<PAGE>
================================================================================


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


                                    FORM 10-Q


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


FOR THE QUARTERLY PERIOD ENDED:     JUNE 30, 2002

                                       OR

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


FOR THE TRANSITION PERIOD FROM                        TO
                               ----------------------    -----------------------

COMMISSION FILE NUMBER:      001-11914


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

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

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

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

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

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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock ($.01 par value)                    45,586,142 as of August 9, 2002


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



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


                                      INDEX




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

     Item 1.      Financial Statements

                      Consolidated Balance Sheets at June 30, 2002 and December 31, 2001..................    3

                      Consolidated Statements of Operations for the three and six months ended
                       June 30, 2002 and June 30, 2001....................................................    4

                      Consolidated Statement of Shareholders' Equity for the six months
                       ended June 30, 2002 and June 30, 2001..............................................    5

                      Consolidated Statements of Cash Flows for the three and six months ended
                       June 30, 2002 and June 30, 2001....................................................    6

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

     Item 2.      Management's Discussion and Analysis of
                  Financial Condition and Results of Operations...........................................   22



PART II.          OTHER INFORMATION

     Item 1.      Legal Proceedings.......................................................................   41

     Item 2.      Changes in Securities ..................................................................   41

     Item 3.      Defaults Upon Senior Securities ........................................................   41

     Item 4.      Submission of Matters to a Vote of Security Holders.....................................   41

     Item 5.      Other Information.......................................................................   41

     Item 6.      Exhibits and Reports on Form 8-K........................................................   42


     SIGNATURES       ..................................................................................43

     EXHIBIT INDEX       ...............................................................................44
</Table>




                                       2
<PAGE>


PART I.       FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)


<Table>
<Caption>
                                                           June 30, 2002
ASSETS                                                      (unaudited)     December 31, 2001
                                                            ------------    -----------------
<S>                                                          <C>              <C>
   Adjustable-rate mortgage ("ARM") assets:
      ARM securities                                         $ 8,160,893      $ 5,162,627
      Collateral for collateralized notes                        352,702          470,752
      ARM loans held for securitization                          351,527           98,766
                                                             -----------      -----------
                                                               8,865,122        5,732,145
                                                             -----------      -----------

   Cash and cash equivalents                                      29,600           33,884
   Accrued interest receivable                                    45,005           33,483
   Prepaid expenses and other                                      3,104            4,136
                                                             -----------      -----------
                                                             $ 8,942,831      $ 5,803,648
                                                             ===========      ===========


LIABILITIES

   Reverse repurchase agreements                             $ 7,553,766      $ 4,738,827
   Collateralized notes                                          316,848          432,581
   Other borrowings                                              280,827           40,283
   Payable for assets purchased                                       --           18,200
   Accrued interest payable                                       17,515           12,160
   Dividends payable                                               1,670           19,987
   Other payables and accrued expenses                            13,555            8,952
                                                             -----------      -----------
                                                               8,184,181        5,270,990
                                                             -----------      -----------

SHAREHOLDERS' EQUITY

   Preferred stock: par value $.01 per share;
      2,760 shares authorized, issued and outstanding;
      9.68% Cumulative Convertible Series A;
      aggregate preference in liquidation $69,000                 65,805           65,805
   22,000 Series B cumulative shares authorized, none
      issued and outstanding, respectively                            --               --
   Common stock: par value $.01 per share; 496,740 and
      47,218 shares authorized, 44,303 and 33,305 shares
      issued and outstanding, respectively                           443              333
   Additional paid-in-capital                                    723,143          515,516
   Accumulated other comprehensive income (loss)                 (44,363)         (36,566)
   Notes receivable from stock sales                              (7,904)          (7,904)
   Retained earnings (deficit)                                    21,526           (4,526)
                                                             -----------      -----------
                                                                 758,650          532,658
                                                             -----------      -----------
                                                             $ 8,942,831      $ 5,803,648
                                                             ===========      ===========
</Table>


See Notes to Consolidated Financial Statements.


                                       3
<PAGE>


THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

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

<Table>
<Caption>
                                                               Three Months Ended            Six Months Ended
                                                                    June 30,                     June 30,
                                                              2002           2001           2002          2001
                                                           ---------      ---------      ---------      ---------
<S>                                                        <C>            <C>            <C>            <C>
Interest income from ARM assets and cash equivalents       $  96,439      $  67,679      $ 175,865      $ 140,904
Interest expense on borrowed funds                           (59,482)       (51,965)      (107,284)      (110,866)
                                                           ---------      ---------      ---------      ---------
   Net interest income                                        36,957         15,714         68,581         30,038
                                                           ---------      ---------      ---------      ---------
Gain on sale of ARM assets                                        84              2             87              2
Hedging expense                                                 (622)          (466)          (936)          (617)
Provision for credit losses                                       --           (153)            --           (331)
Management fee                                                (1,902)        (1,116)        (3,546)        (2,211)
Performance fee                                               (3,721)        (1,073)        (6,914)        (1,997)
Other operating expenses                                      (2,858)        (1,269)        (5,041)        (2,316)
                                                           ---------      ---------      ---------      ---------

   Net income before cumulative effect of change in           27,938         11,639         52,231         22,568
     accounting principle
   Cumulative effect of change in accounting principle            --             --             --           (202)
                                                           ---------      ---------      ---------      ---------
        NET INCOME                                         $  27,938      $  11,639      $  52,231      $  22,366
                                                           =========      =========      =========      =========

Net income                                                    27,938         11,639         52,231         22,366
Dividends on preferred stock                                  (1,670)        (1,670)        (3,340)        (3,340)
                                                           ---------      ---------      ---------      ---------
Net income available to common shareholders                $  26,268      $   9,969      $  48,891      $  19,026
                                                           =========      =========      =========      =========

Basic and diluted earnings per share before cumulative     $    0.63      $    0.46      $    1.25      $    0.89
   effect of change in accounting principle
Cumulative effect of change in accounting principle               --             --             --          (0.01)
                                                           ---------      ---------      ---------      ---------
Basic and diluted earnings per share                       $    0.63      $    0.46      $    1.25      $    0.88
                                                           =========      =========      =========      =========

Average number of common shares outstanding                   41,950         21,791         39,199         21,741
                                                           =========      =========      =========      =========
</Table>



See Notes to Consolidated Financial Statements.



                                       4
<PAGE>


THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)

Six Months Ended June 30, 2002 and 2001

(In thousands, except share data)


<Table>
<Caption>
                                                                     Accum.
                                                                     Other      Notes                           Compre-
                                                                    Compre-   Receivable                        hensive
                                                        Additional  hensive      From     Retained               Income
                                      Preferred  Common  Paid-in     Income     Stock     Earnings/  Treasury     and
                                        Stock    Stock   Capital    and Loss    Sales     (Deficit)   Stock       Loss      Total
                                      ---------  ------ ----------  --------  ----------  ---------- --------   --------  --------
<S>                                    <C>       <C>    <C>         <C>        <C>        <C>        <C>        <C>       <C>
Balance, December 31, 2000             $65,805   $221   $343,036    $(78,427)  $(5,318)   $  (3,113) $ (4,666)            $317,538
Comprehensive income:
  Net income                                                                                 22,366             $ 22,366    22,366
  Other comprehensive income:
    Available-for-sale assets:
      Fair value adjustment                                           22,401                                      22,401    22,401
    Swap Agreements:
      Cumulative adjustment for
       change in accounting principle                                   (629)                                       (629)     (629)
      Fair value adjustment, net of
       amortization                                                  (10,278)                                    (10,278)  (10,278)
                                                                                                                --------
    Other comprehensive income                                                                                  $ 33,860
                                                                                                                ========
Issuance of common stock                            2      2,510                (1,169)                                      1,343
Interest and principal payments on
  notes receivable from stock sales                          170                    36                                         206
Dividends declared on preferred
  stock - $1.21 per share                                                                   (3,340)                         (3,340)
Dividends declared on common
  stock - $0.55 per share                                                                  (11,945)                        (11,945)
                                       -------   ----   --------    --------   -------    --------   --------             --------
Balance, June 30, 2001                 $65,805   $223   $345,716    $(66,933)  $(6,451)   $  3,968   $ (4,666)            $337,662
                                       =======   ====   ========    ========   =======    ========   ========             ========

Balance, December 31, 2001             $65,805   $333   $515,516    $(36,566)  $(7,904)   $ (4,526)  $     --             $532,658
Comprehensive income:
  Net income                                                                                52,231              $ 52,231    52,231
  Other comprehensive income:
    Available-for-sale assets:
      Fair value adjustment                                           16,721                                      16,721    16,721
    Swap Agreements:
      Fair value adjustment, net of
       amortization                                                  (24,518)                                    (24,518)  (24,518)
                                                                                                                --------
  Other comprehensive income                                                                                    $ 44,434
                                                                                                                ========
Issuance of common stock                          110    207,474                                                           207,584
Interest and principal payments on
  notes receivable from stock sales                          153                                                               153
Dividends declared on preferred
  stock - $1.21 per share                                                                   (3,340)                         (3,340)
Dividends declared on common
  stock - $1.10 per share                                                                  (22,839)                        (22,839)
                                       -------   ----   --------    --------   -------    --------   --------             --------
Balance, June 30, 2002                 $65,805   $443   $723,143    $(44,363)  $(7,904)   $ 21,526   $     --             $758,650
                                       =======   ====   ========    ========   =======    ========   ========             ========
</Table>


See Notes to Consolidated Financial Statements.



                                       5
<PAGE>



THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

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

<Table>
<Caption>
                                                                 Three Months Ended            Six Months Ended
                                                                      June 30,                      June 30,
                                                                 2002           2001          2002            2001
                                                             -----------    -----------    -----------    -----------
<S>                                                          <C>            <C>            <C>            <C>
Operating Activities:
  Net Income                                                 $    27,938    $    11,639    $    52,231    $    22,366
  Adjustments to reconcile net income to net cash provided
  by operating activities:
   Amortization                                                    3,014          4,821          8,126          8,663
   Net (gain) loss from investing activities                         (84)           (93)           (87)            84
   Hedging expense                                                   622            466            936            819
   Change in assets and liabilities:
    Accrued interest receivable                                   (7,661)         3,254        (11,522)           433
    Prepaid expenses and other                                     2,007           (168)           857          3,065
    Accrued interest payable                                       3,878             56          5,355         (5,483)
    Accrued expenses and other                                       103           (489)         4,603          9,538
                                                             -----------    -----------    -----------    -----------
       Net cash provided by operating activities                  29,817         19,486         60,499         39,485
                                                             -----------    -----------    -----------    -----------
Investing Activities:
  Available-for-sale ARM securities:
   Purchases                                                  (1,872,412)      (416,508)    (3,677,659)      (915,456)
   Proceeds on sales                                              12,711        101,594         62,817        101,594
   Principal payments                                            689,973        426,510      1,561,159        685,970
 Collateral for collateralized notes payable:
   Principal payments                                             45,775         56,286        116,392         88,430
 ARM loans:
   Purchases                                                    (618,514)      (181,843)    (1,217,871)      (250,953)
   Proceeds on sales                                                  --            339          3,711            339
   Principal payments                                              4,318          6,718          8,328         16,603
 Purchase of interest rate cap agreements                           (505)            --           (505)            --
                                                             -----------    -----------    -----------    -----------
       Net cash used in investing activities                  (1,738,654)        (6,904)    (3,143,628)      (273,473)
                                                             -----------    -----------    -----------    -----------
Financing Activities:
  Net borrowings from reverse repurchase agreements            1,481,800        154,387      2,793,048        436,886
  Repayments of collateralized notes                             (45,464)       (56,011)      (115,732)       (87,841)
  Net borrowing from (repayments of) other borrowings            144,372        (98,331)       240,544        (56,947)
  Payments made on Eurodollar contracts                           (2,290)            --         (2,188)            --
  Proceeds from common stock issued, net                          66,712          1,140        207,584          1,343
  Dividends paid                                                 (24,509)        (8,186)       (44,496)       (15,285)
  Interest from notes receivable from stock sales                     76            115             85            203
                                                             -----------    -----------    -----------    -----------
       Net cash provided by (used in) financing activities     1,620,697         (6,886)     3,078,845        278,359
                                                             -----------    -----------    -----------    -----------
Net increase (decrease) in cash and cash equivalents             (88,140)         5,696         (4,284)        44,371
Cash and cash equivalents at beginning of period                 117,740         51,780         33,884         13,105
                                                             -----------    -----------    -----------    -----------
Cash and cash equivalents at end of period                   $    29,600    $    57,476    $    29,600    $    57,476
                                                             ===========    ===========    ===========    ===========
</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, 2002 are not necessarily
           indicative of the results that may be expected for the calendar year
           ending December 31, 2002.

              BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION

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

              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.

              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 designated all of the Company's ARM securities
                  as available-for-sale. Therefore, they are reported at fair
                  value, with unrealized gains and losses reported in
                  "Accumulated other comprehensive loss" as a separate component
                  of shareholders' equity.

                  The Company securitizes loans for its ARM securities
                  portfolio. The Company does not sell any of the securities
                  created from this securitization process, but rather retains
                  all of the beneficial and economic interests of the loans. The
                  securitizations of the Company's loans are not accounted for
                  as sales and the Company does not capitalize any servicing
                  rights or obligations as a result of this process. The fair
                  value reflected in the Company's financial statements for
                  these securities is

                                       7
<PAGE>

                  based on market prices provided by certain dealers who make
                  markets in these financial instruments.

                  In general, ARM assets have a maximum lifetime interest rate
                  cap, or ceiling, meaning that individual ARM assets contain a
                  contractual maximum interest rate ("Life Cap"). ARM securities
                  typically have a Life Cap that not only places a constraint on
                  the ability of an ARM security to adjust to higher interest
                  rates but also affects the changes in fair value of an ARM
                  security.

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

                  The collateral for the 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.

