<PAGE>

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

                   U. S. SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549

                                   FORM 10-Q

                            ______________________

(Mark One)
[X]     QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001

[ ]     TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
        EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
        _______________ TO ______________


                         Commission File No. 001-13709
                            ______________________

                      ANWORTH MORTGAGE ASSET CORPORATION
            (Exact name of Registrant as specified in its charter)

               MARYLAND                            52-2059785
    (State or other jurisdiction of             (I.R.S. Employer
    incorporation or organization)             Identification No.)

        1299 Ocean Avenue, #200
            Santa Monica, CA                          90401
(Address of principal executive offices)           (Zip Code)

      Registrant's telephone number, including area code: (310) 394-0115
                            ______________________

Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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.  Yes  X   No
                                                               ---     ---

As of March 31, 2001, 2,359,664 shares of Common Stock, $0.01 par value per
share, were outstanding.

                            ______________________

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

                                     INDEX
                                     -----

<TABLE>
<CAPTION>
Part I.      Financial Information                                                           Page
-------      ---------------------                                                           ----
<S>          <C>                                                                             <C>
Item 1.      Financial Statements

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

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

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

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

             Notes to the Financial Statements.........................................       7-10

Item 2.      Management's Discussion and Analysis of
             Financial Condition and Results of Operations.............................      11-18

Item 3.      Quantitative and Qualitative Disclosures about Market Risk................      18-19

Part II.     Other Information
--------     -----------------

Item 1.      Legal Proceedings.........................................................       19

Item 2.      Changes in Securities.....................................................       19

Item 3.      Defaults upon Senior Securities...........................................       19

Item 4.      Submission of Matters to a Vote of Security Holders.......................       19

Item 5.      Other Information.........................................................       19

Item 6.      Exhibits and Reports on Form 8-K..........................................       20


Signatures.............................................................................       20
</TABLE>

                                       2
<PAGE>

Part I.  FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

ANWORTH MORTGAGE ASSET CORPORATION
Balance Sheets
  (Amounts in thousands)

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

Assets
  Mortgage backed securities                           $      156,978           $      134,889
  Other marketable securities                                   1,637                    1,948
  Cash and cash equivalents                                       691                    3,894
  Accrued interest and dividends receivable                     1,287                    1,090
  Prepaid expenses and other                                       49                       13
                                                       --------------           --------------
                                                       $      160,642           $      141,834
                                                       ==============           ==============
Liabilities and Stockholders' Equity

Liabilities
  Reverse repurchase agreements                        $      140,602           $      121,891
  Accrued interest payable                                        947                    1,706
  Accrued expenses and other                                      125                       36
                                                       --------------           --------------
                                                              141,674                  123,633
                                                       --------------           --------------

STOCKHOLDERS' EQUITY

  Preferred stock, par value $.01 per share;
    authorized 20,000,000 shares;
    no shares issued and outstanding                              -                        -
  Common stock; par value $.01 per share;
    authorized 100,000,000 shares;  2,409,664 and
    2,400,016 issued and 2,359,664 and 2,350,016
    outstanding respectively                                       24                       24
  Additional paid in capital                                   19,287                   19,243
  Accumulated other comprehensive income, unrealized
    gain (loss) on available for sale securities                 (749)                  (1,186)
  Retained earnings                                               635                      349
  Treasury stock at cost (50,000 shares)                         (229)                    (229)
                                                       --------------           --------------
                                                               18,968                   18,201
                                                       --------------           --------------
                                                       $      160,642           $      141,834
                                                       ==============           ==============
</TABLE>

See notes to financial statements.

                                       3
<PAGE>

Statements of Operations (unaudited)
(Amounts in thousands except per share data)

<TABLE>
<CAPTION>
                                                                   For the three months ended March 31,
                                                                     2001                       2000
<S>                                                               <C>                        <C>


Interest and dividend income net of
  amortization of premium and discount                            $    2,556                 $    2,627
Interest expense                                                       1,921                      2,132
                                                                  ----------                 ----------
Net interest income                                               $      635                 $      495

Gain on sale of assets                                                    71                         -

Expenses:
  Management fee                                                          47                         41
  Incentive fee                                                           56
  Other expense                                                           59                         61
                                                                  ----------                 ----------
Net Income                                                        $      545                 $      393
                                                                  ==========                 ==========
Basic and diluted earnings per share                              $     0.23                 $     0.17
                                                                  ==========                 ==========
Dividends declared per share                                      $     0.20*                $     0.15
                                                                  ==========                 ==========
Weighted average number of shares outstanding                          2,354                      2,314
                                                                  ==========                 ==========
</TABLE>
* Declared in April 2001

See notes to financial statements.

                                       4
<PAGE>

Statement of Stockholders' Equity (unaudited)
For the three months ended March 31, 2001
(Amounts in thousands)

<TABLE>
<CAPTION>
                                                                      Accum.
                                                                       Other
                                     Common   Common    Additional    Compre-                 Treasury      Compre-
                                     Stock     Stock     Paid-in      hensive     Retained      Stock       hensive
                                     Shares  Par Value   Capital    Income(Loss)  Earnings     at Cost    Income(Loss)    Total
                                     --------------------------------------------------------------------------------------------
<S>                                  <C>     <C>        <C>         <C>           <C>         <C>         <C>            <C>
Balance, December 31, 2000            2,350   $    24    $ 19,243    $  (1,186)     $  349     $  (229)                  $18,201

  Issuance of common stock               10        -           44                        0                                    44
  Available-for-sale securities,
    Fair value adjustment                                                  437                                    437        437
  Net income                                                                           545                        545        545
                                                                                                           ----------
Other comprehensive income (loss)                                                                          $      982
                                                                                                           ==========
Repurchase of common stock               -         -                                                -                         -
  Dividends paid
    $0.15 per share                                                                   (259)                                 (259)
                                     ---------------------------------------------------------------------               --------
Balance, March 31, 2001               2,360   $    24    $ 19,287    $    (749)     $  635     $  (229)                  $18,968
                                     =====================================================================               ========
</TABLE>

See notes to financial statements.

