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


                                    FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED:  JUNE  30,  2000

                                       OR

          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
 ---      EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ________ TO ________

COMMISSION  FILE  NUMBER:  001-11914


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

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

            119 E. MARCY STREET
            SANTA FE, NEW MEXICO                        87501
  (Address of principal executive offices)            (Zip Code)

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


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

Indicate  by  check  mark whether the Registrant (1) has filed all documents and
reports  required  to be filed by Section 13 or 15(d) of the Securities Exchange
Act  of 1934 during the preceding 12 months (or for such shorter period that the
Registrant  was required to file such reports), and (2) has been subject to such
filing  requirements  for  the  past  90  days.

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common  Stock  ($.01  par  value)     21,489,663  as  of  July  31,  2000

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<PAGE>
<TABLE>
<CAPTION>
                                  THORNBURG MORTGAGE, INC.
                                         FORM 10-Q


                                           INDEX

                                                                                        Page
                                                                                        ----
PART  I.       FINANCIAL  INFORMATION

<S>            <C>                                                                       <C>
Item 1.        Financial Statements

               Consolidated Balance Sheets at June 30, 2000 and December 31, 1999         3

               Consolidated Statements of Operations for the three and six months ended
                June 30, 2000 and June 30, 1999                                           4

               Consolidated Statement of Shareholders' Equity for the six months
                ended June 30, 2000 and June 30, 1999                                     5

               Consolidated Statements of Cash Flows for the three and six months ended
                June 30, 2000 and June 30, 1999                                           6

               Notes to Consolidated Financial Statements                                 7

Item 2.        Management's Discussion and Analysis of
               Financial Condition and Results of Operations                             18



PART II.       OTHER INFORMATION

Item 1.        Legal Proceedings                                                         37

Item 2.        Changes in Securities                                                     37

Item 3.        Defaults Upon Senior Securities                                           37

Item 4.        Submission of Matters to a Vote of Security Holders                       37

Item 5.        Other Information                                                         37

Item 6.        Exhibits and Reports on Form 8-K                                          37


SIGNATURES                                                                               38

EXHIBIT INDEX                                                                            39
</TABLE>


                                        2
<PAGE>
<TABLE>
<CAPTION>
PART  I.     FINANCIAL  INFORMATION

ITEM  1.     FINANCIAL  STATEMENTS

THORNBURG  MORTGAGE,  INC.  AND  SUBSIDIARIES


CONSOLIDATED  BALANCE  SHEETS
(Amounts  in  thousands)
                                                                   June 30, 2000   December 31, 1999
                                                                    (Unaudited)
                                                                    ------------  -------------------
<S>                                                                 <C>           <C>
ASSETS

     Adjustable-rate mortgage ("ARM") assets: (Notes 2 and 4)
          ARM securities                                            $ 3,292,151   $        3,391,467
          Collateral for collateralized notes                           700,449              903,529
          ARM loans held for securitization                              29,744               31,102
                                                                    ------------  -------------------
                                                                      4,022,344            4,326,098
                                                                    ------------  -------------------

     Cash and cash equivalents                                           34,381               10,234
     Accrued interest receivable                                         31,499               31,928
     Prepaid expenses and other                                           2,026                7,705
                                                                    ------------  -------------------
                                                                    $ 4,090,250   $        4,375,965
                                                                    ============  ===================
LIABILITIES

     Reverse repurchase agreements (Note 4)                         $ 3,077,228   $        3,022,511
     Collateralized notes payable (Note 4)                              686,242              886,722
     Other borrowings (Note 4)                                           18,408               21,289
     Payable for assets purchased                                             -              110,415
     Accrued interest payable                                            15,087               18,864
     Dividends payable (Note 6)                                           1,670                1,670
     Accrued expenses and other                                           3,047                3,607
                                                                    ------------  -------------------
                                                                      3,801,682            4,065,078
                                                                    ------------  -------------------
COMMITMENTS (Note 2)

SHAREHOLDERS' EQUITY (Note 6)

     Preferred stock:  par value $.01 per share; 2,760 shares
          authorized; 9.68% Cumulative Convertible Series A,
         2,760 and 2,760 issued and outstanding, respectively;
         aggregate preference in liquidation $69,000                     65,805               65,805
     Common stock:  par value $.01 per share; 47,240 shares
          authorized , 21,990 and 21,990 shares issued and 21,490
          and 21,490 outstanding, respectively                              220                  220
     Additional paid-in-capital                                         342,161              342,026
     Accumulated other comprehensive income (loss)                     (106,197)             (82,489)
     Notes receivable from stock sales                                   (4,632)              (4,632)
     Retained earnings (deficit)                                         (4,123)              (5,377)
     Treasury stock:  at cost, 500 and 500 shares, respectively          (4,666)              (4,666)
                                                                    ------------  -------------------
                                                                        288,568              310,887
                                                                    ------------  -------------------
                                                                    $ 4,090,250   $        4,375,965
                                                                    ============  ===================
</TABLE>

See  Notes  to  Consolidated  Financial  Statements.


                                        3
<PAGE>
<TABLE>
<CAPTION>
THORNBURG  MORTGAGE,  INC.  AND  SUBSIDIARIES

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

                                               Three Months Ended      Six Months Ended
                                                    June 30,               June 30,
                                                2000       1999        2000        1999
                                              ---------  ---------  ----------  ----------
<S>                                           <C>        <C>        <C>         <C>
Interest income from ARM assets and cash      $ 73,152   $ 63,087   $ 145,791   $ 122,732
Interest expense on borrowed funds             (64,400)   (54,015)   (127,722)   (107,094)
                                              ---------  ---------  ----------  ----------
     Net interest income                         8,752      9,072      18,069      15,638
                                              ---------  ---------  ----------  ----------

Gain on sale of ARM assets                          49         35          49          35
Provision for credit losses                       (381)      (689)       (713)     (1,375)
Management fee (Note 8)                         (1,033)    (1,020)     (2,057)     (2,038)
Performance fee (Note 8)                             -          -           -           -
Other operating expenses                          (420)      (364)       (868)       (627)
                                              ---------  ---------  ----------  ----------
     NET INCOME                               $  6,967   $  7,034   $  14,480   $  11,633
                                              =========  =========  ==========  ==========

Net income                                    $  6,967   $  7,034   $  14,480   $  11,633
Dividend on preferred stock                     (1,670)    (1,670)     (3,340)     (3,340)
                                              ---------  ---------  ----------  ----------

Net income available to common shareholders   $  5,297   $  5,364   $  11,140   $   8,293
                                              =========  =========  ==========  ==========
Basic earnings per share                      $   0.25   $   0.25   $    0.52   $    0.39
                                              =========  =========  ==========  ==========
Diluted earnings per share                    $   0.25   $   0.25   $    0.52   $    0.39
                                              =========  =========  ==========  ==========
Average number of common shares outstanding     21,490     21,490      21,490      21,490
                                              =========  =========  ==========  ==========
</TABLE>

See  Notes  to  Consolidated  Financial  Statements.


                                        4
<PAGE>
<TABLE>
<CAPTION>


THORNBURG  MORTGAGE,  INC.  AND  SUBSIDIARIES

CONSOLIDATED  STATEMENTS  OF  SHAREHOLDERS'  EQUITY  (UNAUDITED)

Six  Months  Ended  June  30,  2000  and  1999
(In  thousands,  except  share  data)

                                                                    Accum.     Notes
                                                                    Other      Receiv-                         Compre-
                                                       Additional   Compre-  able From  Retained               hensive
                                    Preferred  Common   Paid-in     hensive    Stock    Earnings/   Treasury   Income/
                                      Stock     Stock   Capital     Income     Sales    (Deficit)    Stock     (Loss)     Total
                                     --------  -------  --------  ----------  --------  ----------  --------  ---------  --------
<S>                                  <C>       <C>      <C>       <C>         <C>       <C>         <C>       <C>        <C>
Balance, December 31, 1998           $65,805   $   220  $341,756  $ (82,148)  $(4,632)  $  (4,512)  $(4,666)             $311,823
Comprehensive income:
 Net income                                                                                11,633              $11,633     11,633
 Other comprehensive income:
    Available-for-sale assets:
        Fair value adjustment, net
         of amortization                   -         -         -     19,131         -           -         -     19,131     19,131
     Deferred gain on sale of
        hedges, net of amortization        -         -         -       (425)        -           -         -       (425)      (425)
                                                                                                              ---------
 Other comprehensive income                                                                                    $30,339
                                                                                                              =========
Interest from notes receivable
    from stock sales                                         134                                                              134
Dividends declared on preferred
   stock - $1.21 per share                 -         -         -          -         -      (3,340)        -                (3,340)
Dividends declared on common
   stock - $0.46 per share                 -         -         -          -         -      (9,886)        -                (9,886)
                                     --------  -------  --------  ----------  --------  ----------  --------             --------
Balance, June 30, 1999               $65,805   $   220  $341,890  $ (63,442)  $(4,632)  $  (6,105)  $(4,666)             $329,070
                                     ========  =======  ========  ==========  ========  ==========  ========             =========

Balance, December 31, 1999           $65,805   $   220  $342,026  $ (82,489)  $(4,632)  $  (5,377)  $(4,666)             $310,887
Comprehensive income:
 Net income                                                                                14,480               $14,480    14,480
 Other comprehensive income:
    Available-for-sale assets:
       Fair value adjustment, net
       of amortization                     -         -         -    (23,254)        -           -         -    (23,254)   (23,254)
   Deferred gain on sale of
       hedges, net of amortization         -         -         -       (454)        -           -         -       (454)      (454)
                                                                                                              ---------
 Other comprehensive income                                                                                    $(9,228)
                                                                                                              =========
Interest from notes receivable
   from stock sales                                          135                                                              135
Dividends declared on preferred
   stock - $1.21 per share                 -         -         -          -         -      (3,340)        -                (3,340)
Dividends declared on common
   stock - $0.46 per share                 -         -         -          -         -      (9,886)        -                (9,886)
                                     --------  -------  --------  ----------  --------  ----------  --------             --------
Balance, June 30, 2000               $65,805   $   220  $342,161  $(106,197)  $(4,632)  $  (4,123)  $(4,666)             $288,568
                                     ========  =======  ========  ==========  ========  ==========  ========             =========
</TABLE>

See  Notes  to  Consolidated  Financial  Statements.


                                        5
<PAGE>
<TABLE>
<CAPTION>
THORNBURG  MORTGAGE,  INC.  AND  SUBSIDIARIES

CONSOLIDATED  STATEMENTS  OF  CASH  FLOWS  (UNAUDITED)
(In  thousands)
                                                                Three Months Ended       Six Months Ended
                                                                     June 30,                June 30,
                                                                 2000        1999        2000        1999
                                                              ----------  ----------  ----------  ----------
<S>                                                           <C>         <C>         <C>         <C>
Operating Activities:
  Net Income                                                  $   6,967   $   7,034   $  14,480   $  11,633
  Adjustments to reconcile net income to net
   cash provided by operating activities:
     Amortization                                                 3,998       8,976       9,215      19,772
     Net (gain) loss from investing activities                      332         654         663       1,340
     Change in assets and liabilities:
       Accrued interest receivable                                2,560      (2,982)        429       5,089
       Prepaid expenses and other                                  (391)     (2,081)      5,679      (5,601)
       Accrued interest payable                                     585       5,248      (3,777)    (14,898)
       Accrued expenses and other                                  (235)        805        (560)        336
                                                              ----------  ----------  ----------  ----------
         Net cash provided by operating activities               13,816      17,654      26,129      17,671
                                                              ----------  ----------  ----------  ----------

Investing Activities:
  Available-for-sale ARM securities:
     Purchases                                                  (26,090)   (839,360)   (424,807)   (939,067)
     Proceeds on sales                                           89,443       6,574      89,443       6,574
     Proceeds from calls                                              -       4,126           -       4,126
     Principal payments                                         163,139     241,161     312,722     579,621
Collateral for collateralized notes payable:
     Principal payments                                         155,757      62,515     201,398     135,773
  ARM loans:
     Purchases                                                  (17,267)          -     (19,996)          -
     Principal payments                                             903       1,476       1,532       6,568
  Purchase of interest rate cap agreements                          (91)       (441)       (539)     (1,910)
                                                              ----------  ----------  ----------  ----------
         Net cash provided by (used in) investing activities    365,794    (523,949)    159,753    (208,315)
                                                              ----------  ----------  ----------  ----------

Financing Activities:
  Net borrowings from (repayments of) reverse
  repurchase agreements                                        (226,581)    568,427      54,717     345,069
  Repayments of collateralized notes                           (155,277)    (62,581)   (200,480)   (137,333)
  Net borrowing from (repayments of) other borrowings             9,886        (602)     (2,881)       (685)
  Dividends paid                                                 (6,613)     (6,613)    (13,226)    (13,226)
  Interest from notes receivable from stock sales                    68          68         135         134
                                                              ----------  ----------  ----------  ----------
         Net cash provided by (used in) financing activities   (378,517)    498,699    (161,735)    193,959
                                                              ----------  ----------  ----------  ----------

Net increase (decrease) in cash and cash equivalents              1,093      (7,596)     24,147       3,315

Cash and cash equivalents at beginning of period                 33,288      47,342      10,234      36,431
                                                              ----------  ----------  ----------  ----------
Cash and cash equivalents at end of period                    $  34,381   $  39,746   $  34,381   $  39,746
                                                              ==========  ==========  ==========  ==========
</TABLE>

Supplemental  disclosure  of  cash  flow information and non-cash activities are
included  in  Note  4.

See  Notes  to  Consolidated  Financial  Statements


                                        6
<PAGE>
NOTES  TO  CONSOLIDATED  FINANCIAL  STATEMENTS

NOTE  1.     SIGNIFICANT  ACCOUNTING  POLICIES

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

     In the opinion of  management,  all  material  adjustments,  consisting  of
     normal recurring adjustments,  considered necessary for a fair presentation
     have been  included.  The operating  results for the quarter and six-months
     ended June 30, 2000 are not necessarily  indicative of the results that may
     be expected for the calendar year ending December 31, 2000.

     CASH AND CASH EQUIVALENTS

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

     BASIS OF PRESENTATION

          The  consolidated   financial   statements  include  the  accounts  of
          Thornburg   Mortgage,   Inc  (the  "Company")  and  its   wholly-owned
          bankruptcy  remote special  purpose  finance  subsidiaries,  Thornburg
          Mortgage   Funding   Corporation,    Thornburg   Mortgage   Acceptance
          Corporation  and Thornburg  Mortgage  Acceptance  Corporation  II. The
          Company  formed these entities in connection  with its  securitization
          and  whole  loan  financing  transactions  discussed  in Note  4.  All
          material  intercompany  accounts and  transactions  are  eliminated in
          consolidation.

     ADJUSTABLE-RATE MORTGAGE ASSETS

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

          Management has made the  determination  that all of its ARM securities
          should be designated as  available-for-sale in order to be prepared to
          respond to potential future  opportunities in the market,  to sell ARM
          securities  in order to optimize the  portfolio's  total return and to
          retain  its  ability  to respond  to  economic  conditions  that might
          require the Company to sell assets in order to maintain an appropriate
          level  of  liquidity.  Since  all ARM  securities  are  designated  as
          available-for-sale,  they are reported at fair value,  with unrealized
          gains and losses  excluded from  earnings and reported in  accumulated
          other  comprehensive  income as a separate  component of shareholders'
          equity.

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

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

          Premiums and discounts  associated with the purchase of the ARM assets
          are amortized into interest  income over the lives of the assets using
          the  effective  yield  method  adjusted  for the effects of  estimated
          prepayments.


