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


                                   FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED:     MARCH 31, 2001

                                       OR

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

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

COMMISSION FILE NUMBER:      001-11914


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

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

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

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

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

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

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

                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

Common Stock ($.01 par value)                      21,719,178 as of May 11, 2001



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                            THORNBURG MORTGAGE, INC.
                                    FORM 10-Q


                                      INDEX



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

     Item 1.      Financial Statements

                      Consolidated Balance Sheets at March 31, 2001 and December 31, 2000.................    3

                      Consolidated Statements of Operations for the three months ended
                       March 31, 2001 and March 31, 2000..................................................    4

                      Consolidated Statement of Shareholders' Equity for the three months
                       ended March 31, 2001...............................................................    5

                      Consolidated Statements of Cash Flows for the three months ended
                       March 31, 2001 and March 31, 2000..................................................    6

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

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

PART II.          OTHER INFORMATION

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

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

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

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

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

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


     SIGNATURES       ....................................................................................   36
</TABLE>


                                       2
<PAGE>   3



PART I.       FINANCIAL INFORMATION

ITEM 1.       FINANCIAL STATEMENTS

THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)

<TABLE>
<CAPTION>
                                                              March 31, 2001
                                                                (Unaudited)  December 31, 2000
                                                              -------------- -----------------
<S>                                                           <C>            <C>
ASSETS

     Adjustable-rate mortgage ("ARM") assets: (Notes 2 and 3)
       ARM securities                                           $ 3,507,897    $ 3,359,352
       Collateral for collateralized notes                          582,834        615,696
       ARM loans held for securitization                            210,074        164,413
                                                                -----------    -----------
                                                                  4,300,805      4,139,461
                                                                -----------    -----------

    Cash and cash equivalents                                        51,780         13,105
    Accrued interest receivable                                      35,551         32,730
    Prepaid expenses and other                                        1,638          4,871
                                                                -----------    -----------
                                                                $ 4,389,774    $ 4,190,167
                                                                ===========    ===========


LIABILITIES

    Reverse repurchase agreements (Note 3)                      $ 3,253,329    $ 2,961,617
    Collateralized notes (Note 3)                                   572,080        603,910
    Other borrowings (Note 3)                                       199,977        158,593
    Payable for assets purchased                                         --        124,942
    Accrued interest payable                                         14,980         20,519
    Dividends payable (Note 5)                                        1,670          1,670
    Other payables and accrued expenses                              11,405          1,378
                                                                -----------    -----------
                                                                  4,053,441      3,872,629
                                                                -----------    -----------

SHAREHOLDERS' EQUITY (Note 5)

    Preferred stock: par value $.01 per share;
       2,760 shares authorized; 9.68% Cumulative
       Convertible Series A, 2,760 and 2,760 issued
       and outstanding, respectively; aggregate
       preference in liquidation $69,000                             65,805         65,805
    Common stock: par value $.01 per share;
       47,240 shares authorized, 22,219 and 22,072 shares
       issued and 21,719 and 21,572 outstanding, respectively           222            221
    Additional paid-in-capital                                      344,256        343,036
    Accumulated other comprehensive income (loss)                   (63,559)       (78,427)
    Notes receivable from stock sales                                (6,239)        (5,318)
    Retained earnings (deficit)                                         514         (3,113)
    Treasury stock: at cost, 500 and 500 shares, respectively        (4,666)        (4,666)
                                                                -----------    -----------
                                                                    336,333        317,538
                                                                -----------    -----------

                                                                $ 4,389,774    $ 4,190,167
                                                                ===========    ===========
</TABLE>


See Notes to Consolidated Financial Statements.


                                        3
<PAGE>   4

THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                     Three Months Ended
                                                                          March 31,
                                                                      2001        2000
                                                                    --------    --------
<S>                                                                 <C>         <C>
Interest income from ARM assets and cash                            $ 73,225    $ 72,654
Interest expense on borrowed funds                                   (58,901)    (63,337)
                                                                    --------    --------
     Net interest income                                              14,324       9,317
                                                                    --------    --------

Hedging expense                                                         (151)         --
Provision for credit losses                                             (178)       (331)
Management fee (Note 7)                                               (1,095)     (1,024)
Performance fee (Note 7)                                                (924)         --
Other operating expenses                                              (1,047)       (449)
                                                                    --------    --------

     Net income before cumulative effect of change in
       accounting principle                                           10,929       7,513
     Cumulative effect of change in accounting principle (Note 1)       (202)         --
                                                                    --------    --------

     NET INCOME                                                     $ 10,727    $  7,513
                                                                    ========    ========


Net income                                                          $ 10,727    $  7,513
Dividends on preferred stock                                          (1,670)     (1,670)
                                                                    --------    --------

Net income available to common shareholders                         $  9,057    $  5,843
                                                                    ========    ========

Basic and diluted earnings per share before cumulative effect
     of change in accounting principle                              $   0.43    $   0.27
Cumulative effect of change in accounting principle (Note 1)           (0.01)         --
                                                                    --------    --------


Basic and diluted earnings per share                                $   0.42    $   0.27
                                                                    ========    ========

Average number of common shares outstanding                           21,691      21,490
                                                                    ========    ========
</TABLE>


See Notes to Consolidated Financial Statements.

                                       4
<PAGE>   5

THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)

Three Months Ended March 31, 2001
(In thousands, except share data)

<TABLE>
<CAPTION>
                                                                Accum.     Notes
                                                                Other     Receiv-
                                                  Additional    Compre-   able From  Retained                 Compre-
                              Preferred  Common    Paid-in      hensive     Stock    Earnings/    Treasury    hensive
                               Stock      Stock    Capital      Income      Sales    (Deficit)     Stock      Income     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                                                                                        10,727    $10,727     10,727
  Other comprehensive
    income:
      Available-for-sale
        assets:
        Fair value
          adjustment, net
          of amortization          --        --          --      24,977         --         --           --     24,977     24,977
   Swap Agreements:
      Cumulative
        adjustment for
        change in accounting
        principle                  --        --          --        (629)        --         --           --       (629)      (629)
      Fair value adjustment,
        net of amortization                                      (9,480)                                       (9,480)    (9,480)
                                                                                                              -------
  Other comprehensive income                                                                                  $25,595
                                                                                                              =======
Issuance of common stock,
  Note 5                           --         1       1,133          --       (931)        --           --                   203
Interest and principle
  payments on notes
  receivable from
  stock sales                      87                    10                                             97
Dividends declared on
  preferred stock -
  $0.605 per share                 --        --          --          --         --     (1,670)          --                (1,670)
Dividends declared on
  common stock - $0.23
  per share                        --        --          --          --         --     (5,430)          --                (5,430)
                              -------   -------   ---------   ---------  ---------  ---------    ---------             ---------
Balance, March 31, 2001       $65,805   $   222   $ 344,256   $ (63,559) $  (6,239) $     514    $  (4,666)            $ 336,333
                              =======   =======   =========   =========  =========  =========    =========             =========
</TABLE>


See Notes to Consolidated Financial Statements.


                                       5
<PAGE>   6


THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                       Three Months Ended
                                                                            March 31,
                                                                        2001        2000
                                                                     ---------    ---------
<S>                                                                  <C>          <C>
Operating Activities:
   Net Income                                                        $  10,727    $   7,513
   Adjustments to reconcile net income to
     net cash provided by operating activities:
      Amortization                                                       4,647        5,217
      Provision for credit losses                                          178          331
      Change in assets and liabilities:
        Increase in accrued interest receivable                         (2,821)      (2,131)
        Decrease in prepaid expenses and other                           3,233        6,070
        Decrease in accrued interest payable                            (5,539)      (4,362)
        Increase (decrease) in other payables and accrued expenses      10,027         (325)
                                                                     ---------    ---------
         Net cash provided by operating activities                      20,452       12,313
                                                                     ---------    ---------

Investing Activities:
   Available-for-sale ARM securities:
     Purchases                                                        (498,948)    (398,717)
     Principal payments                                                259,446      149,583
   Collateral for collateralized notes payable:
     Principal payments                                                 32,144       45,641
ARM loans:
     Purchases                                                         (69,093)      (2,729)
     Principal payments                                                  9,879          629
Purchase of interest rate cap agreements                                    --         (448)
                                                                     ---------    ---------
         Net cash used in investing activities                        (266,572)    (201,041)
                                                                     ---------    ---------

Financing Activities:
   Net borrowings from reverse repurchase agreements                   282,254      281,298
   Repayments of collateralized notes                                  (31,830)     (45,203)
   Net borrowings from (repayments of) other borrowings                 41,384      (12,767)
   Dividends paid                                                       (7,100)      (6,613)
   Interest from notes receivable from stock sales                          87           67
                                                                     ---------    ---------
     Net cash provided by financing activities                         284,795      216,782
                                                                     ---------    ---------

Net increase in cash and cash equivalents                               38,675       23,054

Cash and cash equivalents at beginning of period                        13,105       10,234
                                                                     ---------    ---------
Cash and cash equivalents at end of period                           $  51,780    $  33,288
                                                                     =========    =========
</TABLE>

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

See Notes to Consolidated Financial Statements


                                       6
<PAGE>   7

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 end March 31, 2001 are not necessarily indicative of the
           results that may be expected for the calendar year ending December
           31, 2001.

              CASH AND CASH EQUIVALENTS

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

              BASIS OF PRESENTATION

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

              ADJUSTABLE-RATE MORTGAGE ASSETS

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

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

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


                                       7
<PAGE>   8

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

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

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

              CREDIT RISK

                  The Company limits its exposure to credit losses on its
                  portfolio of ARM securities by only purchasing ARM securities
                  that have an investment grade rating at the time of purchase
                  and have some form of credit enhancement or are guaranteed by
                  an agency of the federal government. An investment grade
                  security generally has a security rating of BBB or Baa or
                  better by at least one of two nationally recognized rating
                  agencies, Standard & Poor's, Inc. or Moody's Investor
                  Services, Inc. (the "Rating Agencies"). Additionally, the
                  Company has also purchased ARM loans and limits its exposure
                  to credit losses by restricting its whole loan purchases to
                  ARM loans generally originated to "A" quality underwriting
                  standards or loans that have at least five years of pay
                  history and/or low loan to property value ratios. The Company
                  further limits its exposure to credit 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 monitors the delinquencies and losses on the
                  underlying mortgage loans backing its ARM securities. If the
                  credit performance of the underlying mortgage loans is not as
                  expected, the Company makes a provision for probable credit
                  losses at a level deemed appropriate by management to provide
                  for known losses as well as estimated losses inherent in its
                  ARM securities portfolio. The provision is based on
                  management's assessment of numerous factors affecting its
                  portfolio of ARM assets including, but not limited to, current
                  economic conditions, delinquency status, credit losses to date
                  on underlying mortgages and remaining credit protection. The
                  provision for ARM securities is made by reducing the cost
                  basis of the individual security for the decline in fair value
                  which is other than temporary, and the amount of such
                  write-down is recorded as a realized loss, thereby reducing
                  earnings.

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

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


                                       8
<PAGE>   9

                  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.

