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

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


                                    FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 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)                  28,404,975 as of November 9, 2001

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



<PAGE>



                            THORNBURG MORTGAGE, INC.
                                    FORM 10-Q


                                      INDEX



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

     Item 1.      Financial Statements

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

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

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

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

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

     Item 2.      Management's Discussion and Analysis of Financial Condition
                   and Results of Operations..............................................................   21

PART II. OTHER INFORMATION

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

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

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

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

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

     Item 6.      Exhibits and Reports on Form 8-K........................................................   41


     SIGNATURES ..........................................................................................   42

     EXHIBIT INDEX .......................................................................................   43
</Table>



                                       2
<PAGE>



PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)

<Table>
<Caption>
                                                                             September 30, 2001     December 31, 2000
                                                                                 (Unaudited)
                                                                             -------------------    ------------------
<S>                                                                           <C>                   <C>
ASSETS
     Adjustable-rate mortgage ("ARM") assets:
          ARM securities                                                      $        4,248,087    $        3,359,352
          Collateral for collateralized notes                                            482,766               615,696
          ARM loans held for securitization                                              514,276               164,413
                                                                              ------------------    ------------------
                                                                                       5,245,129             4,139,461
                                                                              ------------------    ------------------

     Cash and cash equivalents                                                            25,307                13,105
     Accrued interest receivable                                                          33,033                32,730
     Prepaid expenses and other                                                            5,250                 4,871
                                                                              ------------------    ------------------
                                                                              $        5,308,719    $        4,190,167
                                                                              ==================    ==================

LIABILITIES
     Reverse repurchase agreements                                            $        3,952,241    $        2,961,617
     Collateralized notes payable                                                        474,623               603,910
     Other borrowings                                                                    416,514               158,593
     Payable for assets purchased                                                             --               124,942
     Accrued interest payable                                                             11,661                20,519
     Dividends payable                                                                     1,670                 1,670
     Accrued expenses and other                                                            4,991                 1,378
                                                                              ------------------    ------------------
                                                                                       4,861,700             3,872,629
                                                                              ------------------    ------------------
COMMITMENTS

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

         22,000 Series B cumulative shares authorized, none issued
         and outstanding, respectively                                                        --                    --

     Common stock: par value $.01 per share; 47,218 and 47,240
          Shares authorized, 27,811 and 22,072 shares issued and
          27,811 and 21,572 outstanding, respectively                                        278                   221
     Additional paid-in-capital                                                          429,632               343,036
     Accumulated other comprehensive income (loss)                                       (49,398)              (78,427)
     Notes receivable from stock sales                                                    (7,405)               (5,318)
     Retained earnings (deficit)                                                           8,107                (3,113)
     Treasury stock:  at cost, 0 and 500 shares, respectively                                 --                (4,666)
                                                                              ------------------    ------------------
                                                                                         447,019               317,538
                                                                              ------------------    ------------------

                                                                              $        5,308,719    $        4,190,167
                                                                              ==================    ==================
</Table>


See Notes to Consolidated Financial Statements.



                                       3
<PAGE>



THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

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

<Table>
<Caption>
                                                          Three Months Ended                Nine Months Ended
                                                              September 30,                    September 30,
                                                         2001             2000             2001             2000
                                                     -------------    -------------    -------------    -------------
<S>                                                  <C>              <C>              <C>              <C>
Interest income from ARM assets and cash
  equivalents                                        $      66,249    $      71,017    $     207,155    $     216,808
Interest expense on borrowed funds                         (46,456)         (62,039)        (157,323)        (189,761)
                                                     -------------    -------------    -------------    -------------
  Net interest income                                       19,793            8,978           49,832           27,047
                                                     -------------    -------------    -------------    -------------

Gain on sale of ARM assets                                      --               --                1               49
Hedging expense                                               (507)              --           (1,124)              --
Provision for credit losses                                   (231)            (270)            (562)            (983)
Management fee                                              (1,249)          (1,029)          (3,463)          (3,086)
Performance fee                                             (1,627)              --           (3,624)              --
Other operating expenses                                    (1,594)            (663)          (3,907)          (1,532)
                                                     -------------    -------------    -------------    -------------

  Net income before cumulative effect of
    change in accounting principle                          14,585            7,016           37,153           21,495
  Cumulative effect of change in accounting
    principle                                                   --               --             (202)              --
                                                     -------------    -------------    -------------    -------------

     NET INCOME                                      $      14,585    $       7,016    $      36,951    $      21,495
                                                     =============    =============    =============    =============


Net income                                           $      14,585    $       7,016    $      36,951    $      21,495
Dividends on preferred stock                                (1,670)          (1,670)          (5,009)          (5,009)
                                                     -------------    -------------    -------------    -------------

Net income available to common shareholders          $      12,915    $       5,346    $      31,942    $      16,486
                                                     =============    =============    =============    =============

Basic and diluted earnings per share before
  cumulative effect of change in accounting
  principle                                          $        0.52    $        0.25    $        1.41    $        0.77
Cumulative effect of change in accounting
  principle                                                     --               --            (0.01)              --
                                                     -------------    -------------    -------------    -------------
Basic and diluted earnings per share                 $        0.52    $        0.25    $        1.40    $        0.77
                                                     =============    =============    =============    =============

Average number of common shares outstanding                 25,004           21,490           22,841           21,490
                                                     =============    =============    =============    =============
</Table>






See Notes to Consolidated Financial Statements.



                                       4
<PAGE>



THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

Nine Months Ended September 30, 2001 and 2000
(In thousands, except share data)

<Table>
<Caption>
                                                                          Accum.       Notes
                                                                          Other       Receiv-
                                                           Additional     Compre-    able From    Retained
                                 Preferred     Common       Paid-in       hensive      Stock      Earnings/
                                   Stock        Stock       Capital       Income       Sales      (Deficit)
                                 ----------   ----------   ----------   ----------   ----------   ----------
<S>                              <C>          <C>          <C>          <C>          <C>          <C>
Balance, December 31, 1999       $   65,805   $      220   $  342,026   $  (82,489)  $   (4,632)  $   (5,377)
Comprehensive income:
   Net income                                                                                         21,495
   Other comprehensive income:
      Available-for-sale assets:
       Fair value adjustment             --           --           --      (17,672)          --           --
      Deferred gain on sale of
       hedges, net of amortization       --           --           --         (653)          --           --

   Other comprehensive income

Interest from notes receivable
   from stock sales                                               203
Dividends declared on preferred
   stock - $1.815 per share              --           --           --           --           --       (5,009)
Dividends declared on common
   stock - $0.69 per share               --           --           --           --           --      (14,828)
                                 ----------   ----------   ----------   ----------   ----------   ----------
Balance, September 30, 2000      $   65,805   $      220   $  342,229   $ (100,814)  $   (4,632)  $   (3,719)
                                 ==========   ==========   ==========   ==========   ==========   ==========

Balance, December 31, 2000       $   65,805   $      221   $  343,036   $  (78,427)  $   (5,318)  $   (3,113)
Comprehensive income:
   Net income                                                                                         36,951
   Other comprehensive income:
      Available-for-sale assets:
        Fair value adjustment            --           --           --       54,556           --           --
   Swap Agreements:
      Cumulative adjustment for
        change in accounting
        principle                        --           --           --         (629)          --           --
      Fair value adjustment,
        net of amortization                                                (24,898)

   Other comprehensive income

Issuance of common stock                              57       86,336                    (2,123)
Interest and principal payments on
  notes receivable from stock sales                               260                        36
Dividends declared on preferred
   stock - $1.815 per share              --           --           --           --           --       (5,009)
Dividends declared on common
   stock - $0.95 per share               --           --           --           --           --      (20,722)
                                 ----------   ----------   ----------   ----------   ----------   ----------
Balance, September 30, 2001      $   65,805   $      278   $  429,632   $  (49,398)  $   (7,405)  $    8,107
                                 ==========   ==========   ==========   ==========   ==========   ==========

<Caption>


                                               Compre-
                                 Treasury      hensive
                                   Stock        Income        Total
                                 ----------   ----------   ----------
<S>                              <C>          <C>          <C>
Balance, December 31, 1999       $   (4,666)               $  310,887
Comprehensive income:
   Net income                                 $   21,495       21,495
   Other comprehensive income:
      Available-for-sale assets:
       Fair value adjustment             --      (17,672)     (17,672)
      Deferred gain on sale of
       hedges, net of
       amortization                      --         (653)        (653)
                                              ----------
   Other comprehensive income                 $    3,170
                                              ==========
Interest from notes receivable
   from stock sales                                               203
Dividends declared on preferred
   stock - $1.815 per share              --                   (5,009)
Dividends declared on common
   stock - $0.69 per share               --                  (14,828)
                                 ----------                ----------
Balance, September 30, 2000      $   (4,666)               $  294,423
                                 ==========                ==========

Balance, December 31, 2000       $   (4,666)               $  317,538
Comprehensive income:
   Net income                                 $   36,951       36,951
   Other comprehensive income:
      Available-for-sale assets:
        Fair value adjustment            --       54,556       54,556
   Swap Agreements:
      Cumulative adjustment for
        change in accounting
        principle                        --         (629)        (629)
      Fair value adjustment,
        net of amortization                      (24,898)     (24,898)
                                              ----------
   Other comprehensive income                 $   65,980
                                              ==========
Issuance of common stock              4,666                    88,936
Interest and principal payments
  on notes receivable from
  stock sales                                                     296
Dividends declared on preferred
   stock - $1.815 per share              --                   (5,009)
Dividends declared on common
   stock - $0.95 per share               --                  (20,722)
                                 ----------                ----------
Balance, September 30, 2001      $       --                $  447,019
                                 ==========                ==========
</Table>




See Notes to Consolidated Financial Statements.




