscal year ending December 31, 2005. The unaudited consolidated financial statements presented herein should be read in conjunction with the audited consolidated financial
statements and related notes thereto in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2004.

6

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The preparation of consolidated financial statements in conformity with GAAP, requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosures 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. Amounts on the consolidated statements of operations most affected by the use of estimates are the
reserve for lossesloans sold (which is a component of gains on sales of mortgage loans, net), provision for loan lossesloans held for investment, derivative valuations (which
are a component of other income(expense)portfolio derivatives), stock-based compensation (which is a component of salaries and employee benefits) and deferred origination and issuance
costs, which are components of net interest income after provision for loan losses.

(2) Mortgage Loans Held for Sale and Reserve for LossesLoans Sold

Mortgage loans that the Company acquires or originates with the intent to sell in the foreseeable future are initially recorded at cost including any premium paid
or discount received, adjusted for the fair value change during the period in which the loan was an interest rate lock commitment. Loans held for sale are carried on the Company's books at the lower
of cost or market value calculated on an aggregate basis by type of loan. Mortgage loans held for sale, net, as of March 31, 2005 and December 31, 2004 are as follows (in thousands):

March 31,
2005

December 31,
2004Mortgage loans held for sale

$
272,368

356,408Net deferred origination costs


730

1,031Premium, net of discount


1,408

1,505Allowance for lower of cost or market value


(2,056
)
(1,894
)Total

$
272,450

357,050


The
Company maintains a reserve for its representation and warranty liabilities related to the sale of loans and for its contractual obligations to rebate a portion of any premium paid
by an investor when a sold loan prepays within an agreed period. The reserve, which is recorded as a liability on the consolidated statements of condition, is established when loans are sold, and is
calculated as the fair value of liabilities reasonably estimated to occur during the life of the related sold loans. The provision is recorded as a reduction of gain on sale of loans.

The
reserve for lossesloans sold is summarized as follows for the three months ended March 31, 2004 and 2005 (in thousands):

Balance at December 31, 2003

$
31,965Provision


4,103Realized losses


(2,340
)Recoveries


829Balance at March 31, 2004

$
34,557Balance at December 31, 2004

$
33,302Provision


2,538Realized losses


(770
)Recoveries


29Balance at March 31, 2005

$
35,099


7

---



Historically,
the Company has experienced substantially all of its losses on loans sold during the first three years following the sale. The reserve for lossesloans sold as
of March 31, 2005 and 2004 primarily relate to loan sales, which approximated $13.4 billion during the period of April 1, 2002
through March 31, 2005 and $12.5 billion during the period April 1, 2001 through March 31, 2004, respectively.

(3) Mortgage Loans Held for Investment and Allowance for Loan Losses

The Company originates fixed-rate and adjustable-rate mortgage loans that have a contractual maturity of up to 30 years. These mortgage loans are initially
recorded at cost including any premium or discount. These mortgage loans are financed with warehouse debt until they are pledged as collateral for securitization financing. The Company is exposed to
risk of loss from its mortgage loan portfolio and establishes an allowance for loan losses taking into account a variety of criteria, including the contractual delinquency status, market delinquency
roll rates and market historical loss severities. The adequacy of this allowance for loan loss is reviewed on a quarterly basis and adjusted, as necessary, based on this review.

The
following is a detail of the mortgage loans held for investment, net as of March 31, 2005 and December 31, 2004 (in thousands):

March 31,
2005

December 31,
2004Mortgage loans held for investmentsecuritized

$
4,539,133

4,156,790Mortgage loans held for investmentwarehouse financed


552,197

578,273Net deferred origination fees and costs


40,959

39,693Mortgage loans held for investment


5,132,289

4,774,756Allowance for loan lossesloans held for investment


(26,379
)
(22,648
)Mortgage loans held for investment, net

$
5,105,910

4,752,108


The
allowance for loan lossesloans held for investment is summarized as follows for the three months ended March 31, 2004 and 2005 (in thousands):

Balance at December 31, 2003

$
2,078Provision


2,179Charge-offs


Recoveries


Balance at March 31, 2004

$
4,257Balance at December 31, 2004

$
22,648Provision


4,494Charge-offs


(827
)Recoveries


64Balance at March 31, 2005

$
26,379


Mortgage
loans held for investment, which were on non-accrual status for interest income recognition due to delinquencies greater than 90 days, were $61.7 million and
$40.6 million as of March 31, 2005 and December 31, 2004, respectively.

8

---



(4)   Warehouse Financing, Loans Held for Sale and Loans Held for Investment

At
March 31, 2005 and December 31, 2004, the Company had a total of $1.9 billion of warehouse lines of credit and repurchase facilities with six financial entities.
Committed facilities comprised $1.85 billion of the total funds available, with uncommitted facilities totaling $50.0 million. The facilities are accounted for as short-term liabilities,
secured by mortgage loans held for investment to be securitized, mortgage loans held for sale, the related investor commitments to purchase those loans held for sale, and all proceeds thereof.

Warehouse
lines of credit and repurchase facilities consist of the following at March 31, 2005 and December 31, 2004 (dollars in millions):

|Agreements as of March 31, 2005             |       | Amount
Outstanding as of
|------------------------------------------- | ----- | ------------------------
|
|Countrywide Warehouse Lending               |       | $                       
|Credit Suisse First Boston Mortgage Capital |       |                         
|Guaranty Bank Warehouse Facility            |       |                         
|Guaranty Bank Purchase Facility             |       |                         
|JP Morgan Chase Bank                        |       |                         
|Lehman Brothers Bank                        |       |                         
|Merrill Lynch Bank USA                      |       |                         
|                                            |       |                         
|                                            | Total |                         
|                                            |       |                         

The
interest rates are based on spreads to one month or overnight LIBOR, and are generally reset daily or weekly. The Company also pays facility fees based on the commitment amount and
non-use fees. A summary of coupon interest expense and facility fees, included in total interest expense in the consolidated statements of operations, and the weighted average cost of funds of the
warehouse lines of credit and repurchase facilities for the three months ended March 31, 2005 and 2004 is as follows
(in thousands):

Three Months Ended March 31,2005

2004Amount

Weighted
Average
Cost

Amount

Weighted
Average
CostCoupon interest expense.

$
5,483

3.3
%
$
3,718

1.9
%Facilities fees


833

0.5
%

919

0.5
%Total

$
6,316

3.8
%
$
4,637

2.4
%


The
warehouse lines and repurchase facilities generally have a term of 364 days or less. Management expects to renew these lines of credit prior to their respective maturity
dates. The Countrywide Warehouse Lending facility has been extended to May 31, 2005. The JP Morgan Chase Bank facility has been renewed until April 2006 and the maximum committed amount
available under the facility has been reduced to $150 million. The credit facilities are secured by substantially all of our unsecuritized mortgage loans and contain customary financial and
operating covenants that require us to maintain specified levels of liquidity and net worth, restrict indebtedness and investments and require compliance with applicable laws. The Company was in
compliance with all of these covenants at March 31, 2005 and December 31, 2004, respectively.

9

---



(5) Securitization Financing

During the three months ended March 31, 2005, the Company issued $0.7 billion of additional mortgage-backed bonds through securitization trusts to
finance the Company's portfolio of loans held for investment. Interest rates on these bonds reset monthly and are indexed to one-month LIBOR. The bonds pay interest monthly based upon a spread over
LIBOR. The estimated average life of the bonds is approximately 23 months, and is based on assumptions made by management. The actual period from inception to maturity may differ from
expectations. The bonds are repaid from the cash flows received from the mortgage loans pledged to the trust.

The
following is a summary of the securitization series issued during the three months ended March 31, 2005 (dollars in millions):

FMIT
2005-1Bonds issued

$
729Loans pledged

$
750Deferred bond issuance costs

$
2.7Financing costsLIBOR plus


0.12-2.00%


The
average securitization financing outstanding was $4.2 billion and $2.3 billion for the three months ended March 31, 2005 and the fiscal year ended
December 31, 2004, respectively. The unamortized bond issuance costs at March 31, 2005 and December 31, 2004 were $13.1 million and $12.5 million, respectively.

A
summary of interest expense, amortization of deferred issuance costs and original issue discount, and the weighted average cost of funds of the securitization financing for the three
months ended March 31, 2005 and 2004 is as follows (in thousands):

Three Months Ended March 31,2005

2004Amount

Weighted
Average
Cost

Amount

Weighted
Average
CostCoupon interest expense

$
31,644

3.0
%
$
3,464

1.6
%Amortization of deferred costs


1,998

0.2
%

366

0.2
%Amortization of bond discount


63

0.0
%

108

0.1
%Total interest expensesecuritization financing

$
33,705

3.2
%
$
3,938

1.9
%


10

---



The
following is a summary of the outstanding securitization bond financing by series as of March 31, 2005 and December 31, 2004 (in thousands):

March 31,
2005

December 31,
2004FMIT Series 2005-1

$
722,798

FMIT Series 2004-5


830,875

861,403FMIT Series 2004-4


770,988

816,527FMIT Series 2004-3


812,712

879,659FMIT Series 2004-2


595,142

692,854FMIT Series 2004-1


410,980

484,025FMIC Series 2003-1


279,406

316,8174,422,901

4,051,285Unamortized bond discount


(436
)
(499
)Total securitization financing

$
4,422,465

4,050,786


The
current carrying amount of the mortgage loans pledged to the securitization trusts was $4.5 billion and $4.2 billion as of March 31, 2005 and December 31,
2004, respectively.

(6) Segment Information

The information presented below with respect to the Company's reportable segments is consistent with the content of the business segment data provided to the
Company's management. This segment data uses a combination of business lines and channels to assess consolidated results. The Company has six reportable segments, which include four production
segments, Non-Conforming Wholesale, Non-Conforming Retail, Conforming Wholesale, Conforming Retail, and two operating segments which include Investment Portfolio, and Corporate.

The
Company originates loans through two channels: a non-conforming channel and a conforming channel, each of which operates both wholesale and retail divisions. The Investment Portfolio
segment primarily includes the net interest income earned by the loans held for investment. In addition, the Company has a Corporate segment that includes the timing and other differences between
actual revenues and costs and amounts allocated to the production segments. The Corporate segment also includes the effects of the deferral and capitalization of net origination costs as required by
FASB Statement No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." Financial information by segment is evaluated regularly by management and used in decision-making relating to the allocation of resources and the assessment of company
performance. The Company manages the business on a pre-tax basis and therefore all income tax expense or benefit is allocated to the Corporate segment. For the purposes of segment information provided
in the tables below, certain fees, origination costs, and other expenses recorded as a component of gains on sale of mortgage loans, net, have been reflected in total revenues or total expenses
consistent with intercompany allocations reported to the Company's management. Also, gain on sale revenue is recognized at the time of funding by the production segments as if all loans will be sold,
and adjusted in the corporate segment to reflect the actual gain on sale recognizable for GAAP revenue reporting on the loans that are sold. In addition, net interest income is recognized on
origination volume by the production segments and adjusted in the Corporate segment for the actual net interest income earned. The Corporate segment includes reconciling amounts necessary for the
segment totals to agree to the consolidated financial statements.

11

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The
assets of the Company that are specifically identified to a segment include mortgage loans held for sale and investment, net, trustee receivable, derivative assets, net and furniture
and equipment, net. All other assets are attributed to the Corporate segment. Total assets by segment at March 31, 2005 and December 31, 2004 are summarized as follows (in thousands):

March 31,
2005

December 31,
2004Non-Conformingwholesale

$
113,101

228,653Non-Conformingretail


26,363

27,014Conformingwholesale


103,965

77,691Conformingretail


37,975

27,104Investment Portfolio


5,246,058

4,863,544Corporate


114,366

139,711Total

$
5,641,828

5,363,717


Operating
results by business segment for the three months ending March 31, 2005 are as follows (in thousands):

|                                                    |                  | Non-Conforming                    |        | Conforming |        |     |        |       |       |     |       
|--------------------------------------------------- | ---------------- | --------------------------------- | ------ | ---------- | ------ | --- | ------ | ----- | ----- | --- | ------
|
|
|Revenues:                                           |                  |                                   |        |            |        |     |        |       |       |     |       
|                                                    | Interest income  |                                   | $      | 6,018      |        | 809 |        | 1,077 |       | 348 |       
|                                                    | Interest expense |                                   |        | 3,075      |        | 389 |        | 865   |       | 254 |       
|                                                    |                  |                                   |        |            |        |     |        |       |       |     |       
|                                                    |                  | Net interest income               |        |            | 2,943  |     | 420    |       | 212   |     | 94    
|Provision for loan lossesloans held for investment |                  |                                   |       |            |       |     |       |       |      |     | (4,494
|Gains on sales of mortgage loans, net               |                  |                                   | 21,983 |            | 6,380  |     | 1,401  |       | 1,916 |     |      
|Other income (expense)portfolio derivatives        |                  |                                   |       |            |       |     |       |       |      |     | 20,342
|Fee and other income                                |                  |                                   |       |            | 187    |     |       |       | 355   |     | (201  
|                                                    |                  |                                   |        |            |        |     |        |       |       |     |       
|                                                    |                  | Total revenues                    |        |            | 24,926 |     | 6,987  |       | 1,613 |     | 2,365 
|                                                    |                  | Total expenses                    |        |            | 21,149 |     | 8,421  |       | 2,302 |     | 3,349 
|                                                    |                  |                                   |        |            |        |     |        |       |       |     |       
|                                                    |                  | Income (loss) before income taxes |        |            | 3,777  |     | (1,434 | )     | (689  | )   | (984  
|Provision for income tax (expense) benefit          |                  |                                   | N/A    |            | N/A    |     | N/A    |       | N/A   |     | N/A   
|                                                    |                  |                                   |        |            |        |     |        |       |       |     |       
|                                                    |                  | Net income (loss)                 |        | $          | 3,777  |     | (1,434 | )     | (689  | )   | (984  
|                                                    |                  |                                   |        |            |        |     |        |       |       |     |       

12

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Operating
results by business segment for the three months ending March 31, 2004 are as follows (in thousands):

|                                                    |                  | Non-Conforming                    |        | Conforming |        |     |        |     |       |     |       
|--------------------------------------------------- | ---------------- | --------------------------------- | ------ | ---------- | ------ | --- | ------ | --- | ----- | --- | ------
|
|
|Revenues:                                           |                  |                                   |        |            |        |     |        |     |       |     |       
|                                                    | Interest income  |                                   | $      | 4,431      |        | 714 |        | 881 |       | 426 |       
|                                                    | Interest expense |                                   |        | 877        |        | 136 |        | 272 |       | 124 |       
|                                                    |                  |                                   |        |            |        |     |        |     |       |     |       
|                                                    |                  | Net interest income               |        |            | 3,554  |     | 578    |     | 609   |     | 302   
|Provision for loan lossesloans held for investment |                  |                                   |       |            |       |     |       |     |      |     | (2,179
|Gains on sales of mortgage loans, net               |                  |                                   | 28,603 |            | 9,870  |     | 1,403  |     | 3,171 |     |      
|Other income (expense)portfolio derivatives        |                  |                                   |       |            |       |     |       |     |      |     | (9,832
|Fee and other income                                |                  |                                   |       |            | 178    |     |       |     | 447   |     |      
|                                                    |                  |                                   |        |            |        |     |        |     |       |     |       
|                                                    |                  | Total revenues                    |        |            | 32,157 |     | 10,626 |     | 2,012 |     | 3,920 
|                                                    |                  | Total expenses                    |        |            | 23,982 |     | 10,028 |     | 2,551 |     | 3,596 
|                                                    |                  |                                   |        |            |        |     |        |     |       |     |       
|                                                    |                  | Income (loss) before income taxes |        |            | 8,175  |     | 598    |     | (539  | )   | 324   
|Provision for income tax (expense) benefit          |                  |                                   | N/A    |            | N/A    |     | N/A    |     | N/A   |     | N/A   
|                                                    |                  |                                   |        |            |        |     |        |     |       |     |       
|                                                    |                  | Net income (loss)                 |        | $          | 8,175  |     | 598    |     | (539  | )   | 324   
|                                                    |                  |                                   |        |            |        |     |        |     |       |     |       

(7) Earnings Per Share

Information relating to the calculations of earnings per share (EPS) of common stock for the three months ended March 31, 2005 and 2004 is summarized as
follows (in thousands, except per share data):

Three Months Ended
March 31,2005

2004Basic earnings (loss) per share:Net income (loss)

$
42,104

(3,771
)Weighted average shares outstanding


48,461,987

48,325,860Earnings (loss) per share

$
0.87

(0.08
)Diluted earnings (loss) per share:Net income (loss)

$
42,104

(3,771
)Weighted average shares outstanding


48,461,987

48,325,860Dilutive effect of options and restricted stock


57,531

Weighted average shares outstanding, diluted


48,519,518

48,325,860Diluted earnings (loss) per share

$
0.87

(0.08
)


Effects
of potentially dilutive securities are presented only in periods in which they are dilutive. For the three months ended March 31, 2005, 46,000 stock options, each at a
strike price of $19.25, were excluded from the calculation of diluted earnings per share. These stock options would have an antidilutive effect on earnings per share. For the three months ended
March 31, 2004, all outstanding stock options and restricted stock were excluded from the calculation of diluted earnings per share.

