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

FORM 10-K

(mark one)



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

For the fiscal year ended: December 31, 2002

OR



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

For the transition period from to

Commission File Number: 001-11914

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

|                                                                                               |  |                                                   
|---------------------------------------------------------------------------------------------- |  | --------------------------------------------------
|Maryland
(State or other jurisdiction of
incorporation or organization)                        |  | 85-0404134
(I.R.S. Employer
Identification Number)
|                                                                                               |  |                                                   
|150 Washington Avenue, Suite 302
Santa Fe, New Mexico
(Address of principal executive offices) |  | 87501
(Zip Code)                                  

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

Securities registered pursuant to Section 12(b) of the Act:

|                                                                       |  |                                     
|---------------------------------------------------------------------- |  | ------------------------------------
|Title of Each Class                                                    |  | Name of Exchange on Which Registered
|                                                                       |  |                                     
|Common Stock ($.01 par value)                                          |  | New York Stock Exchange             
|Series A 9.68% Cumulative Convertible Preferred Stock ($.01 par value) |  | New York Stock Exchange             

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

YesX No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. o

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934).

YesX No

At June 28, 2002, the aggregate market value of the voting stock held by
non-affiliates was $847,465,461, based on the closing price of the common stock
on the New York Stock Exchange.

Number of shares of Common Stock outstanding at March 4, 2003: 57,633,721

DOCUMENTS INCORPORATED BY REFERENCE:



| |  | Portions of the Registrants Proxy Statement to be filed within 120 days
after the close of the Registrants fiscal year in connection with the Annual
Meeting of Shareholders of the Registrant to be held on April 22, 2003, are
incorporated by reference into Part III.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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TABLE OF CONTENTS



|                                                 |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------ | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|PART I                                          
|                                                 | ITEM 1. BUSINESS                                                                                       
|                                                 | Item 2. PROPERTIES                                                                                     
|                                                 | Item 3. LEGAL PROCEEDINGS                                                                              
|                                                 | Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            
|PART II                                         
|                                                 | Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                                       
|                                                 | Item 6. SELECTED FINANCIAL DATA                                                                        
|                                                 | Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS          
|                                                 | Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                    
|                                                 | Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    
|                                                 | Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.          
|PART III                                        
|                                                 | Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                            
|                                                 | Item 11. EXECUTIVE COMPENSATION                                                                        
|                                                 | Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
|                                                 | Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                
|                                                 | Item 14. CONTROLS AND PROCEDURES                                                                       
|                                                 | Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                               
|Index to Consolidated Financial Statements      
|Report of Independent Accountants               
|CONSOLIDATED BALANCE SHEETS                     
|CONSOLIDATED INCOME STATEMENTS                  
|CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY 
|CONSOLIDATED STATEMENTS OF CASH FLOWS           
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS      
|SIGNATURES                                      
|CERTIFICATIONS                                  
|Exhibit Index                                   
|EX-10.9 Amended/Restated 2002 Long-Term Plan    
|EX-23.1 Consent of Independent Accountants      
|EX-99.1 Certification of Chief Executive Officer
|EX-99.2 Certification of Chief Operating Officer
|EX-99.3 Certification of Chief Financial Officer



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THORNBURG MORTGAGE, Inc.
2002 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS

|                     |  |                                                                                                |  |     
|-------------------- |  | ---------------------------------------------------------------------------------------------- |  | ----
|                     |  |                                                                                                |  | Page
|                     |  |                                                                                                |  |     
|                     |  | PART I                                                                                         |  |     
|ITEM 1.              |  | BUSINESS                                                                                       |  | 4   
|ITEM 2.              |  | PROPERTIES                                                                                     |  | 21  
|ITEM 3.              |  | LEGAL PROCEEDINGS                                                                              |  | 21  
|ITEM 4.              |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                            |  | 21  
|                     |  | PART II                                                                                        |  |     
|ITEM 5.              |  | MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                                       |  | 22  
|ITEM 6.              |  | SELECTED FINANCIAL DATA                                                                        |  | 23  
|ITEM 7.              |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS          |  | 24  
|ITEM 7A              |  | QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISKS                                     |  | 45  
|ITEM 8.              |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    |  | 45  
|ITEM 9.              |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE           |  | 45  
|                     |  | PART III                                                                                       |  |     
|ITEM 10.             |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                             |  | 45  
|ITEM 11.             |  | EXECUTIVE COMPENSATION                                                                         |  | 45  
|ITEM 12.             |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS |  | 45  
|ITEM 13.             |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                 |  | 45  
|ITEM 14.             |  | CONTROLS AND PROCEDURES                                                                        |  | 45  
|ITEM 15.             |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K                                |  | 46  
|FINANCIAL STATEMENTS |  | F-1                                                                                           
|SIGNATURES           |  |                                                                                                |  |     
|EXHIBIT INDEX        |  |                                                                                                | 