                                       5
<PAGE>




THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

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

<Table>
<Caption>
                                                                Three Months Ended            Nine Months Ended
                                                                   September 30,                 September 30,
                                                              2001           2000            2001             2000
                                                          ------------    ------------    ------------    ------------
<S>                                                       <C>             <C>             <C>             <C>
Operating Activities:
  Net Income                                              $     14,585    $      7,016    $     36,951    $     21,495
  Adjustments to reconcile net income to net
   cash provided by operating activities:
     Amortization                                                5,542           4,067          14,205          13,282
     Net (gain) loss from investing activities                     476             270             560             934
     Hedging expense                                               507              --           1,326              --
     Change in assets and liabilities:
       Accrued interest receivable                                (736)             33            (303)            462
       Prepaid expenses and other                               (3,445)            466            (379)          6,145
       Accrued interest payable                                 (3,375)           (423)         (8,858)         (4,200)
       Accrued expenses and other                               (5,925)          1,018           3,612             458
                                                          ------------    ------------    ------------    ------------
         Net cash provided by operating activities               7,629          12,447          47,114          38,576
                                                          ------------    ------------    ------------    ------------

Investing Activities:
  Available-for-sale ARM securities:
     Purchases                                              (1,083,221)        (93,537)     (1,998,677)       (518,344)
     Proceeds on sales                                           6,462          22,812         108,056         112,255
     Principal payments                                        522,182         174,410       1,208,152         487,132
Collateral for collateralized notes payable:
     Principal payments                                         41,859          48,179         130,288         249,577
  ARM loans:
     Purchases                                                (414,553)       (111,899)       (665,505)       (131,895)
     Proceeds on sales                                              --              --             339              --
     Principal payments                                          6,380           1,438          22,983           2,970
  Purchase of interest rate cap agreements                          --              --              --            (539)
                                                          ------------    ------------    ------------    ------------
         Net cash provided by (used in) investing
           activities                                         (920,891)         41,403      (1,194,364)        201,156
                                                          ------------    ------------    ------------    ------------

Financing Activities:
  Net borrowings from (repayments of) reverse
      repurchase agreements                                    530,434         (93,735)        967,321         (39,018)
  Repayments of collateralized notes                           (41,446)        (47,805)       (129,287)       (248,285)
  Net borrowing from (repayments of) other borrowings          314,868          91,923         257,921          89,042
  Proceeds from common stock issued, net                        87,593              --          88,936              --
  Dividends paid                                               (10,445)         (6,611)        (25,731)        (19,837)
  Interest from notes receivable from stock sales                   89              68             292             203
                                                          ------------    ------------    ------------    ------------
         Net cash provided by (used in) financing
             activities                                        881,093         (56,160)      1,159,452        (217,895)
                                                          ------------    ------------    ------------    ------------

Net increase (decrease) in cash and cash equivalents           (32,169)         (2,310)         12,202          21,837

Cash and cash equivalents at beginning of period                57,476          34,381          13,105          10,234

                                                          ------------    ------------    ------------    ------------
Cash and cash equivalents at end of period                $     25,307    $     32,071    $     25,307    $     32,071
                                                          ============    ============    ============    ============
</Table>


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

See Notes to Consolidated Financial Statements


                                       6
<PAGE>



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SIGNIFICANT ACCOUNTING POLICIES

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

     In the opinion of management, all material adjustments, consisting of
     normal recurring adjustments, considered necessary for a fair presentation
     have been included. The operating results for the quarter and nine-months
     ended September 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 consists of 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 generally 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



                                       7
<PAGE>



               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 is ARM loans, which are
               accounted for in the same manner as the 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 also purchases and originates ARM loans
               and limits its exposure to credit losses by restricting its whole
               loan purchases and originations to ARM loans generally originated
               to "A" quality underwriting standards or, in the case of
               purchased whole loans, to loans that have at least five years of
               pay history and/or low loan to property value ratios. The Company
               further limits its exposure to credit risk by limiting its
               investment in investment grade securities that are rated A, or
               equivalent, BBB, or equivalent, or ARM loans originated to "A"
               quality underwriting standards ("Other Investments") to no more
               than 30% of the portfolio, including the subordinate classes of
               securities retained as part of the Company's securitization of
               loans.

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

               The Company also makes a monthly provision for estimated credit
               losses on its portfolio of ARM loans, which is an increase to the
               allowance for loan losses. The provision for estimated credit
               losses on loans is based on loss statistics of the real estate
               industry for similar loans, taking into consideration factors



                                       8
<PAGE>



               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 or a borrower declares bankruptcy, 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 have been 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 Company determined that this
               hedge utilizing Cap Agreements was not effective during the third
               quarter and, as a result, the Company recorded the change in fair
               value of the Cap Agreements as hedging expense with no offsetting
               amount associated with the change in fair value of the hedged
               assets. The carrying value of the Cap Agreements is included in
               ARM securities on the balance sheet.

               Upon the adoption of FAS 133 on January 1, 2001, the Company
               recorded a cumulative adjustment for a change in accounting
               principles in the amount 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



                                       9
<PAGE>



               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
               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 Life Cap 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 do 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 between the fixed-rate period of the
               Hybrid ARMs and the fixed-rate period of the Swap Agreements to a
               duration difference of no more than one year ("Duration").
               Duration measures market price volatility of financial
               instruments as their balances and interest rates change over
               time. The Company measures the Duration of its Hybrid ARMs, fixed
               rate liabilities financing Hybrid ARMs and equity using various
               financial models and empirical data.

               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 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
               September 30, 2001, the net unrealized losses on Swap Agreements
               and



                                       10
<PAGE>



               deferred gains from terminated Swap Agreements recorded in
               Other comprehensive income was $26.6 million. The Company
               estimates that over the next twelve months, approximately $17.5
               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 $30.2
               million as of September 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 estimated that over the
               twelve months following the adoption of FAS 133, approximately
               $0.9 million of the deferred gain would be reclassified from
               Other comprehensive income to earnings. As of September 30, 2001,
               $1.0 million of deferred gains from other hedging activity
               remained in Other comprehensive income and the Company estimates
               that over the next twelve months, $0.7 million will be
               reclassified to earnings.

          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 nine months ended September 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.



                                       11
<PAGE>




               Following is information about the computation of the earnings
               per share data for the three and nine-month periods ended
               September 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 September 30, 2001
-------------------------------------
Net income                                      $        14,585

Less preferred stock dividends                           (1,670)
                                                ---------------
Basic EPS, income available to
   common shareholders                                   12,915              25,004       $         0.52
                                                                                          ==============
Effect of dilutive securities:

   Stock options                                              -                  25
                                                ---------------      --------------
Diluted EPS                                     $        12,915              25,029       $         0.52
                                                ===============      ==============       ==============
Three Months Ended September 30, 2000
-------------------------------------
Net income                                      $         7,016

Less preferred stock dividends                           (1,670)
                                                ---------------
Basic EPS, income available to
   common stockholders                                    5,346              21,490       $         0.25
                                                                                          ==============
Effect of dilutive securities:

   Stock options                                             --                  26
                                                ---------------      --------------
Diluted EPS                                     $         5,346              21,516       $         0.25
                                                ===============      ==============       ==============
</Table>

<Table>
<Caption>

                                                                                             Earnings
                                                    Income               Shares             Per Share
                                                ---------------      ---------------      ---------------
<S>                                            <C>                   <C>                  <C>
Nine Months Ended September 30, 2001
-------------------------------------
Net income                                      $        36,951

Less preferred stock dividends                           (5,009)
                                                ---------------

Basic EPS, income available to
   common shareholders                                   31,942              22,841       $         1.40
                                                                                          --------------

Effect of dilutive securities:

   Stock options                                             --                  53
                                                ---------------      --------------
Diluted EPS                                     $        31,942              22,894       $         1.40
                                                ===============      ==============       ==============

Nine Months Ended September 30, 2000
-------------------------------------
Net income                                      $        21,495

Less preferred stock dividends                           (5,009)
                                                ---------------

Basic EPS, income available to
   common stockholders                                   16,486              21,490       $         0.77
                                                                                          ==============

Effect of dilutive securities:

   Stock options                                             --                   6
                                                ---------------      --------------
Diluted EPS                                     $        16,486              21,496       $         0.77
                                                ===============      ==============       ==============
</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
               $7.375 per share during the nine months ended September 30, 2001
               and 2000, respectively. The conversion of preferred



                                       12
<PAGE>



               stock was not included in the computation of diluted EPS because
               such conversion would increase the diluted EPS.