                                        7
<PAGE>
          ARM asset  transactions  are  recorded  on the date the ARM assets are
          purchased or sold.  Purchases of new issue ARM  securities and all ARM
          loans are recorded when all  significant  uncertainties  regarding the
          characteristics  of the assets are removed  and, in the case of loans,
          underwriting  due  diligence  has been  completed,  generally  shortly
          before the  settlement  date.  Realized  gains and losses on ARM asset
          transactions are determined on the specific identification basis.

     CREDIT RISK

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

          The Company  monitors the  delinquencies  and losses on the underlying
          mortgage  loans backing its ARM assets.  If the credit  performance of
          the underlying mortgage loans is not as expected,  the Company makes a
          provision for probable credit losses at a level deemed  appropriate by
          management  to provide for known  losses as well as  estimated  losses
          inherent  in its ARM  assets  portfolio.  The  provision  is  based on
          management's assessment of numerous factors affecting its portfolio of
          ARM assets including, but not limited to, current economic conditions,
          delinquency status,  credit losses to date on underlying mortgages and
          remaining credit protection.  The provision for ARM securities is made
          by reducing the cost basis of the individual  security for the decline
          in fair value,  which is other than temporary,  and the amount of such
          write-down is recorded as a realized loss, thereby reducing earnings.

          The Company also makes a monthly provision for estimated credit losses
          on its portfolio of ARM loans, which is an increase to the reserve for
          possible loan losses.  The  provision  for estimated  credit losses on
          loans is based on loss  statistics  of the real  estate  industry  for
          similar loans,  taking into consideration  factors including,  but not
          limited  to,  underwriting  characteristics,   seasoning,   geographic
          location and current economic conditions.  When a loan or a portion of
          a loan  is  deemed  to be  uncollectible,  the  portion  deemed  to be
          uncollectible   is  charged   against  the   reserve  and   subsequent
          recoveries, if any, are credited to the reserve. Additionally,  once a
          loan is 90 days or more  delinquent,  the Company adjusts the value of
          the accrued interest  receivable to what it believes to be collectible
          and generally stops accruing interest on the loan.

          Credit losses on pools of loans that are held as collateral  for notes
          payable  are also  covered  by third  party  insurance  policies  that
          protect  the  Company  from credit  losses  above a  specified  level,
          limiting the Company's  exposure to credit  losses on such loans.  The
          Company makes a monthly provision for estimated credit losses on these
          loans  the same as it does for loans  that are not held as  collateral
          for notes payable,  except,  it takes into  consideration  its maximum
          exposure.

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


                                        8
<PAGE>
     DERIVATIVE FINANCIAL INSTRUMENTS

          INTEREST RATE CAP AGREEMENTS

          The  Company   purchases   interest  rate  cap  agreements  (the  "Cap
          Agreements")  to manage  interest rate risk. To date,  most of the Cap
          Agreements  purchased  limit the Company's  risks  associated with the
          lifetime  or  maximum  interest  rate  caps of its ARM  assets  should
          interest  rates  rise above  specified  levels.  These Cap  Agreements
          reduce the effect of the lifetime cap feature so that the yield on the
          ARM assets will continue to rise in high interest rate environments as
          the  Company's  cost of  borrowings  also continue to rise. In similar
          fashion,  the  Company  has  purchased  Cap  Agreements  to limit  the
          financing  rate of the  Hybrid  ARMs  during  their  fixed  rate term,
          generally  for three to ten years.  In general,  the cost of financing
          Hybrid  ARMs hedged  with Cap  Agreements  is capped at a rate that is
          0.75% to 1.00% below the fixed Hybrid ARM interest rate.

          All   Cap    Agreements    are   classified   as   a   hedge   against
          available-for-sale  assets or ARM loans and are  carried at their fair
          value  with  unrealized  gains  and  losses  reported  as  a  separate
          component  of equity.  The  carrying  value of the Cap  Agreements  is
          included in ARM securities on the balance sheet. The Company purchases
          Cap   Agreements   by  incurring  a  one-time  fee  or  premium.   The
          amortization of the premium paid for the Cap Agreements is included in
          interest income as a contra item (i.e., expense) and, as such, reduces
          interest income over the lives of the Cap Agreements.

          Realized gains and losses  resulting  from the  termination of the Cap
          Agreements  that were hedging  assets  classified as  held-to-maturity
          were deferred as an  adjustment  to the carrying  value of the related
          assets and are being  amortized into interest income over the terms of
          the  related  assets.  Realized  gains and losses  resulting  from the
          termination of Cap Agreements  that were hedging assets  classified as
          available-for-sale  were initially reported in a separate component of
          equity,  consistent  with  the  reporting  of  those  assets,  and are
          thereafter amortized as a yield adjustment.

          INTEREST RATE OPTIONS CONTRACTS

          The Company  purchases  interest rate futures  contracts (the "Options
          Contracts")  to manage  interest  rate risk in the same  manner as Cap
          Agreements.  To  date,  the  Options  Contracts  purchased  limit  the
          Company's risk associated  with the lifetime or maximum  interest rate
          caps of its ARM assets  should  interest  rates  rise above  specified
          levels.  These Options Contracts reduce the effect of the lifetime cap
          feature so that the yield on the ARM assets  will  continue to rise in
          high interest rate  environments  as the Company's  cost of borrowings
          also continue to rise.

          All   Options   Contracts   are   classified   as  a   hedge   against
          available-for-sale  assets or ARM loans and are  carried at their fair
          value  with  unrealized  gains  and  losses  reported  as  a  separate
          component of equity.  The carrying  value of the Options  Contracts is
          included in ARM securities on the balance sheet. The Company purchases
          Options  Contracts  by  incurring  a  one-time  fee  or  premium.  The
          amortization of the premium paid for the Options Contracts is included
          in  interest  income as a contra item  (i.e.,  expense)  and, as such,
          reduces interest income over the lives of the Options Contracts.

          INTEREST RATE SWAP AGREEMENTS

          The Company  enters into  interest  rate swap  agreements  in order to
          manage its interest rate exposure  when  financing its ARM assets.  In
          general,  swap  agreements  have been  utilized  by the Company in two
          ways. One way has been to use swap  agreements as a cost effective way
          to lengthen  the average  repricing  period of its  variable  rate and
          short-term  borrowings.  Additionally,  as the Company acquires Hybrid
          ARMs,  it also  enters  into swap  agreements  in order to manage  the
          interest rate repricing mismatch (the difference between the remaining
          duration  of a hybrid  and the  maturity  of the  borrowing  funding a
          Hybrid  ARM) to a  mismatched  duration of  approximately  one year or
          less. Revenues and expenses from the interest rate swap agreements are
          accounted for on an accrual basis and  recognized as a net  adjustment
          to interest expense.

          Realized  gains  and  losses   resulting  from  the   termination  and
          replacement of Swap Agreements,  are recorded as basis  adjustments to
          the  hedged  liabilities  and  are  thereafter  amortized  as a  yield
          adjustment  over  the  remaining  term  of the  Swap  Agreements.  The
          terminated and  replacement  Swap  Agreements  generally have the same
          terms and conditions  other than the fixed rate. The  amortization  of
          the


                                        9
<PAGE>
          realized  gains and losses as a yield  adjustment to the fixed rate of
          the replacement Swap Agreement results in approximately the same fixed
          cost between the  terminated  and  replacement  Swap  Agreements.  The
          Company  terminates  and replaces  Swap  Agreements  as an  additional
          source  of  liquidity  when  it is  able  to do so  while  maintaining
          compliance to its hedging policies.

          All Swap  Agreements are  classified as a liability  hedge against the
          Company's borrowings.  As a result, the unrealized gains and losses on
          Swap Agreements are off balance sheet and are reported in Note 5.

          OTHER HEDGING ACTIVITY

          The Company also enters into hedging  transactions  in connection with
          the purchase of Hybrid ARMs between the trade date and the  settlement
          date. Generally, the Company hedges the cost of obtaining future fixed
          rate financing by entering into a commitment to sell similar  duration
          fixed-rate  mortgage-backed  securities  ("MBS") on the trade date and
          settles the  commitment by purchasing  the same  fixed-rate MBS on the
          purchase date. Realized gains and losses are deferred and amortized as
          a yield adjustment over the fixed rate period of the financing.

     INCOME TAXES

          The Company has elected to be taxed as a Real Estate  Investment Trust
          ("REIT") and complies with the provisions of the Internal Revenue Code
          of 1986,  as amended (the "Code") with respect  thereto.  Accordingly,
          the Company will not be subject to Federal  income tax on that portion
          of its  income  that is  distributed  to  shareholders  and as long as
          certain asset, income and stock ownership tests are met.

     NET EARNINGS PER SHARE

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

          Following is  information  about the  computation  of the earnings per
          share data for the three and six month periods ended June 30, 2000 and
          1999 (amounts in thousands except per share data):

<TABLE>
<CAPTION>
                                                       Earnings
                                   Income    Shares    Per Share
                                  --------  ---------  ----------
<S>                               <C>       <C>        <C>

Three Months Ended June 30, 2000
--------------------------------
Net income                        $ 6,967

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

Basic EPS, income available to
 common shareholders                5,297      21,490  $     0.25
                                                       ==========

Effect of dilutive securities:

 Stock options                          -           -
                                  --------  ---------
Diluted EPS                       $ 5,297      21,490  $     0.25
                                  ========  =========  ==========

Three Months Ended June 30, 1999
--------------------------------
Net income                        $ 7,034

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

Basic EPS, income available to
 common stockholders                5,364      21,490  $     0.25
                                                       ==========

Effect of dilutive securities:

 Stock options                          -           7
                                  --------  ---------
Diluted EPS                       $ 5,364      21,497  $     0.25
                                  ========  =========  ==========


                                       10
<PAGE>
                                                       Earnings
                                   Income    Shares    Per Share
                                  --------  ---------  ----------
Six Months Ended June 30, 2000
--------------------------------
Net income                        $14,480

Less preferred stock dividends     (3,340)
                                  --------
Basic EPS, income available to
 common shareholders               11,140      21,490  $     0.52
                                                       ==========

Effect of dilutive securities:

 Stock options                          -           -
                                  --------  ---------
Diluted EPS                       $11,140      21,490  $     0.52
                                  ========  =========  ==========

Six Months Ended June 30, 1999
--------------------------------
Net income                        $11,633

Less preferred stock dividends     (3,340)
                                  --------
Basic EPS, income available to
 common stockholders                8,293      21,490  $     0.39
                                                       ==========
Effect of dilutive securities:

 Stock options                          -           2
                                  --------  ---------
Diluted EPS                       $ 8,293      21,492  $     0.39
                                  ========  =========  ==========
</TABLE>

          The Company  has  granted  options to  directors  and  officers of the
          Company and  employees of the Manager to purchase  200,022 and 141,779
          shares of common  stock at average  prices of $7.375 and  $9.0625  per
          share   during  the  six  months   ended  June  30,   2000  and  1999,
          respectively.  The  conversion of preferred  stock was not included in
          the computation of diluted EPS because such conversion  would increase
          the diluted EPS.

     RECENT ACCOUNTING PRONOUNCEMENTS

          In June 1998, the FASB issued SFAS No. 133,  Accounting for Derivative
          Instruments  and  Hedging  Activities.  SFAS  No.  133  established  a
          framework  of  accounting  rules  that   standardize   accounting  and
          reporting  for  all  derivative   instruments  and  is  effective  for
          financial  statements issued for fiscal years beginning after June 15,
          2000. The Statement requires that all derivative financial instruments
          be carried on the  balance  sheet at fair  value.  Currently  the only
          derivative  instruments that are not on the Company's balance sheet at
          fair  value are  interest  rate  swap  agreements.  The fair  value of
          interest  rate swap  agreements  is disclosed in Note 5, Fair Value of
          Financial  Instruments.  The Company believes that its use of interest
          rate swap  agreements  qualify as  cash-flow  hedges as defined in the
          statement.  Therefore,  the effective  hedge portion of the derivative
          instrument's   change  in  fair  value  will  be   recorded  in  other
          comprehensive  income and the ineffective  portion will be included in
          earnings when the Company adopts the statement in the first quarter of
          its fiscal 2001 year.

     USE OF ESTIMATES

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


                                       11
<PAGE>
NOTE  2.  ADJUSTABLE-RATE  MORTGAGE  ASSETS  AND  INTEREST  RATE  CAP AGREEMENTS

          The following  tables  present the Company's ARM assets as of June 30,
          2000  and  December  31,  1999.  The  ARM  securities   classified  as
          available-for-sale  are  carried  at their fair  value,  while the ARM
          loans are carried at their  amortized  cost basis  (dollar  amounts in
          thousands):

<TABLE>
<CAPTION>
June  30,  2000
                                  Available-
                                   for-Sale      Collateral for
                                ARM Securities    Notes Payable    ARM Loans       Total
                               ----------------  ---------------  -----------  -------------
<S>                            <C>               <C>              <C>          <C>
Principal balance outstanding  $     3,319,112   $      689,872   $   29,878   $  4,038,862
Net unamortized premium                 64,837           12,987          (18)        77,806
Deferred gain from hedging                (175)               -            -           (175)
Allowance for losses                    (2,217)          (2,670)        (116)        (5,003)
Cap Agreements/Options
  Contracts                              4,050              260            -          4,310
Principal payment receivable            13,152                -            -         13,152
                               ----------------  ---------------  -----------  -------------
  Amortized cost, net                3,398,759          700,449       29,744      4,128,952
                               ----------------  ---------------  -----------  -------------
Gross unrealized gains                   2,720               26           10          2,756
Gross unrealized losses               (109,328)         (12,688)        (194)      (122,210)
                               ----------------  ---------------  -----------  -------------
  Fair value                   $     3,292,151   $      687,787   $   29,560   $  4,009,498
                               ================  ===============  ===========  =============
  Carrying value               $     3,292,151   $      700,449   $   29,744   $  4,022,344
                               ================  ===============  ===========  =============

December 31, 1999:
                                  Available-
                                 for-Sale        Collateral for
                                ARM Securities    Notes Payable    ARM Loans        Total
                               ----------------  ---------------  -----------  -------------
Principal balance outstanding  $     3,388,160   $      890,701   $   31,649   $  4,310,510
Net unamortized premium                 70,409           14,045         (445)        84,009
Deferred gain from hedging                (351)               -            -           (351)
Allowance for losses                    (1,930)          (2,106)        (102)        (4,138)
Cap Agreements                           4,923              320            -          5,243
Principal payment receivable            13,610              569            -         14,179
                               ----------------  ---------------  -----------  -------------
  Amortized cost, net                3,474,821          903,529       31,102      4,409,452
                               ----------------  ---------------  -----------  -------------
Gross unrealized gains                   5,462               29           65          5,556
Gross unrealized losses                (88,816)         (13,165)        (170)      (102,151)
                               ----------------  ---------------  -----------  -------------
  Fair value                   $     3,391,467   $      890,393   $   30,997   $  4,312,857
                               ================  ===============  ===========  =============
  Carrying value               $     3,391,467   $      903,529   $   31,102   $  4,326,098
                               ================  ===============  ===========  =============
</TABLE>

          During the quarter  ended June 30,  2000,  the Company  re-securitized
          Other  Investment ARM securities with a par value of $94.0 million and
          a carrying  value of 89.4  million,  into a new series of  securities,
          $56.1  million of which was rated AAA, an  interest  only strip with a
          notional  balance of $45 million rated AAA, $11.7 million rated AA and
          the  remaining  $26.2  million  rated  below  AA.  As a  part  of  the
          re-securitization  transaction,  the Company sold the AAA and AA rated
          ARM  securities for a $49,000 gain and retained the AAA rated interest
          only strip and the other securities rated below AA. During the quarter
          ended June 30, 1999, the Company realized $35,000 in gains on the sale
          of $6.5 million of ARM securities. All of the ARM securities sold were
          classified as available-for-sale.

