<PAGE>

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


                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED:  MARCH 31, 2002

                                       OR

           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:  001-11914


                            THORNBURG MORTGAGE, INC.
             (Exact name of Registrant as specified in its Charter)

                  MARYLAND                                85-0404134
       (State or other jurisdiction of                  (IRS Employer
       incorporation or organization)                Identification Number)

             150 WASHINGTON AVENUE
              SANTA FE, NEW MEXICO                            87501
   (Address of principal executive offices)                 (Zip Code)

        Registrant's telephone number, including area code (505) 989-1900

              (Former name, former address and former fiscal year,
                         if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all documents and
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.

                     (1) Yes     X             No
                             ---------            ---------
                     (2) Yes     X             No
                             ---------            ---------

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.

Common Stock ($.01 par value)                      41,525,711 as of May 10, 2002

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


<PAGE>

                            THORNBURG MORTGAGE, INC.
                                    FORM 10-Q


                                      INDEX


<Table>
<Caption>


                                                                                                          Page
                                                                                                          ----
<S>               <C>                                                                                   <C>
PART I.           FINANCIAL INFORMATION

     Item 1.      Financial Statements

                      Consolidated Balance Sheets at March 31, 2002 and December 31, 2001.................    3

                      Consolidated Statements of Operations for the three months ended
                       March 31, 2002 and March 31, 2001..................................................    4

                      Consolidated Statement of Shareholders' Equity for the three months
                       ended March 31, 2002...............................................................    5

                      Consolidated Statements of Cash Flows for the three months ended
                       March 31, 2002 and March 31, 2001..................................................    6

                      Notes to Consolidated Financial Statements..........................................    7

     Item 2.      Management's Discussion and Analysis of
                  Financial Condition and Results of Operations...........................................   19



PART II.          OTHER INFORMATION

     Item 1.      Legal Proceedings.......................................................................   35

     Item 2.      Changes in Securities ..................................................................   35

     Item 3.      Defaults Upon Senior Securities ........................................................   35

     Item 4.      Submission of Matters to a Vote of Security Holders.....................................   35

     Item 5.      Other Information.......................................................................   35

     Item 6.      Exhibits and Reports on Form 8-K........................................................   35


     SIGNATURES       ....................................................................................   36
</Table>

                                       2

<PAGE>


PART I.       FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)


<Table>
<Caption>
                                                                     March 31, 2002
                                                                      (Unaudited)       December 31, 2001
                                                                    ----------------    -----------------
<S>                                                                 <C>                 <C>
ASSETS
    Adjustable-rate mortgage ("ARM") assets:
       ARM securities                                               $      6,461,925    $      5,163,058
       Collateral for collateralized notes                                   399,020             470,752
       ARM loans held for securitization                                     247,694              98,766
                                                                    ----------------    ----------------
                                                                           7,108,639           5,732,576
                                                                    ----------------    ----------------

    Cash and cash equivalents                                                117,740              33,884
    Accrued interest receivable                                               37,344              33,483
    Prepaid expenses and other                                                 4,854               3,705
                                                                    ----------------    ----------------
                                                                    $      7,268,577    $      5,803,648
                                                                    ================    ================


LIABILITIES
    Reverse repurchase agreements                                   $      6,023,921    $      4,738,827
    Collateralized notes payable                                             362,313             432,581
    Other borrowings                                                         136,455              40,283
    Payable for assets purchased                                                  --              18,200
    Accrued interest payable                                                  13,637              12,160
    Dividends payable                                                          1,670              19,987
    Accrued expenses and other                                                13,451               8,952
                                                                    ----------------    ----------------
                                                                           6,551,447           5,270,990
                                                                    ----------------    ----------------

COMMITMENTS

SHAREHOLDERS' EQUITY
    Preferred stock: par value $.01 per share;
       2,760 shares authorized, issued and outstanding;
       9.68% Cumulative Convertible Series A;
       aggregate preference in liquidation $69,000                            65,805              65,805
    22,000 Series B cumulative shares authorized, none issued
       and outstanding, respectively                                              --                  --
    Common stock: par value $.01 per share;
       47,218 shares authorized, 40,904 and 33,305 shares
       issued and outstanding, respectively                                      409                 333
    Additional paid-in-capital                                               656,388             515,516
    Accumulated other comprehensive loss                                     (15,665)            (36,566)
    Notes receivable from stock sales                                         (7,904)             (7,904)
    Retained earnings (deficit)                                               18,097              (4,526)
                                                                    ----------------    ----------------
                                                                             717,130             532,658
                                                                    ----------------    ----------------

                                                                    $      7,268,577    $      5,803,648
                                                                    ================    ================
</Table>


See Notes to Consolidated Financial Statements.


                                       3
<PAGE>


THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 (In thousands, except per share data)


<Table>
<Caption>

                                                                      Three Months Ended
                                                                            March 31,
                                                                       2002           2001
                                                                    ----------    ----------

<S>                                                                 <C>           <C>
Interest income from ARM assets and cash equivalents                $   79,427    $   73,225
Interest expense on borrowed funds                                     (47,803)      (58,901)
                                                                    ----------    ----------
     Net interest income                                                31,624        14,324
                                                                    ----------    ----------

Hedging expense                                                           (314)         (151)
Provision for credit losses                                                 --          (178)
Management fee                                                          (1,644)       (1,095)
Performance fee                                                         (3,193)         (924)
Other operating expenses                                                (2,180)       (1,047)
                                                                    ----------    ----------

     Net income before cumulative effect of change in
       accounting principle                                             24,293        10,929
     Cumulative effect of change in accounting principle                    --          (202)
                                                                    ----------    ----------

     NET INCOME                                                     $   24,293    $   10,727
                                                                    ==========    ==========


Net income                                                          $   24,293    $   10,727
Dividends on preferred stock                                            (1,670)       (1,670)
                                                                    ----------    ----------

Net income available to common shareholders                         $   22,623    $    9,057
                                                                    ==========    ==========

Basic and diluted earnings per share before cumulative effect
     of change in accounting principle                              $     0.62    $     0.43
Cumulative effect of change in accounting principle                         --         (0.01)
                                                                    ----------    ----------


Basic and diluted earnings per share                                $     0.62    $     0.42
                                                                    ==========    ==========

Average number of common shares outstanding                             36,417        21,691
                                                                    ==========    ==========

</Table>





See Notes to Consolidated Financial Statements.



                                       4
<PAGE>


THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)

Three Months Ended March 31, 2002
(In thousands, except share data)

<Table>
<Caption>
                                                                            Accum.       Notes
                                                                            Other       Receiv-
                                                             Additional    Compre-     able From    Retained    Compre-
                                     Preferred     Common      Paid-in     hensive       Stock      Earnings/   hensive
                                       Stock       Stock       Capital      Income       Sales      (Deficit)    Income    Total
                                     ---------   ---------   ----------   ---------    ---------    ---------  --------- ----------
<S>                                  <C>         <C>         <C>         <C>          <C>          <C>         <C>           <C>
Balance, December 31, 2001           $  65,805   $     333   $ 515,516   $ (36,566)   $  (7,904)   $  (4,526)             $ 532,658
Comprehensive income:
   Net income                                                                                         24,293   $  24,293     24,293
   Other comprehensive income:
      Available-for-sale assets:
     Fair value adjustment                  --          --          --      (5,319)          --           --      (5,319)    (5,319)
  Swap Agreements:
     Fair value adjustment, net
       of amortization                      --          --          --      26,220           --           --      26,220     26,220
                                                                                                               ---------
   Other comprehensive income                                                                                  $  45,194
                                                                                                               =========
Issuance of common stock                    --          76     140,796          --           --           --                140,872
Interest payments on notes
receivable from stock sales                 --          --          76          --           --           --                     76
Dividends declared on preferred
   stock - $0.605 per share                 --          --          --          --           --       (1,670)                (1,670)
                                     ---------   ---------   ---------   ---------    ---------    ---------             ----------
Balance, March 31, 2002              $  65,805   $     409   $ 656,388   $ (15,665)   $  (7,904)   $  18,097             $  717,130
                                     =========   =========   =========   =========    =========    =========             ==========
</Table>

See Notes to Consolidated Financial Statements.



                                       5
<PAGE>


THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)


<Table>
<Caption>

                                                                     Three Months Ended
                                                                         March 31,
                                                                    2002            2001
                                                               -------------    -------------
<S>                                                            <C>              <C>
Operating Activities:
   Net Income                                                  $      24,293    $      10,727
   Adjustments to reconcile net income to
     net cash provided by operating activities:
      Amortization                                                     5,110            3,842
      Provision for credit losses                                         --              178
      Hedging expense and cumulative effect of change
         in accounting principle                                         314              353
      Change in assets and liabilities:
        Accrued interest receivable                                   (3,861)          (2,821)
        Prepaid expenses and other                                    (1,150)           3,233
        Accrued interest payable                                       1,477           (5,539)
        Accrued expenses and other                                     4,499           10,027
                                                               -------------    -------------
         Net cash provided by operating activities                    30,682           20,000
                                                               -------------    -------------

Investing Activities:
   Available-for-sale ARM securities:
     Purchases                                                    (1,805,247)        (498,948)
     Proceeds on sales                                                50,106               --
     Principal payments                                              871,186          259,460
   Collateral for collateralized notes payable:
     Principal payments                                               70,616           32,144
   ARM loans:
     Originations and purchases                                     (599,357)         (69,110)
     Proceeds on sales                                                 3,711               --
     Principal payments                                                4,011            9,885
                                                               -------------    -------------
         Net cash used in investing activities                    (1,404,974)        (266,569)
                                                               -------------    -------------

Financing Activities:
   Net borrowings from reverse repurchase agreements               1,311,248          282,499
   Repayments of collateralized notes                                (70,268)         (31,830)
   Net borrowings from other borrowings                               96,172           41,384
   Proceeds received from hedging activity                               102               --
   Proceeds from common stock issued, net                            140,872              204
   Dividends paid                                                    (19,987)          (7,100)
   Interest from notes receivable from stock sales                         9               87
                                                               -------------    -------------
         Net cash provided by financing activities                 1,458,148          285,244
                                                               -------------    -------------

Net increase in cash and cash equivalents                             83,856           38,675

Cash and cash equivalents at beginning of period                      33,884           13,105
                                                               -------------    -------------
Cash and cash equivalents at end of period                     $     117,740    $      51,780
                                                               =============    =============
</Table>

Supplemental disclosure of cash flow information and non-cash activities is
included in Note 3.

See Notes to Consolidated Financial Statements



                                       6
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.    SIGNIFICANT ACCOUNTING POLICIES

           The accompanying unaudited consolidated financial statements have
           been prepared in accordance with generally accepted accounting
           principles for interim financial information and with the
           instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
           Therefore, they do not include all of the information and footnotes
           required by generally accepted accounting principles for complete
           financial statements.

           In the opinion of management, all material adjustments, consisting of
           normal recurring adjustments, considered necessary for a fair
           presentation have been included. The operating results for the
           quarter ended March 31, 2002 are not necessarily indicative of the
           results that may be expected for the calendar year ending December
           31, 2002.

              BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

                  The consolidated financial statements include the accounts of
                  Thornburg Mortgage, Inc. (together with its subsidiaries
                  referred to hereafter as the "Company") and its wholly-owned
                  bankruptcy remote special purpose finance subsidiaries,
                  Thornburg Mortgage Funding Corporation ("TMFC"), Thornburg
                  Mortgage Acceptance Corporation ("TMAC") and a mortgage
                  banking subsidiary, Thornburg Mortgage Home Loans, Inc.
                  ("TMHL") and its wholly-owned special purpose finance
                  subsidiaries, Thornburg Mortgage Funding Corporation II and
                  Thornburg Mortgage Acceptance Corporation II. TMFC and TMAC
                  are wholly owned qualified REIT subsidiaries and are
                  consolidated with the Company for financial statement and tax
                  reporting purposes. During 2001, TMHL and its subsidiaries
                  operated as taxable REIT subsidiaries and were consolidated
                  with the Company for financial statement purposes and were not
                  consolidated with the Company for tax reporting purposes.
                  Beginning on January 1, 2002, TMHL and its current
                  subsidiaries began operating as wholly owned qualified REIT
                  subsidiaries and are consolidated with the Company for
                  financial statement and tax reporting purposes. All material
                  intercompany accounts and transactions are eliminated in
                  consolidation.

              CASH AND CASH EQUIVALENTS

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

              ADJUSTABLE-RATE MORTGAGE ASSETS

                  The Company's adjustable-rate mortgage ("ARM") assets are
                  comprised of ARM securities, ARM loans and collateral for AAA
                  notes payable, which also consists of ARM securities and ARM
                  loans. Included in the Company's ARM assets are hybrid ARM
                  securities and loans ("Hybrid ARMs") that have a fixed
                  interest rate for an initial period, generally three to ten
                  years, and then convert to an adjustable-rate asset for their
                  remaining term to maturity.

                  Management has designated all of its ARM securities as
                  available-for-sale. Therefore, they are reported at fair
                  value, with unrealized gains and losses excluded from earnings
                  and reported in "Accumulated other comprehensive income
                  (loss)" as a separate component of shareholders' equity.

                  The Company securitizes loans for its ARM securities
                  portfolio. The Company does not sell any of the securities
                  created from this securitization process, but rather retains
                  all of the beneficial and economic interests of the loans. The
                  securitizations of the Company's loans are not accounted for
                  as sales and the Company does not record any servicing assets
                  or liabilities as a result of this process. The fair value
                  reflected in the Company's financial statements for these
                  securities is generally based on market prices provided by
                  certain dealers who make markets in these financial
                  instruments.

                  In general, ARM assets have a maximum lifetime interest rate
                  cap, or ceiling, meaning that individual ARM assets contain a
                  contractual maximum interest rate ("Life Cap"). ARM securities
                  typically have a




                                       7
<PAGE>

                  Life Cap that not only places a constraint on the ability of
                  an ARM security to adjust to higher interest rates but also
                  affects the changes in fair value of an ARM security.

                  Management has the intent and ability to hold the Company's
                  ARM loans for the foreseeable future and until maturity or
                  payoff. Therefore, they are carried at their unpaid principal
                  balances, net of unamortized premium or discount and allowance
                  for loan losses.

                  The collateral for the notes payable includes ARM securities
                  and ARM loans which are accounted for in the same manner as
                  the ARM securities and ARM loans that are not held as
                  collateral.

                  Interest income on ARM assets is accrued based on the
                  outstanding principal amount and their contractual terms.
                  Premiums and discounts associated with the purchase of the ARM
                  assets are amortized into interest income over the lives of
                  the assets using the effective yield method adjusted for the
                  effects of estimated prepayments.