                                       5
<PAGE>

Statements of Cash Flows (unaudited)
  (Amounts in thousands)

<TABLE>
<CAPTION>
                                                                          For the three months ended March 31,
                                                                            2001                      2000
                                                                         -----------               -----------
<S>                                                                      <C>                       <C>
Operating Activities:
  Net income                                                             $      545                $      393
  Adjustments to reconcile net income to
  net cash provided by operating activities:
    Amortization                                                                199                       183
    Decrease (increase) in accrued interest
        and dividends receivable                                               (197)                       15
    Increase (decrease) in accrued interest payable                            (759)                     (130)
    Increase (decrease) in accrued expenses and other                            52                       (70)
                                                                         -----------               -----------
        Net cash provided by (used in) operating activities                    (160)                      391

Investing Activities:
  Available-for-sale securities:
    Purchases                                                               (29,958)                     (572)
    Proceeds from sale                                                          348                         -
    Principal payments                                                        8,070                     6,005
                                                                         -----------               -----------
        Net cash provided by (used in) investing activities                 (21,540)                    5,433

Financing Activities:
  Net borrowings from reverse repurchase agreements                          18,711                    (4,134)
  Proceeds from common stock issued, net                                         45                        24
  Repurchase of common stock                                                      -                         -
  Dividends paid                                                               (259)                     (323)
                                                                         -----------               -----------
        Net cash provided by (used in) financing activities                  18,497                    (4,433)
                                                                         -----------               -----------
Net increase (decrease) in cash and cash equivalents                         (3,203)                    1,391
Cash and cash equivalents at beginning of period                              3,894                     3,302
                                                                         -----------               -----------
Cash and cash equivalents at end of period                               $      691                $    4,693
                                                                         ===========               ===========

Supplemental disclosure of cash flow information:
  Cash paid for interest                                                 $    2,680                $    2,262
                                                                         ===========               ===========
</TABLE>

See notes to financial statements.

                                       6
<PAGE>

NOTES TO FINANCIAL STATEMENTS
March 31, 2001

NOTE 1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Anworth Mortgage Asset Corporation (the "Company") was incorporated in Maryland
on October 20, 1997.  The Company commenced its operations of purchasing and
managing an investment portfolio of mortgage-backed ("MBS") securities on March
17, 1998, upon completion of its initial public offering of the Company's common
stock.

A summary of the company's significant accounting policies follows:

BASIS OF PRESENTATION

The accompanying unaudited condensed 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 ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the calendar year
ending December 31, 2001.

CASH AND CASH EQUIVALENTS

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

MORTGAGE BACKED SECURITIES

The Company has invested primarily in fixed- and adjustable-rate mortgage pass-
through certificates ("MBSs") and hybrid ARMs.  Hybrid ARM securities have an
initial interest rate that is fixed for a certain period, usually three to five
years, and then adjusts annually for the remainder of the term of the loan.

Statement of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"), requires the Company to
classify its investments as either trading investments, available-for-sale
investments or held-to-maturity investments.  It is the Company's policy to
classify each of its MBS as available-for-sale and then to monitor the
security's performance over time before making a final determination as to the
permanent classification.  At this time all of the Company's MBS are classified
as available-for-sale.  All assets that are classified as available-for-sale are
carried at fair value.

Interest income is accrued based on the outstanding principal amount of the MBS
and their contractual terms.  Premiums associated with the purchase of MBS are
amortized into interest income over the estimated lives of the asset using the
effective yield method.

MBS transactions are recorded on the date the securities are purchased or sold.

CREDIT RISK

At March 31, 2001 the Company has limited its exposure to credit losses on its
portfolio of mortgage backed securities by purchasing primarily securities from
Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage
Association ("FNMA").  The payment of principal and interest on the FHLMC and
FNMA ARM securities are guaranteed by those respective agencies.  At March 31,
2001, over 99% of the Company's mortgage backed securities have an implied "AAA"
rating.

                                       7
<PAGE>

INCOME TAXES

The Company intends to elect to be taxed as a Real Estate Investment Trust and
to comply with the provisions of the Internal Revenue Code with respect thereto.
Accordingly, the Company will not be subject to Federal income tax to the extent
that its distributions to stockholders satisfy the REIT requirements.

EARNINGS PER SHARE

Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of common shares outstanding during the period.  Diluted
EPS assumes the conversion, exercise or issuance of all potential common stock
equivalents unless the effect is to reduce a loss or increase the income per
share.  Stock options that could potentially dilute basic EPS in the future were
not included in the computation of diluted EPS because to do so would have been
antidilutive.

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.  MORTGAGE BACKED SECURITIES

The following table pertains to the Company's mortgage backed securities
classified as available-for-sale as of March 31, 2001, which are carried at
their fair value:

<TABLE>
<CAPTION>
                                 Federal          Federal
                                Home Loan        National           Other         Total
                                 Mortgage        Mortgage         Mortgage         MBS
($000's)                       Corporation      Association      Securities       Assets
------------------------------------------------------------------------------------------
<S>                       <C>                   <C>              <C>            <C>
Amortized Cost                   $36,522         $120,072           $480         $157,074
Paydowns Receivable                  605                -              -              605
Unrealized gains                      50              322             38              410
Unrealized losses                   (219)            (892)             0           (1,111)
                          ----------------------------------------------------------------
Fair value                       $36,958         $119,502           $518         $156,978
                          ----------------------------------------------------------------
</TABLE>

In addition, at March 31, 2001 the Company held a position in a preferred stock
issued by Thornburg Mortgage Inc. and common stock issued by Anthracite Capital
Inc.; in total these positions had a fair value of $1,637,000.

The following table summarizes the Company's securities as of  March 31, 2001 at
their fair value:

                                              Fixed
                                               Rate        REIT
($000's)                         ARMS          MBS         Stock        Total
-------------------------------------------------------------------------------
Amortized Cost                 $120,091      $36,983      $1,684      $158,758
Paydowns Receivable                 605            -           -           605
Unrealized gains                    119          291           0           410
Unrealized losses                  (954)        (157)        (47)       (1,158)
                          ------------------------------------------------------
Estimated fair value           $119,861      $37,117      $1,637      $158,615
                          ------------------------------------------------------

NOTE 3.  REVERSE REPURCHASE AGREEMENTS

The Company has entered into reverse repurchase agreements to finance most of
its MBS. The reverse repurchase agreements are short-term borrowings that are
secured by the market value of the Company's MBS and bear interest rates that
have historically moved in close relationship to London Interbank Offered Rate
("LIBOR"). At March 31, 2001 the Company's reverse repurchase agreements had an
average term to maturity of 27 days.