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

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

              CREDIT RISK

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

                  The Company, in general, securitizes all of its loans and
                  retains the resulting securities in its ARM portfolio. At the
                  time of securitization, the Company obtains a credit review by
                  one or more Rating Agencies of the loans being securitized.
                  Based on this review, the Company makes a determination
                  regarding the expected losses to be realized in the future and
                  adjusts the basis of the securities to their expected
                  realizable value. In doing so, the Company establishes a basis
                  adjustment amount to absorb the expected credit losses. The
                  Company then monitors the delinquencies and losses on the
                  underlying mortgage loans backing its ARM securities. If the
                  credit performance of the underlying mortgage loans is not as
                  good as expected, the Company makes a provision for additional
                  probable credit losses at a level deemed appropriate by
                  management to provide for known losses as well as estimated
                  losses inherent in its ARM securities portfolio. The provision
                  is based on management's assessment of numerous factors
                  affecting the Company's portfolio of ARM assets including, but
                  not limited to, current economic conditions, delinquency
                  status, credit losses to date on underlying mortgages and
                  remaining credit


                                       8
<PAGE>

                  protection. The provision for ARM securities is made by
                  reducing the cost basis of the individual security for the
                  decline in fair value, which is other than temporary, and the
                  amount of such write-down is recorded as a realized loss,
                  thereby reducing earnings. Additionally, once a loan within a
                  security is 90 days or more delinquent or a borrower declares
                  bankruptcy, the Company adjusts the value of its accrued
                  interest receivable to what it believes to be collectible and
                  stops accruing interest on that portion of the security
                  collateralized by the loan.

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

                  Loans that are not yet securitized are also reviewed for
                  probable losses. The Company's loans are held for
                  securitization, which generally occurs within a few months of
                  acquisition or origination. As a result, although the Company
                  reviews its unsecuritized loans for probable losses, it is
                  unlikely a loan would incur a loss prior to securitization. If
                  a loss is estimated on an unsecuritized loan, the Company
                  would record a provision, which would reduce earnings, and
                  establish a loan loss reserve.

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

              VALUATION METHODS

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

              DERIVATIVE FINANCIAL INSTRUMENTS

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



                                       9
<PAGE>

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

                  INTEREST RATE CAP AGREEMENTS

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

                  The Company does not currently apply hedge accounting to its
                  Cap Agreements and, as a result, the Company records the
                  change in fair value of the Cap Agreements as hedging expense
                  in current earnings. The Company purchases Cap Agreements by
                  incurring a one-time fee or premium and carries them at fair
                  value. The carrying value of the Cap Agreements is included in
                  "Prepaid Expenses and other" on the balance sheet.

                  INTEREST RATE SWAP AGREEMENTS

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

                  All Swap Agreements are designated as cash flow hedges against
                  the interest rate risk associated with the Company's
                  borrowings. Although the terms and characteristics of the
                  Company's Swap Agreements and hedged borrowings are nearly
                  identical, due to the explicit requirements of FAS 133, the
                  Company does not account for these hedges under a method
                  defined in FAS 133 as the "shortcut" method, but rather the
                  Company calculates the effectiveness of these hedges on an
                  ongoing basis. As a result of the calculated effectiveness of
                  approximately 100% to date, all changes in the unrealized
                  gains and losses on Swap Agreements have been recorded in
                  "Other comprehensive income" and are reclassified to earnings
                  as interest expense is recognized on the Company's hedged
                  borrowings. If it becomes probable that the forecasted
                  transaction, which in this case refers to interest payments to
                  be made under the Company's short-term borrowing agreements,
                  will not occur by the end of the originally specified time
                  period, as documented at the inception of the hedging
                  relationship, or within an additional two-month time period
                  thereafter,



                                       10
<PAGE>

                  then the related gain or loss in "Other comprehensive income"
                  would be reclassified to income. As of June 30, 2002, the net
                  unrealized loss on Swap Agreements and deferred gains from
                  terminated Swap Agreements recorded in "Other comprehensive
                  income" was a net loss of $54.5 million. The Company estimates
                  that over the next twelve months, approximately $28.3 million
                  of the net unrealized losses on its Swap Agreements and the
                  deferred gains from terminated Swap Agreements will be
                  reclassified from "Other comprehensive income" to earnings.
                  The loss on Swap Agreements is the discounted value of the
                  remaining future net interest payments expected to be made
                  over the remaining life of the Swap Agreements. Therefore,
                  over time, as the actual payments are made, the unrealized
                  loss in "Other comprehensive income" and the carrying value of
                  the Swap Agreements adjusts to zero and the Company realizes a
                  fixed cost of money over the life of the hedging instrument.
                  The carrying value of the Swap Agreements, in the amount of
                  $55.9 million as of June 30, 2002, is included in "Reverse
                  repurchase agreements" in the accompanying balance sheets.

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

              INCOME TAXES

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

              NET EARNINGS PER SHARE

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




                                       11
<PAGE>


                  Following is information about the computation of the earnings
                  per share data for the three and six month periods ended June
                  30, 2002 and 2001 (amounts in thousands except per share
                  data):


<Table>
<Caption>
                                                                             Earnings
                                                      Income       Shares   Per Share
                                                     --------      ------   ---------
<S>                                                  <C>           <C>       <C>
Three Months Ended June 30, 2002
Net income                                           $ 27,938
Less preferred stock dividends                         (1,670)
                                                     --------
Basic EPS, income available to common shareholders     26,268      41,950     $0.63
                                                                              =====
Effect of dilutive securities:
  Stock options                                            --          --
  Convertible preferred stock                              --          --
                                                     --------      ------
Diluted EPS                                          $ 26,268      41,950     $0.63
                                                     ========      ======     =====

Three Months Ended June 30, 2001
Net income                                           $ 11,639
Less preferred stock dividends                         (1,670)
                                                     --------
Basic EPS, income available to common shareholders      9,969      21,791     $0.46
                                                                              =====
Effect of dilutive securities:
  Stock options                                            --          56
  Convertible preferred stock                              --          --
                                                     --------      ------
Diluted EPS                                          $  9,969      21,847     $0.46
                                                     ========      ======     =====
</Table>



                                       12
<PAGE>



<Table>
<Caption>
                                                                             Earnings
                                                      Income     Shares      Per Share
                                                     --------   ---------    ---------
<S>                                                  <C>           <C>         <C>
Six Months Ended June 30, 2002
Net income                                           $ 52,231
Less preferred stock dividends                         (3,340)
                                                     --------
Basic EPS, income available to common shareholders     48,891      39,199      $1.25
                                                                               =====
Effect of dilutive securities:
  Stock options                                            --          --
  Convertible preferred stock                              --          --
                                                     --------    --------
Diluted EPS                                          $ 48,891      39,199      $1.25
                                                     ========    ========      =====
Six Months Ended June 30, 2001
Net income                                           $ 22,366
Less preferred stock dividends                         (3,340)
                                                                               -----
Basic EPS, income available to common shareholders     19,026      21,741      $0.88
                                                                               =====
Effect of dilutive securities:
  Stock options                                            --          59
  Convertible preferred stock                              --          --
                                                     --------    --------
Diluted EPS                                          $ 19,026      21,800      $0.87
                                                     ========    ========      =====
</Table>

                  The Company did not grant any options to purchase shares of
                  common stock during the six month period ended June 30, 2002.
                  The Company did grant 35,666 options to purchase common stock
                  to directors and officers of the Company at an average price
                  of $10.56 per share during the six months ended June 30, 2001.
                  As of June 30, 2002, all of the previously granted options to
                  purchase shares of common stock had either been exercised,
                  cancelled or had expired.

              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.



                                       13
<PAGE>

NOTE 2.  ADJUSTABLE-RATE MORTGAGE ASSETS

              The following tables present the Company's ARM assets as of June
              30, 2002 and December 31, 2001. The ARM securities classified as
              available-for-sale are carried at their fair value, while the ARM
              loans are carried at their amortized cost basis (dollar amounts in
              thousands):

<Table>
<Caption>
June 30,2002:
                                                           Collateral for
                                       Available-for-Sale  Collateralized
                                        ARM Securities          Notes         ARM Loans           Total
                                       ------------------  --------------    -----------      -----------
<S>                                        <C>              <C>              <C>              <C>
Principal balance outstanding              $ 8,068,692      $   349,341      $   350,341      $ 8,768,374
Net unamortized premium                         70,471            6,601            1,286           78,358
Basis adjustments/Allowance for losses          (8,272)          (3,240)            (100)         (11,612)
Principal payment receivable                    18,826               --               --           18,826
                                           -----------      -----------      -----------      -----------
   Amortized cost, net                       8,149,717          352,702          351,527        8,853,946
Gross unrealized gains                          45,915            2,482            2,725           51,122
Gross unrealized losses                        (34,739)            (449)            (327)         (35,515)
                                           -----------      -----------      -----------      -----------
   Fair value                              $ 8,160,893      $   354,735      $   353,925      $ 8,869,553
                                           ===========      ===========      ===========      ===========
Carrying value                             $ 8,160,893      $   352,702      $   351,527      $ 8,865,122
                                           ===========      ===========      ===========      ===========
</Table>

<Table>
<Caption>
December 31,2001:
                                                           Collateral for
                                       Available-for-Sale  Collateralized
                                        ARM Securities          Notes         ARM Loans           Total
                                       ------------------  --------------    -----------      -----------
<S>                                        <C>              <C>              <C>              <C>
Principal balance outstanding              $ 5,092,713      $   465,733      $    98,711      $ 5,657,157
Net unamortized premium                         45,025            8,204              155           53,384
Basis adjustments/Allowance for losses          (5,891)          (3,185)            (100)          (9,176)
Principal payment receivable                    36,080               --               --           36,080
                                           -----------      -----------      -----------      -----------
   Amortized cost, net                       5,167,927          470,752           98,766        5,737,445
Gross unrealized gains                          35,439            4,346              216           40,001
Gross unrealized losses                        (40,739)          (2,768)            (258)         (43,765)
                                           -----------      -----------      -----------      -----------
   Fair value                              $ 5,162,627      $   472,330      $    98,724      $ 5,733,681
                                           ===========      ===========      ===========      ===========
Carrying value                             $ 5,162,627      $   470,752      $    98,766      $ 5,732,145
                                           ===========      ===========      ===========      ===========
</Table>

              During the six-month period ended June 30, 2002, the Company sold
              $62.7 million of ARM securities for a gain of $95,000. The ARM
              securities sold were classified as available-for-sale. In
              addition, the Company sold $3.7 million of loans during the first
              six months of 2002 and realized a gross gain of $6,000 and a gross
              loss of $14,000. During the six-month period ended June 30, 2001,
              the Company sold $108.1 million of ARM securities and realized
              $244,000 in gains and $245,000 in losses. In addition, the Company
              sold $0.3 million of fixed-rate loans that it originated during
              the first six months of 2001 for a gain of $3,000.

              During the six-month period ended June 30, 2002, the Company
              securitized $963.9 million of its ARM loans into a series of
              privately-issued multi-class ARM securities. The Company retained,
              for its ARM portfolio, all of the classes of the securities
              created. The Company did not account for any of these
              securitizations as sales and, therefore, did not record any gain
              or loss in connection with the securitizations. As of June 30,
              2002, the Company had $2.435 billion of ARM assets that have
              resulted from the Company's securitization efforts.



                                       14
<PAGE>

              As of June 30, 2002 and December 31, 2001, the Company had reduced
              the cost basis of its securitized ARM loans by $10,510,000 and
              $7,925,000, respectively, due to estimated credit losses (other
              than temporary declines in fair value). The reduction in the cost
              basis recorded during the six months of 2002, in the amount of
              $2,585,000, was recorded in connection with the Company's
              securitization of the $963.9 million of loans.

              As of June 30, 2002 and December 31, 2001, the Company had reduced
              the cost basis of other ARM securities by $1,002,000 and
              $1,151,000, respectively, due to estimated credit losses (other
              than temporary declines in fair value). The estimated credit
              losses for these ARM securities relate to Other Investments that
              the Company purchased at a discount that included an estimate of
              credit losses. During the six-month period ended June 30, 2002,
              the Company recorded realized losses on these ARM securities in
              the amount of $293,000 and realized recoveries in the amount of
              $144,000 and, in accordance with its credit policies, the Company
              did not provide for any additional estimated credit losses.

              The following tables summarize ARM loan delinquency information as
              of June 30, 2002 and December 31, 2001 (dollar amounts in
              thousands):
              <Table>
              <Caption>
              June 30, 2002
                                                               Percent
                                     Loan        Loan          of ARM
              Delinquency Status     Count      Balance        Loans(1)
              ------------------    ------     ---------      ---------
              <S>                   <C>        <C>              <C>
              60 to 89 days              0     $      --        0.00%
              90 days or more            0            --        0.00%
              In foreclosure             8         2,173        0.08%
                                    ------     ---------        ----
                                         8     $   2,173        0.08%
                                    ======     =========        ====
              </Table>

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

                  (1) ARM loans includes loans that the Company has securitized
                      and retained first loss credit exposure for total amounts
                      of $2.730 billion and $1.924 billion at June 30, 2002 and
                      December 31, 2001, respectively.

              As of June 30, 2002, the Company owned two real estate properties
              as a result of foreclosing on delinquent loans in the aggregate
              amount of $0.5 million. The Company has a $0.1 million reserve for
              estimated losses on these properties. The Company believes that
              its current level of reserves is adequate to cover any estimated
              loss, should one occur, from the sale of these properties.