13

---



(8) Commitments and Contingencies



At March 31, 2005 and December 31, 2004, the Company had origination commitments outstanding to fund approximately $542 million and
$422 million in mortgage loans, respectively. Fixed rate and hybrid ARM mortgages which are fixed for the initial two to three year term of the loan comprised 95.5% and 96.9%, respectively, of
the outstanding origination commitments. The Company had forward delivery commitments to sell approximately $0.9 billion and $0.4 billion of loans at March 31, 2005 and
December 31, 2004, respectively, of which $78.2 million and $63.1 million, respectively, were mandatory sales of mortgage backed securities and investor whole loan trades. At
March 31, 2005 and December 31, 2004, the Company had a commitment to sell $110 million and $40 million, respectively, of treasury note forward contracts, used to
economically hedge the interest rate risk of its non-conforming loans.



In 2004, former shareholders of the Company whose shares were redeemed for approximately $188.1 million following the closing of the private placement
offering in November 2003, filed an action alleging that they are entitled to an additional post-closing redemption price payment of approximately $19.0 million. Presently,
the ultimate outcome of this claim and the amount of liability, if any, that may result is not determinable, and no amounts have been accrued in the Company's financial statements with respect to this
claim. Regardless of the outcome, in the opinion of management, the final resolution of this dispute will not have a material effect on the Company's business, financial condition or results of
operations. If the Company is unsuccessful in defending this matter, the Company could be required to make a cash payment of approximately $19.0 million to the former shareholders. Any such
payment would be accounted for as an increase in the redemption price of the shares, and accordingly, will be recorded as a reduction of paid in capital in the period in which the dispute is resolved,
and will have no impact on the Company's statements of operations. In addition, the Company could be required to pay interest or third-party costs associated with the litigation, which, if payable as
part of a settlement, will be recorded to current period earnings.

(9) Subsequent Event

On April 21, 2005, the Company agreed to sell approximately $550 million of loans that were classified as held for investment on March 31,
2005. These loans did not meet the Company's new target return requirement for loans that would be retained for the investment portfolio and, accordingly, were transferred and classified as held for
sale in April 2005. These loans were included as part of a $1.0 billion pool that also included loans held for sale at March 31, 2005 and additional loans originated in
April 2005. The Company has agreed to sell this pool at a price of 103.50% of par. The sale is scheduled to settle in the second half of May 2005.

14

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

The following discussion and analysis of our results of operations, financial condition and liquidity and capital resources should be read in conjunction with our
unaudited consolidated financial statements and related notes contained in this Quarterly Report on Form 10-Q, as well as the audited financial statements and related notes for the fiscal year
ended December 31, 2004 and "Management's Discussion and Analysis of Financial Condition and Results of Operations," contained in the our Annual Report on Form 10-K, as amended, filed
with the Securities and Exchange Commission (SEC) on March 24, 2005.

Safe Harbor for Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Any written or oral statement, made by or on our
behalf, using words such as "believes," "expects," "intends," "estimates," "projects," "predicts," "assumes," "anticipates," "plans," "seeks," and comparable terms, is a forward-looking statement.
Forward-looking statements are not statements of historical fact, but rather are based on our views and assumptions regarding future events and performance, taking into account all information
currently available to us. Because we have a limited operating history, many statements relating to us and our business, including statements relating to our competitive strengths and business
strategies, may be forward-looking statements.

All
forward-looking statements (none of which is intended as a guarantee of performance) are subject to certain risks and uncertainties, known and unknown, that could cause our actual
results to differ materially from the expected results expressed by the forward-looking statements. We believe that the factors that may affect future performance and the accuracy of forward-looking
statements contained in this Form 10-Q include, but are not limited to, the following:



These
factors are illustrative, but by no means exhaustive. All forward-looking statements should be read in conjunction with the other cautionary statements that are included in this Quarterly Report
on Form 10-Q. You are cautioned not to place undue reliance on the forward-looking statements contained in this Quarterly Report on Form 10-Q, which speak only as of the date it is filed
with the

15

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SEC.
We undertake no obligation to update publicly any forward-looking statement, whether as a result of new information, future events or otherwise.

Executive Overview

We are a mortgage REIT that invests in non-conforming loans originated by our wholly owned subsidiary, Fieldstone Mortgage Company (Fieldstone Mortgage), which
are financed with mortgage-backed securities. Fieldstone Mortgage originates loans through both wholesale and retail origination channels. Through Fieldstone Mortgage, we originate, service and sell
both non-conforming and conforming single family residential mortgage loans.

Currently,
our primary sources of income are the net interest income on our loans, both held for investment and held for sale, and the gains on sales of mortgage loans held for sale sold
servicing-released. Our current strategy is to retain a certain portion of our non-conforming loans in our REIT investment portfolio, to finance our portfolio of loans with mortgage-backed securities
collateralized by those loans, and to continue to sell our conforming loans and the remainder of our non-conforming loans. The non-conforming loans that we retain meet certain cash flow, credit and
return requirements.

Our
portfolio of loans held for investment increased to $5.1 billion at March 31, 2005, a 7.4% increase from December 31, 2004. At March 31, 2005, our
financing debt on the loans held in our portfolio was 8.5 times our equity. Based on the current size of our portfolio and management's estimates and assumptions regarding expected future origination
levels and market factors, we have increased our target debt to equity ratio on our portfolio from 11 times our equity to 13 times our equity. We intend to continue to grow our portfolio by retaining
the majority of our non-conforming fundings; however, the percentage of loans we retain for the portfolio in any given period is likely to vary based upon the size of the portfolio we hold,
prepayments in the prior periods and the availability of loans which meet our cash flow, credit and return criteria.

During
the first quarter of 2005, our net income was $42.1 million. Our earnings in the first quarter of 2005 benefited from increased net interest income on our growing portfolio
of loans held for investment, an increase in the non-cash mark to market gain on our interest rate swap and cap agreements and lower total expenses due to decreased origination activity. These
benefits were offset
partially by lower sales volumes and decreased sale margins due, in part, to a rising interest rate environment and higher sales of second lien mortgages, which generally provide lower sale premiums.

We
use interest rate swaps and caps to economically hedge the financing costs on our two and three year hybrid mortgage loans held for investment. Because these derivatives are not
designated as cash flow hedges under Statement of Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
changes in the fair market value of the swaps and caps are recorded to current period earnings and reported in our consolidated statement of operations in "Other income (expense)portfolio
derivatives." We cannot predict the magnitude by which these changes in the fair market value of our swaps and cap could cause our total revenue and net income to increase or decrease significantly
during periods of interest rate volatility.

Key Components of Financial Results of Operations

Revenues

The principle factors that affect our revenues are interest rate volatility, origination volumes, prepayment rates of our mortgage loans held for investment,
credit losses on our investment portfolio and sale margins on our loans held for sale. Rising interest rates may result in an increase in the mortgage rates we charge on our loan originations, but
also will increase our costs of borrowing to finance the loans. Rising interest rates may lead to decreases in loan prepayments of our hybrid adjustable rate mortgages during the initial loan period
in which our borrowers pay a fixed interest

16

---



rate,
generally during the first two years of the loan, but increase prepayments at or near the reset date of the loan, when the coupon resets to a margin over six-month LIBOR. In addition, rising
interest rates will generally increase the fair value on the swaps and caps economically hedging our portfolio financing costs.

Expenses

The principle factors which lead to changes in our expenses are funding volumes, the number of origination offices we operate, our staffing required to support
our origination business, the balance of
our investment portfolio incurring third-party servicing fee expenses and the corporate overhead required to support a publicly traded company. As loan volumes increase, we generally would expect
salaries, benefits and variable operating expenses, net of deferred direct origination costs, which include commissions, to increase. We also expect expenses to increase in 2005 due to costs related
to enhanced portfolio analytic tools, higher audit and legal fees, and increased amortization expense as our new loan origination software becomes fully operational.

Critical Accounting Policies

We consider the policies discussed below to be critical to an understanding of our financial statements because their application places the most significant
demands on the judgment of our management, with financial reporting results relying on estimates and assumptions about the effects of matters that are inherently uncertain. Specific risks for these
critical accounting policies are described in the following paragraphs. While we believe that the estimates and assumptions management utilizes in preparing our financial statements are reasonable,
such estimates and assumptions routinely require periodic adjustment. Actual results could differ from our estimates, and these differences could be significant.



We must comply with the provisions of Statement of Financial Accounting Standards No. 140 "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" (Statement No. 140) and Financial Interpretation Number 46R, "Consolidation of Variable
Interest Entities," (FIN 46R) relating to each securitization. Depending on the structure of the securitization, it will either be treated as a sale or secured financing for
financial statement purposes. We account for our securitizations of mortgage loans as secured financing transactions, and accordingly, we hold the securitized mortgage loans for investment. The loans
are sold to a trust which is a wholly-owned special purpose entity; however, the securitizations do not meet the qualifying special purpose entity criteria of Statement No. 140.



Because we maintain our loans held for investment on the statements of condition for the life of the loans, we maintain an allowance for loan losses, which is
based on our estimates of the losses inherent in the portfolio. This is a critical accounting policy because of the subjective nature of the estimates required and potential for imprecision. Two
critical assumptions used in estimating the loss reserve are an assumed rate at which the loans go into foreclosure subsequent to initial default and an assumed loss severity rate, which represents
the expected rate of realized loss upon disposition of the properties that have been foreclosed. Because we have limited historical loss data on our past originations, all of which were sold
servicing-released, we currently utilize industry loss assumptions for loans similar in credit, loan size and product type. These assumptions result in an estimate that approximately 24% of loans that
are delinquent 30+ days ultimately will default and experience an average principal balance loss of 35%. These underlying assumptions and estimates are continually evaluated and updated to reflect
management's current assessment of the value of the underlying

17

---



collateral
and other relevant factors impacting portfolio credit quality and inherent losses. Provision for losses is charged to our consolidated statements of operations as a reduction in net
interest income. Losses incurred on mortgage loans held for investment are charged to the allowance at the time of liquidation or at the time the loan is transferred to real estate owned.

We
define the beginning of the loss emergence period for a mortgage loan to be the occurrence of a contractual delinquency greater than 30 days. On a monthly basis, loans meeting
this criterion are included in a determination of the allowance for loan losses, which utilizes industry roll rate experience to assess the likelihood and severity of portfolio losses. We do not
assess loans individually for impairment due to the homogeneous nature of the loans, which are collectively evaluated for impairment. If actual results differ from our estimates, we may be required to
adjust our provision accordingly. Likewise, the use of different estimates or assumptions could produce different provisions for loan losses.



Interest income on our mortgage loan portfolio is a combination of the accrual of interest based on the outstanding balance and contractual terms of the mortgage
loans, adjusted by the amortization of net deferred origination costs related to originations in our investment portfolio, in accordance with Statement of Financial Accounting Standards No. 91,
"Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases" (Statement
No. 91). Our net deferred origination costs consist primarily of premiums, discounts and other net capitalized fees or costs associated with originating our mortgage loans. For our loans held
for investment, these
net deferred costs are amortized as adjustments to interest income over the estimated lives of the loans using the interest method. Because we hold a large number of similar loans for which
prepayments are probable and for which we can reasonably estimate the timing of such prepayments, we currently factor in prepayment estimates in determining periodic amortization based on a model that
considers actual prepayment experience to-date as well as forecasted prepayments based on the contractual interest rate on the loans, loan age, loan type, prepayment fee coverage and a variety of
other factors. Mortgage prepayments are also affected by the terms and credit grades of the loans, conditions in the housing and financial markets and general economic conditions. Prepayment
assumptions are reviewed regularly to ensure that actual company experience as well as industry data are supportive of prepayment assumptions used in our model. Updates that are required to be made to
these estimates are applied as if the revised estimates had been in place since the origination of the loans and result in adjustments to the current period amortization recorded to interest income.

Interest
expense on our warehouse and securitization financing is a combination of the accrual of interest based on the contractual terms of the financing arrangements and the
amortization of bond original issue discounts and issuance costs. The amortization of bond original issue discounts and issuance costs also considers estimated prepayments and is calculated using the
interest method. The principal balance of the securitization financing is repaid as the related collateral principal balance amortizes, either through receipt of monthly mortgage payments or any loan
prepayment. The deferred issuance costs and original issue discounts are amortized through interest expense over the estimated life of the outstanding balance of the securitization financing,
utilizing the prepayment assumptions referenced above to estimate the average life of the related debt. Updates that are required to be made to these estimates are applied as if the revised estimates
had been in place since the issuance of the related debt and result in adjustments to the period amortization recorded to interest expense.

We
have sought to minimize the effects caused by faster than anticipated prepayment rates by originating mortgage loans with prepayment fees. These fees typically expire two years after
origination of a loan. As of March 31, 2005 and December 31, 2004, approximately 87% of our mortgage loan portfolio had active prepayment fee features. We anticipate that prepayment
rates on a significant portion of our adjustable rate mortgage portfolio will increase as these predominately adjustable rate

18

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loans
reach their initial adjustments during 2005 and 2006 due to the high concentration of two to three year hybrid loans we originated during 2003 and 2004. The constant prepayment rate, or CPR,
currently used to project cash flows is based upon historical industry speeds for similar loan product and actual history to date. The forward-looking expected CPR used in our current assumptions
averages 28 CPR during the first 12 months, averages 46 CPR through month 24 and declines to an average 42 CPR thereafter. If prepayment speeds increase, our net interest margin would decrease
due to the additional yield adjustment amortization, which may be partially offset by an increase in prepayment fee income.