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PART I




Item 1. BUSINESS

General

We are a single-family residential mortgage lender that originates, acquires
and retains investments in adjustable and variable rate mortgage (ARM) assets
comprised of ARM securities and ARM loans, hybrid ARM securities and loans,
thereby providing capital to the single-family residential housing market. ARM
securities represent interests in pools of ARM loans, which are publicly rated
and include guarantees or other credit enhancements against losses from loan
defaults. While we are not a bank or savings and loan institution, our
business purpose, strategy, method of operation and risk profile are best
understood in comparison to such institutions. We use our equity capital and
borrowed funds to originate, acquire and invest in ARM assets and seek to
generate income for distribution to our shareholders based on the difference
between the yield on our ARM assets portfolio and the cost of our borrowings.
Our corporate structure differs from most lending institutions in that we are
organized for tax purposes as a real estate investment trust (REIT) and
therefore dividend substantially all of our earnings to shareholders, without
paying federal or state income tax at the corporate level. See Federal Income
Tax Considerations  Requirements for Qualification as a REIT. We have five
qualified REIT subsidiaries, all of which are consolidated in our financial
statements and federal and state income tax returns. Two of these
subsidiaries, Thornburg Mortgage Funding Corporation and Thornburg Mortgage
Acceptance Corporation, are involved in financing our mortgage loan assets.
Thornburg Mortgage Home Loans, Inc. (TMHL), our wholly owned mortgage-banking
subsidiary, conducts our mortgage loan acquisition, origination, processing,
underwriting and securitization activities. TMHLs two wholly owned special
purpose subsidiaries, Thornburg Mortgage Funding Corporation II and Thornburg
Mortgage Acceptance Corporation II, facilitate the financing of loans by TMHL.
Effective January 1, 2002, we changed the tax status of TMHL and its
subsidiaries from taxable REIT subsidiaries to qualified REIT subsidiaries
because we determined that the activities of these subsidiaries are consistent
with permitted REIT activities and the change would not jeopardize our ability
to maintain our tax status as a REIT.

We are an externally advised REIT and are managed under a management agreement
(the Management Agreement) with Thornburg Mortgage Advisory Corporation (the
Manager) which manages our operations, subject to the supervision of our
Board of Directors. See Employees  The Management Agreement.

Our Internet website address is www.thornburgmortgage.com. We make available
free of charge, through our Internet website, our annual report on Form 10-K,
our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any
amendments to those reports that we file or furnish pursuant to Section 13(a)
or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission (the SEC).

You may also find our Code of Business Conduct and Ethics, Corporate Governance
Guidelines and the charters of the Audit Committee, Nominating/Corporate
Governance Committee and Compensation Committee of our Board of Directors at
our website. These documents are also available in print to any shareholder
who requests them by writing to us at the following address: 150 Washington
Avenue, Suite 302, Santa Fe, New Mexico, 87501 or by phoning us at (505)
989-1900.

Please note that the reference to the website address we have cited above is an
inactive textual reference made only for purposes of complying with SEC rules.

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Corporate Governance

In light of recent legislation and new regulations regarding corporate
governance, we would like to highlight our compliance with these new
requirements:



| |  |  | Our Board of Directors consists of a majority of independent
directors. The Audit, Nominating/Corporate Governance and Compensation
Committees of the Board of Directors are also composed exclusively of
independent directors.                                                                                                                                                
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our long-term incentive plan does not provide for the granting of
stock options. All long-term incentive awards are fully expensed in our
consolidated income statements, and are fully disclosed in our financial
reports.                                                                                                                                                     
|
| |  |  | We have established a formal internal audit function to further the
effective functioning of our internal controls and procedures. Our
internal audit plan is intended to provide management and the Audit
Committee with an effective tool to identify and address areas of
financial or operational concerns and ensure that appropriate controls
and procedures are in place.
|
| |  |  | We have adopted a Code of Business Conduct and Ethics and Corporate
Governance Guidelines that cover a wide range of business practices and
procedures, apply to all of our employees, officers and directors, and
foster the highest standards of ethics and conduct in all of our
business relationships.                                                                     
|
| |  |  | We have an Insider Trading Policy designed to prohibit any of the
directors or officers of the Company or any director, officer or
employee of the Manager from buying or selling our stock on the basis of
material nonpublic information or communicating material nonpublic
information to others.                                                                           