                  ARM asset transactions are recorded on the date the ARM assets
                  are purchased or sold. Purchases of new issue ARM securities
                  and all ARM loans are recorded when all significant
                  uncertainties regarding the characteristics of the assets are
                  removed and, in the case of loans, underwriting due diligence
                  has been completed, generally shortly before the settlement
                  date. Realized gains and losses on ARM asset transactions are
                  determined on the specific identification basis.

              CREDIT RISK

                  The Company limits its exposure to credit losses on its
                  portfolio of ARM securities by only purchasing ARM securities
                  that have an investment grade rating at the time of purchase
                  and have some form of credit enhancement or are guaranteed by
                  an agency of the federal government. An investment grade
                  security generally has a security rating of BBB or Baa or
                  better by at least one of two nationally recognized rating
                  agencies, Standard & Poor's, Inc. or Moody's Investor
                  Services, Inc. (the "Rating Agencies"). Additionally, the
                  Company also purchases and originates ARM loans and limits its
                  exposure to credit losses by restricting its whole loan
                  purchases and originations to ARM loans generally originated
                  to "A" quality underwriting standards or, in the case of
                  purchased whole loans, to loans that have at least five years
                  of pay history and/or low loan to property value ratios. The
                  Company further limits its exposure to credit risk by limiting
                  its investment in investment grade securities that are rated
                  A, or equivalent, BBB, or equivalent, or ARM loans originated
                  to "A" quality underwriting standards ("Other Investments") to
                  no more than 30% of the portfolio, including the subordinate
                  classes of securities retained as part of the Company's
                  securitization of loans.

                  The Company, in general, securitizes all of its loans and
                  retains the resulting securities in its ARM portfolio. At the
                  time of securitization, the Company obtains a credit review by
                  one or more Rating Agency of the loans being securitized.
                  Based on this review, a determination is made regarding the
                  expected losses to be realized in the future and the Company
                  adjusts the basis of the securities to their expected
                  realizable value. In doing so, the Company establishes a basis
                  adjustment amount to absorb the expected credit losses. The
                  Company then monitors the delinquencies and losses on the
                  underlying mortgage loans backing its ARM securities. If the
                  credit performance of the underlying mortgage loans is not as
                  expected, the Company makes a provision for additional
                  probable credit losses at a level deemed appropriate by
                  management to provide for known losses as well as estimated
                  losses inherent in its ARM securities portfolio. The provision
                  is based on management's assessment of numerous factors
                  affecting its portfolio of ARM assets including, but not
                  limited to, current economic conditions, delinquency status,
                  credit losses to date on underlying mortgages and remaining
                  credit protection. The provision for ARM securities is made by
                  reducing the cost basis of the individual security for the
                  decline in fair value, which is other than temporary, and the
                  amount of such write-down is recorded as a realized loss,
                  thereby reducing earnings. Additionally, once a loan within a
                  security is 90 days or more delinquent or a borrower declares
                  bankruptcy, the Company adjusts the value of its accrued
                  interest receivable to what it believes to be collectible and
                  stops accruing interest on that portion of the security
                  collateralized by the loan.


                                       8
<PAGE>

                  In addition, credit losses on pools of loans that are held as
                  collateral for AAA notes payable are also covered by
                  third-party insurance policies that protect the Company from
                  credit losses above a specified level, limiting the Company's
                  exposure to credit losses on such loans. The Company has
                  reduced the cost basis of the subordinated security retained
                  at the time the collateralized notes payable were issued, to
                  take into consideration estimated credit losses on the
                  underlying loans.

                  Provisions for credit losses do not reduce taxable income and
                  thus do not affect the dividends paid by the Company to
                  shareholders in the period the provisions are taken. Actual
                  losses realized by the Company do reduce taxable income in the
                  period the actual loss is realized and would affect the
                  dividends paid to shareholders for that tax year.

              VALUATION METHODS

                  The fair values of the Company's ARM securities and Cap
                  Agreements (as defined below) are generally based on market
                  prices provided by certain dealers who make markets in these
                  financial instruments or third-party pricing services. If the
                  fair value of an ARM security is not reasonably available from
                  a dealer or a third-party pricing service, management
                  estimates the fair value based on characteristics of the
                  security it receives from the issuer and available market
                  information. The fair values for ARM loans are estimated by
                  the Company by using the same pricing models employed by the
                  Company in the process of determining a price to bid for loans
                  in the open market, taking into consideration the aggregated
                  characteristics of groups of loans such as, but not limited
                  to, collateral type, index, margin, life cap, periodic cap,
                  underwriting standards, age and delinquency experience. The
                  fair value of the Company's collateralized notes payable and
                  interest rate swap agreements is based on market values
                  provided by dealers who are familiar with the terms of the
                  notes and swap agreements. The fair values reported reflect
                  estimates and may not necessarily be indicative of the amounts
                  the Company could realize in a current market exchange. Cash
                  and cash equivalents, interest receivable, reverse repurchase
                  agreements, other borrowings and other liabilities are
                  reflected in the financial statements at their amortized cost,
                  which approximates their fair value because of the short-term
                  nature of these instruments.

              DERIVATIVE FINANCIAL INSTRUMENTS

                  All derivatives are carried on the balance sheet at their fair
                  value. If a derivative is designated as a "fair value hedge",
                  the changes in the fair value of the derivative instrument and
                  the changes in the fair value of the hedged item are both
                  recognized in earnings. If a derivative is designated as a
                  "cash flow hedge" the effective amount of change in the fair
                  value of the derivative instrument is recorded in "Other
                  comprehensive income" and is transferred from "Other
                  comprehensive income" to earnings as the hedged item affects
                  earnings. The ineffective amount of all hedges is recognized
                  in earnings each quarter.

                  As the Company enters into hedging transactions, it formally
                  documents the relationship between the hedging instruments and
                  the hedged items. The Company has also documented its
                  risk-management policies, including objectives and strategies,
                  as they relate to its hedging activities. The Company
                  assesses, both at inception of a hedging activity and on an
                  on-going basis, whether or not the hedging activity is highly
                  effective. When it is determined that a hedge is not highly
                  effective, the Company discontinues hedge accounting
                  prospectively.

                  INTEREST RATE CAP AGREEMENTS

                  The Company purchases interest rate cap agreements and options
                  on interest rate futures (collectively referred to as "Cap
                  Agreements") to manage interest rate risk. In general, ARM
                  assets have a Life Cap, which is a component of the fair value
                  of an ARM asset. The Cap Agreements the Company has purchased
                  have the effect of offsetting a portion of the fair value
                  change in the Company's ARM assets related to the Life Cap.
                  Pursuant to the terms of the Cap Agreements, the Company will
                  receive cash payments if the interest rate index specified in
                  any such Cap Agreement increases above certain specified
                  levels. Therefore, such Cap Agreements have the effect of
                  offsetting a portion of the Company's borrowing costs, thereby
                  reducing the effect of the lifetime cap feature on the
                  Company's ARM assets so that the net margin on the Company's
                  ARM assets will be protected in high interest rate
                  environments.



                                       9
<PAGE>

                  In accordance with the adoption of FAS 133, the change in the
                  fair value of the Cap Agreements is recognized in earnings.
                  The Company does not currently apply hedge accounting to its
                  Cap Agreements and, as a result, the Company records the
                  change in fair value of the Cap Agreements as hedging expense.
                  The Company purchases Cap Agreements by incurring a one-time
                  fee or premium and carries them at fair value. The carrying
                  value of the Cap Agreements is included in ARM securities on
                  the balance sheet.

                  INTEREST RATE SWAP AGREEMENTS

                  The Company enters into interest rate swap agreements ("Swap
                  Agreements") in order to manage its interest rate exposure
                  when financing its ARM assets. The Company generally borrows
                  money based on short-term interest rates, either by entering
                  into borrowings with maturity terms of less than six months,
                  and frequently one month, or by entering into borrowings with
                  longer maturity terms of one to two years that reprice based
                  on a frequency that is commonly one month, but has at times
                  been up to six months. The Company's ARM assets generally have
                  an interest rate that reprices based on frequency terms of one
                  to twelve months. The Company's Hybrid ARMs generally have an
                  initial fixed interest rate period of three to ten years. As a
                  result, the Company's existing and forecasted borrowings
                  reprice to a new rate on a more frequent basis than do the
                  Company's ARM assets. When the Company enters into a Swap
                  Agreement, it agrees to pay a fixed rate of interest and to
                  receive a variable interest rate, generally based on LIBOR.
                  These Swap Agreements have the effect of converting the
                  Company's variable-rate debt into fixed-rate debt over the
                  life of the Swap Agreements. Swap Agreements are used as a
                  cost effective way to lengthen the average repricing period of
                  the Company's variable rate and short-term borrowings such
                  that the average repricing of the borrowings more closely
                  matches the average repricing of the Company's ARM assets.

                  All Swap Agreements are designated as cash flow hedges against
                  the interest rate risk associated with the Company's
                  borrowings. Although the terms and characteristics of the
                  Company's Swap Agreements and hedged borrowings are nearly
                  identical, due to the explicit requirements of FAS 133, the
                  Company does not account for these hedges under a method
                  defined in FAS 133 as the "shortcut" method, but rather the
                  Company calculates the effectiveness of this hedge on an
                  ongoing basis. As a result of the calculated effectiveness of
                  approximately 100% to date, all changes in the unrealized
                  gains and losses on Swap Agreements have been recorded in
                  "Other comprehensive income" and are reclassified to earnings
                  as interest expense is recognized on the Company's hedged
                  borrowings. If it becomes probable that the forecasted
                  transaction will not occur by the end of the originally
                  specified time period, as documented at the inception of the
                  hedging relationship, or within an additional two-month time
                  period thereafter, then the related gain or loss in "Other
                  comprehensive income" would be reclassified to income. For a
                  similar reason, if the Company called its collateralized notes
                  payable prior to the maturity of the Swap Agreements
                  designated as a cash flow hedge of a portion of that debt,
                  then the related gain or loss in "Other comprehensive income"
                  would be reclassified to income. As of March 31, 2002, the net
                  unrealized losses on Swap Agreements and deferred gains from
                  terminated Swap Agreements recorded in "Other comprehensive
                  income" was a net loss of $5.1 million. The Company estimates
                  that over the next twelve months, approximately $4.6 million
                  of the net unrealized losses on its Swap Agreements and the
                  deferred gains from terminated Swap Agreements will be
                  reclassified from "Other comprehensive income" to earnings.
                  The carrying value of the Swap Agreements, in the amount of
                  $7.8 million as of March 31, 2002, is included in "Reverse
                  repurchase agreements" in the accompanying balance sheets.

                  The Company has terminated and replaced Swap Agreements as an
                  additional source of liquidity when it was able to do so while
                  maintaining compliance with its hedging policies. Since the
                  Company's adoption of FAS 133, realized gains and losses
                  resulting from the termination of Swap Agreements, are
                  initially recorded in "Other comprehensive income" as a
                  separate component of equity. The gain or loss from the
                  terminated swaps remains in "Other comprehensive income" until
                  the forecasted interest payments affect earnings. If it
                  becomes probable that the forecasted interest payments will
                  not occur then the entire gain or loss would be reclassified
                  to earnings.




                                       10
<PAGE>


              INCOME TAXES

                  The Company elected to be taxed as a Real Estate Investment
                  Trust ("REIT") and believes it complies with the provisions of
                  the Internal Revenue Code of 1986, as amended (the "Code")
                  with respect thereto. Accordingly, the Company will not be
                  subject to Federal income tax on that portion of its income
                  that is distributed to shareholders and as long as certain
                  asset, income and stock ownership tests are met. During 2001,
                  TMHL and each of its subsidiaries were taxable REIT
                  subsidiaries and, as such, were subject to both federal and
                  state corporate income tax. As of January 1, 2002, the Company
                  revoked its election to operate TMHL and its subsidiaries as
                  taxable REIT subsidiaries and as a result they are now
                  qualified REIT subsidiaries.

              NET EARNINGS PER SHARE

                  Basic EPS amounts are computed by dividing net income
                  (adjusted for dividends declared on preferred stock) by the
                  weighted average number of common shares outstanding. Diluted
                  EPS amounts assume the conversion, exercise or issuance of all
                  potential common stock instruments unless the effect is to
                  reduce a loss or increase the earnings per common share.

                  Following is information about the computation of the earnings
                  per share data for the three-month periods ended March 31,
                  2002 and 2001 (amounts in thousands except per share data):

<Table>
<Caption>
                                                                       Earnings
                                           Income        Shares       Per Share
                                         ---------     ---------      ---------
<S>                                      <C>           <C>            <C>
Three Months Ended March 31, 2002
Net income                               $  24,293

Less preferred stock dividends              (1,670)
                                         ---------

Basic EPS, income available to
   common shareholders                      22,623        36,417      $    0.62
                                                                      =========

Effect of dilutive securities:

   Stock options                                --            --
                                         ---------     ---------
Diluted EPS                              $  22,623        36,417      $    0.62
                                         =========     =========      =========
Three Months Ended March 31, 2001
Net income                               $  10,727

Less preferred stock dividends              (1,670)
                                         ---------

Basic EPS, income available to
   common shareholders                       9,057        21,691      $    0.42
                                                                      =========

Effect of dilutive securities:

   Stock options                                --            53
                                         ---------     ---------
Diluted EPS                              $   9,057        21,744      $    0.42
                                         =========     =========      =========
</Table>


                  The Company did not grant any options to purchase shares of
                  common stock during the quarter ended March 31, 2002. The
                  Company did grant 35,666 options to purchase common stock to
                  directors and officers of the Company at an average price of
                  $10.56 per share during the quarter ended March 31, 2001. As
                  of March 31, 2002, all of the previously granted options to
                  purchase shares of common stock had either been exercised,
                  cancelled or had expired. The conversion of preferred stock
                  was not included in the computation of diluted EPS because
                  such conversion would increase the diluted EPS.

