<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 JUNE 30, 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 June 30, 2001, 2,375,427 shares of Common Stock, $0.01 par value per
share, were outstanding.

                            ______________________

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

                                     INDEX
                                     -----


Part I.    Financial Information                                            Page
-------    ---------------------                                            ----

Item 1.    Financial Statements

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

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

             Statement of Stockholders' Equity for the three months ended
             March 31, 2001 and June 30, 2001...............................  5

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

             Notes to the Financial Statements..............................  7

Item 2.  Management's Discussion and Analysis of
         Financial Condition and Results of Operations...................... 10


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............................... 19


Signatures.................................................................. 20

                                       2
<PAGE>

PART 1. FINANCIAL INFORMATION

Item 1.  Financial Statements
ANWORTH MORTGAGE ASSET CORPORATION
Balance Sheets
  (Amounts in thousands)

<TABLE>
<CAPTION>

                                                 June 30, 2001        December 31, 2000
                                                 -------------        -----------------
                                                  (unaudited)
<S>                                              <C>                  <C>
Assets
  Mortgage backed securities                          $161,047                 $134,889
  Other marketable securities                            1,713                    1,948
  Cash and cash equivalents                              1,140                    3,894
  Accrued interest and dividends receivable              1,133                    1,090
  Prepaid expenses and other                                34                       13
                                                 -------------        -----------------
                                                      $165,066                 $141,834
                                                 =============        =================

Liabilities and Stockholders'
 Equity

Liabilities
  Reverse repurchase agreements                       $134,437                 $121,891
  Payable for securities purchased                      10,094
  Accrued interest payable                                 883                    1,706
  Dividends payable                                          -                        -
  Accrued expenses and other                               272                       36
                                                 -------------        -----------------
                                                       145,686                  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;  2,425,427 and
   2,400,016 issued and 2,375,427 and 2,350,016
   outstanding respectively                                 24                       24
  Additional paid in capital                            19,378                   19,243
  Accumulated other comprehensive income,
   unrealized gain (loss) on available for sale
   securities                                             (650)                  (1,186)
  Retained earnings                                        857                      349
  Treasury stock at cost (50,000 shares)                  (229)                    (229)
                                                 -------------        -----------------
                                                        19,380                   18,201
                                                 -------------        -----------------
                                                      $165,066                 $141,834
                                                 =============        =================
</TABLE>

See notes to financial statements.

                                       3
<PAGE>

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

<TABLE>
<CAPTION>
                                            Three months ended June 30,       Six months ended June 30,
                                            ---------------------------       -------------------------
                                               2001             2000            2001             2000
                                               ----             ----            ----             ----
<S>                                          <C>              <C>              <C>             <C>
Interest and dividend income net of
  amortization of premium                    $ 2,518          $ 2,646          $ 5,075         $ 5,273
Interest expense                              (1,650)          (2,181)          (3,571)         (4,313)
                                             -------          -------          -------         -------
Net interest income                          $   868          $   465          $ 1,504         $   960

  Gain on sale of assets                          81                               152
Less:
  Management fee                                 (49)             (41)             (96)            (82)
  Incentive fee                                  (88)               -             (144)             (1)
  Other expense                                 (118)             (56)            (177)           (116)
                                             -------          -------          -------         -------
Net Income                                   $   694          $   368          $ 1,239         $   761
                                             =======          =======          =======         =======
Basic and diluted earnings per share         $  0.29          $  0.16          $  0.52         $  0.33
                                             =======          =======          =======         =======
Dividends declared per share (Note 1)        $  0.24          $  0.15          $  0.44         $  0.30
                                             =======          =======          =======         =======
Average number of shares outstanding           2,368            2,326            2,361           2,320
                                             =======          =======          =======         =======
Statement of Comprehensive Income

Net Income                                   $   694          $   368           $1,239         $   761
Available for sale securities,
  fair value adjustment                           98             (330)             535            (923)
                                             -------          -------          -------         -------
Comprehensive Income                         $   792          $    38           $1,774         $  (162)
                                             =======          =======          =======         =======
</TABLE>

Note 1:  Effective as of the third quarter of 2000,
         dividends are declared after the close of the quarter

See notes to financial statements.

