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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the quarterly period ended: March 31, 2006

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



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THORNBURG MORTGAGE, INC.

(Exact name of Registrant as specified in its Charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Maryland                                                       |  | 85-0404134                          
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer 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)

Not applicable

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of
accelerated filer and large accelerated filer in Rule 12b-2 of the Securities Exchange Act of 1934.



|                             |  |                    |  |                       
|---------------------------- |  | ------------------ |  | ----------------------
|Large accelerated filer    x |  | Accelerated filer ̈ |  | Non-accelerated filer ̈

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Securities
Exchange Act of 1934).    Yes ̈No  x

APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock
($.01 par value) 111,885,382 as of May 4, 2006



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INDEX

In this quarterly report, we refer to Thornburg Mortgage, Inc. and its subsidiaries as we, us, or
the Company, unless we specifically state otherwise or the context indicates otherwise. Capitalized terms not otherwise defined in this quarterly report and financial statements below shall have the definitive meanings assigned to them
in the Glossary at the end of this report.



|              |  |                                                                                                              |  |     
|------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|              |  |                                                                                                              |  | Page
|PART I.       |  | FINANCIAL INFORMATION                                                                                        |  |     
|              |  |                                                                                                             
|Item 1.       |  | Financial Statements                                                                                         |  |     
|              |  |                                                                                                             
|              |  | Consolidated Balance Sheets at March 31, 2006 and December 31, 2005                                          |  | 3   
|              |  |                                                                                                             
|              |  | Consolidated Income Statements for the three months ended March 31, 2006 and March 31, 2005                  |  | 4   
|              |  |                                                                                                             
|              |  | Consolidated Statements of Comprehensive Income for the three months ended March 31, 2006 and March 31, 2005 |  | 5   
|              |  |                                                                                                             
|              |  | Consolidated Statements of Shareholders Equity for the three months ended March 31, 2006 and March 31, 2005 |  | 6   
|              |  |                                                                                                             
|              |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and March 31, 2005           |  | 7   
|              |  |                                                                                                             
|              |  | Notes to Consolidated Financial Statements                                                                   |  | 8   
|              |  |                                                                                                             
|Item 2.       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 24  
|              |  |                                                                                                             
|Item 3.       |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 54  
|              |  |                                                                                                             
|Item 4.       |  | Controls and Procedures                                                                                      |  | 54  
|              |  |                                                                                                             
|PART II.      |  | OTHER INFORMATION                                                                                            |  |     
|              |  |                                                                                                             
|Item 1.       |  | Legal Proceedings                                                                                            |  | 55  
|              |  |                                                                                                             
|Item 1A.      |  | Risk Factors                                                                                                 |  | 55  
|              |  |                                                                                                             
|Item 2.       |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                  |  | 55  
|              |  |                                                                                                             
|Item 3.       |  | Defaults Upon Senior Securities                                                                              |  | 55  
|              |  |                                                                                                             
|Item 4.       |  | Submission of Matters to a Vote of Security Holders                                                          |  | 55  
|              |  |                                                                                                             
|Item 5.       |  | Other Information                                                                                            |  | 55  
|              |  |                                                                                                             
|Item 6.       |  | Exhibits                                                                                                     |  | 55  
|              | 
|SIGNATURES    |  | 56                                                                                                          
|              | 
|EXHIBIT INDEX |  | 57                                                                                                          
|              | 
|GLOSSARY      |  | 58                                                                                                          



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##### Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (Unaudited) (Dollar amounts in thousands, except
share data)



|                                                                                                                                                                                                                                                                |  |                |            |   |                   |   |            |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------- | ---------- | - | ----------------- | - | ---------- | -
|                                                                                                                                                                                                                                                                |  | March 31, 2006 |            |   | December 31, 2005 |  
|ASSETS                                                                                                                                                                                                                                                          |  |                |            |   |                   |   |            |  
|ARM Assets:                                                                                                                                                                                                                                                     |  |                |            |   |                   |   |            |  
|Purchased ARM Assets:                                                                                                                                                                                                                                           |  |                |            |   |                   |   |            |  
|ARM securities, net                                                                                                                                                                                                                                             |  | $              | 20,643,079 |   |                   | $ | 20,295,504 |  
|Purchased Securitized Loans, net                                                                                                                                                                                                                                |  |                | 7,526,878  |   |                   |   | 6,839,004  |  
|                                                                                                                                                                                                                                                                |  |                |            |   |                   |   |            |  
|Purchased ARM Assets                                                                                                                                                                                                                                            |  |                | 28,169,957 |   |                   |   | 27,134,508 |  
|                                                                                                                                                                                                                                                                |  |                |            |   |                   |   |            |  
|ARM Loans:                                                                                                                                                                                                                                                      |  |                |            |   |                   |   |            |  
|Securitized ARM Loans, net                                                                                                                                                                                                                                      |  |                | 3,187,893  |   |                   |   | 3,310,717  |  
|ARM Loans Collateralizing CDOs, net                                                                                                                                                                                                                             |  |                | 12,736,433 |   |                   |   | 10,396,961 |  
|ARM loans held for securitization, net                                                                                                                                                                                                                          |  |                | 676,070    |   |                   |   | 641,843    |  
|                                                                                                                                                                                                                                                                |  |                |            |   |                   |   |            |  
|ARM Loans                                                                                                                                                                                                                                                       |  |                | 16,600,396 |   |                   |   | 14,349,521 |  
|                                                                                                                                                                                                                                                                |  |                |            |   |                   |   |            |  
|ARM Assets                                                                                                                                                                                                                                                      |  |                | 44,770,353 |   |                   |   | 41,484,029 |  
|Cash and cash equivalents                                                                                                                                                                                                                                       |  |                | 209,060    |   |                   |   | 147,228    |  
|Restricted cash and cash equivalents                                                                                                                                                                                                                            |  |                | 11,776     |   |                   |   | 26,982     |  
|Hedging Instruments                                                                                                                                                                                                                                             |  |                | 709,193    |   |                   |   | 493,074    |  
|Accrued interest receivable                                                                                                                                                                                                                                     |  |                | 268,000    |   |                   |   | 230,479    |  
|Other assets                                                                                                                                                                                                                                                    |  |                | 165,362    |   |                   |   | 125,949    |  
|                                                                                                                                                                                                                                                                |  |                |            |   |                   |   |            |  
|                                                                                                                                                                                                                                                                |  | $              | 46,133,744 |   |                   | $ | 42,507,741 |  
|                                                                                                                                                                                                                                                                |  |                |            |   |                   |   |            |  
|LIABILITIES                                                                                                                                                                                                                                                     |  |                |            |   |                   |   |            |  
|Reverse repurchase agreements                                                                                                                                                                                                                                   |  | $              | 23,544,752 |   |                   | $ | 23,390,079 |  
|Asset-backed CP                                                                                                                                                                                                                                                 |  |                | 6,307,000  |   |                   |   | 4,990,000  |  
|CDOs                                                                                                                                                                                                                                                            |  |                | 12,553,347 |   |                   |   | 10,254,334 |  
|Whole loan financing facilities                                                                                                                                                                                                                                 |  |                | 515,340    |   |                   |   | 404,827    |  
|Senior Notes                                                                                                                                                                                                                                                    |  |                | 305,000    |   |                   |   | 305,000    |  
|Subordinated Notes                                                                                                                                                                                                                                              |  |                | 240,000    |   |                   |   | 190,000    |  
|Hedging Instruments                                                                                                                                                                                                                                             |  |                | 105,024    |   |                   |   | 71,085     |  
|Payable for securities purchased                                                                                                                                                                                                                                |  |                |           |   |                   |   | 463,906    |  
|Accrued interest payable                                                                                                                                                                                                                                        |  |                | 134,019    |   |                   |   | 107,541    |  
|Dividends payable                                                                                                                                                                                                                                               |  |                | 1,998      |   |                   |   | 73,132     |  
|Accrued expenses and other liabilities                                                                                                                                                                                                                          |  |                | 53,474     |   |                   |   | 50,751     |  
|                                                                                                                                                                                                                                                                |  |                |            |   |                   |   |            |  
|                                                                                                                                                                                                                                                                |  |                | 43,759,954 |   |                   |   | 40,300,655 |  
|                                                                                                                                                                                                                                                                |  |                |            |   |                   |   |            |  
|COMMITMENTS AND CONTINGENCIES                                                                                                                                                                                                                                   |  |                |            |   |                   |   |            |  
|SHAREHOLDERS EQUITY                                                                                                                                                                                                                                            |  |                |            |   |                   |   |            |  
|Preferred Stock: par value $0.01 per share; 8% Series C Cumulative Redeemable shares, aggregate preference in liquidation $119,870 and
$115,745, respectively; 7,230,000 shares authorized, 4,795,000 and 4,630,000 shares issued and outstanding, respectively |  |                | 115,589    |   |                   |   | 111,535    |  
|Common Stock: par value $0.01 per share; 492,748,000 shares authorized, 107,546,000 and 104,775,000 shares issued and outstanding,
respectively                                                                                                                 |  |                | 1,075      |   |                   |   | 1,048      |  
|Additional paid-in-capital                                                                                                                                                                                                                                      |  |                | 2,307,173  |   |                   |   | 2,235,435  |  
|Accumulated other comprehensive loss                                                                                                                                                                                                                            |  |                | (126,662   | ) |                   |   | (147,517   | )
|Retained earnings                                                                                                                                                                                                                                               |  |                | 76,615     |   |                   |   | 6,585      |  
|                                                                                                                                                                                                                                                                |  |                |            |   |                   |   |            |  
|                                                                                                                                                                                                                                                                |  |                | 2,373,790  |   |                   |   | 2,207,086  |  
|                                                                                                                                                                                                                                                                |  |                |            |   |                   |   |            |  
|                                                                                                                                                                                                                                                                |  | $              | 46,133,744 |   |                   | $ | 42,507,741 |  
|                                                                                                                                                                                                                                                                |  |                |            |   |                   |   |            |  

See Notes to Consolidated Financial Statements.



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THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS (Unaudited)

(In thousands, except per share data)



|                                                     |  |                              |          |   |  |   |          |  
|---------------------------------------------------- |  | ---------------------------- | -------- | - |  | - | -------- | -
|                                                     |  | Three Months Ended March 31, |         
|                                                     |  |                              | 2006     |   |  |   | 2005     |  
|Interest income from ARM Assets and cash equivalents |  | $                            | 523,756  |   |  | $ | 307,970  |  
|Interest expense on borrowed funds                   |  |                              | (435,135 | ) |  |   | (224,892 | )
|                                                     |  |                              |          |   |  |   |          |  
|Net interest income                                  |  |                              | 88,621   |   |  |   | 83,078   |  
|                                                     |  |                              |          |   |  |   |          |  
|Servicing income, net                                |  |                              | 4,118    |   |  |   | 2,604    |  
|Gain (loss) on ARM Assets, net                       |  |                              | (214     | ) |  |   | 1,645    |  
|Gain on Derivatives, net                             |  |                              | 6,482    |   |  |   | 1,322    |  
|                                                     |  |                              |          |   |  |   |          |  
|Net non-interest income                              |  |                              | 10,386   |   |  |   | 5,571    |  
|                                                     |  |                              |          |   |  |   |          |  
|Provision for credit losses                          |  |                              | (500     | ) |  |   | (409     | )
|Management fee                                       |  |                              | (5,803   | ) |  |   | (4,706   | )
|Performance fee                                      |  |                              | (9,063   | ) |  |   | (10,035  | )
|Long-term incentive awards                           |  |                              | (3,320   | ) |  |   | (1,429   | )
|Other operating expenses                             |  |                              | (7,900   | ) |  |   | (4,614   | )
|                                                     |  |                              |          |   |  |   |          |  
|NET INCOME                                           |  | $                            | 72,421   |   |  | $ | 67,456   |  
|                                                     |  |                              |          |   |  |   |          |  
|Net income                                           |  | $                            | 72,421   |   |  | $ | 67,456   |  
|Dividends on Preferred Stock                         |  |                              | (2,350   | ) |  |   | (100     | )
|                                                     |  |                              |          |   |  |   |          |  
|Net income available to common shareholders          |  | $                            | 70,071   |   |  | $ | 67,356   |  
|                                                     |  |                              |          |   |  |   |          |  
|Earnings per common share:                           |  |                              |          |   |  |   |          |  
|Net income                                           |  | $                            | 0.66     |   |  | $ | 0.72     |  
|                                                     |  |                              |          |   |  |   |          |  
|Average number of shares outstanding                 |  |                              | 106,243  |   |  |   | 93,173   |  
|                                                     |  |                              |          |   |  |   |          |  

See Notes to Consolidated Financial Statements.



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THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

(In thousands)



|                                                                      |  |                             |          |   |      |   |          |  
|--------------------------------------------------------------------- |  | --------------------------- | -------- | - | ---- | - | -------- | -
|                                                                      |  | Three Months EndedMarch 31, |         
|                                                                      |  | 2006                        |          |   | 2005 |  
|Net income                                                            |  | $                           | 72,421   |   |      | $ | 67,456   |  
|Other comprehensive income:                                           |  |                             |          |   |      |   |          |  
|Unrealized losses on securities:                                      |  |                             |          |   |      |   |          |  
|Net unrealized losses arising during the period                       |  |                             | (155,219 | ) |      |   | (145,964 | )
|Reclassification adjustment for net gains included in income          |  |                             |         |   |      |   | (1,645   | )
|                                                                      |  |                             |          |   |      |   |          |  
|Net change in unrealized losses on securities                         |  |                             | (155,219 | ) |      |   | (147,609 | )
|                                                                      |  |                             |          |   |      |   |          |  
|Unrealized gains on Hedging Instruments:                              |  |                             |          |   |      |   |          |  
|Net unrealized gains arising during the period                        |  |                             | 229,838  |   |      |   | 173,724  |  
|Reclassification adjustment for net (gains) losses included in income |  |                             | (53,764  | ) |      |   | 26,823   |  
|                                                                      |  |                             |          |   |      |   |          |  
|Net change in unrealized gains on Hedging Instruments                 |  |                             | 176,074  |   |      |   | 200,547  |  
|                                                                      |  |                             |          |   |      |   |          |  
|Other comprehensive income                                            |  |                             | 20,855   |   |      |   | 52,938   |  
|                                                                      |  |                             |          |   |      |   |          |  
|Total comprehensive income                                            |  | $                           | 93,276   |   |      | $ | 120,394  |  
|                                                                      |  |                             |          |   |      |   |          |  

See Notes to Consolidated Financial Statements.



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THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (Unaudited)

Three months ended March 31, 2006 and 2005

(In thousands, except per
share data)



|                                                        |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   |           |  
|------------------------------------------------------- |  | -------------- | ------- | ----------- | - | ------------------------ |  | -------------------------------------- | --------- |  | ---------------- | -------- | - | ----- | - | ------ | - |  | - | --------- | -
|                                                        |  | PreferredStock |         | CommonStock |   | AdditionalPaid-inCapital |  | Accum. OtherComprehensiveIncome (Loss) |           |  | RetainedEarnings |          |   | Total |  
|Balance, December 31, 2004                              |  | $              |        |             | $ | 919                      |  | $                                      | 1,872,487 |  | $                | (90,715  | ) |       | $ | 6,493  |   |  | $ | 1,789,184 |  
|Comprehensive income:                                   |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   |           |  
|Net income                                              |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   | 67,456 |   |  |   | 67,456    |  
|Other comprehensive income:                             |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   |           |  
|Available-for-sale assets:                              |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   |           |  
|Fair value adjustment                                   |  |                |         |             |   |                          |  |                                        |           |  |                  | (147,609 | ) |       |   |        |   |  |   | (147,609  | )
|Hedging Instruments:                                    |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   |           |  
|Fair value adjustment                                   |  |                |         |             |   |                          |  |                                        |           |  |                  | 200,547  |   |       |   |        |   |  |   | 200,547   |  
|Issuance of Common Stock                                |  |                |         |             |   | 27                       |  |                                        | 75,432    |  |                  |          |   |       |   |        |   |  |   | 75,459    |  
|Issuance of Preferred Stock                             |  |                | 48,344  |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   | 48,344    |  
|Dividends declared on Preferred Stock - $0.05 per share |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   | (100   | ) |  |   | (100      | )
|                                                        |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   |           |  
|Balance, March 31, 2005                                 |  | $              | 48,344  |             | $ | 946                      |  | $                                      | 1,947,919 |  | $                | (37,777  | ) |       | $ | 73,849 |   |  | $ | 2,033,281 |  
|                                                        |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   |           |  
|Balance, December 31, 2005                              |  | $              | 111,535 |             | $ | 1,048                    |  | $                                      | 2,235,435 |  | $                | (147,517 | ) |       | $ | 6,585  |   |  | $ | 2,207,086 |  
|Comprehensive income:                                   |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   |           |  
|Net income                                              |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   | 72,421 |   |  |   | 72,421    |  
|Other comprehensive income:                             |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   |           |  
|Available-for-sale assets:                              |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   |           |  
|Fair value adjustment                                   |  |                |         |             |   |                          |  |                                        |           |  |                  | (155,219 | ) |       |   |        |   |  |   | (155,219  | )
|Hedging Instruments:                                    |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   |           |  
|Fair value adjustment                                   |  |                |         |             |   |                          |  |                                        |           |  |                  | 176,074  |   |       |   |        |   |  |   | 176,074   |  
|Issuance of Common Stock                                |  |                |         |             |   | 27                       |  |                                        | 71,738    |  |                  |          |   |       |   |        |   |  |   | 71,765    |  
|Issuance of Preferred Stock                             |  |                | 4,054   |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   | 4,054     |  
|Dividends declared on Preferred Stock - $0.50 per share |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   | (2,391 | ) |  |   | (2,391    | )
|                                                        |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   |           |  
|Balance, March 31, 2006                                 |  | $              | 115,589 |             | $ | 1,075                    |  | $                                      | 2,307,173 |  | $                | (126,662 | ) |       | $ | 76,615 |   |  | $ | 2,373,790 |  
|                                                        |  |                |         |             |   |                          |  |                                        |           |  |                  |          |   |       |   |        |   |  |   |           |  

See Notes to Consolidated Financial Statements.



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THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(In thousands)



|                                                                                  |  |                             |            |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                  |  | Three Months EndedMarch 31, |           
|                                                                                  |  | 2006                        |            |   | 2005 |  
|Operating activities:                                                             |  |                             |            |   |      |   |            |  
|Net income                                                                        |  | $                           | 72,421     |   |      | $ | 67,456     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |            |   |      |   |            |  
|Amortization                                                                      |  |                             | 24,507     |   |      |   | 19,904     |  
|Loss (gain) on ARM Assets, net                                                    |  |                             | 214        |   |      |   | (1,645     | )
|Gain on Derivatives, net                                                          |  |                             | (6,482     | ) |      |   | (1,322     | )
|Provision for credit losses                                                       |  |                             | 500        |   |      |   | 409        |  
|Change in assets and liabilities:                                                 |  |                             |            |   |      |   |            |  
|Accrued interest receivable                                                       |  |                             | (37,521    | ) |      |   | (25,072    | )
|Other assets                                                                      |  |                             | (39,413    | ) |      |   | (3,953     | )
|Accrued interest payable                                                          |  |                             | 26,478     |   |      |   | 20,988     |  
|Accrued expenses and other liabilities                                            |  |                             | 2,723      |   |      |   | (39,795    | )
|                                                                                  |  |                             |            |   |      |   |            |  
|Net cash provided by operating activities                                         |  |                             | 43,427     |   |      |   | 36,970     |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Investing activities:                                                             |  |                             |            |   |      |   |            |  
|ARM securities:                                                                   |  |                             |            |   |      |   |            |  
|Purchases                                                                         |  |                             | (1,896,247 | ) |      |   | (2,073,744 | )
|Proceeds on sales                                                                 |  |                             |           |   |      |   | 279,496    |  
|Principal payments                                                                |  |                             | 909,648    |   |      |   | 1,190,026  |  
|Purchased Securitized Loans:                                                      |  |                             |            |   |      |   |            |  
|Purchases                                                                         |  |                             | (933,043   | ) |      |   | (1,413,319 | )
|Principal payments                                                                |  |                             | 245,169    |   |      |   | 192,880    |  
|Securitized ARM loans:                                                            |  |                             |            |   |      |   |            |  
|Principal payments                                                                |  |                             | 62,027     |   |      |   | 138,374    |  
|ARM Loans Collateralizing CDOs:                                                   |  |                             |            |   |      |   |            |  
|Principal payments                                                                |  |                             | 482,645    |   |      |   | 312,839    |  
|ARM loans held for securitization:                                                |  |                             |            |   |      |   |            |  
|Purchases and originations                                                        |  |                             | (2,803,249 | ) |      |   | (1,175,438 | )
|Principal payments                                                                |  |                             | 3,143      |   |      |   | 4,983      |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Net cash used in investing activities                                             |  |                             | (3,929,907 | ) |      |   | (2,543,903 | )
|                                                                                  |  |                             |            |   |      |   |            |  
|Financing activities:                                                             |  |                             |            |   |      |   |            |  
|Net borrowings from reverse repurchase agreements                                 |  |                             | 154,673    |   |      |   | 2,827,581  |  
|Net borrowings from Asset-backed CP                                               |  |                             | 1,317,000  |   |      |   | 85,000     |  
|CDO borrowings                                                                    |  |                             | 2,774,201  |   |      |   |           |  
|CDO paydowns                                                                      |  |                             | (475,188   | ) |      |   | (368,921   | )
|Net borrowings (paydowns) on whole loan financing facilities                      |  |                             | 110,513    |   |      |   | (178,370   | )
|Net proceeds from issuance of Subordinated Notes                                  |  |                             | 50,000     |   |      |   |           |  
|Receipts (payments) on Eurodollar contracts                                       |  |                             | 1,832      |   |      |   | (2,074     | )
|Proceeds from Common Stock issued, net                                            |  |                             | 71,765     |   |      |   | 75,459     |  
|Proceeds from Preferred Stock issued, net                                         |  |                             | 4,087      |   |      |   | 48,344     |  
|Dividends paid                                                                    |  |                             | (73,558    | ) |      |   | (62,495    | )
|Purchase of interest rate cap agreements                                          |  |                             | (2,219     | ) |      |   |           |  
|Net decrease (increase) in restricted cash                                        |  |                             | 15,206     |   |      |   | (3,009     | )
|                                                                                  |  |                             |            |   |      |   |            |  
|Net cash provided by financing activities                                         |  |                             | 3,948,312  |   |      |   | 2,421,515  |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Net increase (decrease) in cash and cash equivalents                              |  |                             | 61,832     |   |      |   | (85,418    | )
|Cash and cash equivalents at beginning of period                                  |  |                             | 147,228    |   |      |   | 112,622    |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Cash and cash equivalents at end of period                                        |  | $                           | 209,060    |   |      | $ | 27,204     |  
|                                                                                  |  |                             |            |   |      |   |            |  

See noncash disclosures in Note 2 and Note 4.

See Notes to Consolidated Financial Statements.



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THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

In these financial statements, Thornburg Mortgage, Inc. and its subsidiaries are referred to as the Company, unless specifically stated otherwise or the
context indicates otherwise. Capitalized terms not otherwise defined in the financial statements below shall have the definitive meanings assigned to them in the Glossary at the end of this report.

Note 1. Significant Accounting Policies

The accompanying unaudited
consolidated financial statements have been prepared in accordance with GAAP for interim financial information.

In the opinion of management, all material
adjustments, consisting of normal recurring adjustments, considered necessary for a fair statement have been included. The operating results for the quarter ended March 31, 2006 are not necessarily indicative of the results that may be expected
for the calendar year ending December 31, 2006. The interim financial information should be read in conjunction with Thornburg Mortgage, Inc.s 2005 Annual Report on Form 10-K.

Basis of presentation and principles of consolidation

The consolidated financial statements
include the accounts of TMA, TMD, TMCR, TMHL and TMHS. Thornburg Mortgage Funding Corporation II and Thornburg Mortgage Acceptance Corporation II ceased operations on December 31, 2005 and were dissolved on March 27, 2006. TMD and TMCR are
wholly-owned qualified REIT subsidiaries and are consolidated with the Company for financial statement and tax reporting purposes. TMHL and TMHS are wholly-owned taxable REIT subsidiaries and are consolidated with the Company for financial statement
purposes but are not consolidated with the Company for tax reporting purposes. All material intercompany accounts and transactions are eliminated in consolidation. Certain prior period amounts have been reclassified to conform to current period
classifications.

Accounting changes and other accounting developments

On January 1, 2006, the Company adopted SFAS 123(R) entitled Share-Based Payment. It requires all public companies to report share-based
compensation expense at the grant date fair value of the related share-based awards and to record subsequent changes in the fair value of the awards in current period earnings. Since the Company has accounted for its long-term incentive awards on
this basis since inception of the Plan, the adoption had no impact on the financial statements.

In March 2006, the FASB issued SFAS
No. 156, Accounting for Servicing of Financial Assets. SFAS 156 amends SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for
separately-recognized servicing assets and liabilities. Under SFAS 156, servicing assets and liabilities are no longer recognized in securitizations that are not accounted for as sales under SFAS 140. It also requires all separately-recognized
servicing assets and liabilities to be initially measured at fair value, and permits companies to elect, on a class-by-class basis, to account for servicing assets and liabilities on either a lower of cost or market value basis or a fair value
measurement basis. The Company adopted SFAS 156 on January 1, 2006 and has not recognized any servicing assets or liabilities in connection with its securitizations subsequent to that date because they are accounted for as secured borrowings
under SFAS 140. The Company did not elect to measure its previously existing servicing assets at fair value and continues to measure them at the lower of cost or market value.

In January 2006, the FASB issued an exposure draft titled, The Fair Value Option for Financial Assets and Financial Liabilities, including an
amendment of FASB Statement No. 115. If approved, the proposed standard would provide an option under which an entity may irrevocably elect to report certain financial assets and financial liabilities at fair value. Companies would be
permitted to make the election on a contract-by-contract basis at the time each contract is initially recognized in the financial statements or upon an event that gives rise to a new basis of accounting for the item. Under the fair value option,
changes in the fair value of each financial asset or financial liability would be reflected in earnings as those changes occur. Until the final standard is approved and the full scope is established, the Company is not able to assess the impact, if
any, that the adoption of the standard may have on its financial position or results of operations.



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In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial
Instruments. Key provisions of SFAS 155 include: (1) a broad fair value measurement option for certain hybrid financial instruments that contain an embedded derivative that would otherwise require bifurcation; (2) clarification that
only the simplest separations of interest payments and principal payments qualify for the exception afforded to interest-only strips and principal-only strips from derivative accounting under paragraph 14 of SFAS 133, Accounting for Derivative
Instruments and Hedging Activities, (thereby narrowing such exception); (3) a requirement that beneficial interests in securitized financial assets be analyzed to determine whether they are freestanding derivatives or whether they are
hybrid instruments that contain embedded derivatives requiring bifurcation; (4) clarification that concentrations of credit risk in the form of subordination are not embedded derivatives; and (5) elimination of the prohibition on a QSPE
holding passive derivative financial instruments that pertain to beneficial interests that are or contain a derivative financial instrument. In the context of SFAS 155, hybrid financial instruments refers to financial instruments that contain
embedded derivatives. The Companys Hybrid ARM Assets and Hybrid ARM Hedging Instruments are not hybrid financial instruments in the context of SFAS 155. In general, SFAS 155 will reduce the operational complexity associated with bifurcating
embedded derivatives, and increase the number of beneficial interests in securitization transactions, including interest-only strips and principal-only strips, required to be accounted for in accordance with SFAS 133. Management does not believe
that SFAS 155 will have a material effect on the Companys financial condition, results of operations, or liquidity.

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 amounts of cash equivalents approximate their respective fair values.

Restricted cash

Restricted cash and cash equivalents include cash and highly liquid investments with original maturities of three months or less that are held by
counter-parties as collateral for reverse repurchase agreements, Asset-backed CP and Hedging Instruments. The carrying amounts of restricted cash and cash equivalents approximate their respective fair values.

ARM assets

The Companys ARM Assets are
comprised of Purchased ARM Assets and ARM Loans. All of the Companys ARM Assets are either Traditional ARMs or Hybrid ARMs.

Purchased
ARM Assets are composed mainly of ARM securities and Purchased Securitized Loans obtained from third parties. The Company has designated all of its Purchased ARM Assets as available-for-sale. Therefore, they are reported at fair value, with
unrealized gains and losses reported in accumulated other comprehensive income (loss) as a separate component of shareholders equity. Any unrealized loss deemed to be other-than-temporary is recorded as a realized loss. Realized gains or
losses on the sale of Purchased ARM Assets are recorded in earnings at the time of sale and are determined by the difference between net sale proceeds and the amortized cost of the securities.

Purchased Securitized Loans are third-party loan securitizations in which the Company has purchased all principal classes of the securitizations,
including the subordinated classes.

ARM Loans are designated as held-for-investment as the Company has the intent and ability to hold them
for the foreseeable future, and until maturity or payoff. ARM Loans are carried at their unpaid principal balances, including unamortized premium or discount, unamortized loan origination costs, unamortized deferred loan origination fees, net
unrealized gain (loss) on purchase loan commitments and reserve for loan losses.In accordance with SFAS 140, Securitized ARM Loans and ARM Loans Collateralizing CDOs are accounted for as loans and are not considered investments subject to
classification under SFAS 115, Accounting for Certain Investments in Debt and Equity Securities.

Securitized ARM Loans are
loans originated or acquired by the Company and securitized by the Company with the Company retaining 100% of the beneficial ownership interests.

