<PAGE>   1
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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549


                                    FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 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)                   27,438,025 as of August 14, 2001


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                            THORNBURG MORTGAGE, INC.
                                    FORM 10-Q


                                      INDEX

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

     Item 1.      Financial Statements

                      Consolidated Balance Sheets at June 30, 2001 and December 31, 2000..................    3

                      Consolidated Statements of Operations for the three and six months ended
                       June 30, 2001 and June 30, 2000....................................................    4

                      Consolidated Statement of Shareholders' Equity for the six months
                       ended June 30, 2001 and June 30, 2000..............................................    5

                      Consolidated Statements of Cash Flows for the three and six months ended
                       June 30, 2001 and June 30, 2000....................................................    6

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

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



PART II.          OTHER INFORMATION

     Item 1.      Legal Proceedings.......................................................................   43

     Item 2.      Changes in Securities ..................................................................   43

     Item 3.      Defaults Upon Senior Securities ........................................................   43

     Item 4.      Submission of Matters to a Vote of Security Holders.....................................   43

     Item 5.      Other Information.......................................................................   43

     Item 6.      Exhibits and Reports on Form 8-K........................................................   43


     SIGNATURES       ....................................................................................   44

     EXHIBIT INDEX    ....................................................................................   45
</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>
                                                                June 30, 2001
                                                                  (Unaudited)   December 31, 2000
                                                                -------------   -----------------
<S>                                                             <C>             <C>
ASSETS

     Adjustable-rate mortgage ("ARM") assets:
       ARM securities                                             $ 3,660,683      $ 3,359,352
       Collateral for collateralized notes                            525,463          615,696
       ARM loans held for securitization                              113,138          164,413
                                                                  -----------      -----------
                                                                    4,299,284        4,139,461
                                                                  -----------      -----------

    Cash and cash equivalents                                          57,476           13,105
    Accrued interest receivable                                        32,297           32,730
    Prepaid expenses and other                                          1,805            4,871
                                                                  -----------      -----------
                                                                  $ 4,390,862      $ 4,190,167
                                                                  ===========      ===========


LIABILITIES

    Reverse repurchase agreements                                 $ 3,407,863      $ 2,961,617
    Collateralized notes                                              516,069          603,910
    Other borrowings                                                  101,646          158,593
    Payable for assets purchased                                           --          124,942
    Accrued interest payable                                           15,036           20,519
    Dividends payable                                                   1,670            1,670
    Other payables and accrued expenses                                10,916            1,378
                                                                  -----------      -----------
                                                                    4,053,200        3,872,629
                                                                  -----------      -----------

SHAREHOLDERS' EQUITY

    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; 47,218 and
       47,240 shares authorized, 22,363 and 22,072 shares
       issued and 21,863 and 21,572 outstanding, respectively             223              221
    Additional paid-in-capital                                        345,716          343,036
    Accumulated other comprehensive income (loss)                     (66,933)         (78,427)
    Notes receivable from stock sales                                  (6,451)          (5,318)
    Retained earnings (deficit)                                         3,968           (3,113)
    Treasury stock: at cost, 500 and 500 shares, respectively          (4,666)          (4,666)
                                                                  -----------      -----------
                                                                      337,662          317,538
                                                                  -----------      -----------

                                                                  $ 4,390,862      $ 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            Six Months Ended
                                                       June 30,                      June 30,
                                                  2001           2000           2001           2000
                                                ---------      ---------      ---------      ---------
<S>                                             <C>            <C>            <C>            <C>
Interest income from ARM assets and cash
  equivalents                                   $  67,679      $  73,152      $ 140,904      $ 145,791
Interest expense on borrowed funds                (51,965)       (64,400)      (110,866)      (127,722)
                                                ---------      ---------      ---------      ---------
  Net interest income                              15,714          8,752         30,038         18,069
                                                ---------      ---------      ---------      ---------

Gain on sale of ARM assets                              2             49              2             49
Hedging expense                                      (466)            --           (617)            --
Provision for credit losses                          (153)          (381)          (331)          (713)
Management fee                                     (1,116)        (1,033)        (2,211)        (2,057)
Performance fee                                    (1,073)            --         (1,997)            --
Other operating expenses                           (1,269)          (420)        (2,316)          (868)
                                                ---------      ---------      ---------      ---------

  Net income before cumulative effect of
    change in accounting principle                 11,639          6,967         22,568         14,480
  Cumulative effect of change in accounting
    principle                                          --             --           (202)            --
                                                ---------      ---------      ---------      ---------

     NET INCOME                                 $  11,639      $   6,967      $  22,366      $  14,480
                                                =========      =========      =========      =========


Net income                                      $  11,639      $   6,967      $  22,366      $  14,480
Dividend on preferred stock                        (1,670)        (1,670)        (3,340)        (3,340)
                                                ---------      ---------      ---------      ---------

Net income available to common shareholders     $   9,969      $   5,297      $  19,026      $  11,140
                                                =========      =========      =========      =========

Basic and diluted earnings per share before
  cumulative effect of change in accounting
  principle                                     $    0.46      $    0.25      $    0.89      $    0.52
Cumulative effect of change in accounting
  principle                                            --             --          (0.01)            --
                                                ---------      ---------      ---------      ---------
Basic and diluted earnings per share            $    0.46      $    0.25      $    0.88      $    0.52
                                                =========      =========      =========      =========

Average number of common shares outstanding        21,791         21,490         21,741         21,490
                                                =========      =========      =========      =========
</Table>



See Notes to Consolidated Financial Statements.



                                       4
<PAGE>   5


THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)

Six Months Ended June 30, 2001 and 2000
(In thousands, except share data)

<Table>
<Caption>
                                                                  Accum.
                                                                  Other       Notes
                                                                  Compre-   Receivable                        Compre-
                                                     Additional   hensive      From      Retained             hensive
                                   Preferred  Common  Paid-in     Income/      Stock     Earnings/  Treasury  Income/
                                    Stock      Stock  Capital     (Loss)       Sales     (Deficit)   Stock    (Loss)        Total
                                   ---------  ------ ----------  ---------  ----------   ---------  --------  ---------   --------
<S>                                <C>        <C>    <C>         <C>        <C>          <C>        <C>       <C>         <C>
Balance, December 31, 1999          $65,805    $220   $342,026   $ (82,489)   $(4,632)   $ (5,377)  $(4,666)              $310,887
Comprehensive income:
   Net income                                                                              14,480             $  14,480     14,480
   Other comprehensive income:
      Available-for-sale assets:
        Fair value adjustment,
         net of amortization             --      --         --     (23,254)        --          --        --     (23,254)   (23,254)
      Deferred gain on sale
       of hedges, net of
       amortization                      --      --         --        (454)        --          --        --        (454)      (454)
                                                                                                              ---------
   Other comprehensive income                                                                                 $  (9,228)
                                                                                                              =========
Interest from notes receivable
     from stock sales                                      135                                                                 135
Dividends declared on preferred
   stock - $1.21 per share               --      --         --          --         --      (3,340)       --                 (3,340)
Dividends declared on common
   stock - $0.46 per share               --      --         --          --         --      (9,886)       --                 (9,886)
                                    -------    ----   --------   ---------    -------    --------   -------               --------
Balance, June 30, 2000              $65,805    $220   $342,161   $(106,197)   $(4,632)   $ (4,123)  $(4,666)              $288,568
                                    =======    ====   ========   =========    =======    ========   =======               ========

Balance, December 31, 2000          $65,805    $221   $343,036   $ (78,427)   $(5,318)   $ (3,113)  $(4,666)              $317,538
Comprehensive income:
   Net income                                                                              22,366             $  22,366     22,366
   Other comprehensive income:
      Available-for-sale assets:
        Fair value adjustment,
         net of amortization             --      --         --      22,401         --          --        --      22,401     22,401
      Swap Agreements:
        Cumulative adjustment
         for change in
         accounting principle            --      --         --        (629)        --          --        --        (629)      (629)
        Fair value adjustment,
         net of amortization                                       (10,278)                                     (10,278)   (10,278)
                                                                                                              ---------
   Other comprehensive income                                                                                 $  33,860
                                                                                                              =========
Issuance of common stock                 --       2      2,510          --     (1,169)         --        --                  1,343
Interest and principle
   payments on notes receivable
   from stock sales                                        170                     36                                          206
Dividends declared on preferred
   stock - $1.21 per share               --      --         --          --         --      (3,340)       --                 (3,340)
Dividends declared on common
   stock - $0.55 per share               --      --         --          --         --     (11,945)       --                (11,945)
                                    -------    ----   --------   ---------    -------    --------   -------               --------
Balance, June 30, 2001              $65,805    $223   $345,716   $ (66,933)   $(6,451)   $  3,968   $(4,666)              $337,662
                                    =======    ====   ========   =========    =======    ========   =======               ========
</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            Six Months Ended
                                                                  June 30,                      June 30,
                                                             2001          2000           2001           2000
                                                          ---------      ---------      ---------      ---------
<S>                                                       <C>            <C>            <C>            <C>
Operating Activities:
  Net Income                                              $  11,639      $   6,967      $  22,366      $  14,480
  Adjustments to reconcile net income to net
   cash provided by operating activities:
     Amortization                                             5,127          3,998          9,774          9,215
     Net (gain) loss from investing activities                  152            332            330            663
     Change in assets and liabilities:
       Accrued interest receivable                            3,254          2,560            433            429
       Prepaid expenses and other                              (168)          (391)         3,065          5,679
       Accrued interest payable                                  56            585         (5,483)        (3,777)
       Accrued expenses and other                              (489)          (235)         9,538           (560)
                                                          ---------      ---------      ---------      ---------
         Net cash provided by operating activities           19,571         13,816         40,023         26,129
                                                          ---------      ---------      ---------      ---------

Investing Activities:
  Available-for-sale ARM securities:
     Purchases                                             (416,508)       (26,090)      (915,456)      (424,807)
     Proceeds on sales                                      101,594         89,443        101,594         89,443
     Principal payments                                     426,163        163,139        685,405        312,722
Collateral for collateralized notes payable:
     Principal payments                                      56,286        155,757         88,430        201,398
  ARM loans:
     Purchases                                             (181,843)       (17,267)      (250,936)       (19,996)
     Proceeds on sales                                          339             --            339             --
     Principal payments                                       6,718            903         16,597          1,532
  Purchase of interest rate cap agreements                       --            (91)            --           (539)
                                                          ---------      ---------      ---------      ---------
         Net cash provided by (used in) investing
             activities                                      (7,251)       365,794       (274,027)       159,753
                                                          ---------      ---------      ---------      ---------

Financing Activities:
  Net borrowings from (repayments of) reverse
      repurchase agreements                                 154,681       (226,581)       436,935         54,717
  Repayments of collateralized notes                        (56,011)      (155,277)       (87,841)      (200,480)
  Net borrowing from (repayments of) other borrowings       (98,331)         9,886        (56,947)        (2,881)
  Proceeds from common stock issued                           1,140             --          1,343             --
  Dividends paid                                             (8,186)        (6,613)       (15,285)       (13,226)
  Interest from notes receivable from stock sales                83             68            170            135
                                                          ---------      ---------      ---------      ---------
         Net cash provided by (used in) financing
             activities                                      (6,624)      (378,517)       278,375       (161,735)
                                                          ---------      ---------      ---------      ---------

Net increase (decrease) in cash and cash equivalents          5,696          1,093         44,371         24,147

Cash and cash equivalents at beginning of period             51,780         33,288         13,105         10,234
                                                          ---------      ---------      ---------      ---------
Cash and cash equivalents at end of period                $  57,476      $  34,381      $  57,476      $  34,381
                                                          =========      =========      =========      =========
</Table>

Supplemental disclosure of cash flow information and non-cash activities are
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
         and six-months ended June 30, 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 fair 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 recorded in accumulated other comprehensive income.