                                       8
<PAGE>

At March 31, 2001, the repurchase agreements had the following remaining
maturities:
--------------------------------------------------------------------------------

   Within 59 days                      $126,502,000
   60 to 89 days                         14,100,000
   90 to 119 days                                 0
                                       ------------
                                       $140,602,000
                                       ------------

NOTE 4.  INITIAL PUBLIC OFFERING

On March 17, 1998 the Company completed its initial public offering of common
stock, $0.01 par value. The Company issued 2,200,000 shares of common stock at a
price of $9 per share and received net proceeds of $18,414,000, net of
underwriting discount of $0.63 per share. Offering costs in connection with the
public offering, including the underwriting discount and other expenses, which
total $491,182, have been charged against the proceeds of the offering. Prior to
March 17, 1998, the Company had no operations other than activities relating to
its organization, registration under the Securities Act of 1933 and the issuance
of 100 shares of its common stock to its initial shareholder.

The Company granted the underwriters of the initial public offering of the
Company's common stock a 30-day option to purchase additional shares of common
stock solely to cover over-allotments, if any, at the public offering price of
$9 per share. On April 14, 1998, the underwriters purchased an additional
127,900 shares under the terms of this option. As a result, the Company received
additional net proceeds of $1,070,523, net of the underwriting discount of $0.63
per share, on April 14, 1998.


NOTE 5.  TRANSACTIONS WITH AFFILIATES

The Company entered into a Management Agreement (the "Agreement") with Anworth
Mortgage Advisory Corporation (the "Manager"), effective March 12, 1998. Under
the terms of the Agreement, the Manager, subject to the supervision of the
Company's Board of Directors, is responsible for the management of the day-to-
day operations of the Company and provides all personnel and office space.

The Company pays the Manager an annual base management fee equal to 1% of the
first $300 million of Average Net Invested Assets (as defined in the Agreement),
plus 0.8% of the portion above $300 million (the "Base Management
Compensation").

In addition to the Base Management Compensation, the Manager shall receive as
incentive compensation for each fiscal quarter an amount equal to 20% of the Net
Income of the Company, before incentive compensation, for such fiscal quarter in
excess of the amount that would produce an annualized Return on Equity
(calculated by multiplying the Return on Equity for such fiscal quarter by four)
equal to the Ten-Year U.S. Treasury Rate for such fiscal quarter plus 1% (the
"Incentive Management Compensation").

For the quarters ended March 31, 2001 and March 31, 2000, the Company paid the
Manager $47,000 and $41,000, respectively, in base management fee. For the
quarters ended March 31, 2001 and March 31, 2000, the Company paid the Manager
$56,000 and no incentive compensation, respectively.

The Company has adopted the Anworth Mortgage Asset Corporation 1997 Stock Option
and Awards Plan (the "Stock Option Plan") which authorizes the grant of options
to purchase an aggregate of up to 300,000 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") and
stock appreciation rights ("SARs"). The exercise price for any option granted
under the Stock Option Plan may not be less than 100% of the fair market value
of the shares of Common Stock at the time the option is granted. As of March 31,
2000, the Company had granted a total of 198,000 options, with strike prices of
either $9 per share or $4.60 per share, and 148,500 DER's. Options granted to
officers either become exercisable at a rate of 33.3% each year following their
date of grant or become exercisable three years after their date of grant.
Options granted to directors either became exercisable six months after their
date of grant or become exercisable three years after their date of grant. All
options will expire ten years after their date of grant. The DER's are payable
only when their associated stock options are exercised, thereby reducing the
effective

                                       9
<PAGE>

strike price of such options. The Company recognizes compensation expense at the
time the market price of the stock exceeds the strike price.

For the quarter ended March 31, 2001, the Company recorded $1,375 in operating
expense associated with this plan. Please refer to the Company's Proxy Statement
Pursuant to Section 14(a) of the Securities Exchange Act of 1934, filed with the
Securities and Exchange Commission on April 30, 2001, for more information
regarding options and DER's outstanding.

NOTE 6.  SHARE REPURCHASE

In December of 1998, the Board of Directors authorized the repurchase of 50,000
shares of the Company's common stock. As of September 30, 2000, the entire
50,000 shares had been repurchased at an average cost of $4.58 per share.

                                       10
<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," or "continue" or the negatives thereof or
other variations thereon or comparable terminology. Investors are cautioned that
all forward-looking statements involve risks and uncertainties including, but
not limited to, risks related to the future level and relationship of various
interest rates, prepayment rates and the timing of new programs. The statements
in the "Risk Factors" of the Company's Prospectus dated March 12, 1998
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

The Company was formed in October 1997 to invest in mortgage assets, including
mortgage pass-through certificates, collateralized mortgage obligations,
mortgage loans and other securities representing interests in, or obligations
backed by, pools of mortgage loans which can be readily financed and short-term
investments (collectively, Mortgage-Backed Securities).

The Company's principal business objective is to generate net income for
distribution to stockholders from the spread between the interest income on its
Mortgage-Backed Securities and the costs of borrowing to finance its acquisition
of Mortgage-Backed Securities.  The Company commenced operations on March 17,
1998 upon the closing of its initial public offering.  Since that date the
Company has deployed its capital and built its balance sheet through the
acquisition of mortgage assets and the financing of those assets in the credit
markets.  The Company seeks to generate income through its use of leverage and
active management of the asset/liability yield spread.

The Company will seek to generate growth in earnings and dividends per share in
a variety of ways, including through (i) issuing new Common Stock and increasing
the size of the balance sheet when opportunities in the market for Mortgage-
Backed Securities are likely to allow growth in earnings per share, (ii) seeking
to improve productivity by increasing the size of the balance sheet at a rate
faster than the rate of increase in operating expenses, (iii) continually
reviewing the mix of Mortgage-Backed Security types on the balance sheet in an
effort to improve risk-adjusted returns, and (iv) attempting to improve the
efficiency of the Company's balance sheet structure through the issuance of
uncollateralized subordinated debt, preferred stock and other forms of capital,
to the extent management deems such issuances appropriate.