              DERIVATIVE FINANCIAL INSTRUMENTS

                  INTEREST RATE CAP AGREEMENTS

                  The Company purchases interest rate cap agreements ("Cap
                  Agreements") to manage interest rate risk. The Cap Agreements
                  purchased limit the Company's risks associated with the
                  lifetime or maximum interest rate caps of its ARM assets
                  should interest rates rise above specified levels. These Cap
                  Agreements reduce the effect of the lifetime cap feature so
                  that the yield on the ARM assets will continue to rise in high
                  interest rate environments as the Company's cost of borrowings
                  also continue to rise. In similar fashion, the Company has
                  purchased Cap Agreements in the past to limit the financing
                  rate of the Hybrid ARMs during their fixed rate term,
                  generally for three to ten years, although the Company is
                  currently using only Swaps to hedge the fixed rate term of its
                  Hybrid ARMs.

                  All Cap Agreements are classified as a fair value hedge
                  against the value of the lifetime interest rate cap component
                  of available-for-sale ARM securities or ARM loans and are
                  carried at their fair value. The Company purchases Cap
                  Agreements by incurring a one-time fee or premium, its initial
                  carrying value. In accordance with the adoption of Financial
                  Accounting Standard 133 ("FAS 133"), effective January 1,
                  2001, the change in the fair value of the Cap Agreements is
                  compared to the change in the fair value of the related hedged
                  asset to determine the effectiveness of the hedge. The related
                  hedged asset is the value of the lifetime interest rate cap
                  component of ARM assets. The effective portion of the
                  unrealized gains and losses is reported as a separate
                  component of equity and the ineffective portion is recorded in
                  the Statement of Operations as hedging expense. The carrying
                  value of the Cap Agreements is included in "ARM securities" on
                  the balance sheet.

                  Upon the adoption of FAS 133 on January 1, 2001, the Company
                  recorded a cumulative adjustment for a change in accounting
                  principles in the amount $0.2 million, which reduced net
                  income. This amount is the unrealized loss on certain Cap
                  Agreements that had previously been designated as hedging the
                  Company's borrowing cost during the fixed rate period of
                  certain Hybrid ARMs. The Company re-designated these Cap
                  Agreements as fair value hedges that hedge the value of the
                  lifetime interest rate cap of its ARM assets consistent with
                  the rest of the Company's portfolio of Cap Agreements.
                  Furthermore, based on correlation studies of past periods, the
                  Company determined that its Cap Agreements hedging the fair
                  value change of the lifetime interest rate cap component of
                  its ARM assets meet the effectiveness and other requirements
                  of FAS 133 and that there was no cumulative adjustment
                  associated with these Cap Agreements.

                  INTEREST RATE OPTIONS CONTRACTS

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

                  All Option contracts are classified as a hedge against
                  available-for-sale assets or ARM loans and are carried at
                  their fair value. The Company purchases Option contracts by
                  incurring a one-time fee or premium, its initial carrying
                  value. In accordance with the adoption of FAS 133, effective
                  January 1, 2001, the change in the fair value of the Option
                  contracts is compared to the change in the fair value of the
                  related hedged asset to determine the effectiveness of the
                  hedge. As in the


                                       9
<PAGE>   10

                  case of Cap Agreements, the related hedged asset is the value
                  of the lifetime interest rate cap component of ARM assets. The
                  effective portion of the unrealized gains and losses is
                  reported as a separate component of equity and the ineffective
                  portion is recorded in the Statement of Operations as hedging
                  expense. The carrying value of the Option Contracts is
                  included in "ARM securities" on the balance sheet.

                  The Option Contracts were included in the correlation studies
                  of the Cap Agreements to determine their past effectiveness as
                  fair value hedges. As in the case of the Cap Agreements that
                  hedge the lifetime interest rate cap component of the
                  Company's ARM assets, the Option Contracts meet the
                  effectiveness and other requirements of FAS 133 and there was
                  no cumulative adjustment associated with the Option Contracts.

                  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. In general, Swap Agreements have
                  been utilized by the Company in two ways. Swap Agreements are
                  used as a cost effective way to lengthen the average repricing
                  period of its variable rate and short-term borrowings.
                  Additionally, as the Company acquires Hybrid ARMs, it also
                  enters into Swap Agreements in order to manage the interest
                  rate repricing mismatch (the difference between the remaining
                  duration of a Hybrid ARM and the maturity of the borrowing
                  funding a Hybrid ARM) to a mismatched duration of
                  approximately one year or less.

                  All Swap Agreements are classified as a cash flow hedge
                  against the Company's borrowings. In accordance with FAS 133,
                  the Company has calculated the effectiveness of this hedge.
                  Due to the similarity of the terms of the hedged borrowings
                  and the terms of the Swap Agreements, the effectiveness has
                  been calculated to be 100%. As a result, the unrealized gains
                  and losses on Swap Agreements are recorded in "Other
                  comprehensive income" as a separate component of equity.
                  Revenues and expenses from the Swap Agreements are accounted
                  for on an accrual basis and recognized as a net adjustment to
                  interest expense.

                  As of January 1, 2001, with the adoption of FAS 133, the
                  Company recorded a transition adjustment in "Other
                  comprehensive income" in the amount of $0.6 million to record
                  the unrealized loss on its Swap Agreements. Swap Agreements,
                  which had previously been off-balance sheet hedging
                  instruments, are now carried at their fair value. The carrying
                  value of the Swap Agreements is included in "Reverse
                  repurchase agreements" on the balance sheet.

                  Realized gains and losses resulting from the termination and
                  replacement of Swap Agreements, are recorded in "Other
                  comprehensive income" as a separate component of equity and
                  are thereafter amortized as a yield adjustment over the
                  remaining term of the Swap Agreements. The terminated and
                  replacement Swap Agreements generally have the same terms and
                  conditions other than the fixed rate. The amortization of the
                  realized gains and losses as a yield adjustment to the fixed
                  rate of the replacement Swap Agreement results in
                  approximately the same fixed cost between the terminated and
                  replacement Swap Agreements. The Company terminates and
                  replaces Swap Agreements as an additional source of liquidity
                  when it is able to do so while maintaining compliance with its
                  hedging policies.

                  OTHER HEDGING ACTIVITY

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


                                       10
<PAGE>   11
              INCOME TAXES

                  The Company, excluding TMHL and its subsidiaries, has elected
                  to be taxed as a Real Estate Investment Trust ("REIT") and
                  complies with the provisions of the Internal Revenue Code of
                  1986, as amended (the "Code") with respect thereto.
                  Accordingly, the Company will not be subject to Federal income
                  tax on that portion of its income that is distributed to
                  shareholders and as long as certain asset, income and stock
                  ownership tests are met. TMHL and each of its subsidiaries are
                  taxable REIT subsidiaries and, as such, are subject to both
                  federal and state corporate income tax. For the quarter ended
                  March 31, 2001, TMHL had an immaterial taxable loss.

              NET EARNINGS PER SHARE

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

                  Following is information about the computation of the earnings
                  per share data for the three-month periods ended March 31,
                  2001 and 2000 (amounts in thousands except per share data):

<TABLE>
<CAPTION>
                                                                     Earnings
                                               Income      Shares    Per Share
                                              --------    --------   --------
<S>                                           <C>         <C>        <C>
Three Months Ended March 31, 2001
Net income                                    $ 10,727

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

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

Effect of dilutive securities:

   Stock options                                    --          53

                                              --------    --------
Diluted EPS                                   $  9,057      21,744   $   0.42
                                              ========    ========   ========

Three Months Ended March 31, 2000
Net income                                    $  7,513

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

Basic EPS, income available to
   common shareholders                           5,843      21,490   $   0.27
                                                                     ========

Effect of dilutive securities:

   Stock options                                    --          --

                                              --------    --------
Diluted EPS                                   $  5,843      21,490   $   0.27
                                              ========    ========   ========
</TABLE>

                  The Company has granted options to directors and officers of
                  the Company to purchase 35,666 shares of common stock at an
                  average price of $10.56 per share during the quarter ended
                  March 31, 2001. The Company granted options to purchase 10,000
                  shares of common stock at an average price of $8.44 per share
                  during the quarter ended March 31, 2000. The conversion of
                  preferred stock was not included in the computation of diluted
                  EPS because such conversion would increase the diluted EPS.


                                       11
<PAGE>   12

              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.

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

              The following tables present the Company's ARM assets as of March
              31, 2001 and December 31, 2000. The ARM securities classified as
              available-for-sale are carried at their fair value, while the ARM
              loans are carried at their amortized cost basis (dollar amounts in
              thousands):

<TABLE>
<CAPTION>
March 31, 2001:
                                 Available-
                                  for-Sale    Collateral for
                               ARM Securities  Notes Payable   ARM Loans        Total
                               -------------- --------------- -----------    -----------
<S>                            <C>            <C>            <C>            <C>
Principal balance outstanding   $ 3,486,249    $   574,542    $   210,889    $ 4,271,680
Net unamortized premium              52,257         11,187           (628)        62,816
Allowance for losses                 (1,908)        (3,065)          (187)        (5,160)
Cap agreements                        3,291            170             --          3,461
Principal payment receivable         21,459             --             --         21,459
                                -----------    -----------    -----------    -----------
   Amortized cost, net            3,561,348        582,834        210,074      4,354,256
Gross unrealized gains               16,687             19          2,288         18,994
Gross unrealized losses             (70,138)        (9,726)          (191)       (80,055)
                                -----------    -----------    -----------    -----------
   Fair value                   $ 3,507,897    $   573,127    $   212,171    $ 4,293,195
                                ===========    ===========    ===========    ===========

   Carrying value               $ 3,507,897    $   582,834    $   210,074    $ 4,300,805
                                ===========    ===========    ===========    ===========
</TABLE>

<TABLE>
<CAPTION>
December 31, 2000:
                                 Available-
                                  for-Sale    Collateral for
                               ARM Securities  Notes Payable   ARM Loans        Total
                               -------------- --------------  -----------    -----------
<S>                            <C>            <C>            <C>            <C>
Principal balance outstanding   $ 3,359,301    $   606,686    $   165,131    $ 4,131,118
Net unamortized premium              56,759         11,759           (567)        67,951
Allowance for losses                 (1,869)        (2,949)          (151)        (4,969)
Cap agreements                        3,705            200             --          3,905
Principal payment receivable         19,883             --             --         19,883
                                -----------    -----------    -----------    -----------
   Amortized cost, net            3,437,779        615,696        164,413      4,217,888
Gross unrealized gains                7,526             45          2,029          9,600
Gross unrealized losses             (85,953)       (10,499)           (97)       (96,549)
                                -----------    -----------    -----------    -----------
   Fair value                   $ 3,359,352    $   605,242    $   166,345    $ 4,130,939
                                ===========    ===========    ===========    ===========

   Carrying value               $ 3,359,352    $   615,696    $   164,413    $ 4,139,461
                                ===========    ===========    ===========    ===========
</TABLE>

              During both the quarters ended March 31, 2001 and 2000, the
              Company did not sell any ARM securities.

              During the quarter ended March 31, 2001, in accordance with its
              credit policies, the Company provided for estimated credit losses
              on the subordinated classes of its securitized loans in the amount
              of $26,000 and recorded a $152,000 provision for estimated credit
              losses on its loan portfolio.