ARM Loans Collateralizing CDOs are loans originated or acquired by the Company and financed in their entirety on its balance sheet through securitization by the Company into sequentially rated classes. The Company retains the classes that
are not High Quality which provide credit support for the higher rated classes issued to third-party investors in structured financing arrangements.



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In accordance with SFAS 140 loan securitizations resulting in Securitized ARM Loans and ARM Loans
Collateralizing CDOs are accounted for as secured borrowings under paragraphs 9(a)-9(c) of SFAS 140 because (1) the Company has the unilateral ability to cause the return of transferred assets and, therefore, has maintained effective control
over the transferred assets and (2) the transactions are completed through SPEs that do not meet the requirements of SFAS 140 to be considered QSPEs.

ARM loans held for securitization are loans the Company has acquired or originated and are intended to be securitized and retained by the Company.

Interest income on ARM Assets is accrued based on the outstanding principal amount and contractual terms of the assets. Premiums and discounts associated
with the purchase of the ARM Assets are amortized through interest income over the estimated lives of the assets considering the actual and future estimated prepayments of the assets using the interest method in determining an effective yield.
Estimating future lifetime prepayments and estimating the remaining lives of the Companys ARM Assets requires management judgment, which involves consideration of possible future interest rate environments and an estimate of how borrowers will
behave in those environments. The actual lives of the ARM Assets could be longer or shorter than the lives estimated by management. Loan origination fees, net of certain direct loan origination costs and the cost of securitizing ARM loans, are
deferred and amortized as an interest income yield adjustment over the life of the related loans using the effective yield method.

MSRs

Effective January 1, 2006 with the adoption of SFAS 156, the Company does not capitalize any MSRs in connection with
securitizations accounted for as secured borrowings under SFAS 140. Prior to January 1, 2006, MSRs were capitalized upon the securitization of ARM loans as required by GAAP by allocating a portion of the cost basis of the securitized loans to
the estimated value of the servicing asset related to the loans retained by the Company as collateral in securitizations. MSRs are included in Other assets on the Consolidated Balance Sheets. The servicing revenue, net of servicing costs and MSR
amortization, is recorded as Servicing income, net on the Consolidated Income Statements.

MSRs are amortized in proportion to, and over the
expected period of, the estimated future net servicing income. MSRs are carried at the lower of cost or fair value at the risk strata level and are periodically evaluated for impairment based on fair value, which is determined using a discounted
future cash flow model that considers portfolio characteristics and assumptions regarding prepayment speeds, delinquency rates and other economic factors. Estimating prepayments and estimating the remaining lives of the Companys ARM Assets
requires management judgment, which involves consideration of possible future interest rate environments and an estimate of how borrowers will behave in those environments. The actual lives could be longer or shorter than the amount estimated by
management. For purposes of evaluating and measuring impairment of MSRs, the Company stratifies its portfolio on the basis of predominant risk characteristics, including loan type (Traditional ARM or Hybrid ARM).

Credit risk and reserve for loan losses

The
Companys Purchased Securitized Loans comprise all classes of third-party ARM loan securitizations (including the classes rated less than Investment Grade). Like the Companys own loan originations and acquisitions, these assets are
Qualifying Interests for purposes of maintaining the Companys exemption from the Investment Company Act because the Company retains a 100% ownership interest in the underlying loans. When the Company acquires all classes of third-party ARM
loan securitizations, some of the classes are below Investment Grade and the purchase price of those securities generally includes a discount for probable credit losses. This discount is recorded as part of the purchase price of that security. Based
upon managements analysis and judgment, a portion of the purchase discount is subsequently accreted as interest income under the effective yield method while the remaining portion of the purchase discount is treated as a non-accretable
discount which reflects the estimated unrealized loss on the securities due to credit risk. If management ultimately concludes that the non-accretable discount will not represent realized losses, the balance is accreted into earnings over the
remaining life of the security through the effective yield method. In the event that management concludes that losses may exceed the non-accretable discount, the Company revises its estimate of probable losses and the change in the estimate of
losses is recorded as a reduction in earnings.



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The Company also maintains a reserve for loan losses based on managements estimate of credit losses
inherent in the Companys portfolio of ARM Loans. The estimation of the reserve is based on a variety of factors including, but not limited to, current economic conditions, the potential for natural disasters, loan portfolio composition,
delinquency trends, credit losses to date on underlying loans and remaining credit protection. If the credit performance of its ARM Loans is different than expected, the Company adjusts the reserve for loan losses to a level deemed appropriate by
management to provide for estimated losses inherent in its ARM Loan portfolio. Additionally, once a loan 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 loan. The Company provides specific reserves for loan losses on loans that are considered to be impaired when a significant permanent decline in value is identified.

Valuation methods

The fair values of the
Companys Purchased ARM Assets, Securitized ARM Loans and ARM Loans Collateralizing CDOs are generally based on market prices provided by third-party pricing services or by broker/dealers who make markets in these financial instruments. If the
fair value of a Purchased ARM Asset, a Securitized ARM Loan or ARM Loans Collateralizing CDOs is not reasonably available from a dealer or a third-party pricing service, management estimates the fair value based on characteristics of the security
that the Company receives from the issuer and on available market information.

The fair values of ARM loans held for securitization are
estimated by the Company using the same pricing models employed by the Company to determine prices to purchase loans in the open market, taking into consideration the aggregated characteristics of groups of loans such as, but not limited to,
collateral type, index, interest rate, margin, length of fixed interest rate period, life cap, periodic cap, underwriting standards, age and credit.

The Company enters into commitments to purchase loans through its correspondent and bulk channels. Purchase commitments that will be held for investment purposes generally qualify as derivatives under SFAS 133 and SFAS 149, Amendment
of Statement 133 on Derivative Instruments and Hedging Activities, and are recorded at fair value. The fair value of the net unrealized gain or loss on purchase commitments is calculated using the same methodologies that are used to price the
Companys originated ARM Loans, adjusted for anticipated fallout for purchase commitments that will likely not be funded. The Companys net unrealized gain (loss) on purchase commitments is recorded as a component of ARM Loans, net on the
Consolidated Balance Sheets with the respective changes in fair value recorded in Gain (loss) on Derivatives, net on the Consolidated Income Statements.

The fair values of the Companys CDOs, Senior Notes, Subordinated Notes, Swap Agreements and Cap Agreements are based on market values provided by dealers who are familiar with the terms of these instruments.

The fair value of Eurodollar Transactions is determined on a daily basis by the closing prices on the Chicago Mercantile Exchange.

The fair values reported reflect estimates and may not necessarily be indicative of the amounts the Company could realize if these
instruments were sold. Cash and cash equivalents, restricted cash and cash equivalents, interest receivable, prepaid expenses and other assets, reverse repurchase agreements, Asset-backed CP, other borrowings and other liabilities are reflected in
the consolidated financial statements at their amortized cost, which approximates their fair value because of the short-term nature of these instruments.

Hedging Instruments

All of the Companys Hedging Instruments are carried on the Consolidated Balance Sheets at
their fair value as an asset, if their fair value is positive, or as a liability, if their fair value is negative. In general, most of the Companys Hedging Instruments are designated as cash flow hedges, and the effective amount of change in
the fair value of the Derivative is recorded in accumulated other comprehensive income (loss) and transferred to earnings as the hedged item affects earnings. The ineffective amount of all Hedging Instruments is recognized in earnings each quarter.
Generally, a hedging strategy is effective under SFAS 133 if it achieves offsetting cash flows attributable to the risk being hedged and meets certain statistical thresholds pursuant to SFAS 133. If the hedging strategy is not successful in
achieving offsetting cash flows or meeting the statistical thresholds, it is ineffective and will not qualify for hedge accounting.



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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 the inception of a hedging activity
and on an on-going basis, whether or not the hedging activity is highly effective. If it is determined that a hedge has been highly effective, but will not be prospectively, the Company discontinues hedge accounting prospectively.

Hybrid ARM Hedging Instruments

The Company
enters into Hybrid ARM Hedging Instruments in order to manage its interest rate exposure when financing its Hybrid ARM Assets. Though the Company generally borrows money based on short-term interest rates, its Hybrid ARM Assets 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 Hybrid ARM Assets. Consequently, the Company uses Hybrid ARM Hedging
Instruments to fix the interest rate on its borrowings during the expected fixed interest rate period of the Hybrid ARM Assets such that the combined Effective Duration of its borrowings and Hybrid ARM Hedging Instruments closely matches the
Effective Duration of the Hybrid ARM Assets, the difference being Net Effective Duration. The notional balances of the Hybrid ARM Hedging Instruments generally decline over the life of these instruments approximating the declining balance of the
Hybrid ARM Assets being financed.

Swap Agreements and Eurodollar Transactions have the effect of converting the Companys
variable-rate debt into fixed-rate debt over the life of the Swap Agreements and Eurodollar Transactions. When the Company enters into a Swap Agreement, it generally agrees to pay a fixed rate of interest and to receive a variable interest rate,
generally based on LIBOR. The Company has two-way collateral agreements protecting its credit exposure to Swap Agreement counterparties. The Company also enters into Eurodollar Transactions in order to fix the interest rate on its forecasted
three-month LIBOR-based liabilities. When the Company enters into a Eurodollar Transaction, it incurs an unrealized gain if the applicable interest rate index subsequently rises or an unrealized loss if the applicable interest rate index
subsequently declines. The amortization of the unrealized gain or unrealized loss over the hedged period when combined with the variable cost of the short-term debt is expected to result in a fixed interest cost over the life of the Eurodollar
Transaction.

The Company enters into Cap Agreements in connection with some of its CDO securitizations by incurring a one-time fee or
premium. Pursuant to the terms of the respective Cap Agreements, the Company will receive cash payments if the interest rate index specified in any such Cap Agreement increases above contractually specified levels. Therefore, such Cap Agreements
have the effect of capping the interest rate on a portion of the Companys borrowings so as not to exceed the level specified by the Cap Agreement. The purchase price of these Cap Agreements is expensed over the life of the Cap Agreements and
the expense increases as the Cap Agreements approach maturity.

The Company designates its Hybrid ARM Hedging Instruments as cash flow
hedges. All changes in the unrealized gains and losses on Hybrid ARM Hedging Instruments have been recorded in accumulated other comprehensive income (loss) and are reclassified to earnings as interest expense when each of the forecasted financing
transactions occurs. If it becomes probable that the forecasted transaction, which in this case refers to interest payments to be made under the Companys short-term borrowing agreements or its debt obligations, 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 accumulated other comprehensive income (loss) would be
reclassified to income. The carrying value of these Hybrid ARM Hedging Instruments is included in Hedging Instruments on the Consolidated Balance Sheets.

The unrealized gain (loss) on Swap Agreements is based on the discounted value of the remaining future net interest payments expected to be made over the remaining life of the Swap Agreements. Therefore, over time, as
the actual payments are made, the unrealized gain (loss) in accumulated other comprehensive income (loss) and the carrying value of the Swap Agreements adjust to zero and the Company realizes a fixed financing cost over the life of the Hedging
Instrument.

Pipeline Hedging Instruments

The Company enters into Pipeline Hedging Instruments to manage interest rate risk associated with commitments to purchase ARM loans. The Company does not currently apply hedge accounting to its Pipeline Hedging
Instruments



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and, therefore, the change in fair value and the realized gains (losses) on these Pipeline Hedging Instruments are recorded in current earnings. The net gain
(loss) related to Pipeline Hedging Instruments is reflected in Gain (loss) on Derivatives, net, on the Consolidated Income Statements as an offset to the net gain (loss) recorded for the change in fair value of the loan commitments.

Long-term incentive awards

The Company has a
long-term incentive plan which is more fully described in Note 8. Since inception of the Plan in 2002, the Company has accounted for all awards at fair value on the grant date and recorded subsequent changes in the fair value of the awards in
current period earnings. The PSRs issued under the Plan are variable in nature and are settled in cash. The liability for PSRs is measured each period based on the fair value of the Common Stock. The effects of changes in the stock price during the
vesting period, generally three years, are recognized as expense over the vesting period. Dividend-equivalent payments on DERs and vested and unvested PSRs granted on or before October 20, 2003 are recognized as compensation expense in the
period in which they are declared. PSRs granted after October 20, 2003 do not earn a dividend-equivalent until they are vested.

Accumulated
other comprehensive income (loss)

SFAS 130, Reporting Comprehensive Income, divides comprehensive income into net
income and other comprehensive income (loss), which includes unrealized gains and losses on marketable securities defined as available-for-sale and unrealized gains and losses on derivative financial instruments that qualify for cash flow hedge
accounting under SFAS 133.

The net unrealized losses on the Companys ARM Loans of $59.2 million and $11.2 million at March 31,
2006 and December 31, 2005, respectively, are not included in accumulated other comprehensive income (loss) because, in accordance with GAAP, the ARM Loans are carried at their amortized cost.

Income taxes

The Company, excluding TMHL and
TMHS, elected to be taxed as a REIT and believes it complies with the provisions of 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
as long as certain asset, income and stock ownership tests are met. TMHL and TMHS are taxable REIT subsidiaries and, as such, are subject to both federal and state corporate income tax.

Income taxes are provided under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period the change occurs. Subject to managements judgment, a
valuation allowance is established if realization of deferred tax assets is not more likely than not.

Income taxes for the quarter ended
March 31, 2006 were immaterial and no provision is reflected on the Consolidated Income Statements. The only significant differences between the financial statement carrying amount of existing assets and liabilities and their respective tax
bases relate to MSRs capitalized for financial statement purposes and TMHLs net operating loss carryforward from 2004 and 2005. Management has established a valuation allowance against the net deferred tax assets at March 31, 2006.

Net earnings per share

EPS
amounts are computed by dividing net income (adjusted for dividends declared on Preferred Stock) by the weighted average number of common shares outstanding. The Company had no outstanding Common Stock equivalents during the periods presented.



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Following is information about the computation of the EPS data for the three-month periods ended
March 31, 2006 and 2005 (in thousands except per share data):



|                                             |  |        |        |        |         |     |   |     
|-------------------------------------------- |  | ------ | ------ | ------ | ------- | --- | - | ----
|                                             |  | Income |        | Shares |         | EPS
|Three Months Ended March 31, 2006            |  |        |        |        |         |     |   |     
|EPS, income available to common shareholders |  | $      | 70,071 |        | 106,243 |     | $ | 0.66
|                                             |  |        |        |        |         |     |   |     
|Three Months Ended March 31, 2005            |  |        |        |        |         |     |   |     
|EPS, income available to common shareholders |  | $      | 67,356 |        | 93,173  |     | $ | 0.72
|                                             |  |        |        |        |         |     |   |     

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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.



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Note 2. ARM Assets

The following tables present the Companys ARM Assets as of March 31, 2006 and December 31, 2005 (in thousands):

March 31, 2006



|                                                 |  |                |            |   |                            |   |           |                      |  |   |                              |   |  |                                  |            |   |       |   |         |   |  |   |            |  
|------------------------------------------------ |  | -------------- | ---------- | - | -------------------------- | - | --------- | -------------------- |  | - | ---------------------------- | - |  | -------------------------------- | ---------- | - | ----- | - | ------- | - |  | - | ---------- | -
|                                                 |  | ARM securities |            |   | PurchasedSecuritized Loans |   |           | Securitized ARMLoans |  |   | ARM LoansCollateralizingCDOs |   |  | ARM loans heldfor securitization |            |   | Total |  
|Principal balance outstanding                    |  | $              | 20,903,344 |   |                            | $ | 7,670,745 |                      |  | $ | 3,179,720                    |   |  | $                                | 12,704,601 |   |       | $ | 673,631 |   |  | $ | 45,132,041 |  
|Net unamortized premium                          |  |                | 225,263    |   |                            |   | 66,310    |                      |  |   | 15,558                       |   |  |                                  | 35,446     |   |       |   | 4,243   |   |  |   | 346,820    |  
|Loan loss reserves                               |  |                |           |   |                            |   |          |                      |  |   | (7,385                       | ) |  |                                  | (3,614     | ) |       |   | (250    | ) |  |   | (11,249    | )
|Non-accretable discounts                         |  |                | (236       | ) |                            |   | (15,015   | )                    |  |   |                             |   |  |                                  |           |   |       |   |        |   |  |   | (15,251    | )
|Net unrealized gain on purchase loan commitments |  |                |           |   |                            |   |          |                      |  |   |                             |   |  |                                  |           |   |       |   | (1,554  | ) |  |   | (1,554     | )
|Principal payment receivable                     |  |                | 12,274     |   |                            |   | 3         |                      |  |   |                             |   |  |                                  |           |   |       |   |        |   |  |   | 12,277     |  
|                                                 |  |                |            |   |                            |   |           |                      |  |   |                              |   |  |                                  |            |   |       |   |         |   |  |   |            |  
|Amortized cost, net                              |  |                | 21,140,645 |   |                            |   | 7,722,043 |                      |  |   | 3,187,893                    |   |  |                                  | 12,736,433 |   |       |   | 676,070 |   |  |   | 45,463,084 |  
|Gross unrealized gains                           |  |                | 2,400      |   |                            |   | 3,594     |                      |  |   | 15,089                       |   |  |                                  | 18,710     |   |       |   | 1,218   |   |  |   | 41,011     |  
|Gross unrealized losses                          |  |                | (499,966   | ) |                            |   | (198,759  | )                    |  |   | (85,472                      | ) |  |                                  | (7,187     | ) |       |   | (1,575  | ) |  |   | (792,959   | )
|                                                 |  |                |            |   |                            |   |           |                      |  |   |                              |   |  |                                  |            |   |       |   |         |   |  |   |            |  
|Fair value                                       |  | $              | 20,643,079 |   |                            | $ | 7,526,878 |                      |  | $ | 3,117,510                    |   |  | $                                | 12,747,956 |   |       | $ | 675,713 |   |  | $ | 44,711,136 |  
|                                                 |  |                |            |   |                            |   |           |                      |  |   |                              |   |  |                                  |            |   |       |   |         |   |  |   |            |  
|Carrying value                                   |  | $              | 20,643,079 |   |                            | $ | 7,526,878 |                      |  | $ | 3,187,893                    |   |  | $                                | 12,736,433 |   |       | $ | 676,070 |   |  | $ | 44,770,353 |  
|                                                 |  |                |            |   |                            |   |           |                      |  |   |                              |   |  |                                  |            |   |       |   |         |   |  |   |            |  

December 31, 2005



|                                                 |  |                |            |   |                            |   |           |                      |  |   |                              |   |  |                                  |            |   |       |   |         |   |  |   |            |  
|------------------------------------------------ |  | -------------- | ---------- | - | -------------------------- | - | --------- | -------------------- |  | - | ---------------------------- | - |  | -------------------------------- | ---------- | - | ----- | - | ------- | - |  | - | ---------- | -
|                                                 |  | ARM securities |            |   | PurchasedSecuritized Loans |   |           | SecuritizedARM Loans |  |   | ARM LoansCollateralizingCDOs |   |  | ARM loans heldfor securitization |            |   | Total |  
|Principal balance outstanding                    |  | $              | 20,433,994 |   |                            | $ | 6,942,452 |                      |  | $ | 3,300,677                    |   |  | $                                | 10,370,356 |   |       | $ | 631,543 |   |  | $ | 41,679,022 |  
|Net unamortized premium                          |  |                | 243,967    |   |                            |   | 52,450    |                      |  |   | 17,440                       |   |  |                                  | 29,704     |   |       |   | 4,286   |   |  |   | 347,847    |  
|Loan loss reserves                               |  |                |           |   |                            |   |          |                      |  |   | (7,400                       | ) |  |                                  | (3,099     | ) |       |   | (250    | ) |  |   | (10,749    | )
|Non-accretable discounts                         |  |                | (236       | ) |                            |   | (11,315   | )                    |  |   |                             |   |  |                                  |           |   |       |   |        |   |  |   | (11,551    | )
|Net unrealized loss on purchase loan commitments |  |                |           |   |                            |   |          |                      |  |   |                             |   |  |                                  |           |   |       |   | 6,264   |   |  |   | 6,264      |  
|Principal payment receivable                     |  |                | 10,688     |   |                            |   | 18        |                      |  |   |                             |   |  |                                  |           |   |       |   |        |   |  |   | 10,706     |  
|                                                 |  |                |            |   |                            |   |           |                      |  |   |                              |   |  |                                  |            |   |       |   |         |   |  |   |            |  
|Amortized cost, net                              |  |                | 20,688,413 |   |                            |   | 6,983,605 |                      |  |   | 3,310,717                    |   |  |                                  | 10,396,961 |   |       |   | 641,843 |   |  |   | 42,021,539 |  
|Gross unrealized gains                           |  |                | 4,761      |   |                            |   | 2,242     |                      |  |   | 13,331                       |   |  |                                  | 57,180     |   |       |   | 1,707   |   |  |   | 79,221     |  
|Gross unrealized losses                          |  |                | (397,670   | ) |                            |   | (146,843  | )                    |  |   | (64,462                      | ) |  |                                  | (18,431    | ) |       |   | (515    | ) |  |   | (627,921   | )
|                                                 |  |                |            |   |                            |   |           |                      |  |   |                              |   |  |                                  |            |   |       |   |         |   |  |   |            |  
|Fair value                                       |  | $              | 20,295,504 |   |                            | $ | 6,839,004 |                      |  | $ | 3,259,586                    |   |  | $                                | 10,435,710 |   |       | $ | 643,035 |   |  | $ | 41,472,839 |  
|                                                 |  |                |            |   |                            |   |           |                      |  |   |                              |   |  |                                  |            |   |       |   |         |   |  |   |            |  
|Carrying value                                   |  | $              | 20,295,504 |   |                            | $ | 6,839,004 |                      |  | $ | 3,310,717                    |   |  | $                                | 10,396,961 |   |       | $ | 641,843 |   |  | $ | 41,484,029 |  
|                                                 |  |                |            |   |                            |   |           |                      |  |   |                              |   |  |                                  |            |   |       |   |         |   |  |   |            |  

The Company recorded an impairment charge to recognize managements estimate of additional future losses
inherent in its Purchased Securitized Loan portfolio and realized a loss of $214,000 on ARM Assets during the quarter ended March 31, 2006. The Company realized a gain of $1.6 million on the sale of $277.9 million of ARM Assets during the
quarter ended March 31, 2005.

During the quarter ended March 31, 2006, the Company securitized $2.9 billion of ARM loans into two CDOs. While
TMHL transferred all of the ARM loans to a separate bankruptcy-remote legal entity, on a consolidated basis the Company did not account for these securitizations as sales and, therefore, did not record any gain or loss in connection with the
securitizations. The Company retained $101.6 million of the resulting securities for its ARM Loan portfolio and financed $2.8 billion with third-party investors, thereby providing long-term collateralized financing for these assets. As of
March 31, 2006 and December 31, 2005, the Company held $12.7 billion and $10.4 billion, respectively, of ARM Loans Collateralizing CDOs. As of March 31, 2006 and December 31, 2005, the Company held $3.2 billion and $3.3 billion,
respectively, of Securitized ARM Loans as a result of the Companys securitization efforts. All discussions relating to securitizations in these financial statements and notes are on a consolidated basis and do not reflect the separate legal
ownership of the loans by various bankruptcy-remote legal entities.

During the quarter ended March 31, 2006, the Company acquired $933.0 million of
Purchased Securitized Loans. At March 31, 2006 and December 31, 2005, the Companys Purchased Securitized Loans totaled $7.5 billion and $6.8 billion, respectively. These assets are Qualifying Interests for purposes of maintaining the
Companys exception from the Investment Company Act because the Company retains 100% ownership interest in the underlying loans. Because the Company



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purchases all classes of these securitizations, the Company has credit exposure on the underlying loans. The purchase price of the classes that are less than
Investment Grade generally includes a discount for probable credit losses and, based on managements judgment, the portion of the purchase discount which reflects the estimated unrealized loss on the securities due to credit risk is treated as
a non-accretable discount. As of March 31, 2006, 45 of the underlying loans of the Companys Purchased Securitized Loans were 60 days or more delinquent and had an aggregate balance of $13.0 million. Activity in non-accretable discounts
for the three month periods ended March 31, 2006 and 2005 is as follows (in thousands):



|                                         |  |      |        |   |      |   |       |  
|---------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | -
|                                         |  | 2006 |        |   | 2005 |  
|Balance at beginning of period           |  | $    | 11,551 |   |      | $ | 6,478 |  
|Increase for securities purchased        |  |      | 3,975  |   |      |   | 1,863 |  
|Increase for expected future losses      |  |      | 214    |   |      |   |      |  
|Realized losses                          |  |      | (389   | ) |      |   |      |  
|Reclassifications to accretable discount |  |      | (100   | ) |      |   | (350  | )
|                                         |  |      |        |   |      |   |       |  
|Balance at end of period                 |  | $    | 15,251 |   |      | $ | 7,991 |  
|                                         |  |      |        |   |      |   |       |  

The following table shows the gross unrealized losses and fair value of Purchased ARM Assets, aggregated by credit
rating and length of time that the 778 individual securities have been in a continuous unrealized loss position, at March 31, 2006 (in thousands):

Unrealized Losses on Purchased ARM Assets as of March 31, 2006



|                       |  |                     |            |                |                   |          |            |       |                |            |  |            |          |                |  |   |            |  |   |          |  
|---------------------- |  | ------------------- | ---------- | -------------- | ----------------- | -------- | ---------- | ----- | -------------- | ---------- |  | ---------- | -------- | -------------- |  | - | ---------- |  | - | -------- | -
|                       |  | Less Than 12 Months |            |                | 12 Months or More |          |            | Total |               
|                       |  | Fair Value          |            | UnrealizedLoss |                   |          | Fair Value |       | UnrealizedLoss |            |  | Fair Value |          | UnrealizedLoss | 
|Agency Securities      |  | $                   | 278,529    |                | $                 | (6,152   | )          |       | $              | 1,367,388  |  | $          | (40,153  | )              |  | $ | 1,645,917  |  | $ | (46,305  | )
|AAA/Aaa rating         |  |                     | 14,857,378 |                |                   | (242,170 | )          |       |                | 10,587,656 |  |            | (380,146 | )              |  |   | 25,445,034 |  |   | (622,316 | )
|AA/Aa rating           |  |                     | 470,568    |                |                   | (9,311   | )          |       |                | 73,858     |  |            | (9,612   | )              |  |   | 544,426    |  |   | (18,923  | )
|A rating               |  |                     | 193,149    |                |                   | (5,399   | )          |       |                | 19,095     |  |            | (717     | )              |  |   | 212,244    |  |   | (6,116   | )
|BBB/Baa rating         |  |                     | 82,230     |                |                   | (2,361   | )          |       |                | 21,189     |  |            | (1,363   | )              |  |   | 103,419    |  |   | (3,724   | )
|BB/Ba rating and below |  |                     | 29,284     |                |                   | (1,112   | )          |       |                | 2,829      |  |            | (229     | )              |  |   | 32,113     |  |   | (1,341   | )
|                       |  |                     |            |                |                   |          |            |       |                |            |  |            |          |                |  |   |            |  |   |          |  
|Total                  |  | $                   | 15,911,138 |                | $                 | (266,505 | )          |       | $              | 12,072,015 |  | $          | (432,220 | )              |  | $ | 27,983,153 |  | $ | (698,725 | )
|                       |  |                     |            |                |                   |          |            |       |                |            |  |            |          |                |  |   |            |  |   |          |  

The unrealized losses in the above table are temporary impairments due to changes in market interest rates and,
based upon review of credit ratings, delinquency data and other information, are not reflective of credit deterioration. As the Company has the ability and intent to hold its Purchased ARM Assets until recovery, losses are not considered to be other
than temporary impairments. As presented in Note 7, during the three-month period ended March 31, 2006, the net unrealized loss of $537.5 million on Purchased ARM Assets increased by $155.2 million to a net unrealized loss of $692.7 million.
During the same three-month period in 2006, the net unrealized gain on Hedging Instruments of $390.0 million increased by $176.1 million to a net unrealized gain of $566.1 million, for a combined decrease in the net unrealized loss on Purchased ARM
Assets and Hedging Instruments of $20.9 million. While the Companys Purchased ARM Assets are designated as available-for-sale, the Company does not typically sell its Purchased ARM Assets and therefore does not expect to realize these gross
unrealized losses.

The Company has credit exposure on its ARM Loans. The following tables summarize ARM Loan delinquency information as of March 31,
2006 and December 31, 2005 (dollar amounts in thousands):

March 31, 2006



|                              |  |           |  |             |        |                    |      |   |                        |      |  
|----------------------------- |  | --------- |  | ----------- | ------ | ------------------ | ---- | - | ---------------------- | ---- | -
|Delinquency Status            |  | LoanCount |  | LoanBalance |        | Percent ofARMLoans |      |   | Percent of TotalAssets |     
|60 to 89 days                 |  |          |  |             |       |                    |     |   |                        |     |  
|90 days or more               |  | 2         |  | $           | 320    |                    | 0.00 | % |                        | 0.00 | %
|In bankruptcy and foreclosure |  | 13        |  |             | 10,082 |                    | 0.06 |   |                        | 0.02 |  
|                              |  |           |  |             |        |                    |      |   |                        |      |  
|                              |  | 15        |  | $           | 10,402 |                    | 0.06 | % |                        | 0.02 | %
|                              |  |           |  |             |        |                    |      |   |                        |      |  



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December 31, 2005



|                              |  |           |  |             |        |                     |      |   |                       |      |  
|----------------------------- |  | --------- |  | ----------- | ------ | ------------------- | ---- | - | --------------------- | ---- | -
|Delinquency Status            |  | LoanCount |  | LoanBalance |        | Percent of ARMLoans |      |   | Percent ofTotalAssets |     
|60 to 89 days                 |  | 4         |  | $           | 1,230  |                     | 0.01 | % |                       | 0.00 | %
|90 days or more               |  | 0         |  |             |       |                     |     |   |                       |     |  
|In bankruptcy and foreclosure |  | 12        |  |             | 9,998  |                     | 0.07 |   |                       | 0.02 |  
|                              |  |           |  |             |        |                     |      |   |                       |      |  
|                              |  | 16        |  | $           | 11,228 |                     | 0.08 | % |                       | 0.02 | %
|                              |  |           |  |             |        |                     |      |   |                       |      |  

As of March 31, 2006, the Company owned three real estate properties as a result of foreclosing on delinquent
loans in the amount of $661,000 (not included in the table above.) The Company believes that its current level of loan loss reserves is adequate to cover estimated losses from these loans as well as losses inherent in the ARM Loan portfolio at
March 31, 2006.