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 stockholders without paying federal or state income tax at the
corporate level.

At its June 17, 1999 meeting the Board of Directors approved new operating
policies which were included in Item 5 of the Company's quarterly report on form
10-Q for the quarter ended June 30, 1999.  Effective upon the filing of that
quarterly report, the Company modified its policy of investing primarily in
adjustable rate mortgage assets. The new policy allows the Company to invest
substantially more of its assets in fixed rate mortgage securities.  Depending
on mortgage market conditions, these purchases may or may not be accompanied by
the purchase of hedging instruments intended to mitigate the attendant interest
rate risk.  The Company will target an overall one year duration for the
portfolio, taking all assets and hedging instruments into account.  See
"Statement of Operating Policies" below.

The Company has established the new policies in response to the current interest
rate environment.  The Company believes that, given the current shape of the
yield curve and current conditions in the mortgage markets, it may be able to
increase earnings by implementing these new policies.  These policies may be
modified or waived by the Board of Directors at any time without consent of the
Company's stockholders.  The ultimate effect of any such changes is uncertain.

Under the new policies, (i) at least 60% of the Company's total assets are
expected to be adjustable or fixed rate Mortgage Securities and Short-Term
Investments which will either be rated within one of the two highest rating
categories by at least one nationally recognized statistical rating organization
(such as Moody's, Fitch or Standard & Poors), or if not rated will be
obligations guaranteed by the United States government or its agencies, Fannie
Mae or Freddie Mac (Category I securities); (ii) at least 90% of the

                                       11
<PAGE>

Company's assets are expected to be investments that qualify for Category I
above or Mortgage Assets including (a) unrated Mortgage Loans and, (b) Mortgage
Securities rated at least Investment Grade by at least one nationally recognized
statistical rating organization (Category II securities); and (iii) all other
assets shall be less than 10% of the Company's assets, among these being
securities such as (a) Mortgage Securities rated below Investment Grade, (b)
leveraged Mortgage Derivative Securities, and (c) shares of other REITS or
mortgage related companies (Category III securities). At its January 19, 2001
meeting the Board approved amending the operating policy to define shares of
other REITS or mortgage related companies as Category II securities.

The Company will generally not acquire inverse floaters, Remic residuals or
first loss subordinated bonds.  The Company may acquire mortgage derivative
securities, including, but not limited to, interest only, principal only or
other mortgage securities that receive a disproportionate share of interest
income or principal, either as an independent stand-alone investment opportunity
or to assist in the management of prepayment and other risks, but only on a
limited basis due to the greater risk of loss associated with mortgage
derivative securities.

FINANCIAL CONDITION

At March 31, 2001, the Company held total assets of $161 million, consisting
primarily of $120 million of ARMs, $37 million of fixed-rate mortgage backed
securities and $1.6 million of REIT common and preferred stock.  This balance
sheet size represents an approximate 12% increase over the balance sheet size at
March 31, 2000.  At March 31, 2001, the Company was well within its asset
allocation guidelines, with over 98% of total assets in Category I or II.  Of
the ARM securities owned by the Company, 86% were adjustable-rate pass-through
certificates which reset at least once a year.  The remaining 14% were 3/1 and
5/1 hybrid ARMS.  Hybrid ARM securities have an initial interest rate that is
fixed for a certain period, usually three to five years, and then adjust
annually for the remainder of the term of the loan.

The following table presents a schedule of mortgage backed securities owned at
March 31, 2001, classified by type of issuer.

MORTGAGE SECURITIES BY ISSUER
(Dollar amounts in thousands)

=============================================================
Agency                       Carrying              Portfolio
                               Value               Percentage
-------------------------------------------------------------
FNMA                         $119,502                 76.1
-------------------------------------------------------------
FHLMC                          36,958                 23.6
-------------------------------------------------------------
Private Placement                 518                  0.3
-------------------------------------------------------------
  Total Portfolio            $156,978                  100
=============================================================


The following table classifies the Company's portfolio of mortgage backed
securities, by type of interest rate index.

MORTGAGE ASSETS BY INDEX
(Dollar amounts in thousands)

<TABLE>
<CAPTION>
==================================================================
                  Index                     Carrying    Portfolio
                                             Value     Percentage
------------------------------------------------------------------
<S>                                         <C>        <C>
One-month LIBOR                             $  1,093          0.7%
------------------------------------------------------------------
Six-month LIBOR                                6,731          4.3%
------------------------------------------------------------------
Six-month Certificate of
   Deposit                                     3,569          2.3%
------------------------------------------------------------------
One-year Constant
  Maturity Treasury                          103,452         65.8%
------------------------------------------------------------------
Cost of Funds Index                            4,498          2.9%
------------------------------------------------------------------
Fixed rate                                    37,635         24.0%
------------------------------------------------------------------
                                            $156,978        100.0%
==================================================================
</TABLE>

                                       12
<PAGE>

The ARM portfolio had a weighted average coupon of 7.59% at March 31, 2001.  The
weighted average one-month constant prepayment rates ("CPR") of the Company's
MBS portfolio were 22%, 16% and 18%, respectively, for the months of January,
February and March 2001.  At March 31, 2001 the unamortized net premium paid for
the mortgage-backed securities was $2.8 million.

The Company analyzes its mortgage-backed securities and the extent to which
prepayments impact the yield of the securities.  When actual prepayments exceed
expectations, the Company amortizes the premiums paid on mortgage assets over a
shorter time period, resulting in a reduced yield to maturity on the Company's
mortgage assets. Conversely, if actual prepayments are less than the assumed
constant prepayment rate, the premium would be amortized over a longer time
period, resulting in a higher yield to maturity. The Company monitors its yield
expectations versus its actual prepayment experience on a monthly basis in order
to adjust the amortization of the net premium.