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


                                       7
<PAGE>   8

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

                  In general, ARM assets have a maximum lifetime interest rate
                  cap, or ceiling, meaning that individual ARM assets contain a
                  contractual maximum interest rate ("Life Cap"). ARM securities
                  typically have a Life Cap that not only places a constraint on
                  the ability of an ARM security to adjust to higher interest
                  rates but also affects the changes in fair value of an ARM
                  security. The Company hedges the fair value changes of the
                  Life Cap component of a portion of its ARM portfolio. As a
                  result, the change in fair value associated with the Life Cap
                  component of an ARM security in the portfolio is recorded in
                  earnings, subject to meeting tests of hedging effectiveness,
                  as well as an offsetting change in fair value of the hedging
                  instruments. To the extent the change in fair value of the
                  Life Cap component of the hedged ARM securities and the change
                  in fair value of the hedging instruments do not offset each
                  other, there is hedge ineffectiveness that is recorded in
                  earnings. Hedge ineffectiveness is reported in the Company's
                  Statements of Operations as Hedging expense.

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

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

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

                  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.


                                       8
<PAGE>   9


                  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 that it takes into consideration its maximum exposure.

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

              DERIVATIVE FINANCIAL INSTRUMENTS

                  INTEREST RATE CAP AGREEMENTS

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

                  All Cap Agreements are designated as fair value hedges against
                  the value of the Life Cap components of available-for-sale ARM
                  securities. The Company purchases Cap Agreements by incurring
                  a one-time fee or premium and carries them at fair 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 recognized currently in
                  earnings and is compared to the change in the fair value of
                  the related hedged asset to ensure the hedging relationship is
                  highly effective. The change in fair value associated with the
                  Life Cap component of the hedged portion of the ARM securities
                  portfolio is also recorded in earnings, subject to meeting
                  certain tests of hedging effectiveness. To the extent the
                  change in fair value of the Life Cap component of the hedged
                  ARM securities and the change in fair value of the hedging
                  instruments do not offset each other, there is hedge
                  ineffectiveness, which is reported in the Company's Statements
                  of Operations as Hedging expense. The carrying value of the
                  Cap Agreements is included in ARM securities on the balance
                  sheet.


                                       9
<PAGE>   10


                  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 of $0.2 million, which reduced net
                  income. This amount is primarily 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 recorded this
                  unrealized loss in earnings because there was no change in the
                  intrinsic value of the Cap Agreements since the inception of
                  the hedge to the date of adopting FAS 133. The Company
                  re-designated these Cap Agreements as fair value hedges that
                  hedge the value of the Life Cap component of its ARM assets
                  consistent with the rest of the Company's portfolio of Cap
                  Agreements.

                  In addition, prior to the adoption of FAS 133, the Company had
                  designated the remainder of its Cap Agreements and all of its
                  Option Contracts as a hedge against available for sale
                  securities and ARM loans and had recorded the unrealized gains
                  and losses on both the Cap Agreements, Option Contracts and
                  available for sale securities in Other comprehensive income.
                  Upon the adoption of FAS 133, the Company designated its Cap
                  Agreements and Option Contracts as a fair value hedge against
                  the Life Cap component of its ARM securities. As of the FAS
                  133 transition date, the fair value of the Lifecap component
                  of its ARM securities was determined to be $1.315 million and
                  the Cap Agreements and Option Contracts had a fair value of
                  $1.319 million. Therefore, the transition adjustment to record
                  the reclassification of the fair value of the Cap Agreements
                  and Option Contracts from Other comprehensive income to
                  earnings and the offsetting reclassification of the fair value
                  of the Life Cap component of available for sale ARM
                  securities, also from Other comprehensive income to earnings,
                  resulted in no material net effect on either earnings or Other
                  comprehensive income.

                  INTEREST RATE SWAP AGREEMENTS

                  The Company enters into interest rate swap agreements (Swap
                  Agreements) in order to manage its interest rate exposure when
                  financing its ARM assets. The Company generally borrows money
                  based on short-term interest rates, either by entering into
                  borrowings with maturity terms of less than six months, and
                  frequently one month, or by entering into borrowings with
                  longer maturity terms of one to two years that reprice based
                  on a frequency that is commonly one month, but has at times
                  been up to six months. The Company's ARM assets generally have
                  an interest rate that reprices based on frequency terms of one
                  to twelve months. The Company's Hybrid ARMs generally have an
                  initial fixed interest rate period of three to ten years. As a
                  result, the Company's existing and forecasted borrowings
                  reprice to a new rate on a more frequent basis than does the
                  Company's ARM assets. When the Company enters into a Swap
                  Agreement, it agrees to pay a fixed rate of interest and to
                  receive a variable interest rate based on an index, generally
                  LIBOR, offsetting a portion of its variable cost of short-term
                  borrowings, which have an interest rate that correlates highly
                  with LIBOR. The Company receives a variable interest payment
                  based on one-month LIBOR on all of the Swap Agreements
                  currently outstanding. These Swap Agreements have the effect
                  of converting the Company's variable-rate debt into fixed-rate
                  debt over the life of the Swap Agreements. Swap Agreements are
                  used as a cost effective way to lengthen the average repricing
                  period of its variable rate and short-term borrowings such
                  that the average repricing of the borrowings more closely
                  matches the average repricing of the Company's ARM assets.
                  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 designated as cash flow hedges against
                  the interest rate risk associated with the Company's
                  borrowings. Although the terms and characteristics of the
                  Company's Swap Agreements and hedged borrowings are nearly
                  identical, due to the explicit requirements of FAS 133, the
                  Company does not account for these hedges under a method
                  defined in FAS 133 as the "shortcut" method, but rather the
                  Company calculates the effectiveness of this hedge on an
                  ongoing basis. As a result of the calculated effectiveness of
                  approximately 100% to date, all changes in the unrealized
                  gains and losses on Swap Agreements have been recorded in
                  Other


                                       10
<PAGE>   11


                  comprehensive income and are reclassified to earnings as
                  interest expense is recognized on the Company's hedged
                  borrowings. If it becomes probable that the forecasted
                  transaction will not occur by the end of the originally
                  specified time period, as documented at the inception of the
                  hedging relationship, or within an additional two-month time
                  period thereafter, then the related gain or loss in Other
                  comprehensive income would be reclassified to income. For a
                  similar reason, if the Company called its AAA notes payable
                  prior to the maturity of the Swap Agreements designated as a
                  cash flow hedge of a portion of that debt, then the related
                  gain or loss in Other comprehensive income would be
                  reclassified to income. As of June 30, 2001, the net
                  unrealized losses on Swap Agreements and deferred gains from
                  terminated Swap Agreements recorded in Other comprehensive
                  income was $12.2 million. The Company estimates that over the
                  next twelve months, approximately $10.2 million of the net
                  unrealized losses on its Swap Agreements and the deferred
                  gains from terminated Swap Agreements will be reclassified
                  from Other comprehensive income to earnings. The carrying
                  value of the Swap Agreements, in the amount of $16.3 million
                  as of June 30, 2001, is included in Reverse repurchase
                  agreements in the accompanying balance sheets.

                  As of January 1, 2001, with the adoption of FAS 133, the
                  Company recorded a cumulative adjustment for a change in
                  accounting principle in Other comprehensive income in the net
                  amount of $2.3 million to record the unrealized loss on its
                  Swap Agreements, which had previously been recorded off
                  balance sheet. This amount was comprised of an unrealized loss
                  on Swap Agreements of $7.6 million and a deferred gain from
                  terminated Swap Agreement activity in the amount of $5.3
                  million. The Company estimates that over the twelve months
                  following the adoption of FAS 133, approximately $1.3 million
                  of the net unrealized losses on its Swap Agreements and the
                  deferred gains from terminated Swap Agreements will be
                  reclassified from Other comprehensive income to earnings.

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

                  OTHER HEDGING ACTIVITY

                  Prior to March 31, 2000, the Company entered into hedging
                  transactions in connection with the purchase of Hybrid ARMs
                  between the trade date and the settlement date. Generally, the
                  Company has hedged 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 settled the commitment by purchasing the same
                  fixed-rate MBS on the purchase date. Realized gains and losses
                  were deferred and amortized as a yield adjustment over the
                  fixed rate period of the financing. Upon the adoption of FAS
                  133, the Company recorded a cumulative adjustment for a change
                  in accounting principle in Other comprehensive income in the
                  amount of $1.7 million to record the deferred gains from Other
                  hedging activity, previously included in Reverse repurchase
                  agreements in the Company's consolidated balance sheets. The
                  Company estimates that over the twelve months following the
                  adoption of FAS 133, approximately $0.9 million of the
                  deferred gain will be reclassified from Other comprehensive
                  income to earnings. As of June 30, 2001, $1.2 million of
                  deferred gains from other hedging activity remained in Other
                  comprehensive income and the Company estimates that over the
                  next twelve months, $0.8 million will be reclassified to
                  earnings.