              As of June 30, 2002, the Company had commitments to purchase or
              originate the following amounts of ARM assets (dollar amounts in
              thousands):

<Table>
<S>                                                        <C>
                       Agency ARM securities               $     180,458
                       Whole loans - correspondent               279,745
                       Whole loans - direct originations          58,564
                                                           -------------
                                                           $     518,767
                                                           =============
</Table>


                                       15
<PAGE>
              During the quarter ended June 30, 2002, the Company entered into a
              transaction whereby the Company expects to acquire the remaining
              balance of certain Hybrid ARM securities, at a price of par, in
              2006 when the fixed-rate period of the Hybrid ARM securities
              terminates and they convert into ARM securities. The current
              balance of the Hybrid ARM securities is approximately $1.8
              billion, but is expected to be significantly less, and could be
              zero, at the time they convert into ARM securities. If the Company
              decides not to acquire the Hybrid ARM securities when they convert
              into ARM securities, then it is committed to pay or receive the
              difference between par and the fair value of the ARM securities at
              that time, as determined by an auction of the ARM securities. In
              order to enter into this transaction, the Company was obligated to
              deliver $5.0 million of collateral. This collateral obligation
              will be reduced in proportion to the declining balance of the ARM
              securities expected to be purchased.

NOTE 3.  INTEREST RATE CAP AGREEMENTS

              Included in "Prepaid Expenses and Other" are purchased Cap
              Agreements with a remaining notional amount of $2.205 billion and
              $2.254 billion as of June 30, 2002 and December 31, 2001,
              respectively. The notional amount of the Cap Agreements purchased
              declines at a rate that is expected to approximate the
              amortization of the ARM securities. Under these Cap Agreements,
              the Company will receive cash payments should the one-month or
              three-month London InterBank Offer Rate ("LIBOR") increase above
              the contract rates of these hedging instruments which range from
              6.00% to 12.00% and average approximately 9.90%. The Cap
              Agreements had an average maturity of 1.3 years as of June 30,
              2002. The initial aggregate notional amount of the Cap Agreements
              declines to approximately $2.148 billion over the period of the
              agreements, which expire between 2002 and 2005. During the three
              and six-month periods ended June 30, 2002, the Company recognized
              expenses of $622,000 and $936,000, respectively, which is reported
              as "Hedging expense" in the Company's Consolidated Statements of
              Operations.

              The Company has credit risk to the extent that the counterparties
              to the Cap Agreements do not perform their obligations under the
              Cap Agreements. If one of the counterparties does not perform, the
              Company would not receive the cash to which it would otherwise be
              entitled under the conditions of the Cap Agreement. In order to
              mitigate this risk and to achieve competitive pricing, the Company
              has entered into Cap Agreements with six different counterparties,
              five of which are rated AAA and one which is rated A, but the
              Company has a two-way collateral agreement protecting its credit
              exposure with this counterparty. The fair value of the Cap
              Agreements at June 30, 2002 amounted to $257,000 and is included
              in "Prepaid expenses and other" on the balance sheet.

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

              The Company has arrangements to enter into reverse repurchase
              agreements with 25 different financial institutions and on June
              30, 2002, had borrowed funds with 14 of these firms. Because the
              Company borrows money under these agreements based on the fair
              value of its ARM assets and because changes in interest rates can
              negatively impact the valuation of ARM assets, the Company's
              borrowing ability under these agreements could be limited and
              lenders may initiate margin calls in the event interest rates
              change or the value of the Company's ARM assets decline for other
              reasons.

              As of June 30, 2002, the Company had outstanding $7.554 billion of
              reverse repurchase agreements with a weighted average borrowing
              rate of 2.02% and a weighted average remaining maturity of 3.8
              months. As of December 31, 2001, the Company had outstanding
              $4.739 billion of reverse repurchase agreements with a weighted
              average borrowing rate of 2.24% and a weighted average remaining
              maturity of 2.8 months. As of June 30, 2002, $3.400 billion of the
              Company's borrowings were variable-rate term reverse repurchase
              agreements with original maturities that range from three months
              to eighteen months. The interest rates of these term reverse
              repurchase agreements are indexed to either the one- or
              three-month LIBOR rate and reprice accordingly. ARM assets with a
              carrying value of $7.956 billion, including accrued interest, and
              cash in the amount of $3.5 million collateralized the reverse
              repurchase agreements at June 30, 2002.



                                       16
<PAGE>

              At June 30, 2002, the reverse repurchase agreements had the
              following remaining maturities (dollar amounts in thousands):

                           <Table>
                           <S>                          <C>
                           Within 30 days               $     3,786,414
                           31 to 89 days                        822,237
                           90 to 365 days                     2,783,817
                           Over 365 days                        105,475
                                                        ---------------
                                                              7,497,943
                           Swap Agreements                       55,823
                                                        ---------------
                                                        $     7,553,766
                                                        ===============
                           </Table>

              As of June 30, 2002, the Company had entered into three whole loan
              financing facilities. Each of the whole loan financing facilities
              has a committed borrowing capacity of $300 million; one matures in
              March 2003 and the other two mature in November 2002. As of June
              30, 2002, the Company had $280.8 million borrowed against these
              whole loan financing facilities at an effective cost of 2.50%. As
              of December 31, 2001, the Company had $37.7 million borrowed
              against whole loan financing facilities at an effective cost of
              2.53%. The amount borrowed on the whole loan financing agreements
              at June 30, 2002 was collateralized by ARM loans with a carrying
              value of $290.7 million, including accrued interest.

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

              On December 18, 1998, the Company, through a wholly-owned
              bankruptcy remote special purpose finance subsidiary, issued
              $1.144 billion of notes payable ("Notes") collateralized by ARM
              loans and ARM securities. As part of this transaction, the Company
              retained ownership of a subordinated certificate in the amount of
              $32.4 million, which represents the Company's maximum exposure to
              credit losses on the loans collateralizing the Notes. As of June
              30, 2002, the Notes had a net balance of $316.8 million and an
              effective interest cost of 2.56%, which changes each month at a
              spread to one-month LIBOR. As of June 30, 2002, these Notes were
              collateralized by ARM loans with a principal balance of $349.3
              million. The Notes mature on January 25, 2029 and are callable by
              the Company at par once the total balance of the loans
              collateralizing the Notes is reduced to 25% of their original
              balance.

              During September 2001, the Company entered into a $10 million line
              of credit agreement collateralized by payment receivables in
              connection with Agency ARM securities. As of June 30, 2002, the
              Company was not borrowing any amount against this line. As of
              December 31, 2001, the Company had $2.6 million borrowed against
              this line of credit at an effective interest rate of 3.93%. The
              interest rate on this credit line varies with one-month LIBOR.

              As of June 30, 2002, the Company was a counterparty to forty-eight
              Swap Agreements having an aggregate notional balance of $3.796
              billion. These Swap Agreements hedge the cost of financing Hybrid
              ARMs during their fixed rate term, generally three to ten years.
              The Company limits the interest rate mismatch on the funding of
              its Hybrid ARMs (the difference between the duration of the
              fixed-rate period of Hybrid ARMs and the duration of the
              fixed-rate liabilities) to a duration difference of no more than
              one year. As of June 30, 2002, these Swap Agreements had a
              weighted average maturity of 2.5 years. In accordance with these
              Swap Agreements, the Company will pay a fixed rate of interest
              during the term of these Swap Agreements and receive a payment
              that varies monthly with



                                       17
<PAGE>

              the one-month LIBOR rate. As a result of entering into these Swap
              Agreements, the Company has reduced the interest rate variability
              of its cost to finance its Hybrid ARM assets by increasing the
              average period until the next repricing of its borrowings from 39
              days to 746 days. As of June 30, 2002, ARM assets with a carrying
              value of $40.5 million collateralized the Swap Agreements,
              including accrued interest and cash in the amount of $4.1 million.

              The total cash paid for interest was $55.0 million and $51.3
              million during the quarters ended June 30, 2002 and 2001,
              respectively.

NOTE 5.  FAIR VALUE OF FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET CREDIT RISK

              The following table presents the carrying amounts and estimated
              fair values of the Company's financial instruments at June 30,
              2002 and December 31, 2001 (dollar amounts in thousands):

              <Table>
              <Caption>
                                                            June 30, 2002               December 31, 2001
                                                     --------------------------     -------------------------
                                                      Carrying          Fair         Carrying        Fair
                                                       Amount           Value         Amount         Value
                                                     ----------      ----------     ----------     ----------
              <S>                                    <C>             <C>            <C>            <C>
              Assets:
                 ARM assets                          $8,865,122      $8,869,554     $5,732,145     $5,733,681
                 Cap Agreements                             257             257            431            431

              Liabilities:
                 Reverse repurchase agreements        7,497,943       7,497,943      4,704,895      4,704,895
                 Collateralized notes payable           316,848         317,708        432,581        434,469
                 Other borrowings                       280.827         280.827         40,283         40,283
                 Swap Agreements                         55,823          55,823         33,932         33,932
              </Table>

              The above Cap Agreements are included in the balance sheet under
              the caption "Prepaid expenses and other." The carrying amount for
              securities, which are categorized as available-for-sale, is their
              fair value whereas the carrying amount for loans, which are
              categorized as held for the foreseeable future, is their amortized
              cost.

NOTE 6.  COMMON AND PREFERRED STOCK

              On May 31, 2001, the Company filed a combined shelf registration
              statement on Form S-3 for $409 million of equity securities, which
              included $109 million of securities that were registered under a
              previously filed registration statement. On July 6, 2001, the
              combined registration statement for $409 million, which includes
              the possible issuances of common stock, preferred stock or
              warrants, was declared effective by the Securities and Exchange
              Commission. During February 2002, the Company completed a public
              offering of 6,210,000 shares of its common stock, for which it
              received net proceeds of $113.5 million. In addition, during both
              the three and six-month periods ended June 30, 2002, the Company
              issued 2,530,800 shares of common stock under a continuous equity
              offering program and received net proceeds of $48.3 million. As of
              June 30, 2002, $76.3 million of the Company's securities remained
              registered for future issuance and sale under its currently
              effective registration statement.

              During the three and six-month periods ended June 30, 2002, the
              Company issued 927,592 and 2,312,812 shares, respectively, of
              common stock under its Dividend Reinvestment and Stock Purchase
              Plan and received net proceeds of $18.5 and $45.8 million,
              respectively.

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

              On June 14, 2002, 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 paid on July 10,
              2002 to preferred shareholders of record as of June 28, 2002.

                                       18
<PAGE>
              On July 23, 2002, the Company declared the second quarter 2002
              dividend of $0.57 per common share, which will be paid on August
              16, 2002 to common shareholders of record as of August 5, 2002.

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


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 is intended to be a
              long-term incentive program. The Plan authorizes the Board of
              Directors, or a committee of the Board of Directors, to grant
              Incentive Stock Options ("ISOs") as defined under section 422 of
              the Internal Revenue Code of 1986, as amended, options not so
              qualified ("NQSOs"), Dividend Equivalent Rights ("DERs"), Stock
              Appreciation Rights ("SARs"), Phantom Stock Rights ("PSRs") and
              restricted common stock.

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

              Restricted shares of common stock had been granted at the
              discretion of the Stock Option Committee and approval of the Board
              of Directors. Restricted shares of common stock have generally
              been granted in lieu of ISOs and NQSOs, based on equivalent values
              as calculated by a Black Scholes option model. At the time
              restricted shares are granted, the Board of Directors determines
              the vesting period generally three years. In general, a portion of
              the restricted shares vest at the end of each year of the vesting
              period and the shares participate in the common dividends declared
              during the vesting period. The Company expenses the value of the
              restricted shares, based on their value as of the date of grant,
              over the vesting period. In April 2002, the Company's Board of
              Directors cancelled all previously granted restricted shares of
              common stock and replaced them with PSRs of equal value. The
              replacement PSRs vest over the original vesting period of the
              cancelled restricted shares. The Stock Option Committee, with the
              approval of the Board of Directors, is currently issuing PSRs in
              lieu of stock options using the same methodology under which the
              restricted shares of common stock were being granted.

              The Company usually issues DERs at the same time ISOs, NQSOs, PSRs
              or shares of restricted stock are granted. The Company also allows
              its DER and PSR participants to elect to reinvest their PSR and
              DER cash dividends into additional PSRs at the price of the
              Company's common stock on the related dividend payment date.

              As of June 30, 2002, there were 975,839 DERs outstanding, of which
              947,678 were vested, and 314,094 PSRs outstanding, of which
              141,548 were vested. The Company recorded an expense associated
              with DERs and PSRs of $932,000 and $273,000 for the three-month
              periods ended June 30, 2002 and 2001, respectively. During the
              six-month periods ended June 30, 2002 and 2001, the Company
              recorded an expense associated with DERs and PSRs in the amount of
              $1,479,000 and $521,000, respectively. Of the expense recorded
              during the second quarter of 2002, $676,000 was the amount of
              dividend equivalents paid on DERs and PSRs, $12,000 was the impact
              of the decrease in the Company's common stock price on the value
              of the PSRs which was recorded as a fair value adjustment and
              $268,000 was the amortization of unvested PSRs. Of the expense
              recorded during the second quarter of 2001, $125,000 was the
              amount of dividend equivalents paid on DERs and PSRs and $148,000
              was the impact of the increase in the Company's common stock price
              on the value of the



                                       19
<PAGE>

              PSRs which was recorded as a fair value adjustment. As of June 30,
              2002, all of the previously issued ISOs and NQSOs have been
              exercised, terminated or cancelled.

              Notes receivable arise from the Company financing a portion of the
              purchase of shares of common stock that have been obtained by
              directors and employees through the exercise of stock options. The
              notes mature during 2010 and accrue interest at a rate of 3.91%
              per annum. In addition, the notes are full recourse promissory
              notes and are secured by a pledge of the shares of the common
              stock acquired. Interest, which is credited to paid-in-capital, is
              payable quarterly, with the balance due at the maturity of the
              notes. The payment of the notes will be accelerated only upon the
              sale of the shares of common stock pledged for the notes. The
              notes may be prepaid at any time at the option of each borrower.
              As of June 30, 2002, there was $7.9 million of notes receivable
              outstanding from stock sales.