          During the first six  months of 2000,  in  accordance  with its credit
          policies,  the Company  provided for  estimated  credit  losses on the
          subordinated  classes  of  its  securitized  loans  in the  amount  of
          $135,000 and recorded a $578,000 provision for estimated credit losses
          on its loan portfolio, although no actual losses have been realized in
          the loan portfolio to date.


                                       12
<PAGE>
          The following tables summarize ARM loan delinquency  information as of
          June 30, 2000 and December 31, 1999 (dollar amounts in thousands):

<TABLE>
<CAPTION>
June  30,  2000
---------------
                                                  Percent of  Percent of
                             Loan        Loan         ARM      Total
Delinquency Status           Count      Balance    Loans (1)  Assets
------------------------  ----------  -----------  ---------  -------
<S>                       <C>         <C>          <C>        <C>
60 to 89 days                      5  $     1,238      0.11%    0.03%
90 days or more                    2        3,610      0.31     0.09
In foreclosure                     5        1,050      0.09     0.02
                          ----------  -----------  ---------  -------
                                  12  $     5,898      0.51%    0.14%
                          ==========  ===========  =========  =======

December 31, 1999
------------------------

                                                 Percent of  Percent of
                            Loan       Loan           ARM      Total
Delinquency Status          Count     Balance      Loans (1)  Assets
------------------------  ----------  -----------  ---------  -------
60 to 89 days                      1  $       110     0.01 %   0.00 %
90 days or more                    -            -         -        -
In foreclosure                    10        5,450     0.49     0.12
                          ----------  -----------  ---------  -------
                                  11  $     5,560     0.50 %   0.12 %
                          ==========  ===========  =========  =======
<FN>

          (1)  ARM loans  includes  loans that the Company has  securitized  and
               retained  first loss credit  exposure for total amounts of $1.148
               billion  and $1.108  billion at June 30,  2000 and  December  31,
               1999, respectively.
</TABLE>

          The  following  table  summarizes  the activity for the  allowance for
          losses on ARM  loans for the  quarters  ended  June 30,  2000 and 1999
          (dollar amounts in thousands):

                                           2000    1999
                                         ------  ------
                   Beginning balance     $2,208  $  804
                   Provision for losses     578     764
                   Charge-offs, net           -       -
                                         ------  ------
                   Ending balance        $2,786  $1,568
                                         ======  ======

          As of June 30, 2000,  the Company had  commitments  to purchase  $11.7
          million of ARM loans through its correspondent loan network.

          As of June 30, 2000,  the Company owned one real estate  property as a
          result of foreclosing on a delinquent loan in the aggregate  amount of
          $0.6 million, which is included in collateral for collateralized notes
          on the balance sheet. The Company believes that the above allowance is
          more than adequate to cover estimated losses from this property.

          The average  effective  yield on the ARM assets  owned was 6.92% as of
          June 30, 2000 and 6.38% as of December 31, 1999. The average effective
          yield is based on historical cost and includes the amortization of the
          net premium paid for the ARM assets and the Cap Agreements, the impact
          of ARM principal payment  receivables and the amortization of deferred
          gains from hedging activity.

          During the quarter ended June 30, 2000,  the Company began to purchase
          Interest Rate Options  Contracts as an  alternative  method of hedging
          the  lifetime  interest  rate cap of ARM assets.  Since these  Options
          Contracts  are purchased in  connection  with the Company's  policy to
          hedge the  lifetime  cap of ARM assets  along with the  Company's  Cap
          Agreements,  they are included in the discussion  about Cap Agreements
          below.

          As of June 30, 2000 and December 31, 1999,  the Company had  purchased
          Cap Agreements and Options Contracts with a remaining  notional amount
          of $2.752  billion  and $2.945  billion,  respectively.  The  notional
          amount of the Cap


                                       13
<PAGE>
          Agreements and Options  Contracts  purchased decline at a rate that is
          expected to  approximate  the  amortization  of the ARM assets.  Under
          these Cap Agreements and Options  Contracts,  the Company will receive
          cash payments  should the one-month,  three-month or six-month  London
          InterBank  Offer Rate  ("LIBOR")  increase above the contract rates of
          these hedging  instruments that range from 5.75% to 12.50% and average
          approximately 9.86%. Of the Cap Agreements and Options Contracts owned
          by the  Company as of June 30,  2000,  $118.6  million are hedging the
          cost of  financing  Hybrid  ARMs and $2.633  billion  are  hedging the
          lifetime  interest  rate cap of ARM assets.  The  Company's ARM assets
          portfolio had an average lifetime interest rate cap of 11.59%. The Cap
          Agreements and Options  Contracts had an average maturity of 2.5 years
          as of March 31, 2000. The initial aggregate notional amount of the Cap
          Agreements declines to approximately $2.407 billion over the period of
          the  agreements,  which expire  between 2000 and 2004. The Company has
          credit  risk  to  the  extent  that  the  counterparties  to  the  Cap
          Agreements do not perform their  obligations under the Cap Agreements.
          If one of the counterparties  does not perform,  the Company would not
          receive the cash to which it would  otherwise  be  entitled  under the
          conditions of the Cap Agreement. In order to mitigate this risk and to
          achieve  competitive   pricing,  the  Company  has  entered  into  Cap
          Agreements with six different counterparties,  five of which are rated
          AAA and one is rated  A,  but the  Company  has a  two-way  collateral
          agreement protecting its credit exposure with this counterparty.

NOTE  3.  AGREEMENT  TO  PURCHASE  FASLA  HOLDING  COMPANY

          On December  23, 1999,  the Company and  Thornburg  Mortgage  Advisory
          Corporation  (the  "Manager")  entered  into an  agreement to purchase
          FASLA  Holding  Company,  whose  principal  holding  is First  Arizona
          Savings,  a privately held  Phoenix-based  federally  chartered thrift
          institution  with  six  retail  branch  offices  and,  at  that  time,
          approximately  $138  million  in assets  for $15  million,  subject to
          certain   adjustments.   The  acquisition  is  subject  to  regulatory
          approval,  which is expected to be received by the end of 2000. Due to
          ownership  restrictions  in the  current  IRS tax code  applicable  to
          REITs, the purchase has been structured such that the Company will pay
          95% of the purchase price for preferred stock of FASLA Holding Company
          which will  represent  95% of the economic  interests in FASLA Holding
          Company and the Manager will pay 5% of the  purchase  price for common
          shares of FASLA Holding  Company which will be voting shares that will
          represent 5% of the economic value of FASLA Holding  Company.  In this
          structure,  FASLA Holding Company would be an  unconsolidated  taxable
          subsidiary of the Company. During 1999, legislation was enacted by the
          U.S.  Congress,  effective  January 1, 2001, that will permit REITs to
          have 100%  ownership in  qualified  taxable  subsidiaries,  subject to
          certain limitations,  that would permit the Company and the Manager to
          alter this  structure  such that FASLA  Holding  Company  may become a
          wholly-owned  taxable  subsidiary  of the  Company,  consolidated  for
          financial reporting purposes.

NOTE 4. REVERSE REPURCHASE  AGREEMENTS,  COLLATERALIZED  NOTES PAYABLE AND OTHER
BORROWINGS

          The Company has entered into reverse repurchase  agreements to finance
          most  of  its  ARM  assets.  The  reverse  repurchase  agreements  are
          short-term  borrowings  that are  secured by the  market  value of the
          Company's  ARM assets and bear interest  rates that have  historically
          moved in close relationship to LIBOR.

          As of June 30, 2000,  the Company had  outstanding  $3.077  billion of
          reverse  repurchase  agreements with a weighted average borrowing rate
          of 6.78% and a weighted average  remaining  maturity of 4.5 months. As
          of June 30, 2000,  $2.133  billion of the  Company's  borrowings  were
          variable-rate  term  reverse   repurchase   agreements  with  original
          maturities  that range from six months to twelve months.  The interest
          rates of these  term  reverse  repurchase  agreements  are  indexed to
          either the one- or three-month LIBOR rate and reprice accordingly. The
          reverse repurchase  agreements at June 30, 2000 were collateralized by
          ARM assets with a carrying value of $3.273 billion,  including accrued
          interest.

          At June 30, 2000, the reverse repurchase  agreements had the following
          remaining maturities (dollar amounts in thousands):


                   Within 30 days      $1,138,271
                   31 to 89 days          641,694
                   90 days or greater   1,297,263
                                       ----------
                                       $3,077,228
                                       ==========


                                       14
<PAGE>
          As of June 30,  2000,  the Company  had entered  into three whole loan
          financing facilities. One of the whole loan financing facilities has a
          committed  borrowing  capacity  of $150  million,  with an  option  to
          increase this amount to $300 million. This facility matures in January
          2001.  During the first  quarter of 2000,  the Company  entered into a
          second  committed  whole  loan  financing  facility  that  also  has a
          borrowing  capacity of $150 million.  This second  committed  facility
          matures in March of 2003, subject to an annual review and extension by
          both  parties.  The third  facility  is for an  unspecified  amount of
          uncommitted  borrowing  capacity and does not have a specific maturity
          date.  As of June 30,  2000,  the Company had $18.4  million  borrowed
          against these whole loan financing  facilities at an effective cost of
          6.63%.  The amount borrowed on the whole loan financing  agreements at
          June 30, 2000 was collateralized by ARM loans with a carrying value of
          $19.1 million, including accrued interest.

          The whole  loan  financing  facility  entered  into  during  the first
          quarter of 2000,  discussed above, is a securitization  transaction in
          which the Company  transfers  groups of whole loans to a  wholly-owned
          bankruptcy remote special purpose  subsidiary.  The subsidiary in turn
          simultaneously  transfers  its  interest in the loans to a trust which
          issues  beneficial  interests in the loans in the form of a note and a
          subordinated  certificate,   which  are  then  used  to  collateralize
          borrowings.

          On December 18, 1998, the Company,  through a wholly-owned  bankruptcy
          remote special  purpose finance  subsidiary,  issued $1.144 billion of
          notes  payable   ("Notes")   collateralized   by  ARM  loans  and  ARM
          securities.  As  part  of  this  transaction,   the  Company  retained
          ownership  of a  subordinated  certificate  in  the  amount  of  $32.4
          million,  which  represents the Company's  maximum  exposure to credit
          losses on the loans  collateralizing  the Notes.  As of June 30, 2000,
          the Notes had a net balance of $686.2 million,  an effective  interest
          cost of 7.49%,  which  changes  each  month at a spread  to  one-month
          LIBOR.  As of June 30, 2000,  these Notes were  collateralized  by ARM
          loans with a principal  balance of $722.1  million.  The ARM  security
          that previously collateralized these Notes paid off during the quarter
          ended June 30,  2000.  The Notes  mature on January  25,  2029 and are
          callable  by the  Company  at par once  the  balance  of the  Notes is
          reduced  to 25% of their  original  balance.  In  connection  with the
          issuance and  modification of the Notes, the Company incurred costs of
          approximately $6.0 million, which is being amortized over the expected
          life of the  Notes.  Since the  Notes are paid down as the  collateral
          pays down,  the  amortization  of the  issuance  cost will be adjusted
          periodically  based on actual  payment  experience.  If the collateral
          pays down faster than currently  estimated,  then the  amortization of
          the issuance cost will  increase and the  effective  cost of the Notes
          will increase and, conversely, if the collateral pays down slower than
          currently  estimated,  then the  amortization of issuance cost will be
          decreased and the effective cost of the Notes will also decrease.

          As of June 30,  2000,  the  Company  was a  counterparty  to  nineteen
          interest rate swap agreements  ("Swaps") having an aggregate  notional
          balance of $610.6  million.  As of June 30,  2000,  these  Swaps had a
          weighted average remaining term of 2.6 years. In accordance with these
          Swaps,  the Company will pay a fixed rate of interest  during the term
          of these Swaps and  receive a payment  that  varies  monthly  with the
          one-month LIBOR rate. As a result of entering into these Swaps and the
          Cap  Agreements  that also hedge the fixed rate period of Hybrid ARMs,
          the Company has reduced the interest rate  variability  of its cost to
          finance its ARM assets by increasing the average period until the next
          repricing  of its  borrowings  from 31 days to 213 days.  All of these
          Swaps were entered into in connection  with the Company's  acquisition
          of Hybrid  ARMs.  The Swaps  hedge the cost of  financing  Hybrid ARMs
          during their fixed rate term, generally three to ten years. Due to the
          favorable  market value of the Swaps at June 30,  2000,  they were not
          collateralized by any ARM assets.

          The total cash paid for interest was $62.8  million and $48.2  million
          during the quarters ended June 30, 2000 and 1999, respectively.


                                       15
<PAGE>
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 June 30, 2000 and
          December 31, 1999.  FASB  Statement  No. 107,  Disclosures  About Fair
          Value of Financial Instruments,  defines the fair value of a financial
          instrument as the amount at which the instrument could be exchanged in
          a current transaction between willing parties,  other than in a forced
          or liquidation sale (dollar amounts in thousands):

<TABLE>
<CAPTION>
                                    June 30, 2000          December 31, 1999
                                -----------------------  -----------------------
                                 Carrying      Fair       Carrying      Fair
                                  Amount       Value       Amount       Value
                                ----------  -----------  ----------  -----------
<S>                             <C>         <C>          <C>         <C>
Assets:
 ARM assets                     $4,016,734  $4,003,888   $4,318,301  $4,305,060
Cap Agreements/Options
 Contracts                           5,610       5,610        7,797       7,797

Liabilities:
 Collateralized notes payable      686,242     687,054      886,722     889,305
 Other borrowings                   18,408      18,408       21,289      21,289
 Swap agreements                     8,544      (5,958)         749     (11,527)
</TABLE>

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

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

          The  Company's  transactions  in  interest  rate swap  agreements  and
          hedging   activity  using   commitments  to  sell  securities   create
          off-balance  -sheet risk. These instruments  involve market and credit
          risk that is not recognized on the balance  sheet.  The principal risk
          related to the swap agreements is the possibility  that a counterparty
          to the  agreement  may be unable or unwilling to meet the terms of the
          agreement. With respect to commitments to sell securities,  there is a
          risk  that  the  change  in the  value  of the  hedged  item  may  not
          substantially  offset the change in the value of the  commitment.  The
          Company  reduces  counterparty  risk  by  dealing  only  with  several
          experienced  counterparties  with AA or  better  credit  ratings  or a
          two-way collateral agreement is required.

NOTE  6.  COMMON  AND  PREFERRED  STOCK

          On July 13,  1998,  the Board of  Directors  approved  a common  stock
          repurchase program of up to 500,000 shares at prices below book value,
          subject to  availability  of shares and other  market  conditions.  On
          September  18, 1998,  the Board of Directors  expanded this program by
          approving the repurchase of up to an additional  500,000  shares.  The
          Company did not  repurchase  any shares of its common stock under this
          program during the quarter or six-month period ended June 30, 2000. To
          date, the company has repurchased 500,016 at an average price of $9.28
          per share.


                                       16
<PAGE>
          On April  17,  2000,  the  Company  declared  the first  quarter  2000
          dividend of $0.23 per common share,  which was paid on May 17, 2000 to
          common shareholders of record as of May 4, 2000.

          On July 18,  2000,  the  Company  declared  the  second  quarter  2000
          dividend of $0.23 per common  share,  which will be paid on August 17,
          2000 to common shareholders of record as of August 4, 2000.