Operating Policies and Strategies

Portfolio Strategies

Our business strategy is to hold ARM assets in portfolio, fund them using
equity capital and borrowed funds and generate earnings from the difference or
spread between the yield on our assets and our cost of borrowing. We acquire
ARM assets by purchasing ARM securities or large packages of ARM loans that
other mortgage lending institutions have originated and serviced.
Additionally, we originate ARM loans for our portfolio through our
correspondent lending program, which currently includes approximately 100
approved correspondents, and we originate loans directly through TMHL.
Currently, TMHL is authorized to lend in forty-two states and has licensing
applications pending in additional states. We believe that this
diversification of sourcing of ARM loans and ARM securities will enable us to
consistently find attractive opportunities to acquire or create high quality
assets at attractive yields and spreads for our portfolio.

In addition to our direct origination efforts, we acquire ARM assets from
investment banking firms, broker-dealers and similar financial institutions
that regularly make markets in these assets. We also acquire ARM assets from
other mortgage suppliers, including mortgage bankers, banks, savings and loans,
investment banking firms, home builders and other firms involved in
originating, packaging and selling mortgage loans. We believe that we have a
competitive advantage in the acquisition and investment of these mortgage
securities and loans due to the low cost of our operations relative to
traditional mortgage investors, such as banks and savings and loans.

We have a focused portfolio lending investment policy designed to minimize
credit risk and interest rate risk. Our mortgage assets portfolio may consist
of ARM pass-through securities either guaranteed by an agency of the federal
government (Ginnie Mae), a government-sponsored corporation (Fannie Mae) or
a federally-chartered corporation (Freddie Mac), or privately issued
(generally publicly registered) ARM pass-through securities, multi-class
pass-through securities, floating rate classes of collateralized mortgage
obligations (CMOs), collateralized bond obligations (CBOs) which are
generally backed by high quality mortgage-backed securities (MBS), ARM loans,
fixed rate MBS that have an expected duration of one year or less, or
short-term investments that either mature within one year or have an interest
rate that reprices within one year. Agency securities (Agency Securities)
are MBS for which a U.S. Government agency or a government-sponsored or

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federally chartered corporation, such as Ginnie Mae, Fannie Mae or Freddie Mac,
guarantees payments of principal or interest on the certificates. Agency
Securities are not rated, but carry an implied AAA rating.

Our ARM assets also include investments in hybrid ARM assets, which are
typically 30-year loans with a fixed rate of interest for an initial period,
generally 3 to 10 years, and then convert to an adjustable rate for the balance
of their term. We limit our ownership of hybrid ARM assets with fixed rate
periods of greater than five years to no more than 10% of our total assets. We
also have a policy to fund our hybrid ARM assets with fixed rate borrowings
such that the duration difference of hybrid ARM assets and the corresponding
borrowings is one year or less. We use interest rate swap agreements (Swap
Agreements) and Eurodollar futures contracts (Eurodollar Transactions) to
fix our borrowing cost.

Our investment policy requires that we invest at least 70% of total assets in
High Quality ARM assets and short-term investments. High Quality means:



| | (1) |  | Agency Securities; or                                                                                                                                                                                                                                                                                
| | --- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | securities which are rated within one of the two highest rating
categories by at least one of either Standard & Poors Corporation or
Moodys Investors Service, Inc. (the Rating Agencies); or                                                                                                    
|
| | (3) |  | securities that are unrated or whose ratings have not been updated
but are determined to be of comparable quality (by the rating standards
of at least one of the Rating Agencies) to a High Quality rated mortgage
security, as determined by the Manager and approved by our Board of
Directors; or
|
| | (4) |  | the portion of ARM or hybrid ARM loans that have been deposited into
a trust and have received a credit rating of AA or better from at least
one Rating Agency.                                                                                                                                      