          USE OF ESTIMATES

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

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

               The following tables present the Company's ARM assets as of
               September 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):

<Table>
<Caption>
                 September 30, 2001:
                                                      Available-
                                                        for-Sale        Collateral for
                                                     ARM Securities      Notes Payable         ARM Loans              Total
                                                    ----------------    ----------------    ----------------    ----------------
<S>                                                 <C>                 <C>                 <C>                 <C>
                  Principal balance outstanding     $      4,207,997    $        476,399    $        512,718    $      5,197,114
                  Net unamortized premium                     39,182               9,636               1,832              50,650
                  Allowance for losses                        (1,926)             (3,269)               (274)             (5,469)
                  Cap agreements                               3,655                  --                  --               3,655
                  Principal payment receivable                24,325                  --                  --              24,325
                                                    ----------------    ----------------    ----------------    ----------------
                     Amortized cost, net                   4,273,233             482,766             514,276           5,270,275
                  Gross unrealized gains                      25,914               4,689               2,572              33,175
                  Gross unrealized losses                    (51,060)             (3,267)               (634)            (54,961)
                                                    ----------------    ----------------    ----------------    ----------------
                     Fair value                     $      4,248,087    $        484,188    $        516,214    $      5,248,489
                                                    ================    ================    ================    ================

                     Carrying value                 $      4,248,087    $        482,766    $        514,276    $      5,245,129
                                                    ================    ================    ================    ================
</Table>

<Table>
<Caption>
                  December 31, 2000:

                                                      Available-
                                                        for-Sale        Collateral for
                                                     ARM Securities      Notes Payable         ARM Loans            Total
                                                    ----------------    ----------------    ----------------    ----------------
<S>                                                 <C>                 <C>                 <C>                 <C>
                  Principal balance outstanding     $      3,359,301    $        606,686    $        165,131    $      4,131,118
                  Net unamortized premium                     56,759              11,759                (567)             67,951
                  Allowance for losses                        (1,869)             (2,949)               (151)             (4,969)
                  Cap agreements                               3,705                 200                  --               3,905
                  Principal payment receivable                19,883                  --                  --              19,883
                                                    ----------------    ----------------    ----------------    ----------------
                     Amortized cost, net                   3,437,779             615,696             164,413           4,217,888
                  Gross unrealized gains                       7,526                  45               2,029               9,600
                  Gross unrealized losses                    (85,953)            (10,499)                (97)            (96,549)
                                                    ----------------    ----------------    ----------------    ----------------
                     Fair value                     $      3,359,352    $        605,242    $        166,345    $      4,130,939
                                                    ================    ================    ================    ================
                     Carrying value                 $      3,359,352    $        615,696    $        164,413    $      4,139,461
                                                    ================    ================    ================    ================
</Table>

               During the nine-month period ended September 30, 2001, the
               Company sold $108.1 million of ARM securities, of which $6.8
               million settled 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
               nine-month period for a gain of $2,000. During the nine-month
               period ended September 30, 2000, the Company realized a gain of
               $49,000 on the sale of $112.2 million of ARM securities. The
               Company did not sell any assets during the three month period
               ended September 30, 2001.



                                       13
<PAGE>



               During the nine month period ended September 30, 2001, the
               Company securitized $272.2 million of its ARM loans into a series
               of privately-issued multi-class ARM securities. The Company
               retained, for its ARM portfolio, all of the classes of the
               securities created. In addition, during the three- and nine-month
               periods ended September 30, 2001, the Company swapped $6.7
               million and $20.2 million ARM loans, respectively, for FNMA
               guaranteed certificates. The Company did not account for any of
               these securitizations as sales and, therefore, did not record any
               gain or loss in connection with these securitizations. 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 September 30, 2001, the
               Company had $1.070 billion of ARM assets that have resulted from
               the Company's securitization efforts.

               As of September 30, 2001, the Company had reduced the cost basis
               of its ARM securities by $1,926,000 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 nine 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 $119,000.

               The following tables summarize ARM loan delinquency information
               as of September 30, 2001 and December 31, 2000 (dollar amounts in
               thousands):

               2001

<Table>
<Caption>
                                                                    Percent
                                        Loan           Loan          of ARM       Percent of
                Delinquency Status      Count         Balance       Loans (1)     Total Assets
               --------------------   -----------   -----------    -----------    ------------
<S>                                   <C>           <C>            <C>            <C>
               60 to 89 days                    2   $       608           0.04%          0.01%
               90 days or more                  1           140           0.01           0.00
               In foreclosure                   4           724           0.04           0.02
                                      -----------   -----------    -----------    -----------
                                                7   $     1,472           0.09%          0.03%
                                      ===========   ===========    ===========    ===========
</Table>

               2000

<Table>
<Caption>
                                                     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 $1.551
               billion and $1.165 billion at September 30, 2001 and December 31,
               2000, respectively.

               During the first nine months of 2001, in accordance with its
               credit policies, the Company recorded a $443,000 provision for
               estimated credit losses on its loan portfolio. The following
               table summarizes the activity for the allowance for losses on ARM
               loans for the nine months ended September 30, 2001 and 2000
               (dollar amounts in thousands):

<Table>
<Caption>
                                                  2001            2000
                                               -----------     -----------
<S>                                            <C>              <C>
                   Beginning balance           $     3,100      $    2,208
                   Provision for losses                443             803
                   Charge-offs, net                     --              --
                                               -----------     -----------
                   Ending balance              $     3,543     $     3,011
                                               ===========     ===========
</Table>

               As of September 30, 2001, the Company owned two real estate
               properties as a result of foreclosing on delinquent loans in the
               aggregate amount of $0.7 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.



                                       14
<PAGE>



               As of September 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          $    195,184
                   Whole loans - correspondent               153,770
                   Whole loans - direct originations         103,826
                                                        ------------
                                                        $    452,780
                                                        ============
</Table>

               The average effective yield on the ARM assets owned was 5.65% as
               of September 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 September 30, 2001 and December 31, 2000, the Company had
               purchased Cap Agreements with a remaining notional amount of
               $2.344 billion and $2.624 billion, respectively. The notional
               amount of the Cap Agreements purchased declined 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 10.06%. The Cap Agreements owned by the
               Company, prior to the quarter ended September 30, 2001, were
               hedging the fair value of the Life Cap component of the Company's
               ARM securities, which had an average lifetime interest rate cap
               of 11.36% on that date. During the quarter ended September 30,
               2001, the change in fair value of the Cap Agreements compared to
               the change in the fair value of the hedged assets did not meet
               the effectiveness requirements of FAS 133. Therefore, the Company
               recorded the change in fair value of the Cap Agreements as
               hedging expense and did not record an offsetting amount
               associated with the change in fair value of the hedged assets.
               The Cap Agreements had an average maturity of 1.7 years as of
               September 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 three- and nine-month periods ended September 30,
               2001, the Company recognized expenses of $507,000 and $1,124,000,
               respectively, 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
               September 30, 2001 amounted to $209,000 and is included in ARM
               securities on the balance sheet.

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 September 30, 2001, the Company had outstanding $3.952
               billion of reverse repurchase agreements with a weighted average
               borrowing rate of 3.27% and a weighted average remaining maturity
               of 2.3 months. As of September 30, 2001, $1.031 billion of the
               Company's borrowings were variable-rate term reverse repurchase
               agreements with original maturities that range from 6 months to
               24 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 September 30, 2001 were collateralized by ARM assets with a
               carrying value of $4.175 billion, including accrued interest.



                                       15
<PAGE>



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

<Table>
<S>                                        <C>
               Within 30 days              $  2,594,744
               31 to 89 days                     63,273
               90 days or greater             1,264,176
                                           ------------
                                              3,922,193
               Swap Agreements                   30,048
                                           ------------
                                           $  3,952,241
                                           ============
</Table>

               As of September 30, 2001, the Company had entered into three
               whole loan financing facilities. One of the whole loan financing
               facilities has a committed borrowing capacity of $150 million and
               matures in January 2002. The Company has a second committed whole
               loan financing facility that has a borrowing capacity of $300
               million and matures in March 2002. The Company has a third whole
               loan financing facility that does not have a stated maturity or a
               committed borrowing capacity, although the Company expects to
               convert this into a committed facility with a $150 million
               borrowing capacity during the fourth quarter of 2001. As of
               September 30, 2001, the Company had $416.5 million borrowed
               against these whole loan financing facilities at an effective
               cost of 3.09%. The amount borrowed on the whole loan financing
               agreements at September 30, 2001 was collateralized by ARM loans
               with a carrying value of $435.2 million, including accrued
               interest.