During the three months ended March 31, 2006 and 2005, the Company recorded loan loss provisions totaling $500,000 and $409,000,
respectively, to reserve for estimated credit losses on ARM Loans, bringing its total loan loss reserve to $11.3 million and $9.8 million, respectively.

The Company originates fully amortizing loans with interest only payment terms for a period not to exceed ten years. Interest only loans represented 89.3% and 88.9% of ARM loans at March 31, 2006 and December 31, 2005,
respectively. Beginning in the first quarter of 2006, the Company also began acquiring Pay Option ARMs. The Companys investment in Pay Option ARMs comprised 2.1% of ARM Assets at March 31, 2006 and is expected to increase to as much as 5%
by December 31, 2006. Loans with interest only features and Pay Option ARMs have been identified as potentially having a concentration of credit risk as defined in SFAS 107, Disclosures about Fair Value of Financial Instruments. The
Company believes that its pricing, underwriting, appraisal, and other processes are sufficient to manage potential credit risks.

In accordance with SFAS
156, no MSRs were capitalized in connection with the securitization of $2.9 billion of ARM loans during the three months ended March 31, 2006 because the securitizations were accounted for as secured borrowings under SFAS 140. MSRs capitalized
upon the securitization of $1.3 billion of ARM loans during the three months ended March 31, 2005 totaled $7.8 million. MSRs of $43.0 million, net of amortization of $2.2 million during the three months ended March 31, 2006, are included
in other assets on the Consolidated Balance Sheets at March 31, 2006. MSRs of $45.3 million are included in Other assets on the Consolidated Balance Sheets at December 31, 2005. At March 31, 2006, the fair value of the MSRs in each
risk stratum exceeded their amortized cost basis.

As of March 31, 2006, the Company had commitments to purchase or originate the following amounts of
ARM assets, net of fallout (in thousands):



|                                       |  |   |        
|-------------------------------------- |  | - | -------
|ARM loans  correspondent originations |  | $ | 802,346
|ARM loans  direct originations        |  |   | 26,270 
|                                       |  |   |        
|                                       |  | $ | 828,616
|                                       |  |   |        

Note 3. Hedging Instruments

Hybrid ARM Hedging Instruments

As of March 31, 2006 and December 31, 2005, the Company was
counterparty to Hybrid ARM Hedging Instruments that consist of Swap Agreements and Eurodollar Transactions having aggregate notional balances of $33.2 billion and $32.0 billion, respectively. In addition, as of March 31, 2006, the Company had
entered into delayed Swap Agreements with notional balances totaling $5.3 billion that become effective between April 2006 and December 2006 and are also accounted for as cash flow hedges as of March 31, 2006. These delayed Swap Agreements have
been entered into to hedge the forecasted financing of the Companys ARM asset purchase commitments at March 31, 2006. As of March 31, 2006, these Swap Agreements and Eurodollar Transactions had a weighted average maturity of 3.6
years. In accordance with the Swap Agreements, the Company will pay a fixed rate of interest during the term of these Swap Agreements and receive a payment that varies monthly with the one-month LIBOR rate. The combined weighted average fixed rate
payable of the Swap Agreements and Eurodollar Transactions was 4.02% and 3.79% at March 31, 2006 and December 31, 2005, respectively.



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The net unrealized gain on Swap Agreements at March 31, 2006 of $571.4 million included Swap
Agreements with gross unrealized gains of $571.4 million and gross unrealized losses of $36,000 and is included in Hedging Instruments on the Consolidated Balance Sheets. As of December 31, 2005, the net unrealized gain of $400.2 million
included Swap Agreements with gross unrealized gains of $403.2 million and gross unrealized losses of $3.0 million. As of March 31, 2006, the net unrealized gain on Swap Agreements and deferred gains and losses on Eurodollar Transactions
recorded in accumulated other comprehensive income (loss) totaled a net gain of $570.9 million. In the twelve month period following March 31, 2006, $325.4 million of these net unrealized gains are expected to be realized.

As of March 31, 2006 and December 31, 2005, the Companys Cap Agreements used to manage the interest rate risk exposure on the financing of
Hybrid ARM Loans Collateralizing CDOs had remaining notional amounts of $898.6 million and $970.3 million, respectively. The Company has also entered into Cap Agreements that have start dates ranging from 2006 to 2010. The notional balance at the
start date will be the lesser of the scheduled amount of $371.1 million or the balance of Hybrid ARM loans associated with these Cap Agreements. The fair value of all of these Cap Agreements at March 31, 2006 and December 31, 2005 was
$22.2 million and $19.5 million, respectively, and is included in Hedging Instruments on the Consolidated Balance Sheets. As of March 31, 2006 and December 31, 2005, the unrealized losses on these Cap Agreements of $4.8 million and $9.9
million, respectively, are included in accumulated other comprehensive income (loss). In the twelve month period following March 31, 2006, $2.0 million of net unrealized gains are expected to be realized. Pursuant to the terms of these Cap
Agreements and subject to future prepayment behavior, the notional amount of the Cap Agreements declines such that it is expected to equal the balance of the Hybrid ARM loans collateralizing CDOs. Under these Cap Agreements, the Company will receive
cash payments should the one-month LIBOR increase above the contract rates of these Hedging Instruments, which range from 2.93% to 9.67% and average 3.65%. The Cap Agreements had an average maturity of 2.7 years as of March 31, 2006 and will
expire between 2006 and 2013.

The Company hedges the funding of its Hybrid ARM Assets such that the Net Effective Duration is less than one
year. At March 31, 2006, the financing and hedging of the Companys Hybrid ARM Assets resulted in a Net Effective Duration of approximately 0.41 years while the financing and hedging of all of the Companys ARM Assets resulted in a
Net Effective Duration of approximately 0.39 years. This duration calculation is based on small changes in interest rates and suggests a low degree of portfolio price change implying that the Companys cash flow and earnings characteristics
should be relatively stable as interest rates change.

Interest expense for the quarter ended March 31, 2006 includes net receipts on
Hybrid ARM Hedging Instruments of $57.1 million. Interest expense for the same period in 2005 includes net payments on Hybrid ARM Hedging Instruments of $25.8 million.

Pipeline Hedging Instruments

The Company enters into commitments to purchase loans through its
correspondent and bulk channels. Purchase commitments that will be held for investment purposes generally qualify as derivatives under SFAS 133 and SFAS 149 and are recorded at fair value. The Company hedges these purchase commitments with Pipeline
Hedging Instruments. The change in fair value of the Pipeline Hedging Instruments is included in Gain (loss) on Derivatives, net in the Consolidated Income Statements. The fair value of the Pipeline Hedging Instruments at March 31, 2006 and
December 31, 2005 was a net unrealized gain of $4.6 million and a net unrealized loss of $2.0 million, respectively, and is included in Hedging Instruments on the Consolidated Balance Sheets. Pipeline Hedging Instruments had remaining notional
balances of $593.0 million and $1.9 billion at March 31, 2006 and December 31, 2005, respectively.

The Company recorded a net
gain of $6.5 million on Derivatives during the quarter ended March 31, 2006. This gain consisted of a net gain of $8.4 million on Pipeline Hedging Instruments and a net gain of $1.2 million on other Derivative transactions partially offset by a
net loss of $3.1 million on commitments to purchase loans from correspondent lenders and bulk sellers. The Company recorded a net gain of $1.3 million on Derivatives during the same period in 2005. This gain consisted of a net gain of $7.1 million
on Pipeline Hedging Instruments partially offset by a net loss of $5.8 million on commitments to purchase loans from correspondent lenders and bulk sellers.



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Note 4. Borrowings

Reverse Repurchase Agreements

The Company has arrangements to enter into reverse repurchase agreements, a form of
collateralized short-term borrowing, with 24 different financial institutions, and as of March 31, 2006, had borrowed funds from 19 of these firms.

As of March 31, 2006, the Company had $23.5 billion of reverse repurchase agreements outstanding with a weighted average borrowing rate of 4.83% and a weighted average remaining maturity of 3.1 months. As of
December 31, 2005, the Company had $23.4 billion of reverse repurchase agreements outstanding with a weighted average borrowing rate of 4.43% and a weighted average remaining maturity of 3.0 months. As of March 31, 2006, $22.6 billion of
the Companys borrowings were variable-rate term reverse repurchase agreements with original maturities that range from five to twelve months. The interest rates of these term reverse repurchase agreements are generally indexed to either the
one- or three-month LIBOR rate and reprice accordingly. ARM Assets with a carrying value of $24.4 billion, including accrued interest, and cash totaling $5.0 million, collateralized the reverse repurchase agreements at March 31, 2006.

At March 31, 2006, the reverse repurchase agreements had the following remaining maturities (in thousands):



|               |  |   |           
|-------------- |  | - | ----------
|Within 30 days |  | $ | 4,907,692 
|31 to 89 days  |  |   | 5,989,970 
|90 to 365 days |  |   | 12,647,090
|               |  |   |           
|               |  | $ | 23,544,752
|               |  |   |           

Asset-backed CP

The Company issues Asset-backed CP to investors in the form of secured liquidity notes that are recorded as borrowings on the Companys Consolidated Balance Sheets and are rated P-1 by Moodys Investors
Service, F1+ by Fitch Ratings and A-1+ by Standard and Poors. In December 2005, the Asset-backed CP facility was increased from $5 billion to $10 billion. As of March 31, 2006 and December 31, 2005, the Company had $6.3 billion and
$5.0 billion, respectively, of Asset-backed CP outstanding with a weighted average interest rate of 4.78% and 4.38%, respectively, and a weighted average remaining maturity of 23 days and 18 days, respectively.

As of March 31, 2006 and December 31, 2005, these notes were collateralized by AAA-rated MBS from the Companys ARM Asset portfolio with a
carrying value of $6.7 billion and $5.3 billion, respectively, including accrued interest.

CDOs

All of the Companys CDOs are secured by ARM loans. For financial reporting purposes, the ARM loans held as collateral are recorded as assets of the
Company and the CDOs are recorded as the Companys debt. In some transactions, Hedging Instruments are held by the trusts and recorded as assets or liabilities of the Company. The Hedging Instruments either fix the interest rates of the
pass-through certificates or cap the interest rate exposure on these transactions. As of March 31, 2006, the following CDOs were outstanding (dollar amounts in thousands):



|                                   |  |                   |            |                            |      |  
|---------------------------------- |  | ----------------- | ---------- | -------------------------- | ---- | -
|Description                        |  | Principal Balance |            | EffectiveInterest Rate (1) |     
|Floating-rate financing            |  | $                 | 2,057,316  |                            | 5.05 | %
|Capped floating-rate financing (2) |  |                   | 6,982,501  |                            | 5.05 | %
|Fixed-rate financing (3)           |  |                   | 3,513,530  |                            | 4.49 | %
|                                   |  |                   |            |                            |      |  
|Total                              |  | $                 | 12,553,347 |                            | 4.89 | %
|                                   |  |                   |            |                            |      |  

---

|(1) | Effective interest rate includes the impact of issuance costs and Hedging Instruments.
|--- | --------------------------------------------------------------------------------------

|(2) | Includes financing hedged with Cap Agreements with strike prices in excess of one-month LIBOR with a notional balance of $7.0 million as of March 31, 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes floating-rate financing hedged with Swap Agreements with a notional balance of $1.5 billion and Cap Agreements with strike prices less than one-month LIBOR with a notional
balance of $898.6 million and fixed-rate financing of $1.1 billion as of March 31, 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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As of March 31, 2006, the CDOs were collateralized by ARM loans with a principal balance of $12.7
billion. The debt matures between 2033 and 2046 and is callable by the Company at par once the total balance of the loans collateralizing the debt is reduced to 20% of their original balance. The balance of this debt is reduced as the underlying
loan collateral is paid down and is expected to have an average life of approximately four years.

Whole Loan Financing Facilities

As of March 31, 2006, the Company had entered into three committed whole loan financing facilities with a total borrowing capacity of $900 million
that expire between July 2006 and February 2007. In addition to this committed borrowing capacity, the Company has an uncommitted borrowing capacity of $1.1 billion. The interest rates on these facilities are indexed to one-month LIBOR and reprice
accordingly. The Company expects to renew these facilities when they expire or replace them with new facilities with similar terms. As of March 31, 2006, the Company had $515.3 million borrowed against these whole loan financing facilities at
an effective rate of 5.41%. As of December 31, 2005, the Company had $404.8 million borrowed against these whole loan financing facilities at an effective rate of 5.04%. The amount borrowed on the whole loan financing facilities at
March 31, 2006 was collateralized by ARM loans with a carrying value of $530.5 million, including accrued interest. These facilities have covenants that are standard for industry practice and the Company was in compliance with all such
covenants at March 31, 2006.

Senior Notes

The Company had $305.0 million in Senior Notes outstanding at March 31, 2006. The Senior Notes bear interest at 8.0%, payable each May 15 and November 15, and mature on May 15, 2013. The Senior Notes are redeemable at a
declining premium, in whole or in part, beginning on May 15, 2008, and at par beginning on May 15, 2011. The Senior Notes may also be redeemed under limited circumstances on or before May 15, 2006. In connection with the issuance of
the Senior Notes, the Company incurred costs of $5.4 million, which are being amortized to interest expense over the expected life of the Senior Notes. The Company received premiums totaling $3.6 million in connection with the issuance of Senior
Notes, which are being amortized over the remaining expected life of the Senior Notes. At March 31, 2006 and December 31, 2005, the balance of the Senior Notes outstanding, net of unamortized issuance costs and premiums, was $304.3 million
and had an effective cost of 8.06%, which reflects the effect of issuance costs and premiums received at issuance.

The Companys
Senior Note obligations contain both financial and non-financial covenants. Significant financial covenants include limitations on the Companys ability to incur indebtedness beyond specified levels, restrictions on the Companys ability
to incur liens on assets and limitations on the amount and type of restricted payments, such as repurchases of its own equity securities, that the Company makes. As of March 31, 2006, the Company was in compliance with all financial and
non-financial covenants on its Senior Note obligations.

Subordinated Notes

In 2005, TMHL issued $190.0 million in Subordinated Notes. An additional $50.0 million in Subordinated Notes were issued in the first quarter of 2006. TMA
is a guarantor of the Subordinated Notes. The Subordinated Notes bear interest at a weighted average fixed rate of 7.47% per annum for the first ten years and thereafter at a variable rate equal to three-month LIBOR plus a weighted average rate
of 2.53% per annum, payable each January 30, April 30, July 30 and October 30, and mature between October 30, 2035 and April 30, 2036. TMHL has the option to redeem the Subordinated Notes at par, in whole
or in part, on or after October 30, 2010. The Subordinated Notes may also be redeemed at a premium under limited circumstances on or before October 30, 2010. In connection with the issuance of the Subordinated Notes, the Company incurred
costs of $7.2 million, which are being amortized over the remaining expected life of the Subordinated Notes.

At March 31, 2006 and
December 31, 2005, the balance of all Subordinated Notes outstanding, net of unamortized issuance costs, was $232.9 million and $184.2 million, respectively, and had an effective cost of 7.70% and 7.65%, respectively, which reflects the effect
of issuance costs. TMHLs Subordinated Note obligations contain non-financial covenants. As of March 31, 2006, TMHL was in compliance with all non-financial covenants on its Subordinated Note obligations.



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Other

The total cash paid for interest was $402.2 million and $202.1 million for the quarters ended March 31, 2006 and 2005, respectively.

Note
5. 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, 2006 and December 31, 2005 (in thousands):



|                                  |  |                |            |                   |   |                |  |            |            |  |   |           
|--------------------------------- |  | -------------- | ---------- | ----------------- | - | -------------- |  | ---------- | ---------- |  | - | ----------
|                                  |  | March 31, 2006 |            | December 31, 2005
|                                  |  | CarryingAmount |            | Fair Value        |   | CarryingAmount |  | Fair Value
|Assets:                           |  |                |            |                   |   |                |  |            |            |  |   |           
|ARM securities                    |  | $              | 20,643,079 |                   | $ | 20,643,079     |  | $          | 20,295,504 |  | $ | 20,295,504
|Purchased Securitized Loans       |  |                | 7,526,878  |                   |   | 7,526,878      |  |            | 6,839,004  |  |   | 6,839,004 
|Securitized ARM Loans             |  |                | 3,187,893  |                   |   | 3,117,510      |  |            | 3,310,717  |  |   | 3,259,586 
|ARM Loans Collateralizing CDOs    |  |                | 12,736,433 |                   |   | 12,747,956     |  |            | 10,396,961 |  |   | 10,435,710
|ARM loans held for securitization |  |                | 676,070    |                   |   | 675,713        |  |            | 641,843    |  |   | 643,035   
|Hedging Instruments               |  |                | 709,193    |                   |   | 709,193        |  |            | 493,074    |  |   | 493,074   
|                                  |  |                |            |                  
|Liabilities:                      |  |                |            |                   |   |                |  |            |            |  |   |           
|Reverse repurchase agreements     |  | $              | 23,544,752 |                   | $ | 23,544,752     |  | $          | 23,390,079 |  | $ | 23,390,079
|Asset-backed CP                   |  |                | 6,307,000  |                   |   | 6,307,000      |  |            | 4,990,000  |  |   | 4,990,000 
|CDOs                              |  |                | 12,553,347 |                   |   | 12,354,156     |  |            | 10,254,334 |  |   | 10,222,064
|Whole loan financing facilities   |  |                | 515,340    |                   |   | 515,340        |  |            | 404,827    |  |   | 404,827   
|Senior Notes                      |  |                | 305,000    |                   |   | 305,000        |  |            | 305,000    |  |   | 300,425   
|Subordinated Notes                |  |                | 240,000    |                   |   | 240,000        |  |            | 190,000    |  |   | 190,000   
|Hedging Instruments               |  |                | 105,024    |                   |   | 105,024        |  |            | 71,085     |  |   | 71,085    

As of March 31, 2006, the Company had no off-balance sheet credit risk.

Note 6. Common and Preferred Stock

During the three-month period
ended March 31, 2006, the Company issued 1,059,200 shares of Common Stock and 165,000 shares of Preferred Stock through at-market transactions and received net proceeds of $27.6 million and $4.1 million, respectively, under a controlled equity
offering program.

During the three-month period ended March 31, 2006, the Company issued 1,711,942 shares of Common Stock under the DRSPP and
received net proceeds of $44.1 million.

As of March 31, 2006, $1.2 billion of the Companys registered securities remained available for future
issuance and sale under its shelf registration statement, declared effective on June 16, 2005.

On December 14, 2005, the Company declared the
fourth quarter 2005 dividend of $0.68 per share of Common Stock, which was paid in January 2006 to shareholders of record as of December 30, 2005.

On
December 15, 2005, the Company declared the fourth quarter 2005 dividend of $0.50 per share of Preferred Stock, which was paid in January 2006 to shareholders of record as of December 30, 2005.

On March 15, 2006, the Company declared the first quarter 2006 dividend of $0.50 per share of Preferred Stock, which was paid on April 17, 2006 to shareholders
of record as of March 31, 2006.

For federal income tax purposes, all dividends are expected to be ordinary income to the Companys common
shareholders, subject to year-end allocations of the 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.



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Note 7. Comprehensive Income (Loss)

Comprehensive income (loss) is composed of net income and OCI, which includes the change in unrealized gains and losses on available-for-sale Purchased ARM Assets and Hedging Instruments designated as cash flow
hedges. The following table presents OCI balances (in thousands):



|                           |  |                                                 |          |   |                                               |   |                                          |  |   |          |  
|-------------------------- |  | ----------------------------------------------- | -------- | - | --------------------------------------------- | - | ---------------------------------------- |  | - | -------- | -
|                           |  | Unrealized (losses)gains on PurchasedARM Assets |          |   | Unrealizedgains (losses)on HedgingInstruments |   | Accumulatedothercomprehensive(loss) gain | 
|Balance, December 31, 2004 |  | $                                               | (177,337 | ) |                                               | $ | 86,622                                   |  | $ | (90,715  | )
|Net change                 |  |                                                 | (147,609 | ) |                                               |   | 200,547                                  |  |   | 52,938   |  
|                           |  |                                                 |          |   |                                               |   |                                          |  |   |          |  
|Balance, March 31, 2005    |  | $                                               | (324,946 | ) |                                               | $ | 287,169                                  |  | $ | (37,777  | )
|                           |  |                                                 |          |   |                                               |   |                                          |  |   |          |  
|Balance, December 31, 2005 |  | $                                               | (537,510 | ) |                                               | $ | 389,993                                  |  | $ | (147,517 | )
|Net change                 |  |                                                 | (155,219 | ) |                                               |   | 176,074                                  |  |   | 20,855   |  
|                           |  |                                                 |          |   |                                               |   |                                          |  |   |          |  
|Balance, March 31, 2006    |  | $                                               | (692,729 | ) |                                               | $ | 566,067                                  |  | $ | (126,662 | )
|                           |  |                                                 |          |   |                                               |   |                                          |  |   |          |  

The net unrealized loss on the Companys ARM Loans of $59.2 million and $11.2 million at March 31, 2006
and December 31, 2005, respectively, is not included in accumulated other comprehensive income (loss) because, in accordance with GAAP, the ARM Loans are carried at their amortized cost basis.

Note 8. Long-Term Incentive Awards

The Companys Board of
Directors adopted the Plan, effective September 29, 2002. The Plan authorizes TMAs Compensation Committee to grant DERs, SARs and PSRs.

As of
March 31, 2006, there were 1,595,101 DERs outstanding, all of which were vested, and 1,209,987 PSRs outstanding, of which 1,075,026 were vested. The Company recorded expenses associated with DERs and PSRs of $3.3 million and $1.4 million for
the quarters ended March 31, 2006 and 2005, respectively. The expense recorded in the first quarter of 2006 consists of $1.9 million associated with dividend equivalents paid on DERs and PSRs, $503,000 related to the amortization of unvested
PSRs and $914,000 resulting from the impact of the increase in the Common Stock price on the value of the PSRs which was recorded as a fair value adjustment. Of the expense recorded in the first quarter of 2005, $1.6 million was associated with
dividend equivalents paid on DERs and PSRs and $577,000 related to the amortization of unvested PSRs, partially offset by $759,000 resulting from the impact of the decrease in the Common Stock price on the value of the PSRs which was recorded as a
fair value adjustment.

Note 9. Transactions with Related Parties

The Company is managed externally by the Manager under the terms of the Management Agreement. The Manager receives an annual base management fee of 1.31% on the first $300 million of Average Historical Equity, plus
0.96% on Average Historical Equity above $300 million but less than $1.5 billion. The additional fee earned on Average Historical Equity is limited to 0.85% on Average Historical Equity greater than $1.5 billion but less than $2.0 billion, to 0.79%
for Average Historical Equity greater than $2.0 billion but less than $2.5 billion, to 0.74% for Average Historical Equity greater than $2.5 billion but less than $3.0 billion, and is capped at 0.69% on any Average Historical Equity greater than
$3.0 billion. These percentages are subject to an inflation adjustment each July based on changes to the Consumer Price Index over the prior twelve month period. The Manager earns a performance-based incentive fee of 20% of the Companys
annualized net income, before performance-based compensation, above an annualized ROE as defined in the Management Agreement equal to the Ten Year U.S. Treasury Rate plus 1%, with the fee limited such that once the Manager has earned a performance
fee of $30 million, the performance fee percentage of 20% is reduced by 1% for each additional $5 million earned in performance fees until reaching a performance fee percentage of 15% for any amount greater than $50 million.

The Management Agreement provides for an annual review of the Managers performance under the Management Agreement by the independent directors of the Board of
Directors. In addition, the Board of Directors reviews the Companys financial results, policy compliance and strategic direction on a quarterly basis. If the Company terminated the Management Agreement for a reason other than for cause, a
substantial cancellation fee would be activated.



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During the quarters ended March 31, 2006 and 2005, the Company reimbursed the Manager $2.5 million and $1.6 million,
respectively, for expenses in accordance with the terms of the Management Agreement. As of March 31, 2006 and 2005, $2.3 million and $1.7 million, respectively, was payable by the Company to the Manager for these reimbursable expenses.

For the quarters ended March 31, 2006 and 2005, the Company incurred base management fees of $5.8 million and $4.7 million, respectively, in
accordance with the terms of the Management Agreement. As of March 31, 2006 and 2005, $2.0 million and $1.6 million, respectively, was payable by the Company to the Manager for the base management fee.

For the quarters ended March 31, 2006 and 2005, the Manager earned performance-based compensation in the amount of $9.1 million and $10.0 million, respectively. As
of March 31, 2006 and 2005, $9.1 million and $10.0 million, respectively, was payable by the Company to the Manager for performance-based compensation.

Pursuant to an employee residential mortgage loan program approved by the Board of Directors as part of the Companys residential loan mortgage origination activities, certain of the directors and officers of the Company and employees
of the Manager and of other affiliates of the Company 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, except that participants in the program qualify for an employee discount on the interest rate. At the time each participant enters into a loan agreement, such participant executes an addendum that provides for
the discount on the interest rate that is subject to cancellation at the time such participants employment or association with the Company or the related entity is terminated for any reason. Effective with the enactment of the Sarbanes-Oxley
Act of 2002 on July 30, 2002, any new loans made to directors or executive officers are not eligible for the employee discount. As of March 31, 2006, the aggregate balance of mortgage loans outstanding to directors and officers of the
Company, employees of the Manager and other affiliates amounted to $47.4 million, had a weighted average interest rate of 4.64%, and maturities ranging between 2030 and 2036.

Note 10. Subsequent Events

On April 18, 2006, the Company declared the first quarter 2006 dividend of $0.68 per
share of Common Stock, which is payable on May 16, 2006 to shareholders of record as of May 4, 2006.



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In this quarterly report, we refer to Thornburg Mortgage, Inc. and its subsidiaries as we, us,
or the Company, unless we specifically state otherwise or the context indicates otherwise. Capitalized terms not otherwise defined in this quarterly report shall have the definitive meanings assigned to them in the Glossary at the end of
this report.

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

Executive Overview

Our goal is to acquire or originate ARM Assets for our portfolio and manage them to achieve earnings and dividend stability as our primary objective,
and earnings and dividend growth as our secondary objective. In order to achieve these objectives, we must mitigate key risks inherent in the mortgage portfolio lending business, principally credit risk and interest rate risk, while simultaneously
pursuing earnings growth strategies. Our four primary earnings growth strategies are (i) to increase our more profitable, higher margin mortgage loan origination business; (ii) to raise new common equity in order to grow our earnings and
book value over time; (iii) to access alternative sources of long-term capital such as Preferred Stock and unsecured debt that provide an accretive return to Common Stock and (iv) to better use our existing capital base by pursuing
non-recourse funding sources, relying less on reverse repurchase agreements and more on CDOs to finance our balance sheet.

Earnings Growth Strategies

Higher Margin Loan Originations.Our goal remains to increase our loan originations as a percentage of our annual portfolio acquisitions due to
the higher margin potential of those assets. Despite continued highly competitive pricing, industry-wide origination decreases and a more aggressive approach to granting credit by other mortgage lenders, our loan originations totaled $1.4 billion in
the first quarter, up 23% from the same period last year. Our mortgage origination volumes remain stable with $828.6 million of loans in the fallout-adjusted pipeline at March 31, 2006, most of which we expect will close in the second quarter
of 2006. Our correspondent relationships have increased 27% year-over-year and we now have approximately 235 correspondent partners across the country.

We
also continue to develop our operational capability so that we can begin to source loans through the mortgage broker channel. We believe this channel remains attractive as a source of higher yielding loans. We also believe our entry into the broker
business on a fully paperless and internet-based basis will offer new levels of service within the industry. Leveraging the same strategy that has proven successful with correspondent lenders, including superior service, sensible underwriting and
products designed to meet our sophisticated clients needs, we anticipate generating similar success over time.

We have also expanded our customer
retention and referral program  The Thornburg Mortgage Exchange ProgramSM as the earnings benefit of
retaining an existing client is greater than on new origination business. Our core service feature under this program has been the loan modification option, in which our borrowers can change the rate or other terms of their loans with a brief phone
call and a small fee. Since 2002, we have exchanged 3,428 loans representing $1.9 billion. We have recently expanded this program so that, on a streamlined basis, our borrowers can now cash out some of the equity from their homes. Our growing loan
servicing portfolio, or client base, which grew 28% over the year ago period to $9.9 billion, should be a great source for new loans in the future. This servicing portfolio now represents 18,880 customers.