                                       12
<PAGE>   13
              The following tables summarize ARM loan delinquency information as
              of March 31, 2001 and December 31, 2000 (dollar amounts in
              thousands):

<TABLE>
<CAPTION>
              2001
                                                       Percent
                                     Loan     Loan      of ARM     Percent of
              Delinquency Status     Count   Balance   Loans (1)  Total Assets
              ------------------     -----   -------   ---------  ------------
              <S>                   <C>      <C>       <C>        <C>
              60 to 89 days              2   $   808       0.07%      0.02%
              90 days or more            2       344       0.03       0.01
              In foreclosure (2)         5     4,027       0.35       0.09
                                    ------   -------    -------      -----
                                         9   $ 5,179       0.45%      0.12%
                                    ======   =======    =======      =====
</TABLE>

<TABLE>
<CAPTION>
              2000
                                                       Percent
                                     Loan     Loan      of ARM     Percent of
              Delinquency Status     Count   Balance   Loans (1)  Total Assets
              ------------------     -----   -------   ---------  -------------
              <S>                   <C>      <C>       <C>        <C>
              60 to 89 days              3   $  447      0.04%        0.01%
              90 days or more           --       --        --           --
              In foreclosure             5    3,980      0.34         0.10
                                    ------   ------      ----         ----
                                         8   $4,427      0.38%        0.11%
                                    ======   ======      ====         ====
</TABLE>

              ----------------
              (1)   ARM loans includes loans that the Company has securitized
                    and retained first loss credit exposure for total amounts of
                    $1.161 billion and $1.165 billion at March 31, 2001 and
                    December 31, 2000, respectively.

              (2)   One loan in foreclosure was paid in full, including accrued
                    interest, during the second quarter of 2001 in the amount of
                    $3.5 million.

              The following table summarizes the activity for the allowance for
              losses on ARM loans for the quarters ended March 31, 2000 and 1999
              (dollar amounts in thousands):

<TABLE>
<CAPTION>
                                                    2001            2000
                                                   -------         -------
<S>                                               <C>             <C>
                      Beginning balance             $3,100          $2,208
                      Provision for losses             152             293
                      Charge-offs, net                  --              --
                                                    ------          ------
                      Ending balance                $3,252          $2,501
                                                    ======          ======
</TABLE>

              As of March 31, 2001, the Company owned one real estate property
              as a result of foreclosing on a delinquent loan in the aggregate
              amount of $0.6 million, which is included in collateral for
              collateralized notes on the balance sheet. The Company believes
              that its current level of reserves is adequate to cover any
              estimated loss, should one occur, from the sale of this property.

              As of March 31, 2001, the Company had commitments to purchase
              $43.5 million of ARM loans.

              The average effective yield on the ARM assets owned was 6.71% as
              of March 31, 2001 and 7.09% as of December 31, 2000. The average
              effective yield is based on historical cost and includes the
              amortization of the net premium paid for the ARM assets, the
              impact of ARM principal payment receivables and the amortization
              of deferred gains from hedging activity.

              As of March 31, 2001 and December 31, 2000, the Company had
              purchased Cap Agreements and Options Contracts with a remaining
              notional amount of $2.538 billion and $2.624 billion,
              respectively. The notional amount of the Cap Agreements and
              Options Contracts purchased decline at a rate that is expected to
              approximate the amortization of the ARM assets. Under these Cap
              Agreements and Options Contracts, the Company will receive cash
              payments should the one-month, three-month or six-month London
              InterBank Offer Rate ("LIBOR") increase above the contract rates
              of these hedging instruments that range from 5.75% to 12.50% and
              average approximately 9.94%. The Cap Agreements and Options
              Contracts owned by the Company as of March 31, 2001, are hedging
              the lifetime interest rate cap of ARM assets. The Company's ARM
              assets portfolio had an average


                                       13
<PAGE>   14
              lifetime interest rate cap of 11.40%. The Cap Agreements and
              Options Contracts had an average maturity of 2.1 years as of March
              31, 2001. The initial aggregate notional amount of the Cap
              Agreements declines to approximately $2.265 billion over the
              period of the agreements, which expire between 2001 and 2004. The
              Company has credit risk to the extent that the counterparties to
              the Cap Agreements do not perform their obligations under the Cap
              Agreements. If one of the counterparties does not perform, the
              Company would not receive the cash to which it would otherwise be
              entitled under the conditions of the Cap Agreement. In order to
              mitigate this risk and to achieve competitive pricing, the Company
              has entered into Cap Agreements with six different counterparties,
              five of which are rated AAA and one is rated A, but the Company
              has a two-way collateral agreement protecting its credit exposure
              with this counterparty.

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

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

              As of March 31, 2001, the Company had outstanding $3.253 billion
              of reverse repurchase agreements with a weighted average borrowing
              rate of 5.26% and a weighted average remaining maturity of 2.3
              months. As of March 31, 2001, $1.397 billion of the Company's
              borrowings were variable-rate term reverse repurchase agreements
              with original maturities that range from six months to twelve
              months. The interest rates of these term reverse repurchase
              agreements are indexed to either the one- or three-month LIBOR
              rate and reprice accordingly. The reverse repurchase agreements at
              March 31, 2001 were collateralized by ARM assets with a carrying
              value of $3.466 billion, including accrued interest.

              At March 31, 2001, the reverse repurchase agreements had the
              following remaining maturities (dollar amounts in thousands):


<TABLE>
<S>                                                 <C>
                              Within 30 days        $1,736,950
                              31 to 89 days            902,957
                              90 days or greater       597,465
                                                    ----------
                                                     3,237,372
                              Swap Agreements           15,957
                                                    ----------
                                                    $3,253,329
                                                    ==========
</TABLE>

              As of March 31, 2001, the Company had entered into two whole loan
              financing facilities. One of the whole loan financing facilities
              has a committed borrowing capacity of $150 million, with an option
              to increase this amount to $300 million and matures in February
              2002. The Company has a second committed whole loan financing
              facility that also has a borrowing capacity of $150 million. This
              second committed facility matures in June 2001. As March 31, 2001,
              the Company had $200.0 million borrowed against these whole loan
              financing facilities at an effective cost of 5.48%. The amount
              borrowed on the whole loan financing agreements at March 31, 2001
              was collateralized by ARM loans with a carrying value of $207.5
              million, including accrued interest.

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

              On December 18, 1998, the Company, through a wholly-owned
              bankruptcy remote special purpose finance subsidiary, issued
              $1.144 billion of notes payable ("Notes") collateralized by ARM
              loans and ARM securities. As part of this transaction, the Company
              retained ownership of a subordinated certificate in the amount of
              $32.4 million, which represents the Company's maximum exposure to
              credit losses on the loans collateralizing the Notes. As of March
              31, 2001, the Notes had a net balance


                                       14
<PAGE>   15
              of $572.1 million, an effective interest cost of 5.84%, which
              changes each month at a spread to one-month LIBOR. As of March 31,
              2001, these Notes were collateralized by ARM loans with a
              principal balance of $606.6 million. The Notes mature on January
              25, 2029 and are callable by the Company at par once the balance
              of the Notes is reduced to 25% of their original balance. In
              connection with the issuance and modification of the Notes, the
              Company incurred costs of approximately $6.0 million, which is
              being amortized over the expected life of the Notes. Since the
              Notes are paid down as the collateral pays down, the amortization
              of the issuance cost will be adjusted periodically based on actual
              payment experience. If the collateral pays down faster than
              currently estimated, then the amortization of the issuance cost
              will increase and the effective cost of the Notes will increase
              and, conversely, if the collateral pays down slower than currently
              estimated, then the amortization of issuance cost will be
              decreased and the effective cost of the Notes will also decrease.

              As of March 31, 2001, the Company was a counterparty to
              twenty-three interest rate swap agreements ("Swaps") having an
              aggregate notional balance of $1.079 billion. As of March 31,
              2001, $578.9 million of these Swaps hedged the fixed interest rate
              period of Hybrid ARMs and had a weighed average maturity of 2.1
              years. The remaining Swaps extended the weighted average term of
              the Company's borrowings and mature in July 2001. In accordance
              with these Swaps, the Company will pay a fixed rate of interest
              during the term of these Swaps and receive a payment that varies
              monthly with the one-month LIBOR rate. As a result of entering
              into these Swaps the Company has reduced the interest rate
              variability of its cost to finance its ARM assets by increasing
              the average period until the next repricing of its borrowings from
              28 days to 149 days. In general, the Company enters into Swaps in
              connection with the acquisition of Hybrid ARMs. These Swaps hedge
              the cost of financing Hybrid ARMs during their fixed rate term,
              generally three to ten years. As of March 31, 2001, the Swap
              Agreements were collateralized by ARM assets with a carrying value
              of $11.7 million, including accrued interest and cash in the
              amount of $0.4 million.

              The total cash paid for interest was $63.8 million and $66.9
              million during the quarters ended March 31, 2001 and 2000,
              respectively.

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

              The following table presents the carrying amounts and estimated
              fair values of the Company's financial instruments at March 31,
              2001 and December 31, 2000. FASB Statement No. 107, Disclosures
              About Fair Value of Financial Instruments, defines the fair value
              of a financial instrument as the amount at which the instrument
              could be exchanged in a current transaction between willing
              parties, other than in a forced or liquidation sale (dollar
              amounts in thousands):

<TABLE>
<CAPTION>
                                           March 31, 2001            December 31, 2000
                                      ----------------------     -------------------------
                                       Carrying      Fair         Carrying         Fair
                                        Amount       Value         Amount          Value
                                      ---------    ---------     ---------       ---------
<S>                                  <C>           <C>           <C>            <C>
Assets:
   ARM assets                        $ 4,300,118  $ 4,292,508   $ 4,137,943    $ 4,129,421
   Cap Agreements/Option Contracts           687          687         1,518          1,518

Liabilities:
   Collateralized notes payable          572,080      573,995       603,910        605,927
   Other borrowings                      199,977      199,977       158,593        158,593
   Swap agreements                        16,585       16,585          (334)         7,259
</TABLE>

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

              The fair values of the Company's ARM securities, Cap Agreements
              and Option Contracts are generally based on market prices provided
              by certain dealers who make markets in these financial instruments
              or


                                       15
<PAGE>   16
              third-party pricing services. If the fair value of an ARM security
              is not reasonably available from a dealer or a third-party pricing
              service, management estimates the fair value based on
              characteristics of the security it receives from the issuer and
              available market information. The fair values for ARM loans is
              estimated by the Company by using the same pricing models employed
              by the Company in the process of determining a price to bid for
              loans in the open market, taking into consideration the aggregated
              characteristics of groups of loans such as, but not limited to,
              collateral type, index, margin, life cap, periodic cap,
              underwriting standards, age and delinquency experience. The fair
              value of the Company's collateralized notes payable and interest
              rate swap agreements are 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.

NOTE 5.  COMMON AND PREFERRED STOCK

              On July 13, 1998, the Board of Directors approved a common stock
              repurchase program of up to 500,000 shares at prices below book
              value, subject to availability of shares and other market
              conditions. On September 18, 1998, the Board of Directors expanded
              this program by approving the repurchase of up to an additional
              500,000 shares. The Company did not repurchase any shares of its
              common stock under this program during the quarter ended March 31,
              2001. To date, the company has repurchased 500,016 at an average
              price of $9.28 per share.

              On January 25, 2001, the Board of Directors adopted a Shareholder
              Rights Agreement (the "Rights Agreement"). The following summary
              description of the Rights does not purport to be complete and is
              qualified in its entirety by reference to the Rights Agreement. A
              summary of the Rights Agreement has been mailed to all
              shareholders and is available from the Company upon request, along
              with the Rights Agreement.