The fair value of the Company's portfolio of mortgage-backed securities
classified as available-for-sale was $0.70 million less than the amortized cost
of the securities, resulting in a negative adjustment of 0.48% of the amortized
cost of the portfolio as of March 31, 2001.  In the case of the ARMs, the price
decline reflects the possibility of faster future prepayments which would have
the effect of shortening the average life of the Company's MBS and decreasing
their yield.  In the case of the fixed-rate MBS, fair value tends to decline
when interest rates are rising and tends to rise when interest rates are
declining.

The fair value of the Company's REIT common and preferred stock was $47,000 less
than its cost, resulting in a negative adjustment of 2.8% of the cost of the
securities as of March 31, 2001.  The price decline reflects an increase in
interest rates which caused the price of the security to fall.


RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2001 AS COMPARED WITH
THE THREE MONTHS ENDED MARCH 31, 2000

For the quarter ended March 31, 2001, the Company's net income was $545,000, or
$0.23 per share (basic and diluted EPS), based on an average of 2,354,000 shares
outstanding.  Net interest income for the quarter totaled $635,000.  Net
interest income is comprised of the interest income earned on mortgage
investments, net of premium amortization, less interest expense from borrowings.
For the quarter ended March 31, 2000, the Company's net income was $393,000 or
$0.17 per share (basic and diluted ESP), based on an average of 2,314,000 shares
outstanding. The net interest income for the quarter ended March 31, 2000 was
$495,000. The increase in net income was due primarily to the decline in short-
term interest rates, allowing the Company to borrow at lower rates to finance
its portfolio holdings.

During the first quarters of 2001 and 2000, the Company incurred operating
expenses of $162,000 and $102,000 respectively, consisting in 2001 of a base
management fee of $47,000, incentive management fee of $56,000 and other
operating expenses of $59,000 and in 2000 of a base management fee of $41,000,
incentive management fee of $1,000 and other operating expenses of $60,000.  The
primary difference in operating expenses in the first quarter of 2001 versus the
first quarter of 2000 was increase in incentive management fee.  Also, during
the first quarter of 2001, the Company realized a gain on the sale of assets of
$71,000.

The Company's return on average equity was 2.70% or, on an annualized basis,
10.03%, for the quarter ended March 31, 2001 as compared to 2.06% for the same
period in 2000. The table below shows the components of return on average
equity.

                                       13
<PAGE>

COMPONENTS OF RETURN ON AVERAGE EQUITY/(1)/

<TABLE>
<CAPTION>
=======================================================================================================
For the Quarter Ended               Net Interest Income/         G&A Expense/(2)         Net Income/(3)
                                           Equity                     Equity                Equity
-------------------------------------------------------------------------------------------------------
<S>                                 <C>                          <C>                     <C>
June 30, 1998                               2.52%                    0.65%                  1.87%
-------------------------------------------------------------------------------------------------------
September 30, 1998                          1.92%                    0.64%                  1.28%
-------------------------------------------------------------------------------------------------------
December 31, 1998                           1.62%                    0.23%                  1.40%
-------------------------------------------------------------------------------------------------------
March 31, 1999                              1.94%                    0.47%                  1.46%
-------------------------------------------------------------------------------------------------------
June 30, 1999                               2.20%                    0.49%                  1.70%
-------------------------------------------------------------------------------------------------------
September 30, 1999                          2.27%                    0.61%                  1.66%
-------------------------------------------------------------------------------------------------------
December 31, 1999                           2.21%                    0.54%                  1.67%
-------------------------------------------------------------------------------------------------------
March 31, 2000                              2.59%                    0.53%                  2.06%
-------------------------------------------------------------------------------------------------------
June 30, 2000                               2.55%                    0.50%                  2.05%
-------------------------------------------------------------------------------------------------------
September 30, 2000                          1.61%                    0.52%                  1.09%
-------------------------------------------------------------------------------------------------------
December 31, 2000                           1.93%                    0.43%                  1.50%
-------------------------------------------------------------------------------------------------------
March 31, 2001                              3.24%                    0.54%                  2.70%
=======================================================================================================
</TABLE>

(1) Average equity excludes unrealized gain (loss) on available-for-sale MBS.
(2) Excludes performance fees.
(3) Excludes gain on sale of assets.

The following table shows the Company's average daily balances of cash
equivalents and mortgage assets, the yields earned on each type of earning
assets, the yield on average daily earning assets and interest income.

<TABLE>
<CAPTION>
==================================================================================================================================
                                              Average                                           Yield on
                                               Daily                           Yield on      Average Daily     Yield on
                              Average         Amortized                         Average        Amortized       Average    Dividend
                               Daily          Cost of           Average          Daily          Cost of         Daily       and
                               Cash           Mortgage           Daily           Cash           Mortgage       Earning    Interest
in thousands                Equivalents        Assets        Earning Assets   Equivalents       Assets          Assets     Income
----------------------------------------------------------------------------------------------------------------------------------
<S>                         <C>               <C>            <C>              <C>            <C>               <C>        <C>
For the quarter ended
  June 30, 1998                $6,878         $175,340          $182,218          5.59            6.17          6.14       $2,799
----------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  September 30, 1998           $5,476         $196,014          $201,490          5.56            5.92          5.91       $2,978
----------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
    December 31, 1998          $6,736         $187,444          $194,181          5.00            5.62          5.60       $2,717
----------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  March 31, 1999               $8,384         $170,633          $179,017          4.87            5.40          5.37       $2,404
----------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  June 30, 1999                $6,168         $157,679          $163,846          4.76            5.44          5.41       $2,216
----------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  September 30, 1999           $7,507         $161,379          $168,886          5.15            5.55          5.53       $2,337
----------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  December 31, 1999            $3,751         $162,974          $166,724          5.29            6.10          6.08       $2,536
----------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  March 31, 2000               $2,316         $163,000          $165,316          4.86            6.38          6.36       $2,627
----------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  June 30, 2000                $2,186         $156,317          $158,503          6.30            6.74          6.74       $2,669
----------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  September 30, 2000           $2,075         $148,340          $150,415          6.60            6.78          6.78       $2,549
----------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  December 31, 2000            $1,912         $141,502          $143,414          5.86            6.97          6.95       $2,493
----------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  March 31, 2001               $3,543         $146,951          $150,494          5.39            6.83          6.79       $2,556
==================================================================================================================================
</TABLE>

                                       14
<PAGE>

The table below shows the Company's average daily borrowed funds and average
daily cost of funds as compared to average one- and average three-month LIBOR.