                                       4
<PAGE>

Statements of Stockholders' Equity (unaudited)
For the three months ended March 31, 2001 and June 30, 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           0          45                                                             45
 Available-for-sale securities,
  Fair value adjustment                                                         437                                  437        437
 Net income                                                                                 545                      545        545
                                                                                                               ---------
Other comprehensive income (loss)                                                                                $   982
                                                                                                               =========
 Dividends declared-
  $0.11 per share                                                                          (259)                               (259)

                                    ----------------------------------------------------------------------                ---------
Balance, March 31, 2001                2,360    $     24   $  19,287    $      (749)   $    635    $  (229)                $ 18,969
                                    ======================================================================                =========

 Issuance of common stock                 16           0          91                                                             91
 Available-for-sale securities,
  Fair value adjustment                                                          98                                   98         98
 Net income                                                                                 694                      694        694
                                                                                                               ---------
Other comprehensive income (loss)                                                                                $   792
                                                                                                               =========
 Dividends declared-
  $0.20 per share                                                                          (472)                               (472)

                                    ----------------------------------------------------------------------                ---------
Balance, June 30, 2001                 2,375    $     24   $  19,378    $      (650)   $    857    $  (229)                $ 19,380
                                    ======================================================================                =========
</TABLE>

See notes to financial statements.

                                       5
<PAGE>

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

<TABLE>
<CAPTION>
                                                            For the three months ended June 30,
                                                                2001                   2000
                                                            ------------            -----------
<S>                                                         <C>                     <C>
Operating Activities:
  Net income                                                $    694                $    368
  Adjustments to reconcile net income to
  net cash provided by operating activities:
   Amortization                                                  309                     158
   Decrease (increase) in accrued interest
    and dividends receivable                                     155                      17
   Increase (decrease) in accrued interest payable               (64)                   (984)
   Increase (decrease) in accrued expenses and other             163                     (19)
                                                            --------                --------
    Net cash provided by operating activities                  1,257                    (460)

Investing Activities:
  Available-for-sale securities:
  Purchases                                                   (8,349)                    (67)
  Proceeds from sale                                             747                       -
  Principal payments                                          13,340                   6,540
                                                            --------                --------
    Net cash provided by (used in) investing activities        5,738                   6,473

Financing Activities:
  Net borrowings from reverse repurchase agreements           (6,165)                 (6,855)
  Proceeds from common stock issued, net                          91                      58
  Repurchase of common stock                                       -                       -
  Dividends paid                                                (472)                   (347)
                                                            --------                --------
    Net cash provided by (used in) financing activities       (6,546)                 (7,144)
                                                            --------                --------
Net increase (decrease) in cash and cash equivalents             449                  (1,131)
Cash and cash equivalents at beginning of period                 691                   4,693
                                                            --------                --------
Cash and cash equivalents at end of period                  $  1,140                $  3,562
                                                            ========                ========

See notes to financial statements.
</TABLE>

                                       6
<PAGE>

NOTES TO FINANCIAL STATEMENTS
June 30, 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 securities ("MBS") 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 June 30, 2001 are not
necessarily indicative of the results that may be expected for the calendar year
ending December 31, 2001.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents 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 June 30, 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 June 30,
2001, over 99% of the Company's mortgage backed securities have an implied "AAA"
rating.

INCOME TAXES

                                       7
<PAGE>

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. The impact of this dilution for the quarter ended June 30, 2001 was less
than one half of one cent.

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 June 30, 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                 $34,526         $126,424           $0   $160,949
Paydown Receivable                 970                                      970
Unrealized gains                    35              361                     396
Unrealized losses                 (272)            (997)                 (1,269)
                         ------------------------------------------------------
Fair value                     $35,258         $125,788           $0   $161,046
                         ------------------------------------------------------
</TABLE>

In addition, at June 30, 2001 the Company held a position in a preferred stock
issued by Thornburg Mortgage Inc. which had a fair value of $1,713,000.