Hedging is a critical aspect of our business because of its interest rate sensitivity and the difficulty in estimating which interest rate locks will convert to
closed loans as interest rates fluctuate. We use various financial instruments to hedge our exposure to changes in interest rates. The financial instruments typically include mandatory delivery
forward sale contracts of mortgage-backed securities, mandatory and best efforts whole-loan sales agreements and treasury note forward sales contracts. These financial instruments are
intended to mitigate the interest rate risk inherent in providing interest rate lock commitments to prospective borrowers to finance one-to-four family homes and to hedge the value of our loans held
for sale prior to entering fixed price sale contracts.

The
interest rate locks for conforming loans and the mandatory forward sales, which are typically used to hedge the interest rate risk associated with these locks, are undesignated
derivatives and are marked to market through earnings. For interest rate lock commitments related to conforming loans, mark to market adjustments are recorded from inception of the interest rate lock
through the date the underlying loan funds. The funded loans have not been designated by us as a qualifying hedged asset in accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (Statement 133). We record the funded loans on the consolidated statements of
condition at the lower of cost or market value. The mandatory forward sales, which generally serve as an effective economic hedge from the inception of the interest rate lock through the time of the
sale of the loans, remain subject to mark to market adjustments beyond the time the loan funds, and our reported earnings may reflect some non-economic volatility as a result of this differing
treatment.

The
interest rate lock commitments associated with non-conforming loans held for sale and the treasury note forward sales contracts typically used to hedge the interest rate risk
associated with these locks are also derivatives and are marked to market through earnings. Similar to the conforming loans, the funded non-conforming loans have not been designated as a qualifying
hedged asset in accordance with Statement 133, and, accordingly, we record them at the lower of cost or market value on the consolidated statements of condition. The treasury note forward sales
contracts, which do serve as an effective economic hedge prior to the sale of some of our non-conforming loans, remain subject to mark to market adjustments beyond the time the loans fund, and our
reported earnings may reflect some non-economic volatility as a result of this differing treatment.

We
hedge the effect of interest rate changes on our cash flows relative to our loans held for investment as a result of changes in the benchmark interest rate, in this case, LIBOR, on
which our interest payments on warehouse financing and securitization financing are based. These derivatives are not classified as cash flow hedges under Statement 133. We enter into interest rate
swap agreements to hedge the financing on mortgage loans held for investment. The change in fair value of the derivative during the hedge period is reported as a component of "Other income
(expense)portfolio derivatives." The periodic net cash settlements and any gain or loss on terminated swaps are also reported as a component of "Other income
(expense)portfolio derivatives." We also entered into an interest rate cap agreement to hedge interest rate changes relative to our first securitization in the fourth quarter of 2003. The
cap was not designated as a cash flow hedge instrument, and as such,

19

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realized
and unrealized changes in its fair value are recognized in current period earnings during the period in which the changes occur.

Changes
in interest rates during a reporting period will affect the mark to market valuations on our undesignated derivatives. Increases in short-term interest rates will result in a
non-cash credit being recognized for income reporting, while decreases in short-term rates will result in a non-cash charge to earnings.



We adopted the fair value method of accounting for stock options and shares of restricted stock as prescribed by Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure," which amends Statement of Financial Standards
No. 123, "Accounting for Stock-Based Compensation" (Statement No. 123). Under this method, compensation cost is measured at the grant date
based on the fair value of the award and is recognized as expense on a straight-line basis over the award's vesting period. The fair value of awards of restricted stock is determined at the date of
grant based on the market price of our common stock on that date. For both the stock options and restricted stock, the amount of compensation cost is adjusted for estimated annual forfeitures. The
fair value of the stock options is determined using the Black Scholes option pricing model. Due to the subjective nature and estimates required under Statement No. 123, we consider this a
critical accounting policy.



We maintain a reserve for our representation and warranty liabilities related to the sale of loans and for our contractual obligation to rebate a portion of any
premium paid by a purchaser when a borrower prepays a sold loan within an agreed period. The representations and warranties generally relate to the accuracy and completeness of information related to
the loans sold and to the collectibility of the initial payments following the sale of the loan. The reserve, which is recorded as a liability on our consolidated statements of condition, is
established when loans are sold and is calculated as the fair value of losses estimated to occur over the life of the loan. The reserve for losses is established through a provision for losses, which
is reflected as a reduction of the gain on the loans sold at the time of sale. We use an internally developed analysis of incurred historical losses, stratified by type of loss, by type of loan and by
year of sale to forecast future losses on current sales. This analysis takes into consideration historical information regarding frequency and severity of losses, organized by loan product and year of
sale. We estimate losses due to premium recaptures on early loan prepayments by reviewing loan product and rate, borrower prepayment fee, if any, and estimates of future interest rate volatility.

Results of Operations

Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004

Net Income

Net income increased $45.9 million, to $42.1 million, for the three months ended March 31, 2005, from $(3.8) million for the three months
ended March 31, 2004. The increase was primarily the result of increased net interest income on our loans held for investment reflecting the growth in our portfolio balance, and an increase in
the fair value of our interest rate swap and cap agreements compared to a decrease in cap and swap fair value in the first quarter of 2004. Our average balance of loans held for investment was
$4.9 billion for the three months ended March 31, 2005 as compared to $1.7 billion for the three months ended March 31, 2004. The increase in the ending valuation of the
swaps and cap resulted from an increasing interest rate environment in 2005. Our interest rate swaps and caps are not designated as cash flow hedges and, therefore, the change in the periodic mark to
market of the future

20

---



value
of the interest rate swaps and caps is reported in current period earnings. These increases were offset by lower gains on sales of mortgage loans, net, in 2005 as compared to 2004, because we
sold fewer loans and earned lower sale margins in the first quarter of 2005 as compared to the same period in 2004.

Revenues



The following are the components of net interest income after provision for loan losses for the three months ended March 31, 2005 and 2004 (in thousands):

|                                                    |                                                         | Three Months Ended
March 31,                        |      
|--------------------------------------------------- | ------------------------------------------------------- | --------------------------------------------------- | -----
|
|Interest income:                                    |                                                         |                                                     |      
|                                                    | Coupon interest income on loans held for investment     |                                                     | $    
|                                                    | Coupon interest income on loans held for sale           |                                                     |      
|                                                    | Amortization of deferred origination costs              |                                                     |      
|                                                    | Prepayment fees                                         |                                                     |      
|                                                    |                                                         |                                                     |      
|                                                    | Total interest income                                   |                                                     |      
|                                                    |                                                         |                                                     |      
|Interest expense:                                   |                                                         |                                                     |      
|                                                    | Financing interest expense on loans held for investment |                                                     |      
|                                                    | Financing interest expense on loans held for sale       |                                                     |      
|                                                    | Amortization of deferred bond issuance costs            |                                                     |      
|                                                    |                                                         |                                                     |      
|                                                    | Total interest expense                                  |                                                     |      
|                                                    |                                                         |                                                     |      
|                                                    |                                                         | Net interest income                                 |      
|Provision for loan lossesloans held for investment |                                                         |                                                     | 4,494
|                                                    |                                                         |                                                     |      
|                                                    |                                                         | Net interest income after provision for loan losses |      
|                                                    |                                                         |                                                     |      

21

---



The following table presents the average balances for our loans held for investment and loans held for sale and our warehouse and securitization financing, with the corresponding
annualized yields for the three months ended March 31, 2005 and 2004 (in thousands).

|                                                                                                               |                                                                        | Three Months Ended
March 31,                       |    
|-------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | -------------------------------------------------- | ---
|
|Average balances:                                                                                              |                                                                        |                                                    |    
|                                                                                                               | Mortgage loans held for investment                                     |                                                    | $  
|                                                                                                               | Securitization financingloans held for investment                     |                                                    |    
|                                                                                                               | Warehouse financingloans held for investment                          |                                                    |    
|Yield analysisloans held for investment:                                                                      |                                                                        |                                                    |    
|                                                                                                               | Coupon interest income on loans held for investment                    |                                                    |    
|                                                                                                               | Amortization of deferred origination costs                             |                                                    |    
|                                                                                                               | Prepayment fees                                                        |                                                    |    
|                                                                                                               |                                                                        |                                                    |    
|                                                                                                               |                                                                        | Yield on loans held for investment(1)              |    
|                                                                                                               | Interest expense securitization financing                              |                                                    |    
|                                                                                                               | Interest expense warehouse financing                                   |                                                    |    
|                                                                                                               | Amortizationdeferred bond issuance costs and issue discount           |                                                    |    
|                                                                                                               |                                                                        | Cost of financing for loans held for investment(2) |    
|                                                                                                               | Net yield on loans held for investment(3)                              |                                                    |    
|                                                                                                               | Provision for loan losses                                              |                                                    |    
|                                                                                                               |                                                                        |                                                    |    
|                                                                                                               | Net yield on loans held for investment after provision for loan losses |                                                    |    
|Average balances:                                                                                              |                                                                        |                                                    |    
|                                                                                                               | Mortgage loans held for sale                                           |                                                    | $  
|                                                                                                               | Warehouse financingloans held for sale                                |                                                    |    
|Yield analysisloans held for sale:                                                                            |                                                                        |                                                    |    
|                                                                                                               | Yield on loans held for sale(1)                                        |                                                    |    
|                                                                                                               | Cost of financing for loans held for sale(2)                           |                                                    |    
|                                                                                                               | Net yield on loans held for sale(3)                                    |                                                    |    
|Yieldnet interest income on loans held for sale and loans held for investment after provision for loan losses |                                                                        |                                                    | 3.4

---

The
increase in our net interest income after provision for loan losses from the three months ended March 31, 2004 to the three months ended March 31, 2005 was attributable
primarily to the increase in our portfolio of loans held for investment, partially offset by the increased interest costs on the higher securitization debt financing the portfolio, as interest rates
rose throughout 2004 and 2005. We expect net interest income to increase throughout the remainder of 2005 as we continue to grow the portfolio. Prepayment fee income collected in 2005 was
substantially offset by the amortization of deferred origination costs on the loans. We expect prepayment fee income will continue to increase in

22

---



2005,
reflecting the growth and maturation of the portfolio. The decrease in the net yield on loans held for investment after provision for loan losses during the three months ended March 31,
2005 compared to the same period in 2004, reflects the increase in the cost of financing the warehouse and securitization debt due to rising interest rates. Both the net yield on loans held for sale
and loans held for investment in 2004 and 2005 reflect the use of the proceeds from our 2003 equity offering to finance loan fundings during 2004 and 2005. We anticipate that interest expense related
to both warehouse and securitization financing will continue to increase in 2005 as we continue to build our investment portfolio by issuing additional mortgage-backed securities. The provision for
loan losses increased in 2005, consistent with expectations, due to the increase in delinquent loans in our portfolio as the portfolio continues to season.

The
net interest income after provision for loan losses does not include the $0.3 million and $3.6 million of net cash settlements paid in the three months ended
March 31, 2005 and 2004, respectively, under the terms of the swap and cap agreements used to economically hedge the financing costs of our investment portfolio. The regular monthly swap and
cap settlement amounts, plus any cash paid or received at termination of the agreements prior to maturity, are included in the line item "Other income (expense)portfolio derivatives." We
expect that net interest income after provision for loan losses will increase in 2005, reflecting the anticipated growth in our portfolio of loans held for investment, partially offset by margin
decreases as our portfolio financing costs rise due to current as well as continued anticipated increases in the LIBOR interest rate to which they are indexed.



The components of the gains on sale of mortgage loans, net, are illustrated in the following table for the three months ended March 31, 2005 and 2004 (in
millions)*:

Three Months Ended March 31,2005

% of
Sales
Volume

2004

% of
Sales
VolumeGross premiums from whole loan sales

$
18.8

2.4
%
$
27.0

2.9
%Loan fees collected(1)


4.2

0.5
%

6.1

0.6
%Premiums paid(2)


(6.4
)
(0.8
)%

(7.0
)
(0.7
)%Economic hedging gains (losses)


0.8

0.1
%

(1.0
)
(0.1
)%Gross gain on sale


17.4

2.2
%

25.1

2.7
%Provision for lossesloans sold


(2.5
)
(0.3
)%

(4.1
)
(0.5
)%Direct origination costs(3)


(5.2
)
(0.7
)%

(6.8
)
(0.7
)%Gains on sales of mortgage loans, net

$
9.7

1.2
%
$
14.2

1.5
%Loan sales volume

$
802.7



$
941.8


---

The
31.8% decrease in gains on sale of mortgage loans, net, for the three months ended March 31, 2005 compared to the three months ended March 31, 2004 reflects a 14.8%
decrease in sales volume in 2005, reflecting the lower balance of loans held for sale as of December 31, 2004 compared to the balance of loans held for sale as of December 31, 2003.
Lower gains on sale in 2005 also reflects a

23

---



decrease
in the gross gain on sale margin on loans sold in the three months ended March 31, 2005 to 2.2% from 2.7% for the three months ended March 31, 2004, reflecting the generally
lower market sale margins in 2005 compared to 2004 due to rising rates and competition for new loans, and the changing mix of loan products sold. As we continued to accumulate the majority of our
adjustable non-conforming loan product to be held for investment, we sold all of our conforming originations, all of our second lien loans and the majority of our fixed rate product, which
typically earned lower sale premiums. No discounted loan sales occurred in the three months ended March 31, 2005.

Provision
for lossesloans sold as a percent of sales volume decreased in three months ended March 31, 2005 from the three months ended March 31, 2004 levels
because 2005 loan sales were comprised of a higher percentage of conforming loans, which typically incur lower representation and warranty losses than non-conforming loans.



We use interest rate swap and cap agreements to create economic hedges of the variable rate debt financing our portfolio of non-conforming mortgages held for
investment. Changes in the fair value of these agreements, which reflect the potential future cash settlements over the remaining lives of the agreements according to the market's changing projections
of interest rates, are recognized in the line item "Other income (expense)portfolio derivatives" in the consolidated statements of operations. This single line item includes both the
actual cash settlements related to the agreements that occurred during the period and recognition of the non-cash changes in the fair value of the agreements over the period. The cash
settlements include regular monthly payments or receipts under the terms of the swap agreements and cash paid or received to terminate the agreements prior to maturity. The amounts of cash settlements
and non-cash changes in value that were included in "Other income (expense)portfolio derivatives" are as follows for the three months ended March 31, 2005 and 2004
(in thousands):

Three Months Ended
March 31,2005

2004Non-cash changes in fair value

$
20,628

(6,262
)Net cash settlements paid on existing derivatives


(1,295
)
(1,685
)Net cash settlements received (paid) to terminate derivatives
prior to final maturity


1,009

(1,885
)Other income (expense)portfolio derivatives

$
20,342

(9,832
)


Our
portfolio derivatives allow us to stabilize the expected financing costs of our investment portfolio over a future contractual time period. At March 31, 2005 and
December 31, 2004, the notional balance of our interest rate swaps and cap agreements was $4.5 billion and $4.1 billion, respectively.

The
following table summarizes the average notional balance and the future weighted average fixed payment interest rate of our interest rate swaps and cap in effect as of
March 31, 2005, for the years ending December 31, 2005 and 2006 (in thousands):

Year Ended December 31,2005

2006Average
Notional
Balance

Weighted
Average
Pay Rate

Average
Notional
Balance

Weighted
Average
Pay RateInterest rate swaps

$
3,721,343

2.76
%
$
1,858,245

3.26
%Interest rate cap

$
346,559

2.78
%






24

---



Other
income (expense)portfolio derivatives will vary as the market's expectation of future changes to the LIBOR interest rate vary throughout the period. Generally, rising
interest rates will increase the fair value of our derivatives and our net cash settlements on existing derivatives. We cannot predict the net effect of interest rate volatility in future periods to
our other income (expense)portfolio derivatives.