               The whole loan financing facility with a borrowing capacity of
               $300 million, discussed above, is a securitization transaction in
               which the Company transfers groups of whole loans to a
               wholly-owned bankruptcy remote special purpose subsidiary. The
               subsidiary in turn simultaneously transfers its interest in the
               loans to a trust, which issues beneficial interests in the loans
               in the form of a note and a subordinated certificate. The note is
               then used to collateralize borrowings. This whole loan financing
               facility works similar to a secured line of credit whereby the
               Company can deliver loans into the facility and take loans out of
               the facility at the Company's discretion, subject to the terms
               and conditions of the facility. This securitization transaction
               is accounted for as a secured borrowing. 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 September 30, 2001, the Notes had a net balance of $474.6
               million, an effective interest cost of 3.40%, which changes each
               month at a spread to one-month LIBOR. As of September 30, 2001,
               these Notes were collateralized by ARM loans with a principal
               balance of $508.4 million. The Notes mature on January 25, 2029
               and are callable by the Company at par once the balance of the
               Notes is reduced to 25% of their original balance. In connection
               with the issuance and modification of the Notes, the Company
               incurred costs of approximately $6.0 million, which is being
               amortized over the expected life of the Notes. Since the Notes
               are paid down as the collateral pays down, the amortization of
               the issuance cost will be adjusted periodically based on actual
               payment experience. If the collateral pays down faster than
               currently estimated, then the amortization of the issuance cost
               will increase and the effective cost of the Notes will increase
               and, conversely, if the collateral pays down slower than
               currently estimated, then the amortization of issuance cost will
               be decreased and the effective cost of the Notes will also
               decrease.

               During September 2001, the Company entered into a $10 million
               line of credit agreement collateralized by payment receivables in
               connection with Agency ARM securities. The Company did not borrow
               any proceeds from this line of credit during the third quarter of
               2001. The interest rate on this credit line varies with one-month
               LIBOR.

               As of September 30, 2001, the Company was a counterparty to
               thirty-five interest rate swap agreements ("Swaps") having an
               aggregate notional balance of $1.217 billion. These Swaps hedge
               the cost of financing Hybrid ARMs during their fixed rate term,
               generally three to ten years. The Company limits the interest
               rate repricing mismatch between the fixed-rate period of Hybrid
               ARMs and the fixed rate period of Swaps to a Duration difference
               of no more than one year. As of September 30, 2001, these Swaps
               had a weighed average



                                       16
<PAGE>



               maturity of 2.9 years. In accordance with these Swaps, the
               Company will pay a fixed rate of interest during the term of
               these Swaps and receive a payment that varies monthly with the
               one-month LIBOR rate. As a result of entering into these Swaps
               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 26 days to 286 days. As
               of September 30, 2001, the Swap Agreements were collateralized by
               ARM assets with a carrying value of $18.3 million, including
               accrued interest and cash in the amount of $2.5 million.

               The total cash paid for interest was $49.3 million and $62.0
               million during the quarters ended September 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 September
              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>
                                                                    September 30, 2001               December 31, 2000
                                                               -----------------------------   ------------------------------
                                                                 Carrying         Fair           Carrying          Fair
                                                                  Amount          Value           Amount           Value
                                                               -------------   -------------   -------------    -------------
<S>                                                            <C>             <C>             <C>              <C>
               Assets:
                  ARM assets                                   $   5,244,920   $   5,248,280   $   4,137,943    $   4,129,421
                  Cap Agreements/Option Contracts                        209             209           1,518            1,518

               Liabilities:
                  Collateralized notes payable                       474,623         476,726         603,910          605,927
                  Other borrowings                                   416,514         416,514         158,593          158,593
                  Swap agreements                                     31,177          31,177            (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 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.



                                       17
<PAGE>

NOTE 5. COMMON AND PREFERRED STOCK

               On May 31, 2001, the Company filed a combined shelf registration
               statement on Form S-3 for $409 million of equity securities,
               which included $109 million of securities that were registered
               under a previously filed registration statement. On July 6, 2001,
               the combined registration statement for $409 million, which
               includes the possible issuances of common stock, preferred stock
               or warrants, was declared effective by the Securities and
               Exchange Commission. During August 2001, the Company completed a
               public offering of 5,791,500 shares of its common stock, for
               which it received net proceeds of $86.9 million. As of September
               30, 2001, $316.8 million of the Company's securities remained
               registered for future issuance and sale under its currently
               effective registration statement.

               On August 8, 2001, in accordance with the terms of the Company's
               Stock Option and Incentive Plan, the Company granted 31,969
               restricted shares of its common stock to directors and officers
               of the Company and certain employees of the Manager in connection
               with the public offering in August 2001 of its common stock. The
               restricted shares vest over a three-year period.

               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 in the
               Rights Agreement). 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 three- and nine-month periods ended September 30,
               2001, the Company issued 53,343 and 88,077, respectively, shares
               of common stock under its Dividend Reinvestment and Stock
               Purchase Plan and received net proceeds of $0.8 million and $1.3
               million, respectively.

               During the first nine months of 2001, stock options for 327,259
               shares of common stock were exercised at an average price of
               $8.47. The Company received net proceeds of $0.6 million, and
               $2.1 million of notes receivable were executed in connection with
               the exercise of certain options.

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

               On October 22, 2001, the Company declared the third quarter 2001
               dividend of $0.50 per common share, which will be paid on
               November 19, 2001 to common shareholders of record as of November
               2, 2001.

               On September 17, 2001, the Company declared a third quarter
               dividend of $0.605 per share to the shareholders of the Series A
               9.68% Cumulative Convertible Preferred Stock which was paid on
               October 10, 2001 to preferred shareholders of record as of
               September 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.



                                       18
<PAGE>

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") and restricted common stock.

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

               Restricted shares of common stock are granted at the discretion
               of the Board of Directors and approval of the Stock Option
               Committee. Restricted shares of common stock are generally
               granted in lieu of ISOs and NQSOs, based on equivalent values as
               calculated by a Black Scholes option model. At the time
               restricted shares are granted, the Board of Directors determines
               the vesting period. In general, a portion of the restricted
               shares vest at the end of each year of the vesting period and the
               shares participate in the common dividends declared during the
               vesting period. The Company expenses the value of the restricted
               shares, based on their value as of the date of grant, over the
               vesting period.

               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 September 30, 2001, the Company granted
               31,969 shares of restricted stock and 173,167 DERs. During the
               quarter, 71,930 options to buy common shares were exercised at an
               average price of $10.47 per share and during the nine months
               ended September 30, 2001, 327,259 options to buy common shares
               were exercised at an average price of $8.47 per share.

               As of September 30, 2001, the Company had 44,170 options
               outstanding at exercise prices of $7.375 to $14.375 per share,
               all of which were exercisable. The weighted average exercise
               price of the options outstanding was $8.35 per share. As of
               September 30, 2001, there were 564,323 DERs outstanding, of which
               536,162 were vested, and 71,582 PSRs outstanding. The Company
               recorded an expense associated with DERs, PSRs and restricted
               stock of $296,000 and $108,000 for the three-month periods ended
               September 30, 2001 and 2000, respectively. During the nine-month
               periods ended September 30, 2001 and 2000, the Company recorded
               an expense associated with DERs and PSRs in the amount of
               $818,000 and $154,000, 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 the option of each borrower. As of September 30,
               2001, there were $7.4 million of notes receivable from stock
               sales outstanding.



                                       19
<PAGE>

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: 1.18% of the first $300 million of
              Average Shareholders' Equity, plus 0.87% 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 September 30, 2001 and 2000, the Company
              paid the Manager $1,249,000 and $1,029,000, respectively, in base
              management fees in accordance with the terms of the Management
              Agreements. For the nine-month periods ended September 30, 2001
              and 2000, the Company paid the Manager base management fees of
              $3,463,000 and $3,086,000, 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 nine-month periods
              ended September 30, 2001, the Manager earned performance-based
              compensation in the amount of $1,627,000 and $3,624,000,
              respectively, in accordance with the terms of the Agreement. For
              the three- and nine-month periods ended September 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 nine-month periods ended September 30, 2001,
              the Company's mortgage banking subsidiary, TMHL, reimbursed the
              Manager $523,000 and $975,000 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 $23,000 and $67,000,
              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 September 30, 2001
              and 2000, the combined amount of rent paid to the Manager was
              $4,000 and $9,000, respectively. During the nine-month periods
              ended September 30, 2001 and 2000, the combined amount of rent
              paid to the Manager was $11,000 and $24,000, respectively.



                                       20
<PAGE>

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

Certain information contained in this Quarterly Report on Form 10-Q constitutes
"Forward-Looking Statements" within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act, which can be
identified by the use of forward-looking terminology such as "may," "will,"
"expect," "anticipate," "estimate," "Plan," "intend," "aim" 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 limits its
ownership of Hybrid ARMs with fixed-rate periods of greater than five years to
no more than 10% of the Company's total assets. The Company also limits its
interest rate mismatch on the funding of its Hybrid ARMs (the difference between
the Duration of the fixed-rate period of Hybrid ARMs and the Duration of the
fixed-rate liabilities and equity funding Hybrid ARMs) to a Duration difference
of no more than one year. Duration measures market price volatility of financial
instruments as their balances and interest rates change over time. The Company
measures the Duration of its Hybrid ARMs, fixed rate liabilities financing
Hybrid ARMs and equity using various financial models and empirical data. On
October 22, 2001, the Company's Board of Directors eliminated the overall
limitation on Hybrid ARMs that previously limited total Hybrid ARMs to 40% of
investment assets.