              Pursuant to the Rights Agreement, the Board of Directors declared
              a dividend distribution of one Preferred Stock Purchase Right (a
              "Right") for each outstanding share of common stock, par value
              $0.01 per share, of the Company (the "Common Stock") to
              shareholders of record as of the close of business on April 6,
              2001 (the "Record Date"). In addition, one Right will
              automatically attach to each share of Common Stock issued between
              the Record Date and the Distribution Date (as defined herein).
              Each Right entitles the registered holder thereof to purchase from
              the Company a unit (a "Preferred Unit") consisting of one
              one-thousandth of a share of Series B Cumulative Preferred Stock,
              par value $0.01 per share (the "Preferred Stock"), at a cash
              exercise price of $50.00 per Preferred Unit (the "Exercise
              Price"), subject to adjustment.

              Until a Right is exercised, the holder will have no rights as a
              shareholder of the Company (beyond those as an existing
              shareholder), including the right to vote or to receive dividends.
              While the distribution of the Rights will not be taxable to
              shareholders or to the Company, shareholders may, depending upon
              the circumstances, recognize taxable income if the Rights become
              exercisable for Preferred Units, other securities of the Company
              or other consideration, or for common stock of an acquiring
              company.

              The Rights have certain anti-takeover effects. The Rights will
              cause substantial dilution to a person or group that attempts to
              acquire the Company in a transaction not approved by the Board of
              Directors. The Rights should not interfere with any merger or
              other business combination approved by the Board of Directors,
              since the Rights Agreement may be amended prior to the
              Distribution Date, as described above, and the Rights may be
              redeemed until the calendar day after a Stock Acquisition Date, as
              described above.

              On January 25, 2001, the Company declared the fourth quarter 2000
              dividend of $0.25 per common share, which was paid on February 20,
              2001 to common shareholders of record as of February 8, 2001.


                                       16
<PAGE>   17

              On April 18, 2001, the Company declared the first quarter 2001
              dividend of $0.30 per common share, which will be paid on May 21,
              2001 to common shareholders of record as of May 4, 2001.

              On March 15, 2001, the Company declared a first quarter dividend
              of $0.605 per share to the shareholders of the Series A 9.68%
              Cumulative Convertible Preferred Stock which was also paid on
              April 10, 2001 to preferred shareholders of record as of March 31,
              2001.

              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 6.  STOCK OPTION PLAN

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

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

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

              During the quarter ended March 31, 2001, there were 35,666 options
              to buy common shares granted, at an average price of $10.56 per
              share, and 23,182 DERs granted. Also during the quarter, 146,718
              options to buy common shares were exercised at an average price of
              $7.73 per share and 2,632 options terminated. In January 2001,
              outstanding stock options to purchase 578,303 common shares at
              option exercise prices of $15.00 per share and above were
              voluntarily surrendered and cancelled by the officers and
              directors of the Company and employees of the Manager who held the
              options. The cancelled options were returned to the Plan and will
              be available for future option grants under the Plan.

              As of March 31, 2001, the Company had 224,711 options outstanding
              at exercise prices of $8.375 to $14.375 per share, 189,045 of
              which were exercisable. The weighted average exercise price of the
              options outstanding was $8.93 per share. As of the March 31, 2001,
              there were 391,156 DERs outstanding, of which 362,995 were vested,
              and 52,838 PSRs outstanding. The Company recorded an expense
              associated with DERs and PSRs of $248,000 and $18,000 for the
              quarters ended March 31, 2001 and 2000, respectively.

              Notes receivable from stock sales result from the Company selling
              shares of common stock through the exercise of stock options
              partially for consideration for notes receivable. The notes mature
              between 2006 and 2010 and accrue interest at rates that range from
              4.98% to 6.25% 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


                                       17
<PAGE>   18
              option of each borrower. As of March 31, 2001, there were $6.2
              million of notes receivable from stock sales outstanding.

NOTE 7.  TRANSACTIONS WITH AFFILIATES

              The Company has a Management Agreement (the "Agreement") with
              Thornburg Mortgage Advisory Corporation ("the Manager"). Under the
              terms of this Agreement, the Manager, subject to the supervision
              of the Company's Board of Directors, is responsible for the
              management of the day-to-day operations of the Company and
              provides all personnel and office space. According to the terms of
              the Agreement, certain defined expenses of the Manager are
              reimbursed by the Company, principally expenses of the Company's
              taxable mortgage banking subsidiary related to mortgage loan
              acquisition, selling, servicing and securitization activities. The
              Agreement provides for an annual review by the unaffiliated
              directors of the Board of Directors of the Manager's performance
              under the Agreement.

              The Company pays the Manager an annual base management fee based
              on average shareholders' equity, adjusted for liabilities that are
              not incurred to finance assets ("Average Shareholders' Equity" or
              "Average Net Invested Assets" as defined in the Agreement) payable
              monthly in arrears as follows: 1.15% of the first $300 million of
              Average Shareholders' Equity, plus 0.85% of Average Shareholders'
              Equity above $300 million. This formula is subject to a cost of
              living adjustment as of each annual review of the Agreement based
              on changes in the Consumer Price Index, subject to certain
              limitations. In addition, the three wholly-owned subsidiaries of
              the Company and the two wholly-owned subsidiaries of TMHL have
              entered into separate Management Agreements with the Manager for
              additional management services for a combined amount of $1,200 per
              month, paid in arrears.

              For the quarters ended March 31, 2001 and 2000, the Company paid
              the Manager $1,095,000 and $1,024,000, respectively, in base
              management fees in accordance with the terms of the Management
              Agreements.

              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 quarter ended March 31, 2001, the
              Manager earned performance based compensation in the amount of
              $924,000, in accordance with the terms of the Agreement. For the
              quarter ended March 31, 2000, the Company did not pay the Manager
              any performance based compensation because the Company's net
              income, as measured by Return on Equity, did not exceed the
              ten-year U.S. Treasury Rate plus 1%.

              During the quarter ended March 31, 2001, the Company's mortgage
              banking subsidiary, TMHL, reimbursed the Manager $226,000 for
              expenses, primarily related to the acquisition of loans, in
              accordance with the terms of the Agreement. Additionally, the
              Company reimbursed the Manager and other affiliated companies
              $8,000 for certain other direct expenses of the Company, primarily
              related to shareholder relations, public relations and marketing
              consulting services.

              The Company's subsidiaries, except TMHL, have entered into
              separate lease agreements with the Manager for office space in
              Santa Fe, New Mexico. During the quarters ended March 31, 2001 and
              2000, the combined amount of rent paid to the Manager was $4,000
              and $31,000, respectively.


                                       18
<PAGE>   19


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

Certain information contained in this Quarterly Report on Form 10-Q constitute
"Forward-Looking Statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act, which can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "Plan," or "continue" or the negatives
thereof or other variations thereon or comparable terminology. Investors are
cautioned that all forward-looking statements involve risks and uncertainties
including, but not limited to, risks related to the future level and
relationship of various interest rates, prepayment rates, availability and cost
of acquiring new assets, the timing of new programs and the performance of
third-party, private-label relationships involved in the origination and
servicing of loans. The statements in the "Risk Factors" section of the
Company's 2000 Annual Report on Form 10-K on page 17 constitute cautionary
statements identifying important factors, including certain risks and
uncertainties, with respect to such forward-looking statements that could cause
the actual results, performance or achievements of the Company to differ
materially from those reflected in such forward-looking statements.

GENERAL

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

The Company's mortgage assets portfolio may consist of either agency or
privately issued securities (generally publicly registered) mortgage
pass-through securities, multi-class pass-through securities, collateralized
mortgage obligations ("CMOs"), collateralized bond obligations ("CBOs"),
generally backed by high quality mortgage backed securities, ARM loans, Hybrid
ARMs, fixed-rate mortgage-backed securities that have an expected duration of
one year or less or short-term investments that either mature within one year or
have an interest rate that reprices within one year. The Company will not invest
more than 35% of its ARM assets in Hybrid Arms, and will limit its interest rate
repricing mismatch (the difference between the remaining fixed-rate period of a
Hybrid ARM and the maturity of the fixed-rate liability funding a Hybrid ARM) to
a duration of no more than one year. Hybrid ARMs with fixed-rate periods of
greater than five years are further limited to no more than 10% of the Company's
ARM assets.

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

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

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


                                       19
<PAGE>   20

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

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

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

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

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

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

     (4)  a limited amount, currently $70 million as authorized by the Board of
          Directors, of less than investment grade classes of ARM securities
          that are created as a result of the Company's loan acquisition and
          securitization efforts.

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

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

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

By the second quarter of 2001, the Company expects to expand its ability to
offer mortgages on-line utilizing a third-party, private label web-based
origination system. Prospective borrowers will be able to look up mortgage loan
product and interest rate information through the Company's website, obtain
access to a variety of mortgage calculators and consumer help features, submit
an application on-line and obtain a pre-approval of their loan. Once a mortgage
loan application has been submitted, a Thornburg Mortgage representative will be
assigned the responsibility of completing the loan process on behalf of the
borrower.

The Company does not invest in REMIC residuals or other CMO residuals and,
therefore does not create excess inclusion income or unrelated business taxable
income for tax-exempt investors. Therefore, the Company is a


                                       20
<PAGE>   21
mortgage REIT eligible for purchase by tax-exempt investors, such as pension
plans, profit sharing plans, 401(k) plans, Keogh plans and Individual Retirement
Accounts ("IRAs").

FINANCIAL CONDITION

At March 31, 2001, the Company held total assets of $4.390 billion, $4.301
billion of which consisted of ARM assets, as compared to $4.190 billion and
$4.139 billion, respectively, at December 31, 2000. Since commencing operations,
the Company has purchased either ARM securities (backed by agencies of the U.S.
government or privately-issued, generally publicly registered, mortgage assets,
most of which are rated AA or higher by at least one of the Rating Agencies) or
ARM loans generally originated to "A" quality underwriting standards. At March
31, 2001, 92.7% of the assets held by the Company, including cash and cash
equivalents, were High Quality assets, far exceeding the Company's investment
policy minimum requirement of investing at least 70% of its total assets in High
Quality ARM assets and cash and cash equivalents. Of the ARM assets currently
owned by the Company, 86.4% are in the form of adjustable-rate pass-through
certificates or ARM loans. The remainder are floating rate classes of CMOs
(9.8%) or investments in floating rate classes of CBOs (3.8%) backed primarily
by ARM mortgaged-backed securities.

The following table presents a schedule of ARM assets owned at March 31, 2001
and December 31, 2000 classified by High Quality and Other Investment assets and
further classified by type of issuer and by ratings categories.