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



| | (1) |  | adjustable or variable rate pass-through certificates, multi-class
pass-through certificates or CMOs backed by loans on single-family,
multi-family, commercial or other real estate-related properties so long
as they are rated at least Investment Grade at the time of purchase.
Investment Grade generally means a security rating of BBB or Baa or
better by at least one of the Rating Agencies; or
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | ARM loans collateralized by first liens on single-family residential
properties, generally underwritten to A quality standards, and
acquired for the purpose of future securitization; or                                                                                                                                                                                                                 
|
| | (3) |  | fixed rate mortgage loans collateralized by first liens on single
family residential properties originated for sale to third parties; or                                                                                                                                                                                                                                                                    
|
| | (4) |  | real estate properties acquired as a result of foreclosing on our ARM
loans; or                                                                                                                                                                                                                                                                                                                             
|
| | (5) |  | as authorized by our Board of Directors, ARM securities rated less
than Investment Grade that are created as a result of our loan
acquisition and securitization efforts and that equal an amount no
greater than 17.5% of shareholders equity, measured on a historical
cost basis.                                                                                                                       

To mitigate the adverse effect of an increase in prepayments on our ARM assets,
we emphasize the purchase of ARM assets at prices close to or below par. We
amortize any premiums paid for our assets over their expected lives using the
level yield method of accounting. To the extent that the prepayment rate on
our ARM assets differs from expectations, our net interest income will be
affected. Prepayments generally increase when mortgage interest rates fall
below the interest rates on ARM loans. To the extent there is an increase in
prepayment rates, resulting in a shortening of the expected lives of our ARM
assets, our net income and, therefore, the amount available for dividends could
be adversely affected. Our portfolio of ARM assets is currently held at a book
price, excluding unrealized gains and losses, of 101.01% of par, down from
102.77% of par as of the end of 1997.

We believe that our status as a mortgage REIT makes an investment in our equity
securities attractive for tax-exempt investors, such as pension plans, profit
sharing plans, 401(k) plans, Keogh plans and Individual Retirement Accounts.
We do not invest in real estate mortgage investment conduit (REMIC) residuals
or other CMO residuals that would result in the creation of excess inclusion
income or unrelated business taxable income.

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Acquisition and Securitization of ARM and hybrid ARM Loans

We acquire and originate high quality mortgage loans through TMHL from three
sources: (i) bulk acquisitions, which involve acquiring pools of whole loans
which are originated using the sellers guidelines and underwriting criteria,
(ii) correspondent lending, which involves acquiring individual loans from
correspondent lenders or other loan originators who originate the individual
loans using our underwriting criteria and guidelines or criteria and guidelines
that we have approved, and (iii) direct retail loan originations, which are
loans that we originate. The loans that we acquire or originate are financed
through warehouse borrowing arrangements and securitized for our portfolio, or,
in the case of fixed rate loans, sold to third parties.

The loans acquired or originated by TMHL are first lien, single-family
residential, ARM and hybrid ARM loans with original terms to maturity of not
more than forty years and are either fully amortizing or are interest only up
to ten years, and fully amortizing thereafter. Interest only loans acquired or
originated during 2002 represented 84.4% of total loan production during that
period. We believe the interest only loans do not pose additional credit risk
due to original effective loan-to-value ratios averaging 70.3% and the credit
strength of our borrowers.

All ARM loans that we acquire bear an interest rate tied to an interest rate
index. Some loans have periodic and lifetime constraints on how much the loan
interest rate can change on any predetermined interest rate reset date. In
general, the interest rate on each ARM loan resets at a frequency that is
either monthly, semi-annual or annual. The ARM loans generally adjust to a
margin over a U.S. Treasury index or a LIBOR index. The hybrid ARM loans have
an initial fixed rate period, generally 3 to 10 years, and then convert to an
ARM loan with the features of an ARM loan described above.

We acquire ARM loans for our portfolio with the intention of securitizing them
into pools of High Quality ARM securities. In order to facilitate the
securitization of our loans, we generally create subordinate certificates,
which provide a specified amount of credit enhancement. Upon securitization,
we hold the High Quality ARM securities and the subordinate certificates in our
portfolio that we then finance in the repurchase agreement market or through
the issuance of debt obligations in the capital markets. We have a policy that
limits the amount of subordinate certificates created from these securitization
efforts and rated below Investment Grade that we may hold in our portfolio to
17.5% of our shareholders equity, as measured on a historical cost basis.