                                       21
<PAGE>

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.

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



                                       22
<PAGE>

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 September 30, 2001, the Company held total assets of $5.309 billion, $5.245
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
September 30, 2001, 88.0% of the assets held by the Company, including cash and
cash equivalents, were High Quality assets, 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. Furthermore, the Company's
assets included $514.3 million of loans held for securitization as of the end of
the quarter. Once these loans are securitized, the Company estimates that its
High Quality ARM assets will be approximately 98% of its total assets. Of the
ARM assets currently owned by the Company, 79.7% are in the form of
adjustable-rate pass-through certificates or ARM loans. The remainder are
floating rate classes of CMOs (7.2%), short-term fixed-rate classes of CMOs
(9.8%) or investments in floating rate classes of CBOs (3.3%) backed primarily
by ARM mortgaged-backed securities.

The following table presents a schedule of ARM assets owned at September 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>
                                                   September 30, 2001                     December 31, 2000
                                             --------------------------------      --------------------------------
                                              Carrying            Portfolio          Carrying           Portfolio
                                                Value                Mix              Value                Mix
                                             ------------        ------------      ------------        ------------
<S>                                          <C>                 <C>               <C>                 <C>
HIGH QUALITY:
   Freddie Mac/Fannie Mae                    $  2,626,887                50.1%     $  2,187,180                52.9%
   Privately Issued:
     AAA/Aaa Rating                             1,608,994(1)             30.7         1,309,584(1)             31.6
     AA/Aa Rating                                 346,154                 6.6           351,499                 8.5
                                             ------------        ------------      ------------        ------------
       Total Privately Issued                   1,955,148                37.3         1,661,083                40.1
                                             ------------        ------------      ------------        ------------

                                             ------------        ------------      ------------        ------------
       Total High Quality                       4,582,035                87.4         3,848,263                93.0
                                             ------------        ------------      ------------        ------------

OTHER INVESTMENT:
   Privately Issued:
     A Rating                                      29,064                 0.6            13,724                 0.3
     BBB/Baa Rating                                78,088                 1.5            72,114                 1.7
     BB/Ba Rating and Other                        41,666(1)              0.7            40,947(1)              1.0
   ARM loans pending securitization               514,276                 9.8           164,413                 4.0
                                             ------------        ------------      ------------        ------------
       Total Other Investment                     663,094                12.6           291,198                 7.0
                                             ------------        ------------      ------------        ------------

       Total ARM Portfolio                   $  5,245,129               100.0%     $  4,139,461               100.0%
                                             ============        ============      ============        ============
</Table>

----------

     (1)  The AAA Rating category includes $482.8 million and $615.7 million of
          whole loans as of September 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 September 30, 2001 and December 31, 2000. The
          subordinated certificate is included in the BB/Ba Rating and Other
          category.



                                       23
<PAGE>

As of September 30, 2001, the Company had reduced the cost basis of its ARM
securities by $1,926,000 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 nine 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 $119,000.

As of September 30, 2001, the Company's ARM loan portfolio included 7 delinquent
loans (60 days or more delinquent) with an aggregate balance of $1.5 million.
The ARM loan portfolio also includes two properties ("REO") that the Company
acquired as the result of foreclosure processes in the amount of $0.7 million.
The average original effective loan-to-value ratio on the 7 delinquent loans and
REO is approximately 74%. The Company believes that its current level of
reserves, $3,543,000, is adequate to cover estimated losses from these loans and
REO properties. The Company recorded a provision for estimated loan losses in
the amount of $443,000 during the first nine months of 2001. The Company's
credit reserve policy regarding ARM loans is to record a provision based on the
outstanding principal balance of loans (including loans securitized by the
Company for which the Company has retained first loss exposure), subject to
adjustment on certain loans or pools of loans based upon factors such as, but
not limited to, age of the loans, borrower payment history, low loan-to-value
ratios, historical loss experience, current economic conditions and quality of
underwriting standards applied by the originator.

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

                               ARM ASSETS BY INDEX
                          (Dollar amounts in thousands)

<Table>
<Caption>
                                                        September 30, 2001                  December 31, 2000
                                                  ------------------------------      ------------------------------
                                                   Carrying          Portfolio         Carrying          Portfolio
                                                     Value              Mix              Value              Mix
                                                  ------------      ------------      ------------      ------------
<S>                                               <C>               <C>               <C>               <C>
ARM ASSETS:
    INDEX:
       One-month LIBOR                            $    579,979              11.1%     $    651,502              15.7%
       Three-month LIBOR                               173,507               3.3           158,512               3.8
       Six-month LIBOR                                 285,271               5.4           430,908              10.4
       Six-month Certificate of Deposit                155,463               3.0           230,934               5.6
       Six-month Constant Maturity Treasury             18,477               0.4            22,330               0.5
       One-year Constant Maturity Treasury           1,345,031              25.6         1,402,764              33.9
       Cost of Funds                                   207,939               4.0           164,697               4.0
                                                  ------------      ------------      ------------      ------------
                                                     2,765,667              52.8         3,061,647              73.9
                                                  ------------      ------------      ------------      ------------

HYBRID ARM ASSETS                                    1,961,480              37.4         1,050,199              25.4
ONE-YEAR MATURITY - FIXED RATE                         517,982               9.8            27,615               0.7
                                                  ------------      ------------      ------------      ------------
                                                  $  5,245,129             100.0%     $  4,139,461             100.0%
                                                  ============      ============      ============      ============
</Table>

The ARM portfolio had a current weighted average coupon of 6.49% at September
30, 2001. This consisted of an average coupon of 6.50% on the hybrid portion of
the portfolio and an average coupon of 6.48% on the rest of the portfolio. If
the non-hybrid portion of the portfolio had been "fully indexed," the weighted
average coupon of the ARM portfolio would have been approximately 5.63%, 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 September 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
into 2002 until it reaches the "fully indexed" rate.



                                       24
<PAGE>

At September 30, 2001, the current yield of the ARM assets portfolio was 5.65%,
compared to 7.06% as of December 31, 2000, with an average term to the next
repricing date of 569 days as of September 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 93 days and the hybrid portion had an average term to
the next repricing of 3.7 years at September 30, 2001. As of September 30, 2001,
Hybrid ARMs comprised 37.4% 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 September 30, 2001, the
Duration mismatch was approximately seven 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 1.41% as of September 30, 2001, compared to
December 31, 2000, is primarily due to the decreased weighted average interest
rate coupon discussed above, which decreased by 1.26%. The yield also declined
as a result of a higher level of net premium amortization, which had the effect
of lowering the yield by 0.16% and the impact of non-interest earning principal
payments receivables, which also increased during the first nine months of 2001,
decreasing the portfolio yield by 0.01%, as the average rate of ARM portfolio
prepayments during the third quarter of 2001 increased to 30% Constant
Prepayment Rate ("CPR") from the 19% CPR during the first quarter of 2001 and
28% during the second quarter of 2001. These unfavorable factors that decreased
the ARM portfolio yield were partially offset by the elimination of the 0.02%
effect of hedging cost from the Company's interest rate spread computation. With
the adoption of FAS 133, the Company carries all hedging instruments at their
fair value and records 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 September 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 $1.551 billion.

                ARM AND HYBRID ARM LOAN PORTFOLIO CHARACTERISTICS

<Table>
<Caption>
                                                        Average             High              Low
                                                      ------------      ------------      ------------
<S>                                                   <C>               <C>               <C>
     Unpaid principal balance                         $    338,524      $  5,135,635      $      1,388
     Coupon rate on loans                                     6.87%            10.13%             4.75%
     Pass-through rate                                        6.53%             9.61%             4.48%
     Pass-through margin                                      1.99%             3.48%             0.61%
     Lifetime cap                                            12.56%            16.75%             9.75%
     Original Term (months)                                    355               480                84
     Remaining Term (months)                                   329               477                58

     Geographic Distribution (Top 5 States):                  Property type:
         California                   32.17%                      Single-family            67.64%
         Georgia                       7.88                       DeMinimus PUD            19.96
         Florida                       7.60                       Condominium               7.92
         New York                      6.40                       Other                     4.48
         Colorado                      5.39

     Occupancy status:                                        Loan purpose:
         Owner occupied               86.13%                      Purchase                 55.80%
         Second home                  11.03                       Cash out refinance       25.60
         Investor                      2.84                       Rate & term refinance    18.60

     Documentation type:                                      Periodic Cap:
         Full/Alternative             90.36%                      None                     34.71%
         Other                         9.64             > or = to 3.00%                     2.03
                                                                  2.00%                    62.36
     Average effective original                                   1.00%                     0.22
         loan-to-value:               67.23%                      0.50%                     0.68
</Table>