          On June 15, 2000, the Company  declared a second  quarter  dividend of
          $0.605 per share to the  shareholders of the Series A 9.68% Cumulative
          Convertible  Preferred  Stock  which was also paid on July 10, 2000 to
          preferred shareholders of record as of June 30, 2000.

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

NOTE  7.  STOCK  OPTION  PLAN

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

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

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

          During the quarter ended June 30, 2000,  there were 200,022 options to
          buy common shares and 210,000 DERs granted.  As of June 30, 2000,  the
          Company had 999,495  options  outstanding at exercise prices of $7.375
          to $22.625 per share, 676,828 of which were exercisable.  The weighted
          average  exercise  price of the  options  outstanding  was  $13.80 per
          share. As of the June 30, 2000,  there were 377,675 DERs  outstanding,
          of  which  349,514  were  vested,  and  24,734  PSRs  outstanding.  In
          addition, the Company recorded an expense associated with the DERs and
          the PSRs of $28,000 and  $46,000  for the three and six month  periods
          ended June 30,  2000,  respectively  and for the same  amounts for the
          three and six month periods ended June 30, 1999, respectively.

          Notes  receivable  from stock sales  result  from the Company  selling
          shares of common stock through the exercise of stock options partially
          for  consideration  for notes  receivable.  The notes  have  remaining
          maturity terms ranging from 6.5 year to 6.75 years and accrue interest
          at rates that range from 5.47% to 6.00% per annum.  In  addition,  the
          notes are full recourse  promissory  notes and are secured by a pledge
          of the  shares  of the  Common  Stock  acquired.  Interest,  which  is
          credited to  paid-in-capital,  is payable quarterly,  with the balance
          due at the  maturity  of the notes.  The  payment of the notes will be
          accelerated  only upon the sale of the shares of Common Stock  pledged
          for the  notes.  The notes may be prepaid at any time at the option of
          each borrower.  As of June 30, 2000,  there were $4.6 million of notes
          receivable from stock sales outstanding.


                                       17
<PAGE>
NOTE  8.  TRANSACTIONS  WITH  AFFILIATES

          The Company has a  Management  Agreement  (the  "Agreement")  with the
          Manager.  Under the terms of this Agreement,  the Manager,  subject to
          the  supervision of the Company's  Board of Directors,  is responsible
          for the  management  of the  day-to-day  operations of the Company and
          provides all personnel and office space. The Agreement provides for an
          annual review by the unaffiliated  directors of the Board of Directors
          of the Manager's performance under the Agreement.

          The Company  pays the Manager an annual base  management  fee based on
          average  shareholders'  equity,  adjusted for liabilities that are not
          incurred to finance assets ("Average Shareholders' Equity" or "Average
          Net Invested  Assets" as defined in the Agreement)  payable monthly in
          arrears  as  follows:  1.1%  of the  first  $300  million  of  Average
          Shareholders'  Equity, plus 0.8% of Average Shareholders' Equity above
          $300  million.  In addition,  during  1999,  the two wholly owned REIT
          qualified subsidiaries of the Company entered into separate Management
          Agreements with the Manager for additional  management  services for a
          combined amount of $1,250 per calendar quarter, paid in arrears.

          For the  quarters  ended June 30, 2000 and 1999,  the Company paid the
          Manager  $1,033,000 and $1,020,000,  respectively,  in base management
          fees in accordance with the terms of the Agreement.  For the six month
          periods  ended June 30, 2000 and 1999,  the  Company  paid the Manager
          base management fees of $2,057,000 and $2,038,000, respectively.

          The Manager is also entitled to earn performance based compensation in
          an amount equal to 20% of the Company's annualized net income,  before
          performance based  compensation,  above an annualized Return on Equity
          equal to the ten year U.S.  Treasury Rate plus 1%. For purposes of the
          performance fee calculation,  equity is generally  defined as proceeds
          from issuance of common stock before underwriter's  discount and other
          costs of  issuance,  plus  retained  earnings.  For the  quarters  and
          six-month  periods  ended June 30, 2000 and 1999,  the Company did not
          pay  the  Manager  any  performance  based  compensation  because  the
          Company's net income, as measured by Return on Equity,  did not exceed
          the ten year U.S. Treasury Rate plus 1%.

          Beginning in August 1999,  the Company's  wholly owned REIT  qualified
          subsidiaries  entered into separate lease  agreements with the Manager
          for office space in Santa Fe. During the quarter and six-month  period
          ended June 30, 2000,  the combined  amount of rent paid to the Manager
          was $10,000 and $16,000, respectively.

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

Certain  information  contained in this Quarterly Report on Form 10-Q constitute
"Forward-Looking Statements" within the meaning of Section 27A of the Securities
Act  of  1933,  as  amended,  and  Section 21E of the Exchange Act, which can be
identified  by  the  use  of  forward-looking terminology such as "may," "will,"
"expect,"  "anticipate,"  "estimate,"  or "continue" or the negatives thereof or
other  variations  thereon  or  comparable terminology.  Investors are cautioned
that  all  forward-looking statements involve risks and uncertainties including,
but  not  limited  to,  risks  related  to  the future level and relationship of
various  interest  rates,  prepayment rates and the timing of new programs.  The
statements  in the "Risk Factors" section of the Company's 1999 Annual Report on
Form  10-K  on  page  17  constitute cautionary statements identifying important
factors,  including  certain  risks  and  uncertainties,  with  respect  to such
forward-looking  statements  that could cause the actual results, performance or
achievements  of  the  Company to differ materially from those reflected in such
forward-looking  statements.

GENERAL
-------

Thornburg  Mortgage, Inc., including subsidiaries, (the "Company") is a mortgage
acquisition  company  that primarily invests in adjustable-rate mortgage ("ARM")
assets  comprised  of ARM securities and ARM loans, thereby indirectly providing
capital  to  the  single-family  residential  housing  market.  ARM  securities
represent  interests  in  pools  of ARM loans, which often include guarantees or
other  credit enhancements against losses from loan defaults.  While the Company
is  not  a  bank  or savings and loan, its business purpose, strategy, method of
operation  and  risk  profile  are  best  understood  in  comparison  to  such


                                       18
<PAGE>
institutions.  The  Company  leverages  its equity capital using borrowed funds,
invests  in  ARM  assets  and  seeks  to generate income based on the difference
between  the  yield  on its ARM assets portfolio and the cost of its borrowings.
The corporate structure of the Company differs from most lending institutions in
that the Company is organized for tax purposes as a real estate investment trust
("REIT")  and  therefore  generally  passes  through  substantially  all  of its
earnings  to  shareholders  without  paying  federal  or state income tax at the
corporate  level.  The  Company  has  three REIT qualified subsidiaries that are
involved  in  financing  its  mortgage  loan  assets.  The  three  financing
subsidiaries,  Thornburg  Mortgage  Funding  Corporation,  Thornburg  Mortgage
Acceptance  Corporation  and  Thornburg  Mortgage Acceptance Corporation II, are
consolidated  in  the  Company's  financial statements and federal and state tax
returns.  In 1999, the Company formed a new REIT qualified subsidiary, Thornburg
Mortgage Home Loans, Inc. ("TMHL"), to originate loans for the Company according
to  the  Company's  underwriting  guidelines.  This  subsidiary received its HUD
license  during  the  second  quarter  of  2000  and will commence marketing and
originating  ARM  loans  for the Company's portfolio during the third quarter of
2000.

The  Company's  mortgage  assets  portfolio  may  consist  of  either  agency or
privately  issued  securities  (generally  publicly  registered)  mortgage
pass-through  securities,  multiclass  pass-through  securities,  collateralized
mortgage  obligations  ("CMOs"),  collateralized  bond  obligations  ("CBOs"),
generally  backed  by high quality mortgage backed securities, ARM loans, Hybrid
ARMs  or  short-term  investments  that either mature within one year or have an
interest  rate that reprices within one year.  Hybrid ARM assets ("Hybrid ARMs")
are  included  in  the  Company's  references  to  ARM securities and ARM loans.
Hybrid  ARMs  are typically 30-year loans that have a fixed rate of interest for
an  initial  period,  generally  3  to  10  years,  and  then  convert  to  an
adjustable-rate for the balance of the term of the Hybrid ARM.  The Company will
not  invest  more  than  30% of its ARM assets in Hybrid ARMs and will limit its
interest  rate  repricing  mismatch  (the  difference  between  the  remaining
fixed-rate  period  of a Hybrid ARM and the maturity of the fixed-rate liability
funding  a Hybrid ARM) to a duration of no more than one year.  Hybrid ARMs with
fixed-rate  periods  greater than five years are further limited to no more than
10%  of  the  Company's  ARM  assets.

On  July  18,  2000,  the  Company's  Board  of Directors modified the Company's
investment policy to allow for the origination of fixed-rate loans with up to 30
year terms by the Company's subsidiary, TMHL, to be held for the purpose of sale
only  and  not  for  investment  portfolio  purposes.  This  modification of the
Company's  investment policy to include fixed-rate loans will give the Company's
lending  programs  the ability to offer a more complete line of residential loan
products.  The  Company intends to hedge its pipeline of fixed rate loans and to
sell  them  on  a  regular  basis pursuant to implementing its low risk business
plan.  The  Company  does not believe that this modification, as directed by the
Company's  Board  of Directors, will materially affect the Company's exposure to
interest  rate  risk  or  credit  risk.

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

     (1)  securities that are unrated but are guaranteed by the U.S.  Government
          or issued or guaranteed by an agency of the U.S. Government;
     (2)  securities  which  are  rated  within  one of the two  highest  rating
          categories  by at least one of  either  Standard  & Poor's or  Moody's
          Investors Service, Inc. (the "Rating Agencies"); or
     (3)  securities that are unrated or whose ratings have not been updated but
          are determined to be of comparable quality (by the rating standards of
          at least one of the Rating  Agencies) to a High Quality rated mortgage
          security, as determined by the Manager (as defined below) and approved
          by the Company's Board of Directors; or
     (4)  the  portion of ARM or hybrid  loans that have been  deposited  into a
          trust and have  received a credit rating of AA or better from at least
          one Rating Agency.

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

     (1)  adjustable or variable  rate  pass-through  certificates,  multi-class
          pass-through  certificates  or CMOs backed by loans on  single-family,
          multi-family,  commercial or other real  estate-related  properties so
          long as they  are  rated  at  least  Investment  Grade  at the time of
          purchase.  "Investment Grade" generally means a security rating of BBB
          or Baa or better by at least one of the Rating Agencies;
     (2)  ARM  loans  secured  by  first  liens  on  single-family   residential
          properties,  generally  underwritten  to "A"  quality  standards,  and
          acquired for the purpose of future  securitization (see description of
          "A"  quality in  "Portfolio  of  Mortgage  Assets - ARM and Hybrid ARM
          Loans");
     (3)  real  estate  properties  acquired as a result of  foreclosing  on the
          Company's ARM loans;


                                       19
<PAGE>
     (4)  a limited amount,  currently $70 million as authorized by the Board of
          Directors,  of less than  investment  grade classes of ARM  securities
          that are created as a result of the  Company's  loan  acquisition  and
          securitization efforts; or
     (5)  fixed rate loans secured by first liens on  single-family  residential
          properties held for sale.

Since  inception,  the  Company  has generally invested less than 15%, currently
approximately  3%,  of  its  total  assets in Other Investment assets, excluding
loans  held for securitization.  Despite the generally higher yield, the Company
does  not  expect  to  significantly increase its investment in Other Investment
securities.  This is primarily due to the difficulty of financing such assets at
reasonable  financing  terms  and  values  through  all  economic  cycles.

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

Acquisition  of  FASLA  Holding  Company

On  December  23, 1999, the Company and the Manager entered into an agreement to
purchase  FASLA  Holding  Company,  whose  principal  holding  is  First Arizona
Savings,  a  privately held Phoenix-based federally chartered thrift institution
with  six  retail branch offices and, at that time, $138 million in assets.  The
cash  purchase  price  is  $15  million,  subject  to  certain adjustments.  The
acquisition  is subject to regulatory approval, which is expected to be received
by  the  end  of  2000.

The  primary  purpose  of  this  acquisition  is  to  obtain  nationwide lending
authority  in  order to expand the Company's acquisition channels for ARM loans.
The Company intends to initiate a mortgage banking division within First Arizona
Savings  that  would  originate  loans  for  sale to the Company, based upon the
Company's underwriting standards and ARM product design.  It is also likely that
other  standard  loan  products, including fixed-rate loans, would be originated
and sold to third party investors.  The Company expects to avoid establishing an
expensive  infrastructure involving substantial fixed costs generally associated
with  starting  up  and operating a mortgage banking operation by utilizing "fee
based"  third-party  vendors  who specialize in private label loan underwriting,
application  processing  and  loan  closing,  and by utilizing a sub-servicer to
service  the  loans  originated.  The Company believes these third-party service
providers  have developed both efficiencies and expertise through specialization
that  afford  the  Company  an  opportunity  to  enter  this  business in a cost
effective  manner  with  very  little  initial  capital  investment.

The  Company  also expects to continue operating First Arizona Savings as a full
service  community  bank  within  its current local market areas.  First Arizona
Savings has traditionally been an originator of single-family residential loans,
both  permanent  and  construction,  based  on  underwriting  standards that are
similar to the Company's and has generally retained ARM and Hybrid ARM loans for
its  portfolio  and  has  sold  a  significant percentage of its fixed-rate loan
production  to  FHLMC.  First  Arizona's primary source of funds has been retail
deposits  and  a limited amount of Federal Home Loan Bank advances.  The Company
believes  its  acquisition  and  operation  of First Arizona in this manner is a
consistent  extension  of  the Company's existing business model that emphasizes
high  credit  quality  lending  and  prudent  interest  rate  risk  management.

Due  to  the  uncertainty of receiving regulatory approval and the timing of the
regulatory  decision,  the Company does not believe this acquisition will have a
material  effect  on the Company's operations during 2000.  Further, the Company
believes  that  the combination of First Arizona's existing community-bank style
of operations and the projected mortgage banking operations will have a positive
effect  on  the  Company's  overall  operations  beginning  in  2001.

FINANCIAL  CONDITION
--------------------

At  June  30,  2000,  the  Company  held  total assets of $4.090 billion, $4.022
billion  of  which  consisted  of  ARM assets, as compared to $4.376 billion and
$4.326  billion,  respectively,  at  December  31,  1999.  Since  commencing
operations,  the Company has purchased either ARM securities (backed by agencies
of  the  U.S.  government  or  privately-issued,  generally publicly registered,
mortgage  assets,  most  of  which are rated AA or higher by at least one of the
Rating  Agencies)  or ARM loans generally originated to "A" quality underwriting
standards.  At June 30, 2000, 96.9% of the assets held by the Company, including
cash and cash equivalents, were High Quality assets, far exceeding the Company's
investment  policy  minimum  requirement  of investing at least 70% of its total


                                       20
<PAGE>
assets  in  High  Quality  ARM assets and cash and cash equivalents.  Of the ARM
assets  currently owned by the Company, 85.2% are in the form of adjustable-rate
pass-through certificates or ARM loans.  The remainder are floating rate classes
of  CMOs  (11.1%)  or investments in floating rate classes of CBOs (3.7%) backed
primarily  by  ARM  mortgaged-backed  securities.

The following table presents a schedule of ARM assets owned at June 30, 2000 and
December  31,  1999  classified  by High Quality and Other Investment assets and
further  classified  by  type  of  issuer  and  by  ratings  categories.