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

<TABLE>
<CAPTION>
                                               March 31, 2001           December 31, 2000
                                          -----------------------    -----------------------
                                           Carrying     Portfolio     Carrying     Portfolio
                                            Value          Mix          Value        Mix
                                          ----------   ----------    ----------   ----------
<S>                                       <C>          <C>           <C>          <C>
HIGH QUALITY:
   Freddie Mac/Fannie Mae                 $2,200,368         51.2%   $2,187,180         52.9%
   Privately Issued:
     AAA/Aaa Rating                        1,368,078         31.8     1,309,584         31.6
     AA/Aa Rating                            384,583          8.9       351,499          8.5
                                          ----------   ----------    ----------   ----------
       Total Privately Issued              1,752,661         40.7     1,661,083         40.1
                                          ----------   ----------    ----------   ----------

                                          ----------   ----------    ----------   ----------
       Total High Quality                  3,953,029         91.9     3,848,263         93.0
                                          ----------   ----------    ----------   ----------

OTHER INVESTMENT:
   Privately Issued:
     A Rating                                 26,137          0.6        13,724          0.3
     BBB/Baa Rating                           70,610          1.6        72,114          1.7
     BB/Ba Rating and Other                   40,955          1.0        40,947          1.0
   Whole loans                               210,074          4.9       164,413          4.0
                                          ----------   ----------    ----------   ----------
       Total Other Investment                347,776          8.1       291,198          7.0
                                          ----------   ----------    ----------   ----------

       Total ARM Portfolio                $4,300,805        100.0%   $4,139,461        100.0%
                                          ==========   ==========    ==========   ==========
</TABLE>

   ----------------
   (1)    The AAA Rating category includes $582.8 million and $615.7 million of
          whole loans as of March 31, 2001 and December 31, 2000, respectively,
          that have been credit enhanced to AAA by a combination of an insurance
          policy purchased from a third-party and an unrated subordinated
          certificate retained by the Company in the amount of $32.1 million as
          of March 31, 2001 and December 31, 2000. The subordinated certificate
          is included in the BB/Ba Rating and Other category.

As of March 31, 2001, the Company had reduced the cost basis of its ARM
securities by $1,908,000 due to estimated credit losses (other than temporary
declines in fair value). The estimated credit losses for ARM securities relate
to Other Investments that the Company purchased at a discount that included an
estimate of credit losses and to loans that the Company has securitized for its
own portfolio. Additionally, during the first three months of 2001,


                                       21
<PAGE>   22
in accordance with its credit policies, the Company provided for estimated
credit losses on the subordinated classes of its securitized loans in the amount
of $26,000 and recorded a $152,000 provision for estimated credit losses on its
loan portfolio. As of March 31, 2001, the Company's ARM loan portfolio included
9 loans that are considered seriously delinquent (60 days or more delinquent)
with an aggregate balance of $5.2 million. The ARM loan portfolio also includes
one property ("REO") that the Company acquired as the result of foreclosure
processes in the amount of $0.6 million. During April, the largest seriously
delinquent loan in the amount of $3.5 million was paid off in full, including
accrued interest. The average original effective loan-to-value ratio on the
remaining 8 delinquent loans and REO is approximately 74%. The Company believes
that its current level of reserves is more than adequate to cover estimated
losses from these loans and REO properties. The Company's credit reserve policy
regarding ARM loans is to record a provision based on the outstanding principal
balance of loans (including loans securitized by the Company for which the
Company has retained first loss exposure), subject to adjustment on certain
loans or pools of loans based upon factors such as, but not limited to, age of
the loans, borrower payment history, low loan-to-value ratios, historical loss
experience, current economic conditions and quality of underwriting standards
applied by the originator.

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

                               ARM ASSETS BY INDEX
                          (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                        March 31, 2001           December 31, 2000
                                                   -----------------------    -----------------------
                                                    Carrying     Portfolio     Carrying     Portfolio
                                                     Value          Mix          Value        Mix
                                                   ----------   ----------    ----------   ----------
<S>                                                <C>          <C>           <C>          <C>
ARM ASSETS:
    INDEX:
       One-month LIBOR                              $  665,845     15.5%       $  651,502     15.7%
       Three-month LIBOR                               165,243      3.8           158,512      3.8
       Six-month LIBOR                                 388,058      9.0           430,908     10.4
       Six-month Certificate of Deposit                213,726      5.0           230,934      5.6
       Six-month Constant Maturity Treasury             21,895      0.5            22,330      0.5
       One-year Constant Maturity Treasury           1,506,786     35.0         1,402,764     33.9
       Cost of Funds                                   172,338      4.0           164,697      4.0
                                                    ----------    -----        ----------    -----
                                                     3,133,891     72.8         3,061,647     73.9
                                                    ----------    -----        ----------    -----

HYBRID ARM ASSETS                                    1,074,397     25.0         1,050,199     25.4
ONE-YEAR MATURITY - FIXED RATE                          92,517      2.2            27,615      0.7
                                                    ----------    -----        ----------    -----
                                                    $4,300,805    100.0%       $4,139,461    100.0%
                                                    ==========    =====        ==========    =====
</TABLE>

The ARM portfolio had a current weighted average coupon of 7.47% at March 31,
2001. This consisted of an average coupon of 6.76% on the hybrid portion of the
portfolio and an average coupon of 7.73% 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 6.64%, based
upon the current composition of the portfolio and the applicable indices. As of
December 31, 2000, the ARM portfolio had a weighted average coupon of 7.75%.
This consisted of an average coupon of 6.77% on the hybrid portion of the
portfolio and an average coupon of 8.11% on the rest of the portfolio. If the
non-hybrid portion of the portfolio had been "fully indexed," the weighted
average coupon would have been approximately 7.46%, based upon the composition
of the portfolio and the applicable indices at the time. The lower average
interest coupon on the ARM portfolio as of March 31, 2001 compared to the end of
2000 is reflective of Federal Reserve Board interest rate decreases that have
been occurring since early January 2001. The average interest rate on the ARM
portion of the portfolio is expected to continue to decrease during the
remainder of 2001 to the "fully indexed" rate.

At March 31, 2001, the current yield of the ARM assets portfolio was 6.71%,
compared to 7.06% as of December 31, 2000, with an average term to the next
repricing date of 314 days as of March 31, 2001, compared to 308 days as of
December 31, 2000. As of March 31, 2001, hybrid ARMs comprised 25.0% of the
total ARM portfolio, comparable to the 25.4% as of the end of 2000. The Company
finances its hybrid ARM portfolio with longer term


                                       22
<PAGE>   23
fixed-rate borrowings such that the duration mismatch of the hybrid ARMs and the
corresponding borrowings is one year or less. The current yield includes the
impact of the amortization of applicable premiums and discounts and the impact
of principal payment receivables.

The decrease in the yield of 0.35% as of March 31, 2001, compared to December
31, 2000, is primarily due to the decreased weighted average interest rate
coupon discussed above, which decreased by 0.28%. The yield also declined as a
result of a higher level of net premium amortization, which had the effect of
lowering the yield by 0.08% and the impact of non-interest earning principal
payments receivables, which also increased during the first quarter of 2001,
decreasing the portfolio yield by 0.01%, as the average rate of ARM portfolio
prepayments during the first quarter of 2001 increased to 19% Constant
Prepayment Rate ("CPR") from the 18% CPR during the fourth quarter of 2000.
These unfavorable factors that decreased the ARM portfolio yield were partially
offset by the elimination of the 0.02% effect of hedging cost from the Company's
interest rate spread computation. With the adoption of FAS 133, the Company
carries all hedging instruments at their fair value and records the effective
portion of their change in fair value in "Accumulated other comprehensive
income" and records the ineffective portion in net income as a separate item
identified at "Hedging expense".

The following table presents various characteristics of the Company's ARM and
Hybrid ARM loan portfolio as of March 31, 2001. This information pertains to
loans held for securitization, loans held as collateral for the notes payable
and loans TMA has securitized for its own portfolio for which the Company
retained credit loss exposure. The combined amount of the loans included in this
information is $1.161 billion.

                ARM AND HYBRID ARM LOAN PORTFOLIO CHARACTERISTICS

<TABLE>
<CAPTION>
                                                           Average             High                   Low
                                                          ----------        -----------             --------
<S>                                                       <C>               <C>                     <C>
     Unpaid principal balance                              $290,021          $5,154,041              $1,735
     Coupon rate on loans                                      7.53%              10.13%               5.50%
     Pass-through rate                                         7.18%               9.73%               5.23%
     Pass-through margin                                       1.96%               3.48%               0.61%
     Lifetime cap                                             12.86%              16.75%               9.75%
     Original Term (months)                                     353                 480                  72
     Remaining Term (months)                                    320                 441                  43
</TABLE>

<TABLE>
<S>                               <C>                         <C>                          <C>
     Geographic Distribution (Top 5 States):                  Property type:
         California                   27.49%                      Single-family            65.52%
         Florida                       9.61                       DeMinimus PUD            21.05
         Georgia                       7.54                       Condominium               8.76
         New York                      6.13                       Other                     4.67
         Colorado                      4.56

     Occupancy status:                                        Loan purpose:
         Owner occupied               85.41%                      Purchase                 60.91%
         Second home                  10.65                       Cash out refinance       22.20
         Investor                      3.94                       Rate & term refinance    16.89

     Documentation type:                                      Periodic Cap:
         Full/Alternative             94.06%                      None                     51.73%
         Other                         5.94                       2.00%                    46.86
                                                                  1.00%                     0.41
     Average effective original                                   0.50%                     1.00
         loan-to-value:               68.41%
</TABLE>

As of March 31, 2001, the Company serviced $193.8 million loans and had 421
customer relationships.

During the quarter ended March 31, 2001, the Company purchased $374.0 million of
ARM securities, 96.6% of which were High Quality assets and $69.1 million of ARM
loans generally originated to "A" quality underwriting standards. Of the ARM
assets acquired during the first three months of 2001, approximately 41% were
indexed to


                                       23
<PAGE>   24
U.S. Treasury bill rates, 19% were Hybrid ARMs, 12% were indexed to LIBOR and
25% were fixed-rate, short-term securities. The following table compares the
Company's ARM asset acquisition and origination activity for the consecutive
quarters ended March 31, 2001 and December 31, 2000 (dollar amounts in
thousands):

<TABLE>
<CAPTION>
                                                For the quarters ended:
                                           ---------------- -------------------
                                            March 31, 2001   December 31, 2000
                                           ---------------- -------------------
<S>                                        <C>              <C>
ARM SECURITIES:
   Freddie Mac/Fannie Mae                      $186,834          $337,332
   High Quality, privately issued               174,398             5,835
   Other Investment ARM securities               12,773
                                               --------          --------
                                                374,005           343,167
                                               --------          --------

LOANS:
     Bulk acquisitions                           38,688            24,450
     Correspondent purchases                     27,908            18,595
     Direct retail originations                   2,514             1,087
                                               --------          --------
                                                 69,110            44,132
                                               --------          --------

                                               --------          --------
       Total production                        $443,115          $387,299
                                               ========          ========
</TABLE>

Since 1997, the Company has emphasized purchasing assets at substantially lower
prices relative to par in order to reduce the potential impact of future
prepayments. As a result, the Company has emphasized the acquisition of ARM and
Hybrid ARM assets and high quality floating-rate collateralized mortgages. In
doing so, the average premium/(discount) paid for ARM assets acquired in the
first three months of 2001 and for the years 2000, 1999 and 1998 was (0.12),
(0.42%), 0.45% and 1.09% of par, respectively, as compared to 3.29% of par in
1997 when the Company emphasized the purchase of seasoned ARM assets. In part,
as a result of this strategy, the Company's unamortized net premium as a percent
of par decreased to 1.47% as of March 31, 2001, compared to 1.64% as of December
31, 2000 and down from 2.83% as of the end of 1997. The Company securitized
$13.5 million loans during the first quarter of 2001 and retained the securities
for its own portfolio. Additionally, as of March 31, 2001, the Company had
commitments to purchase and/or originate approximately $43.5 million of retail
loans. The Company did not sell any assets during the quarter ended March 31,
2001.