Expenses

The following is a summary of total expenses and the percentage change from the prior period, for the three months ended March 31, 2005 and 2004 (in
thousands):

Three Months Ended
March 31,2005

2004Salaries and employee benefits

$
19,742

21,062Occupancy


1,795

1,497Depreciation and amortization


795

519Servicing fees


2,604

654General and administrative


7,998

6,816Total expenses

$
32,934

30,548Percentage change from prior period


7.8
%
N/A


Total Expenses.The increase in total expenses from the three months ended March 31, 2004 to the three months ended
March 31, 2005 is primarily due to the increased servicing expense attributable to our growing portfolio of loans held for investment and to higher general and administrative expenses. We
expect total expenses to continue to increase in 2005, reflecting increased third-party portfolio servicing fees, legal and accounting expenses related to operating as a public company, and the
amortization and maintenance expenses related to placing a new loan origination software system fully in service.

We
are currently replacing our two separate loan origination software systems with a single, integrated system to support both conforming and non-conforming originations and
fundings. The project involves purchasing, developing, installing, training and supporting the new system. Additionally, we have upgraded "Fieldscore," our pre-approval and credit
gathering engine. The "Fieldscore" upgrade was complete as of December 31, 2004, and we anticipate the origination components will be fully implemented by the end of 2005. We expect
amortization, licensing and maintenance expenses to increase in 2005 as we complete development of the software and place the system fully into service.

Salaries and Employee Benefits.Salaries and employee benefits decreased from the three months ended March 31, 2004 to the three
months ended March 31, 2005 primarily due to a $1.0 million decrease in employee benefit expense. In July 2004, we adopted a self-insurance health plan which has reduced premium
expense approximately $0.2 million monthly. The benefit expense decrease also includes a decrease in 401K employer match expense in the first quarter of 2005 as compared to the same period in
2004, as forfeiture credits reduced contributions in 2005. We expect salaries and employee benefits, net of deferred direct origination costs, to increase throughout the remainder of 2005 primarily
due to the additional personnel required to support a higher level of loan originations, the growth of our REIT portfolio, the legal and finance requirements of operating as a public company, and
additional information technology personnel to support planned enhancements in access and security controls.

Servicing Fees.Servicing fees paid to our third-party servicer of the loans in our portfolio increased for the three months ended
March 31, 2005 compared to three months ended March 31, 2004 due to the growth of the investment portfolio. Currently, all of our loans held for investment are serviced by a

25

---



third-party
servicer effective with the first mortgage payment due after loan funding. We expect servicing fees to increase in 2005 relative to the expected increase in our loans held for investment
portfolio.

General and Administrative Expenses.General and administrative expenses increased in the three months ended March 31, 2005 from
the three months ended March 31, 2004 due to increased costs associated with quality control and due diligence programs, audit, legal and insurance fees related to operation as a public
company, maintenance and equipment costs associated with the development of a new loan origination system and the increased costs associated with higher conforming mortgage loan fundings. We expect
general and administrative expenses to increase in 2005 primarily due to increased legal and professional fees associated with operation as a public company, including costs incurred for the
implementation of Sarbanes-Oxley Act compliance measures, and the increase in amortization, licensing and maintenance expenses as we put into service our new loan origination software system.

Provision for Income Tax (Expense) Benefit.We elected to be taxed as a REIT, effective in the fourth quarter of 2003, and we elected to
treat our loan origination and sale subsidiary, Fieldstone Mortgage, as a taxable REIT subsidiary (TRS). We recognized income tax benefit of $0.9 million for the three months ended
March 31, 2005 related to the $(2.5) million pretax net loss of Fieldstone Mortgage compared to income tax expense of $1.7 million for the three months ended March 31, 2004
related to Fieldstone Mortgage's $4.1 million pretax net income in that period. Fieldstone Mortgage incurred an operating loss in the first quarter of 2005 as a result of the seasonal slowing
of its originations, lower gains on sales of mortgage loans, rising interest rates on financing costs of its loans held for sale, and negative operating margins in its conforming channel.

Consolidated Statements of Condition at March 31, 2005 and December 31, 2004



The following table summarizes the principal balance of our investment portfolio for the three months ended March 31, 2005 and for the year ended
December 31, 2004 (in thousands):

|                                              |                                            | Three Months Ended
March 31,
2005 |           | Year Ended
December 31,
2004 |          
|--------------------------------------------- | ------------------------------------------ | --------------------------------- | --------- | ---------------------------- | ---------
|Beginning principal balance                   |                                            | $                                 | 4,735,063 |                              | 1,319,123
|                                              | Loan fundings                              |                                   |           | 730,798                      |          
|                                              | Payoffs and principal reductions           |                                   |           | (369,889                     | )        
|                                              | Transfers to real estate owned             |                                   |           | (4,642                       | )        
|                                              |                                            |                                   |           |                              |          
|Ending principal balance                      |                                            |                                   | 5,091,330 |                              | 4,735,063
|                                              | Net deferred loan origination (fees)/costs |                                   |           | 40,959                       |          
|                                              |                                            |                                   |           |                              |          
|Ending balance loans held for investment      |                                            |                                   | 5,132,289 |                              | 4,774,756
|                                              | Allowance for loan losses                  |                                   |           | (26,379                      | )        
|                                              |                                            |                                   |           |                              |          
|Ending balance loans held for investment, net |                                            | $                                 | 5,105,910 |                              | 4,752,108
|                                              |                                            |                                   |           |                              |          

Our
investment portfolio increased to $5.1 billion for the three months ended March 31, 2005 and generated $44.2 million of net interest income before provision for
loans losses. During the year ended December 31, 2004, our portfolio of loans held for investment increased to $4.8 billion and generated $137.4 million of net interest income
before provision for loan losses. A provision for loan losses of $4.5 million was recorded in the three months ended March 31, 2005 and $0.8 million of net charge-offs were
incurred, resulting in an allowance for loan losses of $26.4 million as of March 31, 2005. A provision for loan losses of $21.6 million was recorded and $1.0 million of
charge-offs were incurred, resulting in an allowance for loan losses of $22.6 million as of December 31, 2004.

26

---



The
increase in payoffs and principal reductions as our portfolio seasons is consistent with expectations. Because we sold all of the loans we originated prior to the third quarter of
2003, we do not have comprehensive performance data on our loans sold to investors relative to either prepayments or credit losses. We estimate prepayment speeds and credit losses based on historical
industry data for similar loan products and actual history to date. These assumptions for prepayment curves indicate an average loan life of approximately 24 months. There can be no assurance that
this industry data will be reflective of our actual results.



The following table summarizes the allowance for loan loss activity of our investment portfolio for the three months ended March 31, 2005 and the year
ended December 31, 2004 (in thousands):

|                                                             |  | Three Months Ended
March 31,
2005 |           | Year Ended
December 31,
2004 |  
|------------------------------------------------------------ |  | --------------------------------- | --------- | ---------------------------- | -
|Beginning balance allowance for loan losses                  |  | $                                 | 22,648    |                              |  
|Provision                                                    |  |                                   | 4,494     |                              |  
|Charge-offs                                                  |  |                                   | (827      | )                            |  
|Recoveries                                                   |  |                                   | 64        |                              |  
|                                                             |  |                                   |           |                              |  
|Ending balance allowance for loan losses                     |  | $                                 | 26,379    |                              |  
|                                                             |  |                                   |           |                              |  
|Ending principal balance, mortgage loans held for investment |  | $                                 | 5,091,330 |                              | $
|Ending allowance balance as % of ending principal balance    |  |                                   | 0.5       | %                            |  

The
delinquency status of our loans held for investment as of March 31, 2005 and December 31, 2004 was as follows (in thousands):

|                                                                                                                           |       | March 31, 2005 |           | December 31, 2004 |     
|-------------------------------------------------------------------------------------------------------------------------- | ----- | -------------- | --------- | ----------------- | ----
|
|Current                                                                                                                    |       | $              | 4,768,154 |                   | 93.7
|30 days past due                                                                                                           |       |                | 218,712   |                   | 4.3 
|60 days past due                                                                                                           |       |                | 41,156    |                   | 0.8 
|90+ days past due                                                                                                          |       |                | 19,606    |                   | 0.4 
|In process of foreclosure                                                                                                  |       |                | 43,702    |                   | 0.8 
|                                                                                                                           |       |                |           |                   |     
|                                                                                                                           | Total |                | $         | 5,091,330         |     
|                                                                                                                           |       |                |           |                   |     
|Allowance for loan losses as a % of total delinquent loans (30+ days past due and loans in the process of foreclosure)     |       | $              | 323,176   |                   | 8.2 
|Allowance for loan losses as a % of seriously delinquent loans (60+ days past due and loans in the process of foreclosure) |       | $              | 104,464   |                   | 25.3

27

---



Delinquency
and life to date loss status of our loans held for investment by securitization pool as of March 31, 2005 and December 31, 2004 was as follows (in thousands):

|                                            |                    | As of March 31, 2005
|------------------------------------------- | ------------------ | --------------------
|
|Loans held for investmentsecuritized:      |                    |                     
|                                            | FMIC Series 2003-1 |                     
|                                            | FMIT Series 2004-1 |                     
|                                            | FMIT Series 2004-2 |                     
|                                            | FMIT Series 2004-3 |                     
|                                            | FMIT Series 2004-4 |                     
|                                            | FMIT Series 2004-5 |                     
|                                            | FMIT Series 2005-1 |                     
|                                            |                    |                     
|                                            | Total              |                     
|Loans held for investmentto be securitized |                    |                     
|                                            |                    |                     
|Total loans held for investment             |                    | $                   
|                                            |                    |                     

|                                            |                    | As of December 31, 2004
|------------------------------------------- | ------------------ | -----------------------
|
|Loans held for investmentsecuritized:      |                    |                        
|                                            | FMIC Series 2003-1 |                        
|                                            | FMIT Series 2004-1 |                        
|                                            | FMIT Series 2004-2 |                        
|                                            | FMIT Series 2004-3 |                        
|                                            | FMIT Series 2004-4 |                        
|                                            | FMIT Series 2004-5 |                        
|                                            |                    |                        
|                                            | Total              |                        
|Loans held for investmentto be securitized |                    |                        
|                                            |                    |                        
|Total loans held for investment             |                    | $                      
|                                            |                    |                        

---

The
increase in allowance for loan losses as of March 31, 2005 and December 31, 2004 reflects our estimate of losses inherent in the loan portfolio, and is based upon loss
assumptions which take into account the contractual delinquency status, market delinquency roll rates and market historical loss severities. We currently estimate an average loss severity of 35%, not
including past due interest which is reversed against current period interest income when the loan is placed on non-accrual status. Due to the short time span from our initial
securitization through March 31, 2005, we have only limited actual loss experience from our investment portfolio.

28

---



At
March 31, 2005, $104.5 million, or 2.0%, of loans held for investment were seriously delinquent (60+ days past due and loans in the process of foreclosure), compared to
$79.9 million, or 1.7%, of loans held for investment at December 31, 2004.

We
anticipate that delinquent loans will continue to increase in principal balance and as a percentage of the portfolio, consistent with industry expectations, as the portfolio grows and
the loans continue to season. We expect that our more seasoned portfolio delinquency rate will be lower than the industry average.

The
allowance for loan lossesloans held for investment does not include any additional required valuation allowance for losses on held for investment loans which were
transferred to real estate owned upon foreclosure. Real estate owned is a component of "Prepaid expenses and other assets" on the consolidated statements of condition and is reported at the estimated
net realizable value. The following is a summary of real estate owned as of March 31, 2005 and December 31, 2004 (in thousands):

Three Months Ended
March 31,
2005

Year Ended
December 31,
2004Beginning balance real estate owned

$
4,374

1,805Plus: Transfers from mortgage loans held for sale


204

998Transfers from mortgage loans held for
        investment


4,642

6,213Less: Charge-offs


(737
)
(1,438
)Real estate sold


(2,301
)
(3,204
)Ending balance real estate owned*

$
6,182

4,374


---

We
sold 19 real estate owned properties formerly collateralizing loans held for investment in the three months ended March 31, 2005 with an average aggregate principal net
charge-off of 25.9%, which includes both the initial charge-off at foreclosure, if any, and the final gain or loss on disposal of the property. As we dispose of sufficient properties to
determine a loss severity trend in our portfolio, we will review our loss assumptions and update our estimates as required.



The following tables provides a summary of the mortgage loans held for sale, net and warehouse financingloans held for sale as of March 31,
2005 and December 31, 2004 (in thousands):

March 31,
2005

December 31,
2004Mortgage loans held for sale, net:Non-Conforming

$
133,655

252,620Conforming


138,795

104,430Total mortgage loans held for sale, net

$
272,450

357,050Warehouse financingmortgage loans held for sale

$
174,081

188,496Percentage financedmortgage loans held for sale


64
%
53
%


The
decrease in mortgage loans held for sale, net, at March 31, 2005 compared to December 31, 2004 reflects the decrease in non-conforming loan origination
volumes in the first quarter of 2005. We typically retain loans held for sale for approximately 60 days prior to investor purchase. We had $11.1 million and $6.6 million of loans
deemed to be unsaleable at standard sale premiums as of March 31, 2005 and December 31, 2004, respectively, for which we had recorded a valuation allowance of $2.1 million and
$1.9 million, respectively.

29

---



Warehouse financingloans held for sale decreased as of March 31, 2005 compared to December 31, 2004 reflecting our reduced level of mortgage loans held for
sale at March 31, 2005, We expect the balance of warehouse financing to increase relative to the balance of loans held for sale, as we deploy the remaining equity offering proceeds.



Trustee receivable increased to $99.2 million at March 31, 2005, from $91.1 million at December 31, 2004. The increase reflects higher
principal payments and prepaid loan payments received after the cut-off date for the current month bond payments from our seven securitized mortgage pools outstanding as of
March 31, 2005, compared to six securitized pools outstanding as of December 31, 2004. Trustee receivable includes principal and interest prepayments received after the
15th day prior to the end of the reporting period from loans securitized in pools FMIT Series 2004-1 through pools FMIT Series 2005-1, and prepayments received
by the trustee after the last day of the month prior to the end of the reporting period from loans in pool FMIC Series 2003-1. The funds are retained by the trustee until the following month's
disbursement date.



Derivative assets, net increased to $41.4 million at March 31, 2005, from $20.2 million at December 31, 2004. The increase primarily
relates to the $20.6 million increase in the fair value of the interest rate swap and cap agreements over the period, reflecting an increase in the market's projections of future interest
rates.