As part of our acquisition strategy in the current environment, we also set a target to acquire and/or originate $4.0 billion in High Quality Pay Option ARMs in 2006. In
the first quarter, we acquired and originated $951.0 million of these ARM loans, achieving 24% of our annualized goal. Spreads on these assets are wider than on standard Hybrid ARMs, which should enhance profitability going forward. We believe our
underwriting capabilities and extensive experience with jumbo and super jumbo loans will allow us to prudently acquire these assets at better returns than are currently available through standard Hybrid ARM acquisitions. See additional discussion in
the Portfolio Strategies section below.

Long-term Capital Growth.Our ability to increase long-term capital resulted in continued
growth in asset acquisition activity and also helped us maintain our earnings during the first quarter of 2006. We raised $71.8 million of new common equity capital during the first quarter at an average net price of $25.90 per share. We also
successfully raised unsecured debt by issuing $50.0 million of 7.68%, 30-year Subordinated Notes that are callable by us in five years. This new long-term capital will contribute to additional balance sheet and earnings growth in the future,
principally through the acquisition of high quality ARM MBS.

Capital Efficient CDO Transactions.Since CDOs represent long-term financing and have
no margin call risk, they reduce our financing capital requirements and provide an additional source of balance sheet and earnings growth. Our financing



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capital requirement for CDOs is lowered to approximately 2% versus our customary 8% to 10% capital policy requirement for reverse repurchase agreement and
Asset-backed CP financing. This more efficient use of capital allows us to invest in additional assets, principally high quality ARM MBS. In the first quarter of 2006, we completed CDO transactions totaling $2.9 billion that freed up an estimated
$201.3 million of capital, which will allow us to acquire an additional $2.2 billion in ARM Assets during 2006.

Use of Excess Capital to Grow Interest
Earning Assets.Beginning in the third quarter of 2005, we utilized a portion of our excess capital to increase our holdings of interest earning assets. By reducing our adjusted equity-to-assets ratio from an average of 8.96% during the second
quarter of 2005 to an average of 8.46% during the first quarter of 2006, we were able to boost core earnings without compromising our strong liquidity position, as evidenced by our continued strong unencumbered asset position, which was $1.3 billion
at March 31, 2006.

Consistent Profitability

Our
earnings during the first quarter of 2006 remained strong despite the current challenges confronting the mortgage industry. While as of March 31, 2006, the Fed Funds rate had increased 375 basis points over the past 21 months, our earnings
remained fairly constant. Our business model protects our profitability during periods of rising interest rates or flattening yield curves in that we fund our Hybrid ARM portfolio with fixed-rate borrowings of comparable duration. This strategy
clearly reduced our net interest income and earnings potential in prior years, but has been instrumental in allowing us to achieve our objective of maintaining our earnings through rising interest rate cycles.

Furthermore, prepayment activity decreased in the first quarter with a CPR of 15%, down from 22% in the previous quarter. Our quarterly premium amortization expense has
remained manageable because the unamortized cost basis of our ARM portfolio is very low  100.7% of par at March 31, 2006. This premium marks a historic low for us and will advantageously limit our exposure to prepayments should refinance
activity increase in the future. These on-going core risk management initiatives have allowed us to achieve earnings stability in an unstable interest rate environment and give us confidence in our future earnings prospects.

We possess a number of strategic advantages that allow us to generate consistent profitability. One of these strategic advantages is our low operating expense structure
which is also variable generally based on ROE performance. During the first quarter of 2006, our operating expenses as a percent of average assets were 0.24%, compared to 0.28% for the same quarter of 2005. We are able to operate at this low level
of operating expenses relative to the size of our portfolio because we do not operate like a traditional mortgage lender or FDIC insured depository institution. We acquire many of our assets through MBS purchases, originate loans by developing
strategic partnerships with correspondent lenders, mortgage brokers, lending partners and other sources, and fund our balance sheet using capital market-sourced funds, as opposed to FDIC-insured deposits and FHLB advances. As a result, we generally
avoid the high overhead associated with retail branch networks and commissioned loan officers. In addition, we have developed other outsourced strategic partnerships that provide loan fulfillment services on a variable cost basis. Finally, a
significant component of our cost structure is based on return on equity which has declined over the past year, resulting in a comparable decline in operating expense as a percentage of assets. This low, variable-cost model has allowed us to operate
profitably with a lower interest rate spread on our portfolio, enabling us to mitigate certain cyclical risks frequently associated with mortgage banking and portfolio lending activities. One of the strategic decisions we have been able to make as a
result of our low-cost operating model is to elect either to securitize our acquired and originated ARM loans or invest primarily in AAA- or AA-rated securities, Agency Securities or A quality ARM loans. This strategy has resulted in
very low credit losses. Finally, by employing a portfolio lending strategy and retaining all of our ARM loans rather than employing a mortgage-banking strategy and selling our ARM loan production, we do not depend on gain on sale income, which can
fluctuate significantly with loan origination volume and market conditions.

Exceptional Credit Quality and Securitization

One of our strategic focuses is high credit quality assets. We believe this strategy keeps our credit losses and financing costs low. It also creates significant
portfolio liquidity and low portfolio price volatility, which gives us access to financing through the credit cycle and contributes to maintaining consistent profitability. As of March 31, 2006, 97.4% of our ARM Asset portfolio was High
Quality. Many of our High Quality ARM Assets consist of A quality ARM loans that we have purchased or originated and securitized either into ARM pass-through certificates or into CDO financings for our own portfolio. We retain the risk
of potential credit losses on all of these loans and have loan loss reserves totaling $11.3 million at March 31, 2006. We did not experience any credit losses on our ARM Loans during the first quarter of 2006 and since 1997 have only
experienced $174,000 in credit losses on loans we have originated or acquired.



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Additionally, our High Quality ARM Assets includes Purchased Securitized Loans, which are A quality ARM loans
originated and securitized by third parties which we have acquired for our portfolio. These assets are Qualifying Interests for purposes of maintaining our exemption from the Investment Company Act because we retain a 100% ownership interest in the
underlying loans. Because we purchase all classes of these securitizations, we have the credit exposure on the underlying loans. Prior to the purchase of these securities, our due diligence process allows us to remove loans that do not meet our
credit standards based on loan-to-value ratios, borrowers credit scores, income and asset documentation and other criteria that we believe to be important indications of credit risk. The purchase price of the classes that are less than
Investment Grade generally includes a discount for probable credit losses and, based on managements judgment, the portion of the purchase discount which reflects the estimated unrealized loss on the securities due to credit risk is treated as
a non-accretable discount and totaled $15.3 million at March 31, 2006. During the first quarter of 2006, we realized loan losses of $389,000 on our Purchased Securitized Loans and recorded a $214,000 impairment charge to replenish the
non-accretable discounts to provide for expected future losses.

Interest Rate Risk Management

Interest rate changes affect our short-term borrowing costs, which as a spread lender can pose a risk to our profitability if not responsibly managed. To counter this
potential risk, when we purchase or originate Hybrid ARM Assets, we adhere to a matched funding or duration matching strategy which means we use Hybrid ARM Hedging Instruments to fix, or cap, the interest rates on the short-term borrowings and CDOs
that finance our Hybrid ARM Assets. We hedge our financing cost such that we maintain a Net Effective Duration of less than one year. The lower the Effective Duration gap, the less impact interest rate changes should have on the market value of our
portfolio, and therefore on earnings. As of March 31, 2006, we had $40.6 billion of Hybrid ARM Assets and had entered into Swap Agreements and Eurodollar Transactions with notional balances totaling $33.2 billion and delayed Swap Agreements
with notional balances totaling $5.3 billion that become effective between April 2006 and December 2006. These delayed Swap Agreements have been entered into to hedge the forecasted financing of our ARM Assets. Additionally, at March 31, 2006,
we had Cap Agreements with aggregate net notional balances of $898.6 million. These Cap Agreements receive payments if one-month LIBOR rises above a range of 2.93% to 9.67%, and on average 3.65%. During the quarter ended March 31, 2006, we
received payments of $2.0 million related to these Cap Agreements. As of March 31, 2006, we measured the Net Effective Duration applicable to our Hybrid ARM portfolio, related borrowings and Hybrid ARM Hedging Instruments at approximately 0.41
years, while the financing and hedging of all of our ARM Assets resulted in a Net Effective Duration of approximately 0.39 years.

We continue to employ a
duration matching funding strategy as we acquire Hybrid ARM Assets in order to stabilize earnings during periods of rising interest rates. As we acquire ARM Assets, we attempt to lock-in a spread that is expected to provide a rate of
return at or above our threshold requirement. In order to stabilize the spread over the expected life of our ARM Assets, we use Hedging Instruments in conjunction with our borrowings to approximate the repricing characteristics of our ARM Assets.
Given the prepayment uncertainties on our ARM Assets, there is no guaranteed way to lock-in a spread between the yield on our ARM Assets and the related borrowing that would produce an acceptable rate of return. However, through active
management, we believe we can continue to mitigate a significant amount of net interest income volatility. See the discussion of Effects of Interest Rate Changes on page 53.

Funding Diversification

Another long-term objective is to achieve a more balanced funding mix between Asset-backed
CP, CDOs and reverse repurchase agreements in order to reduce our reliance on any one funding source. Historically, we have relied principally on reverse repurchase agreements for our funding needs. Since year end 2002, we have been actively working
towards diversifying our financing sources. At that time, 91% of our borrowings were provided through reverse repurchase agreements. At March 31, 2006, reverse repurchase agreements accounted for only 55% of our borrowings, while CDOs
represented 30% and our Asset-backed CP facility accounted for 15%. We anticipate that CDOs and Asset-backed CP will continue to grow as a percentage of our financing sources in the future.

Forward-Looking Statements

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 and Section 21E of the Securities Exchange Act of 1934 that are based on our current
expectations, estimates and projections. Pursuant to those sections, we may obtain a safe harbor for forward-looking statements by identifying those statements and by accompanying those statements with cautionary statements, which
identify factors that could cause actual results to differ from those expressed in the forward-looking statements. Statements that are not historical facts, including statements about our beliefs and expectations, are forward-looking statements. The
words believe, anticipate, intend, aim, expect, will, strive, target, confidence and project and similar



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words identify forward-looking statements. Such statements are not guarantees of future performance, events or results and involve potential risks and
uncertainties. Accordingly, our actual results may differ from our current expectations, estimates and projections. Important factors that may impact our actual results or may cause our actual results to differ materially from those expressed in any
forward-looking statements made by us or on our behalf include, but are not limited to, changes in interest rates, changes in yields available for purchase on adjustable and variable rate mortgage assets, changes in the yield curve, changes in
prepayment rates, changes in the supply of mortgage-backed securities and loans, our ability to obtain financing and the terms of any financing that we do obtain. Other factors that may impact our actual results are discussed in our 2005 Annual
Report on Form 10-K under the section entitled Risk Factors. We do not undertake, and specifically disclaim, any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect the
occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

Corporate Governance

We pride ourselves on maintaining an ethical workplace in which the highest standards of professional conduct are practiced. Accordingly, we would like to highlight the
following facts relating to corporate governance:



| |  |  | The Board of Directors is, and always has been, composed of a majority of independent directors. The Audit, Nominating/Corporate Governance and Compensation Committees of the Board
of Directors are, and always have been, composed exclusively of independent directors. The Board of Directors 1) reviews our financial results, policy compliance and strategic direction on a quarterly basis, 2) reviews our budget and five-year
strategic plan annually and 3) performs an annual review of the Managers performance and implementation of our strategic plan.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have a Code of Conduct and Corporate Governance Guidelines that cover a wide range of business practices and procedures that apply to all of our employees, officers, directors
and the Manager that foster the highest standards of ethics and conduct in all of our business relationships. In addition, we have instituted a Nonretaliation Policy and Procedure for Whistleblowers that sets forth procedures by which any officer or
employee of the Company or the Manager may raise concerns regarding alleged violations of federal fraud or securities laws, which may involve financial matters, such as accounting, auditing or financial reporting, as well as non-financial matters,
with the appropriate supervisors, officers or committees of the Board of Directors.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have an Insider Trading Policy to prohibit any of the directors, officers or employees of the Company or the Manager from buying or selling our stock on the basis of material
nonpublic information or communicating material nonpublic information to others.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We are managed externally by the Manager under the terms of the Management Agreement, subject to the supervision of the Board of Directors. The Managers compensation is based
on formulas tied to our success in increasing equity capitalization and generating net income above defined targets. The Compensation Committee and the independent directors annually evaluate the Managers performance and determine whether the
compensation paid to the Manager is reasonable in relation to the nature and quality of services performed.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We have a formal internal audit function to further the effective functioning of our internal controls and procedures. Our internal audit plan is approved annually by the Audit
Committee of the Board of Directors and is based on a formal risk assessment and is intended to provide management and the Audit Committee with an effective tool to identify and address areas of financial or operational concerns and ensure that
appropriate controls and procedures are in place. Section 404 of the Sarbanes-Oxley Act of 2002 requires an annual evaluation of internal control over financial reporting. See Controls and Procedures  Managements Annual Report
on Internal Control over Financial Reporting on page 51 of our 2005 Annual Report on Form 10-K.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our internet website address is
www.thornburgmortgage.com. We make available free of charge, through our internet website, under the Investor Information  SEC Filings section, our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports
on Form 8-K and any amendments to those reports that we file or furnish pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it
to, the SEC.

You may also find the Code of Conduct, the Corporate Governance Guidelines and the charters of the Audit Committee, Nominating/Corporate
Governance Committee and Compensation Committee of the Board of Directors at our website under the Investors  Corporate Governance section. These documents are also available in print to anyone who requests them by writing to us at
the following address: 150 Washington Avenue, Suite 302, Santa Fe, New Mexico, 87501, or by phoning us at 1-888-898-8698.



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Critical Accounting Policies and Estimates

Our financial statements are prepared in conformity with GAAP, which requires the use of estimates and assumptions. In accordance with SEC guidance, those material accounting policies and estimates that we believe are
the most critical to an investors understanding of our financial results and condition and require complex management judgment are discussed below.



| |  | Revenue Recognition. Interest income on ARM Assets is a combination of the interest earned based on the outstanding balance and contractual terms of the assets and the amortization
of yield adjustments, principally the amortization of purchase premiums and discounts. Premiums and discounts associated with the purchase of ARM Assets are amortized into interest income over the estimated lives of the assets in accordance with
FASB 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, using the interest method adjusted for the effects of actual and future estimated prepayments. The
use of these methods requires us to project cash flows over the remaining life of each asset. These projections include assumptions about interest rates, prepayment rates, timing and amount of credit losses, estimates regarding the likelihood and
timing of calls of securities at par, and other factors. Estimating prepayments and estimating the remaining lives of our ARM Assets requires management judgment, which involves consideration of possible future interest rate environments and an
estimate of how borrowers will behave in those environments. We review our cash flow projections on an ongoing basis and monitor these projections based on input and analyses received from external sources, internal models, and our own judgment and
experience. We regularly review our assumptions and make adjustments to the cash flows as deemed necessary. There is no assurance that the assumptions we use to generate future cash flows, or the current periods yield for each asset, will
prove to be accurate.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The following table presents a sensitivity analysis to show the one time adjustment we would have to
make to our net purchase premium of $346.8 million at March 31, 2006 for 5% and 10% increases and decreases to our lifetime prepayment assumptions. The purpose of this analysis is to provide an indication of the impact that changes to the
lifetime prepayment assumptions have on our purchase premium. We believe the current lifetime assumptions used are appropriate and consistent with our long-term portfolio experience.



|                                       |  |                                                           |         |  
|-------------------------------------- |  | --------------------------------------------------------- | ------- | -
|Changed Assumption                     |  | Increase (Decrease) in Net Purchase Premium(in thousands) |        
|Prepayment assumption increased by 5%  |  | $                                                         | (5,867  | )
|Prepayment assumption increased by 10% |  | $                                                         | (11,378 | )
|Prepayment assumption decreased by 5%  |  | $                                                         | 5,374   |  
|Prepayment assumption decreased by 10% |  | $                                                         | 10,780  |  



| |  | Fair Value. We record our Purchased ARM Assets, commitments to purchase ARM loans and Hybrid ARM Hedging Instruments at fair value. The fair values of our Purchased ARM Assets and
Hybrid ARM Hedging Instruments are generally based on market prices provided by third-party pricing services or certain dealers which make markets in these financial instruments. If the fair value of a Purchased ARM Asset, Hybrid ARM Hedging
Instrument or other financial instrument is not reasonably available from a third-party pricing service or dealer, management estimates the fair value. This requires management judgment in determining how the market would value a particular
Purchased ARM Asset, Hybrid ARM Hedging Instrument or other financial instrument, based on characteristics of the security and available market information. The net unrealized gain or loss on loans expected to be purchased from correspondent lenders
and bulk sellers is calculated using the same methodologies that are used to price our ARM Loans, adjusted for anticipated fallout of purchase loan commitments that will likely not be funded. The fair values reported reflect estimates and may not
necessarily be indicative of the amounts we could realize in a current market exchange.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Impairment of Purchased ARM Assets and Non-Accretable Discounts on Purchased ARM Assets. Purchased ARM Assets are evaluated for impairment on a quarterly basis, or
more frequently if events or changes in circumstances indicate that these investments may be impaired. We evaluate whether our Purchased ARM Assets are considered impaired, evaluate whether the impairment is other than temporary, and, if the
impairment is other than temporary, recognize an impairment loss equal to the difference between the Purchased ARM Assets amortized cost basis and its fair value. These evaluations require management to make estimates and judgments based on
changes in market interest
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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rates, changes in credit ratings, delinquency data on the loans underlying the respective securities and other information to determine whether unrealized
losses are reflective of credit deterioration and to evaluate managements ability and intent to hold the investment to maturity or recovery. Because the estimate for other-than-temporary impairment requires management judgment, we consider
this to be a critical accounting estimate. We have determined that the gross unrealized losses on Purchased ARM Assets of $698.7 million at March 31, 2006 are not reflective of credit deterioration and because we have the ability and intent to
hold the Purchased ARM Assets until recovery, the losses are not other-than-temporary impairments.

A portion of our Purchased Securitized
Loans are rated less than Investment Grade and represent subordinated interests in High-Quality, first lien residential mortgage loans where we own all of the securitized classes. We generally purchase the less than Investment Grade classes at a
discount. Based upon managements use of analysis and judgment, a portion of the purchase discount is subsequently accreted as interest income under the effective yield method while the remaining portion of the purchase discount is treated as a
non-accretable discount which reflects the estimated unrealized loss on the securities due to credit losses on the underlying loans. We review Purchased Securitized Loans periodically for impairment and record or adjust non-accretable discounts
accordingly. Non-accretable discounts are increased by recognizing an impairment loss when management determines that there is a decline in the fair value of a Purchased Securitized Loan that is considered other than temporary and decreased when
there is improvement in the risk exposures. Any such determinations are based on managements assessment of numerous factors affecting the fair value of Purchased Securitized Loans, including, but not limited to, current economic conditions,
potential for natural disasters, delinquency trends, credit losses to date on underlying mortgages and remaining credit protection. If management ultimately concludes that the non-accretable discounts will not represent realized losses, the balances
are accreted into earnings over the remaining life of the loan under the interest method.



| |  | Loan Loss Reserves on ARM Loans. We maintain a reserve for loan losses based on managements estimate of credit losses inherent in our portfolio of ARM Loans. The estimation of
the reserve is based on a variety of factors including, but not limited to, industry statistics, current economic conditions, potential for natural disasters, loan portfolio composition, delinquency trends, credit losses to date on underlying loans
and remaining credit protection. If the credit performance of our ARM Loans is different than expected, we adjust the reserve for loan losses to a level deemed appropriate by management to provide for estimated losses inherent in our ARM Loan
portfolio. Two critical assumptions used in estimating the loan loss reserves are an assumed rate of default, which is the expected rate at which loans go into foreclosure over the life of the loans, and an assumed rate of loss severity, which
represents the expected rate of realized loss upon disposition of the properties that have gone into foreclosure.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
following table presents a sensitivity analysis to show the impact on our loan loss reserves at March 31, 2006 of using 5% increases and decreases in the borrowers propensity to default and the loss severity if there is a default. The
purpose of this analysis is to provide an indication of the impact that defaults and loss severity assumptions have on our estimate of loan loss reserves. It is not intended to imply our expectation of future default levels or changes in loss
severity. We believe the current assumptions used for defaults and loss severity are appropriate.



|                                         |  |                                                        |        |  
|---------------------------------------- |  | ------------------------------------------------------ | ------ | -
|Changed Assumption                       |  | Increase (Decrease)in Loan Loss Reserves(in thousands) |       
|Default assumption increased by 5%       |  | $                                                      | 1,111  |  
|Default assumption decreased by 5%       |  | $                                                      | (1,112 | )
|Loss severity assumption increased by 5% |  | $                                                      | 2,456  |  
|Loss severity assumption decreased by 5% |  | $                                                      | (2,456 | )

For additional information on our significant accounting policies, see Note 1 to
the Consolidated Financial Statements.

Accounting Changes and Other Accounting Developments

On January 1, 2006, we adopted SFAS 123(R) entitled Share-Based Payment. It requires all public companies to report share-based compensation expense at
the grant date fair value of the related share-based awards and to record subsequent changes in the fair value of the awards in current period earnings. Since we have accounted for our long-term incentive awards on this basis since inception of the
Plan, the adoption had no impact on our financial statements.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of
Financial Assets. SFAS 156 amends SFAS 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the



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accounting for separately-recognized servicing assets and liabilities. Under SFAS 156, servicing assets and liabilities
are no longer recognized in securitizations that are not accounted for as sales under SFAS 140. It also requires all separately-recognized servicing assets and liabilities to be initially measured at fair value, and permits companies to elect, on a
class-by-class basis, to account for servicing assets and liabilities on either a lower of cost or market value basis or a fair value measurement basis. We adopted SFAS 156 on January 1, 2006 and have not recognized any servicing assets or
liabilities in connection with our securitizations subsequent to that date because they are accounted for as secured borrowings under SFAS 140. We did not elect to measure our previously existing servicing assets at fair value and continue to
measure them at the lower of cost or market value.

In January 2006, the FASB issued an exposure draft titled, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No. 115. If approved, the proposed standard would provide an option under which an entity may irrevocably elect to report certain financial assets and financial
liabilities at fair value. Companies would be permitted to make the election on a contract-by-contract basis at the time each contract is initially recognized in the financial statements or upon an event that gives rise to a new basis of accounting
for the item. Under the fair value option, changes in the fair value of each financial asset or financial liability would be reflected in earnings as those changes occur. Until the final standard is approved and the full scope is established, we are
not able to assess the impact, if any, that the adoption of the standard may have on our financial position or results of operations.

In February 2006,
the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments. Key provisions of SFAS 155 include: (1) a broad fair value measurement option for certain hybrid financial instruments that contain an embedded
derivative that would otherwise require bifurcation; (2) clarification that only the simplest separations of interest payments and principal payments qualify for the exception afforded to interest-only strips and principal-only strips from
derivative accounting under paragraph 14 of SFAS 133, Accounting for Derivative Instruments and Hedging Activities, (thereby narrowing such exception); (3) a requirement that beneficial interests in securitized financial assets be
analyzed to determine whether they are freestanding derivatives or whether they are hybrid instruments that contain embedded derivatives requiring bifurcation; (4) clarification that concentrations of credit risk in the form of subordination
are not embedded derivatives; and (5) elimination of the prohibition on a QSPE holding passive derivative financial instruments that pertain to beneficial interests that are or contain a derivative financial instrument. In the context of SFAS
155, hybrid financial instruments refers to financial instruments that contain embedded derivatives. Our Hybrid ARM Assets and Hybrid ARM Hedging Instruments are not hybrid financial instruments in the context of SFAS 155. In general, SFAS 155 will
reduce the operational complexity associated with bifurcating embedded derivatives, and increase the number of beneficial interests in securitization transactions, including interest-only strips and principal-only strips, required to be accounted
for in accordance with SFAS 133. We do not believe that SFAS 155 will have a material effect on our financial condition, results of operations, or liquidity.

General

We are a single-family residential mortgage lender that originates, acquires and retains investments in ARM Assets, thereby
providing capital to the single-family residential housing market. Our ARM Assets consist of Purchased ARM Assets and ARM Loans and are comprised of Traditional ARM Assets and Hybrid ARM Assets. Purchased ARM Assets are MBS that represent interests
in pools of ARM loans, which are publicly rated and issued by third parties and may include guarantees or other third-party credit enhancements against losses from loan defaults. ARM Loans are either loans that we have securitized from our own loan
origination or acquisition activities, loans that we use as collateral to support the issuance of CDOs or loans pending securitization. Like traditional banking institutions, our income is generated primarily from the net spread or difference
between the interest income we earn on our ARM Assets and the cost of our borrowings. Our strategy is to maximize the long-term sustainable difference between the yield on our ARM Assets and the cost of financing these assets, and to maintain that
difference through interest rate and credit cycles.

While we are not a bank or savings and loan institution, our business purpose, strategy, method of
operation and risk profile are best understood in comparison to such institutions. We finance the purchases and originations of our ARM Assets with equity capital, unsecured debt, CDOs and short-term borrowings such as reverse repurchase agreements,
Asset-backed CP, whole loan financing facilities, and other collateralized financings that we may establish in the future. When we borrow short-term or floating-rate funds to finance our Hybrid ARM Assets, we also enter into interest rate hedging
transactions, which are intended to fix, or cap, our borrowing costs during the fixed-rate period of the Hybrid ARM asset. We believe we have minimized our exposure to changes in interest rates since the assets we hold are primarily ARM Assets and
we generally match the Effective Duration, which is a calculation expressed in months or years that is a measure of the expected price change of financial instruments based on changes in interest rates, of those assets with funding of comparable
Effective Duration. We have a policy to operate with an Adjusted Equity-to-Assets Ratio, a non-GAAP measurement, of at least 8%. See Capital Utilization and Leverage on page 43 for a calculation of our Adjusted Equity-to-Assets Ratio.
Moreover, we



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focus on acquiring high quality assets to minimize potential credit losses and to ensure our access to financing. Our operating structure has resulted in
operating costs well below those of other mortgage originators. Our corporate structure differs from most lending institutions in that we are organized for tax purposes as a REIT and, therefore, pay substantially all of our earnings in the form of
dividends to shareholders.

We are an externally advised REIT and, as such, our operations are managed under the terms of the Management Agreement with
Thornburg Mortgage Advisory Corporation which is subject to the oversight of the Board of Directors.

Portfolio Strategies

Our business strategy is to acquire and originate primarily ARM Assets to hold in our portfolio, fund them using equity capital and borrowed funds, and generate earnings
from the difference, or spread, between the yield on our assets and our cost of borrowings.

We acquire Purchased ARM Securities from investment banking
firms, broker-dealers, mortgage bankers, banks, savings and loan institutions, credit unions, home builders and other entities involved in originating, securitizing, packaging and selling mortgage loans. We believe we have a competitive advantage in
acquiring and investing in ARM Assets due to the low cost of our operations relative to traditional mortgage investors and originators.

We acquire ARM
loans for our portfolio primarily through our correspondent lending program, which currently includes approximately 235 approved correspondents. Our retail lending channel and other lending partners originate ARM loans through direct contact with
consumers. We are authorized to lend in all 50 states and the District of Columbia. We believe that diversifying our sources for ARM loans and Purchased ARM Assets will enable us to consistently find attractive opportunities to acquire or create
high quality assets at attractive yields and spreads for our portfolio.

We have a focused portfolio lending investment policy designed to minimize credit
risk and interest rate risk. Our policy requires us to have a mortgage assets portfolio with an expected Net Effective Duration of one year or less and which may consist of agency securities guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac, or
privately issued (generally publicly registered) ARM pass-through securities, multi-class pass-through securities, CMOs, A quality ARM loans that we intend to securitize, Purchased Securitized Loans or other short-term investments that
either mature within one year or have an interest rate that reprices within one year.

Our investment policy requires that we invest at least 70% of our
total assets in High Quality ARM Assets and short-term investments. The remainder of our ARM portfolio, comprising not more than 30% of total assets, may consist of Other Investments.

Our ARM Assets include investments in Hybrid ARM Assets and Traditional ARM Assets. In 2006, we began acquiring and originating High Quality Pay Option ARMs as well as Purchased Securitized Loans collateralized by Pay
Option ARMs. Pay Option ARMs have features that allow borrowers to defer making the full interest payment on their loans. Therefore, the potential loss in the event of default could be higher than on a loan that does not provide for deferral of
interest. The Pay Option ARMs have features that limit the deferred interest to 110% to 125% of the original loan balance. If the loan balance reaches the applicable limit, additional interest may not be deferred and the monthly minimum payment is
increased to an amount that would amortize the loan over its remaining term. We believe that our pricing, underwriting, appraisal, and other processes are sufficient to manage the potential credit risks that have been associated with Pay Option
ARMs. Specifically, when qualifying a borrower, we evaluate the borrowers ability to make fully amortizing monthly payments, even if the borrower has the option to make lower monthly payments.

We limit our ownership of Hybrid ARM Assets with fixed-rate periods of greater than five years to no more than 50% of our total assets. We may also invest up to 5% of
total assets in fifteen year fixed-rate assets although, as of March 31, 2006, we did not hold any fixed-rate assets. We use Hybrid ARM Hedging Instruments to fix, or cap, the interest rates on the short-term borrowings and floating-rate CDOs
financing our Hybrid ARM Assets. We have a policy that requires us to maintain a Net Effective Duration on Hybrid ARM Assets of less than one year. We use a financial model that simulates interest rate changes and calculates the impact of those
changes on the fair value of our portfolio. By maintaining a Net Effective Duration of less than one year on our Hybrid ARM Assets, we believe that we can maintain relatively stable earnings and dividends given changing interest rates.