We believe the acquisition and origination of ARM loans for securitization
benefits us by providing: (i) greater control over the quality and types of ARM
assets acquired; (ii) the ability to acquire ARM assets at lower prices so that
the amount of the premium to be amortized will be reduced in the event of
prepayment; (iii) additional sources of new whole-pool ARM assets; and (iv)
generally higher yielding investments in our portfolio.

We offer a loan modification program on all loans that we originate and certain
loans that we acquire. We believe this program promotes customer retention and
reduces loan prepayments. Under the terms of this program, a borrower may
choose to pay a fee and modify the mortgage loan to any then-available hybrid
or adjustable-rate product that we offer at the offered interest rate plus
1/8%, at any time during the life of the loan.

Bulk Acquisitions

Third-party mortgage originators or aggregators sell us pools of single-family
residential ARM and hybrid ARM loans at market prices, with or without the
servicing rights. The loans are originated using the sellers loan products,
programs and underwriting guidelines. Additionally, the originator performs
the credit review of the borrower, the appraisal of the property and the
quality control procedures. We generally only consider the purchase of loans
when all of the borrowers have had their income and assets verified, their
credit checked and appraisals of the properties have been obtained. We or a
third party then perform an independent underwriting review of the processing,
underwriting and loan closing methodologies that the originators used in
qualifying a borrower for a loan. Depending on the size of the loan package,
we may not review all of the loans in a bulk package of loans, but rather
select loans for underwriting review based upon specific risk-based criteria
such as property location, loan size, effective loan-to-value ratios,
borrowers credit score and other criteria that we believe to be important
indicators of credit risk. Additionally, prior to the purchase of loans, we
obtain representations and warranties from each seller stating that each loan
either meets the sellers pre-approved underwriting standards and other
requirements or is underwritten to our standards. A seller who breaches such
representations and warranties may be obligated to repurchase the loan. As
added security, we use the services of a third party document custodian to
insure the quality and accuracy of all individual mortgage loan closing
documents and to hold the documents in safekeeping. As a result, all of the
original

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individual loan closing documents that are signed by the borrower, other than
the original credit verification documents, are examined, verified and held by
the custodian.

Correspondent Lending

In the correspondent lending channel, we acquire mortgage loans from
Company-approved correspondent lenders. We pre-qualify all correspondents to
determine their financial strength, the soundness of their own established
in-house mortgage procedures and their ability to fulfill their representations
and warranties to us. Correspondents compliance with these qualifications is
assessed annually. The majority of loans acquired from correspondents are
originated to our approved specifications including our internally developed
loan products, credit and property guidelines, and underwriting criteria. In
certain cases, correspondents sell their own loan products to us, which are
originated according to the correspondents product specifications and
underwriting guidelines and have been pre-approved by us.

Prior to purchase, we review all of the loans generated by our correspondents
to insure product quality and compliance with our guidelines. As an additional
due diligence step, we also obtain a mortgage score for each of the loans
acquired through correspondents. The mortgage score evaluates not only the
borrowers credit but also the geographic location of the property, the
economic viability of the area, the general market conditions and the loan
product chosen by the borrower. We believe that obtaining mortgage scores for
the loans will help in reducing our securitization costs by insuring that we
purchase the highest quality mortgage loans with the lowest risk possible.
After closing, we contract with a third party to perform an additional quality
control review of certain loans in order to verify that such loans were
properly underwritten and to confirm that the loan documents are complete and
properly executed.

Direct Retail Loan Origination

Our retail lending strategy consists of using our portfolio lending capability,
cost-efficient operation, competitive advantages, strategic partnerships, and
available technology, to enable us to provide attractive and innovative
mortgage products, competitive mortgage rates, and a high level of customer
service to prospective borrowers. By eliminating intermediaries, whenever
possible, between the borrower and us, the lender, we expect to originate loans
for retention in our portfolio at attractive yields while offering our
customers innovative mortgage products at competitive rates and fees. Our
expansion into retail residential mortgage loan origination is intended to
continue our strategy of acquiring only high quality mortgage loans.