<TABLE>
<CAPTION>
                         ARM ASSETS BY ISSUER AND CREDIT RATING
                             (Dollar amounts in thousands)

                                  June 30, 2000         December 31, 1999
                              ----------------------  ----------------------
                               Carrying   Portfolio    Carrying   Portfolio
                                Value        Mix        Value        Mix
                              ----------  ----------  ----------  ----------
<S>                           <C>         <C>         <C>         <C>
HIGH QUALITY:
  FHLMC/FNMA                  $2,024,194       50.3%  $2,068,152       47.8%
    Privately Issued:
    AAA/Aaa Rating             1,539,138(1)    38.3    1,585,099(1)     36.6
    AA/Aa Rating                 305,233        7.6      459,858       10.6
                              ----------  ----------  ----------  ----------
      Total Privately Issued   1,844,371       45.9    2,044,957       47.2
                              ----------  ----------  ----------  ----------
      Total High Quality       3,868,565       96.2    4,113,109       95.0
                              ----------  ----------  ----------  ----------

OTHER INVESTMENT:
  Privately Issued:
    A Rating                      14,310        0.4       49,995        1.2
    BBB/Baa Rating                69,919        1.7       84,929        2.0
    BB/Ba Rating or below         39,806(1)     1.0       46,963(1)     1.1
  Whole loans                     29,744        0.7       31,102        0.7
                              ----------  ----------  ----------  ----------
      Total Other Investment     153,779        3.8      212,989        5.0
                              ----------  ----------  ----------  ----------

      Total ARM Portfolio     $4,022,344      100.0%  $4,326,098      100.0%
                              ==========  ==========  ==========  ==========
<FN>
----------------
(1)  AAA Rating  category  includes $722.1 million and $781.8 million as of June
     30, 2000 and December 31, 1999,  respectively,  of ARM loans that have been
     credit  enhanced to AAA by a combination of an insurance  policy  purchased
     from a third-party and an unrated subordinated  certificate retained by the
     Company in the  amount of $32.1  million  and $32.2  million as of June 30,
     2000 and December 31, 1999,  respectively.  The subordinated certificate is
     included in the BB/Ba Rating category.
</TABLE>

As  of  March  31,  2000,  the  Company  had  reduced  the cost basis of its ARM
securities  by  $2,217,000  due to estimated credit losses (other than temporary
declines  in fair value).  The estimated credit losses for ARM securities relate
to  Other  Investments that the Company purchased at a discount that included an
estimate  of credit losses and to loans that the Company has securitized for its
own  portfolio.  Additionally,  during  the  six  months ended June 30, 2000, in
accordance  with  its credit policies, the Company provided for estimated credit
losses  on  the  subordinated  classes of its securitized loans in the amount of
$135,000  and  recorded  a $578,000 provision for estimated credit losses on its
loan  portfolio,  although  no  actual  losses  have  been  realized in the loan
portfolio  to  date.  As  of  June  30,  2000,  the Company's ARM loan portfolio
included  12  loans  that  are  considered seriously delinquent (60 days or more
delinquent)  with  an aggregate balance of $5.9 million.  The ARM loan portfolio
also  includes one property ("REO") that the Company acquired as the result of a
foreclosure  process  in  the  amount  of  $0.6  million.  The  average original
effective  loan-to-value  ratio  on  these  12  delinquent  loans  and  REO  is
approximately  62%.  As  of  June  30,  2000,  the  Company  had $2.8 million of
reserves  for  estimated  credit  losses.  The  Company  believes  this level of
reserves  is  adequate  to  cover  estimated  losses  from  these  loans and REO
properties.  The  Company's  credit  reserve  policy  regarding  ARM loans is to
record  a  provision  based  on  the  outstanding  principal  balance  of  loans
(including  loans  securitized by the Company for which the Company has retained
first  loss  exposure), subject to adjustment on certain loans or pools of loans
based  upon  factors  such  as,  but  not limited to, age of the loans, borrower
payment  history,  low loan-to-value ratios, historical loss experience, current
economic  conditions  and  quality  of  underwriting  standards  applied  by the
originator.


                                       21
<PAGE>
The  following table classifies the Company's portfolio of ARM assets by type of
interest  rate  index.

<TABLE>
<CAPTION>
                               ARM ASSETS BY INDEX
                          (Dollar amounts in thousands)

                                              June 30, 2000     December 31, 1999
                                           ------------------  ------------------
                                            Carrying  Portfolio Carrying  Portfolio
                                             Value      Mix      Value      Mix
                                           ----------  ------  ----------  ------
<S>                                        <C>         <C>     <C>         <C>
ARM ASSETS:
    INDEX:
     One-month LIBOR                       $  690,742   17.2%  $  680,449   15.7%
     Three-month LIBOR                        149,831    3.7      170,384    3.9
     Six-month LIBOR                          516,335   12.8      626,616   14.5
     Six-month Certificate of Deposit         272,093    6.8      304,621    7.0
     Six-month Constant Maturity Treasury      24,764    0.6       37,781    0.9
     One-year Constant Maturity Treasury    1,200,163   29.8    1,359,229   31.4
     Cost of Funds                            183,550    4.6      213,800    5.0
                                           ----------  ------  ----------  ------
                                            3,037,478   75.5    3,392,880   78.4
                                           ----------  ------  ----------  ------

HYBRID ARM ASSETS                             984,866   24.5      933,218   21.6
                                           ----------  ------  ----------  ------
                                           $4,022,344  100.0%  $4,326,098  100.0%
                                           ==========  ======  ==========  ======
</TABLE>

The  ARM  portfolio  had  a current weighted average coupon of 7.48% at June 30,
2000.  This consisted of an average coupon of 6.66% on the hybrid portion of the
portfolio  and  an average coupon of 7.76% on the rest of the portfolio.  If the
non-hybrid  portion  of  the  portfolio had been "fully indexed," their weighted
average  coupon  would  have  been  approximately  8.28%, based upon the current
composition  of  the  portfolio  and the applicable indices.  As of December 31,
1999,  the ARM portfolio had a weighted average coupon of 7.08%.  This consisted
of  an  average  coupon  of  6.54% on the hybrid portion of the portfolio and an
average coupon of 7.22% on the rest of the portfolio.  If the non-hybrid portion
of  the  portfolio  had  been "fully indexed," the weighted average coupon would
have  been  approximately 7.79%, based upon the composition of the portfolio and
the  applicable  indices at the time.  The higher average interest coupon on the
ARM  portfolio  as of June 30, 2000 compared to the end of 1999 is reflective of
Federal  Reserve  Board  interest  rate increases that have been occurring since
June  of 1999.  The average interest rate on the ARM portion of the portfolio is
expected  to  continue  to  rise  to  the  "fully  indexed"  rate.

At  June  30,  2000,  the  current  yield of the ARM assets portfolio was 6.89%,
compared  to  6.38%  as  of  December 31, 1999, with an average term to the next
repricing  date  of  341  days  as  of June 30, 2000, compared to 344 days as of
December  31,  1999.  As  of  June  30, 2000, hybrid ARMs comprised 24.5% of the
total  ARM portfolio, up from 21.6% as of the end of 1999.  The Company finances
its  hybrid  ARM  portfolio  with  longer term borrowings such that the duration
mismatch  of  the  hybrid  ARMs  and the corresponding borrowings is one year or
less.  The  current  yield includes the impact of the amortization of applicable
premiums  and  discounts,  the cost of hedging, the amortization of the deferred
gains  from  hedging  activity  and the impact of principal payment receivables.

The increase in the yield of 0.51% as of June 30, 2000, compared to December 31,
1999,  is  primarily  due to the increased weighted average interest rate coupon
discussed  above,  which  increased  by  0.40%.  The lower yield adjustment from
amortizing  the  net portfolio premium had the effect of increasing the yield by
0.05%.  The  yield  also  improved  as  a  result  of  lower hedging cost, which
decreased  by  0.07%, as higher cost hedges matured and were replaced with lower
cost  hedges.  The impact of non-interest earning principal payments receivables
increased  slightly  during the second quarter of 2000, decreasing the portfolio
yield  by  0.01%.


                                       22
<PAGE>
The  following  table  presents various characteristics of the Company's ARM and
Hybrid  ARM  loan  portfolio  as of June 30, 2000.  This information pertains to
loans  held  for  securitization, loans held as collateral for the notes payable
and  loans  TMA  has  securitized  for  its  own portfolio for which the Company
retained  credit  loss  exposure.

<TABLE>
<CAPTION>
                ARM AND HYBRID ARM LOAN PORTFOLIO CHARACTERISTICS

                            Average      High       Low
                           ---------  -----------  ------
<S>                        <C>        <C>          <C>
Unpaid principal balance   $268,997   $3,450,000   $ 183
Coupon rate on loans           7.52%       10.00%   5.00%
Pass-through rate              7.15%        9.48%   4.61%
Pass-through margin            1.90%        5.06%   0.61%
Lifetime cap                  12.96%       16.75%   9.75%
Original Term (months)          342          480      72
Remaining Term (months)         316          359      52
</TABLE>

<TABLE>
<CAPTION>
Geographic  Distribution   (Top 5 States):  Property  type:
<S>                         <C>             <C>                     <C>
     California                     20.39%  Single-family           64.67%
     Florida                        10.95    DeMinimus PUD          20.35
     Georgia                         7.17    Condominium             9.96
     New York                        7.01    Other                   5.02
     New Jersey                      4.90

Occupancy status:                           Loan purpose:
     Owner occupied                 84.73%   Purchase               58.10%
     Second home                    10.65    Cash out refinance     24.55
     Investor                        4.62    Rate & term refinance  17.35

Documentation type:                         Periodic Cap:
     Full/Alternative               93.16%   None                   59.98%
     Other                           6.84    2.00%                  38.42
                                             1.00%                   0.47
Average effective original                   0.50%                   1.13
     Loan-to-value:                 68.15%
</TABLE>

During  the  quarter ended June 30, 2000, the Company purchased $43.4 million of
ARM  assets,  9.5%  of  which were High Quality ARM securities, 50.6% were Other
Investment  ARM securities purchased in connection with the re-securitization of
$89.4  million  of the Company's Other Investment ARM securities, and 39.8% were
ARM loans acquired through the Company's correspondent loan network.  Of the ARM
assets  acquired  during  the  second  quarter  of  2000, approximately 80% were
indexed  to U.S. Treasury bill rates and 20% were Hybrid ARMs.  Additionally, as
of  June  30,  2000, the Company has commitments to purchase approximately $11.7
million  of  loans  through  its  correspondent  network.

During  the six months ended June 30, 2000, the Company purchased $444.8 million
of  ARM assets, 89.8% of which were High Quality ARM securities, 5.7% were Other
Investment  ARM  securities and 4.5% were ARM loans.  Of the ARM assets acquired
during  the  first  six  months  of 2000, approximately 52% were indexed to U.S.
Treasury  bill  rates,  34%  were  Hybrid  ARMs  and  14% were indexed to LIBOR.

During  the  quarter  ended  June 30, 2000, as previously mentioned, the Company
re-securitized  Other  Investment ARM securities with a $94.0 million par value,
and  a  carrying  value of $89.4 million, into a new series of securities, $56.1
million  of  which was rated AAA, an interest only strip with a notional balance
of  $45.0  million  rated AAA, $11.7 million of which rated AA and the remaining
$26.2  million  rated below AA.  As a part of the re-securitization transaction,
the  Company  sold  the  AAA  and AA rated ARM securities for a $49,000 gain and
retained  the AAA rated interest only strip and the other securities rated below
AA.  These  were  the  only assets sold by the Company during both the three and
six  month  periods  ended  June  30,  2000.

For  the quarter ended June 30, 2000, the Company's mortgage assets paid down at
an  approximate  average  annualized constant prepayment rate of 16% compared to
26%  for the quarter ended June 30, 1999 and 15% for the quarter ended March 31,


                                       23
<PAGE>
2000.  When  prepayment  experience  increases,  the Company has to amortize its
premiums over a shorter time period, resulting in a reduced yield to maturity on
the  Company's  ARM  assets.  Conversely,  if  actual  prepayment  experience
decreases,  the  premium would be amortized over a longer time period, resulting
in  a  higher yield to maturity.  The Company monitors its prepayment experience
on  a  monthly  basis in order to adjust the amortization of the net premium, as
appropriate.

The  fair  value  of  the  Company's  portfolio  of  ARM  assets  classified  as
available-for-sale decreased by 0.74% from a negative adjustment of 2.40% of the
portfolio  as of December 31, 1999, to a negative adjustment of 3.14% as of June
30,  2000.  This  price  decrease  was  primarily  due  to  the effect of rising
interest  rates.  The amount of the negative adjustment to fair value on the ARM
assets  classified  as  available-for-sale  increased  from  $83.4 million as of
December 31, 1999, to $106.6 million as of June 30, 2000.  The fair value of the
Company's  portfolio of ARM assets excludes an adjustment for fair value changes
in  Swap  Agreements,  since  the  Swap  Agreements  hedge liabilities, i.e. the
financing  of  Hybrid  ARMs.  As  of June 30, 2000, the unrecorded positive fair
value  adjustment  for  Swap Agreements was $14.5 million.  As of June 30, 2000,
all of the Company's ARM securities are classified as available-for-sale and are
carried  at  their  fair  value.

The Company has purchased Cap Agreements and Options Contracts in order to hedge
exposure to changing interest rates.  The majority of the Cap Agreements and all
of  the Options Contracts have been purchased to limit the Company's exposure to
risks  associated  with the lifetime interest rate caps of its ARM assets should
interest  rates  rise  above specified levels.  These hedging instruments act to
reduce  the  effect  of  the  lifetime  or maximum interest rate cap limitation.
These  hedging  instruments purchased by the Company will allow the yield on the
ARM  assets  to continue to rise in a high interest rate environment just as the
Company's cost of borrowings would continue to rise, since the borrowings do not
have any interest rate cap limitation.  At June 30, 2000, the Cap Agreements and
Options  Contracts  owned  by the Company that are designated as a hedge against
the lifetime interest rate cap on ARM assets had a remaining notional balance of
$2.633  billion  with  an  average  final  maturity  of 2.4 years, compared to a
remaining  notional  balance of $2.810 billion with an average final maturity of
2.2  years  at  December  31,  1999.  Pursuant  to  the  terms  of these hedging
instruments,  the  Company  will  receive  cash  payments  if  the  one-month,
three-month  or  six-month LIBOR index increases above certain specified levels,
which  range from 7.10% to 12.50% and average approximately 10.04%.  The Company
has  also  entered  into  Cap Agreements with a notional balance of $118.6 as of
June 30, 2000 in connection with hedging the fixed rate period of its Hybrid ARM
assets.  In  doing  so,  the Company establishes a maximum cost of financing the
Hybrid  ARM  assets  during  the  term  of  the  designated  Cap Agreements that
generally  corresponds  to  within  one  year  of the initial fixed rate term of
Hybrid  ARM assets.  The Cap Agreements hedging Hybrid ARM assets as of June 30,
2000  would  receive  cash payments if the one-month LIBOR Index increases above
certain  specified  levels,  which  range  from  5.75%  to  6.00%  and  average
approximately  5.93%  and have a remaining term of 3.0 years.  The fair value of
Cap  Agreements  and Options Contracts also tend to increase when general market
interest  rates  increase  and  decrease  when  market  interest rates decrease,
helping  to  partially  offset  changes  in  the fair value of the Company's ARM
assets.  At  June  30,  2000, the fair value of the Company's Cap Agreements and
Options Contracts was $5.3 million, $1.3 million more than the amortized cost of
these  hedging  instruments.