For the quarter ended March 31, 2001, the Company's mortgage assets paid down at
an approximate average annualized constant prepayment rate of 19% compared to
15% for the quarter ended March 31, 2000 and 18% for the quarter ended December
31, 2000. When prepayment experience increases, the Company has to amortize its
premiums over a shorter time period, resulting in a reduced yield to maturity on
the Company's ARM assets. Conversely, if actual prepayment experience decreases,
the premium would be amortized over a longer time period, resulting in a higher
yield to maturity. The Company monitors its prepayment experience on a monthly
basis in order to adjust the amortization of the net premium, as appropriate.

The fair value of the Company's portfolio of ARM assets classified as
available-for-sale increased by 0.78% from a negative adjustment of 2.28% of the
portfolio as of December 31, 2000, to a negative adjustment of 1.50% as of March
31, 2001. This price increase was primarily due to the effect of declining
short-term interest rates and a steepening of the yield curve (short-term
interest rates declining relative to long-term interest rates). The amount of
the negative adjustment to fair value on the ARM assets classified as
available-for-sale decreased from $78.4 million as of December 31, 2000, to
$53.5 million as of March 31, 2001. As of March 31, 2001, all of the Company's
ARM securities are classified as available-for-sale and are carried at their
fair value.

The Company has designated its Cap Agreements and Option Contracts as fair value
hedges that are intended to hedge the fair value of the lifetime interest rate
cap component of its ARM assets. The fair value of Cap Agreements and Option
Contracts tend to increase when general market interest rates increase and
decrease when market interest rates decrease, helping to partially offset
changes in the fair value of the Company's ARM assets. At March 31, 2001, the
fair value of the Company's Cap Agreements and Option Contracts was $0.5 million
compared to a fair value of $1.3 million as of December 31, 2000. During the
quarter ended March 31, 2001, the change in the fair value of the Cap Agreements
and Option Contracts compared to the change in the fair value of the lifetime


                                       24
<PAGE>   25
interest rate cap component of the Company's ARM assets met the effectiveness
requirements of FAS 133 and the ineffective portion, $0.1 million, was recorded
as a hedging expense. At March 31, 2001, the Cap Agreements and Option Contracts
had a remaining notional balance of $2.538 billion with an average final
maturity of 2.1 years, compared to a remaining notional balance of $2.624
billion with an average final maturity of 2.3 years at December 31, 2000. The
Company also owns Cap Agreements and Option Contracts in order to mitigate
exposure to changing interest rates. They tend to limit the Company's exposure
to risks associated with the lifetime interest rate caps of its ARM assets
should interest rates rise above specified levels. These Cap Agreements and
Option Contracts act to reduce the effect of the lifetime or maximum interest
rate cap limitation. These Cap Agreements and Option Contracts purchased by the
Company will allow the yield on the ARM assets to continue to rise in a high
interest rate environment just as the Company's cost of borrowings would
continue to rise, since the borrowings do not have any interest rate cap
limitation. Pursuant to the terms of these Cap Agreements and Option contracts,
the Company will receive cash payments if the one-month, three-month or
six-month LIBOR index increases above certain specified levels, which range from
5.75% to 12.50% and average approximately 9.94%.

The following table presents information about the Company's Cap Agreement and
Option Contract portfolio that is designated as a fair value hedge of the value
of the lifetime interest rate cap component of the Company's ARM assets as of
March 31, 2001:

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

<TABLE>
<CAPTION>
   Hedged     Weighted    Cap Agreement/                      Weighted
 ARM Assets   Average    Options Contract                      Average
Balance (1)   Life Cap   Notional Balance   Strike Price    Remaining Term
-----------  ----------  ----------------   ------------   ----------------
<S>          <C>         <C>                <C>            <C>
$  124,471         8.24%   $  123,664              6.19%         2.3 Years
   200,186         8.44       200,000              7.50          2.7
   447,461         9.84       447,775              8.00          1.5
    25,055        10.29        25,000              9.00          1.7
    58,556        10.53        59,125              9.50          1.6
   353,148        10.87       353,088             10.00          1.4
   196,361        11.51       196,372             10.50          1.2
   470,813        12.18       470,000             11.00          2.5
   279,781        12.65       280,000             11.50          3.4
   349,792        13.39       350,000             12.00          2.5
   126,313        15.75        32,562             12.50          0.7
----------   ----------    ----------        ----------        ------------
$2,631,937        11.40%   $2,537,586              9.94%         2.1 Years
==========   ==========    ==========        ==========        ============
</TABLE>

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

As of March 31, 2001, the Company was a counterparty to twenty-three Swap
Agreements having an aggregate notional balance of $1.079 million. As of March
31, 2001, $578.9 million of these Swap Agreements hedged the fixed interest rate
period of Hybrid ARMs and had a weighed average maturity of 2.1 years. The
remaining Swap Agreements extended the weighted average term of the Company's
borrowings and mature in July 2001. 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 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 ARM assets by
increasing the average period until the next repricing of its borrowings from 28
days to 149 days. In general, these Swap Agreements were entered into in
connection with the Company's acquisition of Hybrid ARMs. The Swap Agreements
hedge the cost of financing Hybrid ARMs to within a one year duration of their
fixed rate term, generally three to ten years. The average remaining fixed rate
term of the Company's Hybrid ARM assets as of March 31, 2001 was 3.0 years. The
Company has also entered into one delayed Swap Agreement that becomes effective
for a one-year term, beginning in April of 2002. This delayed Swap Agreement has
a notional balance of $100 million and is designated to hedge the interest rate
exposure of Hybrid ARM assets upon the termination of the other Swap Agreements.
In accordance with FAS 133, all of these Swaps Agreements have been designated
as cash


                                       25
<PAGE>   26
flow hedges and, effective January 1, 2001, are being carried on the balance
sheet at their negative fair value of $16.6 million. As of March 31, 2001, the
fair value adjustment for Swap Agreements was a decrease to "Accumulated other
comprehensive income" in the amount of $10.1 million, including an adjustment to
fair value recorded January 1, 2001 in connection with the adoption of FAS 133.
The Swap Agreements and the short-term borrowings they hedge are both indexed to
the one-month LIBOR index and, due to the similarity of their terms, the Company
has calculated their effectiveness as cash flow hedges to be 100% effective. As
such, the change in the fair value of the Swap Agreements is recorded in
"Accumulated other comprehensive income" with no effect on the Company's net
income.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001

For the quarter ended March 31, 2001, the Company's net income was $10,727,000,
or $0.42 per share (Diluted EPS), based on a weighted average of 21,691,000
shares outstanding. That compares to $7,513,000, or $0.27 per share (Diluted
EPS) for the quarter ended March 31, 2000), based on a weighted average of
21,490,000 shares outstanding. Net interest income for the quarter totaled
$14,324,000, compared to $9,317,000 for the same period in 2000. Net interest
income is comprised of interest income earned on portfolio assets less interest
expense from borrowings. During the first three months of both 2001 and 2000,
the Company did not record any gain or loss from the sale of ARM assets. During
the first quarter of 2001, the Company recorded hedging expense of $151,000. In
prior periods before the adoption of FAS 133, the Company reported hedging
expense as a component of net interest income. Additionally, during the first
quarter of 2001, the Company reduced its earnings and the carrying value of its
ARM assets by reserving $178,000 for estimated credit losses, compared to
$331,000 during the first quarter of 2000. During the first quarter of 2001, the
Company incurred operating expenses of $3,066,000, consisting of a base
management fee of $1,095,000, a performance based fee of $924,000 and other
operating expenses of $1,047,000. During the same period of 2000, the Company
incurred operating expenses of $1,473,000, consisting of a base management fee
of $1,024,000 and other operating expenses of $449,000. During the quarter ended
March 31, 2001, the Company also recorded the cumulative effect of change in
accounting principle in connection with the adoption of FAS 133 for $202,000.

The Company's return on average common equity was 11.24% for the quarter ended
March 31, 2001, excluding the cumulative effect of adopting FAS 133, compared to
7.20% for the quarter ended March 31, 2000 and compared to 7.37% for the prior
quarter ended December 31, 2000. The Company's return on equity improved in this
past quarter compared to the prior quarter primarily because the Company's net
interest income improved due to lower cost of funds of the Company's borrowings
and because the yield on the Company's ARM portfolio is benefiting from
acquisitions of loans and other ARM and Hybrid ARM assets acquired at average
prices below par.


                                       26
<PAGE>   27


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

                COMPONENTS OF RETURN ON AVERAGE COMMON EQUITY (1)

<TABLE>
<CAPTION>
                                                                                                                 ROE in
                                                                                                               Excess of
                  Net                 Provision  Gain (Loss)  G & A                           Net     10-Year   10-Year
   For the     Interest  Hedging         For       on ARM    Expense   Perform.  Preferred  Income/  US Treas   US Treas
   Quarter      Income/ Expense/       Losses/     Sales/      (2)/      Fee/    Dividend/  Equity    Average   Average
    Ended       Equity   Equity        Equity      Equity     Equity    Equity     Equity    (ROE)     Yield     Yield
   -------     -------- --------     ----------  ---------- --------- ---------  --------- --------  --------  ----------
<S>            <C>      <C>           <C>        <C>        <C>        <C>       <C>       <C>      <C>       <C>
Mar 31, 1999      8.07%                0.84%         --       1.58%       --       2.05%     3.60%     4.98%    (1.38)%
Jun 30, 1999     11.17%                0.85%       0.04%      1.70%       --       2.05%     6.60%     5.54%     1.06%
Sep 30, 1999     11.48%                0.94%       0.02%      1.76%       --       2.05%     6.75%     5.88%     0.87%
Dec 31, 1999     11.09%                0.89%         --       1.86%       --       2.05%     6.29%     6.14%     0.15%
Mar 31, 2000     11.47%                0.41%         --       1.81%       --       2.06%     7.20%     6.47%     0.73%
Jun 30, 2000     10.74%                0.47%       0.06%      1.78%       --       2.05%     6.50%     6.18%     0.32%
Sep 30, 2000     11.01%                0.33%         --       2.07%       --       2.05%     6.56%     5.89%     0.67%
Dec 31, 2000     11.77%                0.21%       0.29%      2.37%     0.06%      2.05%     7.37%     5.57%     1.80%
Mar 31, 2001     17.40%  0.18%(3)      0.22%         --       2.60%     1.12%      2.03%    11.25%     5.04%     6.21%
</TABLE>

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

(2)  Excludes performance fees.

(3)  Reflects implementation of FAS 133.

The increase in the Company's return on common equity in the first quarter of
2001, compared to the first quarter of 2000, is due to the improvement in the
net interest spread between the Company's interest-earning assets and
interest-bearing liabilities and a decrease in the Company's provision for
losses. These positive impacts on the Company's return on equity were partially
offset by the performance based fee and an increase in other expenses.