The following table summarizes the Company's securities as of  June 30, 2001 at
their fair value:

<TABLE>
<CAPTION>
                                               Fixed
                                                Rate        REIT
($000's)                         ARMS            MBS       Stock        Total
-------------------------------------------------------------------------------
<S>                          <C>             <C>          <C>        <C>
Amortized Cost               $125,074        $35,875      $1,491     $162,440
Paydown Receivable                970                                     970
Unrealized gains                  172            224         222          618
Unrealized losses                (847)          (422)                  (1,269)
                          ---------------------------------------------------
Estimated fair value         $125,369        $35,677      $1,713     $162,759
                          ---------------------------------------------------
</TABLE>

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

                                       8
<PAGE>

moved in close relationship to London Interbank Offered Rate ("LIBOR"). At June
30, 2001 the Company's reverse repurchase agreements had an average term to
maturity of 27 days.

At June 30, 2001, the repurchase agreements had the following remaining
maturities:

<TABLE>
<CAPTION>

--------------------------------------------------------------------------------
<S>                                           <C>
  Within 59 days                              $121,862,000
  60 to 89 days                                 12,575,000
  90 to 119 days                                         0
                                            --------------
                                              $134,437,000
                                            --------------
</TABLE>

NOTE 4. 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 June 30, 2001 and June 30, 2000, the Company paid the
Manager $49,000 and $41,000, respectively, in base management fee.  For the
second quarters of 2001 and 2000, the Company paid the Manager $88,000 for the
quarter ended June 30, 2001 and no incentive compensation for the quarter ended
June 30, 2000.

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 600,000 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 June 30,
2001, 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 strike price of such options.  The Company recognizes compensation
expense at the time the market price of the stock exceeds the effective strike
price.

During the quarter ended June 30, 2001, 114,000 of the outstanding DER's were
truncated and shortly after June 30, 2001 the remaining 34,500 DER's were
truncated.  After the dividend declared on April 20, 2001, no more dividends
will accrue to the DER's.

For the quarter ended June 30, 2001, the Company recorded $61,000 in operating
expense associated with this plan.

NOTE 5.  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.

                                       9
<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 and January 19, 2001 meetings the Board of Directors
approved modifications to the Company's operating policy.  In June of 1999 the
Company modified its policy of investing primarily in adjustable rate mortgage
assets. The current 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.  In January of 2001 the Board
approved a change in the classification of shares of other REITS or mortgage
related companies from Category III to Category II, as defined below.   See
"Statement of Operating Policies" below.

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
changes in operating policies is uncertain.

Under the current 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 Company's
assets are expected to be investments that qualify for Category I above or
Mortgage Assets including (a) unrated Mortgage Loans, (b) Mortgage Securities
rated at least Investment Grade by at least one nationally recognized
statistical rating

                                       10
<PAGE>

organization, and (c) shares of other REITS or mortgage related companies
(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 and (b) leveraged Mortgage Derivative
Securities (Category III 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 June 30, 2001, the Company held total assets of $165 million, consisting
primarily of $114 million of ARMs, $45 million of fixed-rate mortgage backed
securities and $1.7 million of REIT preferred stock.  This balance sheet size
represents an approximate 5% increase over the balance sheet size at June 30,
2000.  At June 30, 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, 80% were adjustable-rate pass-through
certificates which reset at least once a year.  The remaining 20% 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.  A small position in a
private placement, non-agency mortgage backed asset was sold during the period
at a gain.

The following table presents a schedule of mortgage backed securities owned at
June 30, 2001, classified by type of issuer.