NOTE 8.  TRANSACTIONS WITH AFFILIATES

              The Company has a Management Agreement (the "Agreement") with
              Thornburg Mortgage Advisory Corporation ("the Manager"). Under the
              terms of the Agreement, the Manager, subject to the supervision of
              the Company's Board of Directors, is responsible for the
              management of the day-to-day operations of the Company and
              provides all personnel and office space. According to the terms of
              the Agreement, certain defined expenses of the Manager are
              reimbursed by the Company, principally expenses of the Company's
              mortgage banking subsidiary related to mortgage loan acquisition,
              selling, servicing and securitization activities. During the
              quarters ended June 30, 2002 and 2001, TMHL reimbursed the Manager
              $943,000 and $226,000 for expenses, respectively, in accordance
              with the terms of the Agreement. During the six-month periods
              ended June 30, 2002 and 2001, TMHL reimbursed the Manager
              $1,400,000 and $452,000 for expenses, respectively. The Agreement
              has a ten-year term and provides for an annual review of the
              Manager's performance under the Agreement by the unaffiliated
              directors of the Board of Directors. If the Company terminates the
              Agreement for a reason other than for cause, a minimum fee would
              be due to the Manager.

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

              For the quarters ended June 30, 2002 and 2001, the Company
              incurred costs of $1,902,000 and $1,116,000, respectively, in base
              management fees in accordance with the terms of the Management
              Agreements. For the six month periods ended June 30, 2002 and
              2001, the Company incurred base management fees of $3,546,000 and
              $2,211,000, respectively. As of June 30, 2002 and 2001, $647,000
              and $377,000, respectively, was payable by the Company to the
              Manager for the base management fee.

              The Manager is also entitled to earn performance based
              compensation in an amount equal to 20% of the Company's annualized
              net income, before performance based compensation, above an
              annualized Return on Equity equal to the ten year U.S. Treasury
              Rate plus 1%. For purposes of the performance fee calculation,
              equity is generally defined as proceeds from issuance of common
              stock before underwriter's discount and other costs of issuance,
              plus retained earnings. For the three- and six-month periods ended
              June 30, 2002, the Manager earned performance based compensation
              in the amount of $3,721,000 and $6,914,000, respectively, in
              accordance with the terms of the Agreement. For the three- and
              six-month periods ended June 30, 2001, the Manager earned
              performance based compensation in the amount of $1,073,000 and
              $1,997,000, respectively.



                                       20
<PAGE>

              During the three- and six-month periods ended June 30, 2002, the
              Company reimbursed the Manager and other affiliated companies
              $23,000 and $97,000, respectively, for certain other direct
              expenses of the Company, primarily related to shareholder
              relations, public relations and marketing consulting services.
              During the three- and six-month periods ended June 30, 2001, the
              Company reimbursed the Manager and other affiliated companies
              $36,000 and $44,000, respectively, for such expenses. The
              Company's subsidiaries, except TMHL, have entered into separate
              lease agreements with the Manager for office space in Santa Fe,
              New Mexico. During the quarters ended June 30, 2002 and 2001, the
              combined amount of rent paid to the Manager was $4,000 and $3,000,
              respectively. During the six-month periods ended June 30, 2002 and
              2001, the combined amount of rent paid to the Manager was $7,000
              and $7,000, respectively.

              Pursuant to an employee residential mortgage loan program approved
              by the Board of Directors, certain of the Company's directors and
              officers have obtained residential first lien mortgage loans from
              the Company. In general, the terms of the loans and the
              underwriting requirements are identical to the loan programs that
              the Company offers to unaffiliated third parties, except that
              participants in the program qualify for an employee discount on
              the interest rate. At the time each participant enters into a loan
              agreement, such participant executes an addendum that provides for
              the discount on the interest rate which is subject to cancellation
              at the time such participant's employment with the Company is
              terminated for any reason. Effective with the passage of U.S.
              congressional legislation in July of 2002, any new loans made to
              directors or executive officers will not be eligible for the
              employee discount. As of June 30, 2002, the aggregate balance of
              mortgage loans outstanding to directors and officers of the
              Company and employees of the Manager amounted to $5.0 million, had
              a weighted average interest rate of 4.95% and mature between 2016
              and 2032.


                                       21
<PAGE>
ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS

Certain information contained in this Quarterly Report on Form 10-Q constitutes
"Forward-Looking Statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. You can identify such forward-looking statements by the presence of
forward-looking terminology such as "may," "will," "expect," "anticipate,"
"estimate," "plan," or "continue" or the negatives thereof or similar
terminology. You should be aware that all forward-looking statements involve
risks and uncertainties including, but not limited to, risks related to the
future level and relationship of various interest rates, prepayment rates,
availability and cost of acquiring new assets, the timing of new programs and
the performance of third party, private-label relationships involved in the
origination and servicing of loans. The cautionary statements that you will find
in the "Risk Factors" section on pages 14 through 20 of our 2001 Annual Report
on Form 10-K identify important factors, including certain risks and
uncertainties, with respect to such forward-looking statements that could cause
our actual results, performance or achievements to differ materially from those
reflected in such forward-looking statements.

MANAGEMENT'S DISCUSSION OF CORPORATE GOVERNANCE

In light of recent publicity regarding Corporate Governance and recent
incidences involving the accounting practices of certain public companies, we
would like to point out a number of ways we conduct our business that
differentiate us from such companies.

First of all, our Board of Directors consists of a majority of independent
directors. The Audit, Nominating and Compensation Committees of the Board of
Directors are composed exclusively of independent directors.

Second, our Chief Executive Officer, President and Chief Financial Officer have
been involved in assuring the accuracy and completeness of all financial
statements, and are more than willing to certify the accuracy of the financial
information in each annual and quarterly report that we have issued and we are
certifying the accuracy of this quarterly report. Further, under our internal
information gathering procedures, we consult with appropriate key personnel
throughout our organization to assure the accuracy and completeness of our
disclosures, description of our operations and policies and other financial
information included in our annual and quarterly reports.

Finally, all of our long-term incentive compensation programs (which include the
granting of Phantom Stock Rights and Dividend Equivalent Rights) are fully
expensed in our statements of operations, are fully disclosed in our financial
reports and have been approved by our shareholders. At present, we do not have
any unexercised stock options outstanding.

GENERAL

We are a mortgage origination and acquisition company that originates, acquires
and invests in adjustable and variable rate mortgage ("ARM") assets comprised of
ARM securities and ARM loans, thereby providing capital to the single family
residential housing market. ARM securities represent interests in pools of ARM
loans, which often include guarantees or other credit enhancements against
losses from loan defaults. While we are not a bank or savings and loan
institution, our business purpose, strategy, method of operation and risk
profile are best understood in comparison to such institutions. We use our
equity capital and borrowed funds to originate, acquire and invest in ARM assets
and seek to generate income for distribution to our shareholders based on the
difference between the yield on our ARM assets portfolio and the cost of our
borrowings. Our corporate structure differs from most lending institutions in
that we are organized for tax purposes as a real estate investment trust
("REIT") and therefore generally pass through substantially all of our earnings
to shareholders without paying federal or state income tax at the corporate
level. We have five qualified REIT subsidiaries, all of which are consolidated
in our financial statements and federal and state tax returns. Two of these
subsidiaries, Thornburg Mortgage Funding Corporation and Thornburg Mortgage
Acceptance Corporation, are involved in financing our mortgage loan assets.
Thornburg Mortgage Home Loans, Inc. ("TMHL"), our wholly-owned mortgage banking
subsidiary, conducts our mortgage loan acquisition and origination activities.
TMHL's two wholly-owned special purpose subsidiaries, Thornburg Mortgage Funding
Corporation II and Thornburg Mortgage Acceptance Corporation II, facilitate the
financing of loans by TMHL.



                                       22
<PAGE>

Our mortgage assets portfolio may consist of either agency or privately issued
(generally publicly registered) mortgage pass-through securities, multi-class
pass-through securities, collateralized mortgage obligations ("CMOs"),
collateralized bond obligations ("CBOs") which are generally backed by high
quality mortgage-backed securities ("MBS"), ARM loans, fixed rate MBS that have
an expected duration of one year or less or short term investments that either
mature within one year or have an interest rate that reprices within one year.
Agency securities are MBS for which a U.S. Government agency or federally
chartered corporation, such as Freddie Mac, Fannie Mae or Ginnie Mae, guarantees
payments of principal or interest on the certificates. Agency securities are not
rated, but carry an implied AAA rating.

We also invest in hybrid ARM assets ("Hybrid ARMs") which are typically 30-year
loans that have a fixed rate of interest for an initial period, generally 3 to
10 years, and then convert to an adjustable rate for the balance of their term.
We limit our ownership of Hybrid ARMs with fixed rate periods of greater than
five years to no more than 10% of our total assets.

ARM assets are generally subject to periodic caps. Periodic caps generally limit
the maximum interest rate coupon change on any interest rate coupon adjustment
date to either a maximum of 1% per semiannual adjustment or 2% per annual
adjustment. The borrowings that we incur do not have similar periodic caps. We
generally do not hedge against the risk of our borrowing costs rising above the
periodic interest rate cap level on the ARM assets because the contractual
future interest rate adjustments on the ARM assets will cause their interest
rates to increase over time and reestablish the ARM assets' interest rate to a
spread over the then current index rate. We attempt to mitigate the effect of
periodic caps by acquiring variable rate CMOs and CBOs, Hybrid ARMs and certain
other ARM loans that do not have a periodic cap. As of June 30, 2002,
approximately $7.0 billion of our ARM securities and ARM loans did not have
periodic caps or were Hybrid ARMs, representing approximately 78% of total ARM
assets.

Our investment policy is to invest at least 70% of total assets in High Quality
ARM assets and short term investments. High Quality means:

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

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

     (3)     securities that are unrated or whose ratings have not been updated
             but are determined to be of comparable quality (by the rating
             standards of at least one of the Rating Agencies) to a High Quality
             rated mortgage security, as determined by the Manager (as defined
             below) and approved by our Board of Directors; or

     (4)     the portion of ARM loans that have been deposited into a trust and
             have received a credit rating of AA or better from at least one
             Rating Agency.

The remainder of our 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, Baa or better by at least one of the Rating Agencies;

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

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

     (4)     real estate properties acquired as a result of foreclosing on our
             ARM loans; or

     (5)     as authorized by our Board of Directors, ARM securities rated less
             than Investment Grade that are created as a result of loan
             acquisition and securitization efforts and that equal an amount no
             greater than 17.5% of shareholders' equity, measured on a
             historical cost basis.

We acquire and originate high quality mortgage loans through TMHL from three
sources: (i) bulk acquisitions, which involve acquiring pools of whole loans
which are originated using the seller's guidelines and underwriting



                                       23
<PAGE>

criteria, (ii) correspondent lending, which involves acquiring loans from
correspondent lenders or other loan originators who originate the individual
loans using our underwriting criteria and guidelines, and (iii) direct retail
loan originations, which are loans that we originate, including fixed rate loans
that we underwrite to third party specifications and sell to third party
investors. The loans that we acquire or originate are financed through warehouse
borrowing arrangements and securitized for our portfolio or, in the case of
fixed rate loans, sold to third parties.

We perform our own underwriting reviews of loans that we purchase from bulk
sellers or acquire from approved correspondents. We use private label,
fee-based, third party service providers to underwrite, process and close the
loans that we originate. We also service mortgage loans that we acquire or
originate using a contract, private label subservicer. We believe the
efficiencies and expertise that our third party service providers have developed
through specialization afford us an opportunity to enter the mortgage
origination and loan servicing business in a cost effective manner with minimum
initial investment.

Our loan acquisition and origination strategies are designed to take advantage
of our portfolio lending capability, cost efficient operation, competitive
advantages and available technology, enabling us to provide attractive and
innovative mortgage products, competitive mortgage rates and a high level of
customer service. By eliminating intermediaries, whenever possible, between the
borrower and the lender, we expect to acquire and originate loans for retention
in our portfolio at attractive yields while offering our customers innovative
mortgage products at competitive rates and fees. Our expansion into residential
mortgage loan origination is intended to continue our strategy of acquiring only
high quality mortgage loans with the same emphasis on loan quality as in our
past loan acquisition activities.

We offer mortgages on-line utilizing a third party, private label, web-based
origination system. Prospective borrowers are able to look up mortgage loan
product and interest rate information through our website, obtain access to a
variety of mortgage calculators and consumer help features, submit an
application on-line and obtain a pre-approval of their loan. Once a mortgage
loan application has been submitted, one of our representatives will assist the
borrower in completing the loan process.

Since we do not invest in real estate mortgage investment conduit ("REMIC")
residuals or other CMO residuals, we do not create excess inclusion income or
unrelated business taxable income for tax-exempt investors. Therefore, our
securities are eligible for purchase by tax-exempt investors, such as pension
plans, profit sharing plans, 401(k) plans, Keogh plans and Individual Retirement
Accounts.

FINANCIAL CONDITION

At June 30, 2002, we held total assets of $8.943 billion, $8.865 billion of
which consisted of ARM assets, as compared to $5.804 billion and $5.732 billion,
respectively, at December 31, 2001. Since commencing operations, we have
primarily 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, 2002, 94.8% of the assets that we held, including cash and cash equivalents,
were High Quality assets, far exceeding our investment policy minimum
requirement of investing at least 70% of our total assets in High Quality ARM
assets and cash and cash equivalents. Of the ARM assets that we owned as of June
30, 2002, 85.8% are in the form of adjustable rate pass-through certificates or
ARM loans. The remainder are floating rate classes of CMOs (8.2%), short term,
fixed rate classes of CMOs (4.0%) or investments in floating rate classes of
CBOs (2.0%) backed primarily by ARM MBS.




                                       24
<PAGE>


The following table presents a schedule of ARM assets owned at June 30, 2002 and
December 31, 2001 classified by High Quality and Other Investment assets and
further classified by type of issuer and by ratings categories.