To mitigate the adverse effect of an increase in prepayments on our ARM Assets, we emphasize the purchase of ARM Assets at prices close to or below par. We amortize
any premiums paid for our assets over their expected lives using the effective yield method of accounting. To the extent that the prepayment rate on our ARM Assets differs from expectations, our net



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interest income will be affected. Prepayments generally increase when current mortgage interest rates fall below the interest rates on existing ARM loans. To
the extent there is an increase in prepayment rates, resulting in a shortening of the expected lives of our ARM Assets, our net income and, therefore, the taxable income available for distribution and dividends paid to shareholders could be
adversely affected.

We believe that our status as a mortgage REIT makes an investment in our equity securities attractive for tax-exempt investors, such
as pension plans, profit sharing plans, 401(k) plans, Keogh plans and IRAs. We do not invest in REMIC residuals or other CMO residuals that would result in the creation of excess inclusion income or unrelated business taxable income.

Acquisition, Securitization and Retention of Traditional ARM and Hybrid ARM Loans

We acquire and originate A quality ARM loans through TMHL, our wholly-owned mortgage loan origination and acquisition subsidiary, from three sources: (i) correspondent lending, (ii) direct retail
loan originations and (iii) bulk acquisitions. Correspondent lending involves acquiring individual loans from lending partners which we have approved and which originate the individual loans using our product pricing, underwriting criteria and
guidelines, or other approved criteria and guidelines. Direct retail loan originations are loans that we originate through lending partners or directly to consumers via the internet or by telephone. Bulk acquisitions involve acquiring pools of whole
loans, which are originated using the sellers guidelines and underwriting criteria. In the second quarter of 2006, we intend to begin originating loans through mortgage brokers. The loans we acquire or originate are financed through warehouse
borrowing arrangements pending securitization for our portfolio.

The loans acquired or originated by TMHL are first lien, single-family residential
Traditional ARM and Hybrid ARM loans with original terms to maturity of not more than forty years and are either fully amortizing, interest-only for up to ten years and fully amortizing thereafter, or negatively amortizing.

All ARM loans that we acquire or originate for our portfolio bear an interest rate tied to an interest rate index. Most loans have periodic and lifetime constraints on
the amount to which the loan interest rate can change on any predetermined interest rate reset date. The interest rate on each Traditional ARM loan resets monthly, semi-annually or annually. Traditional ARM loans generally adjust to a margin over a
U.S. Treasury index, a LIBOR index or the 12-Month Treasury Average Index. Hybrid ARM loans have a fixed rate for an initial period, generally 3 to 10 years, and then convert to Traditional ARM loans for their remaining term to maturity.

We acquire and originate ARM loans for our portfolio with the intention of using them as collateral for CDOs. Alternatively, we may also securitize them to create
High Quality ARM securities and retain them in our portfolio as Securitized ARM Loans. In order to facilitate the securitization or financing of our loans, we generally create subordinate certificates, which provide a specified amount of credit
enhancement and which we retain in our portfolio. Our investment policy limits the amount we may retain of below Investment Grade subordinate certificates or classes created as a result of our loan acquisition and securitization efforts or acquired
as Purchased Securitized Loans, to 17.5% of shareholders equity, measured on a historical cost basis.

We believe acquiring or originating ARM loans
and then securitizing them benefits us by providing: (i) greater control over the quality and types of ARM Assets acquired; (ii) the ability to acquire ARM Assets at lower prices, so that the amount of the premium to be amortized will be
reduced in the event of prepayment; (iii) additional sources of new whole-pool ARM Assets; and (iv) generally higher yielding investments in our portfolio.

We offer The Thornburg Mortgage Exchange ProgramSMfor loans we originate and/or
service. We believe this program promotes customer retention and reduces loan prepayments. Our core feature under this program is the loan modification option where borrowers pay fees to change their current mortgage loan products to any
then-available Hybrid or Traditional ARM product that we offer. We have recently expanded this program so that, on a streamlined basis, our borrowers can now cash out some of the equity from their homes. During the first quarter of 2006, we
exchanged 341 loans with balances totaling $167.1 million. At March 31, 2006, the pipeline of loans to be exchanged totaled $123.1 million.

Financing Strategies

We finance our ARM Assets using Common and Preferred equity capital, unsecured debt, CDOs and short-term borrowings
such as reverse repurchase agreements, Asset-backed CP, whole loan financing facilities and other collateralized financings that we may establish in the future. See Hedging Strategies below for a discussion of how we convert
short-term borrowings into the equivalent of long-term fixed-rate financing for purposes of managing our interest rate risk. Our long-term objective is to achieve a balanced funding mix including Asset-backed CP, CDOs and reverse repurchase
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Reverse repurchase agreements involve a simultaneous sale of pledged securities to a lender at an agreed-upon price in
return for our agreement to repurchase the same securities at a future date (the maturity of the borrowing) at a higher price. The price difference is the cost of borrowing under these agreements. We have established lines of credit and
collateralized financing agreements with 24 different financial institutions.

We enter into two types of reverse repurchase agreements: variable rate term
reverse repurchase agreements and fixed-rate reverse repurchase agreements. Our variable rate term reverse repurchase agreements are financings with original maturities ranging from five to twelve months. The interest rates on these variable rate
term reverse repurchase agreements are generally indexed to the one-month LIBOR rate, and reprice accordingly. The fixed-rate reverse repurchase agreements have original maturities generally ranging from 30 to 180 days. Generally, upon repayment of
each reverse repurchase agreement, we immediately pledge the ARM Assets used to collateralize the financing to secure a new reverse repurchase agreement.

We have an Asset-backed CP facility, which provides us with an alternative way to finance our High Quality ARM Assets portfolio. In December 2005, the Asset-backed CP facility was increased from $5 billion to $10 billion. We issue
Asset-backed CP in the form of secured liquidity notes that have been rated P-1 by Moodys Investors Service, F1+ by Fitch Ratings and A-1+ by Standard and Poors to money market investors. The notes can be collateralized by Agency
Securities and AAA-rated, adjustable-rate MBS that we have either purchased or created through our loan securitization process. Importantly, we have diversified our funding sources by replacing a portion of our reverse repurchase agreement
borrowings with the issuance of Asset-backed CP under terms that are comparable to our existing reverse repurchase agreement funding.

Because we borrow
money under reverse repurchase agreements and Asset-backed CP based on the fair value of our ARM Assets, our borrowing ability under these agreements could be limited and lenders could initiate margin calls in the event of interest rate changes or
if the value of our ARM Assets declines for other reasons.

We have also financed the purchase of ARM Assets by issuing hedged floating-rate and fixed-rate
CDOs in the capital markets, which are collateralized by ARM loans that are placed in a trust. The trust pays the principal and interest payments on the debt out of the cash flows received on the collateral. This structure enables us to make more
efficient use of our capital because the capital requirement to support these financings is less than the amount our policy requires to support the same amount of financings in the reverse repurchase agreement or Asset-backed CP markets. These
transactions are a long-term form of financing and are not subject to margin calls or disruptions in the asset-backed financing market.

We have financing
facilities, or credit lines, for whole loans. A whole loan is the actual mortgage loan evidenced by a note and secured by a mortgage or deed of trust. We use these financing facilities to finance our acquisition of whole loans while we are
accumulating loans for securitization.

We have issued Senior Notes in the amount of $305.0 million as a form of long-term capital. The Senior Notes bear
interest at 8.0%, payable each May 15 and November 15, and mature on May 15, 2013. The Senior Notes are unsecured and are redeemable at a declining premium, in whole or in part, beginning on May 15, 2008, and at par beginning on
May 15, 2011. The Senior Notes may also be redeemed under limited circumstances on or before May 15, 2006.

We have issued Subordinated Notes in
the amount of $240.0 million as another form of long-term capital. The Subordinated Notes bear interest at a weighted average fixed rate of 7.47% per annum for the first ten years and thereafter at a variable rate equal to three-month LIBOR
plus a weighted average rate of 2.53% per annum, payable each January 30, April 30, July 30 and October 30, and mature between October 30, 2035 and April 30, 2036. The Subordinated Notes are unsecured and
are redeemable at par, in whole or in part, beginning on October 30, 2010. The Subordinated Notes may also be redeemed at a premium under limited circumstances on or before October 30, 2010.

Capital Utilization

The Board of Directors has approved a policy
that limits our capacity to borrow funds to finance mortgage assets based on long-term capital. We monitor the relationship between our assets, borrowings and long-term capital using a variety of different measures. However, the primary operating
policy that limits our borrowings and leverage is a requirement to maintain our Adjusted Equity-to-Assets Ratio, a non-GAAP measurement, at a minimum of 8%. Broadly speaking, this ratio reflects the relationship between those assets financed with
borrowings that are subject to margin calls and our long-term capital position. See further discussion of capital utilization and leverage beginning on page 43 and the calculation of our Adjusted Equity-to-Assets Ratio on page 44.



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Liquidity Management

Our primary focus is to acquire and originate high quality, highly liquid assets such that sufficient assets could be readily converted to cash, if necessary, in order to meet our financial obligations. We have a Liquidity Management
Policy, which is designed to minimize potential shortfalls in liquidity resulting from adverse changes in interest rates or market conditions. The Liquidity Management Policy requires the frequent measurement of the potential market value exposure
of the portfolio to a 100 BP instantaneous parallel increase in interest rates above expected future interest rates as well as a 100 BP instantaneous parallel decrease in interest rates below expected future interest rates. The calculated potential
mark-to-market exposure resulting from this scenario is probability weighted and compared to recent minimum liquidity levels in order to determine whether management needs to take specific actions to improve liquidity or further reduce interest rate
risk.

Hedging Strategies

We attempt to mitigate our
interest rate risk by funding our ARM Assets with a combination of short-term borrowings and Hedging Instruments whose combined Effective Durations approximately match the Effective Durations on our ARM Assets. Some of our borrowings are at interest
rates that are either variable or short-term (one year or less) because a portion of our ARM Assets, the Traditional ARM Assets, have interest rates that adjust within one year. We finance our Hybrid ARM portfolio with borrowings hedged with Hybrid
ARM Hedging Instruments that fix the interest rate on our floating-rate borrowings such that the Net Effective Duration is less than one year. A shorter Net Effective Duration indicates a lower expected volatility of earnings when interest rates
change during future periods. When we enter into a Swap Agreement, we agree to pay a fixed rate of interest and to receive a variable interest rate, generally based on LIBOR. We also enter into Eurodollar Transactions in order to fix the interest
rate changes on our forecasted three-month LIBOR-based liabilities. Each Eurodollar futures contract is a three-month contract with a price that represents the forecasted three-month LIBOR rate. Selling Eurodollar futures contracts locks in a future
interest rate. The difference between these two values results in a gain or loss that offsets the change in the three-month LIBOR rate and locks-in the forecasted three-month LIBOR rate for financing purposes. We purchase Cap Agreements
by incurring a one-time fee or premium. Pursuant to the terms of the Cap Agreements, we will receive cash payments if the interest rate index specified in any such Cap Agreement increases above contractually specified levels. Therefore, such Cap
Agreements have the effect of capping the interest rate on a portion of our borrowings above a specified level as opposed to fixing our cost of funds as in a swap transaction. The notional balances of the Hybrid ARM Hedging Instruments generally
decline over the life of these instruments. As of March 31, 2006, our Hybrid ARM Hedging Instruments had a remaining average term to maturity of 3.5 years before considering the effects of prepayments and when combined with our Hybrid ARM
Assets and related borrowings had a Net Effective Duration of approximately 0.41 years, including the effects of estimated prepayments.

We enter into
Pipeline Hedging Instruments to manage interest rate risk associated with commitments to purchase ARM loans. The gain (loss) on the Pipeline Hedging Instruments is expected to offset the gain (loss) recorded for the change in fair value of the loan
commitments.

We may enter into additional hedging transactions designed to protect our borrowing costs or portfolio yields from interest rate changes. We
may purchase interest-only or principal-only mortgage assets or other mortgage derivative products for purposes of mitigating risk from interest rate changes. We may also use, from time to time, futures contracts and options
on futures contracts on the Eurodollar, Federal Funds, Treasury bills and Treasury notes and similar financial instruments to mitigate risk from changing interest rates.

The hedging transactions that we currently use are primarily designed to protect our income during periods of changing market interest rates and also have the benefit of protecting our portfolio market value. We do
not hedge for speculative purposes. Further, no hedging strategy can completely insulate us from risk and certain of the federal income tax requirements that we must satisfy to qualify as a REIT may limit our ability to hedge. We carefully monitor
and may have to limit our hedging strategies to ensure that we do not realize excessive hedging income or hold hedging assets having excess value in relation to total assets.

Financial Condition

Asset Quality

At March 31, 2006, we held total assets of $46.1 billion, $44.8 billion of which consisted of ARM Assets. That compares to $42.5 billion in total assets and $41.5
billion of ARM Assets at December 31, 2005. Since commencing operations, we have purchased either Agency Securities, privately-issued MBS or ARM loans generally originated to A quality underwriting



34



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standards. At March 31, 2006, 96.0% of the assets we held, including cash and cash equivalents, were High Quality assets, far exceeding our investment
policy minimum requirement of investing at least 70% of our total assets in High Quality ARM Assets and cash and cash equivalents.

The following tables
present schedules of ARM Assets owned at March 31, 2006 and December 31, 2005 classified by High Quality and Other Investment assets and further classified by type of issuer and by ratings categories. All Purchased ARM Assets included in
the tables have been rated by the Rating Agencies. ARM Loans include Securitized ARM Loans that have been rated by the Rating Agencies, ARM Loans Collateralizing CDOs that have been stratified by credit rating based on the ratings received from the
Rating Agencies on the respective CDOs and ARM loans held for securitization that have not been rated by the Rating Agencies.

ARM Assets
by Issuer and Credit Rating

(dollar amounts in thousands)



|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|-------------------------------- |  | -------------------- | ---------- | --- | ------------- | ----- | - | -------------- | - | ---------- | ------------- |  | ----- | -------------- |  | - | ------------- | - |  | ----- | -
|                                 |  | March 31, 2006       |           
|                                 |  | Purchased ARM Assets |            |     | ARM Loans     |       |   | Total          |  
|                                 |  | Carrying Value       |            |     | Portfolio Mix |       |   | Carrying Value |   |            | Portfolio Mix |  |       | Carrying Value |  |   | Portfolio Mix |  
|High Quality                     |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Agency Securities                |  | $                    | 1,712,558  |     |               | 6.1   | % |                | $ | 703        |               |  | 0.0   | %              |  | $ | 1,713,261     |   |  | 3.8   | %
|Non-Agency ARM Assets:           |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|AAA/Aaa Rating                   |  |                      | 25,489,483 |     |               | 90.5  |   |                |   | 15,785,575 | (1)           |  | 95.1  |                |  |   | 41,275,058    |   |  | 92.2  |  
|AA/Aa Rating                     |  |                      | 594,631    |     |               | 2.1   |   |                |   | 39,719     | (1)           |  | 0.2   |                |  |   | 634,350       |   |  | 1.4   |  
|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Total Non-Agency ARM Assets      |  |                      | 26,084,114 |     |               | 92.6  |   |                |   | 15,825,294 |               |  | 95.3  |                |  |   | 41,909,408    |   |  | 93.6  |  
|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Total High Quality               |  |                      | 27,796,672 |     |               | 98.7  |   |                |   | 15,825,997 |               |  | 95.3  |                |  |   | 43,622,669    |   |  | 97.4  |  
|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Other Investments                |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Non-Agency ARM Assets:           |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|A Rating                         |  |                      | 213,596    |     |               | 0.7   |   |                |   | 32,247     |               |  | 0.2   |                |  |   | 245,843       |   |  | 0.5   |  
|BBB/Baa Rating                   |  |                      | 103,750    |     |               | 0.4   |   |                |   | 19,439     |               |  | 0.1   |                |  |   | 123,189       |   |  | 0.3   |  
|BB/Ba Rating and Below           |  |                      | 55,939     | (2) |               | 0.2   |   |                |   | 57,642     | (1)           |  | 0.3   |                |  |   | 113,581       |   |  | 0.3   |  
|ARM loans pending securitization |  |                      |           |     |               |      |   |                |   | 676,320    |               |  | 4.1   |                |  |   | 676,320       |   |  | 1.5   |  
|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Total Other Investments          |  |                      | 373,285    |     |               | 1.3   |   |                |   | 785,648    |               |  | 4.7   |                |  |   | 1,158,933     |   |  | 2.6   |  
|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Loan Loss Reserves               |  |                      |           |     |               |      |   |                |   | (11,249    | )             |  | (0.0  | )              |  |   | (11,249       | ) |  | (0.0  | )
|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Total ARM Portfolio              |  | $                    | 28,169,957 |     |               | 100.0 | % |                | $ | 16,600,396 |               |  | 100.0 | %              |  | $ | 44,770,353    |   |  | 100.0 | %
|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  

---

|(1) | As of March 31, 2006, the Investment Grade classes of ARM Loans Collateralizing CDOs have been credit-enhanced through overcollateralization and subordination in the amount of
$80.7 million.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | As of March 31, 2006, we had total non-accretable discounts of $15.3 million on our Purchased ARM Assets due to estimated credit losses (other than temporary declines in fair
value) related to securities purchased at a discount, which is included in the BB/Ba Rating and Below category.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|-------------------------------- |  | -------------------- | ---------- | --- | ------------- | ----- | - | -------------- | - | ---------- | ------------- |  | ----- | -------------- |  | - | ------------- | - |  | ----- | -
|                                 |  | December 31, 2005    |           
|                                 |  | Purchased ARM Assets |            |     | ARM Loans     |       |   | Total          |  
|                                 |  | Carrying Value       |            |     | Portfolio Mix |       |   | Carrying Value |   |            | Portfolio Mix |  |       | Carrying Value |  |   | Portfolio Mix |  
|High Quality                     |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Agency Securities                |  | $                    | 1,842,998  |     |               | 6.8   | % |                | $ | 706        |               |  | 0.0   | %              |  | $ | 1,843,704     |   |  | 4.4   | %
|Non-Agency ARM Assets:           |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|AAA/Aaa Rating                   |  |                      | 24,441,684 |     |               | 90.0  |   |                |   | 13,550,974 | (1)           |  | 94.5  |                |  |   | 37,992,658    |   |  | 91.6  |  
|AA/Aa Rating                     |  |                      | 542,681    |     |               | 2.0   |   |                |   | 59,387     | (1)           |  | 0.4   |                |  |   | 602,068       |   |  | 1.4   |  
|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Total Non-Agency ARM Assets      |  |                      | 24,984,365 |     |               | 92.0  |   |                |   | 13,610,361 |               |  | 94.9  |                |  |   | 38,594,726    |   |  | 93.0  |  
|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Total High Quality               |  |                      | 26,827,363 |     |               | 98.8  |   |                |   | 13,611,067 |               |  | 94.9  |                |  |   | 40,438,430    |   |  | 97.4  |  
|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Other Investments                |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Non-Agency ARM Assets:           |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|A Rating                         |  |                      | 182,199    |     |               | 0.7   |   |                |   | 34,125     |               |  | 0.2   |                |  |   | 216,324       |   |  | 0.5   |  
|BBB/Baa Rating                   |  |                      | 76,261     |     |               | 0.3   |   |                |   | 20,821     |               |  | 0.1   |                |  |   | 97,082        |   |  | 0.2   |  
|BB/Ba Rating and Below           |  |                      | 48,685     | (2) |               | 0.2   |   |                |   | 52,164     | (1)           |  | 0.4   |                |  |   | 100,849       |   |  | 0.3   |  
|ARM loans pending securitization |  |                      |           |     |               | 0.0   |   |                |   | 642,093    |               |  | 4.5   |                |  |   | 642,093       |   |  | 1.6   |  
|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Total Other Investments          |  |                      | 307,145    |     |               | 1.2   |   |                |   | 749,203    |               |  | 5.2   |                |  |   | 1,056,348     |   |  | 2.6   |  
|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Loan Loss Reserves               |  |                      |           |     |               | 0.0   |   |                |   | (10,749    | )             |  | (0.1  | )              |  |   | (10,749       | ) |  | (0.0  | )
|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  
|Total ARM Portfolio              |  | $                    | 27,134,508 |     |               | 100.0 | % |                | $ | 14,349,521 |               |  | 100.0 | %              |  | $ | 41,484,029    |   |  | 100.0 | %
|                                 |  |                      |            |     |               |       |   |                |   |            |               |  |       |                |  |   |               |   |  |       |  

---

|(1) | As of December 31, 2005, the Investment Grade classes of ARM Loans Collateralizing CDOs have been credit-enhanced through overcollateralization and subordination in the amount
of $67.3 million.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | As of December 31, 2005, we had total non-accretable discounts of $11.6 million on our Purchased ARM Assets due to estimated credit losses (other than temporary declines in
fair value) related to securities purchased at a discount, which is included in the BB/Ba Rating and Below category.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of March 31,
2006, 15 of the 30,598 loans in our $16.6 billion ARM loan portfolio were considered seriously delinquent (60 days or more delinquent) and had an aggregate balance of $10.4 million. At March 31, 2006, we had three real estate-owned properties
as a result of foreclosing on delinquent loans in the amount of $661,000. We believe that our current level of reserves for loan losses is adequate to cover estimated losses from these loans as well as losses inherent in the ARM loan portfolio at
March 31, 2006.

At March 31, 2006, our Purchased Securitized Loans totaled $7.5 billion. Like our own loan originations and acquisitions, these
assets are Qualifying Interests for purposes of maintaining our exemption from the Investment Company Act because we retain a 100% ownership interest in the underlying loans. Because we purchase all classes of these securitizations, we have the
entire credit exposure on the underlying loans. The purchase price of the classes that are less than Investment Grade generally includes a discount for probable credit losses and, based on managements judgment, the portion of the purchase
discount which reflects the estimated unrealized loss on the securities due to credit risk is treated as a non-accretable discount. As of March 31, 2006, 45 of the underlying loans in these Purchased Securitized Loans were 60 days or more
delinquent and had an aggregate balance of $13.0 million, which constitutes 87% of the non-accretable discount set aside to cover losses arising from such delinquencies.



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ARM Loan Portfolio Characteristics

The following table presents various characteristics of our ARM Loan portfolio as of March 31, 2006. This information pertains to ARM loans held for securitization, ARM loans held as collateral for CDOs and ARM
loans securitized for our own portfolio for which we retained credit loss exposure. The combined unpaid principal balance of the loans included in this information is $16.6 billion.

ARM Loan Portfolio Characteristics



|                         |  |         |         |   |      |   |            |     |  |   |        |  
|------------------------ |  | ------- | ------- | - | ---- | - | ---------- | --- |  | - | ------ | -
|                         |  | Average |         |   | High |   |            | Low | 
|Original loan balance    |  | $       | 555,544 |   |      | $ | 12,500,000 |     |  | $ | 13,190 |  
|Unpaid principal balance |  | $       | 541,192 |   |      | $ | 12,500,000 |     |  | $ | 616    |  
|Coupon rate on loans     |  |         | 5.42    | % |      |   | 9.13       | %   |  |   | 1.00   | %
|Pass-through rate        |  |         | 5.14    | % |      |   | 8.60       | %   |  |   | 0.63   | %
|Pass-through margin      |  |         | 1.81    | % |      |   | 4.92       | %   |  |   | 0.35   | %
|Lifetime cap             |  |         | 10.58   | % |      |   | 18.00      | %   |  |   | 7.25   | %
|Original term (months)   |  |         | 360     |   |      |   | 480        |     |  |   | 120    |  
|Remaining term (months)  |  |         | 342     |   |      |   | 480        |     |  |   | 4      |  



|                                                   |  |      |      
|-------------------------------------------------- |  | ---- | -----
|Geographic distribution (top 5 states):            |  |      |      
|California                                         |  | 31.4 | %    
|New York                                           |  | 8.2  |      
|Florida                                            |  | 7.6  |      
|Colorado                                           |  | 7.1  |      
|Georgia                                            |  | 6.2  |      
|                                                   | 
|Occupancy status:                                  |  |      |      
|Owner occupied                                     |  | 77.6 | %    
|Second home                                        |  | 14.3 |      
|Investor                                           |  | 8.1  |      
|                                                   | 
|Documentation type:                                |  |      |      
|Full/alternative                                   |  | 90.7 | %    
|Stated income/no ratio                             |  | 9.3  |      
|                                                   | 
|Loan purpose:                                      |  |      |      
|Purchase                                           |  | 50.1 | %    
|Cash out refinance                                 |  | 27.2 |      
|Rate & term refinance                              |  | 22.7 |      
|                                                   | 
|Unpaid principal balance:                          |  |      |      
|$417,000 or less                                   |  | 21.9 | %    
|$417,001 to $650,000                               |  | 24.1 |      
|$650,001 to $1,000,000                             |  | 20.9 |      
|$1,000,001 to $2,000,000                           |  | 23.2 |      
|$2,000,001 to $3,000,000                           |  | 5.2  |      
|Over $3,000,001                                    |  | 4.7  |      
|                                                   | 
|Original effective loan-to-value:                  |  |      |      
|80.01% and over                                    |  | 1.4  | %    
|70.01%-80.00%                                      |  | 45.8 |      
|60.01%-70.00%                                      |  | 25.0 |      
|50.01%-60.00%                                      |  | 13.3 |      
|50.00% or less                                     |  | 14.5 |      
|Weighted average effective original loan-to-value: |  | 68.4 | %    
|                                                   | 
|Property type:                                     |  |      |      
|Single-family                                      |  | 82.4 | %    
|Condominium                                        |  | 14.4 |      
|Other residential                                  |  | 3.2  |      
|                                                   | 
|ARM Loan type:                                     |  |      |      
|Traditional ARM loans                              |  | 9.4  | %    
|Hybrid ARM loans                                   |  | 90.6 |      
|                                                   | 
|ARM interest rate caps:                            |  |      |      
|Initial cap on Hybrid ARM loans:                   |  |      |      
|3.00% or less                                      |  | 2.8  | %    
|3.01%-4.00%                                        |  | 9.4  |      
|4.01%-5.00%                                        |  | 67.5 |      
|5.01%-6.00%                                        |  | 10.9 |      
|                                                   | 
|Periodic cap on Traditional ARM loans:             |  |      |      
|None                                               |  | 4.0  | %    
|1.00% or less                                      |  | 3.1  |      
|Over 1.00%                                         |  | 2.3  |      
|                                                   | 
|Percent of interest-only loan balances:            |  | 89.3 | %    
|                                                   | 
|Weighted average length of interest-only period:   |  | 9.3  | years
|                                                   | 
|FICO scores:                                       |  |      |      
|801 and over                                       |  | 4.2  | %    
|751 to 800                                         |  | 44.9 |      
|701 to 750                                         |  | 33.2 |      
|651 to 700                                         |  | 15.7 |      
|650 or less                                        |  | 2.0  |      
|                                                   | 
|Weighted average FICO score:                       |  | 747  |      



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As of March 31, 2006 and December 31, 2005, we serviced $9.9 billion and $9.2 billion of our loans,
respectively, and had 18,880 and 18,070 customer relationships, respectively. We hold all of the loans that we service in our portfolio in the form of Securitized ARM Loans, Arm Loans Collateralizing CDOs or ARM loans that are pending
securitization.

Asset Repricing Characteristics

The following table classifies our ARM portfolio by type of interest rate index and frequency of repricing.

ARM Assets by Index and Repricing Frequency

(dollar amounts in thousands)



|                        |  |                |            |   |                   |       |   |               |   |            |               |  |       |  
|----------------------- |  | -------------- | ---------- | - | ----------------- | ----- | - | ------------- | - | ---------- | ------------- |  | ----- | -
|                        |  | March 31, 2006 |            |   | December 31, 2005 |      
|                        |  | CarryingValue  |            |   | Portfolio Mix     |       |   | CarryingValue |   |            | Portfolio Mix | 
|Traditional ARM Assets: |  |                |            |   |                   |       |   |               |   |            |               |  |       |  
|Index:                  |  |                |            |   |                   |       |   |               |   |            |               |  |       |  
|One-month LIBOR         |  | $              | 2,725,403  |   |                   | 6.1   | % |               | $ | 2,570,289  |               |  | 6.2   | %
|Six-month LIBOR         |  |                | 252,526    |   |                   | 0.6   |   |               |   | 306,167    |               |  | 0.7   |  
|MTA                     |  |                | 851,239    |   |                   | 1.9   |   |               |   | 15,542     |               |  | 0.0   |  
|Other                   |  |                | 345,481    |   |                   | 0.8   |   |               |   | 309,546    |               |  | 0.8   |  
|                        |  |                |            |   |                   |       |   |               |   |            |               |  |       |  
|                        |  |                | 4,174,649  |   |                   | 9.4   |   |               |   | 3,201,544  |               |  | 7.7   |  
|                        |  |                |            |   |                   |       |   |               |   |            |               |  |       |  
|Hybrid ARM Assets:      |  |                |            |   |                   |       |   |               |   |            |               |  |       |  
|Remaining fixed period: |  |                |            |   |                   |       |   |               |   |            |               |  |       |  
|3 years or less         |  |                | 8,574,063  |   |                   | 19.2  |   |               |   | 8,278,786  |               |  | 20.0  |  
|Over 3 years  5 years  |  |                | 12,288,520 |   |                   | 27.4  |   |               |   | 13,442,861 |               |  | 32.4  |  
|Over 5 years            |  |                | 19,744,370 |   |                   | 44.0  |   |               |   | 16,571,587 |               |  | 39.9  |  
|                        |  |                |            |   |                   |       |   |               |   |            |               |  |       |  
|                        |  |                | 40,606,953 |   |                   | 90.6  |   |               |   | 38,293,234 |               |  | 92.3  |  
|                        |  |                |            |  
|Loan Loss Reserves      |  |                | (11,249    | ) |                   | (0.0  | ) |               |   | (10,749    | )             |  | (0.0  | )
|                        |  |                |            |   |                   |       |   |               |   |            |               |  |       |  
|                        |  | $              | 44,770,353 |   |                   | 100.0 | % |               | $ | 41,484,029 |               |  | 100.0 | %
|                        |  |                |            |   |                   |       |   |               |   |            |               |  |       |  

The ARM portfolio had a weighted average coupon of 5.17% at March 31, 2006. This consisted of a weighted
average coupon of 5.11% on the Hybrid ARM Assets and a weighted average coupon of 6.36% on the Traditional ARM Assets. If the portfolio had been Fully Indexed, the weighted average coupon of the portfolio would have been 5.22%, based upon the
composition of the portfolio and the applicable indices at March 31, 2006. Additionally, if the Traditional ARM portion of the portfolio had been Fully Indexed, the weighted average coupon of that portion of the portfolio would have been 7.41%,
also based upon the composition of the portfolio and the applicable indices at that time.