              USE OF ESTIMATES

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



                                       11
<PAGE>


NOTE 2.  ADJUSTABLE-RATE MORTGAGE ASSETS AND INTEREST RATE CAP AGREEMENTS

              The following tables present the Company's ARM assets as of March
              31, 2002 and December 31, 2001. The ARM securities classified as
              available-for-sale are carried at their fair value, while the ARM
              loans are carried at their amortized cost basis (dollar amounts in
              thousands):

<Table>
<Caption>
March 31, 2002:
                                      Available-
                                       for-Sale       Collateral for
                                    ARM Securities     Notes Payable       ARM Loans          Total
                                    --------------    --------------    --------------    --------------

<S>                                 <C>               <C>               <C>               <C>
Principal balance outstanding       $    6,404,521    $      395,116    $      247,246    $    7,046,883
Net unamortized premium                     51,966             7,143               548            59,657
Basis adjustments/Allowance
   for losses                               (7,044)           (3,239)             (100)          (10,383)
Cap agreements                               3,539                --                --             3,539
Principal payment receivable                22,984                --                --            22,984
                                    --------------    --------------    --------------    --------------
   Amortized cost, net                   6,475,966           399,020           247,694         7,122,680
Gross unrealized gains                      29,252             2,104               184            31,540
Gross unrealized losses                    (43,293)           (2,194)           (1,740)          (47,227)
                                    --------------    --------------    --------------    --------------
   Fair value                       $    6,461,925    $      398,930           246,138    $    7,106,993
                                    ==============    ==============    ==============    ==============

   Carrying value                   $    6,461,925    $      399,020    $      247,694    $    7,108,639
                                    ==============    ==============    ==============    ==============
</Table>


<Table>
<Caption>

December 31, 2001:

                                      Available-
                                       for-Sale       Collateral for
                                    ARM Securities     Notes Payable       ARM Loans          Total
                                    --------------    --------------    --------------    --------------

<S>                                 <C>               <C>               <C>               <C>
Principal balance outstanding       $    5,092,713    $      465,733    $       98,711    $    5,657,157
Net unamortized premium                     45,025             8,204               155            53,384
Basis adjustments/Allowance
   for losses                               (5,891)           (3,185)             (100)           (9,176)
Cap agreements                               3,622                --                --             3,622
Principal payment receivable                36,080                --                --            36,080
                                    --------------    --------------    --------------    --------------
   Amortized cost, net                   5,171,549           470,752            98,766         5,741,067
Gross unrealized gains                      35,439             4,346               216            40,001
Gross unrealized losses                    (43,930)           (2,768)             (258)          (46,956)
                                    --------------    --------------    --------------    --------------
   Fair value                       $    5,163,058    $      472,330    $       98,724    $    5,734,112
                                    ==============    ==============    ==============    ==============

   Carrying value                   $    5,163,058    $      470,752    $       98,766    $    5,732,576
                                    ==============    ==============    ==============    ==============
</Table>

              During the quarter ended March 31, 2002, the Company sold one ARM
              security in the amount of $50.1 million for no gain or loss. The
              ARM security sold was classified as available-for-sale. In
              addition, the Company sold $3.7 million of loans and realized a
              gross gain of $6,000 and a gross loss of $3,000. During the
              quarter ended March 31, 2001, the Company did not sell any ARM
              assets.

              During the quarter ended March 31, 2002, the Company securitized
              $449.5 million of its ARM loans into a series of privately-issued
              multi-class ARM securities. The Company retained, for its ARM
              portfolio, all of the classes of the securities created. The
              Company did not account for this securitization as a sale and,
              therefore, did not record any gain or loss in connection with this
              securitization. The Company carries the securities at fair value,
              based primarily on market value prices received from dealers
              familiar with similar securities. As of March 31, 2002, the
              Company had $2.090 billion of ARM assets that have resulted from
              the Company's securitization efforts.

              As of March 31, 2002 and December 31, 2001, the Company had
              reduced the cost basis of its securitized ARM loans by $9,138,000
              and $7,925,000, respectively, due to estimated credit losses
              (other than temporary declines in fair value). The reduction in
              the cost basis recorded during the first quarter of 2002, in the
              amount of $1,213,000, was recorded in connection with the
              Company's securitization of the $449.5 million of loans.



                                       12
<PAGE>

              As of March 31, 2002 and December 31, 2001, the Company had
              reduced the cost basis of other ARM securities by $1,145,000 and
              $1,151,000, respectively, due to estimated credit losses (other
              than temporary declines in fair value). The estimated credit
              losses for these ARM securities relate to Other Investments that
              the Company purchased at a discount that included an estimate of
              credit losses. During the first quarter of 2002, the Company
              recorded realized losses on these ARM securities in the amount of
              $44,000 and realized recoveries in the amount of $38,000 and, in
              accordance with its credit policies, the Company did not provide
              for any additional estimated credit losses.

              The following tables summarize ARM loan delinquency information as
              of March 31, 2002 and December 31, 2001 (dollar amounts in
              thousands):

<Table>
<Caption>
         March 31, 2002:
                                                               Percent
                                    Loan        Loan           of ARM       Percent of
         Delinquency Status        Count       Balance        Loans (1)    ARM Portfolio
         ------------------        -----      --------        ---------    -------------
<S>                                <C>        <C>             <C>          <C>
         60 to 89 days                 3      $    507           0.02%          0.01%
         90 days or more               6         1,187           0.05           0.02
         In foreclosure                5           661           0.03           0.01
                                   -----      --------        -------        -------
                                      14      $  2,355           0.10%          0.04%
                                   =====      ========        =======        =======

         December 31, 2001:
                                                               Percent
                                    Loan        Loan           of ARM       Percent of
         Delinquency Status        Count       Balance        Loans (1)    ARM Portfolio
         ------------------        -----      --------        ---------    -------------
<S>                                <C>        <C>             <C>          <C>
         60 to 89 days                 3      $    695           0.04%          0.01%
         90 days or more               2           385           0.02           0.01
         In foreclosure                4           552           0.03           0.01
                                   -----      --------        -------        -------
                                       9      $  1,632           0.09%          0.03%
                                   =====      ========        =======        =======
</Table>

(1)      ARM loans includes loans that the Company has securitized and retained
         first loss credit exposure for total amounts of $2.274 billion and
         $1.924 billion at March 31, 2002 and December 31, 2001, respectively.

The following table summarizes the activity for the allowance for losses on ARM
loans for the quarters ended March 31, 2002 and 2001 (dollar amounts in
thousands):

<Table>
<Caption>
                              2002            2001
                           ----------      ----------

<S>                        <C>             <C>
Beginning balance          $      100      $    3,100
Provision for losses               --             152
Charge-offs, net                   --              --
                           ----------      ----------
Ending balance             $      100      $    3,252
                           ==========      ==========
</Table>

              As of March 31, 2002, the Company owned two real estate properties
              as a result of foreclosing on delinquent loans in the aggregate
              amount of $0.3 million. The Company believes that its current
              level of reserves is adequate to cover any estimated loss, should
              one occur, from the sale of these properties.

              As of March 31, 2002, the Company had commitments to purchase or
              originate the following approximate amounts of ARM assets (dollar
              amounts in thousands):

<Table>

<S>                                             <C>
            Agency ARM securities               $     558,486
            Whole loans - correspondent               272,479
            Whole loans - direct originations          65,918
            Whole loans - bulk acquisitions            60,669
                                                -------------
                                                $     957,552
                                                =============
</Table>



                                       13
<PAGE>

              As of March 31, 2002 and December 31, 2001, the Company had
              purchased Cap Agreements with a remaining notional amount of
              $2.142 billion and $2.254 billion, respectively. The notional
              amount of the Cap Agreements purchased declined at a rate that is
              expected to approximate the amortization of the ARM securities.
              Under these Cap Agreements, the Company will receive cash payments
              should the one-month or three-month London InterBank Offer Rate
              ("LIBOR") increase above the contract rates of these hedging
              instruments that range from 5.875% to 12.00% and average
              approximately 10.06%. The Cap Agreements had an average maturity
              of 1.4 years as of March 31, 2002. The initial aggregate notional
              amount of the Cap Agreements declines to approximately $2.076
              billion over the period of the agreements, which expire between
              2002 and 2004. During the quarter ended March 31, 2002, the
              Company recognized expenses of $314,000 related to hedge
              ineffectiveness of its fair value hedges, which is reported as
              "Hedging expense" in the Company's Consolidated Statements of
              Operations.

              The Company has credit risk to the extent that the counterparties
              to the Cap Agreements do not perform their obligations under the
              Cap Agreements. If one of the counterparties does not perform, the
              Company would not receive the cash to which it would otherwise be
              entitled under the conditions of the Cap Agreement. In order to
              mitigate this risk and to achieve competitive pricing, the Company
              has entered into Cap Agreements with six different counterparties,
              five of which are rated AAA and one is rated A, but the Company
              has a two-way collateral agreement protecting its credit exposure
              with this counterparty. The fair value of the Cap Agreements at
              March 31, 2002 amounted to $212,000 and is included in ARM
              securities on the balance sheet.

NOTE 3.  REVERSE REPURCHASE AGREEMENTS, COLLATERALIZED NOTES PAYABLE  AND OTHER
         BORROWINGS

              The Company has arrangements to enter into reverse repurchase
              agreements with 23 different financial institutions and on March
              31, 2002, had borrowed funds with 14 of these firms. Because the
              Company borrows money under these agreements based on the fair
              value of its ARM assets and because changes in interest rates can
              negatively impact the valuation of ARM assets, the Company's
              borrowing ability under these agreements could be limited and
              lenders may initiate margin calls in the event interest rates
              change or the value of the Company's ARM assets decline for other
              reasons.

              As of March 31, 2002, the Company had outstanding $6.024 billion
              of reverse repurchase agreements with a weighted average borrowing
              rate of 2.03% and a weighted average remaining maturity of 3.2
              months. As of December 31, 2001, the Company had outstanding
              $4.739 billion of reverse repurchase agreements with a weighted
              average borrowing rate of 2.24% and a weighted average remaining
              maturity of 2.8 months. As of March 31, 2002, $2.847 billion of
              the Company's borrowings were variable-rate term reverse
              repurchase agreements with original maturities that range from
              three months to eighteen months. The interest rates of these term
              reverse repurchase agreements are indexed to either the one- or
              three-month LIBOR rate and reprice accordingly. ARM assets with a
              carrying value of $6.314 billion, including accrued interest, and
              cash in the amount of $3.5 million collateralized the reverse
              repurchase agreements at March 31, 2002.

              At March 31, 2002, the reverse repurchase agreements had the
              following remaining maturities (dollar amounts in thousands):

<Table>
<S>                           <C>
Within 30 days                $    3,054,013
31 to 89 days                      1,662,028
90 to 365 days                     1,194,627
Over 365 days                        105,475
                              --------------
                                   6,016,143
Swap Agreements                        7,778
                              --------------
                              $    6,023,921
                              ==============
</Table>

              As of March 31, 2002, the Company had entered into three whole
              loan financing facilities. Each of the whole loan financing
              facilities have a committed borrowing capacity of $300 million;
              one matures in March 2003 and the other two mature in November
              2002. As of March 31, 2002, the Company had $136.5 million
              borrowed against these whole loan financing facilities at an
              effective cost of 2.55%. As of December 31, 2001, the Company had
              $37.7 million borrowed against whole loan financing facilities at
              an effective cost of 2.53%. The





                                       14
<PAGE>

              amount borrowed on the whole loan financing agreements at March
              31, 2002 was collateralized by ARM loans with a carrying value of
              $141.0 million, including accrued interest.

              The whole loan financing facility with a borrowing capacity of
              $300 million that matures in March 2003, discussed above, is a
              securitization transaction in which the Company transfers groups
              of whole loans to a wholly owned bankruptcy remote special purpose
              subsidiary. The subsidiary in turn simultaneously transfers its
              interest in the loans to a trust, which issues beneficial
              interests in the loans in the form of a note and a subordinated
              certificate. The note is then used to collateralize borrowings.
              This whole loan financing facility works similar to a secured line
              of credit whereby the Company can deliver loans into the facility
              and take loans out of the facility at the Company's discretion,
              subject to the terms and conditions of the facility. This
              securitization transaction is accounted for as a secured
              borrowing.

              On December 18, 1998, the Company, through a wholly-owned
              bankruptcy remote special purpose finance subsidiary, issued
              $1.144 billion of notes payable ("Notes") collateralized by ARM
              loans and ARM securities. As part of this transaction, the Company
              retained ownership of a subordinated certificate in the amount of
              $32.4 million, which represents the Company's maximum exposure to
              credit losses on the loans collateralizing the Notes. As of March
              31, 2002, the Notes had a net balance of $362.3 million and an
              effective interest cost of 2.62%, which changes each month at a
              spread to one-month LIBOR. As of March 31, 2002, these Notes were
              collateralized by ARM loans with a principal balance of $395.1
              million. The Notes mature on January 25, 2029 and are callable by
              the Company at par once the balance of the Notes is reduced to 25%
              of their original balance. In connection with the issuance and
              modification of the Notes, the Company incurred costs of
              approximately $6.0 million, which is being amortized over the
              expected life of the Notes. Since the Notes are paid down as the
              collateral pays down, the amortization of the issuance cost will
              be adjusted periodically based on actual payment experience. If
              the collateral pays down faster than currently estimated, then the
              amortization of the issuance cost will increase and the effective
              cost of the Notes will increase and, conversely, if the collateral
              pays down slower than currently estimated, then the amortization
              of issuance cost will be decreased and the effective cost of the
              Notes will also decrease.

              During September 2001, the Company entered into a $10 million line
              of credit agreement collateralized by payment receivables in
              connection with Agency ARM securities. As of March 31, 2002, the
              Company was not borrowing any amount against this line. As of
              December 31, 2001, the Company had $2.6 million borrowed against
              this line of credit at an effective interest rate of 3.93%. The
              interest rate on this credit line varies with one-month LIBOR.

              As of March 31, 2002, the Company was counterparty to forty-nine
              interest rate swap agreements ("Swaps") having an aggregate
              notional balance of $3.213 billion. These Swaps hedge the cost of
              financing Hybrid ARMs during their fixed rate term, generally
              three to ten years. The Company limits the interest rate mismatch
              on the funding of its Hybrid ARMs (the difference between the
              duration of the fixed-rate period of Hybrid ARMs and the duration
              of the fixed-rate liabilities and equity funding Hybrid ARMs) to a
              duration difference of no more than one year. As of March 31,
              2002, these Swaps had a weighted average maturity of 2.8 years. In
              accordance with these Swaps, the Company will pay a fixed rate of
              interest during the term of these Swaps and receive a payment that
              varies monthly with the one-month LIBOR rate. As a result of
              entering into these Swaps the Company has reduced the interest
              rate variability of its cost to finance its ARM assets by
              increasing the average period until the next repricing of its
              borrowings from 46 days to 565 days. As of March 31, 2002, ARM
              assets with a carrying value of $10.9 million collateralized the
              Swap Agreements, including accrued interest and cash in the amount
              of $2.0 million.