                                       24
<PAGE>
The  following  table presents information about the Company's Cap Agreement and
Options  Contract  portfolio  that is designated as a hedge against the lifetime
interest  rate  cap  on  ARM  assets  as  of  June  30,  2000:

<TABLE>
<CAPTION>
           CAP AGREEMENTS/OPTIONS CONTRACTS STRATIFIED BY STRIKE PRICE
                          (Dollar amounts in thousands)

Hedged        Weighted    Cap Agreement/                      Weighted
ARM Assets     Average   Options Contract                     Average
Balance (1)   Life Cap   Notional Balance   Strike Price   Remaining Term
------------  ---------  -----------------  -------------  --------------
<S>           <C>        <C>                <C>            <C>
      26,951      8.01%  $          26,000          7.10%             2.8 Years
     139,994      8.29             140,000          7.50              0.4
     626,043      9.63             626,080          8.00              1.7
      24,992     10.81              25,000          9.00              2.2
      63,731     10.99              63,553          9.50              2.2
     380,542     11.45             381,317         10.00              2.2
     215,026     12.10             215,237         10.50              1.8
     456,833     12.49             456,263         11.00              3.1
     279,950     13.00             280,000         11.50              4.1
     384,342     14.18             384,302         12.00              3.0
       3,682     17.08              35,454         12.50              1.5
------------  ---------  -----------------  -------------  --------------
   2,602,086     11.59%  $       2,633,206         10.04%             2.4 Years
============  =========  =================  =============  ==============
<FN>
(1)  Excludes  ARM  assets  that  do  not have life caps or are hybrids that are
     match funded  during a fixed rate period,  in accordance with the Company's
     investment  policy.
</TABLE>

As  of  June  30, 2000, the Company was a counterparty to nineteen interest rate
swap  agreements  ("Swaps")  having  an  aggregate  notional  balance  of $610.6
million.  As of June 30, 2000, these Swaps had a weighted average remaining term
of 2.6 years.  In accordance with these Swaps, the Company will pay a fixed rate
of  interest  during  the  term of these Swaps and receive a payment that varies
monthly  with the one-month LIBOR rate.  All of these Swaps were entered into in
connection  with  the  Company's  acquisition  of Hybrid ARMs and commitments to
acquire  Hybrid  ARMs.  As  a  result  of  entering into these Swaps and the Cap
Agreements that also hedge the fixed rate period of Hybrid ARMs, the Company has
reduced  the  interest rate variability of its cost to finance its ARM assets by
increasing the average period until the next repricing of its borrowings from 31
days to 213 days.  The Swaps hedge the cost of financing Hybrid ARMs to within a
one  year  duration of their fixed rate term, generally three to ten years.  The
average  remaining fixed rate term of the Company's Hybrid ARM assets as of June
30,  2000  was  3.3  years.  The  Company has also entered into one delayed Swap
Agreement  that  becomes  effective  for  a one-year term, beginning in April of
2002.  This delayed Swap Agreement has a notional balance of $100 million and is
designated  to  hedge  the  interest rate exposure of Hybrid ARM assets upon the
termination  of  the  other  Swap  Agreements.

RESULTS  OF  OPERATIONS  FOR  THE  THREE  MONTHS  ENDED  JUNE  30,  2000

For the quarter ended June 30, 2000, the Company's net income was $6,967,000, or
$0.25  per  share (Basic and Diluted EPS) compared to $7,034,000, also $0.25 per
share  (Basic  and Diluted EPS) for the quarter ended June 30, 1999.  There were
21,490,000  weighted average common shares outstanding during both periods.  Net
interest  income  for the quarter totaled $8,752,000, compared to $9,072,000 for
the  same  period  in  1999.  Net  interest  income is comprised of the interest
income  earned  on  mortgage  investments less interest expense from borrowings.
During  the  second  quarter  of  2000  and 1999, the Company recorded a gain of
$49,000  and  $35,000, respectively, from the sale of ARM assets.  Additionally,
during  the  second  quarter  of  2000, the Company reduced its earnings and the
carrying  value  of  its  ARM  assets by reserving $381,000 for estimated credit
losses, compared to $689,000 during the same quarter of 1999.  During the second
quarter  of  2000,  the  Company  incurred  operating  expenses  of  $1,453,000,
consisting  of  a base management fee of $1,033,000 and other operating expenses
of  $420,000.  During  the  same  period of 1999, the Company incurred operating
expenses  of  $1,384,000,  consisting of a base management fee of $1,020,000 and
other  operating  expenses  of  $364,000.  Total  operating expenses remained at
0.13%  as  a  percentage  of  average assets for the three months ended June 30,
2000,  the  same  as  for  the  second  quarter  of  1999.


                                       25
<PAGE>
The  Company's  return  on average common equity was 6.50% for the quarter ended
June 30, 2000 compared to 6.60% for the quarter ended June 30, 1999 and compared
to  7.20%  for  the prior quarter ended March 31, 2000.  The Company's return on
equity  declined  in  this  past quarter compared to the prior quarter primarily
because  the  Company's  net interest income was lower due to the recent Federal
Reserve  actions  to  raise interest rates.  The Company's average cost of funds
during  the  quarter  increased  by 0.30% as compared to a 0.23% increase in the
Company's  average  ARM  portfolio  yield.  Based on market interest rates as of
June  30, 2000 and interest rate re-pricing characteristics of the Company's ARM
portfolio  and  borrowings,  the  Company  expects  the  ARM  portfolio yield to
increase  more  than the Company's cost of funds over the remainder of the year.
However,  there  is  uncertainty  regarding  future  Federal  Reserve actions to
increase  or  decrease  interest  rates  in  the  future.

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

<TABLE>
<CAPTION>
                                     COMPONENTS OF RETURN ON AVERAGE COMMON EQUITY (1)

                                                                                                            ROE in
                                                                                                           Excess of
                  Net                  Gain (Loss) G & A                                 Net      10-Year   10-Year
For the        Interest     Provision    on ARM   Expense                 Preferred    Income/    US Treas  US Treas
Quarter         Income/    For Losses/   Sales/     (2)/    Performance   Dividend/    Equity     Average   Average
Ended           Equity        Equity     Equity    Equity   Fee/ Equity     Equity      (ROE)      Yield     Yield
------------  -----------  ------------  -------  --------  ------------  ----------  ---------  ---------  --------

<S>           <C>          <C>           <C>      <C>       <C>           <C>         <C>        <C>        <C>
Mar 31, 1998       14.13%         0.48%    1.89%     1.62%         0.94%       2.06%     10.91%      5.60%     5.31%
Jun 30, 1998        9.15%         0.53%    1.76%     1.58%            -        1.96%      6.83%      5.60%     1.23%
Sep 30, 1998        6.82%         0.66%    0.89%     1.54%            -        1.97%      3.54%      5.24%    -1.70%
Dec 31, 1998        7.27%         0.76%   -4.88%     1.57%            -        2.01%     -1.95%      4.66%    -6.61%
Mar 31, 1999        8.07%         0.84%       -      1.58%            -        2.05%      3.60%      4.98%    -1.38%
Jun 30, 1999       11.17%         0.85%    0.04%     1.70%            -        2.05%      6.60%      5.54%     1.06%
Sep 30, 1999       11.48%         0.94%    0.02%     1.76%            -        2.05%      6.75%      5.88%     0.87%
Dec 31, 1999       11.09%         0.89%       -      1.86%            -        2.05%      6.29%      6.14%     0.15%
Mar 31, 2000       11.49%         0.41%       -      1.82%            -        2.06%      7.20%      6.47%     0.73%
Jun 30, 2000       10.74%         0.47%    0.06%     1.78%            -        2.05%      6.50%      6.18%     0.32%
<FN>

(1)  Average  common  equity  excludes  unrealized  gain (loss) on available-for-sale ARM securities.
(2)  Excludes  performance  fees.
</TABLE>

The  modest  decline  in  the  Company's  return  on common equity in the second
quarter of 2000, compared to the second quarter of 1999, is primarily due to the
effect  of  lower  net interest income and higher operating expenses, which were
partially  offset  by  a  decrease  in  the  Company's  provision  for  losses.


                                       26
<PAGE>
The following table presents the components of the Company's net interest income
for  the  quarters  ended  June  30,  2000  and  1999:

<TABLE>
<CAPTION>
                   COMPARATIVE NET INTEREST INCOME COMPONENTS
                          (Dollar amounts in thousands)

                                              2000      1999
                                            --------  --------
<S>                                         <C>       <C>
Coupon interest income on ARM assets        $76,771   $71,586
Amortization of net premium                  (3,658)   (7,837)
Amortization of Cap Agreements                 (633)   (1,377)
Amortization of deferred gain from hedging      293       263
Cash and cash equivalents                       379       452
                                            --------  --------
     Interest income                         73,152    63,087
                                            --------  --------

Reverse repurchase agreements                51,502    38,470
AAA notes payable                            13,687    14,292
Other borrowings                                351        35
Interest rate swaps                          (1,140)    1,218
                                            --------  --------
     Interest expense                        64,400    54,015
                                            --------  --------

Net interest income                         $ 8,752   $ 9,072
                                            ========  ========
</TABLE>

As  presented in the table above, the Company's net interest income decreased by
$0.3  million in the second quarter of 2000 compared to the same three months of
1999.  The  Company's interest income was $10.1 million higher, primarily due to
higher interest rates and a lower level of net premium amortization, in part due
to  slower prepayments during the second quarter of 2000 as compared to the same
period  in 1999.  The Company's amortization expense for Cap Agreements has also
declined,  improving  interest  income  further.  This  amortization expense has
declined  as  the  Company's more expensive Cap Agreements have expired and have
been replaced with less expensive Cap Agreements and because a larger proportion
of  the  Company's ARM portfolio consists of ARMs that do not have lifetime caps
and  Hybrid ARMs that are generally match funded during their fixed rate period,
eliminating any need to hedge their lifetime cap during their fixed rate period.

The  following  table  reflects  the  average  balances for each category of the
Company's  interest  earning  assets  as  well as the Company's interest bearing
liabilities,  with  the  corresponding effective rate of interest annualized for
the  quarters  ended  June  30,  2000  and  1999:

<TABLE>
<CAPTION>
                              AVERAGE BALANCE AND RATE TABLE
                              (Dollar amounts in thousands)

                                           For the Quarter Ended    For the Quarter Ended
                                               June 30, 2000            June 30, 1999
                                          -----------------------  ----------------------
                                            Average    Effective    Average    Effective
                                            Balance       Rate      Balance       Rate
                                          -----------  ----------  ----------  ----------
<S>                                       <C>          <C>         <C>         <C>
Interest Earning Assets:
     Adjustable-rate mortgage assets      $4,322,706        6.73%  $4,374,336       5.73%
     Cash and cash equivalents                21,921        6.92       30,940       5.85
                                          -----------  ----------  ----------  ----------
                                           4,344,627        6.73    4,405,276       5.73
                                          -----------  ----------  ----------  ----------
Interest Bearing Liabilities:
     Borrowings                            3,965,483        6.50    4,034,856       5.35
                                          -----------  ----------  ----------  ----------

Net Interest Earning Assets and Spread    $  379,144        0.23%  $  370,420       0.38%
                                          ===========  ==========  ==========  ==========

Yield on Net Interest Earning Assets (1)                    0.81%                   0.82%
                                                       ===========             ==========
<FN>
(1)  Yield on Net Interest Earning Assets is computed by dividing annualized net
     interest income by the average daily balance of interest earning assets.
</TABLE>


                                       27
<PAGE>
As  a result of the yield on the Company's interest-earning assets increasing to
6.73%  during  the  three  months ended June 30, 2000 from 5.73% during the same
period  of  1999  and the Company's cost of funds increasing to 6.50% from 5.35%
during  the  same time periods, net interest income decreased by $320,000.  This
decrease  in  net  interest  income is primarily a rate variance and to a lesser
extent  a  volume  variance.  There  was  a  net  unfavorable  rate  variance of
$422,000,  primarily  due  to  an  unfavorable  rate  variance  on borrowings of
$11,512,000,  which  was  partially  offset  by  a  favorable  rate  variance of
$11,090,000  on  the  Company's  ARM assets portfolio and other interest-earning
assets.  The amount of net interest earning assets improved by $8,724,000 during
the  second  quarter of 2000 compared to the second quarter of 1999, producing a
favorable  volume  variance of $147,000.  However, the decreased average size of
the  Company's  portfolio during the second quarter of 2000 compared to the same
period  in  1999  decreased  net  interest income in the amount of $45,000.  The
average  balance  of  the  Company's  interest-earning assets was $4.345 billion
during  the  second  three months of 2000, compared to $4.405 billion during the
second  three  months  of  1999  --  a  decrease  of  1%.

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

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

                                                                                          Yield on
               Average   Wgt Avg                         Yield on                            Net
As of the     Interest    Fully    Weighted              Interest                 Net     Interest
Quarter        Earning   Indexed    Average     Yield    Earning    Cost of    Interest   Earning
Ended          Assets     Coupon    Coupon     Adj (2)    Assets     Funds      Spread     Assets
------------  ---------  --------  ---------  ---------  --------  ---------  ----------  --------
<S>           <C>        <C>       <C>        <C>        <C>       <C>        <C>         <C>
Mar 31, 1998  $ 4,859.7     7.47%      7.47%      1.23%     6.24%      5.74%       0.50%     0.92%
Jun 30, 1998  $ 4,918.3     7.51%      7.44%      1.50%     5.94%      5.81%       0.13%     0.56%
Sep 30, 1998  $ 4,963.7     6.97%      7.40%      1.52%     5.88%      5.78%       0.09%     0.46%
Dec 31, 1998  $ 4,526.2     6.79%      7.28%      1.42%     5.86%      5.94%(3)   -0.08%(3)  0.61%
Mar 31, 1999  $ 4,196.4     6.85%      7.03%      1.31%     5.71%      5.36%       0.35%     0.63%
Jun 30, 1999  $ 4,405.3     7.10%      6.85%      1.11%     5.74%      5.40%       0.34%     0.82%
Sep 30, 1999  $ 4,552.1     7.20%      6.85%      0.76%     6.09%      5.74%       0.35%     0.82%
Dec 31, 1999  $ 4,449.0     7.51%      7.08%      0.70%     6.38%      6.47%(3)   -0.09%(3)  0.81%
Mar 31, 2000  $ 4,471.0     7.77%      7.26%      0.68%     6.58%      6.32%       0.26%     0.83%
Jun 30, 2000  $ 4,344.6     7.87%      7.48%      0.59%     6.89%      6.75%       0.15%     0.81%
<FN>
---------

(1)  Yield on Net Interest Earning Assets is computed by dividing annualized net
     interest income for the applicable  quarter by the average daily balance of
     interest earning assets during the quarter.
(2)  Yield adjustments  include the impact of amortizing premiums and discounts,
     the cost of hedging  activities,  the  amortization  of deferred gains from
     hedging  activities and the impact of principal  payment  receivables.  The
     following table presents these components of the yield  adjustments for the
     dates presented in the table above.
(3)  The year-end cost of funds and net interest spread are commonly affected by
     significant,  but generally  temporary,  year-end  pressures that raise the
     Company's  cost of  financing  mortgage  assets over  year-end.  The effect
     generally  begins during the latter part of November and continues  through
     January.
</TABLE>


                                       28
<PAGE>
<TABLE>
<CAPTION>
           COMPONENTS OF THE YIELD ADJUSTMENTS  ON ARM ASSETS

                                                     Amort of
                            Impact of              Deferred Gain
As of the      Premium/     Principal                  From       Total
Quarter        Discount      Payments      Hedging    Hedging     Yield
Ended           Amort       Receivable    Activity   Activity   Adjustment
------------  ----------  --------------  ---------  ---------  -----------
<S>           <C>         <C>             <C>        <C>        <C>
Mar 31, 1998       0.98%           0.16%      0.13%     (0.04)%   1.23%
Jun 30, 1998       1.24%           0.17%      0.13%     (0.04)%   1.50%
Sep 30, 1998       1.25%           0.18%      0.13%     (0.04)%   1.52%
Dec 31, 1998       1.18%           0.14%      0.14%     (0.04)%   1.42%
Mar 31, 1999       1.09%           0.10%      0.15%     (0.03)%   1.31%
Jun 30, 1999       0.87%           0.13%      0.13%     (0.02)%   1.11%
Sep 30, 1999       0.51%           0.13%      0.13%     (0.01)%   0.76%
Dec 31, 1999       0.51%           0.09%      0.11%     (0.01)%   0.70%
Mar 31, 2000       0.57%           0.07%      0.07%     (0.03)%   0.68%
Jun 30, 2000       0.46%           0.10%      0.06%     (0.03)%   0.59%
</TABLE>