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

<Table>
<Caption>
                                                    June 30, 2002                       December 31, 2001
                                         ------------------------------------  ------------------------------------
                                             Carrying           Portfolio          Carrying           Portfolio
                                               Value               Mix              Value                Mix
                                         ------------------  ----------------  -----------------   ----------------
<S>                                        <C>                   <C>            <C>                         <C>
HIGH QUALITY:
   Freddie Mac/Fannie Mae                  $    3,942,738             44.5%     $    2,401,831              41.9%
   Privately Issued:
     AAA/Aaa Rating                             4,056,733 (1)         45.8           2,699,868 (1)          47.1
     AA/Aa Rating                                 378,007              4.2             372,413               6.5
                                           --------------       ----------      --------------        ----------
       Total Privately Issued                   4,434,740             50.0           3,072,281              53.6
                                           --------------       ----------      --------------        ----------
       Total High Quality                       8,377,478             94.5           5,474,112              95.5
                                           --------------       ----------      --------------        ----------

OTHER INVESTMENT:
   Privately Issued:
     A Rating                                      55,870              0.6              49,627               0.9
     BBB/Baa Rating                                38,871              0.4              69,698               1.2
     BB/Ba Rating and Other                        41,376 (1)          0.5              39,942 (1)           0.7
   ARM loans pending securitization               351,527              4.0              98,766               1.7
                                           --------------       ----------      --------------        ----------
       Total Other Investment                     487,644              5.5             258,033               4.5
                                           --------------       ----------      --------------        ----------
       Total ARM Portfolio                 $    8,865,122            100.0%    $     5,732,145             100.0%
                                           ==============       ==========      ==============        ==========

</Table>

----------

     (1)  The AAA Rating category includes $324.2 million and $442.2 million of
          whole loans as of June 30, 2002 and December 31, 2001, respectively,
          that have been credit enhanced to AAA by a combination of an insurance
          policy purchased from a third party and an unrated subordinated
          certificate retained in the amount of $31.7 million and $31.8 million
          as of June 30, 2002 and December 31, 2001, respectively. The
          subordinated certificate is included in the BB/Ba Rating and Other
          category.

As of June 30, 2002 and December 31, 2001, we had reduced the carrying value of
our securitized ARM loans by $10,510,000 and $7,925,000, respectively, due to
estimated credit losses (other than temporary declines in fair value). In
addition, we had reduced the cost basis of other ARM securities by $1,002,000
and $1,151,000, as of the same dates, respectively, related to Other Investments
that we purchased at a discount that included an estimate of credit losses.

As of June 30, 2002, our ARM loan portfolio included 8 loans that are considered
seriously delinquent (60 days or more delinquent) with an aggregate balance of
$2.2 million. The ARM loan portfolio also includes two properties that we
acquired as the result of foreclosure procedures in the amount of $508,000. The
average original effective loan-to-value ratio on the delinquent loans and the
acquired properties is approximately 58%. We believe that our current level of
basis adjustments and allowance for loan losses is more than adequate to cover
estimated losses from these loans and properties.




                                       25
<PAGE>

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

                 <Table>
                 <Caption>
                                                                            Allowance
                                                     Basis Adjustments     for Losses
                                                  -----------------------  ----------
                                                  Securitized  Other ARM
                                                   ARM Loans   Securities   ARM Loans   Total
                                                  -----------  ----------   ---------  --------
                 <S>                                <C>         <C>         <C>        <C>
                 Balance, December 31, 2001         $  7,925    $  1,151    $    100   $  9,176
                 Basis adjustment recorded at
                    time of loan securitization        2,585          --          --      2,585
                 Charge-offs                              --        (293)         --       (293)
                 Recoveries                               --         144          --        144
                                                    --------    --------    --------   --------
                 Balance, June 30, 2002             $ 10,510    $  1,002    $    100   $ 11,612
                                                    ========    ========    ========   ========
</Table>

The following table classifies our portfolio of ARM assets by type of interest
rate index.

                               ARM ASSETS BY INDEX
                          (Dollar amounts in thousands)

<Table>
<Caption>
                                                     June 30, 2002            December 31, 2001
                                                -----------------------     ----------------------
                                                Carrying      Portfolio     Carrying     Portfolio
                                                  Value          Mix         Value          Mix
                                                --------      ---------     --------     ---------
<S>                                             <C>              <C>       <C>              <C>
ARM ASSETS:
    INDEX:
       One-month LIBOR                          $1,077,614       12.2%     $  633,758       11.1%
       Three-month LIBOR                           178,482        2.0         171,262        3.0
       Six-month LIBOR                             497,499        5.6         261,245        4.6
       Six-month Certificate of Deposit            110,738        1.3         140,887        2.5
       Six-month Constant Maturity Treasury         12,531        0.1          16,809        0.3
       One-year Constant Maturity Treasury       1,315,230       14.8       1,651,453       28.8
       Cost of Funds                               108,095        1.2         182,437        3.2
                                                ----------      -----      ----------      -----
                                                 3,300,189       37.2       3,057,851       53.5
                                                ----------      -----      ----------      -----

HYBRID ARM ASSETS                                5,182,820       58.5       2,397,629       41.7
ONE-YEAR MATURITY - FIXED RATE                     382,113        4.3         276,665        4.8
                                                ----------      -----      ----------      -----
                                                $8,865,122      100.0%     $5,732,145      100.0%
                                                ==========      =====      ==========      =====
</Table>

The ARM portfolio had a current weighted average interest rate coupon of 5.27%
at June 30, 2002. This consisted of an average coupon of 5.48% on the hybrid
portion of the portfolio and an average coupon of 4.97% on the rest of the
portfolio. If the non-hybrid portion of the portfolio had been "fully indexed,"
the weighted average coupon of the non-hybrid portion of the portfolio would
have been approximately 4.43%, based upon the current composition of the
portfolio and the applicable indices. The term "fully indexed" refers to an ARM
asset that has an interest rate that is currently equal to its applicable index
plus a margin to the index that is specified by the terms of the ARM asset.

The ARM portfolio had a current weighted average interest rate coupon of 5.96%
at December 31, 2001. This consisted of an average coupon of 6.26% on the hybrid
portion of the portfolio and an average coupon of 5.71% on the rest of the
portfolio. If the non-hybrid portion of the portfolio had been "fully indexed,"
the weighted average coupon of the ARM portfolio would have been approximately
5.16%, based upon the current composition of the portfolio and the applicable
indices at that time. The lower average interest rate coupon on the ARM
portfolio as of June 30, 2002 compared to the end of 2001 is reflective of the
Federal Reserve Board interest rate decreases that occurred during 2001. The
average interest rate on the ARM portion of the portfolio is expected to
continue to decrease during 2002 until it reaches the "fully indexed" rate.



                                       26
<PAGE>

At June 30, 2002, the current yield of the ARM assets portfolio was 4.99%,
compared to 5.09% as of December 31, 2001. The decrease in the yield of 0.10% as
of June 30, 2002, compared to December 31, 2001, is due to the decreased
weighted average interest rate coupon discussed above, which decreased by 0.69%.
This decline in the average interest rate coupon was partially offset by a lower
level of net premium amortization, which had the effect of increasing the yield
by 0.49%. Additionally, the impact of non-interest earning principal payments
receivables also increased the portfolio yield by 0.10%. The current yield
includes the impact of the amortization of applicable premiums and discounts and
the impact of principal payment receivables.


The ARM portfolio had an average term to the next repricing date of 777 days as
of June 30, 2002, compared to 617 days as of December 31, 2001. The non-hybrid
portion of the portfolio had an average term to the next repricing date of 64
days and the hybrid portion had an average term to the next repricing date of
3.5 years at June 30, 2002. As of June 30, 2002, Hybrid ARMs comprised 58.5% of
the total ARM portfolio, compared to 41.7% as of the end of 2001. We attempt to
mitigate our interest rate risk by funding our ARM assets with borrowings that
have maturities that approximately match the interest rate adjustment periods on
our ARM assets. Therefore, many of our borrowings bear variable or short term
(one year or less), fixed interest rates because many of our ARM assets have
interest rates that adjust within one year. However, we finance our Hybrid ARM
portfolio with longer term, fixed rate borrowings such that the duration
difference of the fixed interest rate period of the Hybrid ARMs and the
corresponding borrowings is one year or less. Duration is a calculation that
measures the expected price volatility of financial instruments based on changes
in interest rates over time. By maintaining a duration difference of less than
one year, the price change of our Hybrid ARM portfolio is expected to be a
maximum of 1% for a 1% parallel shift in interest rates net of the fair value
change of our Swap Agreements and other borrowings funding our Hybrid ARMS. As
of June 30, 2002, the duration difference applicable to our Hybrid ARM portfolio
was approximately three months.



                                       27
<PAGE>

The following table presents various characteristics of our ARM and Hybrid ARM
loan portfolio as of June 30, 2002. This information pertains to loans held for
securitization, loans held as collateral for notes payable and loans securitized
for our own portfolio for which we retained credit loss exposure. The combined
amount of the loans included in this information is $2.730 billion.

                ARM AND HYBRID ARM LOAN PORTFOLIO CHARACTERISTICS

<Table>
<Caption>
                                    Average            High              Low
                                  -----------      -------------      ---------
<S>                               <C>              <C>                <C>
     Unpaid principal balance     $   366,424      $   5,106,477      $   1,224
     Coupon rate on loans                5.73%              9.00%          2.28%
     Pass-through rate                   5.40%              8.00%          2.28%
     Pass-through margin                 1.83%              3.48%          0.23%
     Lifetime cap                       11.78%             16.75%          8.12%
     Original term (months)               357                480            120
     Remaining term (months)              341                480             49
</Table>

<Table>
     <S>                              <C>             <C>                          <C>
     Geographic distribution (top 5 states):          Property type:
         California                   30.12%              Single-family            63.46%
         Georgia                      12.02               DeMinimus PUD            24.04
         Colorado                      5.91               Condominium               7.96
         New York                      5.84               Other                     4.54
         Florida                       5.84

     Occupancy status:                                Loan purpose:
         Owner occupied               86.71%              Purchase                 37.62%
         Second home                  10.91               Cash out refinance       29.42
         Investor                      2.38               Rate & term refinance    32.96

     Documentation type:                              Periodic Cap:
         Full/Alternative             93.62%              None                     24.75%
         Other                         6.38               1.00% or less             1.99
                                                          2.00%                    72.68
                                                          Over 2.00%                0.58

     Average effective original                       Percent of loan balances
         loan-to-value:               68.69%              that are interest only:  75.47%
</Table>

As of June 30, 2002, we serviced $1.0 billion of our loans and had 2,545
customer relationships. We hold all of the loans that we service in our
portfolio in the form of securitized loans or loans to be securitized for our
portfolio. We have not retained or capitalized any servicing rights on loans
sold.




                                       28
<PAGE>

During the quarter ended June 30, 2002, we purchased $1.9 billion of ARM
securities, 100% of which were High Quality assets, and $618.5 million of ARM
loans, generally originated to "A" quality underwriting standards. Of the ARM
assets that we acquired during the three months ended June 30, 2002,
approximately 80% were Hybrid ARMs, 6% were fixed rate, short term securities,
13% were indexed to LIBOR and 1% were indexed to U.S. Treasury bill rates. The
following table compares our ARM asset acquisition and origination activity for
the consecutive quarters ended June 30, 2002 and March 31, 2002 (dollar amounts
in thousands):

<Table>
<Caption>
                                             For the quarters ended:
                                        ------------------------------------
                                        June 30, 2002         March 31, 2002
                                        -------------         --------------
<S>                                     <C>                   <C>
ARM SECURITIES:
   Freddie Mac/Fannie Mae               $      730,152        $    1,703,840
   High Quality, privately issued            1,142,260                83,283
   Other Investment ARM securities                                        --
                                        --------------        --------------
                                             1,872,412             1,787,123
                                        --------------        --------------

LOANS:
     Bulk acquisitions                         167,638               200,812
     Correspondent purchases                   380,872               311,603
     Direct retail originations                 70,004                86,942
                                        --------------        --------------
                                               618,514               599,357
                                        --------------        --------------

       Total production                 $    2,490,926        $    2,386,480
                                        ==============        ==============
</Table>

Since 1997, we have emphasized purchasing ARM and Hybrid ARM assets; high
quality, floating rate collateralized mortgages and short term, fixed rate
securities at substantially lower prices relative to par in order to reduce the
potential impact of rapid prepayments. . In doing so, the average
premium/(discount) that we paid for ARM assets acquired in the first six months
of 2002 and for the year 2001 was 0.65% and 0.12% of par, respectively, as
compared to 3.29% of par in 1997 when we emphasized the purchase of seasoned ARM
assets. In part, as a result of this strategy, our unamortized net premium as a
percent of par decreased to 0.89% as of June 30, 2002, compared to 0.94% as of
December 31, 2001 and down from 2.83% as of the end of 1997.

During the three month and six month periods ended June 30, 2002, we securitized
$508.3 million and $957.8 million of our ARM loans into a series of privately
issued multi-class ARM securities, all of which we retained for our ARM
portfolio. We securitize the ARM loans that we acquire into ARM securities for
our own portfolio in order to reduce the cost of financing the portfolio and in
order to enhance the high quality and highly liquid characteristics of our
portfolio, thereby improving our access to mortgage finance markets. In doing
so, we retain all of the economic interest and risk of the loans, except those
swapped for Fannie Mae guaranteed certificates. Of the loans that we securitized
during the first six months of 2002, 99.7% were at least Investment Grade
securities and 0.3% were subordinate securities that provide credit support to
the Investment Grade securities.

As of June 30, 2002, we had commitments to purchase $180.4 million of ARM
securities and $338.3 million of ARM loans through retail channels.

During the three month period ended June 30, 2002, we sold $12.6 million of ARM
securities for a gain of $95,000 and one loan for a loss of $11,000, resulting
in a net gain of $84,000. During the three month period ended June 30, 2001, we
sold $108.1 million of ARM securities and realized $244,000 in gains and
$245,000 in losses. In addition, we sold $0.3 million of fixed rate loans that
we had originated during the second quarter of 2001 for a gain of $3,000.