              The total cash paid for interest was $45.7 million and $63.8
              million during the quarters ended March 31, 2002 and 2001,
              respectively.



                                       15
<PAGE>

NOTE 4.  FAIR VALUE OF FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET CREDIT RISK

              The following table presents the carrying amounts and estimated
              fair values of the Company's financial instruments at March 31,
              2002 and December 31, 2001 (dollar amounts in thousands):

<Table>
<Caption>
                                               March 31, 2002                      December 31, 2001
                                       ---------------------------------   ---------------------------------
                                          Carrying            Fair            Carrying            Fair
                                           Amount             Value            Amount             Value
                                       ---------------   ---------------   ---------------   ---------------
<S>                                    <C>               <C>               <C>               <C>
Assets:
   ARM assets                          $     7,108,427   $     7,106,781   $     5,732,145   $     5,733,681
   Cap Agreements                                  212               212               431               431

Liabilities:
   Reverse repurchase agreements             6,016,143         6,016,143         4,704,895         4,704,895
   Collateralized notes payable                362,313           363,688           432,581           434,469
   Other borrowings                            136,455           136,455            40,283            40,283
   Swap agreements                               7,778             7,778            33,932            33,932
</Table>

              The above carrying amounts for assets are combined in the balance
              sheet under the caption "Adjustable-rate mortgage assets." The
              carrying amount for securities, which are categorized as
              available-for-sale, is their fair value whereas the carrying
              amount for loans, which are categorized as held for the
              foreseeable future, is their amortized cost.

NOTE 5.  COMMON AND PREFERRED STOCK

              On May 31, 2001, the Company filed a combined shelf registration
              statement on Form S-3 for $409 million of equity securities, which
              included $109 million of securities that were registered under a
              previously filed registration statement. On July 6, 2001, the
              combined registration statement for $409 million, which includes
              the possible issuances of common stock, preferred stock or
              warrants, was declared effective by the Securities and Exchange
              Commission. During February 2002, the Company completed a public
              offering of 6,210,000 shares of its common stock, for which it
              received net proceeds of $113.5 million. As of March 31, 2002,
              $125.9 million of the Company's securities remained registered for
              future issuance and sale under its currently effective
              registration statement.

              During the first three months of 2002, the Company issued
              1,385,220 shares of common stock under its Dividend Reinvestment
              and Stock Purchase Plan and received net proceeds of $27.3
              million.

              On December 17, 2001, the Company declared the fourth quarter 2001
              dividend of $0.55 per common share, which was paid on January 31,
              2002 to common shareholders of record as of December 31, 2001.

              On March 15, 2002, the Company declared a first quarter dividend
              of $0.605 per share to the shareholders of the Series A 9.68%
              Cumulative Convertible Preferred Stock which was paid on April 10,
              2002 to preferred shareholders of record as of March 29, 2002.

              On April 23, 2002, the Company declared the first quarter 2002
              dividend of $0.55 per common share, which will be paid on May 17,
              2002 to common shareholders of record as of May 3, 2002.

              For federal income tax purposes, all dividends are expected to be
              ordinary income to the Company's common and preferred
              shareholders, subject to year-end allocations of the common
              dividend between ordinary income, capital gain income and
              non-taxable income as return of capital, depending on the amount
              and character of the Company's full year taxable income.


                                       16
<PAGE>

NOTE 6.  STOCK OPTION PLAN

              The Company has a Stock Option and Incentive Plan (the "Plan")
              that authorizes the granting of options to purchase an aggregate
              of up to 1,800,000 shares, but not more than 5% of the outstanding
              shares of the Company's common stock. The Plan authorizes the
              Board of Directors, or a committee of the Board of Directors, to
              grant Incentive Stock Options ("ISOs") as defined under section
              422 of the Internal Revenue Code of 1986, as amended, options not
              so qualified ("NQSOs"), Dividend Equivalent Rights ("DERs"), Stock
              Appreciation Rights ("SARs"), Phantom Stock Rights ("PSRs") and
              restricted common stock.

              The exercise price for any options granted under the Plan may not
              be less than 100% of the fair value of the shares of the common
              stock at the time the option is granted. Options become
              exercisable six months after the date granted and will expire ten
              years after the date granted, except options granted in connection
              with an offering of convertible preferred stock, in which case
              such options become exercisable if and when the convertible
              preferred stock is converted into common stock.

              Restricted shares of common stock are granted at the discretion of
              the Stock Option Committee and approval of the Board of Directors.
              Restricted shares of common stock are generally granted in lieu of
              ISOs and NQSOs, based on equivalent values as calculated by a
              Black Scholes option model. At the time restricted shares are
              granted, the Board of Directors determines the vesting period,
              generally three years. In general, a portion of the restricted
              shares vest at the end of each year of the vesting period and the
              shares participate in the common dividends declared during the
              vesting period. The Company expenses the value of the restricted
              shares, based on their value as of the date of grant, over the
              vesting period.

              The Company usually issues DERs at the same time ISOs, NQSOs and
              shares of restricted stock are granted. The number of PSRs issued
              is based on the level of the Company's dividends and on the price
              of the Company's stock on the related dividend payment date and is
              equivalent to the cash that otherwise would be paid on the
              outstanding DERs and previously issued PSRs.

              As of March 31, 2002, there were 924,029 DERs outstanding, of
              which 895,868 were vested, and 141,629 PSRs outstanding, of which
              107,842 were vested. Additionally, as of March 31, 2002, there
              were 59,703 restricted shares of common stock outstanding that had
              been granted under the terms of the Plan. The Company recorded an
              expense associated with DERs, PSRs and Restricted Stock of
              $547,000 and $248,000 for the quarters ended March 31, 2002 and
              2001, respectively. Of the expense recorded during the first
              quarter of 2002, $437,000 was the amount of dividends paid on DERs
              and PSRs, $20,000 was the impact of the increase in the Company's
              common stock price on the value of the PSRs which was recorded as
              a fair value adjustment and $90,000 was the amortization of the
              value of restricted shares, net of the effect of cancelled
              restricted shares due to employment termination. Of the expense
              recorded during the first quarter of 2001, $102,000 was the amount
              of dividends paid on DERs and PSRs and $146,000 was the impact of
              the increase in the Company's common stock price on the value of
              the PSRs which was recorded as a fair value adjustment. As of
              March 31, 2002, all of the previously issued ISOs and NQSOs have
              been exercised, terminated or cancelled.

              Notes receivable from stock sales result from the Company selling
              shares of common stock through the exercise of stock options
              partially for consideration for notes receivable. The notes mature
              during 2010 and accrue interest at a rate of 3.91% per annum. In
              addition, the notes are full recourse promissory notes and are
              secured by a pledge of the shares of the Common Stock acquired.
              Interest, which is credited to paid-in-capital, is payable
              quarterly, with the balance due at the maturity of the notes. The
              payment of the notes will be accelerated only upon the sale of the
              shares of Common Stock pledged for the notes. The notes may be
              prepaid at any time at the option of each borrower. As of March
              31, 2002, there was $7.9 million of notes receivable outstanding
              from stock sales.




                                       17
<PAGE>


NOTE 7.  TRANSACTIONS WITH AFFILIATES

              The Company has a Management Agreement (the "Agreement") with
              Thornburg Mortgage Advisory Corporation ("the Manager"). Under the
              terms of the Agreement, the Manager, subject to the supervision of
              the Company's Board of Directors, is responsible for the
              management of the day-to-day operations of the Company and
              provides all personnel and office space. According to the terms of
              the Agreement, certain defined expenses of the Manager are
              reimbursed by the Company, principally expenses of the Company's
              mortgage banking subsidiary related to mortgage loan acquisition,
              selling, servicing and securitization activities. During the
              quarters ended March 31, 2002 and 2001, TMHL reimbursed the
              Manager $457,000 and $226,000 for expenses, respectively, in
              accordance with the terms of the Agreement. The Agreement has a
              ten-year term and provides for an annual review by the
              unaffiliated directors of the Board of Directors of the Manager's
              performance under the Agreement. If the Company terminates the
              Agreement for a reason other than for cause, a minimum fee would
              be due to the Manager.

              The Company pays the Manager an annual base management fee based
              on average shareholders' equity, adjusted for liabilities that are
              not incurred to finance assets ("Average Shareholders' Equity" or
              "Average Net Invested Assets" as defined in the Agreement) payable
              monthly in arrears as follows: 1.18% of the first $300 million of
              Average Shareholders' Equity, plus 0.87% of Average Shareholders'
              Equity above $300 million. The Agreement also has a cost of living
              clause that adjusts the base management fee formula by the change
              in the Consumer Price Index over the previous twelve-month period,
              effective as of each annual review of the Agreement. In addition,
              the three wholly-owned subsidiaries of the Company and the two
              wholly-owned subsidiaries of TMHL have entered into separate
              Management Agreements with the Manager for additional management
              services for a combined amount of $1,200 per month, paid in
              arrears.

              For the quarters ended March 31, 2002 and 2001, the Company
              incurred costs of $1,644,000 and $1,095,000, respectively, in base
              management fees in accordance with the terms of the Management
              Agreements. As of March 31, 2002 and 2001, $602,000 and $369,000,
              respectively, was payable by the Company to the Manager for the
              base management fee.

              The Manager is also entitled to earn performance based
              compensation in an amount equal to 20% of the Company's annualized
              net income, before performance based compensation, above an
              annualized Return on Equity equal to the ten year U.S. Treasury
              Rate plus 1%. For purposes of the performance fee calculation,
              equity is generally defined as proceeds from issuance of common
              stock before underwriter's discount and other costs of issuance,
              plus retained earnings. For the quarters ended March 31, 2002 and
              2001, the Company earned performance based compensation in the
              amount of $3,193,000 and $924,000, respectively, in accordance
              with the terms of the Agreement. These respective amounts were
              payable by the Company to the Manager as of March 31, 2002 and
              2001.

              For the quarters ended March 31, 2002 and 2001, the Company
              reimbursed the Manager and other affiliated companies $74,000 and
              $8,000, respectively, for certain other direct expenses of the
              Company, primarily related to shareholder relations, public
              relations and marketing consulting services. The Company's
              subsidiaries, except TMHL, have entered into separate lease
              agreements with the Manager for office space in Santa Fe, New
              Mexico. During the first three months of 2002 and 2001, the
              combined amount of rent paid to the Manager by these subsidiaries
              was $3,000 and $4,000, respectively.

              Pursuant to an employee residential mortgage loan program approved
              by the Board of Directors, certain of the Company's directors and
              officers have obtained residential first lien mortgage loans from
              the Company. In general, the terms of the loans and the
              underwriting requirements are identical to the loan programs that
              the Company offers to unaffiliated third parties. At the time each
              individual enters into a loan agreement, such individual executes
              an addendum providing a discount on the interest rate which is
              subject to cancellation at the time such individual's employment
              with the Company is terminated for any reason. As of March 31,
              2002, the aggregate balance of mortgage loans outstanding to
              directors and officers of the Company and employees of the Manager
              amounted to $3.7 million, had a weighted average interest rate of
              5.45% and mature between 2016 and 2032.




                                       18
<PAGE>


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

Certain information contained in this Quarterly Report on Form 10-Q constitutes
"Forward-Looking Statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act, which can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "Plan," or "continue" or the negatives
thereof or other variations thereon or comparable terminology. Investors are
cautioned that all forward-looking statements involve risks and uncertainties
including, but not limited to, risks related to the future level and
relationship of various interest rates, prepayment rates, availability and cost
of acquiring new assets, the timing of new programs and the performance of
third-party, private-label relationships involved in the origination and
servicing of loans. The statements in the "Risk Factors" section of the
Company's 2001 Annual Report on Form 10-K on pages 14 through 20 constitute
cautionary statements identifying important factors, including certain risks and
uncertainties, with respect to such forward-looking statements that could cause
the actual results, performance or achievements of the Company to differ
materially from those reflected in such forward-looking statements.

GENERAL

Thornburg Mortgage, Inc., including subsidiaries, (the "Company") is a mortgage
acquisition company that primarily invests in adjustable-rate mortgage ("ARM")
assets comprised of ARM securities and ARM loans, thereby providing capital to
the single-family residential housing market. ARM securities represent interests
in pools of ARM loans, which often include guarantees or other credit
enhancements against losses from loan defaults. While the Company is not a bank
or savings and loan, its business purpose, strategy, method of operation and
risk profile are best understood in comparison to such institutions. The Company
leverages its equity capital using borrowed funds, invests in ARM assets and
seeks to generate income based on the difference between the yield on its ARM
assets portfolio and the cost of its borrowings. The Company securitizes the ARM
loans that it acquires into ARM securities for its own portfolio in order to
reduce the cost of financing the portfolio and in order to enhance the high
quality and highly liquid characteristics of its portfolio, thereby improving
the Company's access to mortgage asset financing. The corporate structure of the
Company differs from most lending institutions in that the Company is organized
for tax purposes as a real estate investment trust ("REIT") and therefore
generally passes through substantially all of its earnings to shareholders
without paying federal or state income tax at the corporate level. The Company
has three qualified REIT subsidiaries. Two of them are special purpose financing
subsidiaries, Thornburg Mortgage Funding Corporation and Thornburg Mortgage
Acceptance Corporation, which are consolidated in the Company's financial
statements and federal and state tax returns. The Company also has one
wholly-owned mortgage banking subsidiary, Thornburg Mortgage Home Loans, Inc
("TMHL") that conducts the Company's mortgage loan acquisition and mortgage loan
origination activities. To facilitate the securitization and financing of loans
by TMHL, two special purpose subsidiaries of TMHL have been created: Thornburg
Mortgage Funding Corporation II and Thornburg Mortgage Acceptance Corporation
II. TMHL and its subsidiaries are also consolidated in the Company's financial
statements and federal and state tax returns.

The Company's mortgage assets portfolio may consist of either U.S. Government
agency or privately issued (generally publicly registered) mortgage pass-through
securities, multi-class pass-through securities, collateralized mortgage
obligations ("CMOs"), collateralized bond obligations ("CBOs") which are
generally backed by high quality mortgage-backed securities ("MBS"), ARM loans,
fixed rate MBS that have an expected duration of one year or less or short-term
investments that either mature within one year or have an interest rate that
reprices within one year. The Company also invests in hybrid ARM assets ("Hybrid
ARMs"). Hybrid ARMs are typically 30-year loans that have a fixed rate of
interest for an initial period, generally 3 to 10 years, and then convert to an
adjustable rate for the balance of their term. The Company limits its ownership
of Hybrid ARMs with fixed rate periods of greater than five years to no more
than 10% of our total assets.