As of December 31, 2005, the ARM portfolio had a weighted
average coupon of 5.02%. This consisted of a weighted average coupon of 5.01% on the Hybrid ARM Assets and a weighted average coupon of 5.37% on the Traditional ARM assets. If the portfolio had been Fully Indexed, the weighted average coupon of the
portfolio would have been 5.05%, based upon the composition of the portfolio and the applicable indices at December 31, 2005. Additionally, if the Traditional ARM portion of the portfolio had been Fully Indexed, the weighted average coupon of
that portion of the portfolio would have been 6.00%, also based upon the composition of the portfolio and the applicable indices at that time.

At
March 31, 2006, the current yield of the ARM Assets portfolio was 4.88% up from 4.62% as of December 31, 2005. The increase in the yield of 26 BPs as of March 31, 2006, compared to December 31, 2005, is primarily due to a 16 BP
increase in the weighted average coupon as a result of new asset purchases at higher weighted average coupons and a 10 BP increase due to lower net premium amortization and payments receivable due to lower prepayments.



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##### Table of Contents

Interest Rate Risk Management

The Hybrid ARM portfolio comprised 90.6% of the total ARM portfolio, or $40.6 billion, compared to 92.3%, or $38.3 billion as of December 31, 2005. We attempt to mitigate our interest rate risk by funding our ARM
portfolio with borrowings and Hedging Instruments with an Effective Duration approximately matching the Effective Duration on our ARM Assets. Some of our borrowings bear variable or short-term (one year or less) fixed interest rates because our
Traditional ARM Assets have interest rates that adjust within one year. However, most of our Hybrid ARM Assets are financed with short-term borrowings that are hedged with Hybrid ARM Hedging Instruments that fix the interest rate on those borrowings
such that the Net Effective Duration is less than one year. By maintaining a Net Effective Duration of less than one year, which is our maximum Effective Duration policy limit, the combined price change of our Hybrid ARM Assets, associated Hybrid
ARM Hedging Instruments and other borrowings is expected to be a maximum of 1% for a 1% parallel shift in interest rates. A lower Effective Duration indicates a lower expected volatility of earnings given future changes in interest rates. As of
March 31, 2006, the Net Effective Duration applicable to our Hybrid ARM Assets was approximately 0.41 years while the Net Effective Duration applicable to the ARM portfolio was approximately 0.39 years.

As of March 31, 2006 and December 31, 2005, we were counterparty to Swap Agreements and Eurodollar Transactions having an aggregate notional balance of $33.2
billion and $32.0 billion, respectively. In addition, as of March 31, 2006, we had entered into delayed Swap Agreements with notional balances totaling $5.3 billion that will become effective between April 2006 and December 2006. We entered
into these delayed Swap Agreements to hedge the financing of existing ARM Assets and the forecasted financing of our ARM Assets purchase commitments at March 31, 2006. As of March 31, 2006, our Swap Agreements and Eurodollar Transactions
had a weighted average maturity of 3.6 years. In accordance with the Swap Agreements, we will pay a fixed rate of interest during the term of these Swap Agreements and receive a payment that varies monthly with the one-month LIBOR rate. The combined
weighted average fixed rate payable of the Swap Agreements and Eurodollar Transactions was 4.02% and 3.79% at March 31, 2006 and December 31, 2005, respectively. The net unrealized gain on Swap Agreements at March 31, 2006 of $571.4
million included Swap Agreements with gross unrealized gains of $571.4 million and gross unrealized losses of $36,000 and is included in Hedging Instruments on the Consolidated Balance Sheets. As of March 31, 2006, the net unrealized gain on
Swap Agreements and deferred gains and losses on Eurodollar Transactions recorded in accumulated other comprehensive income (loss) was a net gain of $570.9 million. Over the next twelve months, $325.4 million of these net unrealized gains are
expected to be realized as a component of net interest income.

As of March 31, 2006 and December, 31, 2005, our Cap Agreements, used to manage our
interest rate risk exposure on the financing of the Hybrid ARM Assets had remaining notional amounts of $898.6 million and $970.3 million, respectively. We have also entered into Cap Agreements that have start dates ranging from 2006 to 2010. The
notional balance at the start date will be the lesser of the scheduled amount of $371.1 million or the balance of Hybrid ARM loans associated with these Cap Agreements. The fair value of all of our Cap Agreements at March 31, 2006 and December,
31, 2005 was $22.2 million and $19.5 million, respectively, and is included in Hedging Instruments on the Consolidated Balance Sheets. As of March 31, 2006, the unrealized loss on these Cap Agreements of $4.8 million is included in accumulated
other comprehensive income (loss). In the twelve month period following March 31, 2006, a $2.0 million gain is expected to be realized. Pursuant to the terms of these Cap Agreements, the notional amount of the Cap Agreements declines such that
it is expected to equal the balance of the Hybrid ARM loans collateralizing our CDOs. Under these Cap Agreements, we will receive cash payments should the one-month LIBOR increase above the contract rates of these Hedging Instruments, which range
from 2.93% to 9.67% and average 3.65%. The Cap Agreements had an average maturity of 2.7 years as of March 31, 2006 and will expire between 2006 and 2013.



39



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##### Table of Contents

The following table presents the outstanding notional balance of our Hybrid ARM Hedging Instruments as of March 31,
2006 and the balance of these same Hybrid ARM Hedging Instruments as of March 31 for each of the following five years, without any assumption that additional Hybrid ARM Hedging Instruments are added to the portfolio in the future periods (in
thousands):



|                            |  |                 |            |      |   |            |  |      |            |      |   |           |  |   |           |  |   |          
|--------------------------- |  | --------------- | ---------- | ---- | - | ---------- |  | ---- | ---------- | ---- | - | --------- |  | - | --------- |  | - | ---------
|                            |  | As of March 31,
|                            |  | 2006            |            | 2007 |   | 2008       |  | 2009 |            | 2010 |   | 2011     
|Swap Agreements:            |  |                 |            |      |   |            |  |      |            |      |   |           |  |   |           |  |   |          
|Balance-guaranteed (1) (3)  |  | $               | 1,525,864  |      | $ | 1,100,170  |  | $    | 741,827    |      | $ | 282,045   |  | $ | 119,195   |  | $ | 68,402   
|Other (2)                   |  |                 | 31,555,353 |      |   | 23,492,449 |  |      | 10,340,068 |      |   | 7,363,502 |  |   | 4,622,427 |  |   | 2,398,448
|                            |  |                 |            |      |   |            |  |      |            |      |   |           |  |   |           |  |   |          
|                            |  |                 | 33,081,217 |      |   | 24,592,619 |  |      | 11,081,895 |      |   | 7,645,547 |  |   | 4,741,622 |  |   | 2,466,850
|                            |  |                 |            |      |   |            |  |      |            |      |   |           |  |   |           |  |   |          
|Eurodollar Transactions (2) |  |                 | 112,000    |      |   |           |  |      |           |      |   |          |  |   |          |  |   |         
|Cap Agreements (1) (3)      |  |                 | 898,614    |      |   | 718,892    |  |      | 508,899    |      |   | 407,119   |  |   | 228,620   |  |   | 182,896  
|                            |  |                 |            |      |   |            |  |      |            |      |   |           |  |   |           |  |   |          
|                            |  | $               | 34,091,831 |      | $ | 25,311,511 |  | $    | 11,590,794 |      | $ | 8,052,666 |  | $ | 4,970,242 |  | $ | 2,649,746
|                            |  |                 |            |      |   |            |  |      |            |      |   |           |  |   |           |  |   |          

---

|(1) | These Swap Agreements and Cap Agreements have been entered into in connection with our CDO transactions. The notional balances of these agreements are guaranteed to match the
balance of the Hybrid ARM collateral in the respective CDO transactions, subject to a maximum notional balance over the term of those agreements. The notional balances presented in the table above for these balance-guaranteed agreements represent
forward-looking statements which are calculated based on a CPR assumption of 20%. The actual balances will likely be different based on the actual prepayment performance of the applicable Hybrid ARM collateral. The final maturity of these agreements
is 2015.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | These hedging instruments have a pre-determined schedule of notional balances over the term of the respective instruments, based on the expected decline in the balance of our
short-term borrowings used to finance our Hybrid ARM portfolio. The final maturity of these agreements is 2015.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The following table presents the maximum outstanding notional balance of our balance-guaranteed Hybrid ARM Hedging Instruments as of March 31, 2006 and as of March 31 for
each of the following five years (in thousands):
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                |  |                 |           |      |   |           |  |      |           |      |   |         |  |   |         |  |   |        
|--------------- |  | --------------- | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | ------- |  | - | ------- |  | - | -------
|                |  | As of March 31,
|                |  | 2006            |           | 2007 |   | 2008      |  | 2009 |           | 2010 |   | 2011   
|Swap Agreements |  | $               | 1,525,864 |      | $ | 1,202,984 |  | $    | 858,407   |      | $ | 342,136 |  | $ | 155,425 |  | $ | 93,486 
|Cap Agreements  |  |                 | 898,614   |      |   | 998,413   |  |      | 526,084   |      |   | 574,686 |  |   | 255,092 |  |   | 253,736
|                |  |                 |           |      |   |           |  |      |           |      |   |         |  |   |         |  |   |        
|                |  | $               | 2,424,478 |      | $ | 2,201,397 |  | $    | 1,384,491 |      | $ | 916,822 |  | $ | 410,517 |  | $ | 347,222
|                |  |                 |           |      |   |           |  |      |           |      |   |         |  |   |         |  |   |        

The fair value of the Pipeline Hedging Instruments at March 31, 2006 and December 31, 2005 was a net
unrealized gain of $4.6 million and a net unrealized loss of $2.0 million, respectively, and is included in Hedging Instruments on the Consolidated Balance Sheets. Pipeline Hedging Instruments had remaining notional balances of $593.0 million and
$1.9 billion at March 31, 2006 and December 31, 2005, respectively. We recorded a net gain of $6.5 million on Derivatives during the quarter ended March 31, 2006. This gain consisted of a net gain of $8.4 million on Pipeline Hedging
Instruments and a net gain of $1.2 million on other Derivative transactions partially offset by a net loss of $3.1 million on commitments to purchase loans from correspondent lenders and bulk sellers. We recorded a net gain of $1.3 million on
Derivatives during the same period in 2005. This gain consisted of a net gain of $7.1 million on Pipeline Hedging Instruments partially offset by a net loss of $5.8 million on commitments to purchase loans from correspondent lenders and bulk
sellers.



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##### Table of Contents

Asset Acquisitions

During the quarter ended March 31, 2006, we purchased $2.8 million of Purchased ARM Assets, 97.4% of which were High Quality assets and $2.8 billion of ARM loans, generally originated to A quality
underwriting standards. Of the ARM Assets acquired during the first quarter of 2006, 48.8% were Hybrid ARM Assets and 50.2% were Traditional ARM assets generally indexed to LIBOR. The following table compares our ARM asset acquisition and
origination activity for the three-month periods ended March 31, 2006 and 2005 (dollar amounts in thousands):



|                               |  |                            |           |  |                |   |  |   |           |  |       |  
|------------------------------ |  | -------------------------- | --------- |  | -------------- | - |  | - | --------- |  | ----- | -
|                               |  | For the three months ended |          
|                               |  | March 31, 2006             |           |  | March 31, 2005 |  
|ARM securities:                |  |                            |           |  |                |   |  |   |           |  |       |  
|High Quality, privately issued |  |                            | 2,756,486 |  | 48.9           |   |  |   | 2,618,620 |  | 68.1  |  
|Other privately issued         |  |                            | 72,804    |  | 1.3            |   |  |   | 52,528    |  | 1.4   |  
|                               |  |                            |           |  |                |   |  |   |           |  |       |  
|                               |  |                            | 2,829,290 |  | 50.2           |   |  |   | 2,671,148 |  | 69.4  |  
|                               |  |                            |           |  |                |   |  |   |           |  |       |  
|ARM loans:                     |  |                            |           |  |                |   |  |   |           |  |       |  
|Bulk acquisitions              |  |                            | 1,361,506 |  | 24.2           |   |  |   |          |  | 0.0   |  
|Correspondent originations     |  |                            | 1,376,553 |  | 24.4           |   |  |   | 1,114,563 |  | 29.0  |  
|Direct retail originations     |  |                            | 65,190    |  | 1.2            |   |  |   | 60,875    |  | 1.6   |  
|                               |  |                            |           |  |                |   |  |   |           |  |       |  
|                               |  |                            | 2,803,249 |  | 49.8           |   |  |   | 1,175,438 |  | 30.6  |  
|                               |  |                            |           |  |                |   |  |   |           |  |       |  
|Total acquisitions             |  | $                          | 5,632,539 |  | 100.0          | % |  | $ | 3,846,586 |  | 100.0 | %
|                               |  |                            |           |  |                |   |  |   |           |  |       |  

As of March 31, 2006, we had commitments to purchase $828.6 million of ARM loans through origination
channels. At March 31, 2006, we used a 22.0% fallout assumption in the determination of our ARM loan commitments based on our historical experience with the conversion of loan commitments to funded loans.

Securitization Activity

During the quarter ended
March 31, 2006, we securitized $2.9 billion of our ARM loans into two CDOs. While TMHL transferred all of the ARM loans to a separate bankruptcy-remote legal entity, on a consolidated basis we did not account for these securitizations as sales
and, therefore, did not record any gain or loss in connection with the securitizations. We retained $101.6 million of the resulting securities for our ARM Loan portfolio and financed $2.8 billion with third-party investors, thereby providing
long-term collateralized financing for these assets. As of March 31, 2006 and December 31, 2005, we held $12.7 billion and $10.4 billion, respectively, of ARM loans as collateral for CDOs. As of March 31, 2006 and December 31,
2005, we held $3.2 billion and $3.3 billion, respectively, of Securitized ARM Loans as a result of our securitization efforts. All discussions relating to securitizations in these financial statements and notes are on a consolidated basis and do not
reflect the separate legal ownership of the loans by various bankruptcy-remote legal entities.

Prepayment Experience

For the quarter ended March 31, 2006, our mortgage assets paid down at an approximate average annualized CPR of 15%, compared to 22% for the quarter ended
December 31, 2005 and 21% for the quarter ended March 31, 2005. When prepayment expectations over the remaining life of the assets increase, we have to amortize our premiums over a shorter time period, resulting in a reduced yield to
maturity on our ARM Assets. Conversely, if prepayment expectations decrease, we would amortize the premium over a longer time period, resulting in a higher yield to maturity. We monitor our prepayment experience on a monthly basis and adjust the
amortization of the net premium, as appropriate.

Liquidity and Capital Resources

We manage liquidity to ensure that we have the continuing ability to maintain cash flows that are adequate to fund operations and meet commitments on a timely and cost-effective basis. At March 31, 2006 and
December 31, 2005, we had unencumbered assets of $1.3 billion, consisting of unpledged ARM Assets, cash and cash equivalents, and other assets. We believe that our liquidity level is in excess of that necessary to satisfy our operating
requirements and we expect to continue to use diverse funding sources to maintain our financial flexibility.



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##### Table of Contents

Sources of Funds

Our primary sources of funds for the quarter ended March 31, 2006 consisted of reverse repurchase agreements, Asset-backed CP, CDOs, whole loan financing facilities and Subordinated Notes, as well as new equity
proceeds and principal and interest payments from ARM Assets. The reverse repurchase agreement market is approximately a $4 trillion market, the Asset-backed CP market is approximately an $830 billion market and the AAA-rated mortgage- and asset-
backed securities market is approximately a $10 trillion market, all of which have been readily available sources of financing for mortgage assets, particularly those rated AA or better. Using CDOs as financing effectively eliminates rollover and
margin call risk for the related portion of our balance sheet. To supplement our funding sources, we also issue equity securities and unsecured long-term debt.

We have arrangements to enter into reverse repurchase agreements with 24 different financial institutions and on March 31, 2006, had borrowed funds from 19 of these firms. Reverse repurchase agreement borrowings outstanding at
March 31, 2006 had a weighted average effective borrowing rate of 4.83% and a weighted average remaining term to maturity of 3.1 months.

We also have
a $10 billion Asset-backed CP facility, which provides an alternative way to finance a portion of our ARM portfolio. We issue Asset-backed CP to investors in the form of secured liquidity notes that are recorded as borrowings on our Consolidated
Balance Sheets and are rated P-1 by Moodys Investors Service, F1+ by Fitch Ratings and A-1+ by Standard and Poors. As of March 31, 2006, we had $6.3 billion of Asset-backed CP outstanding with a weighted average interest rate of
4.78% and a weighted average remaining maturity of 23 days.

Because we borrow money under reverse repurchase and Asset-backed CP agreements based on the
fair value of our ARM Assets, and because changes in interest rates can negatively impact the valuation of ARM Assets, our borrowing ability under these agreements may be limited and lenders may initiate margin calls in the event interest rates
change or the value of our ARM Assets declines for other reasons. External disruptions to credit markets might also impair access to additional liquidity and, therefore, we might be required to sell certain mortgage assets in order to maintain
liquidity. If required, such sales might be at prices lower than the carrying value of the assets, which would result in losses. Our Hedging Instruments help offset this risk and since inception of our operations, we have never had to sell assets to
maintain liquidity.

All of our CDOs are secured by ARM loans. For financial reporting purposes, the ARM loans held as collateral are recorded as our
assets and the CDOs are recorded as our debt. In some transactions, Hedging Instruments are held by the trusts and are recorded as our assets or liabilities. The Hedging Instruments either fix the interest rates of the pass-through certificates or
cap the interest rate exposure on these transactions. As of March 31, 2006, the following CDOs were outstanding (dollar amounts in thousands):



|                                   |  |                   |            |                            |      |  
|---------------------------------- |  | ----------------- | ---------- | -------------------------- | ---- | -
|Description                        |  | Principal Balance |            | EffectiveInterest Rate (1) |     
|Floating-rate financing            |  | $                 | 2,057,316  |                            | 5.05 | %
|Capped floating-rate financing (2) |  |                   | 6,982,501  |                            | 5.05 | %
|Fixed-rate financing (3)           |  |                   | 3,513,530  |                            | 4.49 | %
|                                   |  |                   |            |                            |      |  
|Total                              |  | $                 | 12,553,347 |                            | 4.89 | %
|                                   |  |                   |            |                            |      |  

---

|(1) | Effective interest rate includes the impact of issuance costs and Hedging Instruments.
|--- | --------------------------------------------------------------------------------------

|(2) | Includes financing hedged with Cap Agreements with strike prices in excess of one-month LIBOR with a notional balance of $7.0 million as of March 31, 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Includes floating-rate financing hedged with Swap Agreements with a notional balance of $1.5 billion and Cap Agreements with strike prices less than one-month LIBOR with a notional
balance of $898.6 million and fixed-rate financing of $1.1 billion as of March 31, 2006.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of March 31, 2006, the CDOs were
collateralized by ARM loans with a principal balance of $12.7 billion. The debt matures between 2033 and 2046 and is callable at par once the total balance of the loans collateralizing the debt is reduced to 20% of their original balance. The
balance of this debt is reduced as the underlying loan collateral is paid down and is expected to have an average life of approximately four years.

As of
March 31, 2006, we had entered into three committed whole loan financing facilities with a total borrowing capacity of $900 million that expire between July 2006 and February 2007. In addition to our committed borrowing capacity, we have an
uncommitted borrowing capacity of $1.1 billion. The interest rates on these facilities are indexed to one-month LIBOR and reprice accordingly. We expect to renew these facilities when they expire or replace them with new facilities with similar
terms. As of March 31, 2006, we had $515.3 million borrowed against these whole loan financing facilities at an effective cost of 5.41%.



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##### Table of Contents

During the first quarter of 2006, we issued $50.0 million in Subordinated Notes. At March 31, 2006, we had $240.0
million of Subordinated Notes outstanding. The Subordinated Notes bear interest at a weighted average fixed rate of 7.47% per annum for the first ten years and thereafter at a variable rate equal to three-month LIBOR plus a weighted average
rate of 2.53% per annum, payable each January 30, April 30, July 30 and October 30, and mature between October 30, 2035 and April 30, 2036. We have the option to redeem the Subordinated Notes at par on or
after October 30, 2010. The Subordinated Notes may also be redeemed at a premium under limited circumstances on or before October 30, 2010. In connection with the issuance of the Subordinated Notes, we incurred costs of $7.2 million, which
will be amortized over the remaining expected life of the Subordinated Notes. At March 31, 2006, the balance of the Subordinated Notes outstanding, net of unamortized issuance costs, was $232.9 million and had an effective cost of 7.70% which
reflects the effect of issuance cost.

Capital Utilization and Leverage

The Board of Directors has approved a policy that limits our capacity to borrow funds to finance ARM Assets based on our long-term capital. We monitor the relationship
between our ARM Assets, borrowings and long-term capital using a variety of different measures. However, the primary operating policy that limits our borrowings and leverage is a requirement to maintain our Adjusted Equity-to-Assets Ratio, a
non-GAAP measurement, at a minimum of 8%. Broadly speaking, this ratio reflects the relationship between those ARM Assets financed with borrowings that are subject to margin calls and our long-term capital position. See the table below for the
calculation of this ratio.

Recourse or marginable debt generally consists of reverse repurchase agreements, Asset-backed CP and whole loan financing
facilities. These borrowings are based on the current market value of our ARM Assets, are short-term in nature, mature on a frequent basis (weighted average maturity of 2.6 months as of March 31, 2006), need to be rolled over at each maturity
and are subject to margin calls based on collateral value changes or changes in margin requirements. For these reasons, our policy requires that we maintain significant excess capital and liquidity above the initial margin requirement to meet future
margin calls as a result of unexpected changes in margin requirements and collateral value. Our initial margin requirements typically average between 4% and 5% for these borrowings, so our policy requires that we maintain an Adjusted
Equity-to-Assets Ratio of at least 8% against the financing of these ARM Assets. The 8% minimum policy requirement provides a capital cushion that we feel confident will be sufficient to allow us to fund future margin requirements that might result
from changes in the value of our assets or Hedging Instruments or changes in margin requirements. Historically, this capital cushion has proved to be more than adequate to support our borrowing arrangements through a variety of interest rate and
credit cycles.

We use the Adjusted Equity-to-Assets Ratio as a way to ensure that we always have an adequate capital cushion relative to those recourse
borrowings subject to margin call. If we did not maintain a sufficient capital cushion to meet initial and ongoing margin requirements, we could be forced to liquidate ARM Assets, potentially at a loss, at a time when our ARM Assets had declined in
value or when margin requirements had changed. The potential limitation that may result from the use of the non-GAAP measurement is that, in an economic environment where the market value of the investment portfolio is increasing, the amount of
capital that we can invest will be less than the amount then available for investment under a comparable GAAP measurement. Although we acknowledge this limitation, we believe that it is not prudent to factor these market gains into the calculation
of leveragable capital because the gains may be short-term in nature. The potential volatility in market prices could result in subsequent reversal of the gains that would require subsequent disposition of ARM Assets in unfavorable market
conditions.

As we increase our use of CDOs, the risk of margin calls, changes in margin requirements and potential rollover risk is reduced because CDOs
represent long-term non-recourse financing whose terms are established at the time of the financing and are not subject to change. As a result, the need to maintain a capital cushion comparable to what we maintain on our recourse borrowings is
eliminated. For purposes of maintaining an adequate capital cushion, our policy allows us to eliminate all assets (and the associated long-term equity capital) associated with CDOs from our operating capital ratio. Because the CDOs only require
approximately 2% of equity capital to support the transactions, versus the minimum 8% policy requirement on our recourse borrowings, we are able to use this freed-up capital to acquire additional ARM Assets. We expect that we will be able to retain
and carry an increased amount of assets in the future as a percentage of our equity capital base. Additionally, we eliminate from our Adjusted Equity-to-Assets Ratio any unrealized market value adjustments, recorded as accumulated other
comprehensive income (loss), from our equity accounts and we include our Senior Notes and Subordinated Notes as forms of long-term capital as if the notes were equity capital.



43



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##### Table of Contents

The following table presents the calculation of our Adjusted Equity-to-Assets ratio, a
non-GAAP measurement:

(dollar amounts in thousands)



|                                                         |  |                |             |   |                   |   |             |  
|-------------------------------------------------------- |  | -------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                         |  | March 31, 2006 |             |   | December 31, 2005 |  
|Assets                                                   |  | $              | 46,133,744  |   |                   | $ | 42,507,741  |  
|Adjustments:                                             |  |                |             |   |                   |   |             |  
|Net unrealized loss on Purchased ARM Assets              |  |                | 692,729     |   |                   |   | 537,510     |  
|Net unrealized gain on Hedging Instruments               |  |                | (586,863    | ) |                   |   | (393,583    | )
|ARM Loans Collateralizing CDOs                           |  |                | (12,736,433 | ) |                   |   | (10,396,961 | )
|Cap Agreements                                           |  |                | (59,598     | ) |                   |   | (54,241     | )
|                                                         |  |                |             |   |                   |   |             |  
|Adjusted assets                                          |  | $              | 33,443,579  |   |                   | $ | 32,200,466  |  
|                                                         |  |                |             |   |                   |   |             |  
|                                                         |  |               
|Shareholders equity                                     |  | $              | 2,373,790   |   |                   | $ | 2,207,086   |  
|Adjustments:                                             |  |                |             |   |                   |   |             |  
|Accumulated other comprehensive loss                     |  |                | 126,662     |   |                   |   | 147,517     |  
|Equity supporting CDOs:                                  |  |                |             |   |                   |   |             |  
|CDOs                                                     |  |                | 12,553,347  |   |                   |   | 10,254,334  |  
|ARM Loans Collateralizing CDOs                           |  |                | (12,736,433 | ) |                   |   | (10,396,961 | )
|Cap Agreements                                           |  |                | (59,598     | ) |                   |   | (54,241     | )
|                                                         |  |                |             |   |                   |   |             |  
|                                                         |  |                | (242,684    | ) |                   |   | (196,868    | )
|                                                         |  |               
|Senior Notes                                             |  |                | 305,000     |   |                   |   | 305,000     |  
|Subordinated Notes                                       |  |                | 240,000     |   |                   |   | 190,000     |  
|                                                         |  |                |             |   |                   |   |             |  
|Adjusted shareholders equity                            |  | $              | 2,802,768   |   |                   | $ | 2,652,735   |  
|                                                         |  |                |             |   |                   |   |             |  
|Adjusted equity-to-assets ratio                          |  |                | 8.38        | % |                   |   | 8.24        | %
|                                                         |  |                |             |   |                   |   |             |  
|GAAP equity-to-assets ratio                              |  |                | 5.15        | % |                   |   | 5.19        | %
|                                                         |  |                |             |   |                   |   |             |  
|Ratio of historical equity-to-average quarterly assets   |  |                | 5.73        | % |                   |   | 5.76        | %
|                                                         |  |                |             |   |                   |   |             |  
|Ratio of long-term equity to historical assets           |  |                | 6.59        | % |                   |   | 6.68        | %
|                                                         |  |                |             |   |                   |   |             |  
|Estimated total risk-based capital /risk-weighted assets |  |                | 21.01       | % |                   |   | 21.33       | %
|                                                         |  |                |             |   |                   |   |             |  

The above table also presents four alternative capital utilization measurements to our Adjusted Equity-to-Assets
ratio. The first capital utilization measurement is the GAAP equity-to-assets ratio, a calculation that simply divides total GAAP equity by total assets. While the simplest of all equity-to-assets calculations, it is not used by management to manage
our balance sheet because it includes factors such as unrealized gains and losses on assets and Hedging Instruments deemed to be less important to the long-term operating nature of our business since our assets are not held for sale and since the
unrealized gains and losses are not permanent impairments of our equity or of these assets and Hedging Instruments. If we did use the GAAP measurement as a basis for our leverage limitation and if our Board of Directors-approved policy limited our
GAAP equity-to-assets to a minimum of 8%, our total assets would have been reduced to $29.7 billion instead of the $46.1 billion of assets owned as of March 31, 2006. In part, we are able to carry those additional assets by financing a portion
of our ARM Assets with CDO financings, which have an initial fixed capital requirement of approximately 2% of the assets financed in this way. The GAAP measurement ignores changes in the level of equity required to support various forms of financing
as the mix of our financing of ARM Assets changes between financing subject to margin requirements and CDO financings which are not subject to margin requirements. This is another reason why we do not use the GAAP measurement to make leverage or
capital utilization decisions.