                                       11
<PAGE>   12


              INCOME TAXES

                  The Company, excluding TMHL and its subsidiaries, has elected
                  to be taxed as a Real Estate Investment Trust ("REIT") and
                  believes it complies with the provisions of the Internal
                  Revenue Code of 1986, as amended (the "Code") with respect
                  thereto. Accordingly, the Company will not be subject to
                  Federal income tax on that portion of its income that is
                  distributed to shareholders and as long as certain asset,
                  income and stock ownership tests are met. 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 and six months ended June 30, 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 and six month periods ended June
                  30, 2001 and 2000 (amounts in thousands except per share
                  data):

<Table>
<Caption>
                                                                Earnings
                                      Income        Shares      Per Share
                                     --------      --------     ---------
<S>                                  <C>           <C>          <C>
Three Months Ended June 30, 2001
Net income                           $ 11,639

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

Basic EPS, income available to
   common shareholders                  9,969        21,791     $   0.46
                                                                ========

Effect of dilutive securities:

   Stock options                           --            56
                                     --------      --------
Diluted EPS                          $  9,969        21,847     $   0.46
                                     ========      ========     ========

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

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

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

Effect of dilutive securities:

   Stock options                           --            --
                                     --------      --------
Diluted EPS                          $  5,297        21,490     $   0.25
                                     ========      ========     ========
</Table>


                                       12
<PAGE>   13


<Table>
<Caption>
                                                              Earnings
                                    Income        Shares      Per Share
                                   --------      --------     ---------
<S>                                <C>           <C>          <C>
Six Months Ended June 30, 2001
Net income                         $ 22,366

Less preferred stock dividends       (3,340)
                                   --------

Basic EPS, income available to
   common shareholders               19,026        21,741     $   0.88
                                                              ========

Effect of dilutive securities:

   Stock options                         --            59
                                   --------      --------
Diluted EPS                        $ 19,026        21,800     $   0.88
                                   ========      ========     ========

Six Months Ended June 30, 2000
Net income                         $ 14,480

Less preferred stock dividends       (3,340)
                                   --------

Basic EPS, income available to
   common stockholders               11,140        21,490     $   0.52
                                                              ========

Effect of dilutive securities:

   Stock options                         --            --
                                   --------      --------
Diluted EPS                        $ 11,140        21,490     $   0.52
                                   ========      ========     ========
</Table>


                  The Company has granted options to directors and officers of
                  the Company and employees of the Manager to purchase 35,666
                  and 200,022 shares of common stock at average prices of $10.56
                  and $7.38 per share during the six months ended June 30, 2001
                  and 2000, respectively. The conversion of preferred stock was
                  not included in the computation of diluted EPS because such
                  conversion would increase the diluted EPS.

              RECENT ACCOUNTING PRONOUNCEMENTS

                  In September of 2000, the Financial Accounting Standards Board
                  issued SFAS No. 140, Accounting for Transfers and Servicing of
                  Financial Assets and Extinguishments of Liabilities. The
                  Company has adopted this standard effective April 1, 2001. The
                  adoption of this standard does not materially affect the
                  Company's reported results of operations or financial
                  position. The Company has included the required additional
                  disclosures of SFAS 140 in Note 1 under Adjustable-rate
                  mortgage assets and in Note 2.

                  In July of 2001, the Financial Accounting Standards Board
                  issued Statement No. 141, Business Combinations, and Statement
                  No. 142, Goodwill and Other Intangible Assets. The Company
                  does not expect either of these statements to have an effect
                  on the Company's reported results of operations or financial
                  position.

              USE OF ESTIMATES

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


                                       13
<PAGE>   14


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

                  The following tables present the Company's ARM assets as of
                  June 30, 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):

June 30, 2001:

<Table>
<Caption>
                                    Available-
                                     for-Sale      Collateral for
                                   ARM Securities   Notes Payable      ARM Loans         Total
                                   --------------  --------------     -----------      -----------
<S>                                <C>             <C>                <C>              <C>
Principal balance outstanding       $ 3,644,293      $   518,257      $   113,217      $ 4,275,767
Net unamortized premium                  44,581           10,377              131           55,089
Allowance for losses                     (1,906)          (3,171)            (210)          (5,287)
Cap agreements                            3,697               --               --            3,697
Principal payment receivable             26,854               --               --           26,854
                                    -----------      -----------      -----------      -----------
   Amortized cost, net                3,717,519          525,463          113,138        4,356,120
Gross unrealized gains                   14,753            2,669               69           17,491
Gross unrealized losses                 (71,589)          (3,547)            (602)         (75,738)
                                    -----------      -----------      -----------      -----------
   Fair value                       $ 3,660,683      $   524,585      $   112,605      $ 4,297,873
                                    ===========      ===========      ===========      ===========

   Carrying value                   $ 3,660,683      $   525,463      $   113,138      $ 4,299,284
                                    ===========      ===========      ===========      ===========
</Table>

December 31, 2000:

<Table>
<Caption>
                                    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 three and six-month periods ended June 30,
                  2001, the Company sold $108.1 million of ARM securities, of
                  which $6.8 million will settle in the third quarter, and
                  realized $244,000 in gains and $245,000 in losses. In
                  addition, the Company sold $0.3 million of fixed-rate loans
                  that it originated during the second quarter for a gain of
                  $3,000. During the three and six-month periods ended June 30,
                  2000, the Company realized a gain of $49,000 on the sale of
                  $89.4 million of ARM securities.

                  During the quarter ended June 30, 2001, the Company
                  securitized $272.2 million of its ARM loans into a series of
                  multi-class ARM securities. The Company retained, for its ARM
                  portfolio, all of the classes of the securities created. The
                  Company did not account for this securitization as a sale and,
                  therefore, did not record any gain or loss in connection with
                  the securitization. The Company securitizes its loans for the
                  purpose of improving the liquidity of its ARM assets and in
                  order to lower the cost of financing its ARM assets. The
                  Company carries the securities at fair value, based on market
                  value prices received from dealers familiar with similar
                  securities.

                  As of June 30, 2001, the Company has $1.136 billion of ARM
                  assets that have resulted from the Company's securitization
                  efforts. In each securitization, the Company retained all of
                  the beneficial interest in the underlying loans and did not
                  account for any of the securitizations as a sale. The


                                       14
<PAGE>   15


                  Company has performed a stress test of the fair value of these
                  ARM assets using a discounted cash flow model that used, as
                  its key assumptions, prepayment speeds, potential credit
                  losses and discount rates. In performing the stress test, the
                  Company made a 10% and 20% pessimistic change to each key
                  assumption, individually. The table below identifies the key
                  assumptions and the effect of each adverse change on the fair
                  value of the ARM assets (dollars in millions):


<Table>
<S>                                                <C>
Carrying amount                                    $ 1,136.4
Fair Value                                         $ 1,135.5

Weighted average life (in years)                         2.7
Prepayment speed assumption (annual rate)                 30%
    Impact on fair value of 10% adverse change     $     0.8
    Impact on fair value of 20% adverse change     $     1.7

Projected credit losses (annual rate)                   0.10%
    Impact on fair value of 10% adverse change     $     0.3
    Impact on fair value of 20% adverse change     $     0.5

Cash flow discount rate                                 5.91%
    Impact on fair value of 10% adverse change     $    14.8
    Impact on fair value of 20% adverse change     $    29.2
</Table>

                  These sensitivities presented in the table above are
                  hypothetical and should be used with caution. As the figures
                  indicate, changes in fair value generally cannot be
                  extrapolated because the relationship of the change in
                  assumption to the change in fair value may not be linear.
                  Also, in this table, the effect of a variation of a particular
                  key assumption is calculated without changing any other
                  assumption. In reality, changes in one factor may occur
                  simultaneously with changes in one or more of the other key
                  assumptions, which may magnify or offset the sensitivities.

                  During the first six months of 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 $50,000 and recorded a $281,000 provision for
                  estimated credit losses on its loan portfolio.

                  The following tables summarize ARM loan delinquency
                  information as of June 30, 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            9     $2,704        0.22%       0.06%
90 days or more          5        746        0.06        0.02
In foreclosure           4        660        0.05        0.02
                    ------     ------      ------      ------
                        18     $4,110        0.33%       0.10%
                    ======     ======      ======      ======
</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 $1.242 billion and $1.165 billion
    at June 30, 2001 and December 31, 2000, respectively.


                                       15
<PAGE>   16


                  The following table summarizes the activity for the allowance
                  for losses on ARM loans for the six months ended June 30, 2001
                  and 2000 (dollar amounts in thousands):

<Table>
<Caption>
                          2001       2000
                         ------     ------
<S>                      <C>        <C>
Beginning balance        $3,100     $2,208
Provision for losses        281        578
Charge-offs, net             --         --
                         ------     ------
Ending balance           $3,381     $2,786
                         ======     ======
</Table>


                  As of June 30, 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 June 30, 2001, the Company had commitments to purchase
                  or originate the following amounts of ARM assets (dollar
                  amounts in thousands):

<Table>
<S>                                   <C>
High Quality ARM securities           $352,045
Whole loans - bulk acquisitions         76,231
Whole loans - correspondent            127,028
Whole loans - direct originations       26,661
                                      --------
                                      $581,965
                                      ========
</Table>


                  The average effective yield on the ARM assets owned was 5.90%
                  as of June 30, 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 June 30, 2001 and December 31, 2000, the Company had
                  purchased Cap Agreements with a remaining notional amount of
                  $2.486 billion and $2.624 billion, respectively. The notional
                  amount of the Cap Agreements purchased decline at a rate that
                  is expected to approximate the amortization of the ARM
                  securities. Under these Cap Agreements, the Company will
                  receive cash payments should the one-month, 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 owned by the Company as of June 30, 2001, are
                  hedging the fair value of the Life Cap component of the
                  Company's ARM securities, which had an average lifetime
                  interest rate cap of 11.18% on that date. The Cap Agreements
                  had an average maturity of 1.9 years as of June 30, 2001. The
                  initial aggregate notional amount of the Cap Agreements
                  declines to approximately $2.243 billion over the period of
                  the agreements, which expire between 2001 and 2004. During the
                  quarter ended June 30, 2001, the Company recognized an expense
                  of $466,000 related to hedge ineffectiveness of its fair value
                  hedges, which is reported as Hedging expense in the Company's
                  Consolidated Statements of Operations. The Company has credit
                  risk to the extent that the counterparties to the Cap
                  Agreements do not perform their obligations under the Cap
                  Agreements. If one of the counterparties does not perform, the
                  Company would not receive the cash to which it would otherwise
                  be entitled under the conditions of the Cap Agreement. In
                  order to mitigate this risk and to achieve competitive
                  pricing, the Company has entered into Cap Agreements with six
                  different counterparties, five of which are rated AAA and one
                  is rated A, but the Company has a two-way collateral agreement
                  protecting its credit exposure with this counterparty. The
                  fair value of the Cap Agreements at June 30, 2001 amounted to
                  $572,000 and is included in ARM securities on the balance
                  sheet.