                                       19
<PAGE>


The Company's investment policy is to invest at least 70% of total assets in
High Quality adjustable and variable rate mortgage securities and short-term
investments. High Quality means:

     (1) securities that are unrated but are guaranteed by the U.S. Government
         or issued or guaranteed by an agency of the U.S. Government; or

     (2) securities which are rated within one of the two highest rating
         categories by at least one of either Standard & Poor's Corporation or
         Moody's Investors Service, Inc. (the "Rating Agencies"); or

     (3) securities that are unrated or whose ratings have not been updated but
         are determined to be of comparable quality (by the rating standards of
         at least one of the Rating Agencies) to a High Quality rated mortgage
         security, as determined by the Manager (as defined below) and approved
         by the Company's Board of Directors; or (4) the portion of ARM or
         hybrid loans that have been deposited into a trust and have received a
         credit rating of AA or better from at least one Rating Agency.

The remainder of the Company's ARM portfolio, comprising not more than 30% of
total assets, may consist of Other Investment assets, which may include:

     (1) adjustable or variable rate pass-through certificates, multi-class
         pass-through certificates or CMOs backed by loans on single-family,
         multi-family, commercial or other real estate-related properties so
         long as they are rated at least Investment Grade at the time of
         purchase. "Investment Grade" generally means a security rating of BBB
         or Baa or better by at least one of the Rating Agencies;

     (2) ARM loans collateralized by first liens on single-family residential
         properties, generally underwritten to "A" quality standards, and
         acquired for the purpose of future securitization; or

     (3) fixed rate mortgage loans collateralized by first liens on single
         family residential properties originated for sale to third parties; or

     (4) real estate properties acquired as a result of foreclosing on the
         Company's ARM loans; or

     (5) as authorized by the Company's Board of Directors, ARM securities rated
         less than Investment Grade that are created as a result of loan
         acquisition and securitization efforts may equal an amount up to 17.5%
         of shareholders equity, measured on a historical cost basis.

The Company acquires and produces prime quality mortgage loans through its
mortgage banking subsidiary, TMHL, from three sources: bulk sellers,
correspondent relationships and direct retail originations. The Company finances
the loans during an accumulation phase through its warehouse borrowing
arrangements, then securitizes the ARM and Hybrid ARM loans for the Company's
portfolio, or, in the case of fixed-rate loans, sells those loans to third
parties.

The Company acquires and produces ARM loans based upon its own underwriting
standards, due diligence criteria and ARM product designs. It also originates
fixed-rate loans that are generally underwritten to third party specifications
and sold to third party investors. The Company's mortgage banking operation
performs its own due diligence underwriting review of loans that it purchases
from bulk sellers, performs an underwriting review of loans it acquires from its
approved correspondents and utilizes private-label "fee based" third-party
service providers to underwrite, process and close its direct retail mortgage
loans. It also services mortgage loans using a contract "private label"
subservicer, whether the loan is produced or acquired. The Company believes its
third-party service providers have developed both efficiencies and expertise
through specialization that afford the Company an opportunity to enter the
mortgage origination and loan servicing business in a cost effective manner with
very little "up front" investment.

The Company's loan production strategies through correspondent and direct retail
channels take advantage of the Company's portfolio lending capability, its cost
efficient operation, its competitive advantages and available technology to make
it a mortgage lender that provides attractive and innovative mortgage products,
competitive mortgage rates, and a high level of customer service. By eliminating
intermediaries, whenever possible, between the borrower and the lender, the
Company expects to produce loans for retention in its portfolio at attractive
yields while offering its customers innovative mortgage products at competitive
rates and fees. In expanding into the residential mortgage loan production
business, the Company intends to continue its strategy of acquiring only high
quality mortgages with the same emphasis on loan quality as in its current loan
acquisition activities.

The Company offers mortgages on-line utilizing a third party, private label
web-based origination system. Prospective borrowers are able to look up mortgage
loan product and interest rate information through the Company's website, obtain
access to a variety of mortgage calculators and consumer help features, submit
an application on-line and obtain a pre-approval of their loan. Once a mortgage
loan application has been submitted, a Thornburg Mortgage representative is
assigned the responsibility of completing the loan process on behalf of the
borrower.



                                       20
<PAGE>

The Company does not invest in REMIC residuals or other CMO residuals and,
therefore does not create excess inclusion income or unrelated business taxable
income for tax-exempt investors. Therefore, the Company is a mortgage REIT
eligible for purchase by tax-exempt investors, such as pension plans, profit
sharing plans, 401(k) plans, Keogh plans and Individual Retirement Accounts
("IRAs").

FINANCIAL CONDITION

At March 31, 2002, the Company held total assets of $7.269 billion, $7.109
billion of which consisted of ARM assets. That compares to $5.804 billion in
total assets and $5.733 billion of ARM assets at December 31, 2001. Since
commencing operations, the Company has purchased either ARM securities (backed
by agencies of the U.S. government or privately-issued, generally publicly
registered, mortgage assets, most of which are rated AA or higher by at least
one of the Rating Agencies) or ARM loans generally originated to "A" quality
underwriting standards. At March 31, 2002, 94.8% of the assets held by the
Company, including cash and cash equivalents, were High Quality assets, far
exceeding the Company's investment policy minimum requirement of investing at
least 70% of its total assets in High Quality ARM assets and cash and cash
equivalents. Of the ARM assets owned by the Company as of March 31, 2002, 79.6%
are in the form of adjustable-rate pass-through certificates or ARM loans. The
remainder are floating rate classes of CMOs (13.3%), short-term fixed-rate
classes of CMOs (4.7%) or investments in floating rate classes of CBOs (2.4%)
backed primarily by ARM securities.

The following table presents a schedule of ARM assets owned at March 31, 2002
and December 31, 2001 classified by High Quality and Other Investment assets and
further classified by type of issuer and by ratings categories.

                     ARM ASSETS BY ISSUER AND CREDIT RATING
                          (Dollar amounts in thousands)

<Table>
<Caption>
                                                      March 31, 2002                       December 31, 2001
                                           ------------------------------------    ------------------------------------
                                              Carrying            Portfolio           Carrying            Portfolio
                                                Value                 Mix               Value                 Mix
                                           ---------------      ---------------    ---------------      ---------------

<S>                                        <C>                  <C>                <C>                  <C>
HIGH QUALITY:
   Freddie Mac/Fannie Mae                  $     3,586,491                 50.5%   $     2,402,028                 41.9%
   Privately Issued:
     AAA/Aaa Rating                              2,758,577(1)              38.8          2,700,069(1)              47.1
     AA/Aa Rating                                  363,137                  5.1            372,435                  6.5
                                           ---------------      ---------------    ---------------      ---------------
       Total Privately Issued                    3,121,714                 43.9          3,072,504                 53.6
                                           ---------------      ---------------    ---------------      ---------------
       Total High Quality                        6,708,205                 94.4          5,474,532                 95.5
                                           ---------------      ---------------    ---------------      ---------------

OTHER INVESTMENT:
   Privately Issued:
     A Rating                                       79,654                  1.1             49,632                  0.9
     BBB/Baa Rating                                 32,297                  0.4             69,703                  1.2
     BB/Ba Rating and Other                         40,790(1)               0.6             39,943(1)               0.7
   ARM loans pending securitization                247,693                  3.5             98,766                  1.7
                                           ---------------      ---------------    ---------------      ---------------
       Total Other Investment                      400,434                  5.6            258,044                  4.5
                                           ---------------      ---------------    ---------------      ---------------

       Total ARM Portfolio                 $     7,108,639                100.0%   $     5,732,576                100.0%
                                           ===============      ===============    ===============      ===============
</Table>

(1)       The AAA Rating category includes $370.5 million and $442.2 million of
          whole loans as of March 31, 2002 and December 31, 2001, respectively,
          that have been credit enhanced to AAA by a combination of an insurance
          policy purchased from a third-party and an unrated subordinated
          certificate retained by the Company in the amount of $31.7 million and
          $31.8 million as of March 31, 2002 and December 31, 2001,
          respectively. The subordinated certificate is included in the BB/Ba
          Rating and Other category.



                                       21
<PAGE>

As of March 31, 2002 and December 31, 2001, the Company had reduced the cost
basis of its securitized ARM loans by $9,138,000 and $7,925,000, respectively,
due to estimated credit losses (other than temporary declines in fair value). In
addition, the Company had reduced the cost basis of other ARM securities by
$1,145,000 and $1,151,000, as of the same dates, respectively, related to Other
Investments that the Company purchased at a discount that included an estimate
of credit losses.

As of March 31, 2002, the Company's ARM loan portfolio included 14 loans that
are considered seriously delinquent (60 days or more delinquent) with an
aggregate balance of $2,355,000. The ARM loan portfolio, inclusive of
securitized loans, also includes two properties ("REO") that the Company
acquired as the result of foreclosure processes in the amount of $287,000. The
average original effective loan-to-value ratio on the delinquent loans and REO
is approximately 78%. The Company believes that its current level of basis
adjustments and allowance for loan losses is more than adequate to cover
estimated losses from these loans and REO properties.

The following table presents a summary of the Company's basis adjustments on the
Company's securitized ARM loans, basis adjustments on other ARM securities and
the Company's allowance for losses on ARM loans (dollar amounts in thousands):

<Table>
<Caption>
                                                                            Allowance for
                                           Basis Adjustments                    Losses
                                      ---------------------------    ---------------------------
                                      Securitized     Other ARM
                                        ARM Loans     Securities      ARM Loans        Total
                                      ------------   ------------    ------------   ------------

<S>                                   <C>            <C>             <C>            <C>
Balance, December 31, 2001            $      7,925   $      1,151    $        100   $      9,176
Basis adjustment recorded at
   time of loan securitization               1,213             --              --          1,213
Charge-offs                                     --            (44)             --            (44)
Recoveries                                      --             38              --             38
                                      ------------   ------------    ------------   ------------
Balance, March 31, 2002               $      9,138   $      1,145    $        100   $     10,383
                                      ============   ============    ============   ============
</Table>


The following table classifies the Company's portfolio of ARM assets by type of
interest rate index.

                               ARM ASSETS BY INDEX
                          (Dollar amounts in thousands)

<Table>
<Caption>
                                                          March 31, 2002             December 31, 2001
                                                     ------------------------    ------------------------
                                                     Carrying      Portfolio     Carrying      Portfolio
                                                       Value          Mix          Value          Mix
                                                     ----------    ----------    ----------    ----------
<S>                                                  <C>          <C>            <C>          <C>
ARM ASSETS:
    INDEX:
       One-month LIBOR                               $  967,610          13.6%   $  633,797          11.1%
       Three-month LIBOR                                170,882           2.4       171,262           3.0
       Six-month LIBOR                                  224,046           3.2       261,265           4.6
       Six-month Certificate of Deposit                 123,548           1.7       140,900           2.5
       Six-month Constant Maturity Treasury              14,770           0.2        16,809           0.3
       One-year Constant Maturity Treasury            1,548,400          21.8     1,651,576          28.8
       Cost of Funds                                    147,097           2.1       182,452           3.2
                                                     ----------    ----------    ----------    ----------
                                                      3,196,353          45.0     3,058,061          53.5
                                                     ----------    ----------    ----------    ----------

HYBRID ARM ASSETS                                     3,577,437          50.3     2,397,850          41.7
ONE-YEAR MATURITY - FIXED RATE                          334,849           4.7       276,665           4.8
                                                     ----------    ----------    ----------    ----------
                                                     $7,108,639         100.0%   $5,732,576         100.0%
                                                     ==========    ==========    ==========    ==========
</Table>

The ARM portfolio had a current weighted average coupon of 5.42% at March 31,
2002. This consisted of an average coupon of 5.72% on the hybrid portion of the
portfolio and an average coupon of 5.10% on the rest of the portfolio. If the
non-hybrid portion of the portfolio had been "fully indexed," the weighted
average coupon of the ARM portfolio would have been approximately 5.05%, based
upon the current composition of the portfolio and the applicable indices. The
term "fully-indexed"




                                       22
<PAGE>

refers to an ARM asset that has an interest rate that is currently equal to its
applicable index plus a margin to the index that is specified by the terms of
the ARM asset.

The ARM portfolio had a current weighted average coupon of 5.96% at December 31,
2001. This consisted of an average coupon of 6.26% on the hybrid portion of the
portfolio and an average coupon of 5.71% on the rest of the portfolio. If the
non-hybrid portion of the portfolio had been "fully indexed," the weighted
average coupon of the ARM portfolio would have been approximately 5.16%, based
upon the current composition of the portfolio and the applicable indices at that
time. The lower average interest coupon on the ARM portfolio as of March 31,
2002 compared to the end of 2001 is reflective of the Federal Reserve Board
interest rate decreases that occurred during 2001. The average interest rate on
the ARM portion of the portfolio is expected to continue to decrease during 2002
until it reaches the "fully indexed" rate.

At March 31, 2002, the current yield of the ARM assets portfolio was 4.94%,
compared to 5.09% as of December 31, 2001, with an average term to the next
repricing date of 709 days as of March 31, 2002, compared to 617 days as of
December 31, 2001. The non-hybrid portion of the portfolio had an average term
to the next repricing of 110 days and the hybrid portion had an average term to
the next repricing of 3.3 years at March 31, 2002. As of March 31, 2002, Hybrid
ARMs comprised 50.4% of the total ARM portfolio, compared to 41.7% as of the end
of 2001. The Company finances its Hybrid ARM portfolio with longer term
fixed-rate borrowings such that the duration mismatch of the Hybrid ARMs and the
corresponding borrowings is one year or less. Duration is a calculation that
measures the expected price volatility of financial instruments based on changes
in interest rates over time. By maintaining a duration mismatch of less than one
year, the price change of the Company's Hybrid ARM portfolio would be expected
to be a maximum of 1% for every 1% change in interest rates. As of March 31,
2002, the duration mismatch was approximately two months. The current yield
includes the impact of the amortization of applicable premiums and discounts and
the impact of principal payment receivables.

The decrease in the yield of 0.15% as of March 31, 2002, compared to December
31, 2001, is due to the decreased weighted average interest rate coupon
discussed above, which decreased by 0.54%. This decline in the average interest
rate coupon was partially offset by a lower level of net premium amortization,
which had the effect of increasing the yield by 0.35%. Additionally, the impact
of non-interest earning principal payments receivables also increased the
portfolio yield by 0.04%.




                                       23
<PAGE>

The following table presents various characteristics of the Company's ARM and
Hybrid ARM loan portfolio as of March 31, 2002. This information pertains to
loans held for securitization, loans held as collateral for the notes payable
and loans the Company has securitized for its own portfolio for which the
Company retained credit loss exposure. The combined amount of the loans included
in this information is $2.280 billion.