We originate mortgage loans through TMHL. As of February 26, 2003, TMHL was
authorized to originate loans in the following forty-two states:

|                                                                                                                     |  |                                                                                                                                           |  |                                                                                                                                    
|-------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------
|Alabama
Alaska
Arkansas
Arizona
California
Colorado
Connecticut
Delaware
Florida
Georgia
Idaho
Illinois
Indiana
Iowa |  | Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Mexico
North Carolina |  | North Dakota
Oklahoma
Ohio
Oregon
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
West Virginia
Wisconsin
Wyoming

Our direct retail lending origination model is built upon strategic
partnerships with third party providers of traditional back office processing
and underwriting and other services such as appraisals, title and settlement
services. We have entered into agreements with two Company-approved third
party, private label fulfillment vendors for the processing, underwriting and
closing of our retail loans. In addition, we work with nationally recognized
providers of appraisal, credit, title insurance and settlement services. We
oversee the activities of these service providers through on-site visits,
report monitoring, customer service surveys, post-closing quality control, and
periodic direct participation in the customer experience.

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We use one of two channels to originate loans directly with borrowers. We
originate loans using a call center, where borrowers can call to inquire about
loan products and interest rates, as well as to seek advice and counseling
regarding qualifying for a loan and the approval process. In 2001, we expanded
this channel to employ third party call center specialists versed in mortgage
loan origination so that prospective borrowers are able to apply for a loan
over the telephone. A completed mortgage loan application along with a request
for additional supporting documentation is sent to the borrower for signature.
Our loan processors, or their third party agents, are responsible for working
with the borrower to complete the processing of the loan application, obtain a
final loan approval and schedule the loan for closing.

We also offer mortgages on-line utilizing a third party, private label,
web-based origination system. Prospective borrowers are able to look up
mortgage loan product and interest rate information through our website, obtain
access to a variety of mortgage calculators and consumer help features, submit
an application on-line and begin the process of obtaining pre-approval of their
loan. Once a mortgage loan application has been submitted, one of our
representatives will assist the borrower in completing the loan process.

The mortgage origination process is a labor- and document-intensive business
that requires significant back office systems and personnel. We have
contracted with third party mortgage service providers to provide loan
processing, underwriting, documentation and closing functions required to
originate and close mortgage loans. Additionally, another third party service
provider has staffed a mortgage loan call center for our benefit. These
services are provided on a private label basis, meaning that these providers
will identify themselves as being our representatives. The benefit to us of
this arrangement is that we pay for these services as we use them, without a
significant investment in personnel, systems, office space and equipment.

Mortgage Loan Servicing

In the third quarter of 2001, we began purchasing the servicing rights on some
of the loans we acquired through the bulk and correspondent loan acquisition
programs, with the intent of providing borrowers with integrated, ongoing high
quality customer service, as well as loan modification and refinance
opportunities. We also retain the servicing rights on loans originated through
the retail channel. These efforts are designed to lower prepayment rates on
the portfolio through customer retention. We contract with a qualified third
party subservicer to service our loans for our customers on a private label
basis. This third party subservicer collects mortgage loan payments, manages
escrow accounts, provides monthly statements and notices to borrowers, offers
on-line mortgage servicing information and provides customer service, loan
collection, loss mitigation, foreclosure, bankruptcy and real estate-owned
management services. We pay fees for this service based on a fixed fee
schedule per mortgage loan.

Underwriting Guidelines

Our underwriting guidelines are intended to determine the collateral value of
the mortgaged property and to consider the borrowers credit standing and
repayment ability. Each prospective borrower completes an application that
includes information with respect to the applicants assets, liabilities,
income and employment history, as well as certain other personal information.
A credit report is required for each applicant from at least one credit
reporting company. The report typically contains information relating to
matters such as credit history with local and national merchants and lenders,
installment debt payments and any record of default, bankruptcy, repossession,
suit or judgment. At December 31, 2002, our borrowers had an average credit
score, called a FICO (based upon the credit evaluation methodology developed by
Fair, Isaac and Company, a consulting firm specializing in creating credit
evaluation models) of 737. On a case-by-case basis, we may determine that,
based upon compensating factors, a prospective borrower not strictly qualifying
under the applicable underwriting guidelines warrants an underwriting
exception. Compensating factors may include, but are not limited to, low
loan-to-value ratios, low debt-to-income ratios, good credit history, stable
employment, financial reserves, and time in residence at the applicants
current address.