                                       16
<PAGE>   17

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 June 30, 2001, the Company had outstanding $3.408
                  billion of reverse repurchase agreements with a weighted
                  average borrowing rate of 4.10% and a weighted average
                  remaining maturity of 2.3 months. As of June 30, 2001, $818.0
                  million of the Company's borrowings were variable-rate term
                  reverse repurchase agreements with original maturities that
                  range from six months to thirteen months. The interest rates
                  of these term reverse repurchase agreements are indexed to
                  either the one- or three-month LIBOR rate and reprice
                  accordingly. The reverse repurchase agreements at June 30,
                  2001 were collateralized by ARM assets with a carrying value
                  of $3.632 billion, including accrued interest.

                  At June 30, 2001, the reverse repurchase agreements had the
                  following remaining maturities (dollar amounts in thousands):

<Table>
<S>                    <C>
Within 30 days         $2,094,802
31 to 89 days             618,485
90 days or greater        678,472
                       ----------
                        3,391,759
Swap Agreements            16,104
                       ----------
                       $3,407,863
                       ==========
</Table>

                  As of June 30, 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
                  and matures in February 2002. The Company has a second
                  committed whole loan financing facility that also has a
                  borrowing capacity of $150 million, but has been increased to
                  $300 million during the third quarter of 2001. This second
                  committed facility matures in March 2002. As of June 30, 2001,
                  the Company had $101.6 million borrowed against these whole
                  loan financing facilities at an effective cost of 4.40%. The
                  amount borrowed on the whole loan financing agreements at June
                  30, 2001 was collateralized by ARM loans with a carrying value
                  of $106.4 million, including accrued interest.

                  One of the whole loan financing facilities, 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. This whole loan financing facility
                  works similar to a secured line of credit whereby the Company
                  can deliver loans into the facility and take loans out of the
                  facility at the Company's discretion, subject to the terms and
                  conditions of the facility. This securitization transaction is
                  accounted for as a secured borrowing. The Company entered into
                  this securitization transaction in March 2000 and began using
                  this facility in May 2000.

                  On December 18, 1998, the Company, through a wholly-owned
                  bankruptcy remote special purpose finance subsidiary, issued
                  $1.144 billion of notes payable ("Notes") collateralized by
                  ARM loans and ARM securities. As part of this transaction, the
                  Company retained ownership of a subordinated certificate in
                  the amount of $32.4 million, which represents the Company's
                  maximum exposure to credit losses on the loans collateralizing
                  the Notes. As of June 30, 2001, the Notes had a net balance of
                  $516.1 million, an effective interest cost of 4.57%, which
                  changes each month at a spread to one-month LIBOR. As of June
                  30, 2001, these Notes were collateralized by ARM loans with a
                  principal balance of $550.3 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


                                       17
<PAGE>   18


                  payment experience. If the collateral pays down faster than
                  currently estimated, then the amortization of the issuance
                  cost will increase and the effective cost of the Notes will
                  increase and, conversely, if the collateral pays down slower
                  than currently estimated, then the amortization of issuance
                  cost will be decreased and the effective cost of the Notes
                  will also decrease.

                  As of June 30, 2001, the Company was a counterparty to
                  thirty-five interest rate swap agreements ("Swaps") having an
                  aggregate notional balance of $1.658 billion. As of June 30,
                  2001, $1.158 billion of these Swaps hedged the fixed interest
                  rate period of Hybrid ARMs and had a weighed average maturity
                  of 2.9 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 24 days to 329 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 June 30, 2001, the Swap Agreements
                  were collateralized by ARM assets with a carrying value of
                  $12.2 million, including accrued interest and cash in the
                  amount of $0.4 million.

                  The total cash paid for interest was $51.3 million and $62.8
                  million during the quarters ended June 30, 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 June 30, 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>
                                             June 30, 2001               December 31, 2000
                                       -------------------------     --------------------------
                                        Carrying         Fair         Carrying         Fair
                                         Amount          Value         Amount          Value
                                       ----------     ----------     ----------      ----------
<S>                                    <C>            <C>            <C>             <C>
Assets:
   ARM assets                          $4,298,713     $4,297,302     $4,137,943      $4,129,421
   Cap Agreements/Option Contracts            571            571          1,518           1,518

Liabilities:
   Collateralized notes payable           516,069        518,087        603,910         605,927
   Other borrowings                       101,646        101,646        158,593         158,593
   Swap agreements                         17,595         17,595           (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 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


                                       18
<PAGE>   19


                  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

                  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 December 31, 2000, the
                  Company had $109 million of its securities registered for
                  future sale under this Registration Statement.

                  On July 6, 2001, the Company's Registration Statement on Form
                  S-3, registering the sale of up to an additional $300 million
                  of 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. In addition, the Company's
                  Board of Directors suspended the Company's previously approved
                  program to repurchase shares. The Company had not repurchased
                  any shares under this program since 1998.

                  In August 2001, the Company issued 5,500,000 shares of common
                  stock at a price of $16.00 per share pursuant to its
                  Registration Statement on Form S-3 declared effective on July
                  6, 2001. Net proceeds from this issuance were approximately
                  $82.6 million. In addition, the Company has granted the
                  underwriters an option, exercisable for 30 days, to purchase
                  up to 825,000 additional shares of common stock to cover
                  over-allotments.

                  On January 25, 2001, the Board of Directors adopted a
                  Shareholder Rights Agreement (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.

                  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.

                  During the quarter ended June 30, 2001, the Company issued
                  34,734 shares of common stock under its Dividend Reinvestment
                  and Stock Purchase Plan and received net proceeds of $0.5
                  million.

                  During the first six months of 2001, stock options for 255,329
                  shares of common stock were exercised at an average price of
                  $7.91. The Company received net proceeds of $0.6 million, and
                  $1.2 million of notes receivable were executed in connection
                  with the exercise of certain options.

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


                                       19
<PAGE>   20


                  On July 17, 2001, the Company declared the second quarter 2001
                  dividend of $0.40 per common share, which will be paid on
                  August 17, 2001 to common shareholders of record as of July
                  27, 2001.

                  On June 15, 2001, the Company declared a second quarter
                  dividend of $0.605 per share to the shareholders of the Series
                  A 9.68% Cumulative Convertible Preferred Stock which was paid
                  on July 10, 2001 to preferred shareholders of record as of
                  June 30, 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"). On July 17, 2001,
                  the Board of Directors approved an amendment to the Plan to
                  include restricted stock grants as an additional incentive
                  award, to be granted at the discretion of the Stock Option
                  Committee.

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

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

                  During the quarter ended June 30, 2001, the Company did not
                  grant any options to buy common shares or grant any DERs.
                  During the quarter, 108,611 options to buy common shares were
                  exercised at an average price of $8.14 per share and during
                  the six months ended June 30, 2001, 255,329 options to buy
                  common shares were exercised at an average price of $7.91 per
                  share.

                  As of June 30, 2001, the Company had 116,100 options
                  outstanding at exercise prices of $7.375 to $14.375 per share,
                  80,434 of which were exercisable. The weighted average
                  exercise price of the options outstanding was $9.66 per share.
                  As of June 30, 2001, there were 391,156 DERs outstanding, of
                  which 362,995 were vested, and 61,211 PSRs outstanding. The
                  Company recorded an expense associated with DERs and PSRs of
                  $273,000 and $28,000 for the three-month periods ended June
                  30, 2001 and 2000, respectively. During the six-month periods
                  ended June 30, 2001 and 2000, the Company recorded an expense
                  associated with DERs and PSRs in the amount of $521,000 and
                  $46,000, respectively.

                  Notes receivable from stock sales result from the Company
                  selling shares of common stock through the exercise of stock
                  options, partially for consideration in the form of notes
                  receivable. The notes mature between 2006 and 2010 and accrue
                  interest at rates that range from 4.68% 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


                                       20
<PAGE>   21

                  the option of each borrower. As of June 30, 2001, there were
                  $6.5 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 June 30, 2001 and 2000, the Company
                  paid the Manager $1,116,000 and $1,033,000, respectively, in
                  base management fees in accordance with the terms of the
                  Management Agreements. For the six month periods ended June
                  30, 2001 and 2000, the Company paid the Manager base
                  management fees of $2,211,000 and $2,057,000, respectively.

                  The Manager is also entitled to earn performance based
                  compensation in an amount equal to 20% of the Company's
                  annualized net income, before performance based compensation,
                  above an annualized Return on Equity equal to the ten year
                  U.S. Treasury Rate plus 1%. For purposes of the performance
                  fee calculation, equity is generally defined as proceeds from
                  issuance of common stock before underwriter's discount and
                  other costs of issuance, plus retained earnings. For the
                  three- and six-month periods ended June 30, 2001, the Manager
                  earned performance based compensation in the amount of
                  $1,073,000 and $1,997,000, respectively, in accordance with
                  the terms of the Agreement. For the three- and six-month
                  periods ended June 30, 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 three- and six-month periods ended June 30, 2001,
                  the Company's mortgage banking subsidiary, TMHL, reimbursed
                  the Manager $226,000 and $452,000 for expenses, respectively,
                  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 $36,000
                  and $44,000, respectively, for the same periods 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 June 30, 2001
                  and 2000, the combined amount of rent paid to the Manager was
                  $3,000 and $10,000, respectively. During the six-month periods
                  ended June 30, 2001 and 2000, the combined amount of rent paid
                  to the Manager was $7,000 and $16,000, respectively.


                                       21
<PAGE>   22


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

Certain information contained in this Quarterly Report on Form 10-Q constitutes
"Forward-Looking Statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act, which can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "Plan," or "continue" or the negatives
thereof or other variations thereon or comparable terminology. Investors are
cautioned that all forward-looking statements involve risks and uncertainties
including, but not limited to, risks related to the future level and
relationship of various interest rates, prepayment rates, availability and cost
of acquiring new assets, the timing of new programs and the performance of
third-party, private-label relationships involved in the origination and
servicing of loans. The statements in the "Risk Factors" section of the
Company's 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 Company securitizes the ARM
loans that it acquires into ARM securities for its own portfolio in order to
reduce the cost of financing the portfolio and in order to enhance the high
quality and highly liquid characteristics of its portfolio, thereby improving
the Company's access to mortgage asset financing. The corporate structure of the
Company differs from most lending institutions in that the Company is organized
for tax purposes as a real estate investment trust ("REIT") and therefore
generally passes through substantially all of its earnings to shareholders
without paying federal or state income tax at the corporate level. The Company
has 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 40% of its investment 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 difference 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 investment assets. The Company's Board of
Directors increased the limitation on Hybrid ARMs from 35% of investment assets
to 40% of investment assets on July 17, 2001.