                ARM AND HYBRID ARM LOAN PORTFOLIO CHARACTERISTICS

<Table>
<Caption>

                                                          Average              High                Low
                                                     ----------------    ---------------     ---------------
<S>                                                  <C>                 <C>                 <C>
     Unpaid principal balance                        $      351,145     $     5,116,409     $         1,306
     Coupon rate on loans                                      5.97%               9.25%               2.75%
     Pass-through rate                                         5.62%               8.73%               2.48%
     Pass-through margin                                       1.87%               3.48%               0.23%
     Lifetime cap                                             11.92%              16.75%               8.13%
     Original Term (months)                                      356                 480                 120
     Remaining Term (months)                                     338                 479                  52

     Geographic Distribution (Top 5 States):                  Property type:
         California                   30.47%                      Single-family                64.74%
         Georgia                      10.55                       DeMinimus PUD                23.29
         Florida                       6.76                       Condominium                   7.66
         New York                      5.29                       Other                         4.31
         Colorado                      5.92

     Occupancy status:                                        Loan purpose:
         Owner occupied               87.16%                      Purchase                     39.49%
         Second home                  10.40                       Cash out refinance           30.13
         Investor                      2.44                       Rate & term refinance        30.38

     Documentation type:                                      Periodic Cap:
         Full/Alternative             93.39%                      None                         25.12%
         Other                         6.61                       1.00% or less                 0.84
                                                                  2.00%                        73.07
                                                                  Over 2.00%                    0.97

     Average effective original                               Percent of loan balances that
         loan-to-value:               65.30%                      are interest only:           76.24%
</Table>

As of March 31, 2002, the Company serviced $720.4 million of its loans and had
1,815 customer relationships. All of the loans serviced are held by the Company
in its portfolio in the form of securitized loans or loans held for
securitization for the Company's portfolio. The Company has not retained and
capitalized any servicing rights on loans sold.

During the quarter ended March 31, 2002, the Company purchased $1.8 billion of
ARM securities, 100% of which were High Quality assets and $599.4 million of ARM
loans, generally originated to "A" quality underwriting standards. Of the ARM
assets acquired during the quarter, approximately 67% were Hybrid ARMs, 13% were
fixed-rate, short-term securities and 20% were indexed to LIBOR.




                                       24
<PAGE>


The following table compares the Company's ARM asset acquisition and origination
activity for the quarters ended March 31, 2002 and 2001 (dollar amounts in
thousands):

<Table>
<Caption>
                                               For the quarters ended:
                                           ---------------------------------
                                           March 31, 2002    March 31, 2001
                                           ---------------   ---------------

<S>                                        <C>               <C>
ARM SECURITIES:
   Freddie Mac/Fannie Mae                  $     1,703,840   $       186,834
   High Quality, privately issued                   83,283           174,398
   Other Investment ARM securities                      --            12,773
                                           ---------------   ---------------
                                                 1,787,123           374,005
                                           ---------------   ---------------

LOANS:
   Bulk acquisitions                               200,812            38,688
   Correspondent purchases                         311,603            27,908
   Direct retail originations                       86,942             2,514
                                           ---------------   ---------------
                                                   599,357            69,110
                                           ---------------   ---------------

       Total production                    $     2,386,480   $       443,115
                                           ===============   ===============
</Table>

Since 1997, the Company has emphasized purchasing assets at substantially lower
prices relative to par in order to reduce the potential impact of future
prepayments. As a result, the Company has emphasized the acquisition of ARM and
Hybrid ARM assets, high quality floating-rate collateralized mortgages and
short-term fixed-rate securities. In doing so, the average premium/(discount)
paid for ARM assets acquired in the first three months of 2002 and for the year
2001 was 0.5% and 0.12% of par, respectively, as compared to 3.29% of par in
1997 when the Company emphasized the purchase of seasoned ARM assets. In part,
as a result of this strategy, the Company's unamortized net premium as a percent
of par decreased to 0.85% as of March 31, 2002, compared to 0.94% as of December
31, 2001, and down from 2.83% as of the end of 1997.

During the three-month period ended March 31, 2002, the Company securitized
$449.5 million of its ARM loans into a series of privately-issued multi-class
ARM securities. The Company retained, for its ARM portfolio, all of the classes
of the securities created. The Company securitizes the ARM loans that it
acquires into ARM securities for its own portfolio in order to reduce the cost
of financing the portfolio and in order to enhance the high quality and highly
liquid characteristics of its portfolio, thereby improving the Company's access
to mortgage finance markets. In doing so, the Company retains all of the
economic interest and risk of the loans, except those swapped for FNMA
guaranteed certificates, which it acquires and originates, although they are in
the form of securities. Of the securities created during the first three months
of 2002, 99.8% were at least investment grade securities and 0.2% were
subordinate securities that provide credit support to the investment grade
securities.

As of March 31, 2002, the Company had commitments to purchase $558.5 million of
ARM securities and $399.1 million ARM loans through its origination channels.

During the three-month period ended March 31, 2002, the Company sold $50.1
million of ARM securities for no gain or loss. In addition, the Company sold
$3.7 million of loans for a gain of $3,000. The Company did not sell any assets
during the first quarter of 2001.

For the quarter ended March 31, 2002, the Company's ARM mortgage assets paid
down at an approximate average annualized CPR of 34% compared to 19% for the
quarter ended March 31, 2001 and 29% for the quarter ended December 31, 2001.
When prepayment experience increases, the Company has to amortize its premiums
over a shorter time period, resulting in a reduced yield to maturity on the
Company's ARM assets. Conversely, if actual prepayment experience decreases, the
premium would be amortized over a longer time period, resulting in a higher
yield to maturity. The Company monitors its prepayment experience on a monthly
basis in order to adjust the amortization of the net premium, as appropriate.

The fair value of the Company's portfolio of ARM assets classified as
available-for-sale decreased by 0.06% from a negative adjustment of 0.16% of the
portfolio as of December 31, 2001, to a negative adjustment of 0.22% as of March
31, 2002. This price decrease was primarily due to the effect of increasing
short-term interest rates. The amount of the negative adjustment to fair value
on the ARM assets classified as available-for-sale decreased to $14.0 million as
of March 31, 2002 from $8.5 million




                                       25
<PAGE>
as of December 31, 2001. All of the Company's ARM securities are classified as
available-for-sale and are carried at their fair value.

At March 31, 2002, the Cap Agreements had a remaining notional balance of $2.142
billion with an average final maturity of 1.4 years, compared to a remaining
notional balance of $2.254 billion with an average final maturity of 1.5 years
at December 31, 2001. At March 31, 2002, the fair value of the Company's Cap
Agreements was $0.2 million compared to a fair value of $0.4 million as of
December 31, 2001. The Cap Agreements have the effect of offsetting a portion of
the Company's borrowing costs, thereby reducing the effect of the lifetime cap
feature on the Company's ARM assets so that the net margin on the Company's ARM
assets will be protected in high interest rate environments. In April 2002, the
Company acquired additional Cap Agreements with a total notional balance of $200
million. Pursuant to the terms of the Cap Agreements, including the Cap
Agreements purchased in April 2002, the Company will receive cash payments if
the one-month, three-month or six-month LIBOR index increases above certain
specified levels, which range from 5.875% to 12.00% and average approximately
9.90%.

The following table presents information about the Company's Cap Agreement
portfolio as of March 31, 2002, adjusted for the Cap Agreements acquired in
April 2002:

           CAP AGREEMENTS/OPTIONS CONTRACTS STRATIFIED BY STRIKE PRICE
                          (Dollar amounts in thousands)

<Table>
<Caption>
        Hedged             Weighted       Cap Agreement/ Options                          Weighted
     Portion of            Average           Contract Notional        Strike           Avg. Remaining
   ARM Assets (1)          Life Cap               Balance              Price                Term
   --------------         ---------       ----------------------      ------           --------------
<S>                       <C>             <C>                        <C>               <C>
     $   88,385              8.38%             $   89,554              6.30%                1.5 Years
        203,420              8.39                 200,000              7.50                 1.7
        419,677              8.65                 420,565              8.00                  .8
         98,602              9.72                 100,000              8.25                  .7
         25,133              9.81                  25,000              9.00                  .7
         53,837             10.04                  53,974              9.50                  .6
        226,738             10.55                 226,854             10.01                  .7
        128,110             11.17                 126,303             10.50                  .5
        470,002             11.59                 470,000             11.00                 1.5
        279,337             12.45                 280,000             11.50                 2.4
        426,192             13.52                 350,000             12.00                 1.5
     ----------             -----              ----------             -----            --------------
     $2,419,433             10.86%             $2,342,250              9.90%                1.4 Years
     ==========             =====              ==========             =====            ==============
</Table>


---------

(1)  Excludes ARM assets that do not have life caps or are hybrids that are
     match funded during their fixed rate period, in accordance with the
     Company's investment policy.

The Company enters into interest rate Swap Agreements in order to manage its
interest rate exposure when financing its ARM assets. The Company generally
borrows money based on short-term interest rates, either by entering into
borrowings with maturity terms of less than six months, and frequently one
month, or by entering into borrowings with longer maturity terms of one to two
years that reprice based on a frequency that is commonly one month, but has at
times been up to six months. The Company's ARM assets generally have an interest
rate that reprices based on frequency terms of one to twelve months. The
Company's Hybrid ARMs generally have an initial fixed interest rate period of
three to ten years. As a result, the Company's existing and forecasted
borrowings reprice to a new rate on a more frequent basis than do the Company's
ARM assets. When the Company enters into a Swap Agreement, it agrees to pay a
fixed rate of interest and to receive a variable interest rate, generally based
on LIBOR. These Swap Agreements have the effect of converting the Company's
variable-rate debt into fixed-rate debt over the life of the Swap Agreements.
Swap Agreements are used as a cost effective way to lengthen the average
repricing period of the Company's variable rate and short-term borrowings such
that the average repricing of the borrowings more closely matches the average
repricing of the Company's ARM assets.

As of March 31, 2002, the Company was counterparty to forty-nine Swap Agreements
having an aggregate notional balance of $3.213 billion. These Swap Agreements
hedged the short-term financing during the fixed interest rate period of Hybrid
ARMs and had a weighed average maturity of 2.8 years. As a result of entering
into these Swap Agreements, the Company




                                       26
<PAGE>

has reduced the interest rate variability of its cost to finance its ARM assets
by increasing the average period until the next repricing of its borrowings from
46 days to 545 days. The average remaining fixed rate term of the Company's
Hybrid ARM assets as of March 31, 2002 was 3.3 years. Further, the difference
between the duration of Hybrid ARMs and the duration of the borrowings funding
Hybrid ARMs, as of March 31, 2002, was approximately two months.

In accordance with FAS 133, all of these Swaps Agreements have been designated
as cash flow hedges and, as of March 31, 2002, are being carried on the balance
sheet at their negative fair value of $10.8 million. As of March 31, 2002, the
fair value adjustment for Swap Agreements was a decrease to "Accumulated other
comprehensive income" in the amount of $7.9 million. Since the Swap Agreements
and the short-term borrowings they hedge have nearly identical terms and
characteristics with respect to the applicable index and interest rate repricing
dates, the Company has calculated the effectiveness of this cash flow hedge to
be approximately 100%. As a result of the calculated effectiveness of
approximately 100% to date, all changes in the unrealized gains and losses on
Swap Agreements have been recorded in "Accumulated other comprehensive income"
and are reclassified to earnings as interest expense is recognized on the
Company's hedged borrowings.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002

For the quarter ended March 31, 2002, the Company's net income was $24,293,000,
or $0.62 per share (Basic and Diluted EPS), based on a weighted average of
36,417,000 shares outstanding. That compares to $10,727,000, or $0.42 per share
(Basic and Diluted EPS) for the quarter ended March 31, 2001, based on a
weighted average of 21,691,000 shares outstanding, a 48% increase in the
Company's earnings per share.

The table below highlights the historical trend and the components of return on
average common equity (annualized) and the 10-year U S Treasury average yield
during each respective quarter that is applicable to the computation of the
performance fee:

                COMPONENTS OF RETURN ON AVERAGE COMMON EQUITY (1)

<Table>
<Caption>
                                                                                                                   ROE in
                                                                                                                  Excess of
                  Net                   Provision  Gain (Loss)  G & A                           Net     10-Year    10-Year
   For the     Interest     Hedging        For       on ARM    Expense   Perform.  Preferred  Income/  US Treas.  US Treas.
   Quarter      Income/    Expense/      Losses/     Sales/      (2)/      Fee/    Dividend/  Equity    Average    Average
    Ended       Equity      Equity       Equity      Equity     Equity    Equity     Equity    (ROE)     Yield      Yield
   -------     --------    --------      ------     --------   -------    ------   ---------  -------  --------   ---------
<S>             <C>        <C>          <C>         <C>        <C>        <C>      <C>        <C>        <C>      <C>
Mar 31, 2000     11.47%       --          0.41%       --        1.81%       --       2.06%    7.20%      6.47%      0.73%
Jun 30, 2000     10.74%       --          0.47%     0.06%       1.78%       --       2.05%    6.50%      6.18%      0.32%
Sep 30, 2000     11.01%       --          0.33%       --        2.07%       --       2.05%    6.56%      5.89%      0.67%
Dec 31, 2000     11.77%       --          0.21%     0.29%       2.37%     0.06%      2.05%    7.37%      5.57%      1.80%
Mar 31, 2001     17.40%     0.18%         0.22%       --        2.59%     1.12%      2.03%   11.24%      5.04%      6.21%
Jun 30, 2001     18.50%     0.55%         0.18%       --        2.81%     1.26%      1.97%   11.73%      5.28%      6.45%
Sep 30, 2001     21.36%     0.55%         0.25%       --        3.07%     1.76%      1.80%   13.94%      4.99%      8.95%
Dec 31, 2001     25.25%     0.19%         0.08%       --        3.51%     2.70%      1.46%   17.31%      4.76%     12.55%
Mar 31, 2002     22.71%     0.23%           --        --        2.75%     2.29%      1.20%   16.24%      5.79%     10.45%
</Table>

--------------
(1)  Average common equity excludes unrealized gain (loss) on available-for-sale
     ARM securities.

(2)  Excludes performance fees and net of loan servicing fees.