The following is a summary of the outstanding securitization bond financing by series as of March 31, 2005 and December 31, 2004 (in thousands):

Balance as ofBonds Issued

March 31,
2005

December 31,
2004FMIT Series 2005-1

$
728,625

722,798

FMIT Series 2004-5


863,550

830,875

861,403FMIT Series 2004-4


845,283

770,988

816,527FMIT Series 2004-3


949,000

812,712

879,659FMIT Series 2004-2


843,920

595,142

692,854FMIT Series 2004-1


652,944

410,980

484,025FMIC Series 2003-1


488,923

279,406

316,8175,372,245

4,422,901

4,051,285Unamortized bond discount


(1,130
)
(436
)
(499
)Total securitization financing

$
5,371,115

4,422,465

4,050,786


During
the three months ended March 31, 2005 and the year ended December 31, 2004, we issued $0.7 billion and $4.2 billion, respectively, of mortgage-backed
bonds through securitization trusts to finance the Company's portfolio of loans held for investment. Interest rates reset monthly and are indexed to one-month LIBOR. The bonds pay interest monthly
based upon a spread over LIBOR. The estimated average months to maturity is based on estimates and assumptions made by management. The actual maturity may differ from expectations. We retain the
option to repay the bonds when the remaining unpaid principal balance of the underlying mortgages loans for each pool falls below 20% of the original principal balance, with the exception of FMIC
Series 2003-1, which may be repaid when

30

---



the
principal balance falls below 10% of the original collateralized amount. The repayment of the bonds is secured by pledging mortgage loans to the trust.

As
of March 31, 2005 and December 31, 2004, the outstanding bonds were over-collateralized by $221.0 million and $194.8 million, respectively. The collateral
includes mortgage loans and trustee receivables. We enter into interest rate swap or cap agreements to hedge the bond costs and protect against rising interest rates.

Total Shareholders' Equity.Our total shareholders' equity increased to $568.6 million at
March 31, 2005, from $526.3 million at December 31, 2004. The change in shareholders' equity primarily reflects an increase in accumulated earnings of $42.1 million from
net income for the three months ended March 31, 2005.

Business Segment Results

We have a total of six reportable business segments, which include four production segments and two operating segments. We originate loans through our production
segments, which include the Non-Conforming Wholesale, Non-Conforming Retail, Conforming Wholesale, and Conforming Retail segments. The results of operations of our production segments primarily
include a net interest income
allocation for funded loans, direct expenses and an allocation of corporate overhead expenses. In addition, revenues include an allocation method whereby the production segments are credited with a
pro forma value for net gain on sale of loan production as if all fundings were sold servicing-released, concurrent with funding, at standard investor premium margins.

The
operating segments include the Investment Portfolio and Corporate segments. The results of operations of the Investment Portfolio segment primarily include the net interest income
after provision for loan losses for the loans held in our investment portfolio, changes in the fair value and actual cash settlements relating to our portfolio derivatives, and direct expenses,
including third-party servicing fees paid related to our loans held for investment. The results of operations of the Corporate segment primarily include direct expenses of the corporate home office,
income tax expense (benefit) related to the TRS operating results, and the elimination of the corporate overhead allocated to the production segments. The Corporate segment also includes various
reconciling amounts necessary to convert the production segments' allocated revenue and expenses to comply with GAAP reporting under Statement No. 91.

The
results of operations reported per segment differ materially from consolidated results due to timing differences in net gain on sale recognition at time of cash settlement of the
sale compared to loan funding, the actual sale prices compared to the pro forma values, the actual net interest margin earned on loans, and the holding for investment of a substantial portion of our
non-conforming loans for which actual revenue will consist of net interest income rather than net gain on sale.

31

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The
following is a summary of net income (loss) by production segments and operating segments for the three months ended March 31, 2005 and 2004 (in thousands):

|                                           |                                   | Production
Segments |        | Operating
Segments |         | Total   |       
|------------------------------------------ | --------------------------------- | ------------------- | ------ | ------------------ | ------- | ------- | ------
|Three Months Ended March 31, 2005          |                                   |                     |        |                    |         |         |       
|Total revenues                             |                                   | $                   | 35,891 |                    | 38,206  |         | 74,097
|Total expenses                             |                                   |                     | 35,221 |                    | (2,287  | )       | 32,934
|                                           |                                   |                     |        |                    |         |         |       
|                                           | Income before income taxes        |                     |        | 670                |         | 40,493  |       
|Provision for income tax (expense) benefit |                                   |                     |       |                    | 941     |         | 941   
|                                           |                                   |                     |        |                    |         |         |       
|                                           | Net income (loss)                 |                     | $      | 670                |         | 41,434  |       
|                                           |                                   |                     |        |                    |         |         |       
|Three Months Ended March 31, 2004          |                                   |                     |        |                    |         |         |       
|Total revenues                             |                                   | $                   | 48,715 |                    | (20,248 | )       | 28,467
|Total expenses                             |                                   |                     | 40,157 |                    | (9,609  | )       | 30,548
|                                           |                                   |                     |        |                    |         |         |       
|                                           | Income (loss) before income taxes |                     |        | 8,558              |         | (10,639 | )     
|Provision for income tax (expense) benefit |                                   |                     |       |                    | (1,690  | )       | (1,690
|                                           |                                   |                     |        |                    |         |         |       
|                                           | Net income (loss)                 |                     | $      | 8,558              |         | (12,329 | )     
|                                           |                                   |                     |        |                    |         |         |       

Production Segment Results

The following tables summarize our production segment results for the three months ended March 31, 2005 and 2004 (in thousands):

|                                      |                      | Non-Conforming |           | Conforming |         |       |        
|------------------------------------- | -------------------- | -------------- | --------- | ---------- | ------- | ----- | -------
|
|
|Three Months Ended March 31, 2005     |                      |                |           |            |         |       |        
|Revenues                              |                      | $              | 24,926    |            | 6,987   |       | 1,613  
|Direct expenses                       |                      |                | 16,827    |            | 7,676   |       | 2,022  
|                                      |                      |                |           |            |         |       |        
|                                      | Segment contribution |                |           | 8,099      |         | (689  | )      
|Corporate overhead allocation         |                      |                | 4,322     |            | 745     |       | 280    
|                                      |                      |                |           |            |         |       |        
|Net income (loss)                     |                      | $              | 3,777     |            | (1,434  | )     | (689   
|                                      |                      |                |           |            |         |       |        
|Funding volume                        |                      | $              | 975,905   |            | 127,776 |       | 274,610
|Segment contribution as a % of volume |                      |                | 0.83      | %          | (0.54   | )%    | (0.15  
|Three Months Ended March 31, 2004     |                      |                |           |            |         |       |        
|Revenues                              |                      | $              | 32,157    |            | 10,626  |       | 2,012  
|Direct expenses                       |                      |                | 17,773    |            | 9,038   |       | 2,380  
|                                      |                      |                |           |            |         |       |        
|                                      | Segment contribution |                |           | 14,384     |         | 1,588 |        
|Corporate overhead allocation         |                      |                | 6,209     |            | 990     |       | 171    
|                                      |                      |                |           |            |         |       |        
|Net income (loss)                     |                      | $              | 8,175     |            | 598     |       | (539   
|                                      |                      |                |           |            |         |       |        
|Funding volume                        |                      | $              | 1,121,972 |            | 163,137 |       | 215,860
|Segment contribution as a % of volume |                      |                | 1.28      | %          | 0.97    | %     | (0.17  

Production
segment net income decreased during the three months ended March 31, 2005 compared to the same period in 2004, primarily due to lower origination volumes and increased
competitive pressures. In response to industry-wide margin compression on new loan originations, as interest rates increased, our revenues per loan decreased in all production segments. We expect
margins to increase modestly throughout the remainder of 2005 as the industry adjusts rates on new

32

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loan
originations to return slightly higher yields. To address the market revenue compression and increase segment contribution from each of our production segments to meet or exceed 2004 levels, we
are focusing on expansion opportunities in favorable geographic locations, hiring additional account executives and loan officers and implementing cost efficiency initiatives, including savings
generated as we implement our new loan origination system.

Non-Conforming Wholesale Segment.Our non-conforming wholesale segment continued to report a positive segment contribution before
corporate allocation in the three months ended March 31, 2005, although the contribution reduced from 2004 levels primarily due to lower origination volume and thinning interest and sale
margins as interest rates increased throughout 2004 and the first quarter of 2005. The decrease in direct expenses in three months ended March 31, 2005 compared to the three months ended
March 31, 2004 reflects lower variable loan costs including commissions related to the 13.0% decrease in loan production year over year.

Non-Conforming Retail Segment.The decrease in our non-conforming retail segment contribution in the three months ended March 31,
2005 from the three months ended March 31, 2004 reflects a 21.7% decrease in origination volume, and a reduction in the fees we collected due primarily to increased pricing competition and a
higher percentage in 2005 of second lien originations, which generate lower fee income. Our non-conforming retail direct expenses decreased in 2005 due to a reduction in marketing initiatives and the
salary expenses associated with cost efficiency measures implemented within the production centers in 2005. We have reduced our total marketing budget for 2005 and appointed new management to support
our model of increasing volume, reducing costs and increasing the segment's contribution in 2005.

Conforming Wholesale Segment.The negative conforming wholesale segment contribution reported in the three months ended March 31,
2005 reflects revenue reductions from 2004 levels primarily due to thinning interest and sale margins as interest rates increased throughout 2004 and the first quarter of 2005, partially offset by
direct production cost decreases due to the downsizing of production operations. In the second half of 2004, we evaluated each conforming wholesale branch for profitability and closed those branches
with negative contributions. The remaining five wholesale production centers in our conforming wholesale segment are forecasting positive segment contribution in 2005.

Conforming Retail Segment.The decrease in our conforming retail segment contribution in the three months ended March 31, 2005 from
the three months ended March 31, 2004 reflects a 17.1% decrease in loan funding volume. We opened five new branches during the first quarter of 2005 and anticipate an increase in both
origination volume and segment contribution throughout the remainder of 2005.

33

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Operating Segment Results

The following table summarizes our operating segment results for the three months ended March 31, 2005 and 2004 (in thousands):

|                                           |                      |   |        | Corporate |        |        |        
|------------------------------------------ | -------------------- | - | ------ | --------- | ------ | ------ | -------
|
|Three Months Ended March 31, 2005          |                      |   |        |           |        |        |        
|Revenues                                   |                      | $ | 59,875 |           | 36     |        | (21,705
|Direct expenses                            |                      |   | 2,985  |           | 9,185  |        | (8,979 
|                                           |                      |   |        |           |        |        |        
|                                           | Segment contribution |   |        | 56,890    |        | (9,149 | )      
|Corporate overhead allocation              |                      |   |       |           | (5,478 | )      |       
|                                           |                      |   |        |           |        |        |        
|Income (loss) before income taxes          |                      |   | 56,890 |           | (3,671 | )      | (12,726
|Provision for income tax (expense) benefit |                      |   |       |           | 941    |        |       
|                                           |                      |   |        |           |        |        |        
|Net income (loss)                          |                      | $ | 56,890 |           | (2,730 | )      | (12,726
|                                           |                      |   |        |           |        |        |        
|Three Months Ended March 31, 2004          |                      |   |        |           |        |        |        
|Revenues                                   |                      | $ | 8,413  |           | 247    |        | (28,908
|Direct expenses                            |                      |   | 663    |           | 8,042  |        | (10,861
|                                           |                      |   |        |           |        |        |        
|                                           | Segment contribution |   |        | 7,750     |        | (7,795 | )      
|Corporate overhead allocation              |                      |   |       |           | (7,453 | )      |       
|                                           |                      |   |        |           |        |        |        
|Income (loss) before income taxes          |                      |   | 7,750  |           | (342   | )      | (18,047
|Provision for income tax (expense) benefit |                      |   |       |           | (1,690 | )      |       
|                                           |                      |   |        |           |        |        |        
|Net income (loss)                          |                      | $ | 7,750  |           | (2,032 | )      | (18,047
|                                           |                      |   |        |           |        |        |        

Investment Portfolio.Segment contribution increased $49.1 million in the three months ended
March 31, 2005 as compared to the three months ended March 31, 2004 primarily due to the increase of net interest income after provision for loan loss of $21.5 million, as a
result of the growth of our portfolio of loans held for investment. During the three months ended March 31, 2005, our average portfolio of loans held for investment increased to
$4.8 billion from $1.7 billion for the three months ended March 31, 2004. Other income (expense)portfolio derivatives increased $30.2 million to
$20.3 million for the first quarter of 2005, as compared to ($9.8) million for the same period in 2004. Other income (expense)portfolio derivatives included a $20.6 million
fair value increase in the interest rate swap and cap agreements hedging the variable rate debt financing our securitized loans, as compared to a ($6.3) million fair value decrease in the three months
ended March 31, 2004, during a period of declining interest rates. Direct expenses, including third party servicing expense relating to our portfolio of loans held for investment and the
salaries incurred for portfolio management personnel, increased from $2.3 million to $3.0 million for the three months ended March 31, 2005 compared to the same period in 2004. We
anticipate a continued increase in investment segment contribution in 2005, primarily due to continued increases in net interest income on our growing investment portfolio, offset by increasing
third-party servicing fees, portfolio management personnel and analytical technology costs.

Corporate.Direct expenses increased from the three months ended March 31, 2004 to
March 31, 2005 due to staffing increases in the second half of 2004 primarily to support our legal, accounting and information technology departments. The increase in 2005 direct expenses also
includes increases in professional costs related to operating as a public company. We expect direct expenses to increase in 2005 reflecting costs to be incurred for the implementation of
Sarbanes-Oxley Act compliance measures

34

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and
additional amortization, licensing and maintenance expenses related to placing our new loan origination software system fully into service.

Liquidity and Capital Resources

As a mortgage lending company, we borrow substantial sums of money to fund the mortgage loans we originate. After funding, our primary operating subsidiary,
Fieldstone Mortgage, holds all of the conforming loans and some of the non-conforming loans that it originates in inventory (warehouse) prior to sale. We hold the remainder of the non-conforming loans
for investment in our portfolio. As a REIT, we are required to distribute at least 90% of our REIT taxable income to our stockholders. Our primary cash requirements include:



Our
primary cash sources include:



We
rely on our securitizations as a primary source of liquidity. As of March 31, 2005, we have completed seven securitizations, issuing an aggregate of $5.4 billion of
mortgage-backed securities.

The
following is a summary of the securitizations issued by series during the year ended December 31, 2004 and the three months ended March 31, 2005 (in millions):

|Issue date                         |  | FMIT 2004-1 |             | FMIT 2004-2 |   | FMIT 2004-3 |   | FMIT 2004-4 |             | FMIT 2004-5 |   | FMIT 2005-1 |  
|---------------------------------- |  | ----------- | ----------- | ----------- | - | ----------- | - | ----------- | ----------- | ----------- | - | ----------- | -
|Issue date                         |  |             | Feb 2004    |             |   | April 2004  |   |             | Jul 2004    |             |   | Oct 2004    |  
|Bonds issued                       |  | $           | 652         |             | $ | 844         |   | $           | 949         |             | $ | 845         |  
|Loans pledged                      |  | $           | 681         |             | $ | 880         |   | $           | 1,000       |             | $ | 879         |  
|Bond ratings Standard and Poor's   |  |             | AAABBB     |             |   | AAABBB     |   |             | AAABBB     |             |   | AAABBB     |  
|Bond ratingsMoody's               |  |             | AaaBaa     |             |   | AaaBaa     |   |             | AaaBaa2    |             |   | AaaBaa2    |  
|Financing costsLIBOR plus         |  |             | 0.29  1.80 | %           |   | 0.24  2.15 | % |             | 0.27  2.15 | %           |   | 0.33  1.80 | %
|Weighted average spread over LIBOR |  |             | 0.55        | %           |   | 0.47        | % |             | 0.48        | %           |   | 0.51        | %
|Weighted average life of loans     |  |             | 2.5 years   |             |   | 2.5 years   |   |             | 2.5 years   |             |   | 2.5 years   |  
|Transaction fees                   |  |             | 0.36        | %           |   | 0.32        | % |             | 0.34        | %           |   | 0.35        | %

We use our various warehouse lines and repurchase facilities to fund substantially all of our loan originations. Fieldstone Mortgage sells the
mortgage loans it holds within two or three months of origination and pays down these facilities with the sale proceeds. We issue mortgage-backed securities to pay down the portion of those facilities
financing our loans held for investment.