For the quarter ended June 30, 2002, our mortgage assets paid down at an
approximate average annualized Constant Paydown Rate ("CPR") of 26% compared to
28% for the quarter ended June 30, 2001 and 34% for the quarter ended March 31,
2002. When prepayment experience increases, we have to amortize our premiums
over a shorter time period, resulting in a reduced yield to maturity on our ARM
assets. Conversely, if actual prepayment experience decreases, we would amortize
the premium over a longer time period, resulting in a higher yield to maturity.
We



                                       29
<PAGE>

monitor our prepayment experience on a monthly basis in order to adjust the
amortization of the net premium, as appropriate.

The fair value of our portfolio of ARM assets classified as available-for-sale
increased by 0.24% from a negative adjustment of 0.10% of the portfolio as of
December 31, 2001, to a positive adjustment of 0.14% as of June 30, 2002. This
price improvement was primarily due to the effect of declining medium to
long-term interest rates on the fair value of our Hybrid ARM assets. The amount
of the adjustment to the fair value on the ARM assets classified as
available-for-sale improved from a negative adjustment of $5.3 million as of
December 31, 2001, to a positive adjustment of $11.2 million as of June 30,
2002. All of our ARM securities are classified as available-for-sale and are
carried at their fair value.

Our ARM assets generally have a maximum lifetime interest rate cap or ceiling,
meaning that each ARM asset contains a contractual maximum interest rate. Since
our borrowings are not subject to equivalent interest rate caps, we enter into
Cap Agreements which have the effect of offsetting a portion of our borrowing
costs, thereby reducing the effect of the lifetime cap feature on our ARM assets
and protecting the net margin on our ARM assets in high interest rate
environments. At June 30, 2002, our Cap Agreements had a remaining notional
balance of $2.205 billion with an average final maturity of 1.3 years, compared
to a remaining notional balance of $2.254 billion with an average final maturity
of 1.5 years at December 31, 2001. At June 30, 2002, the fair value of our Cap
Agreements was $0.3 million compared to a fair value of $0.4 million as of
December 31, 2001. Pursuant to the terms of the Cap Agreements, we will receive
cash payments if the one month or three month LIBOR indices increase above
certain specified levels, which range from 6.00% to 12.00% and average
approximately 9.90%.

The following table presents information about our Cap Agreement portfolio as of
June 30, 2002:

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

<Table>
<Caption>
  Hedged      Weighted                                       Weighted
ARM Assets    Average      Cap Agreement                      Average
Balance(1)    Life Cap    Notional Balance   Strike Price  Remaining Term
----------    --------    ----------------   ------------  --------------
<S>             <C>       <C>                   <C>          <C>
$   83,134      8.40%     $      73,851         6.39%        1.5 Years
   222,858      8.40            200,000         7.50         1.5
   576,714      8.84            518,932         8.05         1.3
    27,040      9.90             25,000         9.00         0.5
    59,111     10.07             52,809         9.50         0.3
   200,241     10.67            180,494        10.02         0.6
    60,079     10.92             54,000        10.50         0.6
   522,627     11.40            470,000        11.00         1.2
   311,441     12.30            280,000        11.50         2.1
   581,152     13.21            350,000        12.00         1.3
----------     -----      -------------        -----         --------
$2,644,397     10.87%     $   2,205,086         9.90         1.3 Years
==========     =====      =============        =====         =========
 </Table>
----------
(1)  Excludes ARM assets that do not have lifetime interest rate caps or are
     hybrids that are match funded during their fixed rate period, in
     accordance with our investment policy.

We enter into interest rate Swap Agreements in order to manage our interest rate
exposure when financing our ARM assets. We generally borrow money based on short
term interest rates, either by entering into borrowings with maturity terms
ranging from one month to six months or by entering into borrowings with longer
maturity terms of one to two years that reprice based on a frequency ranging
from one month to six months. Our ARM assets generally have interest rates that
reprice based on frequency terms of one to twelve months. Our Hybrid ARMs
generally have an initial fixed interest rate period of three to ten years. As a
result, our existing and forecasted borrowings reprice to a new interest rate on
a more frequent basis than do our ARM assets. When we enter into a Swap
Agreement, we agree to pay a fixed rate of interest and to receive a variable
interest rate based on LIBOR. These Swap Agreements have the effect of
converting our variable rate debt into fixed rate debt over the life of the Swap
Agreements. We use Swap Agreements as a cost effective way to lengthen the
average repricing period of our



                                       30
<PAGE>

variable rate and short term borrowings such that the average repricing period
of our borrowings more closely matches the average repricing period of our ARM
assets.

As of June 30, 2002, we were a counterparty to forty-eight Swap Agreements
having an aggregate notional balance of $3.796 billion. These Swap Agreements
hedged our short-term financing during the fixed interest rate period of the
Hybrid ARM assets we held in our portfolio and had a weighted average maturity
of 2.5 years. Entering into these Swap Agreements has enabled us to reduce the
interest rate variability of the cost to finance our Hybrid ARM assets by
increasing the average period until the next repricing of the associated
borrowings from 39 days to 746 days. The average remaining fixed rate term of
our Hybrid ARM assets as of June 30, 2002 was 3.5 years. Further, the difference
between the duration of Hybrid ARMs and the duration of the borrowings funding
Hybrid ARMs, as of June 30, 2002, was approximately three months.

In accordance with Financial Accounting Standards No. 133 ("FAS 133"), we
designate all of these Swap Agreements as cash flow hedges and, as of June 30,
2002, carry them on the balance sheet at their negative fair value of $59.8
million. As of June 30, 2002, the fair value adjustment for Swap Agreements was
a decrease to "Accumulated other comprehensive income" in the amount of $55.9
million. The Swap Agreements and the short-term borrowings they hedge have
nearly identical terms and characteristics with respect to the applicable index
and interest rate repricing dates, and we have calculated the effectiveness of
this cash flow hedge to be approximately 100%. As a result, we have recorded all
changes in the unrealized gains and losses on Swap Agreements in "Accumulated
other comprehensive income" and we have reclassified all such changes to
earnings as interest expense is recognized on our hedged borrowings.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2002

For the quarter ended June 30, 2002, our net income was $27,938,000, or $0.63
per share (Basic and Diluted EPS), based on a weighted average of 41,950,000
shares outstanding. That compares to $11,639,000, or $0.46 per share (Basic and
Diluted EPS) for the quarter ended June 30, 2001, based on a weighted average of
21,791,000 shares outstanding, a 37% increase in our earnings per share.

The table below highlights the historical trend, 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 of our manager, Thornburg Mortgage Advisory Corporation (the
"Manager"):

                COMPONENTS OF RETURN ON AVERAGE COMMON EQUITY(1)

<Table>
<Caption>
                                                                                                                 ROE in
                                                                                                      10-Year   Excess of
                  Net                  Provision   Gain     Operating                         Net        US      10-Year
   For the     Interest     Hedging      For      on ARM      Expense   Perform.  Preferred  Income/  Treasury  US Treas.
   Quarter      Income/     Expense/    Losses/   Sales/       (2)/       Fee/    Dividend/  Equity    Average   Average
    Ended       Equity       Equity     Equity    Equity      Equity     Equity     Equity    (ROE)     Yield     Yield
    -----       ------       ------     ------    ------      ------     ------     ------    -----     -----     -----
<S>              <C>         <C>        <C>        <C>        <C>        <C>        <C>       <C>       <C>      <C>
Jun 30, 2000     10.74%        --       0.47%      0.06%      1.78%        --       2.05%      6.50%    6.18%     0.32%
Sep 30, 2000     11.01%        --       0.33%        --       2.07%        --       2.05%      6.56%    5.89%     0.67%
Dec 31, 2000     11.77%        --       0.21%      0.29%      2.37%      0.06%      2.05%      7.37%    5.57%     1.80%
Mar 31, 2001     17.40%      0.18%      0.22%        --       2.59%      1.12%      2.03%     11.24%    5.04%     6.21%
Jun 30, 2001     18.50%      0.55%      0.18%        --       2.81%      1.26%      1.97%     11.73%    5.28%     6.45%
Sep 30, 2001     21.36%      0.55%      0.25%        --       3.07%      1.76%      1.80%     13.94%    4.99%     8.95%
Dec 31, 2001     25.25%      0.19%      0.08%        --       3.51%      2.70%      1.46%     17.31%    4.76%    12.55%
Mar 31, 2002     22.71%      0.23%        --         --       2.75%      2.29%      1.20%     16.24%    5.79%    11.16%
Jun 30, 2002     22.53%      0.38%        --       0.05%      2.90%      2.27%      1.02%     16.01%    5.11%    10.90%
</Table>

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

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



                                       31
<PAGE>

Our return on average common equity was 16.01% for the quarter ended June 30,
2002 compared to 11.73% for the quarter ended June 30, 2001. Our return on
equity improved in this past quarter compared to the same quarter of the prior
year primarily because our net interest income improved. This improvement was
due, in part, to the lower cost of funds of our borrowings and because the yield
on our net interest earning assets is benefiting from acquisitions of loans and
other ARM and Hybrid ARM assets acquired at average prices close to par,
replacing lower yielding assets that paid off.

The following table presents the components of our net interest income:

                   COMPARATIVE NET INTEREST INCOME COMPONENTS
                          (Dollar amounts in thousands)

<Table>
<Caption>
                                             For the quarters ended June 30,
                                           ----------------------------------
                                               2002                  2001
                                           ------------          ------------
<S>                                        <C>                   <C>
 Coupon interest income on ARM assets      $     99,530          $     72,697
 Amortization of net premium                     (3,431)               (5,393)
 Cash and cash equivalents                          340                   375
                                           ------------          ------------
     Interest income                             96,439                67,679
                                           ------------          ------------

 Reverse repurchase agreements                   32,748                38,644
 AAA notes payable                                2,229                 7,192
 Other borrowings                                 2,504                 2,106
 Interest rate swaps                             22,001                 4,023
                                           ------------          ------------
     Interest expense                            59,482                51,965
                                           ------------          ------------

 Net interest income                       $     36,957          $     15,714
                                           ============          ============
</Table>

As presented in the table above, our net interest income increased by $21.2
million in the second quarter of 2002 compared to the second quarter of 2001.
The change was attributable to a $28.8 million increase in interest income due
to an increased asset base, partially offset by a $7.5 million increase in
interest expense as a result of higher interest rates. The following two tables
explain the increase in terms of volume and rate variances.




                                       32
<PAGE>


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

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

<Table>
<Caption>
                                                                  For the quarters ended June 30,
                                             ----------------------------------------------------------------------------
                                                           2002                                       2001
                                             ------------------------------------     -----------------------------------
                                                                       Interest                                 Interest
                                              Average      Effective    Income/        Average     Effective    Income/
                                              Balance        Rate       Expense        Balance       Rate       Expense
                                             ----------      ----      ----------     ----------     ----      ----------
<S>                                          <C>             <C>       <C>            <C>            <C>       <C>
Interest Earning Assets:
  Adjustable-rate mortgage assets            $7,771,676      4.95%     $   96,099     $4,362,918     6.17%     $   67,304
  Cash and cash equivalents                      74,434      1.83             340         31,461     4.77             375
                                             ----------      ----      ----------     ----------     ----      ----------
                                              7,846,110      4.91          96,439      4,394,380     6.15          67,679
                                             ----------      ----      ----------     ----------     ----      ----------
Interest Bearing Liabilities:
  Reverse repurchase agreements               6,426,458      3.41          54,749      3,305,686     5.16          42,667
  Collateralized notes payable                  344,902      2.59           2,229        547,165     5.26           7,192
  Other borrowings                              337,952      2.96           2,504        154,542     5.45           2,106
                                             ----------      ----      ----------     ----------     ----      ----------
                                              7,109,312      3.35          59,482      4,007,393     5.19          51,965
                                             ----------      ----      ----------     ----------     ----      ----------

Net Interest Earning Assets and Spread       $  736,798      1.56%     $   36,957     $  386,987     0.96%     $   15,714
                                             ==========      ====      ==========     ==========     ====      ==========
Yield on Net Interest Earning Assets(1)                      1.88%                                   1.43%
                                                             ====                                    ====
</Table>
----------
(1) Yield on Net Interest Earning Assets is computed by dividing annualized
    net interest income by the average daily balance of interest earning
    assets.

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

<Table>
<Caption>
                                          Three Months Ended June 30,
                                               2002 versus 2001
                                     ------------------------------------
                                       Rate         Volume        Total
                                     --------      --------      --------
<S>                                  <C>           <C>           <C>
Interest Income:
   ARM assets                        $(13,355)     $ 42,150      $ 28,795
   Cash and cash equivalents             (210)          174           (35)
                                     --------      --------      --------
                                      (13,565)       42,324        28,759
                                     --------      --------      --------
Interest Expense:
   Reverse repurchase agreements      (14,505)       26,587        12,081
   Collateralized notes payable        (3,655)       (1,307)       (4,962)
   Other borrowings                      (961)        1,359           398
                                     --------      --------      --------
                                      (19,121)       26,638         7,517
                                     --------      --------      --------

Net interest income                  $  5,556      $ 15,687      $ 21,243
                                     ========      ========      ========
</Table>


As a result of the yield on our interest-earning assets decreasing to 4.91%
during the second quarter of 2002 from 6.15% during the same period of 2001, a
decrease of 1.23%, and our cost of funds decreasing even more to 3.35% from
5.19% during the same time period, a decrease of 1.84%, net interest income
increased by $21,243,000. This increase in net interest income is both a
favorable rate variance and a favorable volume variance. There was a net
favorable rate variance of $5,556,000, primarily due to a favorable rate
variance on borrowings that increased net interest income by $19,121,000,
partially offset by an unfavorable rate variance on our ARM assets portfolio and
other interest-earning assets in the amount of $13,565,000. The increased
average size of our portfolio during the



                                       33
<PAGE>

second quarter of 2002 compared to the same period in 2001 increased net
interest income in the amount of $15,687,000. The average balance of our
interest-earning assets was $7.846 billion during the second quarter of 2002,
compared to $4.394 billion during the same period of 2001 -- an increase of
78.6%.