The Company's return on average common equity was 16.24% for the quarter ended
March 31, 2002 compared to 11.24% for the quarter ended March 31, 2001. The
Company's return on equity improved in this past quarter compared to the same
quarter of the prior year primarily because the Company's net interest income
improved. This improvement was due, in part, to a lower cost of funds of the
Company's borrowings and because the Company's yield on net interest earning
assets is benefiting from acquisitions of loans and other ARM and Hybrid ARM
assets acquired at average prices close to par, replacing lower yielding assets
that paid off.




                                       27
<PAGE>

The following table presents the components of the Company's net interest
income:

                   COMPARATIVE NET INTEREST INCOME COMPONENTS
                          (Dollar amounts in thousands)

<Table>
<Caption>

                                              For the quarters ended March 31,
                                             --------------------------------
                                                 2002               2001
                                             --------------    --------------
<S>                                          <C>               <C>
Coupon interest income on ARM assets         $       84,190    $       77,553
Amortization of net premium                          (5,148)           (4,626)
Cash and cash equivalents                               385               298
                                             --------------    --------------
    Interest income                                  79,427            73,225
                                             --------------    --------------

Reverse repurchase agreements                        26,530            46,152
AAA notes payable                                     2,626             9,661
Other borrowings                                      1,815             2,797
Interest rate swaps                                  16,832               291
                                             --------------    --------------
    Interest expense                                 47,803            58,901
                                             --------------    --------------

Net interest income                          $       31,624    $       14,324
                                             ==============    ==============
</Table>

As presented in the table above, the Company's net interest income increased by
$17.3 million in the first quarter of 2002 compared to the first quarter of
2001. The change was attributable to an $11.1 million decline in interest
expense as a result of lower rates and a $6.2 million increase in interest
income due to an increased asset base. The following two tables explain the
increase in terms of volume and rate variances.

The following table presents the average balances for each category of the
Company's interest earning assets as well as the Company's interest bearing
liabilities, with the corresponding annualized effective rate of interest and
the related interest income or expense:

             AVERAGE BALANCE, RATE AND INTEREST INCOME/EXPENSE TABLE
                          (Dollar amounts in thousands)

<Table>
<Caption>

                                                                     For the quarters ended March 31,
                                             -------------------------------------------------------------------------------
                                                             2002                                           2001
                                             ------------------------------------      -------------------------------------
                                                                         Interest                                   Interest
                                               Average      Effective     Income/         Average      Effective     Income/
                                               Balance        Rate        Expense         Balance         Rate       Expense
                                             ----------     ---------    --------       ----------     ---------    --------
<S>                                          <C>            <C>          <C>            <C>            <C>          <C>
Interest Earning Assets:

  Adjustable-rate mortgage assets            $6,326,272          5.00%   $ 79,042       $4,238,664          6.88%   $ 72,927
  Cash and cash equivalents                      95,156          1.62         385           21,572          5.53         298
                                             ----------     ---------    --------       ----------     ---------    --------
                                              6,421,428          4.95      79,427        4,260,236          6.88      73,225
                                             ----------     ---------    --------       ----------     ---------    --------
Interest Bearing Liabilities:
  Reverse repurchase agreements               5,144,702          3.37      43,362        3,114,509          5.96      46,443
  Collateralized notes payable                  405,069          2.59       2,626          592,052          6.53       9,661
  Other borrowings                              234,486          3.10       1,815          175,379          6.38       2,797
                                             ----------     ---------    --------       ----------     ---------    --------
                                              5,784,257          3.31      47,803        3,881,940          6.07      58,901
                                             ----------     ---------    --------       ----------     ---------    --------

Net Interest Earning Assets and Spread       $  637,171          1.64%   $ 31,624       $  378,296          0.81%   $ 14,324
                                             ==========     =========    ========       ==========     =========    ========
Yield on Net Interest Earning Assets(1)                          1.97%                                      1.34%
                                                            =========                                  =========

</Table>


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

(1) Yield on Net Interest Earning Assets is computed by dividing annualized net
    interest income by the average daily balance of interest earning assets.




                                       28
<PAGE>


The following table presents the total amount of change in interest
income/expense from the table above and presents the amount of change due to
changes in interest rates versus the amount of change due to changes in volume
(dollar amounts in thousands):

<Table>
<Caption>
                                                     2002 versus 2001
                                         --------------------------------------
                                            Rate         Volume         Total
                                         ----------    ----------    ----------

<S>                                      <C>           <C>           <C>
Interest Income:
   ARM assets                            $  (19,968)   $   26,083    $    6,115
   Cash and cash equivalents                   (211)          298            87
                                         ----------    ----------    ----------
                                            (20,179)       26,381         6,202
                                         ----------    ----------    ----------
Interest Expense:
   Reverse repurchase agreements            (20,193)       17,110        (3,083)
   Collateralized notes payable              (5,822)       (1,212)       (7,034)
   Other borrowings                          (1,440)          459          (981)
                                         ----------    ----------    ----------
                                            (27,455)       16,357       (11,098)
                                         ----------    ----------    ----------

Net interest income                      $    7,276    $   10,024    $   17,300
                                         ==========    ==========    ==========
</Table>

As a result of the yield on the Company's interest-earning assets decreasing to
4.95% during the first three months of 2002 from 6.88% during the same period of
2001, a decrease of 1.93%, and the Company's cost of funds decreasing even more
to 3.31% from 6.07% during the same time period, a decrease of 2.76%, net
interest income increased by $17,300,000. This increase in net interest income
is both a favorable rate variance and a favorable volume variance. There was a
net favorable rate variance of $7,276,000, primarily due to a favorable rate
variance on borrowings that increased net interest income by $27,455,000,
partially offset by an unfavorable rate variance on the Company's ARM assets
portfolio and other interest-earning assets in the amount of $20,179,000. The
increased average size of the Company's portfolio during the first quarter of
2002 compared to the same period in 2001 increased net interest income in the
amount of $10,024,000. The average balance of the Company's interest-earning
assets was $6.421 billion during the first three months of 2002, compared to
$4.260 billion during the first three months of 2001 -- an increase of 51%.




                                       29
<PAGE>


The following table highlights the components of net interest spread and the
annualized yield on net interest-earning assets as of each applicable quarter
end:

 COMPONENTS OF NET INTEREST SPREAD AND YIELD ON NET INTEREST EARNING ASSETS (1)
                          (Dollar amounts in millions)

<Table>
<Caption>
                    Average      Wgt Avg                              Yield on                                     Yield on
  As of the        Interest       Fully        Weighted               Interest                         Net       Net Interest
   Quarter         Earning       Indexed       Average      Yield      Earning        Cost of        Interest       Earning
    Ended           Assets        Coupon        Coupon     Adj (2)     Assets          Funds          Spread        Assets
------------     ----------      --------      --------   --------    --------        -------        --------    ------------
<S>              <C>             <C>           <C>        <C>         <C>             <C>            <C>         <C>
Mar 31, 2000     $  4,471.0        7.77%        7.26%       0.68%       6.58%          6.32%           0.26%         0.83%
Jun 30, 2000     $  4,344.6        7.87%        7.48%       0.59%       6.89%          6.75%           0.14%         0.81%
Sep 30, 2000     $  4,066.1        7.84%        7.68%       0.68%       7.00%          6.72%           0.28%         0.88%
Dec 31, 2000     $  4,131.4        7.46%        7.75%       0.69%       7.06%          6.75%           0.31%         0.93%
Mar 31, 2001     $  4,260.2        6.64%        7.47%       0.79%       6.68%          5.48%           1.20%         1.34%
Jun 30, 2001     $  4,394.4        6.06%        6.84%       0.97%       5.87%          4.75%           1.12%         1.43%
Sep 30, 2001     $  4,641.4        5.63%        6.49%       0.85%       5.64%          3.74%           1.90%         1.71%
Dec 31, 2001     $  5,522.5        5.16%        5.96%       0.89%       5.07%          3.01%           2.06%         2.10%
Mar 31, 2002     $  6,421.4        5.05%        5.42%       0.53%       4.89%          3.28%           1.61%         1.97%
</Table>

---------

(1) Yield on Net Interest Earning Assets is computed by dividing annualized net
    interest income for the applicable quarter by the average daily balance of
    interest earning assets during the quarter.

(2) Yield adjustments include the impact of amortizing premiums and discounts,
    the cost of hedging activities, the amortization of deferred gains from
    hedging activities and the impact of principal payment receivables. The
    following table presents these components of the yield adjustments for the
    dates presented in the table above.

                COMPONENTS OF THE YIELD ADJUSTMENTS ON ARM ASSETS

<Table>
<Caption>
                                                                        Amort. of
                                      Impact of                       Deferred Gain
  As of the           Premium/         Principal         Hedging          From              Total
   Quarter            Discount         Payments         Activity/        Hedging            Yield
    Ended               Amort         Receivable          Other         Activity          Adjustment
------------         ---------        ----------        ---------     -------------       ----------
<S>                  <C>              <C>               <C>           <C>                 <C>
Mar 31, 2000            0.57%            0.07%            0.07%           (0.03)%             0.68%
Jun 30, 2000            0.46%            0.10%            0.06%           (0.03)%             0.59%
Sep 30, 2000            0.56%            0.10%            0.05%           (0.03)%             0.68%
Dec 31, 2000            0.54%            0.13%            0.05%           (0.03)%             0.69%
Mar 31, 2001            0.61%            0.14%            0.04%              -- %             0.79%
Jun 30, 2001            0.74%            0.20%            0.03%              -- %             0.97%
Sep 30, 2001            0.69%            0.14%            0.02%              -- %             0.85%
Dec 31, 2001            0.68%            0.20%            0.01%              -- %             0.89%
Mar 31, 2002            0.33%            0.16%            0.04%              -- %             0.53%
</Table>

The Company recorded hedging expense during the first quarter of 2002 for
$314,000. At March 31, 2002, the fair value of the Company's Cap Agreements was
$212,000 compared to a fair value of $431,000 as of December 31, 2001, a
decrease in fair value of $219,000. Since the Company is not currently applying
hedge accounting to the Company's Cap Agreements, this change in fair value of
the Cap Agreements was recorded as hedging expense during the quarter ended
March 31, 2002. Additionally, during the first quarter of 2002, the Company also
reclassified to earnings $95,000 of the transition adjustment recorded in
"Accumulated other comprehensive income" on January 1, 2001, in connection with
the implementation of FAS 133.

During the first quarter of 2001, the Company recorded hedging expense of
$151,000. This expense was calculated based on the requirements of FAS 133,
adopted by the Company as of January 1, 2001. At March 31, 2001, the fair value
of the Company's Cap Agreements and Option Contracts was $0.5 million compared
to a fair value of $1.3 million as of December 31, 2000. In accordance with FAS
133, this change in the fair value of the Cap Agreements and Option Contracts
was compared to the change in the fair value of the lifetime interest rate cap
component of




                                       30
<PAGE>

the Company's ARM assets, the hedged assets. As a result, the Company determined
that the fair value hedge met the effectiveness requirements of FAS 133 to
qualify for fair value hedge accounting treatment and the ineffective portion,
$151,000, was recorded as a hedging expense. The ineffective portion is measured
as the change in the hedge instruments in excess of the change in the hedged
assets.

In November 2001, the Company made the determination that virtually all of its
loans were expected to be securitized and that none of its loans were expected
to experience a loss prior to securitization. Therefore, the Company
discontinued its provision for estimated loan losses. During the first quarter
of 2001, the Company recorded a provision for estimated loan losses in the
amount of $178,000. Since the commencement of acquiring whole loans in 1997, the
Company has only experienced losses on three loans, for the total amount of
$174,000. The Company continues to evaluate its estimated credit losses on loans
that are not expected to be securitized and for estimated credit losses that
become probable prior to securitization. As of March 31, 2002, the Company's
whole loans, including those held as collateral for the notes payable and those
that the Company has securitized but retained credit loss exposure, accounted
for 32.4% of the Company's portfolio of ARM assets or $2.280 billion.

As a REIT, the Company is required to declare dividends amounting to 85% of each
year's taxable income by the end of each calendar year and to have declared
dividends amounting to 90% of its taxable income for each year by the time it
files its applicable tax return and, therefore, generally passes through
substantially all of its earnings to shareholders without paying federal income
tax at the corporate level. Since the Company, as a REIT, pays its dividends
based on taxable earnings, the dividends may at times be more or less than
reported earnings. The following table provides a reconciliation between the
Company's earnings as reported based on generally accepted accounting principles
and the Company's taxable income before its common dividend deduction:

           RECONCILIATION OF REPORTED NET INCOME TO TAXABLE NET INCOME
                          (Dollar amounts in thousands)


<Table>
<Caption>
                                                             For the quarters ended March 31,
                                                             --------------------------------
                                                                    2002          2001
                                                               ------------    ------------

<S>                                                            <C>             <C>
Net income                                                     $     24,293    $     10,727
   Additions:
     Provision for credit losses                                         --             155
     Net compensation related items                                     479             325
     Hedging Expense                                                    314             353
     Non-REIT subsidiary taxable loss                                    --              91
   Deductions:
     Dividend on Series A Preferred Shares                           (1,670)         (1,670)
     Actual credit (losses) recoveries on ARM assets                     (6)             14
     Amortization of hedges                                            (369)           (444)
                                                               ------------    ------------
Taxable net income available to common                         $     23,041    $      9,551
                                                               ============    ============
Taxable net income per share available to common               $       0.63    $       0.44
                                                               ============    ============
</Table>


For the quarter ended March 31, 2002, the Company's ratio of operating expenses
to average assets was 0.44% compared to 0.29% for the same period in 2001 and
0.50% for the prior quarter ended December 31, 2001. The most significant single
increase to the Company's expenses was the performance based fee, $3,193,000,
that the Manager earned during the first quarter of 2002 as a result of the
Company achieving a return on shareholder equity in excess of the threshold as
defined in the Management Agreement. The Company's return on equity prior to the
effect of the performance based fee was 18.54% whereas the threshold during the
first quarter of 2002, the average 10-year treasury rate plus 1%, was 6.79%. The
Manager earned a performance based fee of $924,000 during the first quarter of
2001. The Company's Other expenses increased by approximately $1,133,000 during
the quarter ended March 31, 2002 compared to the same period in 2001, primarily
due to the operations of the Company's mortgage banking subsidiary, expenses
associated with the Company's issuance of DERs, PSRs and restricted stock and
other corporate matters. The operations of TMHL accounted for $706,000 of this
increase and the Company's issuance of DERs, PSRs and restricted stock accounted
for $299,000 of the increase. The Company's expense ratios are among the lowest
of any company originating and investing in mortgage assets, giving the Company
what





                                       31
<PAGE>

it believes to be a significant competitive advantage over more traditional
mortgage portfolio lending institutions such as banks and savings and loans.
This competitive advantage enables the Company to operate with less risk, such
as credit and interest rate risk, and still generate an attractive long-term
return on equity when compared to these more traditional mortgage portfolio
lending institutions.