<TABLE>
<CAPTION>
=======================================================================================================================
                                                                                 Average        Average       Average
                                                                                One-month       Cost of       Cost of
                                                                                  LIBOR          Funds         Funds
                        Average               Average    Average    Average      Relative      Relative       Relative
                         Daily                 Daily       One-      Three-     to Average    to Average     to Average
                        Borrowed   Interest   Cost of     Month      Month     Three-month     One-month    Three-month
in thousands             Funds     Expense     Funds      LIBOR      LIBOR        LIBOR          LIBOR         LIBOR
-----------------------------------------------------------------------------------------------------------------------
<S>                     <C>        <C>        <C>         <C>        <C>       <C>            <C>           <C>
For the quarter
ended
June 30, 1998           $162,829    $2,318     5.70%      5.66%      5.69%        (0.03)%        0.04%         0.01%
-----------------------------------------------------------------------------------------------------------------------
For the quarter
ended
September 30, 1998       182,954     2,611     5.71%      5.62%      5.62%          0.00%        0.09%         0.09%
-----------------------------------------------------------------------------------------------------------------------
For the quarter
ended
December 31, 1998        174,611     2,407     5.51%      5.36%      5.27%          0.09%        0.15%         0.24%
-----------------------------------------------------------------------------------------------------------------------
For the quarter
ended
March 31, 1999           157,555     2,036     5.24%      4.95%      5.00%        (0.05)%        0.29%         0.24%
-----------------------------------------------------------------------------------------------------------------------
For the quarter
ended
June 30, 1999            144,828     1,816     5.09%      4.96%      5.08%        (0.12)%        0.13%         0.01%
-----------------------------------------------------------------------------------------------------------------------
For the quarter
ended
September 30, 1999       149,183     1,921     5.22%      5.28%      5.44%        (0.16)%      (0.06)%       (0.22)%
-----------------------------------------------------------------------------------------------------------------------
For the quarter
ended
December 31, 1999        145,923     2,119     5.89%      5.77%      6.13%        (0.36)%      (0.12)%       (0.24)%
-----------------------------------------------------------------------------------------------------------------------
For the quarter
ended
March 31, 2000           144,696     2,132     5.98%      5.93%      6.12%        (0.19)%      (0.05)%       (0.14)%
-----------------------------------------------------------------------------------------------------------------------
For the quarter
ended
June 30, 2000            138,799     2,181     6.37%      6.47%      6.65%        (0.18)%      (0.10)%       (0.28)%
-----------------------------------------------------------------------------------------------------------------------
For the quarter
ended
September 30, 2000       131,880     2,240     6.89%      6.62%      6.70%        (0.08)%        0.17%         0.19%
-----------------------------------------------------------------------------------------------------------------------
For the quarter
ended
December 31, 2000        127,150     2,120     6.76%      6.64%      6.67%        (0.03)%        0.12%         0.09%
-----------------------------------------------------------------------------------------------------------------------
For the quarter
ended
March 31, 2001           130,279     1,921     5.98%      5.47%      5.29%          0.18%        0.51%         0.69%
=======================================================================================================================
</TABLE>



For the quarter ended March 31, 2001, the yield on the Company's total assets,
including the impact of the amortized premiums and discounts, was 6.83%.  The
Company's weighted average cost of funds at March 31, 2001 was 5.40%.

In general, the Company's operating margin can be estimated from the tables
above by comparing the yield on average earning assets to the average daily cost
of funds.  The table below summarizes this operating margin.

                                       15
<PAGE>

=============================================================================
                               Yield on
                                Average           Average
                                 Daily             Daily            Average
                                Earning           Cost of          Operating
                                Assets             Funds            Margin
-----------------------------------------------------------------------------
For the quarter ended
  June 30, 1998                  6.14%             5.70%             0.44%
-----------------------------------------------------------------------------
For the quarter ended
  September 30, 1998             5.91%             5.71%             0.20%
-----------------------------------------------------------------------------
For the quarter ended
    December 31, 1998            5.60%             5.51%             0.09%
-----------------------------------------------------------------------------
For the quarter ended
  March 31, 1999                 5.37%             5.24%             0.13%
-----------------------------------------------------------------------------
For the quarter ended
  June 30, 1999                  5.41%             5.09%             0.32%
-----------------------------------------------------------------------------
For the quarter ended
  September 30, 1999             5.53%             5.22%             0.31%
-----------------------------------------------------------------------------
For the quarter ended
  December 31, 1999              6.08%             5.89%             0.19%
-----------------------------------------------------------------------------
For the quarter ended
  March 31, 2000                 6.36%             5.98%             0.38%
-----------------------------------------------------------------------------
For the quarter ended
June 30, 2000                    6.74%             6.37%             0.37%
-----------------------------------------------------------------------------
For the quarter ended
September 30, 2000               6.78%             6.89%           (0.11)%
-----------------------------------------------------------------------------
For the quarter ended
December 31, 2000                6.98%             6.76%             0.22%
-----------------------------------------------------------------------------
For the quarter ended
March 31, 2001                   6.83%             5.98%             0.85%
=============================================================================

The Company pays the Manager an annual base management fee, generally based on
average net invested assets, as defined in the Management Agreement, payable
monthly in arrears as follows: 1.0% of the first $300 million of Average Net
Invested Assets, plus 0.8% of the portion above $300 million.

In order for the Manager to earn a performance fee, the rate of return on the
stockholders' investment, as defined in the Management Agreement, must exceed
the average ten-year U.S. Treasury rate during the quarter plus 1%. During the
first quarter of 2001, the Manager earned $56,000 in incentive fee. During the
first quarter of 2001, the Company's return on stockholder's investment was 2.8%
or, on an annualized basis, 11.29%.  The ten-year U.S. Treasury rate for the
corresponding period was 5.0%.