                                       22
<PAGE>   23


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

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

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

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

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

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

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

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

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

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

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

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

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

The Company's loan production strategies through correspondent and direct retail
channels take advantage of the Company's portfolio lending capability, its cost
efficient operation, its competitive advantages and available technology to make
it a mortgage lender that provides attractive and innovative mortgage products,
competitive mortgage rates, and a high level of customer service 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.


                                       23
<PAGE>   24


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

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

FINANCIAL CONDITION

At June 30, 2001, the Company held total assets of $4.391 billion, $4.299
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 June
30, 2001, 94.8% of the assets held by the Company, including cash and cash
equivalents, were High Quality assets, far exceeding the Company's investment
policy minimum requirement of investing at least 70% of its total assets in High
Quality ARM assets and cash and cash equivalents. Of the ARM assets currently
owned by the Company, 85.6% are in the form of adjustable-rate pass-through
certificates or ARM loans. The remainder are floating rate classes of CMOs
(10.7%) or investments in floating rate classes of CBOs (3.7%) backed primarily
by ARM mortgaged-backed securities.


                                       24
<PAGE>   25


The following table presents a schedule of ARM assets owned at June 30, 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>
                                          June 30, 2001                  December 31, 2000
                                  -----------------------------     ----------------------------
                                   Carrying         Portfolio        Carrying         Portfolio
                                    Value              Mix             Value             Mix
                                  ----------        ----------      ----------        ----------
<S>                               <C>               <C>             <C>              <C>
HIGH QUALITY:
   Freddie Mac/Fannie Mae         $2,137,627              49.7%     $2,187,180              52.9%
   Privately Issued:
     AAA/Aaa Rating                1,541,319 (1)          35.8       1,309,584 (1)          31.6
     AA/Aa Rating                    363,867               8.5         351,499               8.5
                                  ----------        ----------      ----------        ----------
       Total Privately Issued      1,905,186              44.3       1,661,083              40.1
                                  ----------        ----------      ----------        ----------

                                  ----------        ----------      ----------        ----------
       Total High Quality          4,042,813              94.0       3,848,263              93.0
                                  ----------        ----------      ----------        ----------

OTHER INVESTMENT:
   Privately Issued:
     A Rating                         29,357               0.7          13,724               0.3
     BBB/Baa Rating                   71,914               1.7          72,114               1.7
     BB/Ba Rating and Other           41,952 (1)           1.0          40,947 (1)           1.0
   Whole loans                       113,248               2.6         164,413               4.0
                                  ----------        ----------      ----------        ----------
       Total Other Investment        256,471               6.0         291,198               7.0
                                  ----------        ----------      ----------        ----------

       Total ARM Portfolio        $4,299,284             100.0%     $4,139,461             100.0%
                                  ==========        ==========      ==========        ==========
</Table>

---------
(1)      The AAA Rating category includes $525.5 million and $615.7 million of
         whole loans as of June 30, 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 $32.0 million as
         of June 30, 2001 and December 31, 2000. The subordinated certificate is
         included in the BB/Ba Rating and Other category.

As of June 30, 2001, the Company had reduced the cost basis of its ARM
securities by $1,906,000 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 six months of 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 $50,000 and
recorded a $281,000 provision for estimated credit losses on its loan portfolio.

As of June 30, 2001, the Company's ARM loan portfolio included 18 delinquent
loans (60 days or more delinquent) with an aggregate balance of $4.1 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.
The average original effective loan-to-value ratio on the 19 delinquent loans
and REO is approximately 75%. The Company believes that its current level of
reserves is adequate to cover estimated losses from these loans and REO
properties. The Company's credit reserve policy regarding ARM loans is to record
a provision based on the outstanding principal balance of loans (including loans
securitized by the Company for which the Company has retained first loss
exposure), subject to adjustment on certain loans or pools of loans based upon
factors such as, but not limited to, age of the loans, borrower payment history,
low loan-to-value ratios, historical loss experience, current economic
conditions and quality of underwriting standards applied by the originator.


                                       25
<PAGE>   26


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>
                                                        June 30, 2001                  December 31, 2000
                                                -----------------------------     ----------------------------
                                                 Carrying         Portfolio        Carrying         Portfolio
                                                  Value              Mix             Value             Mix
                                                ----------        ----------      ----------        ----------
<S>                                             <C>               <C>             <C>              <C>
ARM ASSETS:
    INDEX:
       One-month LIBOR                          $  673,251            15.6%     $  651,502            15.7%
       Three-month LIBOR                           159,850             3.7         158,512             3.8
       Six-month LIBOR                             329,321             7.7         430,908            10.4
       Six-month Certificate of Deposit            182,700             4.3         230,934             5.6
       Six-month Constant Maturity Treasury         20,034             0.5          22,330             0.5
       One-year Constant Maturity Treasury       1,348,423            31.3       1,402,764            33.9
       Cost of Funds                               153,719             3.6         164,697             4.0
                                                ----------      ----------      ----------      ----------
                                                 2,867,298            66.7       3,061,647            73.9
                                                ----------      ----------      ----------      ----------

HYBRID ARM ASSETS                                1,230,943            28.6       1,050,199            25.4
ONE-YEAR MATURITY - FIXED RATE                     201,043             4.7          27,615             0.7
                                                ----------      ----------      ----------      ----------
                                                $4,299,284           100.0%     $4,139,461           100.0%
                                                ==========      ==========      ==========      ==========
</Table>

The ARM portfolio had a current weighted average coupon of 6.84% at June 30,
2001. This consisted of an average coupon of 6.67% on the hybrid portion of the
portfolio and an average coupon of 6.90% 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 6.06%, based
upon the current composition of the portfolio and the applicable indices. The
term "fully-indexed" refers to an ARM asset that has an interest rate that is
currently equal to its applicable index plus a margin to the index that is
specified by the terms of the ARM asset. 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 of the ARM portfolio 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 June 30, 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 and
early 2002 to the "fully indexed" rate.

At June 30, 2001, the current yield of the ARM assets portfolio was 5.90%,
compared to 7.06% as of December 31, 2000, with an average term to the next
repricing date of 400 days as of June 30, 2001, compared to 308 days as of
December 31, 2000. The non-hybrid portion of the portfolio had an average term
to the next repricing of 82 days and the hybrid portion had an average term to
the next repricing of 3.3 years at June 30, 2001. As of June 30, 2001, hybrid
ARMs comprised 28.6% of the total ARM portfolio, compared to 25.4% as of the end
of 2000. The Company finances its hybrid ARM portfolio with longer term
fixed-rate borrowings such that the duration mismatch of the hybrid ARMs and the
corresponding borrowings is one year or less. As of June 30, 2001, the duration
mismatch was approximately two months. The current yield includes the impact of
the amortization of applicable premiums and discounts and the impact of
principal payment receivables.

The decrease in the yield of 1.16% as of June 30, 2001, compared to December 31,
2000, is primarily due to the decreased weighted average interest rate coupon
discussed above, which decreased by 0.91%. The yield also declined as a result
of a higher level of net premium amortization, which had the effect of lowering
the yield by 0.20% and the impact of non-interest earning principal payments
receivables, which also increased during the first six months of 2001,
decreasing the portfolio yield by 0.07%, as the average rate of ARM portfolio
prepayments during the second quarter of 2001 increased to 28% Constant
Prepayment Rate ("CPR") from the 19% CPR during the first quarter of 2001. These
unfavorable factors that decreased the ARM portfolio yield were partially offset
by


                                       26
<PAGE>   27


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 hedging income and expense
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 June 30, 2001. This information pertains to
loans held for securitization, loans held as collateral for the notes payable
and loans the Company has securitized for its own portfolio for which the
Company retained credit loss exposure. The combined amount of the loans included
in this information is $1.242 billion.

                ARM AND HYBRID ARM LOAN PORTFOLIO CHARACTERISTICS

<Table>
<Caption>
                              Average       High         Low
                             --------    ----------     -----
<S>                          <C>         <C>            <C>
Unpaid principal balance     $299,361    $5,144,938     $910
Coupon rate on loans             7.20%        10.13%    4.88%
Pass-through rate                6.85%         9.61%    4.63%
Pass-through margin              1.94%         3.48%    0.61%
Lifetime cap                    12.79%        16.75%    9.75%
Original Term (months)            355           480       72
Remaining Term (months)           323           438       40
</Table>

<Table>
<S>                                                 <C>
     Geographic Distribution (Top 5 States):        Property type:
         California                   28.57%            Single-family            65.28%
         Florida                       9.23             DeMinimus PUD            21.73
         Georgia                       7.41             Condominium               8.67
         New York                      5.86             Other                     4.32
         Colorado                      5.32

     Occupancy status:                              Loan purpose:
         Owner occupied               84.92%            Purchase                 58.49%
         Second home                  11.51             Cash out refinance       25.08
         Investor                      3.57             Rate & term refinance    16.43

     Documentation type:                            Periodic Cap:
         Full/Alternative             89.29%            None                     44.36%
         Other                        10.71             2.00%                    54.40
                                                        1.00%                     0.36
     Average effective original                         0.50%                     0.88
         loan-to-value:               68.00%
</Table>

As of June 30, 2001, the Company serviced $226.3 million of its loans and had
471 customer relationships. All of the loans serviced are held by the Company in
its portfolio in the form of securitized loans or loans held for securitization
for the Company's portfolio. The Company has not retained and capitalized any
servicing rights on loans sold.