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

                   COMPARATIVE NET INTEREST INCOME COMPONENTS
                          (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                           For the quarters ended March 31,
                                                           --------------------------------
                                                               2001             2000
                                                           ------------     ------------
<S>                                                        <C>              <C>
                  Coupon interest income on ARM assets        $77,553          $77,615
                  Amortization of net premium                  (4,626)          (4,683)
                  Amortization of Cap Agreements                   --             (838)
                  Amort. of deferred gain from hedging             --              304
                  Cash and cash equivalents                       298              256
                                                               ------          -------
                      Interest income                          73,225           72,654
                                                               ------          -------

                  Reverse repurchase agreements                46,152           48,883
                  AAA notes payable                             9,661           14,660
                  Other borrowings                              2,797              285
                  Interest rate swaps                             291             (491)
                                                               ------          -------
                      Interest expense                         58,901           63,337
                                                               ------          -------

                  Net interest income                         $14,324          $ 9,317
                                                              =======          =======
</TABLE>

As presented in the table above, the Company's net interest income increased by
$5.0 million in the first quarter of 2001 compared to the first quarter of 2000.
The most significant change was the decline in interest expense of $4.4 million.
The following two tables explain the increase in terms of volume and rate
variances.


                                       27
<PAGE>   28

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

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

<TABLE>
<CAPTION>
                                                            For the quarters ended March 31,
                                           -----------------------------------------------------------------
                                                        2001                              2000
                                           -------------------------------   -------------------------------
                                                                 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          $4,238,664   6.88%   $   72,927   $4,455,294   6.50%   $   72,398
  Cash and cash equivalents                    21,572   5.53           298       15,699   6.52           256
                                           ----------   ----    ----------   ----------   ----    ----------
                                            4,260,236   6.88        73,225    4,470,993   6.50        72,654
                                           ----------   ----    ----------   ----------   ----    ----------
Interest Bearing Liabilities:
  Reverse repurchase agreements             3,114,509   5.96        46,443    3,199,873   6.05        48,392
  Collateralized notes payable                592,052   6.53         9,661      876,656   6.69        14,660
  Other borrowings                            175,379   6.38         2,797       11,757   9.68           285
                                           ----------   ----    ----------   ----------   ----    ----------
                                            3,881,940   6.07        58,901    4,088,286   6.20        63,337
                                           ----------   ----    ----------   ----------   ----    ----------

Net Interest Earning Assets and Spread     $  378,296   0.81%   $   14,324   $  382,707   0.30%   $    9,317
                                           ==========   ====    ==========   ==========   ====    ==========
Yield on Net Interest Earning Assets (1)                1.34%                             0.83%
                                                        ====                              ====
</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>
                                           2001 versus 2000
                                   -----------------------------
                                     Rate      Volume     Total
                                   -------    -------    -------
<S>                                <C>        <C>        <C>
Interest Income:
   ARM assets                      $ 4,257    $(3,728)   $   529
   Cash and cash equivalents           (39)        81         42
                                   -------    -------    -------
                                     4,218     (3,647)       571
                                   -------    -------    -------
Interest Expense:
   Reverse repurchase agreements      (674)    (1,275)    (1,949)
   Collateralized notes payable       (356)    (4,643)    (4,999)
   Other borrowings                    (97)     2,609      2,512
                                   -------    -------    -------
                                    (1,127)    (3,309)    (4,436)
                                   -------    -------    -------

Net interest income                $ 5,345    $  (338)   $ 5,007
                                   =======    =======    =======
</TABLE>

As a result of the yield on the Company's interest-earning assets increasing to
6.88% during the first three months of 2001 from 6.50% during the same period of
2000 and the Company's cost of funds decreasing to 6.07% from 6.20% during the
same time periods, net interest income increased by $5,007,000. This increase in
net interest income is primarily a rate variance, partially offset by a volume
variance. There was a net favorable rate variance of $5,345,000, primarily due
to a favorable rate variance of $4,218,000 on the Company's ARM assets portfolio
and other interest-earning assets combined with a favorable rate variance on
borrowings that increased net interest income by $1,127,000. The decreased
average size of the Company's portfolio during the first quarter of 2001


                                       28
<PAGE>   29

compared to the same period in 2000 decreased net interest income in the amount
of $338,000. The average balance of the Company's interest-earning assets was
$4.260 billion during the first three months of 2001, compared to $4.471 billion
during the first three months of 2000 -- a decrease of 5%.

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>
                                                                                                                 Yield on
                  Average     Wgt Avg                               Yield on                                        Net
 As of the       Interest      Fully      Weighted                  Interest                        Net          Interest
  Quarter         Earning     Indexed      Average       Yield       Earning      Cost of         Interest        Earning
   Ended          Assets      Coupon       Coupon       Adj (2)      Assets        Funds           Spread         Assets
-----------      --------    ---------    --------     ---------    --------     ---------       ----------     ----------
<S>              <C>         <C>          <C>          <C>          <C>          <C>             <C>            <C>
Mar 31, 1999     $4,196.4      6.85%        7.03%        1.31%        5.71%        5.36%           0.35%          0.63%
Jun 30, 1999     $4,405.3      7.10%        6.85%        1.11%        5.74%        5.40%           0.34%          0.82%
Sep 30, 1999     $4,552.1      7.20%        6.85%        0.76%        6.09%        5.74%           0.35%          0.82%
Dec 31, 1999     $4,449.0      7.51%        7.08%        0.70%        6.38%        6.47%(3)       (0.09)%(3)      0.81%
Mar 31, 2000     $4,471.0      7.77%        7.26%        0.68%        6.58%        6.32%           0.26%          0.83%
Jun 30, 2000     $4,344.6      7.87%        7.48%        0.59%        6.89%        6.75%           0.14%          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%(3)        0.31%(3)       0.93%
Mar 31, 2001     $4,260.2      6.64%        7.47%        0.79%        6.68%        5.48%           1.20%          1.31%
</TABLE>

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

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

     (3) The year-end cost of funds and net interest spread are commonly
         effected by significant, but generally temporary, year-end pressures
         that raise the Company's cost of financing mortgage assets over
         year-end. The effect generally begins during the latter part of
         November and continues through January.

                COMPONENTS OF THE YIELD ADJUSTMENTS ON ARM ASSETS

<TABLE>
<CAPTION>
                                                                            Amort of
                                          Impact of                       Deferred Gain
 As of the               Premium/         Principal         Hedging           From              Total
  Quarter                Discount          Payments        Activity/        Hedging             Yield
   Ended                  Amort           Receivable        Other           Activity          Adjustment
-----------             ----------       -----------      ----------      --------------      ----------
<S>                      <C>              <C>             <C>             <C>                 <C>
Mar 31, 1999              1.09%             0.10%            0.15%           (0.03)%             1.31%
Jun 30, 1999              0.87%             0.13%            0.13%           (0.02)%             1.11%
Sep 30, 1999              0.51%             0.13%            0.13%           (0.01)%             0.76%
Dec 31, 1999              0.51%             0.09%            0.11%           (0.01)%             0.70%
Mar 31, 2000              0.57%             0.07%            0.07%           (0.03)%             0.68%
Jun 30, 2000              0.46%             0.10%            0.06%           (0.03)%             0.59%
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%
</TABLE>

The Company's spreads and net interest income has also been negatively impacted
since early 1998 by the spread relationship between U.S. Treasury rates and
LIBOR. This spread relationship has impacted the Company negatively because a
portion of the Company's ARM portfolio is indexed to U.S. Treasury rates and the
interest rates on all of the Company's borrowings tend to change with changes in
LIBOR. During 1998, 1999 and 2000, the


                                       29
<PAGE>   30

Company reduced its exposure to ARM assets indexed to U.S. Treasury rates
through the product mix of its sales and acquisitions in order to reduce the
negative impact of this situation. Current acquisitions of U.S. Treasury indexed
ARM assets are purchased at a price that the Company believes will result in a
yield that will compensate the Company for the spread relationship between U.S.
Treasury rates and LIBOR. The following table presents historical data since the
year the Company commenced operations regarding this relationship as well as
data regarding the percent of the Company's ARM portfolio that is indexed to
U.S. Treasury rates. As presented in the table below, the Company has reduced
the proportion of its ARM portfolio that is indexed to U.S. Treasury rates to
35.5% at March 31, 2001 from 49.0% as of the end of 1997. The data is as
follows:

    ONE-YEAR U.S. TREASURY RATES COMPARED TO ONE- AND THREE-MONTH LIBOR RATES

<TABLE>
<CAPTION>
                                                                            Average Spread
                                                                            Between 1 Year     Percent of ARM
                                                                             U.S. Treasury        Portfolio
                                       Average 1 Year    Average 1 and 3    Rates and 1 & 3     Indexed to 1
                                        U.S. Treasury      Month LIBOR        Month LIBOR         Year U.S.
              For the Year Ended        Rates During      Rates During       Rates During      Treasury Rates
                 December 31,              Period            Period             Period        at End of Period
              ------------------       --------------    ---------------    ---------------   ----------------
<S>                                    <C>               <C>                <C>               <C>
              1993                          3.43%           3.25%              0.18%               20.9%
              1994                          5.32%           4.61%              0.71%               15.5%
              1995                          5.94%           6.01%             (0.07)%              19.3%
              1996                          5.52%           5.48%              0.04%               45.4%
              1997                          5.63%           5.69%             (0.06)%              49.0%
              1998                          5.05%           5.57%             (0.52)%              34.7%
              1999                          5.08%           5.33%             (0.25)%              31.4%
              2000                          6.11%           6.47%             (0.36)%              33.9%
</TABLE>

<TABLE>
<CAPTION>
           For the Quarter Ended
           ---------------------
<S>                                          <C>              <C>             <C>                 <C>
           Mar 31, 1999                      4.67%            4.98%           (0.31)%             34.8%
           Jun 30, 1999                      4.88%            5.02%           (0.14)%             32.5%
           Sep 30, 1999                      5.16%            5.36%           (0.20)%             30.5%
           Dec 31, 1999                      5.62%            5.96%           (0.34)%             31.4%
           Mar 31, 2000                      6.19%            6.02%            0.17 %             31.7%
           Jun 30, 2000                      6.22%            6.55%           (0.33)%             29.8%
           Sep 30, 2000                      6.13%            6.66%           (0.53)%             30.5%
           Dec 31, 2000                      5.91%            6.67%           (0.77)%             34.4%
           Mar 31, 2001                      4.59%            5.42%           (0.83)%             35.5%
</TABLE>

The Company recorded hedging expense during the first quarter of 2000 for
$151,000. This expense was calculated based on the requirements of FAS 133,
adopted by the Company as of January 1, 2001. At March 31, 2001, the fair value
of the Company's Cap Agreements and Option Contracts was $0.5 million compared
to a fair value of $1.3 million as of December 31, 2000, a decline in fair value
of $0.7 million. 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 the Company's ARM assets,
the hedged assets. As a result, the Company determined that the fair value hedge
met the effectiveness requirements of FAS 133 to qualify for fair value hedge
accounting treatment and the ineffective portion, $151,000, was recorded as a
hedging expense. The ineffective portion is measured as the change in the hedge
instruments in excess of the change in the hedged assets.