The following table shows operating expenses as a percent of total assets:

ANNUALIZED OPERATING EXPENSE RATIOS

<TABLE>
<CAPTION>
====================================================================================================
                          Management Fee & Other                                Total G&A Expenses/
For The                          Expenses/                Performance Fee/          Total Assets
Quarter Ended                  Total Assets                 Total Assets
----------------------------------------------------------------------------------------------------
<S>                       <C>                             <C>                   <C>
Jun 30, 1998                      0.23%                        0.00%                   0.23%
----------------------------------------------------------------------------------------------------
Sep 30, 1998                      0.24%                        0.00%                   0.24%
----------------------------------------------------------------------------------------------------
Dec 31, 1998                      0.09%                        0.00%                   0.09%
----------------------------------------------------------------------------------------------------
Mar 31, 1999                      0.21%                        0.00%                   0.21%
----------------------------------------------------------------------------------------------------
Jun 30, 1999                      0.21%                        0.00%                   0.21%
----------------------------------------------------------------------------------------------------
Sep 30, 1999                      0.27%                        0.00%                   0.27%
----------------------------------------------------------------------------------------------------
Dec 31, 1999                      0.24%                        0.00%                   0.24%
----------------------------------------------------------------------------------------------------
Mar 31, 2000                      0.25%                        0.00%                   0.25%
----------------------------------------------------------------------------------------------------
Jun 30, 2000                      0.25%                        0.00%                   0.25%
----------------------------------------------------------------------------------------------------
Sep 30, 2000                      0.27%                        0.00%                   0.27%
----------------------------------------------------------------------------------------------------
Dec 31, 2000                      0.23%                        0.00%                   0.23%
----------------------------------------------------------------------------------------------------
Mar 31, 2001                      0.26%                        0.14%                   0.40%
====================================================================================================
</TABLE>

                                       16
<PAGE>

HEDGING

The Company did not enter into any interest rate agreements to date. As part of
its asset/liability management process, the Company may enter into interest rate
agreements such as interest rate caps, floors and swaps.  These agreements would
be entered into to reduce interest rate risk and would be designed to provide
income and capital appreciation to the Company in the event of certain changes
in interest rates.  The Company reviews the need for interest rate agreements on
a regular basis consistent with its Capital Investment Policy.

The Company has not experienced credit losses on its portfolio of mortgage
backed securities to date, but losses may be experienced in the future.  At
March 31, 2001, the Company had limited its exposure to credit losses on its
portfolio of MBS by purchasing primarily Agency Certificates, which, although
not rated, carry an implied "AAA" rating.

COMMON DIVIDEND

As a REIT, the Company is required to declare dividends amounting to 85% of each
year's taxable income by the end of each calendar year and to have declared
dividends amounting to 95% of its taxable income for each year by the time it
files its applicable tax return.  The Company 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.

On April 20, 2001 the Company declared a dividend of $0.20 per share payable on
May 16, 2001 to holders of record as of May 2, 2001.

The following table shows the dividends paid by the Company since it first began
paying dividends in June of 1998:

<TABLE>
<CAPTION>
==================================================================
For the quarter ended                          Dividend per share
------------------------------------------------------------------
<S>                                            <C>
June 30, 1998                                  $0.15
------------------------------------------------------------------
September 30, 1998                             $0.10
------------------------------------------------------------------
December 31, 1998                              $0.12
------------------------------------------------------------------
March 31, 1999                                 $0.12
------------------------------------------------------------------
June 30, 1999                                  $0.13
------------------------------------------------------------------
September 30, 1999                             $0.14
------------------------------------------------------------------
December 31, 1999                              $0.14
------------------------------------------------------------------
March 31, 2000                                 $0.15
------------------------------------------------------------------
June 30, 2000                                  $0.15
------------------------------------------------------------------
September 30, 2000                             $0.10
------------------------------------------------------------------
December 31, 2000                              $0.11
------------------------------------------------------------------
March 31, 2001                                 $0.20
==================================================================
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of funds for the quarter ended March 31, 2001
consisted of reverse repurchase agreements, which totaled $141 million at March
31, 2001.  The Company's other significant source of funds for the quarter ended
March 31, 2001 consisted of payments of principal and interest from its mortgage
securities portfolio in the amount of $8.0 million.  In the future, the Company
expects its primary sources of funds will consist of borrowed funds under
reverse repurchase agreement transactions with one- to twelve-month maturities
and of monthly payments of principal and interest on its MBS securities
portfolio.  The Company's liquid assets generally consist of unpledged MBS
assets, cash and cash equivalents.

The borrowings incurred during the quarter ended March 31, 2001 had a weighted
average interest cost during the quarter of 6.0% compared with 5.9% for the
quarter ended March 31, 2000.  As of March 31, 2001, all of the Company's
reverse repurchase agreements were fixed-rate term reverse repurchase agreements
with original maturities that range from three months to one year.  The Company
has borrowing arrangements with ten different financial institutions and on
March 31, 2001, had borrowed funds under reverse repurchase agreements with nine
of these firms. Because the Company borrows money based on the fair value of its
MBS and because increases in short-term interest rates can negatively impact the
valuation of MBS, the Company's borrowing

                                       17
<PAGE>

ability could be limited and lenders may initiate margin calls in the event
short-term interest rates increase or the value of the Company's MBS declines
for other reasons. During the quarter ended March 31, 2001, the Company had
adequate cash flow, liquid assets and unpledged collateral with which to meet
its margin requirements during the period. Further, 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.

STOCKHOLDERS' EQUITY

The Company uses "available-for-sale" treatment for its Mortgage-Backed
Securities; these assets are carried on the balance sheet at fair value rather
than historical amortized cost. Based upon such "available-for-sale" treatment,
the Company's equity base at March 31, 2001 was $19.0 million, or $8.04 per
share. If the Company had used historical amortized cost accounting, the
Company's equity base at March 31, 2001 would have been $19.7 million, or
$8.36 per share.

With the Company's "available-for-sale" accounting treatment, unrealized
fluctuations in fair values of assets do not impact GAAP or taxable income but
rather are reflected on the balance sheet by changing the carrying value of the
asset and reflecting the change in stockholders' equity under "Other
comprehensive income, unrealized gain (loss) on available for sale securities."
By accounting for its assets in this manner, the Company hopes to provide useful
information to stockholders and creditors and to preserve flexibility to sell
assets in the future without having to change accounting methods.