44



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##### Table of Contents

The second alternative capital utilization measurement is the ratio of historical equity to average quarterly assets.
This is a non-GAAP measurement that eliminates the market value adjustment of our assets and Hedging Instruments included in accumulated other comprehensive income (loss). This measurement is calculated by dividing the sum of shareholders
equity and OCI by the average daily balance of our assets during the quarter. Our historical equity-to-average quarterly assets ratio is higher than the regulatory well-capitalized threshold of 5% required of banks and savings and loan
institutions for the Tier I Core Capital Ratio.

The third alternative capital utilization measurement is the ratio of long-term equity to historical
assets. This is a non-GAAP measurement that eliminates the market value adjustment of our assets and Hedging Instruments included in accumulated other comprehensive income (loss). This calculation also includes Senior Notes and Subordinated Notes as
a component of our long-term capital base. This measurement is calculated by dividing the sum of the assets, net unrealized gain (loss) on Purchased ARM Assets and net unrealized gain (loss) on Hedging Instruments in the table above by long-term
capital. We monitor these ratios in order to have a complete picture of the relationship between our total assets and long-term capital position.

The
fourth alternative capital utilization measurement is a calculation of our estimated total risk-based capital ratio, a regulatory calculation required to be made by banks and savings and loan institutions that comply with Federal Reserve Board
capital requirements. The ratio results from dividing the sum of our historical and supplementary capital by total risk weighted assets as presented in the Thrift Financial Report instructions. Risk-based capital measures capital requirements for
assets based on their credit exposure as defined by the regulation, with lower credit risk assets requiring less capital and higher credit risk assets requiring more capital. Although we are not subject to these regulatory requirements, we focus our
efforts on only high quality assets. Therefore, our risk-based capital ratio tends to be quite high when compared to banking institutions, and well in excess of the regulatory minimum of 10% required for banks and savings and loan institutions to
qualify as well-capitalized.

Equity Transactions

During the three-month period ended March 31, 2006, we issued 1,059,200 shares of Common Stock and 165,000 shares of Preferred Stock through at-market transactions and received net proceeds of $27.6 million and
$4.1 million, respectively, under a controlled equity offering program.

During the three-month period ended March 31, 2006, we issued 1,711,942
shares of Common Stock under the DRSPP and received net proceeds of $44.1 million.

Off-Balance Sheet Commitments

As of March 31, 2006, we had commitments in the ordinary course of business to purchase or originate the following amounts of ARM Assets (in thousands):



|                                       |  |   |        
|-------------------------------------- |  | - | -------
|ARM loans  correspondent originations |  |   | 802,346
|ARM loans  direct originations        |  |   | 26,270 
|                                       |  |   |        
|                                       |  | $ | 828,616
|                                       |  |   |        



45



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Contractual Obligations

As of March 31, 2006, we had the following contractual obligations (in thousands):



|                                |  |                        |            |                 |   |             |  |             |        |                  |   |        |  |   |           
|------------------------------- |  | ---------------------- | ---------- | --------------- | - | ----------- |  | ----------- | ------ | ---------------- | - | ------ |  | - | ----------
|                                |  | Payments Due by Period
|                                |  | Total                  |            | Less than 1year |   | 1  3 years |  | 3  5 years |        | More than 5years
|Reverse repurchase agreements   |  | $                      | 23,544,752 |                 | $ | 23,544,752  |  | $           |       |                  | $ |       |  | $ |          
|Asset-backed CP                 |  |                        | 6,307,000  |                 |   | 6,307,000   |  |             |       |                  |   |       |  |   |          
|CDOs (1)                        |  |                        | 12,553,347 |                 |   | 21,374      |  |             | 59,026 |                  |   | 90,583 |  |   | 12,382,364
|Whole loan financing facilities |  |                        | 515,340    |                 |   | 515,340     |  |             |       |                  |   |       |  |   |          
|Senior Notes                    |  |                        | 305,000    |                 |   |            |  |             |       |                  |   |       |  |   | 305,000   
|Subordinated Notes              |  |                        | 240,000    |                 |   |            |  |             |       |                  |   |       |  |   | 240,000   
|                                |  |                        |            |                 |   |             |  |             |        |                  |   |        |  |   |           
|Total (2)                       |  | $                      | 43,465,439 |                 | $ | 30,388,466  |  | $           | 59,026 |                  | $ | 90,583 |  | $ | 12,927,364
|                                |  |                        |            |                 |   |             |  |             |        |                  |   |        |  |   |           

---

|(1) | Maturities of our CDOs are dependent upon cash flows received from the underlying loans receivable. Our estimate of their repayment is based on scheduled principal payments on the
underlying loans receivable. This estimate will differ from actual amounts to the extent we experience prepayments and/or loan losses.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Our Consolidated Balance Sheets include a liability for Hedging Instruments with negative market values, which are not reflected in this table.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------

Results of Operations For the Three Months Ended March 31, 2006

For the quarter ended March 31, 2006, our net income was $72.4 million, or $0.66 EPS, based on weighted average shares of Common Stock outstanding of 106,243,000. That compares to $67.5 million, or $0.72 EPS for the quarter ended
March 31, 2005, based on weighted average shares of Common Stock outstanding of 93,173,000, an 8.3% decrease in our EPS.

The table below highlights
the historical trend in the components of return on average common equity (annualized) during each respective quarter:

Components of
Return on Average Common Equity



|                      |  |                          |   |  |                               |   |  |                |   |  |                         |   |  |                 |    |  |                            |   |  |                       |  
|--------------------- |  | ------------------------ | - |  | ----------------------------- | - |  | -------------- | - |  | ----------------------- | - |  | --------------- | -- |  | -------------------------- | - |  | --------------------- | -
|For the Quarter Ended |  | NetInterestIncome/Equity |   |  | G & A Expense,net (1)/ Equity |   |  | MgmtFee/Equity |   |  | Performance Fee/ Equity |   |  | Other(2)/Equity |    |  | Preferred Dividend/ Equity |   |  | NetIncome/Equity(ROE) |  
|Mar 31, 2004          |  | 21.31                    | % |  | 2.21                          | % |  | 1.11           | % |  | 2.55                    | % |  | (0.90           | )% |  | 0.00                       | % |  | 16.34                 | %
|Jun 30, 2004          |  | 19.94                    | % |  | 0.58                          | % |  | 1.06           | % |  | 2.29                    | % |  | 0.39            | %  |  | 0.00                       | % |  | 15.62                 | %
|Sep 30, 2004          |  | 18.76                    | % |  | 1.43                          | % |  | 1.09           | % |  | 2.23                    | % |  | (1.16           | )% |  | 0.00                       | % |  | 15.17                 | %
|Dec 31, 2004          |  | 18.84                    | % |  | 1.10                          | % |  | 1.06           | % |  | 2.23                    | % |  | (0.86           | )% |  | 0.00                       | % |  | 15.31                 | %
|Mar 31, 2005          |  | 17.91                    | % |  | 0.74                          | % |  | 1.01           | % |  | 2.16                    | % |  | (0.54           | )% |  | 0.02                       | % |  | 14.52                 | %
|Jun 30, 2005          |  | 16.53                    | % |  | 1.04                          | % |  | 1.03           | % |  | 2.00                    | % |  | (1.54           | )% |  | 0.29                       | % |  | 13.71                 | %
|Sep 30, 2005          |  | 17.85                    | % |  | 0.33                          | % |  | 1.09           | % |  | 2.00                    | % |  | 0.09            | %  |  | 0.44                       | % |  | 13.90                 | %
|Dec 31, 2005          |  | 17.59                    | % |  | 1.05                          | % |  | 1.13           | % |  | 1.74                    | % |  | (0.83           | )% |  | 0.46                       | % |  | 14.04                 | %
|Mar 31, 2006          |  | 16.78                    | % |  | 1.34                          | % |  | 1.10           | % |  | 1.72                    | % |  | (1.10           | )% |  | 0.45                       | % |  | 13.27                 | %

---

|(1) | G & A expense excludes management and performance fees and is net of servicing income.
|--- | --------------------------------------------------------------------------------------

|(2) | Other includes gain on ARM assets and Hedging Instruments, hedging expense and provision for credit losses.
|--- | -----------------------------------------------------------------------------------------------------------

Our ROE declined in the first quarter of 2006 compared to the same period in 2005 primarily due to increased competition for mortgage assets, increased hedging activity
as interest rates rose, the continuing effect of a portion of our portfolio being hedged with Cap Agreements instead of Swap Agreements and the lag in reset dates on our Traditional ARM portfolio compared to the associated financing cost. This ROE
decline was partially offset by growing our balance sheet and better utilizing our existing capital base.



46



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The following table presents the components of our net interest income for the quarters
ended March 31, 2006 and 2005:

Comparative Net Interest Income Components

(in thousands)



|                                                  |  |                                  |         |   |      |   |         |  
|------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | -
|                                                  |  | For the quarters ended March 31, |        
|                                                  |  | 2006                             |         |   | 2005 |  
|Coupon interest income on ARM assets              |  | $                                | 543,847 |   |      | $ | 326,175 |  
|Amortization of net premium                       |  |                                  | (20,690 | ) |      |   | (18,913 | )
|Cash and cash equivalents                         |  |                                  | 599     |   |      |   | 708     |  
|                                                  |  |                                  |         |   |      |   |         |  
|Interest income                                   |  |                                  | 523,756 |   |      |   | 307,970 |  
|                                                  |  |                                  |         |   |      |   |         |  
|Reverse repurchase agreements and Asset-backed CP |  |                                  | 331,273 |   |      |   | 135,764 |  
|CDOs                                              |  |                                  | 140,174 |   |      |   | 51,619  |  
|Whole loan financing facilities                   |  |                                  | 11,052  |   |      |   | 5,548   |  
|Senior Notes                                      |  |                                  | 6,133   |   |      |   | 6,134   |  
|Subordinated Notes                                |  |                                  | 3,558   |   |      |   |        |  
|Hedging Instruments                               |  |                                  | (57,055 | ) |      |   | 25,827  |  
|                                                  |  |                                  |         |   |      |   |         |  
|Interest expense                                  |  |                                  | 435,135 |   |      |   | 224,892 |  
|                                                  |  |                                  |         |   |      |   |         |  
|Net interest income                               |  | $                                | 88,621  |   |      | $ | 83,078  |  
|                                                  |  |                                  |         |   |      |   |         |  



47



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##### Table of Contents

The following table presents the average balances for each category of our interest-earning assets as well as our
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)



|                                                         |  |                                  |            |               |       |   |                          |   |         |                |  |               |            |  |                          |   |  |   |        
|-------------------------------------------------------- |  | -------------------------------- | ---------- | ------------- | ----- | - | ------------------------ | - | ------- | -------------- |  | ------------- | ---------- |  | ------------------------ | - |  | - | -------
|                                                         |  | For the quarters ended March 31,
|                                                         |  | 2006                             |            |               | 2005 
|                                                         |  | AverageBalance                   |            | EffectiveRate |       |   | InterestIncomeandExpense |   |         | AverageBalance |  | EffectiveRate |            |  | InterestIncomeandExpense
|Interest-Earning Assets:                                 |  |                                  |            |               |       |   |                          |   |         |                |  |               |            |  |                          |   |  |   |        
|ARM assets (1)                                           |  | $                                | 42,747,782 |               | 4.90  | % |                          | $ | 523,157 |                |  | $             | 29,328,087 |  | 4.19                     | % |  | $ | 307,262
|Cash and cash equivalents                                |  |                                  | 60,620     |               | 3.95  |   |                          |   | 599     |                |  |               | 85,557     |  | 3.31                     |   |  |   | 708    
|                                                         |  |                                  |            |               |       |   |                          |   |         |                |  |               |            |  |                          |   |  |   |        
|                                                         |  |                                  | 42,808,402 |               | 4.89  |   |                          |   | 523,756 |                |  |               | 29,413,644 |  | 4.19                     |   |  |   | 307,970
|                                                         |  |                                  |            |               |       |   |                          |   |         |                |  |               |            |  |                          |   |  |   |        
|Interest-Bearing Liabilities:                            |  |                                  |            |               |       |   |                          |   |         |                |  |               |            |  |                          |   |  |   |        
|Reverse repurchase agreements and Asset-backed CP        |  |                                  | 28,548,208 |               | 4.64  |   |                          |   | 331,273 |                |  |               | 20,218,608 |  | 2.69                     |   |  |   | 135,764
|Plus: Cost of Hedging Instruments (2)                    |  |                                  |            |               | (0.77 | ) |                          |   | (54,645 | )              |  |               |            |  | 0.35                     |   |  |   | 17,662 
|                                                         |  |                                  |            |               |       |   |                          |   |         |                |  |               |            |  |                          |   |  |   |        
|Hedged reverse repurchase agreements and Asset-backed CP |  |                                  |            |               | 3.87  |   |                          |   | 276,628 |                |  |               |            |  | 3.04                     |   |  |   | 153,426
|                                                         |  |                                  |            |               |       |   |                          |   |         |                |  |               |            |  |                          |   |  |   |        
|CDOs                                                     |  |                                  | 11,349,208 |               | 4.94  |   |                          |   | 140,174 |                |  |               | 6,498,392  |  | 3.18                     |   |  |   | 51,619 
|Plus: Cost of Hedging Instruments (2)                    |  |                                  |            |               | (0.08 | ) |                          |   | (2,410  | )              |  |               |            |  | 0.50                     |   |  |   | 8,165  
|                                                         |  |                                  |            |               |       |   |                          |   |         |                |  |               |            |  |                          |   |  |   |        
|Hedged CDOs                                              |  |                                  |            |               | 4.86  |   |                          |   | 137,764 |                |  |               |            |  | 3.68                     |   |  |   | 59,784 
|                                                         |  |                                  |            |               |       |   |                          |   |         |                |  |               |            |  |                          |   |  |   |        
|Whole loan financing facilities                          |  |                                  | 808,316    |               | 5.47  |   |                          |   | 11,052  |                |  |               | 683,144    |  | 3.25                     |   |  |   | 5,548  
|Senior and Subordinated Notes                            |  |                                  | 496,075    |               | 7.81  |   |                          |   | 9,691   |                |  |               | 304,179    |  | 8.07                     |   |  |   | 6,134  
|                                                         |  |                                  |            |               |       |   |                          |   |         |                |  |               |            |  |                          |   |  |   |        
|                                                         |  |                                  | 41,201,807 |               | 4.22  |   |                          |   | 435,135 |                |  |               | 27,704,323 |  | 3.25                     |   |  |   | 224,892
|                                                         |  |                                  |            |               |       |   |                          |   |         |                |  |               |            |  |                          |   |  |   |        
|Net Interest-Earning Assets and Spread                   |  | $                                | 1,606,595  |               | 0.67  | % |                          | $ | 88,621  |                |  | $             | 1,709,321  |  | 0.94                     | % |  | $ | 83,078 
|                                                         |  |                                  |            |               |       |   |                          |   |         |                |  |               |            |  |                          |   |  |   |        
|Yield on Net Interest-Earning Assets (3)                 |  |                                  |            |               | 0.83  | % |                          |   |         |                |  |               |            |  | 1.13                     | % |  |   |        
|                                                         |  |                                  |            |               |       |   |                          |   |         |                |  |               |            |  |                          |   |  |   |        

---

|(1) | Effective rate includes impact of amortizing ARM assets net premium.
|--- | --------------------------------------------------------------------

|(2) | Includes Swap Agreements and Eurodollar Transactions with notional balances of $33.2 billion and $22.8 billion as of March 31, 2006 and 2005, respectively, and Cap Agreements
with notional balances of $898.6 million and $1.2 billion as of March 31, 2006 and 2005, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Yield on Net Interest-Earning Assets is computed by dividing annualized net interest income by the average daily balance of interest-earning assets.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------



48



---

##### Table of Contents

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 (in thousands):



|                                                  |  |                                               |         |   |        |   |         |       |  |   |         |  
|------------------------------------------------- |  | --------------------------------------------- | ------- | - | ------ | - | ------- | ----- |  | - | ------- | -
|                                                  |  | Rate/Volume Variance                          |        
|                                                  |  | Three Months ended March 31, 2006 versus 2005 |        
|                                                  |  | Rate                                          |         |   | Volume |   |         | Total | 
|Interest Income:                                  |  |                                               |         |   |        |   |         |       |  |   |         |  
|ARM assets                                        |  | $                                             | 51,662  |   |        | $ | 164,233 |       |  | $ | 215,895 |  
|Cash and cash equivalents                         |  |                                               | 137     |   |        |   | (246    | )     |  |   | (109    | )
|                                                  |  |                                               |         |   |        |   |         |       |  |   |         |  
|                                                  |  |                                               | 51,799  |   |        |   | 163,987 |       |  |   | 215,786 |  
|                                                  |  |                                               |         |   |        |   |         |       |  |   |         |  
|Interest Expense:                                 |  |                                               |         |   |        |   |         |       |  |   |         |  
|Reverse repurchase agreements and Asset-backed CP |  |                                               | 42,489  |   |        |   | 80,713  |       |  |   | 123,202 |  
|CDOs                                              |  |                                               | 19,098  |   |        |   | 58,882  |       |  |   | 77,980  |  
|Whole loan financing facilities                   |  |                                               | 3,793   |   |        |   | 1,711   |       |  |   | 5,504   |  
|Senior and Subordinated Notes                     |  |                                               | (192    | ) |        |   | 3,749   |       |  |   | 3,557   |  
|                                                  |  |                                               |         |   |        |   |         |       |  |   |         |  
|                                                  |  |                                               | 65,188  |   |        |   | 145,055 |       |  |   | 210,243 |  
|                                                  |  |                                               |         |   |        |   |         |       |  |   |         |  
|Net interest income                               |  | $                                             | (13,389 | ) |        | $ | 18,932  |       |  | $ | 5,543   |  
|                                                  |  |                                               |         |   |        |   |         |       |  |   |         |  

Net interest income increased $5.5 million in the first quarter of 2006, compared to the same quarter of the prior
year. This increase in net interest income is composed of an unfavorable rate variance and a favorable volume variance. The increased average size of our portfolio during the first quarter of 2006 compared to the same period of 2005 increased net
interest income in the amount of $18.9 million. The average balance of our interest-earning assets was $42.8 billion during the quarter ended March 31, 2006, compared to $29.4 billion during the same period of 2005  an increase of 45.5%.
As a result of the yield on our interest-earning assets increasing to 4.89% during the first quarter of 2006 from 4.19% during the same quarter of 2005, an increase of 70 BPs, and our cost of funds increasing to 4.22% from 3.25% during the same
period, an increase of 97 BPs, there was a net unfavorable rate variance of $13.4 million.

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

Components of Net Interest Spread and Yield
on Net Interest-Earning Assets (1)

(dollar amounts in millions)



|                      |  |                               |        |                                 |      |   |                      |      |   |                               |      |   |              |      |   |                   |      |   |                                   |      |  
|--------------------- |  | ----------------------------- | ------ | ------------------------------- | ---- | - | -------------------- | ---- | - | ----------------------------- | ---- | - | ------------ | ---- | - | ----------------- | ---- | - | --------------------------------- | ---- | -
|For the Quarter Ended |  | AverageInterest-EarningAssets |        | HistoricalWeightedAverageCoupon |      |   | YieldAdjust-ment (2) |      |   | Yield onInterestEarningAssets |      |   | Cost ofFunds |      |   | NetInterestSpread |      |   | Yield onNetInterest-EarningAssets |     
|Mar 31, 2004          |  | $                             | 19,911 |                                 | 4.29 | % |                      | 0.36 | % |                               | 3.93 | % |              | 2.73 | % |                   | 1.20 | % |                                   | 1.40 | %
|Jun 30, 2004          |  | $                             | 22,628 |                                 | 4.25 | % |                      | 0.41 | % |                               | 3.84 | % |              | 2.72 | % |                   | 1.12 | % |                                   | 1.31 | %
|Sep 30, 2004          |  | $                             | 24,450 |                                 | 4.30 | % |                      | 0.38 | % |                               | 3.92 | % |              | 2.93 | % |                   | 0.99 | % |                                   | 1.17 | %
|Dec 31, 2004          |  | $                             | 27,193 |                                 | 4.42 | % |                      | 0.35 | % |                               | 4.07 | % |              | 3.11 | % |                   | 0.96 | % |                                   | 1.15 | %
|Mar 31, 2005          |  | $                             | 29,414 |                                 | 4.55 | % |                      | 0.36 | % |                               | 4.19 | % |              | 3.25 | % |                   | 0.94 | % |                                   | 1.13 | %
|Jun 30, 2005          |  | $                             | 30,854 |                                 | 4.65 | % |                      | 0.36 | % |                               | 4.29 | % |              | 3.44 | % |                   | 0.85 | % |                                   | 1.05 | %
|Sep 30, 2005          |  | $                             | 35,858 |                                 | 4.83 | % |                      | 0.37 | % |                               | 4.46 | % |              | 3.63 | % |                   | 0.83 | % |                                   | 1.03 | %
|Dec 31, 2005          |  | $                             | 40,501 |                                 | 4.98 | % |                      | 0.32 | % |                               | 4.66 | % |              | 3.96 | % |                   | 0.70 | % |                                   | 0.87 | %
|Mar 31, 2006          |  | $                             | 42,808 |                                 | 5.10 | % |                      | 0.21 | % |                               | 4.89 | % |              | 4.22 | % |                   | 0.67 | % |                                   | 0.83 | %

---

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

|(2) | Yield adjustments include the impact of amortizing premiums and discounts, the impact of principal payment receivables and the impact of interest-earning non-ARM assets.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



49



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##### Table of Contents

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



|                      |  |                              |   |  |                                      |   |  |           |    |  |                       |  
|--------------------- |  | ---------------------------- | - |  | ------------------------------------ | - |  | --------- | -- |  | --------------------- | -
|For the Quarter Ended |  | Premium/DiscountAmortization |   |  | Impact ofPrincipalPaymentsReceivable |   |  | Other (1) |    |  | Total YieldAdjustment |  
|Mar 31, 2004          |  | 0.27                         | % |  | 0.06                                 | % |  | 0.03      | %  |  | 0.36                  | %
|Jun 30, 2004          |  | 0.29                         | % |  | 0.10                                 | % |  | 0.02      | %  |  | 0.41                  | %
|Sep 30, 2004          |  | 0.30                         | % |  | 0.08                                 | % |  | 0.00      | %  |  | 0.38                  | %
|Dec 31, 2004          |  | 0.30                         | % |  | 0.07                                 | % |  | (0.02     | )% |  | 0.35                  | %
|Mar 31, 2005          |  | 0.32                         | % |  | 0.07                                 | % |  | (0.01     | )% |  | 0.36                  | %
|Jun 30, 2005          |  | 0.35                         | % |  | 0.06                                 | % |  | (0.05     | )% |  | 0.36                  | %
|Sep 30, 2005          |  | 0.35                         | % |  | 0.06                                 | % |  | (0.04     | )% |  | 0.37                  | %
|Dec 31, 2005          |  | 0.30                         | % |  | 0.07                                 | % |  | (0.05     | )% |  | 0.32                  | %
|Mar 31, 2006          |  | 0.23                         | % |  | 0.05                                 | % |  | (0.07     | )% |  | 0.21                  | %

---

|(1) | Other includes the impact of interest-earning cash and cash equivalents, restricted cash and cash equivalents and mark-to-market adjustments.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------

As of March 31, 2006, our ARM Loans, including those that we have securitized, but with respect to which we have retained credit loss exposure, accounted for 37.1%
of our portfolio of ARM Assets or $16.6 billion. During the first quarters of 2006 and 2005, we recorded loan loss provisions totaling $500,000 and $409,000, respectively, to reserve for estimated credit losses on ARM Loans.

During the first quarter of 2006, we purchased securitized loans in the amount of $933.0 million. At March 31, 2006 and December 31, 2005, our Purchased
Securitized Loans totaled $7.5 billion and $6.8 billion, respectively. Like our own loan originations and acquisitions, these assets are Qualifying Interests for purposes of maintaining our exemption from the Investment Company Act because we retain
a 100% ownership interest in the underlying loans. Because we purchase all classes of these securitizations, we have the entire credit exposure on the underlying loans. The purchase price of the classes that are less than Investment Grade generally
includes a discount for probable credit losses and, ba sed on managements judgment, the portion of the purchase discount which reflects the estimated unrealized loss on the securities due to credit risk is treated as a non-accretable discount.
As of March 31, 2006, 45 of the underlying loans in these Purchased Securitized Loans were 60 days or more delinquent and had an aggregate balance of $13.0 million. Activity in non-accretable discounts for the three month periods ended
March 31, 2006 and 2005 is as follows (in thousands):



|                                         |  |      |        |   |      |   |       |  
|---------------------------------------- |  | ---- | ------ | - | ---- | - | ----- | -
|                                         |  | 2006 |        |   | 2005 |  
|Balance at beginning of period           |  | $    | 11,551 |   |      | $ | 6,478 |  
|Increase for securities purchased        |  |      | 3,975  |   |      |   | 1,863 |  
|Increase for expected future losses      |  |      | 214    |   |      |   |      |  
|Realized losses                          |  |      | (389   | ) |      |   |      |  
|Reclassifications to accretable discount |  |      | (100   | ) |      |   | (350  | )
|                                         |  |      |        |   |      |   |       |  
|Balance at end of period                 |  | $    | 15,251 |   |      | $ | 7,991 |  
|                                         |  |      |        |   |      |   |       |  

We recorded a net gain of $6.5 million on Derivatives during the first quarter of 2006, which consisted of a net
gain of $8.4 million on Pipeline Hedging Instruments and a net gain of $1.2 million on other Derivative transactions, partially offset by a $3.1 million net loss on commitments to purchase loans from correspondent lenders and bulk sellers. We
recorded a net gain of $1.3 million on Derivatives during the same period in 2005. This gain consisted of a net gain of $7.1 million on Pipeline Hedging Instruments partially offset by a net loss of $5.8 million on commitments to purchase loans from
correspondent lenders and bulk sellers.

We recorded an impairment charge to recognize our estimate of additional future losses inherent in our Purchased
Securitized Loan portfolio and realized a loss of $214,000 on ARM Assets during the quarter ended March 31, 2006. We realized a gain of $1.6 million on the sale of $227.9 million of ARM Assets during the quarter ended March 31, 2005.



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

Annualized Operating Expense Ratios



|                      |  |                               |   |  |                                 |   |  |                               |   |  |                                          |  
|--------------------- |  | ----------------------------- | - |  | ------------------------------- | - |  | ----------------------------- | - |  | ---------------------------------------- | -
|For the Quarter Ended |  | Management Fee/Average Assets |   |  | Performance Fee/ Average Assets |   |  | Other Expenses/Average Assets |   |  | Total Operating Expenses/ Average
Assets |  
|Mar 31, 2004          |  | 0.07                          | % |  | 0.17                            | % |  | 0.16                          | % |  | 0.40                                     | %
|Jun 30, 2004          |  | 0.07                          | % |  | 0.15                            | % |  | 0.06                          | % |  | 0.28                                     | %
|Sep 30, 2004          |  | 0.07                          | % |  | 0.14                            | % |  | 0.12                          | % |  | 0.33                                     | %
|Dec 31, 2004          |  | 0.06                          | % |  | 0.14                            | % |  | 0.10                          | % |  | 0.30                                     | %
|Mar 31, 2005          |  | 0.06                          | % |  | 0.14                            | % |  | 0.08                          | % |  | 0.28                                     | %
|Jun 30, 2005          |  | 0.06                          | % |  | 0.13                            | % |  | 0.10                          | % |  | 0.29                                     | %
|Sep 30, 2005          |  | 0.06                          | % |  | 0.11                            | % |  | 0.05                          | % |  | 0.22                                     | %
|Dec 31, 2005          |  | 0.06                          | % |  | 0.09                            | % |  | 0.08                          | % |  | 0.23                                     | %
|Mar 31, 2006          |  | 0.05                          | % |  | 0.08                            | % |  | 0.11                          | % |  | 0.24                                     | %

The most significant increases to our operating expenses for the quarter ended March 31, 2006 compared to
March 31, 2005 were the $2.8 million increase in expenses related to expanded operations of TMHL, the $1.9 million increase in the expenses associated with our long-term incentive awards and the $1.1 million increase in base management fees
partially offset by the $972,000 decrease in the performance-based fee that the Manager earned as a result of our achieving a Return on Equity in excess of the threshold as defined in the Management Agreement. Our ROE prior to the effect of the
performance-based fee of $9.1 million for the first quarter of 2006 was 14.98%, whereas the threshold, the average Ten Year U.S. Treasury Rate plus 1%, was 5.58%. This ROE is a non-GAAP measurement used solely to calculate the amount of the
performance-based fee earned by the Manager, in accordance with the formula contained in the Management Agreement. Our GAAP ROE for the quarter ended March 31, 2006, which includes the effect of the performance-based fee of $9.1 million, was
13.27%.

Market Risks

The market risk management
discussion and the amounts estimated from the analysis that follows are forward-looking statements that assume that certain market conditions occur. Actual results may differ materially from these projected results due to changes in our ARM
portfolio and borrowings mix and due to developments in the domestic and global financial and real estate markets. Developments in the financial markets include the likelihood of changes in interest rates and in the relationship of various interest
rates and their impact on our ARM portfolio yield, cost of funds and cash flows.