                                       25
<PAGE>

As of September 30, 2001, the Company serviced $333.5 million of its loans and
had 719 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 September 30, 2001, the Company purchased $1.083
billion of ARM securities, 98.9% of which were High Quality assets and $414.6
million of ARM loans, generally originated to "A" quality underwriting
standards. Of the ARM assets acquired during the three months ended September
30, 2001, approximately 63% were Hybrid ARMs, 27% were fixed-rate, short-term
securities, 5% were indexed to a cost of funds index, 3% were indexed to LIBOR
and 2% were indexed to U.S. Treasury bill rates. The following table compares
the Company's ARM asset acquisition and origination activity for each of the
consecutive quarters of 2001, along with total activity for the first nine
months of 2001 (dollar amounts in thousands):

<Table>
<Caption>
                                                        For the quarters ended:
                                           -------------------------------------------------
                                           March 31, 2001    June 30, 2001    Sept. 30, 2001    Year to Date
                                           --------------    -------------    --------------    ------------
<S>                                        <C>              <C>              <C>                <C>
ARM SECURITIES:
   Freddie Mac/Fannie Mae                    $    186,834     $    257,434     $    867,466        1,311,734
   High Quality, privately issued                 174,398          156,702          203,539          534,639
   Other Investment ARM securities                 12,773            2,372           12,216           27,361
                                             ------------     ------------     ------------     ------------
                                                  374,005          416,508        1,083,221        1,873,734
                                             ------------     ------------     ------------     ------------

LOANS:
   Bulk acquisitions                               38,688          102,684          199,229          340,601
   Correspondent origination                       27,908           58,557          191,622          278,087
   Direct retail originations                       2,514           20,602           23,702           46,818
                                             ------------     ------------     ------------     ------------
                                                   69,110          181,843          414,553          665,506
                                             ------------     ------------     ------------     ------------

       Total production                      $    443,115     $    598,351     $  1,497,774        2,539,240
                                             ============     ============     ============     ============
</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 nine months of 2001 and for the years
2000, 1999 and 1998 was (0.03%), (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 0.97% as of September
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 nine-month periods ended September 30, 2001, the
Company securitized $6.8 million and $292.4 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, 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 nine months of 2001, 99.5% were at least
investment grade securities and 0.5% were subordinate securities that provide
credit support to the investment grade securities.

As of September 30, 2001, the Company had commitments to purchase $195.2 million
of ARM securities and $257.6 million ARM loans through its origination channels.

During the nine-month period ended September 30, 2001, the Company sold $108.1
million of ARM securities and realized $244,000 in gains and $245,000 in losses.
In addition, the Company sold $0.3 million of fixed-rate loans that it
originated for a gain of $2,000. The Company did not sell any assets during the
third quarter of 2001.



                                       26
<PAGE>

For the quarter ended September 30, 2001, the Company's mortgage assets paid
down at an approximate average annualized CPR of 30% compared to 18% for the
quarter ended September 30, 2000 and 28% for the quarter ended June 30, 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 1.69% from a negative adjustment of 2.28% of the
portfolio as of December 31, 2000, to a negative adjustment of 0.59% as of
September 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
$25.1 million as of September 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 September 30, 2001, the fair value of the Company's Cap Agreements
was $0.2 million compared to a fair value of $1.3 million as of December 31,
2000. During the quarter ended September 30, 2001, the change in the fair value
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 the Cap Agreements, $0.4 million, was recorded as a hedging
expense with no offsetting change recorded for the change in fair value of the
hedged asset, along with a reclassification to earnings of $0.1 million of the
transition adjustment recorded in Accumulated other comprehensive income on
January 1, 2001. At September 30, 2001, the Cap Agreements had a remaining
notional balance of $2.344 billion with an average final maturity of 1.7 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
10.06%.



                                       27
<PAGE>

The following table presents information about the Company's Cap Agreement
portfolio as of September 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>
 $        109,910              8.29%         $        109,554             6.22%                  1.8 Years
          200,216              8.42                   200,000             7.50                   2.2
          323,080              9.56                   324,029             8.00                   1.3
           24,841             10.10                    25,000             9.00                   1.2
           56,680             10.10                    56,449             9.50                   1.1
          336,294             10.84                   336,030            10.00                   1.0
          163,532             11.52                   162,933            10.50                   0.8
          469,905             12.32                   470,000            11.00                   2.0
          279,849             12.79                   280,000            11.50                   2.9
          349,650             13.89                   350,000            12.00                   2.0
           20,328             16.93                    29,893            12.50                   0.2
 ----------------             -----          ----------------            -----                   ---------
 $      2,334,285             11.36%         $      2,343,888            10.06%                  1.7 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.

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 the Company's variable
rate and short-term borrowings such that the average repricing of the borrowings
more closely matches the average repricing of the Company's ARM assets.
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 Hybrid ARMs and the Duration of the
borrowings funding Hybrid ARMs) to a mismatched Duration of approximately one
year or less. As of September 30, 2001, the Duration mismatch was approximately
seven months.

As of September 30, 2001, the Company was a counterparty to thirty-five Swap
Agreements having an aggregate notional balance of $1.217 billion. These Swap
Agreements hedged the fixed interest rate period of Hybrid ARMs and had a
weighed average maturity of 2.9 years. 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 26 days to 286 days. The average remaining fixed rate
term of the Company's Hybrid ARM assets as of September 30, 2001 was 3.7 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 September 30, 2001, are being
carried on the balance sheet at their negative fair value of $31.2 million. As
of September 30, 2001, the fair value adjustment for Swap Agreements was a
decrease to "Accumulated other comprehensive income" in the amount of $30.2
million. Since the Swap Agreements and the short-term borrowings they hedge have
nearly identical terms and



                                       28
<PAGE>

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 SEPTEMBER 30, 2001

For the quarter ended September 30, 2001, the Company's net income was
$14,585,000, or $0.52 per share (Basic and Diluted EPS), based on a weighted
average of 25,004,000 shares outstanding. That compares to $7,016,000, or $0.25
per share (Basic and Diluted EPS) for the quarter ended September 30, 2000,
based on a weighted average of 21,490,000 shares outstanding. Net interest
income for the quarter totaled $19,793,000, compared to $8,978,000 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 third quarter
of 2001, the Company recorded hedging expense of $507,000. In prior years,
before the adoption of FAS 133, the Company reported hedging expense as a
component of net interest income. Additionally, during the third quarter of
2001, the Company reduced its earnings and the carrying value of its ARM assets
by reserving $231,000 for estimated credit losses, compared to $270,000 during
the third quarter of 2000. During the third quarter of 2001, the Company
incurred operating expenses of $4,470,000, consisting of a base management fee
of $1,249,000, a performance based fee of $1,627,000 and other operating
expenses of $1,594,000. During the same period of 2000, the Company incurred
operating expenses of $1,692,000, consisting of a base management fee of
$1,029,000 and other operating expenses of $663,000.

The Company's return on average common equity was 13.94% for the quarter ended
September 30, 2001 compared to 6.56% for the quarter ended September 30, 2000
and compared to 11.73% for the prior quarter ended June 30, 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 close to 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%
Sep 30, 2001     21.36%     0.55%(3)      0.25%       -        3.07%     1.76%      1.80%   13.94%      4.99%      8.95%
</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.



                                       29
<PAGE>

The increase in the Company's return on common equity in the third quarter of
2001, compared to the third quarter of 2000, is due to the improvement in the
net interest spread between the Company's interest-earning assets and
interest-bearing liabilities, a decrease in the Company's provision for losses,
and a decrease in the impact of the preferred dividend. 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.

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 September 30,
                                                    ------------------------------------
                                                          2001              2000
                                                      ------------      ------------
<S>                                                 <C>               <C>
     Coupon interest income on ARM assets             $     72,164      $     74,738
     Amortization of net premium                            (6,218)           (3,885)
     Amortization of Cap Agreements                             --              (467)
     Amort. of deferred gain from hedging                       --               285
     Cash and cash equivalents                                 303               346
                                                      ------------      ------------
         Interest income                                    66,249            71,017
                                                      ------------      ------------

     Reverse repurchase agreements                          33,788            50,867
     AAA notes payable                                       5,544            12,375
     Other borrowings                                        2,245               462
     Interest rate swaps                                     4,879            (1,665)
                                                      ------------      ------------
         Interest expense                                   46,456            62,039
                                                      ------------      ------------

     Net interest income                              $     19,793      $      8,978
                                                      ============      ============
</Table>

As presented in the table above, the Company's net interest income increased by
$10.8 million in the third quarter of 2001 compared to the third quarter of
2000. The most significant change was the decline in interest expense of $15.6
million. The following two tables explain the increase in terms of volume and
rate variances.