As  of June 30, 2000, the Company's yield on its ARM assets portfolio, including
the  impact  of the amortization of premiums and discounts, the cost of hedging,
the  amortization  of  deferred  gains  from  hedging activity and the impact of
principal  payment  receivables,  was  6.89%,  compared to 6.58% as of March 31,
2000--  an  increase of 0.31%.  The Company's cost of funds as of June 30, 2000,
was 6.75%, compared to 6.32% as of March 31, 2000 -- an increase of 0.43%.  As a
result  of  these changes, the Company's net interest spread as of June 30, 2000
was  0.15%,  compared  to  0.26%  as  of March 31, 2000.  The decline in the net
interest spread is largely attributable to the increase in the Company's cost of
funds  due  to  the impact of recent Federal Reserve actions to raise short-term
interest  rates.  The  Federal Reserve raised short-term interest rates by 0.25%
at  the  end  of  March  and  another 0.50% at the end of May.  As a result, the
interest  rate  on  the Company's various sources of borrowings had increased by
0.54%  by the end of June, but this was partially offset by the Company's use of
Swaps such that the total cost of the Company's borrowings, including the effect
of  hedging,  only  increased  by  the 0.43% to 6.75%.  Due to the repricing and
maturity  characteristics  of the Company's borrowings compared to the Company's
assets, the Company's borrowings react quicker to changes in interest rates.  On
average,  as  of  the  end of June 2000, the Company's borrowings reprice in 213
days  whereas  the  Company's assets, on average, reprice in 341 days.  Once the
Federal Reserve decides to stop increasing rates or to increase them at a slower
pace,  as  opposed to 0.75% in one quarter, the Company's assets are expected to
reprice  more  than  the  Company's  borrowings  and,  therefore,  the Company's
margins,  interest  rate  spread  and  net  income  would  improve.

The  Company's spreads and net interest income has also been negatively impacted
since  early  1998  by  the  spread relationship between U.S. Treasury rates and
LIBOR.  This  spread  relationship has impacted the Company negatively because a
portion of the Company's ARM portfolio is indexed to U.S. Treasury rates and the
interest rates on all of the Company's borrowings tend to change with changes in
LIBOR.  The  Company  has  been  reducing  its  exposure  to ARM assets that are
indexed  to  U.S.  Treasury  rates  through  the  product  mix  of its sales and
acquisitions in order to reduce the negative impact of this situation.  In March
of  this  year,  the  U.S.  Treasury  announced that it would adjust its monthly
auction  of  one-year  treasury  bills  to  quarterly  and  that  it would cease
auctioning  the  one-year treasury bill next year.  As a consequence, a shortage
of  one-year  bills  has  developed, increasing its cost and lowering its yield.
Therefore,  the  relationship  between the one-year treasury index and LIBOR was
negatively  impacted  during  the  second quarter of 2000 after improving during
1999  and  early  2000.  The  Company does not know when or if this relationship
will  improve, although it expects that once the U.S. Treasury ceases to auction
new  one-year treasury bills, that the method to compute the one-year index will
be  based  on  outstanding  U.S.  treasury debt one year from maturity which may
improve  the  relationship  back to its historical average.  The following table
presents  historical  data  since  the  year  the  Company  commenced operations
regarding  this  relationship  as  well  as  data  regarding  the percent of the
Company's ARM portfolio that is indexed to U.S. Treasury rates.  As presented in
the
table below, the Company has reduced the proportion of its ARM portfolio that is
indexed  to one-year U.S. Treasury rates to 29.8% at June 30, 2000 from 49.0% as
of  the  end  of  1997.  The  data  is  as  follows:


                                       29
<PAGE>
<TABLE>
<CAPTION>
           ONE-YEAR U.S. TREASURY RATES COMPARED TO ONE- AND THREE-MONTH LIBOR RATES

                                                          Average Spread
                                                          Between 1 Year
                                                          U.S. Treasury       Percent of ARM
                       Average 1 Year   Average 1 and 3   Rates and 1 & 3   Portfolio Indexed
                        U.S. Treasury     Month LIBOR       Month LIBOR       to 1 Year U.S.
For the Year Ended      Rates During      Rates During      Rates During    Treasury Rates at
December 31,               Period            Period            Period         End of Period
---------------------  ---------------  ----------------  ----------------  ------------------
<S>                    <C>              <C>               <C>               <C>
1993                             3.43%             3.25%             0.18%               20.9%
1994                             5.32%             4.61%             0.71%               15.5%
1995                             5.94%             6.01%            -0.07%               19.3%
1996                             5.52%             5.48%             0.04%               45.4%
1997                             5.63%             5.69%            -0.06%               49.0%
1998                             5.05%             5.57%            -0.52%               34.7%
1999                             5.08%             5.33%            -0.25%               31.4%

For the Quarter Ended
---------------------
Mar 31, 1998                     5.32%             5.66%            -0.34%               44.3%
Jun 30, 1998                     5.41%             5.68%            -0.27%               38.8%
Sep 30, 1998                     5.10%             5.62%            -0.52%               37.5%
Dec 31, 1998                     4.39%             5.32%            -0.93%               34.7%
Mar 31, 1999                     4.67%             4.98%            -0.31%               34.8%
Jun 30, 1999                     4.88%             5.02%            -0.14%               32.5%
Sep 30, 1999                     5.16%             5.36%            -0.20%               30.5%
Dec 31, 1999                     5.62%             5.96%            -0.34%               31.4%
Mar 31, 2000                     6.19%             6.02%             0.17%               31.7%
Jun 30, 2000                     6.22%             6.55%            -0.33%               29.8%
</TABLE>

The  Company's  provision  for  estimated  credit losses decreased in the second
quarter  of  2000  compared  to  the  same  period  in  1999 because the Company
discontinued  reducing  the  cost  basis  of two securities that the Company now
believes  have  been reduced to a cost basis that fully reflects its estimate of
credit losses for these two securities.  The outlook for estimated loss on these
two  securities  has  improved  as the underlying loans have been paying off and
real  estate  values  have  improved,  primarily  in the California market.  The
Company's  provision  for  estimated loan losses is based on a number of factors
including,  but  not  limited  to,  the  outstanding principal balance of loans,
historical  loss  experience,  current  economic  conditions,  borrower  payment
history, age of loans, loan-to-value ratios and underwriter standards applied by
the  originator.  The Company includes the outstanding balance of loans which it
has  securitized  and retained an exposure to credit losses, although the credit
losses in certain securitization structures may be limited by third party credit
enhancement  agreements.  As  of  June  30,  2000,  the  Company's  whole loans,
including  those  held  as  collateral  for the notes payable and those that the
Company  has  securitized but retained credit loss exposure, accounted for 28.4%
of  the  Company's  portfolio  of  ARM  assets  or $1.148 billion.  To date, the
Company  has  not  experienced  any  actual  losses in its whole loan portfolio,
although  losses  are  expected  and  are being estimated as the portfolio ages.

As a REIT, the Company is required to declare dividends amounting to 85% of each
year's  taxable  income  by  the  end of each calendar year and to have declared
dividends  amounting  to  95% of its taxable income for each year by the time it
files  its  applicable  tax  return  and,  therefore,  generally  passes through
substantially  all of its earnings to shareholders without paying federal income
tax  at  the  corporate level.  Since the Company, as a REIT, pays its dividends
based  on  taxable  earnings,  the  dividends  may at times be more or less than
reported  earnings.  The  following  table provides a reconciliation between the
Company's earnings as reported based on generally accepted accounting principles
and  the  Company's  taxable  income  before  its'  common  dividend  deduction:


                                       30
<PAGE>
<TABLE>
<CAPTION>
           RECONCILIATION OF REPORTED NET INCOME TO TAXABLE NET INCOME
                          (Dollar amounts in thousands)

                                            Quarters Ending June 30,
                                               ------------------
                                                 2000      1999
                                               --------  --------
<S>                                            <C>       <C>
Net income                                     $ 6,967   $ 7,034
       Additions:
       Provision for credit losses                 381       689
       Net compensation related items               97        96
       Deductions:
       Dividend on Series A Preferred Shares    (1,670)   (1,670)
       Capital loss carryover from 1998            (49)      (35)
       Actual credit losses on ARM securities     (335)     (323)
                                               --------  --------
Taxable net income                             $ 5,391   $ 5,791
                                               --------  --------

                                               --------  --------
Taxable income per share                       $  0.25   $  0.27
                                               ========  ========
</TABLE>

For  the  quarter ended June 30, 2000, the Company's ratio of operating expenses
to  average  assets  was 0.13% compared to 0.12% for the same period in 1999 and
0.13%  for the prior quarter ended March 31, 2000.  The Company's expense ratios
are  among  the  lowest  of any company investing in mortgage assets, giving the
Company  what  it  believes  to be a significant competitive advantage over more
traditional  mortgage  portfolio  lending institutions such as banks and savings
and  loans.  This competitive advantage enables the Company to operate with less
risk,  such  as  credit and interest rate risk, and still generate an attractive
long-term  return  on  equity  when  compared to these more traditional mortgage
portfolio  lending  institutions.  The  Company  pays the Manager an annual base
management  fee, generally based on average shareholders' equity, not assets, as
defined  in  the  Management  Agreement,  payable monthly in arrears as follows:
1.1%  of  the  first  $300 million of Average Shareholders' Equity, plus 0.8% of
Average  Shareholders'  Equity above $300 million.  Since this management fee is
based  on shareholders' equity and not assets, this fee increases as the Company
successfully  accesses  capital markets and raises additional equity capital and
is,  therefore,  managing  a  larger amount of invested capital on behalf of its
shareholders.  In  order  for the Manager to earn a performance fee, the rate of
return  on the shareholders' investment, as defined in the Management Agreement,
must  exceed the average ten-year U.S. Treasury rate during the quarter plus 1%.
The  Company  has not paid the Manager a performance fee since the first quarter
of 1998.  As presented in the following table, the performance fee is a variable
expense  that  fluctuates  with  the  Company's  return  on shareholders' equity
relative  to  the  average  10-year  U.S.  Treasury  rate.

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

<TABLE>
<CAPTION>
                       ANNUALIZED OPERATING EXPENSE RATIOS

               Management Fee &                          Total
For the         Other Expenses/   Performance Fee/   G & A Expense/
Quarter Ended   Average Assets     Average Assets    Average Assets
-------------  -----------------  -----------------  ---------------
<S>            <C>                <C>                <C>
Mar 31, 1998               0.10%              0.06%            0.16%
Jun 30, 1998               0.10%                 -             0.10%
Sep 30, 1998               0.10%                 -             0.10%
Dec 31, 1998               0.11%                 -             0.11%
Mar 31, 1999               0.12%                 -             0.12%
Jun 30, 1999               0.12%                 -             0.12%
Sep 30, 1999               0.13%                 -             0.13%
Dec 31, 1999               0.13%                 -             0.13%
Mar 31, 2000               0.13%                 -             0.13%
Jun 30, 2000               0.13%                 -             0.13%
</TABLE>

RESULTS  OF  OPERATIONS  FOR  THE  SIX  MONTHS  ENDED  JUNE  30,  2000

For  the  six  months  ended  June  30,  2000,  the  Company's  net  income  was
$14,480,000,  or  $0.52  per  share (Basic and Diluted EPS), based on a weighted
average  of  21,490,000  shares  outstanding.  That  compares to $11,633,000, or
$0.39  per  share  (Basic  and  Diluted  EPS),  based  on  a weighted average of
21,490,000  shares  outstanding  for  the  six  months ended June 30, 1999.  Net
interest  income  for  this  most  recent  six month period totaled $18,069,000,


                                       31
<PAGE>
compared  to  $15,638,000  for  the same period in 1999.  Net interest income is
comprised  of  the  interest income earned on mortgage investments less interest
expense  from  borrowings.  During  the  first  six  months of 2000, the Company
recorded  a  gain on the sale of ARM securities of $49,000 as compared to a gain
of  $35,000 during the same period of 1999.  Additionally, during the first half
of  2000,  the  Company  reduced  its earnings and the carrying value of its ARM
assets by reserving $713,000 for potential credit losses, compared to $1,375,000
during  the  first half of 1999.  During the six months ended June 30, 2000, the
Company  incurred  operating  expenses  of  $2,925,000,  consisting  of  a  base
management  fee  of $2,057,000 and other operating expenses of $868,000.  During
the  same period of 1999, the Company incurred operating expenses of $2,665,000,
consisting  of  a base management fee of $2,038,000 and other operating expenses
of  $627,000.

The  Company's return on average common equity was 6.9% for the six months ended
June  30,  2000  compared  to  5.1% for the six months ended June 30, 1999.  The
primary  reasons  for  the  higher  return  on average common equity is a higher
interest  rate spread, as discussed below, and the lower level of provisions for
credit  losses.

The following table presents the components of the Company's net interest income
for  the  six  month  periods  ended  June  30,  2000  and  1999:

<TABLE>
<CAPTION>
                   COMPARATIVE NET INTEREST INCOME COMPONENTS
                          (Dollar amounts in thousands)

                                              2000       1999
                                            ---------  ---------
<S>                                         <C>        <C>
Coupon interest income on ARM assets        $154,386   $141,577
Amortization of net premium                   (8,341)   (17,605)
Amortization of Cap Agreements                (1,471)    (2,722)
Amortization of deferred gain from hedging       597        588
Cash and cash equivalents                        620        894
                                            ---------  ---------
     Interest income                         145,791    122,732
                                            ---------  ---------

Reverse repurchase agreements                100,370     73,836
AAA notes payable                             28,347     30,643
Other borrowings                                 635         74
Interest rate swaps                           (1,630)     2,541
                                            ---------  ---------
     Interest expense                        127,722    107,094
                                            ---------  ---------

Net interest income                         $ 18,069   $ 15,638
                                            =========  =========
</TABLE>

As  presented in the table above, the Company's net interest income increased by
$2.4  million in the first half of 2000 compared to the same six months of 2000.
The  Company's interest income was $23.1 million higher, primarily due to higher
interest  rates  and  a  lower level of net premium amortization, in part due to
slower  prepayments during the first half of 2000 as compared to the same period
in  1999.  The  Company's  amortization  expense  for  Cap  Agreements  has also
declined,  improving  interest  income  further.  This  amortization expense has
declined  as  the  Company's more expensive Cap Agreements have expired and have
been replaced with less expensive Cap Agreements and because a larger proportion
of  the  Company's ARM portfolio consists of ARMs that do not have lifetime caps
and  Hybrid ARMs that are generally match funded during their fixed rate period,
eliminating any need to hedge their lifetime cap during their fixed rate period.
The  Company's  interest  expense  increased  by $20.6 million, primarily due to
higher  interest  rates.  It  is  important  to note that the Company received a
benefit  from  its  use  of Swaps to hedge the fixed rate period of Hybrid ARMs,
decreasing  its  interest  expense by $1.6 million during the first half of 2000
compared  to  an  expense  of  $2.5 million during the same period of 1999.  The
Company's  use  of hedges has mitigated the effect of rising short-term interest
rates  on  the financing of its Hybrid ARMs and thereby, was an important factor
in  the  Company's  ability  to  maintain comparable earnings between the second
quarter  of  2000  and  1999.