As a result of this mark-to-market accounting treatment, the book value and book
value per share of the Company are likely to fluctuate far more than if the
Company used historical amortized cost accounting. As a result, comparisons with
companies that use historical cost accounting for some or all of their balance
sheet may be misleading.

Unrealized changes in the fair value of Mortgage-Backed Securities have one
significant and direct effect on the Company's potential earnings and dividends:
positive mark-to-market changes will increase the Company's equity base and
allow the Company to increase its borrowing capacity while negative changes will
tend to limit borrowing capacity under the Company's Capital Investment Policy.
A very large negative change in the net market value of the Company's Mortgage-
Backed Securities might impair the Company's liquidity position, requiring the
Company to sell assets with the likely result of realized losses upon sale.
"Other comprehensive income, unrealized gain (loss) on available for sale
securities" was $(0.75) million, or (0.48)% of the amortized cost of mortgage
backed securities at March 31, 2001.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

EFFECTS OF INTEREST RATE CHANGES

The Company has invested in adjustable-rate mortgage securities. Adjustable-rate
mortgage assets are typically subject to periodic and lifetime interest rate
caps that limit the amount an adjustable-rate mortgage securities' interest rate
can change during any given period. Adjustable-rate mortgage securities are also
typically subject to a minimum interest rate payable. The Company borrowings
will not be subject to similar restrictions. Hence, in a period of increasing
interest rates, interest rates on its borrowings could increase without
limitation by caps, while the interest rates on its mortgage assets could be so
limited. This problem would be magnified to the extent the Company acquires
mortgage assets that are not fully indexed. Further, some adjustable-rate
mortgage assets may be subject to periodic payment caps that result in some
portion of the interest being deferred and added to the principal outstanding.
This could result in receipt by the Company of less cash income on its
adjustable-rate mortgage assets than is required to pay interest on the related
borrowings. These factors could lower the Company's net interest income or cause
a net loss during periods of rising interest rates, which would negatively
impact the Company's liquidity and its ability to make distributions to
stockholders.

The Company intends to fund the purchase of a substantial portion of its
adjustable-rate mortgage securities with borrowings that may have interest rates
based on indices and repricing terms similar to, but of somewhat shorter
maturities than, the interest rate indices and repricing terms of the mortgage
assets. Thus, the Company anticipates that in most cases the interest rate
indices and repricing terms of its mortgage assets and its funding sources will
not be identical, thereby creating an interest rate mismatch between assets and
liabilities. During periods of changing interest rates, such interest rate
mismatches could negatively impact the Company's net income, dividend yield and
the market price of the Common Stock.

Prepayments are the full or partial repayment of principal prior to the original
term to maturity of a mortgage loan and typically occur due to refinancing of
mortgage loans.  Prepayment rates on mortgage securities vary from time to time
and may cause changes

                                       18
<PAGE>

in the amount of the Company's net interest income. Prepayments of adjustable-
rate mortgage loans usually can be expected to increase when mortgage interest
rates fall below the then-current interest rates on such loans and decrease when
mortgage interest rates exceed the then-current interest rate on such loans,
although such effects are not predictable. Prepayment experience also may be
affected by the conditions in the housing and financial markets, general
economic conditions and the relative interest rates on fixed-rate and
adjustable-rate mortgage loans underlying mortgage securities. The purchase
prices of mortgage securities are generally based upon assumptions regarding the
expected amounts and rates of prepayments. Where slow prepayment assumptions are
made, the Company may pay a premium for mortgage securities. To the extent such
assumptions materially and adversely differ from the actual amounts of
prepayments, the Company could experience reduced earnings or losses. The total
prepayment of any mortgage asset that had been purchased at a premium by the
Company would result in the immediate write-off of any remaining capitalized
premium amount and consequent reduction of the Company's net interest income by
such amount. Finally in the event that the Company is unable to acquire new
mortgage assets to replace the prepaid mortgage assets, its financial condition,
cash flows and results of operations could be materially adversely affected.

OTHER MATTERS

As of March 31, 2001, the Company calculates its Qualified REIT Assets, as
defined in the Internal Revenue Code of 1986, as amended (the "Code"), to be
greater than 90% 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 greater than 98% of its 2000 revenue qualifies for both the 75%
source of income test and the 95% source of income test under the REIT rules.
The Company believes it met all REIT requirements regarding the ownership of its
common stock and the distributions of its net income. Therefore, as of March 31,
2001, the Company believes that it will continue to qualify as a REIT under the
provisions of the Code.

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, as
amended (the "Investment Company Act). 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 of the certificates issued with respect to an
underlying pool of mortgages, such mortgage securities may be treated as
securities separate from the underlying mortgage loans and, thus, may not be
considered Qualifying Interests for purposes of the 55% requirement. The Company
calculates that it is in compliance with this requirement.


PART II. OTHER INFORMATION

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

Item 2. Changes in Securities
Not applicable

Item 3. Defaults Upon Senior Securities
Not applicable

Item 4. Submission of Matters to a Vote of Security Holders
Not applicable

Item 5. Other Information

On September 22, 1999 the Company filed with the Securities and Exchange
Commission a Prospectus describing the Company's Dividend Reinvestment and Stock
Purchase Plan.  The Prospectus relates to the offer and sale of 450,000
authorized but unissued shares of Common Stock under the Plan, of which no more
than 225,000 may be issued through the Optional and Initial Cash

                                       19
<PAGE>

Purchases. The Dividend Reinvestment and Stock Purchase Plan provides both
existing stockholders of the Company's common stock and interested new investors
with a convenient and cost effective method to purchase shares of the common
stock. A copy of the Prospectus is available from the Securities and Exchange
Commission or by writing or phoning the Company at 1299 Ocean Avenue, Suite 200,
Santa Monica, CA 90401, phone 310-394-0115.


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

(a) Exhibits
None

(b) Reports on Form 8-K
None

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,



ANWORTH MORTGAGE ASSET CORPORATION



Dated: May 15, 2001



By: /s/ Lloyd McAdams
-------------------------
Lloyd McAdams
President
(authorized officer of registrant)



Dated: May 15, 2001



By: /s/ Pamela J. Watson
-------------------------
Pamela J. Watson,
Chief Financial Officer and Treasurer
(principal accounting officer)

                                       20