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

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

<Table>
<Caption>
                           Weighted                                                    Yield on
               Average     Average                       Yield on                        Net
 As of the     Interest     Fully    Weighted   Yield    Interest              Net     Interest
  Quarter      Earning     Indexed    Average   Adjust-  Earning    Cost of  Interest   Earning
   Ended        Assets     Coupon     Coupon    ment(2)   Assets     Funds    Spread    Assets
 ---------     --------    --------  --------   -------  --------   -------  --------  --------
<S>            <C>          <C>        <C>       <C>       <C>       <C>       <C>       <C>
Jun 30, 2000   $4,344.6     7.87%      7.48%     0.59%     6.89%     6.75%     0.14%     0.81%
Sep 30, 2000   $4,066.1     7.84%      7.68%     0.68%     7.00%     6.72%     0.28%     0.88%
Dec 31, 2000   $4,131.4     7.46%      7.75%     0.69%     7.06%     6.75%     0.31%     0.93%
Mar 31, 2001   $4,260.2     6.64%      7.47%     0.79%     6.68%     5.48%     1.20%     1.34%
Jun 30, 2001   $4,394.4     6.06%      6.84%     0.97%     5.87%     4.75%     1.12%     1.43%
Sep 30, 2001   $4,641.4     5.63%      6.49%     0.85%     5.64%     3.74%     1.90%     1.71%
Dec 31, 2001   $5,522.5     5.16%      5.96%     0.89%     5.07%     3.01%     2.06%     2.10%
Mar 31, 2002   $6,421.4     5.05%      5.42%     0.53%     4.89%     3.28%     1.61%     1.97%
Jun 30, 2002   $7,846.1     5.06%      5.27%     0.30%     4.97%     3.17%     1.80%     1.88%
</Table>

----------

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

     (2) Yield adjustments include the impact of amortizing premiums and
         discounts, the cost of hedging activities, the amortization of deferred
         gains from hedging activities and the impact of principal payment
         receivables.

The following table presents the components of the yield adjustments for the
dates presented in the table above.

                COMPONENTS OF THE YIELD ADJUSTMENTS ON ARM ASSETS

<Table>
<Caption>
                                                     Amortization
                              Impact of              of Deferred
As of the       Premium/      Principal    Hedging    Gain From        Total
 Quarter        Discount      Payments    Activity/    Hedging         Yield
  Ended       Amortization   Receivable     Other      Activity     Adjustment
---------     ------------   ----------   ---------  ------------   ----------
<S>              <C>           <C>         <C>         <C>              <C>
Jun 30, 2000     0.46%         0.10%       0.06%       (0.03)%          0.59%
Sep 30, 2000     0.56%         0.10%       0.05%       (0.03)%          0.68%
Dec 31, 2000     0.54%         0.13%       0.05%       (0.03)%          0.69%
Mar 31, 2001     0.61%         0.14%       0.04%          -- %          0.79%
Jun 30, 2001     0.74%         0.20%       0.03%          -- %          0.97%
Sep 30, 2001     0.69%         0.14%       0.02%          -- %          0.85%
Dec 31, 2001     0.68%         0.20%       0.01%          -- %          0.89%
Mar 31, 2002     0.33%         0.16%       0.04%          -- %          0.53%
Jun 30, 2002     0.19%         0.11%       0.00%          -- %          0.30%
</Table>

We recorded hedging expense during the second quarter of 2002 of $622,000. At
June 30, 2002, the fair value of our Cap Agreements was $257,000 compared to a
fair value of $212,000 as of March 31, 2002, a decrease in fair value of
$460,000, after adjusting for purchasing Cap Agreements during the second
quarter for $505,000. Since we are not currently applying hedge accounting to
our Cap Agreements, we recorded this change in fair value of the Cap Agreements
as hedging expense during the quarter ended June 30, 2002. Additionally, during
the second



                                       34
<PAGE>

quarter of 2002, we reclassified to earnings $149,000 of the transition
adjustment recorded in "Accumulated other comprehensive income" on January 1,
2001, in connection with the implementation of FAS 133 and recorded other
hedging expenses in the amount of $13,000.

During the second quarter of 2001, we recorded a hedging expense of $466,000. At
June 30, 2001, the fair value of our Cap Agreements and Option Contracts was
$0.6 million compared to a fair value of $0.5 million as of March 31, 2001. In
accordance with FAS 133, this change in the fair value of the Cap Agreements and
Option Contracts was compared to the change in the fair value of the lifetime
interest rate cap component of our ARM assets, the hedged assets. As a result,
we determined that the fair value hedge met the effectiveness requirements of
FAS 133 to qualify for fair value hedge accounting treatment and we recorded the
ineffective portion of $466,000 as a hedging expense. The ineffective portion is
measured as the change in the hedge instruments in excess of the change in the
hedged assets.

Since we began acquiring whole loans in 1997, we have only experienced losses on
three loans, for a total amount of $174,000. We continue to evaluate our
estimated credit losses on loans that are not expected to be securitized and on
loans prior to their securitization and we may readjust our current policy if
the circumstances so warrant. As of June 30, 2002, our whole loans, including
those held as collateral for notes payable and those that we have securitized
but with respect to which we have retained credit loss exposure, accounted for
31.2% of our portfolio of ARM assets or $2.730 billion.

For the quarter ended June 30, 2002, our ratio of operating expenses to average
assets was 0.43% compared to 0.31% for the same period in 2001 and 0.44% for the
prior quarter ended March 31, 2002. The most significant single increase to our
expenses was the performance-based fee of $3,721,000 that the Manager earned
during the second quarter of 2002 as a result of our achieving a return on
shareholders' equity in excess of the threshold as defined in the management
agreement that we entered into with the Manager (the "Management Agreement").
Our return on equity prior to the effect of the performance-based fee was 18.28%
whereas the threshold, the average 10-year treasury rate plus 1%, was 6.11%. Our
other expenses increased by approximately $1,589,000 from the second quarter of
2001 to the second quarter of 2002, primarily due to the operations of TMHL,
expenses associated with our issuance of Dividend Equivalent Rights ("DERs") and
Phantom Stock Rights ("PSRs"), and other corporate matters. TMHL's operations
accounted for $890,000 of this increase and our issuance of DERs and PSRs
accounted for $659,000 of the increase. Our expense ratios are among the lowest
of any company originating and investing in mortgage assets, giving us what we
believe to be a significant competitive advantage over more traditional mortgage
portfolio lending institutions such as banks and savings and loan institutions.
This competitive advantage enables us 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 more traditional mortgage portfolio lending
institutions.

We pay the Manager an annual base management fee, generally based on average
shareholders' equity as defined in the Management Agreement, payable monthly in
arrears as follows: 1.18% of the first $300 million of average shareholders'
equity, plus 0.85% of average shareholders' equity above $300 million, subject
to an annual inflation adjustment based on changes in the Consumer Price Index.
Since the management fee is based on shareholders' equity and not assets, the
fee increases as we raise additional equity capital and thereby manage a larger
amount of invested capital on behalf of our 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
10-year U.S. Treasury rate during the quarter plus 1%. As presented in the
following table, the performance fee is a variable expense that fluctuates with
our return on shareholders' equity relative to the average 10-year U.S. Treasury
rate.




                                       35
<PAGE>


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

                       ANNUALIZED OPERATING EXPENSE RATIOS

<Table>
<Caption>
                    Management Fee &                          Total Operating
   For the          Other Expenses/     Performance Fee/        Expenses/
Quarter Ended       Average Assets       Average Assets       Average Assets
-------------       ----------------    ----------------      ---------------

<S>                     <C>                  <C>                 <C>
Jun 30, 2000            0.13%                  --                0.13%
Sep 30, 2000            0.16%                  --                0.16%
Dec 31, 2000            0.18%                  --                0.18%
Mar 31, 2001            0.20%                0.09%               0.29%
Jun 30, 2001            0.21%                0.10%               0.31%
Sep 30, 2001            0.25%                0.14%               0.39%
Dec 31, 2001            0.28%                0.22%               0.50%
Mar 31, 2002            0.24%                0.20%               0.44%
Jun 30, 2002            0.24%                0.19%               0.43%
</Table>

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2002

For the six months ended June 30, 2002, our net income was $52,231,000, or $1.25
per share (Basic and Diluted EPS), based on a weighted average of 39,199,000
shares outstanding. That compares to $22,366,000, or $0.88 per share (Basic and
Diluted EPS), for the six months ended June 30, 2001, based on a weighted
average of 21,741,000 shares outstanding, a 42% increase in our earnings per
share.

Our return on average common equity was 16.26% for the six months ended June 30,
2002 compared to 11.37% for the six months ended June 30, 2001. Our return on
equity improved in this past quarter compared to the same quarter of the prior
year primarily because our net interest income improved. This improvement was
due, in part, to the lower cost of funds of our borrowings and because our yield
on net interest earning assets is benefiting from acquisitions of loans and
other ARM and Hybrid ARM assets acquired at average prices close to par,
replacing lower yielding assets that paid off.

The following table presents the components of our net interest income for the
six month periods ended June 30, 2002 and 2001:

                   COMPARATIVE NET INTEREST INCOME COMPONENTS
                          (Dollar amounts in thousands)

<Table>
<Caption>
                                            2002            2001
                                         ---------      ---------
<S>                                      <C>            <C>
Coupon interest income on ARM assets     $ 183,720      $ 150,251
Amortization of net premium                 (8,579)       (10,019)
Cash and cash equivalents                      724            672
                                         ---------      ---------
     Interest income                       175,865        140,904
                                         ---------      ---------

Reverse repurchase agreements               59,277         84,797
AAA notes payable                            4,856         16,852
Other borrowings                             4,318          4,903
Interest rate swaps                         38,833          4,314
                                         ---------      ---------
     Interest expense                      107,284        110,866
                                         ---------      ---------

Net interest income                      $  68,581      $  30,038
                                         =========      =========
</Table>

As presented in the table above, our net interest income increased by $38.5
million in the first half of 2002 compared to the same six months of 2001. The
change was attributable to a $35.0 million increase in interest income due to an
increased asset base and a $3.5 million decline in interest expense as a result
of lower rates.



                                       36
<PAGE>

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

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

<Table>
<Caption>
                                                              For the six month periods ended June 30,
                                             ----------------------------------------------------------------------------
                                                           2002                                       2001
                                             ------------------------------------     -----------------------------------
                                                                       Interest                                 Interest
                                              Average      Effective    Income/        Average     Effective    Income/
                                              Balance        Rate       Expense        Balance       Rate       Expense
                                             ----------    ---------   ----------     ----------   ---------   ----------
<S>                                          <C>            <C>       <C>            <C>            <C>       <C>
Interest Earning Assets:
  Adjustable-rate mortgage assets           $7,048,974      4.97%     $  175,141     $4,300,791     6.52%     $  140,232
  Cash and cash equivalents                     84,750      1.71             724         26,517     5.08             672
                                            ----------      ----      ----------     ----------     ----      ----------
                                             7,133,724      4.93         175,865      4,327,308     6.51         140,904
                                            ----------      ----      ----------     ----------     ----      ----------
Interest Bearing Liabilities:
  Reverse repurchase agreements              5,785,580      3.39          98,110      3,210,097     5.55          89,111
  Collateralized notes payable                 374,986      2.59           4,856        569,609     5.92          16,852
  Other borrowings                             286,219      3.02           4,318        164,960     5.94           4,903
                                            ----------      ----      ----------     ----------     ----      ----------
                                             6,446,785      3.33         107,284      3,944,666     5.62         110,866
                                            ----------      ----      ----------     ----------     ----      ----------

Net Interest Earning Assets and Spread      $  686,939      1.60%     $   68,581     $  382,642     0.89%     $   30,038
                                            ==========      ====      ==========     ==========     ====      ==========
Yield on Net Interest Earning Assets(1)                     1.92%                                   1.39%
                                                            ====                                    ====
</Table>

----------

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

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

<Table>
<Caption>
                                           Six Months Ended June 30,
                                               2002 versus 2001
                                       ----------------------------------
                                       Rate         Volume         Total
                                     --------      --------      --------
<S>                                  <C>           <C>           <C>
Interest Income:
   ARM assets                        $(33,373)     $ 68,282      $ 34,909
   Cash and cash equivalents             (426)          478            51
                                     --------      --------      --------
                                      (33,799)       68,760        34,961
                                     --------      --------      --------
Interest Expense:
   Reverse repurchase agreements      (34,676)       43,674         8,999
   Collateralized notes payable        (9,476)       (2,520)      (11,996)
   Other borrowings                    (2,414)        1,829          (584)
                                     --------      --------      --------
                                      (46,566)       42,983        (3,582)
                                     --------      --------      --------

Net interest income                  $ 12,767      $ 25,776      $ 38,543
                                     ========      ========      ========
</Table>

As a result of the yield on our interest-earning assets decreasing to 4.93%
during the first half of 2002 from 6.51% during the same period of 2001, a
decrease of 1.58%, and our cost of funds decreasing to 3.33% from 5.62% during
the same time period, a decrease of 2.29%, net interest income increased by
$38,543,000. This increase in net interest income is both a favorable rate
variance and a favorable volume variance. There was a net favorable rate
variance of $12,782,000, primarily due to a favorable rate variance on
borrowings that increased net interest income by $46,583,000, partially offset
by an unfavorable rate variance on our ARM assets portfolio and other
interest-earning assets in the amount of $33,801,000. The increased average size
of our portfolio during the first half of 2002 compared to the same period in
2001 increased net interest income in the amount of $25,761,000. The average


                                       37
<PAGE>

balance of our interest-earning assets was $7.214 billion during the first half
of 2002, compared to $4.327 billion during the same period of 2001 -- an
increase of 66.7%.

During the first half of 2002, we realized a net gain from the sale of ARM
securities and fixed-rate loans in the amount of $87,000 as compared to $2,000
during the first half of 2001. The sale of ARM securities during the first six
months of 2002 resulted in a net gain of $95,000 and the sale of fixed rate
loans by TMHL resulted in a net loss of $8,000. The gain from the sale of ARM
assets during 2001 was a result of the sale of ARM securities and fixed rate
loans.