                                       30
<PAGE>

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 September 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            $ 4,593,688           5.74%   $    65,946   $ 4,046,485          6.99%   $    70,671
  Cash and cash equivalents                       47,745           2.54            303        19,605          7.00            346
                                             -----------    -----------    -----------   -----------   -----------    -----------
                                               4,641,433           5.71         66,249     4,066,090          6.99         71,017
                                             -----------    -----------    -----------   -----------   -----------    -----------
Interest Bearing Liabilities:
  Reverse repurchase agreements                3,492,997           4.43         38,667     2,999,417          6.56         49,202
  Collateralized notes payable                   498,110           4.45          5,544       666,327          7.43         12,375
  Other borrowings                               211,450           4.25          2,245        22,774          8.11            462
                                             -----------    -----------    -----------   -----------   -----------    -----------
                                               4,202,557           4.42         46,456     3,688,518          6.73         62,039
                                             -----------    -----------    -----------   -----------   -----------    -----------

Net Interest Earning Assets and Spread $         438,876           1.29%   $    19,793   $   377,572          0.26%   $     8,978
                                             ===========    ===========    ===========   ===========   ===========    ===========
Yield on Net Interest Earning Assets (1)                           1.71%                                      0.88%
                                                            ===========                                ===========
</Table>

----------

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

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

<Table>
<Caption>
                                                  Three Months Ended September 30,
                                                          2001 versus 2000
                                             ------------------------------------------
                                                Rate           Volume          Total
                                             ----------      ----------      ----------
<S>                                          <C>             <C>             <C>
     Interest Income:
        ARM assets                           $  (12,580)     $    7,856      $   (4,725)
        Cash and cash equivalents                  (222)            178             (43)
                                             ----------      ----------      ----------
                                                (12,802)          8,034          (4,768)
                                             ----------      ----------      ----------
     Interest Expense:
        Reverse repurchase agreements           (15,999)          5,464         (10,535)
        Collateralized notes payable             (4,959)         (1,872)         (6,831)
        Other borrowings                           (220)          2,003           1,783
                                             ----------      ----------      ----------
                                                (21,178)          5,595         (15,583)
                                             ----------      ----------      ----------

     Net interest income                     $    8,376      $    2,439      $   10,815
                                             ==========      ==========      ==========
</Table>

As a result of the yield on the Company's interest-earning assets decreasing to
5.71% during the third quarter of 2001 from 6.99% during the same period of 2000
and the Company's cost of funds decreasing to 4.42% from 6.73% during the same
time periods, net interest income increased by $10,815,000. 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 $8,376,000
was primarily due to a favorable rate variance of $21,178,000 on borrowings,
which was partially offset by an unfavorable rate variance of $12,802,000 on the
Company's ARM assets portfolio and other interest-earning assets. The increased
average size of the Company's portfolio during the third quarter of 2001
compared to the same period in 2000 increased net interest



                                       31
<PAGE>

income in the amount of $2,439,000. The average balance of the Company's
interest-earning assets was $4.641 billion during the third quarter of 2001,
compared to $4.066 billion during the same period of 2000, an increase of 14.1%.

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

 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%
Sep 30, 2001     $  4,641.4        5.63%        6.49%       0.85%       5.64%       3.74%           1.90%            1.71%
</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%
Sep 30, 2001              0.69%            0.14%            0.02%              -- %             0.85%
</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



                                       32
<PAGE>

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 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
non-Hybrid ARM portfolio that is indexed to U.S. Treasury rates to 26.0% of the
ARM portfolio at September 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%
     Sep 30, 2001                       3.34%             3.51%           -0.16%             26.0%
</Table>

The Company recorded hedging expense during the third quarter of 2001 of
$507,000. This expense was calculated based on the requirements of FAS 133,
adopted by the Company as of January 1, 2001. At June 30, 2001, the fair value
of the Company's Cap Agreements was $571,000 compared to a fair value of
$209,000 as of September 30, 2001, a decrease in fair value of $362,000. The
Company determined that the hedge utilizing Cap Agreements was not effective
during the third quarter and, as a result, the Company recorded the change in
fair value of the Cap Agreements as hedging expense. The Company also
reclassified to earnings $145,000 of the transition adjustment recorded in
Accumulated other comprehensive income on January 1, 2001, in connection with
the implementation of FAS 133.

The Company's provision for estimated credit losses decreased to $231,000 for
the quarter ended September 30, 2001 compared to $270,000 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
such that it was appropriate to reduce the rate at which the Company is
recording loss provisions. Since the



                                       33
<PAGE>

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. Furthermore, the Company estimates that its losses on loans
currently identified as seriously delinquent and on the two REO properties will
be immaterial and are also fully reserved. The 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 September 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 29.8% of the
Company's portfolio of ARM assets or $1.551 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 September 30,
                                                                   ------------------------------------
                                                                          2001              2000
                                                                      ------------      ------------
<S>                                                                 <C>               <C>
     Net income                                                       $     14,585      $      7,016
        Additions:
          Provision for credit losses                                          231               270
          Net compensation related items & other                               134               179
          Hedging expense                                                      507                --
          Adj for non-REIT subsidiaries net loss                               138                --
        Deductions:
          Dividend on Series A Preferred Shares                             (1,670)           (1,670)
          Actual credit losses (recoveries) on ARM assets                      (49)             (265)
          Amortization of hedges                                              (391)               --
                                                                      ------------      ------------
     Taxable net income                                               $     13,485      $      5,530
                                                                      ============      ============

     Taxable income per share                                         $       0.54      $       0.26
                                                                      ============      ============
</Table>

For the quarter ended September 30, 2001, the Company's ratio of operating
expenses to average assets was 0.39% compared to 0.13% for the same period in
2000 and 0.31% for the prior quarter ended June 30, 2001. The most significant
single increase to the Company's expenses was the performance based fee,
$1,627,000, that the Manager earned during the third 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 15.7% whereas the
threshold, the average 10-year treasury rate plus 1%, was 5.99%. The Manager did
not earn a performance-based fee during the third quarter of 2000. The Company's
other expenses increased by approximately $931,000 from the third quarter of
2000 to the third 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 other corporate matters. The operations of TMHL
accounted for $800,000 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.



                                       34
<PAGE>

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: 1.18% of the first $300
million of Average Shareholders' Equity, plus 0.87% 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%
Sep 30, 2001                 0.25%                  0.14%                  0.39%
</Table>

RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001

For the nine months ended September 30, 2001, the Company's net income was
$36,951,000 or $1.40 per share (Basic and Diluted EPS), based on a weighted
average of 22,841,000 shares outstanding. That compares to $21,495,000, or $0.77
per share (Basic and Diluted EPS), based on a weighted average of 21,490,000
shares outstanding for the nine months ended September 30, 2000. Net interest
income for this most recent nine-month period totaled $49,832,000, compared to
$27,047,000 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 nine months of 2001, the Company recorded a gain on
the sale of ARM securities of $1,000 as compared to a gain of $49,000 during the
same period of 2000. Additionally, during the first nine months of 2001, the
Company reduced its earnings and the carrying value of its ARM assets by
reserving $562,000 for potential credit losses, compared to $983,000 during the
first nine months of 2000. During the nine months ended September 30, 2001, the
Company incurred operating expenses of $10,994,000, consisting of a base
management fee of $3,463,000, a performance based fee of $3,624,000 and other
operating expenses of $3,907,000. During the same period of 2000, the Company
incurred operating expenses of $4,618,000, consisting of a base management fee
of $3,086,000 and other operating expenses of $1,532,000.

The Company's return on average common equity was 12.3% for the nine months
ended September 30, 2001 compared to 6.8% for the nine months ended September
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 impact of the performance
based fee earned by the Manager during 2001 and expenses related to the
Company's taxable mortgage banking subsidiary.



                                       35
<PAGE>

The following table presents the components of the Company's net interest income
for the nine-month periods ended September 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              $  222,416      $  229,124
     Amortization of net premium                          (16,237)        (12,226)
     Amortization of Cap Agreements                                        (1,938)
     Amortization of deferred gain from hedging                               882
     Cash and cash equivalents                                976             966
                                                       ----------      ----------
          Interest income                                 207,155         216,808
                                                       ----------      ----------

     Reverse repurchase agreements                        118,586         151,237
     AAA notes payable                                     22,396          40,722
     Other borrowings                                       7,148           1,097
     Interest rate swaps                                    9,193          (3,295)
                                                       ----------      ----------
          Interest expense                                157,323         189,761
                                                       ----------      ----------

     Net interest income                               $   49,832      $   27,047
                                                       ==========      ==========
</Table>

As presented in the table above, the Company's net interest income increased by
$22.8 million in the first nine months of 2001 compared to the same nine 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 $9.7 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 nine
months of 2001 as compared to the same period in 2000. The rate of prepayments
averaged approximately 26% during the first nine months of 2001 compared to
approximately 16% during the same period of 2000. The Company's interest expense
decreased by $32.4 million, primarily due to lower interest rates. During the
first nine months of 2001, the Federal Reserve Bank has lowered short-term
interest rates by 3.5% and, as a result, the Company's cost of funds has
decreased from 6.75% as of December 31, 2000 to 3.74% as of September 30, 2001,
a decrease of 3.01%. 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 take place over an
approximate twelve month period of time. The yield has declined from 7.06% as of
December 31, 2000 to 5.65% as of September 30, 2001, a decrease of 1.41%. As a
result, during the first nine 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 at a decreased
level during the fourth quarter of 2001 and potentially into early 2002.