During the quarter ended June 30, 2001, the Company purchased $416.0 million of
ARM securities, 99.4% of which were High Quality assets and $181.8 million of
ARM loans, generally originated to "A" quality underwriting standards. Of the
ARM assets acquired during the three months ended June 30, 2001, approximately
54% were Hybrid ARMs, 33% were fixed-rate, short-term securities, 12% were
indexed to LIBOR and 1% were indexed to


                                       27
<PAGE>   28

U.S. Treasury bill rates. The following table compares the Company's ARM asset
acquisition and origination activity for the consecutive quarters ended June 30,
2001 and March 31, 2001 (dollar amounts in thousands):

<Table>
<Caption>
                                        For the quarters ended:
                                    ------------------------------
                                    June 30, 2001   March 31, 2001
                                    -------------   --------------
<S>                                 <C>             <C>
ARM SECURITIES:
   Freddie Mac/Fannie Mae              $256,973        $186,834
   High Quality, privately issued       156,702         174,398
   Other Investment ARM securities        2,372          12,773
                                       --------        --------
                                        416,047         374,005
                                       --------        --------

LOANS:
     Bulk acquisitions                  102,684          38,688
     Correspondent purchases             58,557          27,908
     Direct retail originations          20,602           2,514
                                       --------        --------
                                        181,843          69,110
                                       --------        --------

       Total production                $597,890        $443,115
                                       ========        ========
</Table>

Since 1997, the Company has emphasized purchasing assets at substantially lower
prices relative to par in order to reduce the potential impact of future
prepayments. As a result, the Company has emphasized the acquisition of ARM and
Hybrid ARM assets, high quality floating-rate collateralized mortgages and
short-term fixed-rate securities. In doing so, the average premium/(discount)
paid for ARM assets acquired in the first six months of 2001 and for the years
2000, 1999 and 1998 was (0.30 ), (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 1.29% as of June 30,
2001, compared to 1.64% as of December 31, 2000 and down from 2.83% as of the
end of 1997.

During the three-month and six-month periods ended June 30, 2001, the Company
securitized $272.2 million and $285.6 million loans, respectively, and retained
all of the securities for its own portfolio. The Company securitizes the ARM
loans that it acquires into ARM securities for its own portfolio in order to
reduce the cost of financing the portfolio and in order to enhance the high
quality and highly liquid characteristics of its portfolio, and thereby
improving the Company's access to mortgage finance markets. In doing so, the
Company retains all of the economic interest and risk of the loans that it
acquires and originates, although they are in the form of securities. Of the
securities created during the first six months of 2001, 97.4% were High Quality
securities and 2.6% were subordinate securities that provide credit support to
the High Quality securities.

As of June 30, 2001, the Company had commitments to purchase $352.0 million of
ARM securities, $76.2 million ARM loans from bulk channels and $153.7 million
ARM loans through retail channels.

During the three-month period ended June 30, 2001, the Company sold $108.1
million of ARM securities, of which $6.8 million will settle in the third
quarter, and realized $244,000 in gains and $245,000 in losses. In addition, the
Company sold $0.3 million of fixed-rate loans that it originated during the
second quarter for a gain of $3,000. The Company did not sell any assets during
the first quarter of 2001.

For the quarter ended June 30, 2001, the Company's mortgage assets paid down at
an approximate average annualized CPR of 28% compared to 16% for the quarter
ended June 30, 2000 and 19% for the quarter ended March 31, 2001. When
prepayment experience increases, the Company has to amortize its premiums over a
shorter time period, resulting in a reduced yield to maturity on the Company's
ARM assets. Conversely, if actual prepayment experience decreases, the premium
would be amortized over a longer time period, resulting in a higher yield to
maturity. The Company monitors its prepayment experience on a monthly basis in
order to adjust the amortization of the net premium, as appropriate.

The fair value of the Company's portfolio of ARM assets classified as
available-for-sale increased by 0.75% from a negative adjustment of 2.28% of the
portfolio as of December 31, 2000, to a negative adjustment of 1.53% as of

                                       28
<PAGE>   29


June 30, 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
$56.8 million as of June 30, 2001. As of June 30, 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 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 tend to increase when general
market interest rates increase and decrease when market interest rates decrease,
helping to partially offset changes in the fair value of the Company's ARM
assets. At June 30, 2001, the fair value of the Company's Cap Agreements was
$0.6 million compared to a fair value of $1.3 million as of December 31, 2000.
During the quarter ended June 30, 2001, the change in the fair value of some of
the Cap Agreements compared to the change in the fair value of the hedged asset,
the lifetime interest rate cap component of the Company's ARM assets, did not
meet the effectiveness requirements of FAS 133. Therefore, the change in fair
value of those Cap Agreements, $0.5 million, was recorded as a hedging expense
with no offsetting change recorded for the change in fair value of the hedged
asset. For the Cap Agreements that did meet the FAS 133 effectiveness test,
their change in fair value was recorded as hedging expense along with an
offsetting amount for the change in fair value of the hedged asset. At June 30,
2001, the Cap Agreements had a remaining notional balance of $2.486 billion with
an average final maturity of 1.9 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 these Cap Agreements 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 act to reduce
the effect of the lifetime or maximum interest rate cap limitation. These Cap
Agreements 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, 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
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 June 30, 2001:

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

<Table>
<Caption>
 Hedged           Weighted                                        Weighted
ARM Assets        Average     Cap Agreement                    Average Remaining
Balance (1)       Life Cap   Notional Balance   Strike Price        Term
----------        --------   ----------------   ------------   -----------------
<S>               <C>        <C>                <C>            <C>
$  122,249           8.23%     $  116,979           6.20%         2.1 Years
   197,899           8.35         200,000           7.50          2.5
   445,638           9.60         445,864           8.00          1.2
    26,791          10.43          25,000           9.00          1.5
    53,756          10.09          57,761           9.50          1.3
   343,301          10.91         344,392          10.00          1.2
   166,215          11.54         166,212          10.50          1.1
   470,325          11.48         470,000          11.00          2.2
   280,188          12.72         280,000          11.50          3.1
   350,027          13.48         350,000          12.00          2.2
    86,133          15.74          29,893          12.50          0.5
----------          -----      ----------          -----          ----------
$2,542,522          11.18%     $2,486,101           9.94%         1.9 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.


                                       29
<PAGE>   30


The Company enters into interest rate Swap Agreements in order to manage its
interest rate exposure when financing its ARM assets. The Company generally
borrows money based on short-term interest rates, either by entering into
borrowings with maturity terms of less than six months, and frequently one
month, or by entering into borrowings with longer maturity terms of one to two
years that reprice based on a frequency that is commonly one month, but has at
times been up to six months. The Company's ARM assets generally have an interest
rate that reprices based on frequency terms of one to twelve months. The
Company's Hybrid ARMs generally have an initial fixed interest rate period of
three to ten years. As a result, the Company's existing and forecasted
borrowings reprice to a new rate on a more frequent basis than does the
Company's ARM assets. When the Company enters into a Swap Agreement, it agrees
to pay a fixed rate of interest and to receive a variable interest rate based on
an index, generally LIBOR, offsetting a portion of its variable cost of
short-term borrowings, which have an interest rate that correlates highly with
LIBOR. The Company receives a variable interest payment based on one-month LIBOR
on all of the Swap Agreements currently outstanding. These Swap Agreements have
the effect of converting the Company's variable-rate debt into fixed-rate debt
over the life of the Swap Agreements. Swap Agreements are used as a cost
effective way to lengthen the average repricing period of its variable rate and
short-term borrowings such that the average repricing of the borrowings more
closely matches the average repricing of the Company's ARM assets. 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. As of
June 30, 2001, the mismatch duration was approximately two months.

As of June 30, 2001, the Company was a counterparty to thirty-five Swap
Agreements having an aggregate notional balance of $1.658 billion. As of June
30, 2001, $1.158 billion of these Swap Agreements hedged the fixed interest rate
period of Hybrid ARMs and had a weighed average maturity of 2.9 years. The
remaining Swap Agreements extended the weighted average term of the Company's
borrowings and mature in July 2001. 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 24 days to 329 days. The average remaining fixed rate
term of the Company's Hybrid ARM assets as of June 30, 2001 was 3.3 years. The
Company has also entered into one delayed Swap Agreement that becomes effective
for a one-year term, beginning in April of 2002. This delayed Swap Agreement has
a notional balance of $100 million and is designated to hedge the interest rate
exposure of Hybrid ARM assets upon the termination of the other Swap Agreements.
In accordance with FAS 133, all of these Swaps Agreements have been designated
as cash flow hedges and, as of June 30, 2001, are being carried on the balance
sheet at their negative fair value of $17.6 million. As of June 30, 2001, the
fair value adjustment for Swap Agreements was a decrease to "Accumulated other
comprehensive income" in the amount of $10.9 million. Since the Swap Agreements
and the short-term borrowings they hedge have nearly identical terms and
characteristics with respect to the applicable index and interest rate repricing
dates, the Company has calculated the effectiveness of this cash flow hedge to
be approximately 100%. As a result of the calculated effectiveness of
approximately 100% to date, all changes in the unrealized gains and losses on
Swap Agreements have been recorded in Other comprehensive income and are
reclassified to earnings as interest expense is recognized on the Company's
hedged borrowings.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2001

For the quarter ended June 30, 2001, the Company's net income was $11,639,000,
or $0.46 per share (Basic and Diluted EPS), based on a weighted average of
21,791,000 shares outstanding. That compares to $6,967,000, or $0.25 per share
(Basic and Diluted EPS) for the quarter ended June 30, 2000, based on a weighted
average of 21,490,000 shares outstanding. Net interest income for the quarter
totaled $15,714,000, compared to $8,752,000 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 three months ended June 30, 2001
and 2000, the Company recorded $2,000 and $49,000, respectively, of net gain
from the sale of ARM assets. During the second quarter of 2001, the Company
recorded hedging expense of $466,000. In prior periods before the adoption of
FAS 133, the Company reported hedging expense as a component of net interest
income. Additionally, during the second quarter of 2001, the Company reduced its
earnings and the carrying value of its ARM assets by reserving $153,000 for
estimated credit losses, compared to $381,000 during the second quarter of 2000.
During the second quarter of 2001, the Company incurred operating expenses of
$3,458,000, consisting of a base management fee of $1,116,000, a performance
based fee of $1,073,000 and other operating expenses of $1,269,000. During the
same period of 2000,


                                       30
<PAGE>   31


the Company incurred operating expenses of $1,453,000, consisting of a base
management fee of $1,033,000 and other operating expenses of $420,000.

The Company's return on average common equity was 11.73% for the quarter ended
June 30, 2001 compared to 6.50% for the quarter ended June 30, 2000 and compared
to 11.24% for the prior quarter ended March 31, 2001. 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.