MORTGAGE SECURITIES BY ISSUER
(Dollar amounts in thousands)

<TABLE>
<CAPTION>

Agency                              Carrying              Portfolio
                                     Value               Percentage
-----------------------------------------------------------------------------
<S>                                 <C>                  <C>
FNMA                                $125,788                78.6%
-----------------------------------------------------------------------------
FHLMC                                 34,288                21.4%
-----------------------------------------------------------------------------
Private Placement                      0                     0.0%
-----------------------------------------------------------------------------
  Total Portfolio                   $160,076               100.0%
=============================================================================
</TABLE>

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               $    708            0.4%
-----------------------------------------------------------------
Six-month LIBOR                  5,645            3.5%
-----------------------------------------------------------------
Six-month Certificate of
 Deposit                         2,656            1.7%
-----------------------------------------------------------------
One-year Constant
 Maturity Treasury             101,096           63.2%
-----------------------------------------------------------------
Cost of Funds Index              4,252            2.7%
-----------------------------------------------------------------
Fixed rate                      45,719           28.6%
-----------------------------------------------------------------
                              $160,076          100.0%
=================================================================
</TABLE>

                                       11
<PAGE>

The ARM portfolio had a weighted average coupon of 7.37% at June 30, 2001.  The
weighted average one-month constant prepayment rates ("CPR") of the Company's
MBS portfolio were 35%, 27% and 26%, respectively, for the months of April, May
and June 2001.  At June 30, 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 $0.65 million less than the amortized cost
of the securities, resulting in a negative adjustment of 0.40% of the amortized
cost of the portfolio as of June 30, 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 $222,000
more than its cost, resulting in a positive adjustment of 14.9% of the cost of
the securities as of June 30, 2001.  The price increase reflects an decrease in
interest rates which caused the price of the security to rise.


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

For the quarter ended June 30, 2001, the Company's net income was $694,000, or
$0.29 per share (basic and diluted EPS), based on an average of 2,367,000 shares
outstanding.  Net interest income for the quarter totaled $868,000.  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 June 30, 2000, the Company's net income was $368,000.  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 second quarters of 2001 and 2000, the Company incurred operating
expenses of $255,000 and $97,000 respectively, consisting in 2001 of a base
management fee of $49,000, incentive management fee of $88,000 and other
operating expenses of $118,000 and in 2000 of a base management fee of $41,000,
no incentive management fee and other operating expenses of $56,000.  The
primary difference in operating expenses in the second quarter of 2001 versus
the first quarter of 2000 was increase in incentive management fee and
compensation expense associated with the Company's Stock Option and Awards Plan.
Also, during the second quarter of 2001, the Company realized a gain on the sale
of assets of $81,000.

The Company's return on average equity was 3.49% or, on an annualized basis,
14.72%, for the quarter ended June 30, 2001. The table below shows the
components of return on average equity.

                                       12
<PAGE>

COMPONENTS OF RETURN ON AVERAGE EQUITY/1/

<TABLE>
<CAPTION>
For the Quarter Ended                 Net Interest Income/               G&A Expense/2//                 Net Income/
                                             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%
--------------------------------------------------------------------------------------------------------------------------
June 30, 2001                                4.34%                            0.85%                         3.49%
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

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


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         Yield on       Yield on
                              Average          Daily                            Average      Average Daily     Average    Dividend
                               Daily       Amortized Cost       Average          Daily       Amortized Cost     Daily       and
                               Cash         of Mortgage          Daily           Cash         of 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              $2,075           $146,951          $150,494         5.39            6.83           6.79     $2,556
----------------------------------------------------------------------------------------------------------------------------------
For the quarter ended
  June 30, 2001               $4,706           $153,069          $157,775         4.14            6.42           6.35     $2,506
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       13
<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%
-----------------------------------------------------------------------------------------------------------------------
For the quarter
ended
June 30, 2001            138,275      1,649      4.84%      4.27%      4.17%          0.04%         0.57%          0.67%
-----------------------------------------------------------------------------------------------------------------------
</TABLE>

For the quarter ended June 30, 2001, the yield on the Company's total assets,
including the impact of the amortized premiums and discounts, was 6.42%.  The
Company's weighted average cost of funds at June 30, 2001 was 4.31%.

                                       14

<PAGE>

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.