35

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The
material terms and features of these secured warehouse lines and repurchase facilities as of March 31, 2005 are as follows (in millions):

|Lender                                      |  | Committed |         | Uncommitted |      | Maturity
Date |               | Range of
Allowable
Advances |           | Minimum
Consolidated
Tangible
Net Worth |   | Ratio of
Indebtedness
To Adjusted
Tangible
Net Worth |  | Minimum
Liquidity
|------------------------------------------- |  | --------- | ------- | ----------- | ---- | ------------- | ------------- | --------------------------- | --------- | --------------------------------------- | - | ---------------------------------------------------- |  | -----------------
|Countrywide Warehouse Lending(1)            |  | $         | 100.0   |             |     |               | April 2005    |                             | 95%-98%   |                                         | $ | 250.0                                                |  | 17:1             
|Credit Suisse First Boston Mortgage Capital |  |           | 500.0   |             |     |               | February 2006 |                             | 95%-99%   |                                         |   | 400.0                                                |  | 16:1             
|Guaranty Bank Warehouse Facility            |  |           | 50.0    |             |     |               | June 2005     |                             | 95%-98%   |                                         |   | 400.0                                                |  | 15:1             
|Guaranty Bank Purchase Facility             |  |           |        |             | 50.0 |               | Uncommitted   |                             | 95%-98%   |                                         |   | N/A                                                  |  | N/A              
|JP Morgan Chase Bank(2)                     |  |           | 200.0   |             |     |               | April 2005    |                             | 95%-97%   |                                         |   | 400.0                                                |  | 16:1             
|Lehman Brothers Bank                        |  |           | 500.0   |             |     |               | December 2005 |                             | 95%-98.5% |                                         |   | 250.0                                                |  | 16:1             
|Merrill Lynch Bank USA                      |  |           | 500.0   |             |     |               | November 2005 |                             | 93%-98%   |                                         |   | 250.0                                                |  | 17:1             
|                                            |  |           |         |             |      |               |               |                             |           |                                         |   |                                                      |  |                  
|                                            |  | $         | 1,850.0 |             | 50.0 |               |               |                             |           |                                         |   |                                                      |  |                  
|                                            |  |           |         |             |      |               |               |                             |           |                                         |   |                                                      |  |                  

---

Under our warehouse lines and repurchase facilities, interest is payable monthly in arrears and outstanding principal is payable upon receipt of
loan sale proceeds or transfer of a loan into a securitization trust. Outstanding principal is also repayable upon the occurrence of certain disqualifying events, which include a mortgage loan in
default for a period of time, a repaid mortgage loan, a mortgage loan obtained with fraudulent information or the failure to cure a defect in a mortgage loan's
documentation. Outstanding principal also is repayable if the mortgage loan does not close, but had been pledged and funds were advanced. Our warehouse lines and repurchase facilities contain terms
mandating principal repayment if a loan remains on the line after a contractual time period from date of funding, or on the maturity date of the facility.

A
primary component of our liquidity strategy is to finance our mortgage loans held for sale and our loans held for investment (prior to issuing securities collateralized by those loans)
through a diverse group of lending counterparties and to schedule frequent sales or securitizations of loans so that the average holding period of our inventory of loans generally does not exceed
60 days.

We
use our excess cash from operations and our capital to reduce the advances on our warehouse lines or repurchase facilities. This process reduces our debt outstanding and the
corresponding interest expense incurred and results in excess mortgage collateral available to secure borrowings in an amount required to meet our working capital needs. This pool of available
collateral totaled approximately $200 million and $190 million as of March 31, 2005 and December 31, 2004, respectively. We plan to deploy a portion of this working capital
to finance the continued growth of our investment portfolio. Depending upon the projected incremental returns available through new loan originations and our stock price, our Board of Directors may
consider authorizing us to repurchase a limited amount of our common stock. Any repurchase of our common stock would decrease our capital base, but could increase our overall return on remaining
equity. If we did decrease our capital base with a share repurchase, we would reduce our target portfolio balance while maintaining our current 13:1 leverage target.

The
warehouse lines and repurchase facilities are secured by substantially all of our non-securitized mortgage loans and contain customary financial and operating covenants
that, among other things, require us to maintain specified levels of liquidity and net worth, restrict indebtedness other than in the ordinary course of business, restrict investments in other
entities except in certain limited circumstances, restrict our ability to engage in mergers, consolidations or substantially change the

36

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nature
or character of our business and require compliance with applicable laws. We were in compliance with all of these covenants at March 31, 2005 and December 31, 2004.

For
our warehouse lines and repurchase facilities, advances bear interest at annual rates that vary depending upon the type of mortgage loans securing the advance of LIBOR or the
30-day Eurodollar rate plus an additional percentage which ranges from 0.80% to 3.25%. We are required to pay facilities fees ranging from 0.10% to 0.25% of the committed amount of the
facility. We are also required to pay non-use fees ranging from 0.125% to 0.25% on unused amounts which exceed certain thresholds relating to the average outstanding balance of the
facility.

Cash Flows

For the three months ended March 31, 2005, our cash flow from operations was $103.5 million as compared to operating cash flows of
$170.0 million for the three months ended March 31, 2004. This decrease in operating cash flows is primarily due to lower proceeds from mortgage loan sales, reflecting the lower balance
of loans held for sale as of December 31, 2004 compared to the balance of loans held for sale as of December 31, 2003.

Our
cash used in investing activities was $(365.9) million and $(807.1) million for the three months ended March 31, 2005 and 2004, respectively. The decrease in investing
activities primarily relates to the higher principal repayments in 2005 of our loans held for investment due to the increase in balance and continued seasoning of our portfolio of loans held for
investment. Our investing cash flows, as presented in our consolidated statements of cash flows, exclude the net proceeds from mortgage warehouse financing and securitization financing used to support
the increase in our investment in mortgage loans. We are required to show the net proceeds from, or repayments of, mortgage financing in our consolidated statements of cash flows as cash flow from
financing activities and not as investing cash flow. Our cash flows from financing activities were $235.5 million and $525.4 million for the three months ended March 31, 2005 and
2004, respectively.

Commitments and Contingencies

We had commitments to fund approximately $542.0 million and $422.0 million of mortgage loans at March 31, 2005 and December 31, 2004,
respectively. Interest rate lock commitments are considered derivatives under Statement No. 133, and as such, have been recorded at fair value in the consolidated statements of condition at
period ends. This does not necessarily represent future cash requirements, as some of the commitments are likely to expire without being drawn upon or may be subsequently declined for credit or other
reasons.

We
had forward delivery commitments to sell approximately $0.9 billion and $0.4 billion of loans at March 31, 2005 and December 31, 2004, respectively, of
which $78.2 million and $63.1 million, respectively, were mandatory sales of mortgage-backed securities and investor whole loan trades. At March 31, 2005 and December 31,
2004, we had a commitment to sell $110.0 million and $40.0 million, respectively, of treasury note forward contracts, which we used to economically hedge the interest rate risk of our
non-conforming loans.

Because
the nature of our business involves the collection of numerous accounts, the validity of liens and compliance with various state and federal lending and consumer protection laws,
we are subject to various legal proceedings in the ordinary course of our business related to foreclosures, bankruptcies, condemnation and quiet title actions and alleged statutory and regulatory
violations. We are also subject to other legal proceedings in the ordinary course of business related to employee matters. All of these ordinary course proceedings, taken as a whole, are not expected
to have a material adverse effect on our business, financial condition or results of operations.

37

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In
addition, on May 24, 2004, our former shareholders whose shares were redeemed for approximately $188.1 million following the closing of our private offering in
November 2003, filed an action in the District Court of Tarrant County, Texas, against us, Fieldstone Mortgage and KPMG LLP. The lawsuit alleges that the former shareholders are entitled to an
additional post-closing redemption price payment of approximately $19.0 million because, according to plaintiffs, our November 13, 2003 balance sheet should have included a deferred tax
asset that, if included, would have increased the redemption price. At the present time, the ultimate outcome of this claim and the amount of liability, if any, that may result is not determinable,
and no amounts have been accrued in our financial statements with respect to this claim. We intend to vigorously defend against this claim. Regardless of the outcome, in the opinion of management, the
final resolution of this dispute will not have a material effect on our business, financial condition or results of operations. If we ultimately are unsuccessful in defending this matter, we could be
required to make a cash payment of up to $19.0 million to the redeemed shareholders, plus potential interest and third-party costs associated with the litigation. Excluding interest or
third-party costs, which may be payable as part of a settlement, the potential payment will be an increase in the redemption price of the shares and recorded as a reduction of our paid in capital in
the period in which the dispute is resolved and will not be reflected in our income statement.

REIT Taxable Income

To maintain our status as a REIT, we are required to distribute at least 90% of our REIT taxable income each year to our shareholders. Federal tax rules calculate
REIT taxable income in a manner that, in certain respects, differs from the calculation of consolidated net income pursuant to GAAP. Our consolidated GAAP net income will differ from our REIT taxable
income primarily for the following reasons:



Our
REIT taxable income will continue to differ from our GAAP consolidated income, particularly during the period in which we build our investment portfolio.

REIT
taxable income is a non-GAAP financial measure within the meaning of Regulation G promulgated by the SEC. Management believes that the presentation of REIT
taxable income provides useful information to investors regarding the estimated annual distributions to our investors. The presentation of REIT taxable income is not meant to be considered in
isolation or as a substitute for financial results prepared in accordance with GAAP.

38

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The following table is a reconciliation of GAAP net income to estimated REIT taxable net income for the three months ended March 31, 2005 and the year ended December 31,
2004 (in thousands):

Three Months
Ended
March 31,
2005

Year
Ended
December 31,
2004Consolidated GAAP pre-tax net income

$
42,104

69,530Plus:Provision for loan losses in excess of actual charge-offs


5,130

21,056Variance in recognition of net origination expenses


4,412

9,922Less:Taxable REIT subsidiary pre-tax net income (loss)


(1,451
)
10,091Mark-to-market valuation changes on derivatives


20,628

22,079Miscellaneous other


1,591

4,972Estimated REIT taxable income

$
30,878

63,366


REIT
taxable income for the three months ended March 31, 2005 and the year ended December 31, 2004 is an estimate only, and is subject to change until we file the 2004 and
2005 REIT federal tax returns.

On
April 6, 2005, a quarterly cash dividend of $0.47 per share was declared for the first quarter of 2005. The dividend was paid on April 29, 2005 to stockholders of record
at the close of business on April 20, 2005. We currently intend to distribute approximately 85% of our 2005 REIT taxable income, as well as the portion of the 2004 REIT taxable income that was
not distributed in 2004.

Other Operational and Investment Portfolio Data

Loan Fundings

The following table indicates our total fundings of loans held for investment and loans held for sale for the three months ended March 31, 2005 and 2004
(in thousands):

Three Months Ended March 31,2005

2004Fundings

% of
Total

Fundings

% of
TotalNon-Conforming:Loans held for investment

$
730,798

66
%
$
833,646

65
%Loans held for sale


372,883

34
%

451,463

35
%Total Non-Conforming


1,103,681

100
%

1,285,109

100
%Conforming:Loans held for sale


352,171

100
%

309,450

100
%Total Fundings

$
1,455,852



$
1,594,559


The
decrease in loan fundings in three months ended March 31, 2005 compared to the three months ended March 31, 2004 was the result of a 14.1% decrease in our
non-conforming fundings as we responded to rising interest rates and narrower interest margins by increasing the interest rate on new originations to a greater degree than many of our industry
competitors. The decision of our competitors to accept narrower net interest margins rather than increase new origination interest rates reduced our competitive position and reduced our origination
volume. In March 2005, we evaluated our year to date gain on sale margins and adjusted the coupon on new loan originations to more closely reflect market pricing. The decrease in
non-conforming volume was partially offset by a 13.8%

39

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increase
in our conforming fundings, as new retail branches opened in the second half of 2004 contributed to the higher fundings volume. We expect funding volumes to grow approximately 4% in 2005 from
2004 volumes, as we hire additional account executives and loan officers in both our new and existing production centers and continue our geographic expansion. We expect interest margins to improve
modestly over the remainder of 2005, but we do not expect that these margins will return to 2003 or 2004 levels because competitive pressures likely will prevent a widening of the margins.

The
following tables provide a summary of the characteristics of our total non-conforming loan originations for the three months ended March 31, 2005 (in thousands):



|                            |       | Aggregate
Principal
Balance |         | Percent of
Mortgage
Pool |      | Weighted
Average
Coupon |     | Weighted
Average
Credit
Score |     | Average
Principal
Balance |   | Weighted
Average
LTV |     | Weighted
Average
CLTV |     
|--------------------------- | ----- | --------------------------- | ------- | ------------------------ | ---- | ----------------------- | --- | ----------------------------- | --- | ------------------------- | - | -------------------- | --- | --------------------- | ----
|Full Documentation          |       | $                           | 474,926 |                          | 43.1 | %                       | 7.4 | %                             | 627 |                           | $ | 129                  |     | 84.5                  | %   
|Stated Income Wage Earner   |       |                             | 283,635 |                          | 25.7 | %                       | 7.5 | %                             | 685 |                           |   | 159                  |     | 82.8                  | %   
|Stated Income Self Employed |       |                             | 201,136 |                          | 18.2 | %                       | 7.5 | %                             | 673 |                           |   | 169                  |     | 82.2                  | %   
|24 Month Bank Statements    |       |                             | 66,299  |                          | 6.0  | %                       | 7.2 | %                             | 637 |                           |   | 203                  |     | 85.3                  | %   
|12 Month Bank Statements    |       |                             | 74,253  |                          | 6.7  | %                       | 7.4 | %                             | 641 |                           |   | 180                  |     | 84.1                  | %   
|Limited Documentation       |       |                             | 3,432   |                          | 0.3  | %                       | 7.5 | %                             | 653 |                           |   | 123                  |     | 82.7                  | %   
|                            |       |                             |         |                          |      |                         |     |                               |     |                           |   |                      |     |                       |     
|                            | Total |                             | $       | 1,103,681                |      | 100.0                   | %   | 7.4                           | %   | 652                       |   | $                    | 149 |                       | 83.6
|                            |       |                             |         |                          |      |                         |     |                               |     |                           |   |                      |     |                       |     