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%       --       2.59%     1.12%       2.03%   11.24%      5.04%      6.21%
Jun 30, 2001     18.50%     0.55%(3)      0.18%       --       2.81%     1.26%       1.97%   11.73%      5.28%      6.45%
</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 second quarter of
2001, compared to the second 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 hedging expense and other
expenses.


                                       31
<PAGE>   32
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 June 30,
                                      -------------------------------
                                            2001          2000
                                         --------      --------
<S>                                      <C>           <C>
Coupon interest income on ARM assets     $ 72,697      $ 76,771
Amortization of net premium                (5,393)       (3,658)
Amortization of Cap Agreements                 --          (633)
Amort. of deferred gain from hedging           --           293
Cash and cash equivalents                     375         3,796
                                         --------      --------
    Interest income                        67,679        73,152
                                         --------      --------

Reverse repurchase agreements              38,644        51,502
AAA notes payable                           7,192        13,687
Other borrowings                            2,106           351
Interest rate swaps                         4,023        (1,140)
                                         --------      --------
    Interest expense                       51,965        64,400
                                         --------      --------

Net interest income                      $ 15,714      $  8,752
                                         ========      ========
</Table>

As presented in the table above, the Company's net interest income increased by
$7.0 million in the second quarter of 2001 compared to the second quarter of
2000. The most significant change was the decline in interest expense of $12.4
million. The following two tables explain the increase in terms of volume and
rate variances.

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

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

<Table>
<Caption>
                                                                       For the quarters ended June 30,
                                             -------------------------------------------------------------------------------
                                                             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            $4,362,918         6.17%   $   67,304     $4,322,706         6.73%   $   72,773
  Cash and cash equivalents                      31,461         4.77           375         21,921         6.92           379
                                             ----------   ----------    ----------     ----------   ----------    ----------
                                              4,394,380         6.15        67,679      4,344,627         6.73        73,152
                                             ----------   ----------    ----------     ----------   ----------    ----------
Interest Bearing Liabilities:
  Reverse repurchase agreements               3,305,686         5.16        42,667      3,176,376         6.34        50,362
  Collateralized notes payable                  547,165         5.26         7,192        778,131         7.04        13,687
  Other borrowings                              154,542         5.45         2,106         10,976        12.78           351
                                             ----------   ----------    ----------     ----------   ----------    ----------
                                              4,007,393         5.19        51,965      3,965,483         6.50        64,400
                                             ----------   ----------    ----------     ----------   ----------    ----------

Net Interest Earning Assets and Spread       $  386,987         0.96%   $   15,714     $  379,144         0.23%   $    8,752
                                             ==========   ==========    ==========     ==========   ==========    ==========
Yield on Net Interest Earning Assets (1)                        1.43%                                     0.81%
                                                          ==========                                ==========
</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.


                                       32
<PAGE>   33

The following table presents the total amount of change in interest
income/expense from the table above and presents the amount of change due to
changes in interest rates versus the amount of change due to changes in volume
(dollar amounts in thousands):
<Table>
<Caption>
                                              Three Months Ended June 30,
                                                    2001 versus 2000
                                           ---------------------------------
                                            Rate        Volume       Total
                                           -------      -------     --------
<S>                                        <C>          <C>         <C>
Interest Income:
   ARM assets                             $ (6,089)     $   620     $ (5,469)
   Cash and cash equivalents                  (118)         114           (4)
                                          --------      -------     --------
                                            (6,207)         734       (5,473)
                                          --------      -------     --------
Interest Expense:
   Reverse repurchase agreements            (9,364)       1,669       (7,695)
   Collateralized notes payable             (3,460)      (3,035)      (6,495)
   Other borrowings                           (201)       1,956        1,755
                                          --------      -------     --------
                                           (13,025)         590      (12,435)
                                          --------      -------     --------
Net interest income                       $  6,818      $   144     $  6,962
                                          ========      =======     ========
</Table>


As a result of the yield on the Company's interest-earning assets decreasing to
6.15% during the second quarter of 2001 from 6.73% during the same period of
2000 and the Company's cost of funds decreasing to 5.19% from 6.50% during the
same time periods, net interest income increased by $6,962,000. This increase in
net interest income is primarily a favorable rate variance, combined with a less
significant favorable volume variance. The favorable rate variance of $6,818,000
was primarily due to a favorable rate variance of $13,025,000 on borrowings,
which was partially offset by an unfavorable rate variance of $6,207,000 on the
Company's ARM assets portfolio and other interest-earning assets. The increased
average size of the Company's portfolio during the second quarter of 2001
compared to the same period in 2000 increased net interest income in the amount
of $144,000. The average balance of the Company's interest-earning assets was
$4.394 billion during the second quarter of 2001, compared to $4.345 billion
during the same period of 2000 -- an increase of 1%.


                                       33
<PAGE>   34


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%          1.34%
Jun 30, 2001     $4,394.4        6.06%        6.84%        0.97%        5.87%        4.75%            1.12%          1.43%
</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%
Jun 30, 2001       0.74%        0.20%       0.03%         -- %         0.97%
</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 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


                                       34
<PAGE>   35


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 31.8% at June 30, 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%

For the Quarter Ended
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%
Jun 30, 2001                  3.77%               4.22%             -0.45%               31.8%
</Table>

The Company recorded hedging expense during the second quarter of 2001 of
$466,000. 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 was $0.6 million compared to a fair value of
$0.5 million as of March 31, 2001, an increase in fair value of $0.1 million.
However, in accordance with FAS 133, the change in the fair value of the Cap
Agreements 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, and for
several of the Cap Agreements the Company determined that the hedge was
ineffective during the second quarter of 2001. As a result, the Company recorded
the change in fair value of those Cap Agreements, a decline of $466,000, as
hedging expense. The other Cap Agreements were determined to be effective. The
change in fair value of the effective Cap Agreements was recorded in earnings
along with an offsetting amount for the change in fair value of the hedged
assets.

The Company's provision for estimated credit losses decreased to $153,000 for
the quarter ended June 30, 2001 compared to $381,000 for 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 third quarter of 2000. 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


                                       35
<PAGE>   36


Company will continue to review economic conditions and the quality of 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 June 30, 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 29.0%
of the Company's portfolio of ARM assets or $1.242 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 June 30,
                                                    -------------------------------
                                                           2001           2000
                                                         --------      --------
<S>                                                      <C>           <C>
Net income                                               $ 11,639      $  6,967
   Additions:
     Provision for credit losses                              153           381
     Net compensation related items                          (121)           97
     Hedging Expense                                          466            --
   Deductions:
     Dividend on Series A Preferred Shares                 (1,670)       (1,670)
     Actual credit losses (recoveries) on ARM assets          (26)         (335)
     Non-REIT subsidiary taxable income                       (53)           --
     Capital loss carryover from 1998                          --           (49)
     Amortization of hedges                                  (383)           --
                                                         --------      --------
Taxable net income                                       $ 10,005      $  5,391
                                                         ========      ========
Taxable income per share                                 $   0.46      $   0.25
                                                         ========      ========
</Table>

For the quarter ended June 30, 2001, the Company's ratio of operating expenses
to average assets was 0.31% compared to 0.13% for the same period in 2000 and
0.29% for the prior quarter ended March 31, 2001. The most significant single
increase to the Company's expenses was the performance based fee, $1,073,000,
that the Manager earned during the second 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 13.0% whereas the threshold, the average
10-year treasury rate plus 1%, was 6.28%. The Manager did not earn a performance
based fee during the second quarter of 2000. The Company's other expenses
increased by approximately $849,000 from the second quarter of 2000 to the
second quarter of 2001, primarily due the operations of the Company's taxable
mortgage banking subsidiary, expenses associated with the Company's issuance of
DERs and PSRs and due to other corporate matters. The operations of TMHL
accounted for $549,000 of this increase. 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.


                                       36
<PAGE>   37


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, subject to an annual inflation adjustment based on
changes in the Consumer Price Index. 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%
Jun 30, 2001          0.21%             0.10%                 0.31%
</Table>

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2001

For the six months ended June 30, 2001, the Company's net income was
$22,366,000, or $0.88 per share (Basic and Diluted EPS), based on a weighted
average of 21,741,000 shares outstanding. That compares to $14,480,000, or $0.52
per share (Basic and Diluted EPS), based on a weighted average of 21,490,000
shares outstanding for the six months ended June 30, 2000. Net interest income
for this most recent six month period totaled $30,038,000, compared to
$18,069,000 for the same period in 2000. Net interest income is comprised of the
interest income earned on mortgage investments less interest expense from
borrowings. During the first six months of 2001, the Company recorded a gain on
the sale of ARM securities of $2,000 as compared to a gain of $49,000 during the
same period of 2000. Additionally, during the first half of 2001, the Company
reduced its earnings and the carrying value of its ARM assets by reserving
$331,000 for potential credit losses, compared to $713,000 during the first half
of 2000. During the six months ended June 30, 2001, the Company incurred
operating expenses of $6,524,000, consisting of a base management fee of
$2,211,000, a performance based fee of $1,997,000 and other operating expenses
of $2,316,000. During the same period of 2000, the Company incurred operating
expenses of $2,925,000, consisting of a base management fee of $2,057,000 and
other operating expenses of $868,000.

The Company's return on average common equity was 11.37% for the six months
ended June 30, 2001 compared to 6.9% for the six months ended June 30, 2000. The
primary reasons for the higher return on average common equity is a higher
interest rate spread, as discussed below, and the lower level of provisions for
credit losses. These favorable changes were partially offset by increased
operating expenses, primarily related to the Company's taxable mortgage banking
subsidiary.