The  following  table  reflects  the  average  balances for each category of the
Company's  interest  earning  assets  as  well as the Company's interest bearing
liabilities,  with  the  corresponding effective rate of interest annualized for
the  six  month  periods  ended  June  30,  2000  and  1999:


                                       32
<PAGE>
<TABLE>
<CAPTION>
                              AVERAGE BALANCE AND RATE TABLE
                              (Dollar amounts in thousands)

                                            For the Six Month         For the Six Month
                                               Period Ended             Period Ended
                                          -----------------------  ----------------------
                                               June 30, 2000           June 30, 1999
                                          -----------------------  ----------------------
                                            Average    Effective    Average    Effective
                                            Balance       Rate      Balance       Rate
                                          -----------  ----------  ----------  ----------
<S>                                       <C>          <C>         <C>         <C>
Interest Earning Assets:
     Adjustable-rate mortgage assets      $4,389,000        6.62%  $4,270,323       5.71%
     Cash and cash equivalents                18,810        6.59       30,492       5.87
                                          -----------  ----------  ----------  ----------
                                           4,407,810        6.62    4,300,815       5.71
                                          -----------  ----------  ----------  ----------
Interest Bearing Liabilities:
     Borrowings                            4,029,356        6.34    3,925,409       5.46
                                          -----------  ----------  ----------  ----------

Net Interest Earning Assets and Spread    $  378,454        0.28%  $  375,407       0.25%
                                          ===========  ==========  ==========  ==========

Yield on Net Interest Earning Assets (1)                    0.82%                   0.73%
                                                       ==========              ==========
<FN>
(1)  Yield on Net Interest Earning Assets is computed by dividing annualized net
     interest income by the average daily balance of interest earning assets.
</TABLE>

As a net result of the yield on the Company's interest-earning assets increasing
to  6.62% during the first half of 2000 from 5.71% during the first half of 1999
and  the  Company's  cost  of  funds increasing to 6.34% from 5.46% for the same
respective  time periods, its net interest income increased by $2,431,000.  This
increase  in  net  interest  income is primarily the result of a  favorable rate
variance  as  well as a less significant favorable volume variance.  There was a
net  favorable  rate  variance  of  $2,185,000,  which  consisted of a favorable
variance  of  $19,518,000  resulting  from the higher yield on the Company's ARM
assets  portfolio  and other interest-earning assets and an unfavorable variance
of  $17,333,000 resulting from the increase in the Company's cost of funds.  The
increased  average size of the Company's portfolio during the first half of 2000
compared  to  the  same  period  of 1999 also contributed to higher net interest
income  in  the  amount  of  $246,000.  The  average  balance  of  the Company's
interest-earning  assets  was  $4.408  billion  during  the  first  half of 2000
compared to $4.301 billion during the first half of 1999 -- an increase of 2.5%.

During  the first half of 2000, the Company realized a net gain from the sale of
ARM  securities in the amount of $49,000 as compared to $35,000 during the first
half of 1999.  The gain from the sale of ARM securities during 2000 was a result
of  the  Company's  re-securitization of Other Investment ARM securities and the
subsequent  sale  of  AAA  and  AA  rated  securities  resulting  from  this
re-securitization.  As  a  result  of this transaction, the Company improved its
liquidity,  the  credit  quality of its ARM portfolio and recorded a small gain.

The  Company  recorded  an  expense for estimated credit losses in the amount of
$713,000  during  the  six  months  ended  June 30, 2000, compared to $1,375,000
during  the  same  period of 1999.  The Company's provision for estimated credit
losses  decreased  in  the  first  half of 2000 because the Company discontinued
reducing  the  cost  basis  of two securities that the Company now believes have
been  reduced  to  a  cost  basis that fully reflects its applicable estimate of
credit  losses.  The  outlook  for  estimated  loss  on these two securities has
improved  as  the  underlying  loans have been paying off and real estate values
have  improved,  primarily  in  the  California  market.

For  the  six  months  ended  June  30,  2000,  the Company's ratio of operating
expenses to average assets was 0.13% as compared to 0.12% for the same period of
1999.  The  Company's other expenses increased by approximately $241,000 for the
six  months ended June 30, 2000 compared to the same three-month period in 1999.
The  other expenses increased primarily due to increased usage of legal services
in  connection  with  the  Company's  financing  and  securitization  of  loans,
increased  usage  of investor and public relations services in order to increase
the  visibility  and awareness of the Company to potential new investors and due
to  other  general  corporate  matters.


                                       33
<PAGE>
LIQUIDITY  AND  CAPITAL  RESOURCES

The  Company's  primary  source  of  funds  for  the quarter ended June 30, 2000
consisted  of  reverse  repurchase agreements, which totaled $3.077 billion, and
callable  AAA notes, which had a balance of $686.2 million.  The Company's other
significant  source  of  funds  for the quarter ended June 30, 2000 consisted of
payments  of  principal and interest from its ARM assets in the amount of $399.0
million.  In  the  future, the Company expects its primary sources of funds will
consist  of  borrowed funds under reverse repurchase agreement transactions with
one-  to  twelve-month  maturities,  capital  market  financing  transactions
collateralized  by  ARM  and Hybrid ARM loans, proceeds from monthly payments of
principal  and  interest on its ARM assets portfolio and occasional asset sales.
The  Company's liquid assets generally consist of unpledged ARM assets, cash and
cash  equivalents.

Total  borrowings outstanding at June 30, 2000, had a weighted average effective
cost  of  6.89%.  The  reverse  repurchase  agreements  had  a  weighted average
remaining  term  to  maturity  of  4.5  months  and the collateralized AAA notes
payable  had  a final maturity of January 25, 2029, but will be paid down as the
ARM assets collateralizing the notes are paid down.  As of June 30, 2000, $2.133
billion  of  the Company's borrowings were variable-rate term reverse repurchase
agreements.  Term  reverse  repurchase  agreements are committed financings with
original  maturities  that range from six months to twelve months.  The interest
rates on these term reverse repurchase agreements are indexed to either the one-
or  three-month  LIBOR  rate  and reprice accordingly.  The interest rate on the
collateralized  AAA  notes  adjusts monthly based on changes in one-month LIBOR.

The Company has arrangements to enter into reverse repurchase agreements with 25
different  financial  institutions and on June 30, 2000, had borrowed funds with
12  of  these  firms.  Because  the Company borrows money under these agreements
based  on the fair value of its ARM assets and because changes in interest rates
can  negatively  impact  the  valuation  of  ARM assets, the Company's borrowing
ability  under these agreements could be limited and lenders may initiate margin
calls  in  the  event  interest  rates  change or the value of the Company's ARM
assets  decline  for  other reasons.  Additionally, certain of the Company's ARM
assets  are  rated  less than AA by the Rating Agencies (approximately 3.0%) and
have  less  liquidity  than  assets that are rated AA or higher.  Other mortgage
assets  which  are rated AA or higher by the Rating Agencies derive their credit
rating based on a mortgage pool insurer's rating.  As a result of either changes
in  interest  rates,  credit  performance of a mortgage pool or a downgrade of a
mortgage  pool  issuer, the Company may find it difficult to borrow against such
assets  and, therefore, may be required to sell certain mortgage assets in order
to  maintain  liquidity.  If required, these sales could be at prices lower than
the  carrying  value  of  the  assets, which would result in losses.  During the
second  quarter  of  2000,  the Company increased its level of liquidity and the
Company  believes  it  will  continue  to  have sufficient liquidity to meet its
future  cash  requirements from its primary sources of funds for the foreseeable
future  without  needing  to  sell  assets.

As of June 30, 2000, the Company had $686.2 million of  AAA collateralized notes
outstanding, which are not subject to margin calls.  Due to the structure of the
collateralized notes, their financing is not based on market value or subject to
subsequent  changes  in  mortgage  credit markets, as is the case of the reverse
repurchase  agreement  arrangements.

As  of  June  30,  2000, the Company had entered into three whole loan financing
facilities.  One  of  the  whole  loan  financing  facilities  has  a  committed
borrowing  capacity  of  $150 million, with an option to increase this amount to
$300  million.  This facility matures in January 2001.  During the first quarter
of  2000,  the  Company  entered  into  a  second committed whole loan financing
facility  that  also  has  a  borrowing  capacity  of $150 million.  This second
committed  facility  matures  in  March of 2003, subject to an annual review and
extension  by  both parties.  The third facility is for an unspecified amount of
uncommitted  borrowing  capacity and does not have a specific maturity date.  As
of  June  30,  2000,  the Company had $18.4 million borrowed against these whole
loan  financing  facilities  at  an  effective  cost  of  6.72%.

On  December  23, 1999, the Company and the Manager entered into an agreement to
purchase  FASLA Holding Company for $15 million, subject to certain adjustments,
in  a cash transaction.  The Company expects to complete this acquisition by the
end  of  2000,  depending upon the timing of receiving regulatory approval.  The
Company  expects  to  generate  sufficient  working  capital  in  advance of the
purchase  acquisition  date  in  order  to  complete  the  acquisition  with
cash-on-hand.

In  December 1996, the Company's Registration Statement on Form S-3, registering
the  sale  of  up  to $200 million of additional equity securities, was declared
effective  by  the  Securities  and  Exchange  Commission.  This  registration
statement  includes  the  possible  issuances  of common stock, preferred stock,
warrants  or  shareholder  rights.  As  of  June  30, 2000, the Company had $109
million  of  its  securities  registered for future sale under this Registration
Statement.


                                       34
<PAGE>
During  1998,  the Board of Directors approved a common stock repurchase program
of up to 1,000,000 shares at prices below book value, subject to availability of
shares  and  other market conditions.  The Company did not repurchase any shares
during  the  first  six  months  of  2000.  To date, the Company has repurchased
500,016  shares  at  an  average  price  of  $9.28  per  share.

The  Company  has  a  Dividend  Reinvestment and Stock Purchase Plan (the "DRP")
designed to provide a convenient and economical way for existing shareholders to
automatically  reinvest their dividends in additional shares of common stock and
for  new  and  existing  shareholders to purchase shares, as defined in the DRP.
During  the  first  six months of 2000, the Company purchased shares in the open
market  on  behalf  of the participants in its DRP instead of issuing new shares
below  book  value.  In accordance with the terms and conditions of the DRP, the
Company  pays  the  brokerage  commission  in  connection  with these purchases.

EFFECTS  OF  INTEREST  RATE  CHANGES

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

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

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

The rate of prepayment on the Company's mortgage assets may increase if interest
rates  decline,  or  if the difference between long-term and short-term interest
rates diminishes.  Increased prepayments would cause the Company to amortize the
premiums  paid  for  its mortgage assets faster, resulting in a reduced yield on
its mortgage assets.  Additionally, to the extent proceeds of prepayments cannot
be reinvested at a rate of interest at least equal to the rate previously earned
on  such  mortgage  assets,  the  Company's  earnings may be adversely affected.

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


                                       35
<PAGE>
Lastly,  because  the Company only invests in ARM assets and approximately 8% to
10%  of  such  mortgage  assets  are  purchased  with  shareholders' equity, the
Company's  earnings  over  time  will  tend  to  increase following periods when
short-term  interest  rates  have  risen  and  decrease  following  periods when
short-term  interest  rates have declined.  This is because the financed portion
of  the  Company's  portfolio of ARM assets will, over time, reprice to a spread
over  the  Company's cost of funds, while the portion of the Company's portfolio
of ARM assets that are purchased with shareholders' equity will generally have a
higher  yield in a higher interest rate environment and a lower yield in a lower
interest  rate  environment.

OTHER  MATTERS

As  of  June  30,  2000,  the  Company  calculates its Qualified REIT Assets, as
defined  in  the  Internal  Revenue Code of 1986, as amended (the "Code"), to be
99.0% of its total assets, as compared to the Code requirement that at least 75%
of  its total assets must be Qualified REIT Assets.  The Company also calculates
that  98.5%  of its 2000 revenue  for the first six months qualifies for the 75%
source  of  income  test and 100% of its revenue qualifies for the 95% source of
income  test  under  the REIT rules.  The Company also met all REIT requirements
regarding  the  ownership  of  its common stock and the distributions of its net
income.  Therefore,  as  of  June  30,  2000,  the Company believes that it will
continue  to  qualify  as  a  REIT  under  the  provisions  of  the  Code.

The  Company  at  all  times intends to conduct its business so as not to become
regulated as an investment company under the Investment Company Act of 1940.  If
the  Company  were  to  become  regulated  as  an  investment  company, then the
Company's  use  of  leverage  would  be  substantially  reduced.  The Investment
Company  Act  exempts  entities  that  are "primarily engaged in the business of
purchasing  or otherwise acquiring mortgages and other liens on and interests in
real  estate"  ("Qualifying  Interests").  Under  current  interpretation of the
staff  of  the  SEC,  in  order  to qualify for this exemption, the Company must
maintain  at  least  55%  of  its  assets  directly in Qualifying Interests.  In
addition,  unless  certain  mortgage  securities  represent all the certificates
issued with respect to an underlying pool of mortgages, such mortgage securities
may  be  treated  as securities separate from the underlying mortgage loans and,
thus,  may  not  be  considered  Qualifying  Interests  for  purposes of the 55%
requirement.  The  Company  calculates  that  it  is  in  compliance  with  this
requirement.


                                       36
<PAGE>
PART  II.   OTHER  INFORMATION

Item  1.    Legal  Proceedings
              At June 30, 2000, there were no pending legal proceedings to which
              the Company  was a party or  of  which  any  of  its  property was
              subject.

Item  2.    Changes  in  Securities
              Not  applicable

Item  3.    Defaults  Upon  Senior  Securities
              Not  applicable

Item  4.     Submission  of  Matters  to  a  Vote  of  Security  Holders
             (a)  The Annual Meeting of Shareholders of the Company was held on
                  April 27,  2000.

             (c)  The  following  matters  were voted upon and approved at the
                  Annual Meeting:
                  (1)  Election  of  Directors

                                                           Votes
                                                  -----------------------
                                Nominee              For         Withheld
                          -------------------     ----------     --------
                          Garrett  Thornburg      19,823,965     261,832
                          Joseph  H.  Badal       19,828,435     257,362
                          Stuart  C.  Sherman     19,826,962     258,835

                  (2)  Amendment to the registrant's  Articles of Incorporation
                       to change the name of the Company to Thornburg Mortgage,
                       Inc.

                                               Votes
                          -----------------------------------------------
                                  For              Against       Abstain
                          -------------------     ----------     --------
                              19,828,439           110,599       146,759

Item  5.     Other  Information
               None

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

             (a)  Exhibits
                  See  "Exhibit  Index"

             (b)  Reports  on  Form  8-K
                  None


                                       37
<PAGE>
                                   SIGNATURES


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



                                      THORNBURG  MORTGAGE,  INC.


Dated:  July  31,  2000               By:  /s/  Larry  A.  Goldstone
                                          --------------------------------------
                                          Larry  A.  Goldstone
                                          President and Chief Operating Officer
                                          (authorized officer of registrant)




Dated:  July  31,  2000               By: /s/  Richard  P.  Story
                                          --------------------------------------
                                          Richard  P.  Story,
                                          Chief Financial Officer and Treasurer
                                          (principal accounting officer)


                                       38
<PAGE>
                                  Exhibit Index


                                                                  Sequentially
                                                                    Numbered
     Exhibit Number       Exhibit  Description                        Page
     --------------       -----------------------                 ------------

     27                   Financial Data Schedule                      40


                                       39
<PAGE>