|               |       | Aggregate
Principal
Balance |         | Percent of
Mortgage
Pool |      | Weighted
Average
Coupon |     | Weighted
Average
Credit
Score |     | Average
Principal
Balance |   | Weighted
Average
LTV |     | Weighted
Average
CLTV |      | Percent Full
Documentation |     
|-------------- | ----- | --------------------------- | ------- | ------------------------ | ---- | ----------------------- | --- | ----------------------------- | --- | ------------------------- | - | -------------------- | --- | --------------------- | ---- | -------------------------- | ----
|500  549      |       | $                           | 46,461  |                          | 4.2  | %                       | 8.4 | %                             | 531 |                           | $ | 147                  |     | 80.3                  | %    | 81.8                       | %   
|550  599      |       |                             | 143,870 |                          | 13.0 | %                       | 7.9 | %                             | 579 |                           |   | 142                  |     | 83.2                  | %    | 87.6                       | %   
|600  649      |       |                             | 318,156 |                          | 28.8 | %                       | 7.4 | %                             | 626 |                           |   | 143                  |     | 84.2                  | %    | 92.6                       | %   
|650  699      |       |                             | 397,141 |                          | 36.0 | %                       | 7.4 | %                             | 673 |                           |   | 153                  |     | 83.6                  | %    | 95.3                       | %   
|700 or greater |       |                             | 198,053 |                          | 18.0 | %                       | 7.2 | %                             | 732 |                           |   | 154                  |     | 83.9                  | %    | 95.4                       | %   
|               |       |                             |         |                          |      |                         |     |                               |     |                           |   |                      |     |                       |      |                            |     
|               | Total |                             | $       | 1,103,681                |      | 100.0                   | %   | 7.4                           | %   | 652                       |   | $                    | 149 |                       | 83.6 | %                          | 92.9
|               |       |                             |         |                          |      |                         |     |                               |     |                           |   |                      |     |                       |      |                            |     



|                     |       | Aggregate
Principal
Balance |         | Percent of
Mortgage
Pool |      | Weighted
Average
Coupon |      | Weighted
Average
Credit
Score |     | Average
Principal
Balance |   | Weighted
Average
LTV |     | Weighted
Average
CLTV |      | Percent Full
Documentation |     
|-------------------- | ----- | --------------------------- | ------- | ------------------------ | ---- | ----------------------- | ---- | ----------------------------- | --- | ------------------------- | - | -------------------- | --- | --------------------- | ---- | -------------------------- | ----
|2/28 LIBOR ARM       |       | $                           | 236,367 |                          | 21.4 | %                       | 7.6  | %                             | 623 |                           | $ | 148                  |     | 83.3                  | %    | 91.7                       | %   
|2/28 LIBOR ARM IO    |       |                             | 505,146 |                          | 45.8 | %                       | 6.9  | %                             | 662 |                           |   | 252                  |     | 81.3                  | %    | 93.9                       | %   
|3/27 LIBOR ARM       |       |                             | 63,533  |                          | 5.8  | %                       | 7.7  | %                             | 623 |                           |   | 145                  |     | 84.0                  | %    | 91.2                       | %   
|3/27 LIBOR ARM IO    |       |                             | 81,162  |                          | 7.3  | %                       | 6.9  | %                             | 658 |                           |   | 244                  |     | 81.3                  | %    | 91.5                       | %   
|5/25 Treasury ARM    |       |                             | 2,228   |                          | 0.2  | %                       | 7.0  | %                             | 658 |                           |   | 159                  |     | 80.9                  | %    | 88.0                       | %   
|5/25 Treasury ARM IO |       |                             | 10,443  |                          | 1.0  | %                       | 6.4  | %                             | 684 |                           |   | 268                  |     | 80.7                  | %    | 89.8                       | %   
|Fixed Rate           |       |                             | 66,333  |                          | 6.0  | %                       | 7.0  | %                             | 656 |                           |   | 143                  |     | 79.0                  | %    | 83.6                       | %   
|Fixed Rate IO        |       |                             | 9,047   |                          | 0.8  | %                       | 7.1  | %                             | 686 |                           |   | 245                  |     | 80.6                  | %    | 91.1                       | %   
|6 Month ARM          |       |                             | 968     |                          | 0.1  | %                       | 6.7  | %                             | 707 |                           |   | 161                  |     | 81.7                  | %    | 95.7                       | %   
|6 Month ARM IO       |       |                             | 5,555   |                          | 0.5  | %                       | 7.2  | %                             | 668 |                           |   | 309                  |     | 80.8                  | %    | 93.9                       | %   
|2nd                  |       |                             | 122,899 |                          | 11.1 | %                       | 10.0 | %                             | 670 |                           |   | 50                   |     | 98.6                  | %    | 98.6                       | %   
|                     |       |                             |         |                          |      |                         |      |                               |     |                           |   |                      |     |                       |      |                            |     
|                     | Total |                             | $       | 1,103,681                |      | 100.0                   | %    | 7.4                           | %   | 652                       |   | $                    | 149 |                       | 83.6 | %                          | 92.9
|                     |       |                             |         |                          |      |                         |      |                               |     |                           |   |                      |     |                       |      |                            |     

40

---



Cost to Produce

Cost to produce is a non-GAAP financial measure within the meaning of Regulation G promulgated by the SEC. Management believes that the
presentation of cost to produce provides useful information to investors regarding financial performance because this measure includes additional costs to originate mortgage loans, both recognized
when incurred and deferred costs, which are not all included in total expenses under GAAP. In addition, the production segments' cost to produce includes the allocation of the direct expenses of the
operating segments, which include corporate home office costs and investment portfolio management costs. The presentation of cost to produce is not meant to be considered in isolation or as a
substitute for financial results prepared in accordance with GAAP.

As
required by Regulation G, a reconciliation of cost to produce to the most directly comparable measure under GAAP, which is total expenses, is provided below for the three
months ended March 31, 2005 and 2004 (in thousands):

Three Months Ended
March 31,2005

2004Total expenses

$
32,934

30,548Deferred origination costs


8,978

10,861Servicing costsinternal and external


(3,319
)
(1,428
)Total general and administrative costs


38,593

39,981Premiums paid, net of fees collected


4,565

3,185Cost to produce

$
43,158

43,166Fundings:Non-Conforming wholesale

$
975,905

1,121,972Non-Conforming retail


127,776

163,137Conforming wholesale


274,610

215,860Conforming retail


77,561

93,590Total mortgage fundings

$
1,455,852

1,594,559Cost to produce as % of total mortgage loan fundings


2.96
%
2.71
%Total general and administrative costs as % of total mortgage loan fundings


2.65
%
2.51
%Segment cost to produce as % of mortgage loan fundings:Non-Conforming wholesale


2.87
%
2.62
%Non-Conforming retail


4.79
%
3.76
%Conforming wholesale


2.42
%
2.47
%Conforming retail


3.08
%
2.46
%


Our
cost to produce increased in the three months ended March 31, 2005 from the prior year level in the same period, primarily due to the relatively flat production segment fixed
expenses in 2005, including branch personnel and facilities, which supported a lower origination volume in the first quarter of 2005 as compared to the first quarter of 2004. The increase also was
attributable to additional expenses related to our portfolio of loans held for investment, including portfolio management personnel and increased accounting and legal costs. We expect our cost to
produce as a percentage of total mortgage loan fundings to decrease throughout the remainder of 2005 based upon the improvement of our funding volumes during the quarter, our forecast of relatively
flat fixed costs supporting an increase in origination volume, and our continued focus on improving cost efficiencies within the production segments.

41

---



Non-Conforming Wholesale Segment.Our non-conforming wholesale segment net
cost to produce increased in three months ended March 31, 2005 from the three months ended March 31, 2004, primarily due to the relative increase of fixed expenses and corporate overhead
to loan volume, due to the 13.0% decrease in loan fundings in the first quarter of 2005 as compared to the first quarter of 2004. Origination volumes are expected to increase in the second quarter of
2005 due to seasonal upswings in the mortgage market, the hiring of additional account executives and continued maturation of our origination offices.

Non-Conforming Retail Segment.The increase in our non-conforming retail
segment cost to produce reflects a lower origination volume, a reduction in the fees collected due mainly to increased pricing competition, and a higher percentage in 2005 of second lien originations,
which generate lower fee income. We expect the segment's cost to produce to improve throughout the remainder of 2005 due to reductions in marketing expenses combined with an increase in origination
volumes as we expand our relationship-based and affinity-lending programs.

Conforming Wholesale Segment.Our conforming wholesale segment cost to produce decreased in the three
months ended March 31 2005 from the three months ended March 31, 2004, primarily due to a decrease in fixed expenses in 2005 combined with a 27.2% increase in loan fundings in the first
quarter of 2005 as compared to the same period in 2004. In the second half of 2004, we evaluated each conforming wholesale branch for profitability and closed those branches with negative
contributions. Cost to produce is expected to continue to improve throughout 2005 due to continued operational efficiency initiatives, including the implementation of our new loan origination system.

Conforming Retail Segment.The increase in the cost to produce of our conforming retail segment in
the three months ended March 31, 2005, primarily reflects a decrease in fee revenue due to market price competition and a decrease in revenue from loans brokered to other mortgage companies. We
opened five new branches during the first quarter of 2005, and we anticipate an increase in origination volume and a decrease in cost to produce throughout the remainder of 2005.

Investment Portfolio

The following tables provide a summary of the characteristics of the principal balance of our portfolio of loans held for investment as of March 31, 2005
(in thousands):



|                            |       | Aggregate
Principal
Balance |           | Percent of
Mortgage
Pool |      | Weighted
Average
Coupon |     | Weighted
Average
Credit
Score |     | Average
Principal
Balance |   | Weighted
Average
LTV |     | Weighted
Average
CLTV |     
|--------------------------- | ----- | --------------------------- | --------- | ------------------------ | ---- | ----------------------- | --- | ----------------------------- | --- | ------------------------- | - | -------------------- | --- | --------------------- | ----
|Full Documentation          |       | $                           | 2,326,779 |                          | 45.7 | %                       | 6.9 | %                             | 622 |                           | $ | 169                  |     | 83.3                  | %   
|Stated Income Wage Earner   |       |                             | 1,453,617 |                          | 28.6 | %                       | 6.8 | %                             | 690 |                           |   | 219                  |     | 80.9                  | %   
|Stated Income Self Employed |       |                             | 800,980   |                          | 15.7 | %                       | 7.0 | %                             | 670 |                           |   | 222                  |     | 80.1                  | %   
|24 Month Bank Statements    |       |                             | 226,535   |                          | 4.4  | %                       | 6.8 | %                             | 629 |                           |   | 236                  |     | 83.6                  | %   
|12 Month Bank Statements    |       |                             | 252,834   |                          | 5.0  | %                       | 6.9 | %                             | 641 |                           |   | 220                  |     | 83.2                  | %   
|Limited Documentation       |       |                             | 30,585    |                          | 0.6  | %                       | 7.0 | %                             | 631 |                           |   | 191                  |     | 82.4                  | %   
|                            |       |                             |           |                          |      |                         |     |                               |     |                           |   |                      |     |                       |     
|                            | Total |                             | $         | 5,091,330                |      | 100.0                   | %   | 6.9                           | %   | 651                       |   | $                    | 194 |                       | 82.1
|                            |       |                             |           |                          |      |                         |     |                               |     |                           |   |                      |     |                       |     

42

---





|               |       | Aggregate
Principal
Balance |           | Percent of
Mortgage
Pool |      | Weighted
Average
Coupon |     | Weighted
Average
Credit
Score |     | Average
Principal
Balance |   | Weighted
Average
LTV |     | Weighted
Average
CLTV |      | Percent Full
Documentation |     
|-------------- | ----- | --------------------------- | --------- | ------------------------ | ---- | ----------------------- | --- | ----------------------------- | --- | ------------------------- | - | -------------------- | --- | --------------------- | ---- | -------------------------- | ----
|500  549      |       | $                           | 363,170   |                          | 7.1  | %                       | 7.9 | %                             | 530 |                           | $ | 141                  |     | 80.1                  | %    | 81.3                       | %   
|550  599      |       |                             | 718,168   |                          | 14.1 | %                       | 7.4 | %                             | 575 |                           |   | 162                  |     | 82.6                  | %    | 85.3                       | %   
|600  649      |       |                             | 1,256,688 |                          | 24.7 | %                       | 6.8 | %                             | 627 |                           |   | 193                  |     | 82.6                  | %    | 91.3                       | %   
|650  699      |       |                             | 1,716,780 |                          | 33.7 | %                       | 6.7 | %                             | 674 |                           |   | 213                  |     | 82.0                  | %    | 95.8                       | %   
|700 or greater |       |                             | 1,036,524 |                          | 20.4 | %                       | 6.5 | %                             | 734 |                           |   | 221                  |     | 82.2                  | %    | 97.1                       | %   
|               |       |                             |           |                          |      |                         |     |                               |     |                           |   |                      |     |                       |      |                            |     
|               | Total |                             | $         | 5,091,330                |      | 100.0                   | %   | 6.9                           | %   | 651                       |   | $                    | 194 |                       | 82.1 | %                          | 92.5
|               |       |                             |           |                          |      |                         |     |                               |     |                           |   |                      |     |                       |      |                            |     



|                     |       | Aggregate
Principal
Balance |           | Percent of
Mortgage
Pool |      | Weighted
Average
Coupon |     | Weighted
Average
Credit
Score |     | Average
Principal
Balance |   | Weighted
Average
LTV |     | Weighted
Average
CLTV |      | Percent Full
Documentation |     
|-------------------- | ----- | --------------------------- | --------- | ------------------------ | ---- | ----------------------- | --- | ----------------------------- | --- | ------------------------- | - | -------------------- | --- | --------------------- | ---- | -------------------------- | ----
|2/28 LIBOR ARM       |       | $                           | 1,776,895 |                          | 34.9 | %                       | 7.2 | %                             | 628 |                           | $ | 145                  |     | 82.2                  | %    | 90.4                       | %   
|2/28 LIBOR ARM IO    |       |                             | 2,853,342 |                          | 56.0 | %                       | 6.6 | %                             | 664 |                           |   | 247                  |     | 82.2                  | %    | 94.1                       | %   
|3/27 LIBOR ARM       |       |                             | 142,524   |                          | 2.8  | %                       | 7.3 | %                             | 626 |                           |   | 146                  |     | 82.1                  | %    | 89.5                       | %   
|3/27 LIBOR ARM IO    |       |                             | 190,666   |                          | 3.7  | %                       | 6.6 | %                             | 660 |                           |   | 241                  |     | 80.7                  | %    | 90.6                       | %   
|5/25 Treasury ARM    |       |                             | 25,003    |                          | 0.5  | %                       | 6.3 | %                             | 656 |                           |   | 167                  |     | 79.2                  | %    | 86.5                       | %   
|5/25 Treasury ARM IO |       |                             | 62,679    |                          | 1.2  | %                       | 6.1 | %                             | 674 |                           |   | 257                  |     | 81.5                  | %    | 90.3                       | %   
|Fixed Rate           |       |                             | 23,106    |                          | 0.5  | %                       | 7.9 | %                             | 710 |                           |   | 114                  |     | 84.3                  | %    | 88.9                       | %   
|Fixed Rate IO        |       |                             | 6,912     |                          | 0.2  | %                       | 6.9 | %                             | 697 |                           |   | 197                  |     | 81.4                  | %    | 94.3                       | %   
|6 Month ARM          |       |                             | 840       |                          | 0.0  | %                       | 6.5 | %                             | 717 |                           |   | 168                  |     | 82.0                  | %    | 95.1                       | %   
|6 Month ARM IO       |       |                             | 9,363     |                          | 0.2  | %                       | 6.8 | %                             | 678 |                           |   | 260                  |     | 80.9                  | %    | 93.9                       | %   
|                     |       |                             |           |                          |      |                         |     |                               |     |                           |   |                      |     |                       |      |                            |     
|                     | Total |                             | $         | 5,091,330                |      | 100.0                   | %   | 6.9                           | %   | 651                       |   | $                    | 194 |                       | 82.1 | %                          | 92.5
|                     |       |                             |           |                          |      |                         |     |                               |     |                           |   |                      |     |                       |      |                            |     

Core Financial Measures



Core net income and core earnings per share (diluted) are non-GAAP financial measures within the meaning of Regulation G promulgated by the
SEC. Management believes that the presentation of core net income and core earnings per share (diluted) provides useful information to investors regarding financial performance because this measure
excludes the non-cash mark to market gains or losses on interest rate swap and cap agreements. The presentation of core net income and core earnings per share (diluted) is not meant to be
considered in isolation or as a substitute for financial results prepared in accordance with GAAP.