                                       37
<PAGE>   38


The following table presents the components of the Company's net interest income
for the six month periods ended June 30, 2001 and 2000:

                   COMPARATIVE NET INTEREST INCOME COMPONENTS
                          (Dollar amounts in thousands)

<Table>
<Caption>
                                                  2001           2000
                                               ---------      ---------
<S>                                            <C>            <C>
Coupon interest income on ARM assets           $ 150,251      $ 154,386
Amortization of net premium                      (10,019)        (8,341)
Amortization of Cap Agreements                        --         (1,471)
Amortization of deferred gain from hedging            --            597
Cash and cash equivalents                            672            620
                                               ---------      ---------
     Interest income                             140,904        145,791
                                               ---------      ---------

Reverse repurchase agreements                     84,797        100,370
AAA notes payable                                 16,852         28,347
Other borrowings                                   4,903            635
Interest rate swaps                                4,314         (1,630)
                                               ---------      ---------
     Interest expense                            110,866        127,722
                                               ---------      ---------

Net interest income                            $  30,038      $  18,069
                                               =========      =========
</Table>


As presented in the table above, the Company's net interest income increased by
$12.0 million in the first half of 2001 compared to the same six months of 2000.
In general, this is the result of the Company's cost of funds decreasing by more
than the decrease in the Company's interest income. The Company's interest
income was $4.9 million lower, primarily due to lower interest rates and a
higher level of net premium amortization, in part due to higher prepayment
activity of the Company's ARM portfolio during the first half of 2001 as
compared to the same period in 2000. The rate of prepayments averaged
approximately 24% during the first six months of 2001 compared to approximately
16% during the same period of 2000. The Company's interest expense decreased by
$16.9 million, primarily due to lower interest rates. During the first six
months of 2001, the Federal Reserve Bank has lowered short-term interest rates
by 2.75% and, as a result, the Company's cost of funds has decreased from 6.75%
as of June 30, 2000 to 4.75% as of June 30, 2001. The interest rates on the
Company's ARM assets are also declining as a result of these lower short-term
interest rates, but the changes to the interest rates on the Company's ARM
assets generally takes place over an approximate twelve month period of time. As
a result, during the first six months of 2001, the Company has benefited from
higher net interest income resulting from the effect of lower short-term
interest rates. The Company expects this benefit to continue during the third
quarter of 2001 and to then continue at a decreased level during the fourth
quarter of 2001 and potentially into early 2002.


                                       38
<PAGE>   39


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 six month periods ended June 30,
                                             ----------------------------------------------------------------------------
                                                           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            $4,300,791     6.52%     $  140,231     $4,389,000      6.62%     $  145,172
  Cash and cash equivalents                      26,517     5.08             673         18,810      6.59             620
                                             ----------     ----      ----------     ----------     -----      ----------
                                              4,327,308     6.51         140,904      4,407,810      6.62         145,791
                                             ----------     ----      ----------     ----------     -----      ----------
Interest Bearing Liabilities:
  Reverse repurchase agreements               3,210,097     5.55          89,111      3,190,596      6.19          98,740
  Collateralized notes payable                  569,609     5.92          16,852        827,394      6.85          28,347
  Other borrowings                              164,960     5.94           4,903         11,366     11.18             635
                                             ----------     ----      ----------     ----------     -----      ----------
                                              3,944,666     5.62         110,866      4,029,356      6.34         127,722
                                             ----------     ----      ----------     ----------     -----      ----------

Net Interest Earning Assets and Spread       $  382,642     0.89%     $   30,038     $  378,454      0.28%     $   18,069
                                             ==========     ====      ==========     ==========     =====      ==========
Yield on Net Interest Earning Assets (1)                    1.39%                                    0.82%
                                                            ====                                    =====
</Table>

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

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

<Table>
<Caption>
                                          Six Months Ended June 30,
                                              2001 versus 2000
                                     ------------------------------------
                                       Rate         Volume        Total
                                     --------      --------      --------
<S>                                  <C>           <C>           <C>
Interest Income:
   ARM assets                        $ (2,064)     $ (2,876)     $ (4,940)
   Cash and cash equivalents             (142)          195            53
                                     --------      --------      --------
                                       (2,206)       (2,681)       (4,887)
                                     --------      --------      --------
Interest Expense:
   Reverse repurchase agreements      (10,170)          541        (9,628)
   Collateralized notes payable        (3,868)       (7,627)      (11,495)
   Other borrowings                      (297)        4,565         4,267
                                     --------      --------      --------
                                      (14,335)       (2,521)      (16,856)
                                     --------      --------      --------

Net interest income                  $ 12,129      $   (160)     $ 11,969
                                     ========      ========      ========
</Table>

Net interest income increased by $11,969,000, primarily as a result of the
Company's cost of funds decreasing to 5.62% during the first half of 2001 from
6.34% during the first half of 2000, partially offset by a decrease of the yield
on the Company's interest-earning assets which decreased to 6.51% from 6.62% for
the same respective time periods. This increase in net interest income is the
net result of a favorable rate variance, partially offset by an unfavorable
volume variance. There was a net favorable rate variance of $12,129,000, which
consisted of a favorable variance of $14,335,000 resulting from the decrease in
the Company's cost of funds and an unfavorable variance of $2,206,000 resulting
from the lower yield on the Company's ARM assets portfolio and other
interest-earning assets. The decreased average size of the Company's portfolio
during the first half of 2001 compared to the


                                       39
<PAGE>   40


same period of 2000 resulted in lower net interest income in the amount of
$160,000. The average balance of the Company's interest-earning assets was
$4.327 billion during the first half of 2001 compared to $4.408 billion during
the first half of 2000 -- a decrease of 1.8%.

During the first half of 2001, the Company realized a net gain from the sale of
ARM securities and fixed-rate loans in the amount of $2,000 as compared to
$49,000 during the first half of 2000. The sale of ARM securities during the
first six months of 2001 resulted in a net loss of $1,000 and the sale of
fixed-rate loans by the Company's taxable mortgage banking subsidiary resulted
in a gain of $3,000. The gain from the sale of ARM assets during 2000 was a
result of the Company's re-securitization of Other Investment ARM securities and
the subsequent sale of AAA and AA rated securities resulting from this
re-securitization. As a result of this transaction, the Company improved its
liquidity, the credit quality of its ARM portfolio and recorded a small gain.

The Company recorded an expense for estimated credit losses in the amount of
$331,000 during the six months ended June 30, 2001, compared to $713,000 during
the same period of 2000, primarily because the Company decided to reduce its
rate of providing for losses on its whole loan credit exposure during the third
quarter of 2000 after doing a review of the historical loss experience of the
Company's whole loans and after reviewing the expected losses related to
delinquent whole loans.

For the six months ended June 30, 2001, the Company's ratio of operating
expenses to average assets was 0.30% as compared to 0.13% for the same period of
2000. During the fist six months of 2001, the Manager earned a performance based
fee of $1,997,000 or 0.09% of average assets. The Manager did not earn a
performance based fee during the same six months of 2000. The Company's other
expenses increased by approximately $1,448,000 for the six months ended June 30,
2001 compared to the same six-month period in 2000, primarily due the operations
of the Company's taxable mortgage banking subsidiary, expenses associated with
the Company's issuance of DERs and PSRs and due to other corporate matters. The
operations of TMHL accounted for $993,000 of this increase.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of funds for the quarter ended June 30, 2001
consisted of reverse repurchase agreements, which totaled $3.407 billion,
collateralized notes payable, which had a balance of $516.1 million and whole
loan financing facilities, which had a balance of $101.6 million. The Company's
other significant sources of funds for the quarter ended June 30, 2001 consisted
primarily of payments of principal and interest from its ARM assets in the
amount of $566.0 million. In the future, the Company expects its primary sources
of funds will consist of borrowed funds under reverse repurchase agreement
transactions with one- to twelve-month maturities, 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 June 30, 2001, had a weighted average effective
cost of 4.17%. 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 March 2002.
As of June 30, 2001, $818.0 million 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
to thirteen 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 June 30, 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 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


                                       40
<PAGE>   41


Rating Agencies (approximately 3.4%) 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 June 30, 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 June 30, 2001, the Company had $516.1 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 June 30, 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. 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 March 2002. As of June 30, 2001, the
Company had $101.6 million borrowed against these whole loan financing
facilities at an effective cost of 4.40%.

In December 1996, the Company's Registration Statement on Form S-3, registering
the sale of up to $200 million of additional equity securities, was declared
effective by the Securities and Exchange Commission. This registration statement
includes the possible issuances of common stock, preferred stock, warrants or
shareholder rights. As of June 30, 2001, the Company had $109 million of its
securities registered for future sale under this Registration Statement.

In July 2001, the Company's Registration Statement on Form S-3, registering the
sale of up to an additional $300 million of 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.

In August 2001, the Company issued 5,500,000 shares of common stock at a price
of $16.00 per share pursuant to its Registration Statement on Form S-3 declared
effective on July 6, 2001. Net proceeds from this issuance were approximately
$82.6 million. In addition, the Company has granted the underwriters an option,
exercisable for 30 days, to purchase up to 825,000 additional shares of common
stock to cover over-allotments.

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 quarter ended June 30, 2001, the Company issued 34,734 shares of
common stock under the DRP and received net proceeds of $0.5 million.

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


                                       41
<PAGE>   42


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 June 30, 2001, the Company calculates its Qualified REIT Assets, as
defined in the Internal Revenue Code of 1986, as amended (the "Code"), to be
98.9% 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 99.2% of its 2001 revenue for the first six months of 2001 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 June 30, 2001, the Company believes that it
will continue to qualify as a REIT under the provisions of the Code.


                                       42
<PAGE>   43


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 June 30, 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

         (a)      The Annual Meeting of Shareholders of the Company was held on
                  April 26, 2001.

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

                  (1)      Election of Directors

<Table>
<Caption>
                                Votes
                       -----------------------
    Nominee               For         Withheld
------------------     ----------     --------
<S>                    <C>            <C>
David A. Ater          19,990,337     137,067
Larry A. Goldstone     20,002,614     124,790
Ike Kalangis           20,004,319     123,085
</Table>

Item 5.  Other Information

         On July 17, 2001, the Board of Directors approved an amendment to the
         Company's 1992 Stock Option and Incentive Plan (the "Plan") to include
         restricted stock grants as an additional form of incentive award under
         the Plan. A copy of the amendment to the Plan is being filed herewith
         as Exhibit 10.3.3.


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

         (a)      Exhibits

                  See "Exhibit Index"

         (b)      Reports on Form 8-K

                  None


                                       43
<PAGE>   44


                                   SIGNATURES


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


                                       THORNBURG MORTGAGE, INC.


Dated: August 14, 2001                 By: /s/ Larry A. Goldstone
                                           -------------------------------------
                                           Larry A. Goldstone
                                           President and Chief Operating Officer
                                           (authorized officer of registrant)


Dated: August 14, 2001                 By: /s/ Richard P. Story
                                           -------------------------------------
                                           Richard P. Story,
                                           Chief Financial Officer and Treasurer
                                           (principal accounting officer)



                                       44
<PAGE>   45


                                  EXHIBIT INDEX


<Table>
<Caption>
EXHIBIT
NUMBER                            DESCRIPTION
-------                           -----------
<S>               <C>
   10.3.3         Amendment dated July 17, 2001 to the amended and restated 1992
                  Stock Option and Incentive Plan
</Table>


                                       45