                                       36
<PAGE>

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 nine-month periods ended September 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          $ 4,398,423           6.25%   $   206,179   $ 4,274,828          6.73%   $   215,842
  Cash and cash equivalents                     35,175           3.70            976        19,075          6.75            966
                                           -----------    -----------    -----------   -----------   -----------    -----------
                                             4,433,598           6.23        207,155     4,293,903          6.73        216,808
                                           -----------    -----------    -----------   -----------   -----------    -----------
Interest Bearing Liabilities:
  Reverse repurchase agreements              3,304,397           5.16        127,779     3,126,870          6.31        147,942
  Collateralized notes payable                 545,776           5.47         22,396       773,705          7.02         40,722
  Other borrowings                             180,457           5.28          7,148        15,169          9.64          1,097
                                           -----------    -----------    -----------   -----------   -----------    -----------
                                             4,030,630           5.20        157,323     3,915,744          6.46        189,761
                                           -----------    -----------    -----------   -----------   -----------    -----------

Net Interest Earning Assets and Spread     $   402,969           1.03%   $    49,832   $   378,159          0.27%   $    27,047
                                           ===========    ===========    ===========   ===========   ===========    ===========
Yield on Net Interest Earning Assets (1)                         1.50%                                      0.84%
                                                          ===========                                ===========
</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>
                                                           Nine Months Ended September 30,
                                                                 2001 versus 2000
                                                  ------------------------------------------------
                                                      Rate             Volume            Total
                                                  ------------      ------------      ------------
<S>                                               <C>               <C>               <C>
     Interest Income:

     ARM assets                                   $    (15,457)     $      5,794      $     (9,663)
     Cash and cash equivalents                            (437)              447                10
                                                  ------------      ------------      ------------
                                                       (15,894)            6,241            (9,653)
                                                  ------------      ------------      ------------
     Interest Expense:
     Reverse repurchase agreements                     (27,028)            6,865           (20,163)
     Collateralized notes payable                       (8,973)           (9,353)          (18,326)
     Other borrowings                                     (496)            6,547             6,051
                                                  ------------      ------------      ------------
                                                       (36,497)            4,059           (32,438)
                                                  ------------      ------------      ------------

     Net interest income                          $     20,603      $      2,182      $     22,785
                                                  ============      ============      ============
</Table>

Net interest income increased by $22,785,000 primarily as a result of the
Company's cost of funds decreasing to 5.20% during the first nine months of 2001
from 6.46% during the first nine months of 2000, partially offset by a decrease
of the yield on the Company's interest-earning assets which decreased to 6.23%
from 6.73% for the same respective time periods. This increase in net interest
income is the result of a favorable rate and volume variance. There was a net
favorable rate variance of $20,603,000, which consisted of a favorable variance
of $36,497,000 resulting from the decrease in the Company's cost of funds and an
unfavorable variance of $15,894,000 resulting from the lower yield on the
Company's ARM assets portfolio and other interest-earning assets. The increased
average size of the Company's portfolio during the first nine



                                       37
<PAGE>

months of 2001 compared to the same period of 2000 resulted in higher net
interest income in the amount of $2,182,000. The average balance of the
Company's interest-earning assets was $4.434 billion during the first nine
months of 2001 compared to $4.294 billion during the first nine months of 2000,
an increase of 3.3%.

During the first nine months of 2001, the Company realized a net gain from the
sale of ARM securities and fixed-rate loans in the amount of $1,000 as compared
to $49,000 during the first nine months of 2000. The sale of ARM securities
during the first nine 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 $2,000. 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
$562,000 during the nine months ended September 30, 2001, compared to $983,000
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 nine months ended September 30, 2001, the Company's ratio of operating
expenses to average assets was 0.33% as compared to 0.15% for the same period of
2000. During the first nine months of 2001, the Manager earned a
performance-based fee of $3,624,000 or 0.11% of average assets. The Manager did
not earn a performance-based fee during the same nine months of 2000. The
Company's other expenses increased by approximately $2,375,000 for the nine
months ended September 30, 2001 compared to the same nine-month period in 2000,
primarily due to the operations of the Company's taxable mortgage banking
subsidiary, TMHL, and other corporate matters. The operations of TMHL accounted
for $1,818,000 of this increase, 76.5% of the increase.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of funds for the quarter ended September 30, 2001
consisted of reverse repurchase agreements, which totaled $3.952 billion,
collateralized notes payable, which had a balance of $474.6 million and whole
loan financing facilities, which had a balance of $416.5 million. The Company's
other significant sources of funds for the quarter ended September 30, 2001
consisted primarily of payments of principal and interest from its ARM assets in
the amount of $640.3 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 September 30, 2001, had a weighted average
effective cost of 3.27%. 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. Two of the whole loan
financing facilities are committed facilities that mature in January 2002 and
March 2002. The Company has also entered into a third whole loan financing
facility that does not have a committed borrowing capacity or a stated maturity
date. As of September 30, 2001, $1.031 billion of the Company's borrowings were
variable-rate term reverse repurchase agreements. Term reverse repurchase
agreements are committed financings with original maturities that range from 6
to 24 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-two different financial institutions and on September 30, 2001, had
borrowed funds with fourteen of these firms. Because the Company borrows money
under these agreements based on the fair value of its ARM assets and because
changes in interest rates can negatively impact the valuation of ARM assets, the
Company's borrowing ability under these agreements could be limited and lenders
may initiate margin calls in the event interest rates change or the value of the
Company's ARM assets decline for other reasons. Additionally, certain of the
Company's ARM assets are rated less than AA by the Rating Agencies
(approximately 2.8%) and



                                       38
<PAGE>

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 September 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 September 30, 2001, the Company had $474.6 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 September 30, 2001, the Company had entered into three 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 affected by changes in interest rates and
other factors, including the delinquency status of individual loans. One of the
whole loan financing facilities has a committed borrowing capacity of $150
million. This facility matures in January 2002. The Company has a second
committed whole loan financing facility that has a borrowing capacity of $300
million. This second committed facility matures in March 2002. The Company has
also entered into an uncommitted whole loan financing facility that the Company
expects to convert into a one-year committed facility with a borrowing capacity
of $150 million during the fourth quarter of 2001. As of September 30, 2001, the
Company had $416.5 million borrowed against these whole loan financing
facilities at an effective cost of 3.09%.

On May 31, 2001, the Company filed a combined shelf registration statement on
Form S-3 for $409 million of equity securities, which included $109 million of
securities that were registered under a previously filed registration statement.
On July 6, 2001, the combined registration statement for $409 million, which
includes the possible issuances of common stock, preferred stock or warrants,
was declared effective by the Securities and Exchange Commission. During August
2001, the Company completed a public offering of 5,791,500 shares of its common
stock, for which it received net proceeds of $86.9 million. As of September 30,
2001, $316.8 million of the Company's securities remained registered for future
issuance and sale under its currently effective registration statement.

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 three- and nine-month periods ended September 30, 2001, the Company
issued 53,343 and 88,077 shares of common stock, respectively, under the DRP and
received net proceeds of $0.8 and $1.3 million, respectively.

EFFECTS OF INTEREST RATE CHANGES

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

Interest rates can also affect the Company's net return on its Hybrid ARMs (net
of the cost of financing Hybrid ARMs). The Company 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



                                       39
<PAGE>

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 September 30, 2001, the Company calculates its Qualified REIT Assets, as
defined in the Internal Revenue Code of 1986, as amended (the "Code"), to be
99.5% of its total assets, as compared to the Code requirement that at least 75%
of its total assets must be Qualified REIT Assets. The Company also calculates
that 98.8% of its 2001 revenue for the first nine 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 September 30, 2001, the Company believes
that it will continue to qualify as a REIT under the provisions of the Code.

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



                                       40
<PAGE>

PART II. OTHER INFORMATION

Item 1.  Legal Proceedings
              At September 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
              None

Item 5.  Other Information
              None

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

         (a)  Exhibits
                  See "Exhibit Index"

         (b)  Reports on Form 8-K

              The Company filed the following Current Report on Form 8-K during
the period covered by this Form 10-Q:

               (i)  Current Report on Form 8-K, dated July 20, 2001 regarding
                    the Registrant's Press Release dated July 17, 2001
                    announcing the Registrant's second quarter earnings.

               (ii) Current Report on Form 8-K, dated August 13, 2001 regarding
                    the Registrant's public offering of 5,500,000 shares and
                    related underwriting agreement.




                                       41
<PAGE>

                                   SIGNATURES



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




                                             THORNBURG MORTGAGE, INC.



Dated:     November 9, 2001                  By:   /s/ Larry A. Goldstone
                                                  ------------------------------
                                                  Larry A. Goldstone
                                                  President and Chief Operating
                                                  Officer
                                                  (authorized officer of
                                                  registrant)




Dated:     November 9, 2001                  By:  /s/ Richard P. Story
                                                  ------------------------------
                                                  Richard P. Story,
                                                  Executive Vice President and
                                                  Chief Financial Officer
                                                  (principal accounting officer)





                                       42
<PAGE>


                               INDEX TO EXHIBITS

<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
                         (supercedes form of Exhibit 10.3.3 previously filed)
</Table>




                                       43