For the six months ended June 30, 2002, our ratio of operating expenses to
average assets was 0.43% as compared to 0.30% for the same period of 2001.
During the first six months of 2002, the Manager earned a performance-based fee
of $6,914,000 or 0.19% of average assets. The Manager earned a performance-based
fee of $1,997,000 during the same six months of 2001. Our other expenses
increased by approximately $2,725,000 for the six months ended June 30, 2002
compared to the same six month period in 2001, primarily due to the operations
of TMHL, expenses associated with our issuance of DERs and PSRs, and due to
other corporate matters. TMHL's operations accounted for $1,593,000 of this
increase and our issuance of DERs, PSRs and restricted stock accounted for
$958,000 of the increase.

LIQUIDITY AND CAPITAL RESOURCES

Our primary source of funds for the quarter ended June 30, 2002 consisted of
reverse repurchase agreements which totaled $7.554 billion, collateralized notes
payable which had a balance of $316.8 million, and whole loan financing
facilities which had a balance of $280.8 million. Our other significant sources
of funds for the quarter ended June 30, 2002 consisted primarily of payments of
principal and interest from our ARM assets in the amount of $832.8 million. In
the future, we expect our primary sources of funds to consist of borrowed funds
under reverse repurchase agreement transactions with one to twelve month
maturities, funds borrowed from whole loan financing facilities, capital market
financing transactions collateralized by ARM and hybrid loans, proceeds from
monthly payments of principal and interest on our ARM assets portfolio and
occasional asset sales. Our liquid assets generally consist of unpledged ARM
assets, cash and cash equivalents.

Total borrowings outstanding at June 30, 2002 had a weighted average effective
cost of 2.06%. The reverse repurchase agreements had a weighted average
remaining term to maturity of 3.8 months and the collateralized AAA notes
payable had a final maturity of January 25, 2029, but will be paid down as the
ARM assets collateralizing the notes are paid down. The whole loan financing
facilities are committed facilities that mature in March 2003 and November 2003.
As of June 30, 2002, $3.400 billion of our borrowings were variable rate term
reverse repurchase agreements. Term reverse repurchase agreements are committed
financings with original maturities that range from three to eighteen months.
The interest rates on these term reverse repurchase agreements are indexed to
either the one or three month LIBOR rate and reprice accordingly. The interest
rate on the collateralized AAA notes adjusts monthly based on changes in the one
month LIBOR rate. The interest rates on the whole loan financing facilities are
indexed to the one month LIBOR index and are subject to either daily or monthly
adjustment.

We have arrangements to enter into reverse repurchase agreements with
twenty-five different financial institutions and on June 30, 2002, we had
borrowed funds from fourteen of these firms. Because we borrow money under these
agreements based on the fair value of our ARM assets and because changes in
interest rates can negatively impact the valuation of ARM assets, our borrowing
ability under these agreements may be limited and lenders may initiate margin
calls in the event interest rates change or the value of our ARM assets decline
for other reasons. Additionally, approximately 1.5% of our ARM assets are rated
less than AA by the Rating Agencies 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 changes in interest rates, credit performance of a
mortgage pool or a downgrade of a mortgage pool issuer, we 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, such sales could be
at prices lower than the carrying value of the assets, which would result in
losses. We had adequate liquidity throughout the quarter ended June 30, 2002. We
believe that we will continue to have sufficient liquidity to meet our future
cash requirements from our primary sources of funds for the foreseeable future
without needing to sell assets.



                                       38
<PAGE>

As of June 30, 2002, we had $316.8 million of AAA collateralized notes payable
outstanding, which are not subject to margin calls. Due to the structure of the
collateralized notes payable, their financing is not based on market value or
subject to subsequent changes in mortgage credit markets, as is the case of the
reverse repurchase agreement arrangements.

As of June 30, 2002, we had entered into three whole loan financing facilities.
We borrow money under these facilities based on the fair value of the ARM loans.
Therefore, the amount of money available to us under these facilities is subject
to margin call based on changes in fair value, which can be negatively affected
by changes in interest rates and other factors, including the delinquency status
of individual loans. One of the whole loan financing facilities has a committed
borrowing capacity of $300 million and matures in March 2003. Our other two
committed whole loan financing facilities also have a borrowing capacity of $300
million each and they both mature in November 2002. As of June 30, 2002, we had
$280.8 million borrowed against these whole loan financing facilities at an
effective cost of 2.50%.

On May 31, 2001, we filed a combined shelf registration statement on Form S-3
for $409 million of equity securities including common stock, preferred stock or
warrants, which included $109 million of securities that were registered under a
previously filed registration statement. On July 6, 2001, the Securities and
Exchange Commission (the "SEC") declared the combined registration statement
effective. During February 2002, we completed a public offering of 6,210,000
shares of our common stock, for which we received net proceeds of $113.5
million. During both the three and six-month periods ended June 30, 2002, we
issued 2,530,800 shares of common stock under a continuous equity offering
program and received net proceeds of $48.3 million. As of June 30, 2002, $76.3
million of our securities remained registered for future issuance and sale under
our currently effective registration statement.

We have 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 our common stock
and for new and existing shareholders to purchase shares at a discount to the
current market price of the common stock, as defined in the DRP. During the
three and six-month periods ended June 30, 2002, we issued 927,592 and 2,312,812
shares, respectively, of common stock under our Dividend Reinvestment and Stock
Purchase Plan and received net proceeds of $18.5 and $45.8 million,
respectively.


EFFECTS OF INTEREST RATE CHANGES

Changes in interest rates impact our earnings in various ways. While we invest
primarily in ARM assets, rising short term interest rates may temporarily
negatively affect our earnings and conversely falling short term interest rates
may temporarily increase our earnings. This impact can occur for several reasons
and may be mitigated by portfolio prepayment activity as discussed below. First,
our borrowings will react to changes in interest rates sooner than our ARM
assets because the weighted average next repricing date of the borrowings is
usually a shorter time period than that of the ARM assets. Second, interest
rates on non-hybrid ARM assets may be limited to an increase of either 1% or 2%
per adjustment period (commonly referred to as the periodic cap) and our
borrowings do not have similar limitations. At June 30, 2002, 21.6% of our total
ARM assets are non-hybrid ARM assets subject to periodic caps. Third, our ARM
assets lag changes in the applicable interest rate indices due to the notice
period provided to ARM borrowers when the interest rates on their loans are
scheduled to change.

Interest rates can also affect our net return on Hybrid ARMs (net of the cost of
financing Hybrid ARMs). We estimate the duration of the fixed rate period of our
Hybrid ARMs and have a policy to hedge the financing of the Hybrid ARMs such
that the duration difference between our borrowed funds and the Hybrid ARM
assets is less than one year. The cost of financing 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 our cost of short-term funds is higher at the expiration of the
hedged period, our net interest spread on the remaining balance of a Hybrid ARM
asset will be affected unfavorably and conversely, if our cost of short-term
funds is lower, the net interest spread will be affected favorably. In addition,
during a declining interest rate environment, the prepayment of Hybrid ARMs may
accelerate causing the amount of fixed rate financing to increase relative to
the amount of Hybrid ARMs, possibly resulting in a decline in our net return on
Hybrid ARMs as replacement Hybrid ARMs may have a lower yield than the ones
paying off. In contrast, during an increasing


                                       39
<PAGE>

interest rate environment, Hybrid ARMs may prepay slower than expected,
requiring us to finance a higher amount of Hybrid ARMs than originally
anticipated at a time when interest rates may be higher, resulting in a decline
in our net return on Hybrid ARMs. In order to manage our exposure to changes in
the prepayment speed of Hybrid ARMs, we regularly monitor the balance of Hybrid
ARMs and make adjustments to the amounts anticipated to be outstanding in future
periods and, on a regular basis, make adjustments to the amount of our
fixed-rate borrowing obligations in future periods.

Interest rate changes may also impact our ARM assets and borrowings differently
because our ARM assets are indexed to various indices whereas the interest rate
on our borrowings generally move with changes in LIBOR. Although we have always
favored acquiring LIBOR-based ARM assets in order to reduce this risk,
LIBOR-based ARM assets are not generally well accepted by homeowners in the U.S.
As a result, we have acquired ARM assets indexed to a mix of indices in order to
diversify our exposure to changes in LIBOR. During times of global economic
instability, U.S. Treasury rates generally decline as foreign and domestic
investors generally increase their investment in U.S. Treasury instruments
because they are considered to be a safe haven for investments. Our non-hybrid
ARM assets indexed to U.S. Treasury rates then decline in yield as U.S. Treasury
rates decline, whereas our borrowings and other non-hybrid ARM assets may not be
affected by the same pressures or to the same degree. As a result, our income
can improve or decrease depending on the relationship between the various
indices to which our non-hybrid ARM assets are indexed, compared to changes in
our cost of funds. At June 30, 2002, 14.9% of our ARM assets were non-hybrid ARM
assets indexed to U.S. Treasury rates.

The rate of prepayment on our 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 us to amortize the premiums paid
for our mortgage assets faster, resulting in a reduced yield on our mortgage
assets. Additionally, to the extent proceeds of prepayments cannot be reinvested
at a rate of interest at least equal to the rate previously earned on such
mortgage assets, our earnings may be adversely affected.

Conversely, the rate of prepayment on our 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 us to amortize the
premiums paid for our ARM assets over a longer time period, resulting in an
increased yield on our mortgage assets. Therefore, in rising interest rate
environments where prepayments are declining, not only would the interest rate
on the ARM assets portfolio increase to re-establish a spread over the higher
interest rates, but the yield also would rise due to slower prepayments. The
combined effect could significantly mitigate other negative effects that rising
short-term interest rates might have on earnings.

Lastly, because we invest primarily in ARM assets and approximately 8% to 10% of
such assets are purchased with shareholders' equity, our earnings, over time,
will tend to increase, after an initial short term decline, following periods
when short term interest rates have risen, and decrease after an initial short
term increase, following periods when short term interest rates have declined.
This is because the financed portion of our portfolio of ARM assets will, over
time, reprice to a spread over our cost of funds, while the portion of our
portfolio of ARM assets that is 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, 2002, we calculated our Qualified REIT Assets, as defined in the
Internal Revenue Code of 1986, as amended (the "Code"), to be 99.7% of our total
assets, as compared to the Code requirement that at least 75% of our total
assets must be Qualified REIT Assets. We also calculated that 99.6% of our 2002
revenue for the first six months of 2002 qualifies for the 75% source of income
test and 100% of our revenue qualifies for the 90% source of income test under
the REIT rules. We also met all REIT requirements regarding the ownership of our
common stock and the distributions of our net income. Therefore, as of June 30,
2002, we believe that we will continue to qualify as a REIT under the provisions
of the Code.

We at all times intend to conduct our business so as not to become regulated as
an investment company under the Investment Company Act of 1940, as amended. If
we were to become regulated as an investment company, then our 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



                                       40
<PAGE>

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

PART II.   OTHER INFORMATION

Item 1.  Legal Proceedings
              At June 30, 2002, there were no pending legal proceedings to which
              we were a party or of which any of our 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) Our Annual Meeting of Shareholders was held on April 25, 2002.
         (b) Election of Class II Directors
<Table>
<Caption>
                                                               Votes
                                                     -------------------------
                              Nominee                    For          Withheld
                    --------------------------       ----------       --------
<S>                                                  <C>              <C>
                    Owen M. Lopez                    38,036,423       175,504
                    James H. Lorie                   38,029,327       182,600
                    Francis I. Mullin, III           38,033,921       178,007
                    Richard P. Story                 38,036,435       175,493
</Table>

                The following Class I and Class III directors continued in
                office after the Annual Meeting:

                David A. Ater
                Joseph H. Badal
                Larry A. Goldstone
                Ike Kalangis
                Stuart C. Sherman
                Garrett Thornburg

         (c) Approval of an amendment to our Articles of Incorporation to
             increase the authorized capital stock to 500,000,000 shares.

<Table>
<Caption>
                                                Votes
                       ------------------------------------------------------
                           For                 Against            Abstain
                       ------------        ---------------    ---------------
                  <S>                       <C>              <C>
                        33,015,815             402,670           4,793,435
</Table>


Item 5.  Other Information
                  The registrant is also filing its 2002 Long-Term Incentive
                  Plan which was approved by its Board of Directors on July 23,
                  2002 and which will be submitted for shareholder approval at
                  the 2003 Annual Meeting of Shareholders. The new plan will
                  become effective following the expiration of the existing 1992
                  Stock Option and Incentive Plan when it expires on September
                  28, 2002.

                  The Company is also filing its Limited Stock Repurchase Plan,
                  which was approved by the Company's Board of Directors on
                  April 23, 2002 for the purpose of facilitating the repayment
                  of


                                       41
<PAGE>

                  outstanding notes receivable from stock sales in connection
                  with the exercise of options to purchase stock.

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

         (a)  Exhibits
                  See "Exhibit Index"

         (b)  Reports on Form 8-K
                  None



                                       42
<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: August 12, 2002             By:   /s/ Larry A. Goldstone
                                        ---------------------------------------
                                        Larry A. Goldstone
                                        President and Chief Operating Officer
                                        (authorized officer of registrant)




Dated: August 12, 2002             By:  /s/ Richard P. Story
                                        ---------------------------------------
                                        Richard P. Story,
                                        Executive Vice President, Chief
                                        Financial Officer and Treasurer
                                        (principal accounting officer)




                                       43
<PAGE>


                                  EXHIBIT INDEX




<Table>
<Caption>

Exhibit Number                              Exhibit Description
--------------    -------------------------------------------------------------
<S>               <C>
    10.9          Form of Limited Stock Repurchase Plan

    10.10         Form of 2002 Long-Term Incentive Plan

    99.1          Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

    99.2          Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
                  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
</Table>


                                       44