43

---



As
required by Regulation G, a reconciliation of net income and earnings per share (diluted) in the consolidated statements of operations, presented in accordance with GAAP, to
core net income and core earnings per share (diluted) is provided below for the three months ended March 31, 2005 and 2004 (in thousands):

Three Months Ended
March 31,2005

2004Core net income:Net income (loss)

$
42,104

(3,771
)Less: mark to market (gain) loss on portfolio derivatives included in "Other income (expense)portfolio derivatives"Mark to market-interest rate swaps


(20,558
)
4,755Mark to market-interest rate cap


(70
)
1,507Total mark to market on portfolio derivatives


(20,628
)
6,262Core net income

$
21,476

2,491Core earnings per share (diluted):Income available to common shareholders

$
42,104

(3,771
)Less: mark to market (gain) loss on portfolio derivatives


(20,628
)
6,262Core income available to common shareholders

$
21,476

2,491Earnings (loss) per sharediluted

$
0.87

(0.08
)Core earnings per sharediluted

$
0.44

0.05Diluted weighted average common shares outstanding


48,519,518

48,325,860


Core
net income for the three months ended March 31, 2005 was $21.5 million, or core earnings per share (diluted) of $0.44, an increase of $19.0 million from the
$2.5 million core net income, or core earnings per share (diluted) of $0.05 for the first quarter of 2004. Core net income in the three months
ended March 31, 2005 was higher that the three months ended March 31, 2004 due to the growth of the investment portfolio.



Core net interest income after provision for loan losses is a non-GAAP financial measure within the meaning of Regulation G promulgated by the
SEC. Management believes that the presentation of core net interest income after provision for loan losses provides useful information to investors because this measure includes the effect of the net
cash settlements on the existing interest rate swap and cap agreements economically hedging the variable rate debt financing the portfolio of mortgage loans and the net cash settlements incurred or
paid to terminate those derivatives prior to maturity. Core net interest income after provision for loan losses does not include the net cash settlements incurred or paid to terminate swaps or caps
related to loans ultimately sold. The presentation of core net interest income after provision for loan losses is not meant to be considered in isolation or as a substitute for financial results
prepared in accordance with GAAP.

44

---



As
required by Regulation G, a reconciliation of net interest income after provision for loan losses in the consolidated statements of operations, presented in accordance with
GAAP, to core net interest income after provision for loan losses is provided below for the three months ended March 31, 2005 and 2004 (in thousands):

|                                                                                                                              |  | Three Months Ended
March 31, |       
|----------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------- | ------
|
|Net interest income after provision for loan losses                                                                           |  | $                            | 43,693
|Plus: net cash settlements received (paid) on portfolio derivatives included in "Other income (expense)portfolio derivatives |  |                              | (286  
|                                                                                                                              |  |                              |       
|Core net interest income after provision for loan losses                                                                      |  | $                            | 43,407
|                                                                                                                              |  |                              |       
|Interest income loans held for investment                                                                                     |  | $                            | 82,836
|Interest expense loans held for investment                                                                                    |  |                              | 38,608
|Plus: net cash settlements received (paid) on portfolio derivatives                                                           |  |                              | 286   
|                                                                                                                              |  |                              |       
|Core interest expenseloans held for investment                                                                               |  |                              | 38,894
|                                                                                                                              |  |                              |       
|Core net income loans held for investment                                                                                     |  |                              | 43,942
|Provision for loan losses loans held for investment                                                                           |  |                              | 4,494 
|                                                                                                                              |  |                              |       
|Core net interest income loans held for investment after provision for loan losses                                            |  |                              | 39,448
|Net interest income loans held for sale                                                                                       |  |                              | 3,959 
|                                                                                                                              |  |                              |       
|Core net interest income after provision for loan losses                                                                      |  | $                            | 43,407
|                                                                                                                              |  |                              |       
|Core Yield Analysis:                                                                                                          |  |                              |       
|Yield on loans held for investment                                                                                            |  |                              | 6.8   
|Cost of financing for loans held for investment                                                                               |  |                              | 3.3   
|Net cash settlements (received) paid on portfolio derivatives                                                                 |  |                              | 0.0   
|                                                                                                                              |  |                              |       
|Core cost of financing for loans held for investment                                                                          |  |                              | 3.3   
|                                                                                                                              |  |                              |       
|Net yield on loans held for investment                                                                                        |  |                              | 3.6   
|Net cash settlements received (paid) on portfolio derivatives                                                                 |  |                              | 0.0   
|                                                                                                                              |  |                              |       
|Core net yield on loans held for investment                                                                                   |  |                              | 3.6   
|Provision for loan lossesloans held for investment                                                                           |  |                              | (0.4  
|                                                                                                                              |  |                              |       
|Core yield on loans held for investment after provision for loan losses                                                       |  |                              | 3.2   
|                                                                                                                              |  |                              |       
|Yield-net interest income on loans held for sale and loans held for investment after provision for loan losses                |  |                              | 3.3   
|Net cash settlements received (paid) on portfolio derivatives                                                                 |  |                              | 0.0   
|                                                                                                                              |  |                              |       
|Core yieldnet interest income on loans held for sale and loans held for investment after provision for loan losses           |  |                              | 3.3   
|                                                                                                                              |  |                              |       

Core
net interest income after provision for loan losses was $43.4 million for the three months ended March 31, 2005, a 3.3% core net interest margin, an increase of
$23.7 million compared to $19.7 million for the three months ended March 31, 2004, a 3.9% core net interest margin. Core net interest margin in the three months ended
March 31, 2005 is lower the three months ended March 31, 2004 due to the generally lower net interest margins available on loans held for investment added to the portfolio over the
course of 2004.

45

---



Impact of New Accounting Standards

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R, "Share Based
Payments" (Statement No. 123R), requiring, among other things, that the compensation cost of stock options and other equity-based compensation issued to employees, which
cost is based on the estimated fair value of the awards on the grant date, be reflected in the income statement over the requisite service period. Statement No. 123R is effective for interim or
annual reporting periods beginning after June 15, 2005. In April 2005, the SEC amended the compliance dates for Statement No. 123R to the beginning of the next fiscal year after
June 15, 2005. We have adopted the fair value method of accounting for our grants of stock options and restricted stock as prescribed by Statement of Financial Accounting Standards
No. 148, "Accounting for Stock-Based CompensationTransition and Disclosure." Under this method, compensation cost is measured at the
grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the award's vesting period. Management believes that the
implementation of Statement 123R will not have a material effect on our results of operations or statements of condition.

Effect of Inflation

Inflation effects us most significantly in the effect it has on interest rates and real estate values. Our level of loan originations is affected by the level and
trends of interest rates. Interest rates normally increase during periods of high inflation (or in periods when the Federal Reserve Bank raises short-term interest rates in an attempt to
prevent inflation) and decrease during periods of low inflation. In addition, inflation of real estate values increases the equity homeowners have in their homes and increases the volume of
refinancing loans we can originate as borrowers draw down on the increased equity in their homes. We believe that real estate inflation will improve the performance of the loans originated by us in
the past, reducing delinquencies and defaults, as borrowers protect or borrow against the equity in their homes.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

General

We
carry interest-sensitive assets on our balance sheet that are financed by interest-sensitive liabilities. We are subject to interest rate risk because the interval for
re-pricing of the assets and liabilities is not matched. An increase or decrease in interest rates would affect our net interest income and the fair value of our mortgage loans held for
investment and held for sale as well as the related financing. We employ hedging strategies to manage the interest-rate risk inherent in our assets and liabilities. These strategies are
designed to create gains when movements in interest rates would cause our cash flows or the value of our assets to decline and to result in losses when movements in interest rates cause our cash flows
and/or the value of our assets to increase.

The
interest rates on our hybrid ARM loans held for investment are fixed for the first two to three years of the loan, after which the interest rates reset every six months to the
then-current market rate. The interest rates on the bonds financing these loans reset to current market rates each month during the entire term of the loan. During the period we are
receiving
fixed rate payments on our loans, we use interest rate swaps to pay fixed to the swap counter-party, and receive variable interest rate payments which match the interest rates on our financing
interest costs. The swap of "variable for fixed" rates allows us to match fund our loans during the fixed period of the loans.

There
have not been any significant changes in our interest rate risk profile and our strategies to manage interest rate risk from December 31, 2004 to March 31, 2005. For
further information on our interest rate risk profile, refer to Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" contained in our 2004 Form 10-K.

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Effects of interest rate volatility

Changes in interest rates impact our earnings and cash flows in several ways. Interest rate changes can affect our net interest income on our hybrid mortgages
held for investment (net of the cost of financing these assets). We estimate the duration of our hybrid loans in our investment portfolio and our policy is to hedge the financing of the loans during
the period in which the loans are paying a fixed coupon, while being financed with floating rate debt indexed to LIBOR. During an increasing interest rate environment, our assets may prepay slower
than expected, requiring us to finance a higher amount of fixed assets with floating rate debt than originally anticipated, at a time when interest rates may be higher, resulting in a decline in our
net return. In order to manage our exposure to changes in the prepayment speed of our hybrid loan assets, we regularly monitor the portfolio balance, revise the amounts anticipated to be outstanding
in future periods and adjust the notional balance of our hedging derivatives to mitigate this risk.

During
a rising interest rate environment, there may be less total loan origination and refinance activity. At the same time, a rising interest rate environment may result in a larger
percentage of ARM products being originated, mitigating the impact of lower overall loan origination and refinance activity. Conversely, during a declining interest rate environment, consumers, in
general, may favor fixed rate mortgage products over ARM and hybrid products.

If
interest rates decline, the rate of prepayment on our mortgage assets may increase during the two to three year initial life of our loans held for investment. Increased prepayments
would cause us to amortize the deferred origination costs of our mortgage assets faster, resulting in a reduced yield on our mortgage assets. Additionally, to the extent proceeds of prepayments cannot
be reinvested at a rate of interest at least equal to the rate previously earned on such mortgage assets, our earnings may be adversely affected.

Conversely,
if interest rates rise, the rate of prepayment on our mortgage assets during the initial fixed pay period of the assets' life may decrease. Decreased prepayments would cause
us to amortize the deferred origination costs of our ARM assets over a longer time period, resulting in an increased yield on our mortgage assets.

ITEM 4.    CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Our principal executive officer, Michael J. Sonnenfeld, and our principal accounting officer, Robert G. Partlow, evaluated as of March 31, 2005, the
effectiveness of the design and operation of our disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file with or
submit to the SEC under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations. As a
result of this evaluation, these executive officers have concluded that, as of such date, the design and operation of our disclosure controls and procedures were effective.

Changes in Internal Controls

In connection with the evaluation described above, our principal executive officer and principal accounting officer identified no change in our internal control
over financial reporting that occurred during the three months ended March 31, 2005, and that has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.

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PART II

ITEM 1.    LEGAL PROCEEDINGS.

There have been no material legal proceedings initiated or terminated during the quarter ended March 31, 2005, and there have been no material developments
in ongoing material legal proceedings during the quarter ended March 31, 2005. For information on material legal proceedings, see our Annual Report on Form 10-K for the
fiscal year ended December 31, 2004, as filed with the SEC on March 25, 2005.

ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.

None.

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

No matters were submitted to a vote of security holders during the quarter ended March 31, 2005.

ITEM 5.    OTHER INFORMATION.

On February 23, 2005, the Compensation Committee of the Board of Directors awarded annual bonuses for services performed in fiscal year 2004 to our Chief
Executive Officer and our other four most highly compensated executive officers (the "named executive officers") and approved the 2005 salary increases for the named executive officers. The annual
bonuses were based on the achievement of the specific performance goals and business criteria set forth in the employment agreements of each of the named executive officers, which agreements
previously have been filed with the SEC as Exhibits 10.7 through 10.12 to our Registration Statement on Form S-11, as amended (File No. 333-114802)
(Form S-11), and were disclosed in our Definitive Proxy Statement for the 2005 Annual Meeting of Stockholders. The 2004 bonuses and 2005 annual salaries are filed as
Exhibit 10.4 to this Form 10-Q.

On
February 23, 2005, the Compensation Committee also approved the Executive Incentive Compensation Plan (Bonus Plan), which is filed as Exhibit 10.1 to this
Form 10-Q, to reward the named executive officers and certain other executive officers that make a significant contribution to our growth and profitability. The Bonus Plan was
established pursuant to the Fieldstone Investment Corporation Equity Incentive Plan, which was approved by our stockholders in November 2003 and is filed as Exhibit 10.1 to the
Form S-11. Under the Bonus Plan, cash bonuses, if any, will be calculated based upon the level of achievement of both financial and performance components. The financial component
consists of a minimum to maximum target range for our 2005 net income. The performance component consists of the level of achievement by the Bonus Plan participant of certain critical objectives
established and approved by the Compensation Committee. The receipt of any cash bonus under the Bonus Plan by a named executive officer is contingent upon the achievement of the minimum net income
target. If the minimum net income target is achieved, the named executive officer's preliminary bonus amount will be prorated based upon our actual net income. This prorated bonus amount may be
reduced, but may not be increased, based on the level of achievement by the named executive officer of his critical objectives.

The
maximum 2005 bonus amounts established by the Compensation Committee for the named executive officers are 200% of annual salary for the Chief Executive Officer and 175% of annual
salary for the other named executive officers. Receipt by a named executive officer of the maximum 2005 bonus amount will require achievement of the maximum net income target and an assessment by the
Compensation Committee that the named executive officer has exceeded all of his critical objectives.

ITEM 6.    EXHIBITS.

The exhibits required by this Item are set forth on the Exhibit Index attached hereto.

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SIGNATURES

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.

|                   |  | FIELDSTONE INVESTMENT CORPORATION(registrant)
|------------------ |  | ---------------------------------------------
|Date: May 16, 2005 |  | By:                                          
|Date: May 16, 2005 |  | By:                                          

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EXHIBIT INDEX

|Exhibit
Number |  | Description                                                                                                                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1          |  | Executive Incentive Compensation Plan (filed herewith)                                                                                                                                                
|10.2*          |  | Form of Nonqualified Stock Option Agreement with Dividend Equivalents                                                                                                                                 
|10.3**         |  | Form of Performance Share Agreement                                                                                                                                                                   
|10.4           |  | Summary of Named Executive Officers' 2004 Bonuses and 2005 Annual Salary Increases (filed herewith)                                                                                                   
|10.5***        |  | Second Amended and Restated Master Repurchase Agreement, dated March 31, 2005 among Credit Suisse First Boston Mortgage Capital LLC, Fieldstone Mortgage Company and Fieldstone Investment Corporation
|31.1           |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)   
|31.2           |  | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith)   
|32.1           |  | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith)         

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