Our underwriting guidelines for both the correspondent lending and direct
retail loan origination channels are applied in accordance with a procedure
that generally requires (1) one appraisal report for loan amounts up to $650
thousand, one appraisal report and one field review for loan amounts between
$650 thousand and $1 million, and two appraisal reports for loan amounts
greater than $1 million, (2) a review of such appraisal by a third party
appraisal review firm for loans over $650 thousand if deemed necessary and (3)
an internal review by us of all appraisal reports. Our underwriting guidelines
permit single-family mortgage loans with loan-to-value ratios at origination of
up to 95% (or, with respect to additional collateral

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mortgage loans, up to 100%) for the highest credit grading category, depending
on the creditworthiness of the borrower, the type and use of the property, the
purpose of the loan application and the loan amount. All loans with
loan-to-value ratios greater than 80% must either have mortgage insurance or
additional collateral securing the loan.

Financing Strategies

We finance our purchased or securitized ARM assets using (i) equity capital and
(ii) borrowings, such as reverse repurchase agreements, lines of credit, and
other secured or unsecured financings that we may establish with approved
institutional lenders. We have established lines of credit and collateralized
financing agreements with twenty-two different financial institutions. We
generally expect to maintain an equity-to-assets ratio of between 8% and 10%,
as measured on a historical cost basis. This ratio may vary from time to time
within the above stated range depending upon market conditions and other
factors that our management deems relevant, but cannot fall below 8% without
the approval of our Board of Directors.

Our borrowings are primarily at short-term interest rates and in the form of
reverse repurchase agreements using our ARM securities as collateral. Reverse
repurchase agreements involve a simultaneous sale of pledged assets to a lender
at an agreed-upon price in return for the lenders agreement to resell the same
assets back to us at a future date (the maturity of the borrowing) at a higher
price. The price difference is the cost of borrowing under these agreements.
Generally, upon repayment of each reverse repurchase agreement, we immediately
pledge the ARM assets used to collateralize the financing to secure a new
reverse repurchase agreement. In the event of the insolvency or bankruptcy of
a lender during the term of a reverse repurchase agreement, the lender, under
the Federal Bankruptcy Code, may be allowed to assume or reject the agreement
to resell the assets. If a bankrupt lender rejects its obligation to resell
pledged assets to us, our claim against the lender for the resulting damages
may be treated as one of many unsecured claims against the lenders assets.
These claims would be subject to significant delay and, if and when payments
are received, they may be substantially less than the damages that we actually
suffer. To mitigate this risk, we enter into collateralized borrowings with
only financially sound institutions approved by our Board of Directors,
including a majority of unaffiliated directors, and monitor the financial
condition of such institutions on an ongoing basis.

We have also financed the purchase of ARM assets by issuing debt obligations in
the capital markets, which are collateralized by securitized pools of our ARM
assets that are placed in a trust. The trust pays the principal and interest
payments on the debt out of the cash flows received on the collateral. Using
such a structure enables us to issue debt that will not be subject to margin
calls once the debt obligation has been issued.

We also enter into financing facilities for whole loans. A whole loan is the
actual mortgage loan evidenced by a note and secured by a mortgage or deed of
trust. We use these credit lines to finance our acquisition of whole loans
while we are accumulating loans for securitization or until we arrange
financing in a capital markets, collateralized debt transaction.

Hedging Strategies

We attempt to mitigate our interest rate risk by funding our ARM assets with
borrowings that have maturities that approximately match the interest rate
adjustment periods on our ARM assets. Accordingly, some of our borrowings have
variable interest rates or short term fixed (one year or less) maturities
because, as of December 31, 2002, 27.7% of our ARM assets had interest rates
that adjust within one year. However, for that part of our portfolio that is
financing our hybrid ARM assets, which generally have fixed interest rate
periods of 3 to 10 years and, as of December 31, 2002, averaged a 3.9-year
fixed rate period, we extend the maturity of our borrowings such that the
difference between the duration of our hybrid ARM assets and the duration of
the fixed-rate borrowings funding our hybrid ARM assets is no more than one
year. By maintaining a duration mismatch of less than one year, we expect the
net market value change of our hybrid ARM portfolio and associated fixed-rate
liabilities to be no more than 1.00% for a 1.00% change in interest rates. A
lower duration indicates a lower expected volatility of earnings given future
changes in interest rates. We generally accomplish this fixed rate maturity
extension through the use of Swap Agreements and Eurodollar Transactions. When
we enter into a Swap Agreement, we generally agree to pay a fixed rate of
interest and to receive a variable interest rate, generally based on LIBOR. We
enter into Eurodollar Transactions in order to hedge changes in our forecasted
three-month LIBOR based liabilities. These Swap Agreements and Eurodollar
Transactions have the effect of converting our short-term borrowings into
fixed-rate borrowings over the life of the Swap Agreements and Eurodollar
Transactions. As of December 31, 2002, our current Swap Agreements and
Eurodollar Transactions that hedged the financing of hybrid ARM assets had a
remaining fixed rate term to maturity of 2.8 years and a duration mismatch of
approximately 3 months, which is in compliance with our hedging policy.