The Company pays the Manager an annual base management fee, generally based on
average shareholders' equity, not assets, as defined in the Management
Agreement, payable monthly in arrears as follows: 1.18% of the first $300
million of Average Shareholders' Equity, plus 0.87% of Average Shareholders'
Equity above $300 million. Since this management fee is based on shareholders'
equity and not assets, this fee increases as the Company successfully accesses
capital markets and raises additional equity capital and is, therefore, managing
a larger amount of invested capital on behalf of its shareholders. In order for
the Manager to earn a performance fee, the rate of return on the shareholders'
investment, as defined in the Management Agreement, must exceed the average
ten-year U.S. Treasury rate during the quarter plus 1%. As presented in the
following table, the performance fee is a variable expense that fluctuates with
the Company's return on shareholders' equity relative to the average 10-year
U.S. Treasury rate.

The following table highlights the quarterly trend of operating expenses as a
percent of average assets:

                       ANNUALIZED OPERATING EXPENSE RATIOS

<Table>
<Caption>
                      Management Fee &                                    Total
   For the            Other Expenses/        Performance Fee/       G & A Expense/
Quarter Ended         Average Assets          Average Assets        Average Assets
-------------        -----------------       ----------------       --------------
<S>                  <C>                     <C>                    <C>
Mar 31, 2000                 0.13%                    --                   0.13%
Jun 30, 2000                 0.13%                    --                   0.13%
Sep 30, 2000                 0.16%                    --                   0.16%
Dec 31, 2000                 0.18%                    --                   0.18%
Mar 31, 2001                 0.20%                  0.09%                  0.29%
Jun 30, 2001                 0.21%                  0.10%                  0.31%
Sep 30, 2001                 0.25%                  0.14%                  0.39%
Dec 31, 2001                 0.28%                  0.22%                  0.50%
Mar 31, 2002                 0.24%                  0.20%                  0.44%
</Table>

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of funds for the quarter ended March 31, 2002
consisted of reverse repurchase agreements, which totaled $6.024 billion,
collateralized notes payable, which had a balance of $362.3 million and whole
loan financing facilities, which had a balance of $136.5 million. The Company's
other significant sources of funds for the quarter ended March 31, 2002
consisted primarily of payments of principal and interest from its ARM assets in
the amount of $1.027 billion. In the future, the Company expects its primary
sources of funds will consist of borrowed funds under reverse repurchase
agreement transactions with one- to twelve-month maturities, funds borrowed from
whole loan financing facilities, capital market financing transactions
collateralized by ARM and hybrid loans, proceeds from monthly payments of
principal and interest on its ARM assets portfolio and occasional asset sales.
The Company's liquid assets generally consist of unpledged ARM assets, cash and
cash equivalents.

Total borrowings outstanding at March 31, 2002, had a weighted average effective
cost of 2.08%. The reverse repurchase agreements had a weighted average
remaining term to maturity of 3.2 months and the collateralized AAA notes
payable had a final maturity of January 25, 2029, but will be paid down as the
ARM assets collateralizing the notes are paid down. The whole loan financing
facilities are committed facilities that mature in March 2003 and November 2002.
As of March 31, 2002, $2.847 billion of the Company's borrowings were
variable-rate term reverse repurchase agreements. Term reverse repurchase
agreements are committed financings with original maturities that range from
three months to eighteen months. The interest rates on these term reverse
repurchase agreements are indexed to either the one- or three-month LIBOR rate
and reprice accordingly. The interest rate on the collateralized AAA notes
adjusts monthly based on changes in one-month LIBOR. The interest rates on the
whole loan financing facilities are indexed to the one-month LIBOR index and are
subject to either daily or monthly adjustment.



                                       32
<PAGE>

The Company has arrangements to enter into reverse repurchase agreements with
twenty-three different financial institutions and on March 31, 2002, had
borrowed funds with fourteen of these firms. Because the Company borrows money
under these agreements based on the fair value of its ARM assets and because
changes in interest rates can negatively impact the valuation of ARM assets, the
Company's borrowing ability under these agreements could be limited and lenders
may initiate margin calls in the event interest rates change or the value of the
Company's ARM assets decline for other reasons. Additionally, certain of the
Company's ARM assets are rated less than AA by the Rating Agencies
(approximately 2.2%) and have less liquidity than assets that are rated AA or
higher. Other mortgage assets which are rated AA or higher by the Rating
Agencies derive their credit rating based on a mortgage pool insurer's rating.
As a result of either changes in interest rates, credit performance of a
mortgage pool or a downgrade of a mortgage pool issuer, the Company may find it
difficult to borrow against such assets and, therefore, may be required to sell
certain mortgage assets in order to maintain liquidity. If required, these sales
could be at prices lower than the carrying value of the assets, which would
result in losses. The Company had adequate liquidity throughout the quarter
ended March 31, 2002. The Company believes it will continue to have sufficient
liquidity to meet its future cash requirements from its primary sources of funds
for the foreseeable future without needing to sell assets.

As of March 31, 2002, the Company had $362.3 million of AAA collateralized notes
payable outstanding, which are not subject to margin calls. Due to the structure
of the collateralized notes payable, their financing is not based on market
value or subject to subsequent changes in mortgage credit markets, as is the
case of the reverse repurchase agreement arrangements.

As of March 31 2002, the Company had entered into three whole loan financing
facilities. The Company borrows money under these facilities based on the fair
value of the ARM loans. Therefore, the amount of money available to the Company
under these facilities is subject to margin call based on changes in fair value,
which can be negatively effected by changes in interest rates and other factors,
including the delinquency status of individual loans. One of the whole loan
financing facilities has a committed borrowing capacity of $300 million, and
matures in March 2003. The Company's other two committed whole loan financing
facilities also have a borrowing capacity of $300 million each and they both
mature in November 2002. As of March 31, 2001, the Company had $136.5 million
borrowed against these whole loan financing facilities at an effective cost of
2.55%.

On May 31, 2001, the Company filed a combined shelf registration statement on
Form S-3 for $409 million of equity securities, which included $109 million of
securities that were registered under a previously filed registration statement.
On July 6, 2001, the combined registration statement for $409 million, which
includes the possible issuances of common stock, preferred stock or warrants,
was declared effective by the Securities and Exchange Commission. During
February 2002, the Company completed a public offering of 6,210,000 shares of
its common stock, for which it received net proceeds of $113.5 million. As of
March 31, 2002, $125.9 million of the Company's securities remained registered
for future issuance and sale under its currently effective registration
statement.

The Company has a Dividend Reinvestment and Stock Purchase Plan (the "DRP")
designed to provide a convenient and economical way for existing shareholders to
automatically reinvest their dividends in additional shares of common stock and
for new and existing shareholders to purchase shares at a discount to the
current market price of the common stock, as defined in the DRP. As a result of
participation in the DRP during the first three months of 2002, the Company
issued 1,385,220 shares of common stock under its DRP and received net proceeds
of $27.3 million of new equity capital.

EFFECTS OF INTEREST RATE CHANGES

Changes in interest rates impact the Company's earnings in various ways. While
the Company only invests in ARM assets, rising short-term interest rates may
temporarily negatively affect the Company's earnings and conversely falling
short-term interest rates may temporarily increase the Company's earnings. This
impact can occur for several reasons and may be mitigated by portfolio
prepayment activity as discussed below. First, the Company's borrowings will
react to changes in interest rates sooner than the Company's ARM assets because
the weighted average next repricing date of the borrowings is usually a shorter
time period. Second, interest rates on ARM loans are generally limited to an
increase of either 1% or 2% per adjustment period (commonly referred to as the
periodic cap) and the Company's borrowings do not have similar limitations.
Third, the Company's ARM assets lag changes in the indices due to the notice
period provided to ARM borrowers when the interest rates on their loans are
scheduled to change. The periodic cap only affects the Company's earnings when
interest rates move by more than 1% per six-month period or 2% per year.



                                       33
<PAGE>

Interest rates can also affect the Company's net return on its Hybrid ARMs (net
of the cost of financing Hybrid ARMs). The Company estimates the duration of the
fixed rate period of its Hybrid ARM and has a policy to hedge the financing of
the Hybrid ARMs such that the duration difference is less than one year. The
financing of the unhedged fixed rate remaining period of one year or less is
subject to prevailing interest rates on the remaining balance of the Hybrid ARMs
at the expiration of the hedged period. As a result, if the cost of funds on
borrowings is higher at the expiration of the hedged period, the Company's net
interest spread on the remaining balance of a Hybrid ARM asset will be affected
unfavorably and conversely, if the cost of funds on borrowings is lower, the net
interest spread will be affected favorably.

Interest rate changes may also impact the Company's ARM assets and borrowings
differently because the Company's ARM assets are indexed to various indices
whereas the interest rate on the Company's borrowings generally move with
changes in LIBOR. Although the Company has always favored acquiring LIBOR based
ARM assets in order to reduce this risk, LIBOR based ARMs are not generally well
accepted by homeowners in the U.S. As a result, the Company has acquired ARM
assets indexed to a mix of indices in order to diversify its exposure to changes
in LIBOR in contrast to changes in other indices. During times of global
economic instability, U.S. Treasury rates generally decline because foreign and
domestic investors generally increase their investment in U.S. Treasury
instruments because they are considered to be a safe haven for investments. The
Company's ARM assets indexed to U.S. Treasury rates then decline in yield as
U.S. Treasury rates decline, whereas the Company's borrowings and other ARM
assets may not be affected by the same pressures or to the same degree. As a
result, the Company's income can improve or decrease depending on the
relationship between the various indices to which the Company's ARM assets are
indexed, compared to changes in the Company's cost of funds.

The rate of prepayment on the Company's mortgage assets may increase if interest
rates decline, or if the difference between long-term and short-term interest
rates diminishes. Increased prepayments would cause the Company to amortize the
premiums paid for its mortgage assets faster, resulting in a reduced yield on
its 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, the Company's earnings may be adversely affected.

Conversely, the rate of prepayment on the Company's mortgage assets may decrease
if interest rates rise, or if the difference between long-term and short-term
interest rates increases. Decreased prepayments would cause the Company to
amortize the premiums paid for its ARM assets over a longer time period,
resulting in an increased yield on its mortgage assets. Therefore, in rising
interest rate environments where prepayments are declining, not only would the
interest rate on the ARM assets portfolio increase to re-establish a spread over
the higher interest rates, but the yield also would rise due to slower
prepayments. The combined effect could significantly mitigate other negative
effects that rising short-term interest rates might have on earnings.

Lastly, because the Company only invests in ARM assets and approximately 8% to
10% of such mortgage assets are purchased with shareholders' equity, the
Company's earnings, over time, will tend to increase, after an initial
short-term decline, following periods when short-term interest rates have risen,
and decrease after an initial short-term increase, following periods when
short-term interest rates have declined. This is because the financed portion of
the Company's portfolio of ARM assets will, over time, reprice to a spread over
the Company's cost of funds, while the portion of the Company's portfolio of ARM
assets that are purchased with shareholders' equity will generally have a higher
yield in a higher interest rate environment and a lower yield in a lower
interest rate environment.

OTHER MATTERS

As of March 31, 2002, the Company calculates its Qualified REIT Assets, as
defined in the Internal Revenue Code of 1986, as amended (the "Code"), to be
98.5% of its total assets, as compared to the Code requirement that at least 75%
of its total assets must be Qualified REIT Assets. The Company also calculates
that 99.5% of its 2002 revenue for the first quarter qualifies for the 75%
source of income test and 100% of its revenue qualifies for the 90% source of
income test under the REIT rules. The Company also met all REIT requirements
regarding the ownership of its common stock and the distributions of its net
income. Therefore, as of March 31, 2002, the Company believes that it will
continue to qualify as a REIT under the provisions of the Code.

The Company at all times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act of 1940. If
the Company were to become regulated as an investment company, then the
Company's use of leverage would be substantially reduced. The Investment Company
Act exempts entities that are "primarily engaged in the business of purchasing
or otherwise acquiring mortgages and other liens on and interests in real




                                       34
<PAGE>

estate" ("Qualifying Interests"). Under current interpretation of the staff of
the SEC, in order to qualify for this exemption, the Company must maintain at
least 55% of its assets directly in Qualifying Interests. In addition, unless
certain mortgage securities represent all the certificates issued with respect
to an underlying pool of mortgages, such mortgage securities may be treated as
securities separate from the underlying mortgage loans and, thus, may not be
considered Qualifying Interests for purposes of the 55% requirement. The Company
calculates that it is in compliance with this requirement.


PART II.   OTHER INFORMATION

Item 1.  Legal Proceedings
              At March 31, 2002, there were no pending legal proceedings to
              which the Company was a party or of which any of its property was
              subject.

Item 2.  Changes in Securities
              Not applicable

Item 3.  Defaults Upon Senior Securities
              Not applicable

Item 4.  Submission of Matters to a Vote of Security Holders
              None

Item 5.  Other Information
              None

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

         (a)  Exhibits
                  See "Exhibit Index"

         (b)  Reports on Form 8-K

              The Company filed the following Current Reports on Form 8-K during
              the period covered by this Form 10-Q:

              (i)   Current Report on Form 8-K, dated February 12, 2002
                    regarding the Registrant's Press Release dated January 22,
                    2002 announcing the Registrant's earnings for the year and
                    quarter ended December 31, 2001.

              (ii)  Current Report on Form 8-K, dated February 19, 2002
                    regarding the Registrant's public offering of 5,400,000
                    shares and related underwriting agreement.


                                       35
<PAGE>


                                   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,




                                   THORNBURG MORTGAGE, INC.



Dated:     May 14, 2002            By: /s/ Larry A. Goldstone
                                       -------------------------------------
                                       Larry A. Goldstone
                                       President and Chief Operating Officer
                                       (authorized officer of registrant)




Dated:     May 14, 2002            By: /s/ Richard P. Story
                                       -------------------------------------
                                       Richard P. Story
                                       Executive Vice President and
                                       Chief Financial Officer
                                       (principal accounting officer)



                                       36
<PAGE>





                                  Exhibit Index

<Table>
<Caption>


                                                                                                    Sequentially
                                                                                                      Numbered
     Exhibit Number                              Exhibit Description                                    Page
     --------------                              -------------------                                ------------
<S>                        <C>                                                                    <C>
         3.1.5             Amendment to Articles of Incorporation dated April 29, 2002                   38

         3.3.1             Amended Audit Committee Charter dated as of April 23, 2002                    39
</Table>