As a financial institution that has only U.S.-dollar denominated assets,
liabilities and Hedging Instruments, we are not subject to foreign currency exchange or commodity price risk. Our market risk exposure is largely due to interest rate risk. Interest rate risk is defined as the sensitivity of our current and future
earnings to interest rate volatility, variability of spread relationships, the difference in repricing intervals between our assets and liabilities and the effect that interest rates may have on our cash flows, especially ARM portfolio prepayments.
Interest rate risk impacts our interest income, interest expense and the market value on a large portion of our assets and liabilities. The management of interest rate risk attempts to maximize earnings and to preserve capital by minimizing the
negative impacts of changing interest rates, asset and liability mix, and prepayment activity.

The table below presents an approximation of the
sensitivity of the market value of our ARM portfolio, including purchase commitments, using a discounted cash flow simulation model. Application of this method results in an estimation of the percentage change in the market value of our assets,
liabilities and Hedging Instruments per 100 BP shift in interest rates expressed in years  a measure commonly referred to as Effective Duration. Positive portfolio Effective Duration indicates that the market value of the total portfolio will
decline if interest rates rise and increase if interest rates decline. Negative portfolio Effective Duration indicates that the market value of the total portfolio will decline if interest rates decline and increase if interest rates rise. The
closer Effective Duration is to zero, the less interest rate changes are expected to affect earnings. Included in the table is a base case Effective Duration calculation for an interest rate scenario that assumes future rates are those implied by
the yield curve as of March 31, 2006. The other three scenarios assume interest rates are instantaneously 100 BPs lower and 100 and 200 BPs higher than those implied by interest rates as of March 31, 2006.

The use of Hybrid ARM Hedging Instruments is a critical part of our interest rate risk management strategies, and the effects of these Hybrid ARM Hedging Instruments on
the market value of the portfolio are reflected in the models output. This analysis also takes into consideration the value of options embedded in our mortgage assets including constraints on the repricing of the interest rates of ARM Assets
resulting from periodic and lifetime cap features, as well as prepayment options.



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Assets and liabilities that are not interest rate-sensitive, such as cash, payment receivables, prepaid expenses, payables and accrued expenses, are
excluded. The Effective Duration calculated from this model is a key measure of the effectiveness of our interest rate risk management strategies.

Net Portfolio Effective Duration

March 31, 2006



|                                 |  |           |       |  |                   |       |  |                   |       |  |                   |      
|-------------------------------- |  | --------- | ----- |  | ----------------- | ----- |  | ----------------- | ----- |  | ----------------- | -----
|                                 |  | Base Case |       |  | Parallel -100 BPs |       |  | Parallel +100 BPs |       |  | Parallel +200 BPs |      
|Assets:                          |  |           |       |  |                   |       |  |                   |       |  |                   |      
|Traditional ARMs                 |  | 0.39      | Years |  | 0.37              | Years |  | 0.40              | Years |  | 0.41              | Years
|Hybrid ARMs                      |  | 2.33      |       |  | 1.99              |       |  | 2.53              |       |  | 2.96              |      
|                                 |  |           |       |  |                   |       |  |                   |       |  |                   |      
|Total ARM Assets                 |  | 2.27      |       |  | 1.94              |       |  | 2.45              |       |  | 2.88              |      
|                                 |  |           |       |  |                   |       |  |                   |       |  |                   |      
|Borrowings and hedges            |  | (1.57     | )     |  | (1.58             | )     |  | (1.56             | )     |  | (1.53             | )    
|                                 |  |           |       |  |                   |       |  |                   |       |  |                   |      
|Net Portfolio Effective Duration |  | 0.39      | Years |  | 0.22              | Years |  | 0.49              | Years |  | 0.72              | Years
|                                 |  |           |       |  |                   |       |  |                   |       |  |                   |      

Based on the assumptions used, the model output suggests a very low degree of portfolio price change given
decreases and increases in interest rates, which implies that our cash flow and earning characteristics should be relatively stable for comparable changes in interest rates. As a comparison, the approximate base case Effective Duration of a ten year
U.S. treasury, a conforming 30-year fixed mortgage and a conforming 5/1 Hybrid ARM are 7.8, 3.2 and 2.2 years respectively.

Changes in assumptions
including, but not limited to, volatility, mortgage and financing spreads, prepayment behavior and defaults, as well as the timing and level of interest rate changes, will affect the results of the model. Therefore, actual results are likely to vary
from modeled results.

Although market value sensitivity analysis is widely accepted in identifying interest rate risk, it does not take into consideration
changes that may occur such as, but not limited to, changes in investment and financing strategies, changes in market spreads, and changes in business volumes. Accordingly, we make extensive use of an earnings simulation model to further analyze our
level of interest rate risk.

There are a number of key assumptions in our earnings simulation model. These key assumptions include changes in market
conditions that affect interest rates, the pricing of ARM products, the availability of ARM products, and the availability and the cost of financing for ARM products. Other key assumptions made in using the simulation model include prepayment speeds
and managements investment, financing and hedging strategies, and the issuance of new equity. We typically run the simulation model under a variety of hypothetical business scenarios that may include different interest rate scenarios,
different investment strategies, different prepayment possibilities and other scenarios that provide us with a range of possible earnings outcomes in order to assess potential interest rate risk. The assumptions used represent our estimate of the
likely effect of changes in interest rates and do not necessarily reflect actual results. The earnings simulation model takes into account periodic and lifetime caps embedded in our ARM Assets in determining the earnings at risk.

At March 31, 2006, based on the earnings simulation model, our potential earnings increase (decrease) from our base case earnings forecast for a parallel 100 BP
decline and 100 and 200 BP rise in market interest rates over the next twelve months and an adjustment in prepayment speeds as interest rates change, was 18.0%, 0.5% and (12.0)%, respectively, of projected net income for the twelve months ended
March 31, 2007. All of these earnings projections, together with undistributed taxable income at March 31, 2006, result in taxable income that provide sufficient coverage of dividends at their current level. The assumptions used in the
earnings simulation model are inherently uncertain and, as a result, the analysis cannot precisely predict the impact of higher or lower interest rates on net income. Actual results could differ from simulated results due to timing, magnitude and
frequency of interest rate changes, changes in prepayment speed other than what was assumed in the model, and changes in other market conditions and management strategies to offset our potential exposure, among other factors. This measure of risk
represents our exposure to higher or lower interest rates at a particular point in time. Our actual risk is always changing. We continuously monitor our risk profile and alter our strategies as appropriate based on our view of interest rates and
other developments in our business.



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Effects of Interest Rate Changes

Changes in interest rates impact our earnings in various ways. While we invest primarily in ARM Assets, rising short-term interest rates may temporarily negatively affect our earnings, and, conversely, falling
short-term interest rates may temporarily increase our earnings. This impact can occur for several reasons and may be mitigated by portfolio prepayment activity and portfolio funding and hedging strategies. For example, our borrowings may react to
changes in interest rates sooner than our ARM Assets because the weighted average next repricing date of our borrowings may be sooner than that of our ARM Assets. Additionally, interest rates on Traditional ARM Assets may be limited to an increase
of either 1% or 2% per adjustment period (commonly referred to as the periodic cap), while our borrowings do not have similar limitations. At March 31, 2006, 7.18% of our ARM Assets were Traditional ARM Assets subject to periodic caps. Our
ARM Assets also typically lag changes in the applicable interest rate indices by 45 days, due to the notice period provided to ARM borrowers when the interest rates on their loans are scheduled to change.

Interest rates can also affect our net return on Hybrid ARM Assets (net of the cost of financing Hybrid ARM Assets). We estimate the Effective Duration of our Hybrid ARM
Assets and have a policy to hedge the financing of the Hybrid ARM Assets such that the Net Effective Duration is less than one year. During a declining interest rate environment, the prepayment of Hybrid ARM Assets may accelerate causing the amount
of fixed-rate financing to increase relative to the amount of Hybrid ARM Assets, possibly resulting in a decline in our net return on Hybrid ARM Assets as replacement Hybrid ARM Assets may have lower yields than the ones paying off. In contrast,
during a rising interest rate environment, Hybrid ARM Assets may prepay slower than expected, requiring us to finance more Hybrid ARM Assets in a higher interest rate environment than was originally anticipated, resulting in a decline in our net
return on Hybrid ARM Assets. In order to manage our exposure to changes in the prepayment speed of Hybrid ARM Assets, we regularly monitor the balance of Hybrid ARM Assets and make adjustments to the amounts anticipated to be outstanding in future
periods and, on a regular basis, make adjustments to the amount of our fixed-rate borrowing obligations in future periods.

Interest rate changes can also
affect the availability and pricing of ARM Assets, which affects our investment opportunities. During a rising interest rate environment, there may be less total loan origination and refinance activity, but a larger percentage of ARM products being
originated, mitigating the impact of lower overall loan origination and refinance activity. Conversely, during a declining interest rate environment, consumers, in general, may favor fixed-rate mortgage products, but because there will likely be
above average loan origination and refinancing volume in the industry, even a small percentage of ARM product volume may provide sufficient investment opportunities. Additionally, a flat yield curve may be an adverse environment for ARM products
because there may be little incentive for a consumer to choose an ARM product over a 30 year fixed-rate mortgage loan. Conversely, in a steep yield curve environment, ARM products may enjoy an above average advantage over 30-year fixed-rate mortgage
loans, increasing our investment opportunities. The volume of ARM loans being originated industry-wide can also affect their investment yield. During periods when there is a shortage of ARM products, yields may decline due to market forces and
conversely, when there is an above average supply of ARM products, yields may improve due to the same market forces.

The prepayment rate on our ARM Assets
may increase if interest rates decline or if the difference between long-term and short-term interest rates diminishes. An increase in prepayments would cause us to amortize the premiums paid for our ARM Assets faster, resulting in a lower yield on
our ARM Assets. Additionally, if prepayment proceeds cannot be reinvested in ARM Assets having similar yields to those being replaced, our earnings may be adversely affected. Conversely, the prepayment rate on our ARM Assets may decrease if interest
rates rise or if the difference between long-term and short-term interest rates increases. Decreased prepayments would cause us to amortize the premiums paid for our ARM Assets over a longer time period, resulting in an increased yield on our ARM
Assets. Therefore, in rising interest rate environments where prepayments are declining, not only would the interest rate on the ARM portfolio reset to reflect higher interest rates, but the yield would also 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 we
invest primarily in ARM Assets, and a portion of such assets are purchased with shareholders equity, our 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 our ARM portfolio will, over time, reprice to a spread over our cost of funds, while
the portion of our ARM portfolio 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.



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Taxable income per share

As a REIT, we pay substantially all of our taxable earnings in the form of dividends to shareholders. Therefore, taxable income per share, a non-GAAP financial measurement, is a meaningful measurement for both management and investors. A
reconciliation of our REIT taxable income per common share to GAAP EPS follows:

Reconciliation of REIT Taxable Income Per Share to GAAP
EPS



|                                        |  |                             |       |   |      |   |       |  
|--------------------------------------- |  | --------------------------- | ----- | - | ---- | - | ----- | -
|                                        |  | Three Months Ended March 31 |      
|                                        |  | 2006                        |       |   | 2005 |  
|REIT Taxable income per share           |  | $                           | 0.70  |   |      | $ | 0.70  |  
|Payments under long-term incentive plan |  |                             | 0.02  |   |      |   |      |  
|Taxable REIT subsidiary (loss) income   |  |                             | (0.02 | ) |      |   | 0.03  |  
|Hedging Instruments, net                |  |                             | (0.02 | ) |      |   |      |  
|Long-term incentive plan expense        |  |                             | (0.02 | ) |      |   | (0.01 | )
|Other                                   |  |                             |      |   |      |   |      |  
|                                        |  |                             |       |   |      |   |       |  
|GAAP EPS                                |  | $                           | 0.66  |   |      | $ | 0.72  |  
|                                        |  |                             |       |   |      |   |       |  

We estimate that our undistributed taxable income as of March 31, 2006, after deducting the first quarter
dividend declared on April 18, 2006, was $40.4 million, or $0.38 per share, based on outstanding common shares at March 31, 2006 of 107,545,672.

Other Matters

The Code requires that at least 75% of our total assets must be Qualified REIT Assets. The Code also requires that we meet a
defined 75% source of income test and a 95% source of income test. As of March 31, 2006, we calculated that we were in compliance with all of these requirements. We also met all REIT requirements regarding the ownership of capital stock and the
distributions of our net income. Therefore, as of March 31, 2006, we believed that we continue to qualify as a REIT under the provisions of the Code.

We intend to conduct our business so as not to become regulated as an investment company under the Investment Company Act. If we were to become regulated as an investment company, our use of leverage would be substantially reduced. The
Investment Company Act exempts from regulation entities that are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. In order to maintain our
exempt status under the Investment Company Act, current SEC staff interpretations require that at least 55% of our assets must consist of Qualifying Interests, as such term has been defined by the SEC staff. 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. We calculated that we are in compliance with this requirement.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information called for by Item 3 is
incorporated by reference from the information in Part I, Item 2 under the captions General - Hedging Strategies, Interest Rate Risk Management and Market Risks.

Item 4. CONTROLS AND PROCEDURES

Our Chief Executive Officer, Chief Operating Officer and Chief Financial
Officer, after evaluating the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, have concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures were effective to provide reasonable assurances that information required to be disclosed in the reports filed or submitted under such Act is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms. In addition, during the quarter ended March 31, 2006, there has been no significant change in our internal control over financial reporting that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.



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PART II OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

At March 31, 2006, there were no material pending legal proceedings to
which we were a party or of which any of our property was subject.

Item 1A. RISK FACTORS

There have been no material changes from risk factors as previously disclosed in
our 2005 Annual Report on Form 10-K.

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

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

See Exhibit Index



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SIGNATURES

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



|                   |  |                                                            
|------------------ |  | -----------------------------------------------------------
|                   |  | THORNBURG MORTGAGE, INC. (Registrant)                      
|                   | 
|Dated: May 8, 2006 |  | /s/ Garrett Thornburg                                      
|                   |  | Garrett Thornburg                                          
|                   |  | Chairman of the Board and Chief Executive Officer          
|                   |  | (Principal Executive Officer)                              
|                   | 
|Dated: May 8, 2006 |  | /s/ Larry A. Goldstone                                     
|                   |  | Larry A. Goldstone                                         
|                   |  | President and Chief Operating Officer                      
|                   |  | (authorized officer of registrant)                         
|                   | 
|Dated: May 8, 2006 |  | /s/ Clarence G. Simmons, III                               
|                   |  | Clarence G. Simmons, III                                   
|                   |  | Senior Executive Vice President and Chief Financial Officer
|                   |  | (Principal Financial and Accounting Officer)               



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Exhibit Index



|               |  |                                                                                                                                                                                       
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Description                                                                                                                                                                   
|31.1           |  | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934*                                                             
|               | 
|31.2           |  | Certification of President and Chief Operating Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934*                                               
|               | 
|31.3           |  | Certification of Senior Executive Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934*                         
|               | 
|32.1           |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*                                    
|               | 
|32.2           |  | Certification of President and Chief Operating Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*                      
|               | 
|32.3           |  | Certification of Senior Executive Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*

---

|* | Being filed herewith.
|- | ---------------------



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GLOSSARY

There follows a definition of certain capitalized and other terms and abbreviations used in this Quarterly Report on
Form 10-Q.

Adjusted Equity-to-Assets Ratio means a ratio that reflects the relationship between assets financed with recourse debt that is
subject to margin calls and our long-term capital. The ratio is a non-GAAP measurement that we have adopted and that the Board of Directors has approved as an internal policy. Our policy requires us to maintain this ratio at a minimum of 8%, which
represents approximately twice the initial margin requirement for our recourse debt.

Agency Securities means Purchased ARM Assets that are
guaranteed by Ginnie Mae, Fannie Mae or Freddie Mac.

Agent means American Stock Transfer & Trust Company, TMAs transfer agent.

ARM means adjustable-rate and variable-rate mortgage, which signifies that adjustments of the underlying interest rate are made at
predetermined times based on an agreed margin to an established index.

ARM Assets means all of the Companys ARM Loans and Purchased ARM
Assets comprised of Traditional ARM Assets and Hybrid ARM Assets.

ARM Loans means Securitized ARM Loans, ARM Loans Collateralizing CDOs and
ARM loans held for securitization.

ARM Loans Collateralizing CDOs means loans originated or acquired by the Company and financed in their
entirety on its balance sheet through securitization by the Company into sequentially rated classes. The Company retains the classes that are not High Quality which provide credit support for higher rated classes issued to third-party investors in
structured financing arrangements.

Asset-backed CP means asset-backed commercial paper, which provides an alternative way to finance our High
Quality ARM Assets portfolio. We issue Asset-backed CP to investors in the form of secured liquidity notes that are recorded as borrowings on our Consolidated Balance Sheets.

Average Historical Equity means for any period the difference between our total assets and total liabilities calculated on a consolidated basis in accordance with GAAP, excluding (i) OCI,
(ii) goodwill and (iii) other intangibles, computed by taking the average of such values at the end of each month during such period, adjusted for equity sold during the period on a pro rata basis.

Average Net Worth means for any period the average of the sum of the gross proceeds from any offering of our equity securities, before deducting any
underwriting discounts and commissions and other expenses and costs relating to the offering, plus our retained earnings (without taking into account any losses incurred in prior periods) computed by taking the average of such values at the end of
each month during such period, and shall be reduced by any amount that we pay for the repurchases of Common Stock.

Board of Directors means
the board of directors of TMA.

BP means basis point, a hundredth of a percent.

Cap Agreements means interest rate cap agreements, pursuant to which we receive cash payments if the interest rate index specified in any such agreement increases above contractually specified levels, thus
effectively capping the interest rate on a specified amount of borrowings at a level specified by the agreement.

CDOs means collateralized
debt obligations, which can be either floating-rate or fixed-rate non-recourse financing, all of which is issued by trusts and secured by ARM loans and may also include Hedging Instruments. CDOs represent long-term financing that is not subject to
margin calls. Approximately 2% of equity capital is required to support CDO financing.



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CMOs means collateralized mortgage obligations which are debt obligations ordinarily issued in series and
backed by a pool of fixed-rate mortgage loans, Hybrid ARM loans, Traditional ARM loans or ARM securities, each of which consists of several serially maturing classes. Generally, principal and interest payments received on the underlying
mortgage-related assets securing a series of CMOs are applied to principal and interest due on one or more classes of the CMOs of such series.

Code means the Internal Revenue Code of 1986, as amended.

Code of Conduct means the Code of Business Conduct and Ethics
adopted by TMA.

Common Stock means shares of TMAs common stock, $.01 par value per share.

Company means TMA and its subsidiaries, unless specifically stated otherwise or the context indicates otherwise.

Consumer Price Index means an inflationary indicator that measures the change in the cost of a fixed basket of products and services, including housing,
electricity, food, and transportation. The Consumer Price Index is published monthly.

Corporate Governance Guidelines means the Corporate
Governance Guidelines adopted by TMA.

CPR means constant prepayment rate, which refers to the annualized rate at which the mortgage assets in
our portfolio are prepaid. The CPR typically increases as interest rates decrease and, conversely, the CPR typically decreases as interest rates increase.

Derivative means a contract or agreement whose value is derived from changes in interest rates, prices of securities or commodities, or financial or commodity indices. The Companys Derivatives include commitments to
purchase loans from correspondent and bulk sellers, Pipeline Hedging Instruments and Hybrid ARM Hedging Instruments.

DERs means dividend
equivalent rights, which may be granted under the Plan. A DER consists of the right to receive either cash or PSRs in an amount equal to the value of the cash dividends paid on a share of Common Stock.

DRSPP means the Dividend Reinvestment and Stock Purchase Plan adopted by TMA.

Effective Duration is a calculation expressed in months or years that is a measure of the expected price change of financial instruments based on changes in interest rates. For example, a duration of 4.4
months implies that a 1% change in interest rates would cause a .37% change in the opposite direction in the value of our portfolio (i.e., 4.4 months equals 37% of twelve months.)

EITF means Emerging Issues Task Force Abstract which is an authoritative GAAP pronouncement issued by the FASB.

EPS means earnings per share calculated by dividing net income available to common shareholders by the average common shares outstanding during the period.

Eurodollar Transactions means Eurodollar futures contracts, which are three month contracts with a price that represents the forecasted three-month LIBOR rate. The sale of these contracts locks in a future
interest rate.

Fannie Mae means the Federal National Mortgage Association, a government-sponsored private corporation that operates under a
federal charter.

FASB means the Financial Accounting Standards Board.



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FDIC means Federal Depository Insurance Corporation.

Federal Funds means the overnight intrabank lending rate.

FHLB means the Federal Home Loan Bank.

FICO means a credit score, ranging from 300 to 850, with 850 being the best score,
based upon the credit evaluation methodology developed by Fair, Isaac and Company, a consulting firm specializing in creating credit evaluation models.

FIN means Financial Accounting Standards Board Interpretation.

Freddie Mac means the Federal Home Loan Mortgage
Corporation, a federally-chartered private corporation.

Fully Indexed means an ARM Asset that has an interest rate currently equal to its
applicable index plus a margin to the index that is specified by the terms of the ARM Asset.

G & A means general and administrative.

GAAP means generally accepted accounting principles set forth in the statements, opinions and pronouncements of the Accounting Principles
Board of the American Institute of Certified Public Accountants and the FASB or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States.

Ginnie Mae means the Government National Mortgage Association, a government-owned corporation within the United States Department of Housing and Urban
Development.

Hedging Instruments means Cap Agreements, Swap Agreements and Eurodollar Transactions which are Derivatives that we use to manage
our interest rate exposure when financing the purchase of ARM Assets.

High Quality means (i) Agency Securities, (ii) Purchased ARM
Assets and Securitized ARM Loans which are rated within one of the two highest rating categories by at least one of the Rating Agencies, (iii) Purchased ARM Assets and Securitized ARM Loans 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 and approved by the Board of Directors, or (iv) the
portion of ARM loans that have been deposited into a trust and have received a credit rating of AA or better from at least one Rating Agency. Our investment policy requires that we invest at least 70% of total assets in High Quality ARM Assets and
short-term investments.

Hybrid ARM Hedging Instruments means Hedging Instruments, including Swap Agreements, Eurodollar Transactions and Cap
Agreements, that we use to manage our interest rate exposure when financing the purchase of Hybrid ARMs.

Hybrid ARMs or Hybrid ARM
Assets means ARM Loans and Purchased ARM Assets that have a fixed interest rate for an initial period of three to ten years, after which they convert to Traditional ARM Assets for their remaining terms to maturity.

Insider Trading Policy means the Insider Trading Policy adopted by TMA.

Investment Company Act means the Investment Company Act of 1940, as amended.

Investment Grade generally means a security
rating of BBB or better by Standard & Poors Corporation or Baa or better by Moodys Investors Service, Inc.

IRA means
Individual Retirement Account.



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LIBOR means the London InterBank Offer Rate, which is fixed each morning at 11 a.m. London time, by the
British Bankers Association. The rate is an average derived from sixteen quotations provided by banks determined by the British Bankers Association, the four highest and lowest are then eliminated and an average of the remaining eight is
calculated to arrive at the fixed rate.

Liquidity Management Policy means the Liquidity Management Policy adopted by TMA.

Management Agreement means the management agreement by and between TMA and the Manager whereby the Manager performs certain services for TMA in exchange for
certain fees.

Manager means Thornburg Mortgage Advisory Corporation, a Delaware corporation.

MBS means mortgage-backed securities, which are pools of mortgages used as collateral for the issuance of securities in the secondary market. MBS are
commonly referred to as pass-through certificates because the principal and interest of the underlying loans is passed through to investors. The interest rate of the security is lower than the interest rate of the underlying
loan to allow for payment of servicing and guaranty fees.

MSRs means mortgage servicing rights.

MTA means the monthly treasury average. This index is the 12 month average of the monthly average yields of U.S. Treasury securities adjusted to a constant
maturity of one year.

Net Effective Duration means the Effective Duration of assets minus the Effective Duration of borrowings and Hedging
Instruments.

OCI means the Companys accumulated other comprehensive income or loss calculated on a consolidated basis in accordance with
GAAP.

Other Investments means assets that are (i) adjustable or variable rate pass-through certificates, multi-class pass-through
certificates or CMOs backed by loans that are rated at least Investment Grade at the time of purchase, (ii) 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, (iii) fixed-rate mortgage loans collateralized by first liens on single-family residential properties originated for sale to third parties, (iv) real estate properties
acquired as a result of foreclosing on our ARM Loans, or (v) as authorized by the Board of Directors, ARM Assets rated less than Investment Grade that are created as a result of our loan acquisition and securitization efforts or are acquired as
Purchased Securitized Loans, and that equal an amount no greater than 17.5% of shareholders equity, measured on a historical cost basis. Other Investments may not comprise more than 30% of our total assets.

Pay Option ARM means a Traditional ARM Asset that typically has an initial payment based on a below market interest rate, has no interest rate change cap,
offers an annual maximum payment cap of 7.5% and offers borrowers the ability to select a payment amount with the understanding that if a payment is selected that is less than a fully indexed rate the shortfall will be added to the principal balance
of the loan until the loan balance increases to a maximum of 110% to 125% of the original loan balance, at which time the loan is recast to fully amortize over the remaining term of the loan.

Pipeline Hedging Instruments means Eurodollar Transactions that we use to limit interest rate risk associated with commitments to purchase ARM loans.

Plan means TMAs Amended and Restated 2002 Long-Term Incentive Plan, as amended.

Portfolio Margin means yield on net interest earning assets.

Preferred Stock means the 8% Series C Cumulative Redeemable Preferred Stock, $.01 par value per share, issued by TMA.



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PSRs means phantom stock rights, which may be granted under the Plan. A PSR consists of (i) the unfunded
deferred obligation of TMA to pay the recipient of a PSR, upon exercise, an amount of cash equal to the fair market value of a share of Common Stock at the time of exercise, and (ii) the recipients right to receive distributions, either
in the form of cash or additional PSRs, in an amount equal to the value of the cash dividends that are paid on a share of Common Stock.

Purchased
ARM Assets means ARM securities and Purchased Securitized Loans.

Purchased Securitized Loans means loans securitized by third parties
and purchased by the Company. The Company purchases all principal classes of the securitizations, including the subordinated classes. These assets are Qualifying Interests for purposes of maintaining the Companys exemption from the Investment
Company Act because, like the Companys own loan originations and acquisitions, the Company retains a 100% interest in the underlying loans.

QSPE means qualifying special purpose entity.

Qualified REIT Assets means real estate assets as defined by the Code.
Substantially all the assets that we have acquired and will acquire for investment are expected to be Qualified REIT Assets.

Qualifying
Interests means mortgages and other liens on and interests in real estate, as such term has been defined by SEC staff. Under current SEC staff interpretations, we must maintain at least 55% of our assets directly in Qualifying
Interests.

Rating Agencies means Standard & Poors Corporation and Moodys Investors Service, Inc.

REIT means real estate investment trust as defined in the Code.

REMIC means real estate mortgage investment conduit which is an entity that holds a fixed pool of mortgages and issues multiple classes of interests in itself to investors as defined in the Code.

Return on Equity or ROE means the quotient obtained by dividing our annualized net income by our Average Net Worth.

SARs means stock appreciation rights, which may be granted under the Plan. A SAR consists of the right to receive the value of the appreciation of our Common
Stock that occurs from the date the right is granted up to the date of exercise.

Service means the Internal Revenue Service.

SEC means the United States Securities and Exchange Commission.

Securitized ARM Loans means loans originated or acquired by the Company and securitized by the Company with the Company retaining 100% of the beneficial ownership interests.

Senior Notes means the 8% senior unsecured notes due May 15, 2013, issued by TMA.

SFAS means Statement of Financial Accounting Standards which is an authoritative GAAP pronouncement issued by the FASB.

SPE means special purpose entity.

Subordinated Notes means the floating rate junior subordinated notes, issued by TMHL
and guaranteed by TMA.

Swap Agreements means interest rate swap agreements, pursuant to which we agree to pay a fixed rate of interest and to
receive a variable interest rate, thus effectively fixing the cost of funds.



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Ten Year U.S. Treasury Rate means the arithmetic average of the weekly average yield to maturity for actively
traded current coupon U.S. Treasury fixed interest rate securities (adjusted to a constant maturity of ten years) published by the Federal Reserve Board during a quarter, or, if such rate is not published by the Federal Reserve Board, any Federal
Reserve Bank or agency or department of the federal government that we select. If we determine in good faith that the Ten Year U.S. Treasury Rate cannot be calculated as provided above, then the rate shall be the arithmetic average of the per annum
average yields to maturities, based upon closing asked prices on each business day during a quarter, for each actively traded marketable U.S. Treasury fixed interest rate security with a final maturity date not less than eight nor more than twelve
years from the date of the closing asked prices as chosen and quoted for each business day in each such quarter in New York City by at least three recognized dealers in U.S. Government securities that we select.

The Thornburg Mortgage Exchange ProgramSM means the program where borrowers can choose to take equity out of their homes, select another ARM loan product, extend the fixed-rate period of their loan, modify to a current interest rate or change to an interest-only
payment option by paying a small flat fee.

TMA means Thornburg Mortgage, Inc., a Maryland corporation.

TMCR means Thornburg Mortgage Capital Resources, LLC, a wholly-owned special purpose finance subsidiary of TMD.

TMD means Thornburg Mortgage Depositor, LLC, a wholly-owned special purpose finance subsidiary of TMA.

TMHL means Thornburg Mortgage Home Loans, Inc., a wholly-owned mortgage loan origination and acquisition subsidiary of TMA.

TMHS means Thornburg Mortgage Hedging Strategies, Inc., a wholly-owned taxable REIT subsidiary of TMA.

Traditional ARMs or Traditional ARM Assets means ARM Loans and Purchased ARM Assets that have interest rates that reprice in a year or less.



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