<TABLE>
<CAPTION>
                                 Average             Average
                                  Daily               Daily              Average
                                 Earning             Cost of            Operating
                                 Assets               Funds              Margin
------------------------------------------------------------------------------------
<S>                              <C>                 <C>                <C>
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%
------------------------------------------------------------------------------------
For the quarter ended
June 30, 2001                     6.42%               4.84%               1.58%
------------------------------------------------------------------------------------
</TABLE>


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
second quarter of 2001, the Manager earned $88,000 in incentive fee. During the
second quarter of 2001, the Company's return on stockholder's investment was
3.6% or, on an annualized basis, 14.4%.  The ten-year U.S. Treasury rate for the
corresponding period was 5.3%.

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%
--------------------------------------------------------------------------------------------------------------------------
Jun 30, 2001                            0.41%                           0.21%                           0.62%
--------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       15
<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 June
30, 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 (90% for taxable years
beginning after January 1, 2001) 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 July 23, 2001 the Company declared a dividend of $0.24 per share payable on
August 16, 2001 to holders of record as of August 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
------------------------------------------------------------------------------
June 30, 2001                               $0.24
------------------------------------------------------------------------------
</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary source of funds for the quarter ended June 30, 2001
consisted of reverse repurchase agreements, which totaled $134 million at June
30, 2001.  The Company's other significant source of funds for the quarter ended
June 30, 2001 consisted of payments of principal and interest from its mortgage
securities portfolio in the amount of $13.3 million.  Finally, in

                                       16
<PAGE>

September of 1999 the Company instituted its Dividend Reinvestment and Stock
Purchase Plan; the Company has raised $448,000 in capital to date under this
plan.

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 June 30, 2001 had a weighted
average interest cost during the quarter of 4.8% compared with 6.4% for the
quarter ended June 30, 2000.  As of June 30, 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 eleven different financial institutions and on June
30, 2001, had borrowed funds under reverse repurchase agreements with ten 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 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
June 30, 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 June 30, 2001 was $19.0 million, or $8.16 per
share.   If the Company had used historical amortized cost accounting, the
Company's equity base at June 30, 2001 would have been $20.0 million, or $8.43
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 $(0.65) million, or (0.40)% of the amortized cost of mortgage
backed securities at June 30, 2001.

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

                                       17
<PAGE>

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 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 June 30, 2001, the Company calculates its Qualified REIT Assets, as
defined in the Internal Revenue Code of 1986, as amended (the "Code"), to be
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 2001 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 June 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, 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.

                                       18
<PAGE>
PART II. OTHER INFORMATION

Item 1. Legal Proceedings
At June 30, 2001, there were no pending legal proceedings to which the Company
was a party or of which any of its property was subject.

Item 2. Changes in Securities


Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

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

The Company held its annual meeting of stockholders (the "Annual Meeting") on
June 28, 2001 in Santa Monica, California. At the Annual Meeting, the following
persons were elected directors for a one-year term ending in 2002 based on the
voting results below.

     Name                         For                      Withheld
     ----                         ---                      --------
     Lloyd McAdams                2,285,482                48,359
     Charles H. Black             2,280,406                53,435
     Joe E. Davis                 2,285,482                48,359
     Charles F. Smith             2,288,482                45,359

The stockholders ratified an amendment to the Anworth 1997 Stock Option and
Awards Plan to increase the authorized number of shares under this plan. The
voting results were as follows:

             For           Against        Abstain      Not Voted
             ---           -------        -------      ---------
             821,624       343,714        30,374       1,138,129

The stockholders also ratified the appointment of PricewaterhouseCoopers LLP
as independent accountants of the Company for the fiscal year ending December
31, 2001. The voting results were as follows:

              For                   Against                Abstain
              ---                   -------                -------
              13,377,840            75,027                 33,682

Item 5. Other Information

Not applicable

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

(a) Exhibits

None


(b) Reports on Form 8-K

None

                                       19
<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,



ANWORTH MORTGAGE ASSET CORPORATION



Dated: August 10, 2001


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



Dated: August 10, 2001


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

                                       20