The Company's provision for estimated credit losses decreased for the quarter
ended March 31, 2001 compared to same quarter in 2000, in part, because the
Company decided to reduce its rate of providing for losses on its whole loan
credit exposure. During the Company's third quarter 2000 review of the level of
its loan loss reserves and after considering its identifiable loss exposure to
currently delinquent loans and the lack of any significant losses to date
recorded in the portfolio, the Company concluded that its loan loss reserves had
reached a level that it was appropriate to reduce the rate at which the Company
is recording provisions. Since the commencement of acquiring whole loans in
1997, the Company has only experienced a loss on one loan, in the amount of
$59,000, which was fully reserved and occurred in 2000. The Company will
continue to review economic conditions and the quality of


                                       30
<PAGE>   31

its loan portfolio and periodically adjust the rate at which it provides for
losses. The Company's provision for estimated loan losses is based on a number
of factors including, but not limited to, the outstanding principal balance of
loans, historical loss experience, current economic conditions, borrower payment
history, age of loans, loan-to-value ratios and underwriter standards applied by
the originator. The Company includes the outstanding balance of loans which it
has securitized and retained an exposure to credit losses, although the credit
losses in certain securitization structures may be limited by third-party credit
enhancement agreements. As of March 31, 2001, the Company's whole loans,
including those held as collateral for the notes payable and those that the
Company has securitized but retained credit loss exposure, accounted for 27.2%
of the Company's portfolio of ARM assets or $1.161 billion.

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

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

<TABLE>
<CAPTION>
                                                           For the quarters ended March 31,
                                                           --------------------------------
                                                              2001                 2000
                                                           -----------          -----------
<S>                                                        <C>                 <C>
Net income                                                  $ 10,727              $  7,513
   Additions:
     Provision for credit losses                                 155                   331
     Net compensation related items                              325                    86
     Hedging Expense                                             353                    --
     Non-REIT subsidiary taxable loss                             91                    --
   Deductions:
       Dividend on Series A Preferred Shares                  (1,670)               (1,670)
       Actual credit losses (recoveries) on ARM assets            14                  (126)
       Amortization of hedges                                   (444)
                                                            --------              --------
Taxable net income                                          $  9,551              $  6,134
                                                            --------              --------

                                                            --------              --------
Taxable income per share                                    $   0.44              $   0.29
                                                            ========              ========
</TABLE>

For the quarter ended March 31, 2001, the Company's ratio of operating expenses
to average assets was 0.29% compared to 0.13% for the same period in 2000 and
0.18% for the prior quarter ended December 31, 2000. The most significant single
increase to the Company's expenses was the performance based fee, $924,000, that
the Manager earned during the first quarter of 2001 as a result of the Company
achieving a return on shareholder equity in excess of the threshold as defined
in the Management Agreement. The Company's return on equity prior to the effect
of the performance based fee was 12.1% whereas the threshold, the average
10-year treasury rate plus 1%, was 6.04%. The Manager did not earn a performance
based fee during the first quarter of 2000. The Company's other expenses
increased by approximately $598,000, primarily due the operations of the
Company's taxable mortgage banking subsidiary, legal and other expenses related
to acquiring state mortgage banking licenses, expenses associated with the
Company's issuance of DERs and PSRs and due to other corporate matters. The
Company's expense ratios are among the lowest of any company originating and
investing in mortgage assets, giving the Company what it believes to be a
significant competitive advantage over more traditional mortgage portfolio
lending institutions such as banks and savings and loans. This competitive
advantage enables the Company to operate with less risk, such as credit and
interest rate risk, and still generate an attractive long-term return on equity
when compared to these more traditional mortgage portfolio lending institutions.


                                       31
<PAGE>   32
The Company pays the Manager an annual base management fee, generally based on
average shareholders' equity, not assets, as defined in the Management
Agreement, payable monthly in arrears as follows: 1.15% of the first $300
million of Average Shareholders' Equity, plus 0.85% of Average Shareholders'
Equity above $300 million. Since this management fee is based on shareholders'
equity and not assets, this fee increases as the Company successfully accesses
capital markets and raises additional equity capital and is, therefore, managing
a larger amount of invested capital on behalf of its shareholders. In order for
the Manager to earn a performance fee, the rate of return on the shareholders'
investment, as defined in the Management Agreement, must exceed the average
ten-year U.S. Treasury rate during the quarter plus 1%. As presented in the
following table, the performance fee is a variable expense that fluctuates with
the Company's return on shareholders' equity relative to the average 10-year
U.S. Treasury rate.

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

                       ANNUALIZED OPERATING EXPENSE RATIOS

<TABLE>
<CAPTION>
                       Management Fee &                                    Total
   For the              Other Expenses/        Performance Fee/       G & A Expense/
Quarter Ended           Average Assets          Average Assets        Average Assets
-------------          ----------------        ----------------       --------------
<S>                   <C>                     <C>                    <C>
Mar 31, 1999                 0.12%                    --                   0.12%
Jun 30, 1999                 0.12%                    --                   0.12%
Sep 30, 1999                 0.13%                    --                   0.13%
Dec 31, 1999                 0.13%                    --                   0.13%
Mar 31, 2000                 0.13%                    --                   0.13%
Jun 30, 2000                 0.13%                    --                   0.13%
Sep 30, 2000                 0.16%                    --                   0.16%
Dec 31, 2000                 0.18%                    --                   0.18%
Mar 31, 2001                 0.20%                  0.09%                  0.29%
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of funds for the quarter ended March 31, 2001
consisted of reverse repurchase agreements, which totaled $3.253 billion,
collateralized notes payable, which had a balance of $572.1 million and whole
loan financing facilities, which had a balance of $200.0 million. The Company's
other significant sources of funds for the quarter ended March 31, 2001
consisted primarily of payments of principal and interest from its ARM assets in
the amount of $378.2 million. In the future, the Company expects its primary
sources of funds will consist of borrowed funds under reverse repurchase
agreement transactions with one- to twelve-month maturities, funds borrowed from
whole loan financing facilities, capital market financing transactions
collateralized by ARM and hybrid loans, proceeds from monthly payments of
principal and interest on its ARM assets portfolio and occasional asset sales.
The Company's liquid assets generally consist of unpledged ARM assets, cash and
cash equivalents.

Total borrowings outstanding at March 31, 2001, had a weighted average effective
cost of 5.48%. The reverse repurchase agreements had a weighted average
remaining term to maturity of 2.3 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 February 2002 and June 2001.
As of March 31, 2001, $1.397 billion of the Company's borrowings were
variable-rate term reverse repurchase agreements. Term reverse repurchase
agreements are committed financings with original maturities that range from six
months to twelve months. The interest rates on these term reverse repurchase
agreements are indexed to either the one- or three-month LIBOR rate and reprice
accordingly. The interest rate on the collateralized AAA notes adjusts monthly
based on changes in one-month LIBOR. The 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.

The Company has arrangements to enter into reverse repurchase agreements with
twenty-six different financial institutions and on March 31, 2001, had borrowed
funds with twelve 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


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limited and lenders may initiate margin calls in the event interest rates change
or the value of the Company's ARM assets decline for other reasons.
Additionally, certain of the Company's ARM assets are rated less than AA by the
Rating Agencies (approximately 3.0%) and have less liquidity than assets that
are rated AA or higher. Other mortgage assets which are rated AA or higher by
the Rating Agencies derive their credit rating based on a mortgage pool
insurer's rating. As a result of either changes in interest rates, credit
performance of a mortgage pool or a downgrade of a mortgage pool issuer, the
Company may find it difficult to borrow against such assets and, therefore, may
be required to sell certain mortgage assets in order to maintain liquidity. If
required, these sales could be at prices lower than the carrying value of the
assets, which would result in losses. The Company had adequate liquidity
throughout the quarter ended March 31, 2001. The Company believes it will
continue to have sufficient liquidity to meet its future cash requirements from
its primary sources of funds for the foreseeable future without needing to sell
assets.

As of March 31, 2001, the Company had $572.1 million of AAA collateralized notes
payable outstanding, which are not subject to margin calls. Due to the structure
of the collateralized notes payable, their financing is not based on market
value or subject to subsequent changes in mortgage credit markets, as is the
case of the reverse repurchase agreement arrangements.

As of March 31 2001, the Company had entered into two whole loan financing
facilities. The Company borrows money under these facilities based on the fair
value of the ARM loans. Therefore, the amount of money available to the Company
under these facilities is subject to margin call based on changes in fair value,
which can be negatively effected by changes in interest rates and other factors,
including the delinquency status of individual loans. One of the whole loan
financing facilities has a committed borrowing capacity of $150 million, with an
option to increase this amount to $300 million. This facility matures in
February 2002. The Company has a second committed whole loan financing facility
that also has a borrowing capacity of $150 million. This second committed
facility matures in June 2001. As of March 31, 2001, the Company had $200.0
million borrowed against these whole loan financing facilities at an effective
cost of 5.48%.

In December 1996, the Company's Registration Statement on Form S-3, registering
the sale of up to $200 million of additional equity securities, was declared
effective by the Securities and Exchange Commission. This registration statement
includes the possible issuances of common stock, preferred stock, warrants or
shareholder rights. As of March 31, 2001, the Company had $109 million of its
securities registered for future sale under this Registration Statement.

During 1998, the Board of Directors approved a common stock repurchase program
of up to 1,000,000 shares at prices below book value, subject to availability of
shares and other market conditions. The Company did not repurchase any shares
during the first quarter of 2001. To date, the Company has repurchased 500,016
shares at an average price of $9.28 per share.

The Company has a Dividend Reinvestment and Stock Purchase Plan (the "DRP")
designed to provide a convenient and economical way for existing shareholders to
automatically reinvest their dividends in additional shares of common stock and
for new and existing shareholders to purchase shares, as defined in the DRP.
During the first three months of 2001, the Company purchased shares in the open
market on behalf of the participants in its DRP instead of issuing new shares
below book value. In accordance with the terms and conditions of the DRP, the
Company pays the brokerage commission in connection with these purchases.

EFFECTS OF INTEREST RATE CHANGES

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


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<PAGE>   34
scheduled to change. The periodic cap only affects the Company's earnings when
interest rates move by more than 1% per six-month period or 2% per year.

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

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

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

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

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

OTHER MATTERS

As of March 31, 2001, the Company calculates its Qualified REIT Assets, as
defined in the Internal Revenue Code of 1986, as amended (the "Code"), to be
99.0% of its total assets, as compared to the Code requirement that at least 75%
of its total assets must be Qualified REIT Assets. The Company also calculates
that 99.3% of its 2001 revenue for the first quarter qualifies for the 75%
source of income test and 100% of its revenue qualifies for the 90% source of
income test under the REIT rules. The Company also met all REIT requirements
regarding the ownership of its common stock and the distributions of its net
income. Therefore, as of March 31, 2001, the Company believes that it will
continue to qualify as a REIT under the provisions of the Code.


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<PAGE>   35

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


PART II.   OTHER INFORMATION

Item 1.   Legal Proceedings
              At March 31, 2001, there were no pending legal proceedings to
              which the Company was a party or of which any of its property was
              subject.

Item 2.  Changes in Securities
              Not applicable

Item 3.  Defaults Upon Senior Securities
              Not applicable

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

Item 5.  Other Information
                   None

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

         (a)  Exhibits
                  None

         (b)  Reports on Form 8-K
                  None


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<PAGE>   36
                                   SIGNATURES



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




                                    THORNBURG MORTGAGE, INC.



Dated:     May 11, 2001             By:  /s/ Larry A. Goldstone
                                         --------------------------------------
                                         Larry A. Goldstone
                                         President and Chief Operating Officer
                                         (authorized officer of registrant)




Dated:     May 11, 2001             By:  /s/ Richard P. Story
                                         --------------------------------------
                                         Richard P. Story,
                                         Chief Financial Officer and Treasurer
                                         (principal accounting officer)


                                       36