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We may also enter into Swap Agreements to manage the average interest rate
reset period on our borrowings that finance non-hybrid ARM assets. We may also
use Swap Agreements from time to time to change from one interest rate index to
another interest rate index and thus decrease further the basis risk between
our interest-yielding assets and the financing of such assets.

In general, ARM assets have a maximum lifetime interest rate cap, or ceiling,
meaning that each ARM asset contains a contractual maximum interest rate.
Since our borrowings are not subject to equivalent interest rate caps, we have
entered into interest rate cap agreements (Cap Agreements) which have the
effect of offsetting a portion of our borrowing costs, thereby reducing the
effect of the lifetime cap feature on our ARM assets and protecting the net
margin on our ARM assets in high interest rate environments. A Cap Agreement
is a contractual agreement for which we pay a fee, which may at times be
financed, typically to either a commercial bank or investment banking firm.
Pursuant to the terms of the Cap Agreements owned as of December 31, 2002, we
will receive cash payments if the applicable index, generally the three- or
six-month LIBOR index, increases above certain specified levels, which range
from 6.00% to 12.00% and average 10.00%. The fair value of these Cap
Agreements generally increases when general market interest rates increase and
decreases when market interest rates decrease, helping to partially offset
changes in the fair value of our ARM assets related to the effect of the
lifetime interest rate cap.

In addition, some ARM assets are subject to periodic caps. Periodic caps
generally limit the maximum interest rate coupon change on any interest rate
coupon adjustment date to either a maximum of 1.00% per semiannual adjustment
or 2.00% per annual adjustment. The borrowings that we incur do not have
similar periodic caps. We do not hedge against the risk of our borrowing costs
rising above the periodic interest rate cap level on the ARM assets because the
contractual future interest rate adjustments on the ARM assets will cause their
interest rates to increase over time and reestablish the ARM assets interest
rate to a spread over the then current index rate. As of December 31, 2002,
$8.6 billion of our ARM securities and ARM loans did not have periodic caps or
were hybrid ARM assets, representing 83.5% of total ARM assets.

We may enter into other hedging-type transactions designed to protect our
borrowing costs or portfolio yields from interest rate changes. We may also
purchase interest only mortgage derivative assets or other mortgage
derivative products for purposes of mitigating risk from interest rate changes,
although we have not, to date, entered into these types of transactions. We
may also use from time to time futures contracts and options on futures
contracts on the Eurodollar, Federal Funds, Treasury bills and Treasury notes
and similar financial instruments. In connection with our use of these
instruments, the Commodity Futures Trading Commission has indicated to us that
it will not seek enforcement against our directors for failure to register as
Commodity Pool Operators or against the Manager for failure to register as a
Commodity Trading Adviser.

The hedging transactions that we currently use generally are designed to
protect our net interest income during periods of changing market interest
rates. We do not hedge for speculative purposes. Further, no hedging strategy
can completely insulate us from risk, and certain of the federal income tax
requirements that we must satisfy to qualify as a REIT may limit our ability to
hedge, particularly with respect to hedging against periodic cap risk. We
carefully monitor and may have to limit our hedging strategies to ensure that
we do not realize excessive hedging income or hold hedging assets having excess
value in relation to total assets. See Federal Income Tax
Considerations 
Requirements for Qualification as a REIT.

Operating Restrictions

Our Board of Directors has established our operating and investing policies and
strategies, and any revisions in such policies and strategies require the
approval of the Board of Directors, including a majority of the unaffiliated
directors. In general, the Board of Directors has the power to modify or alter
such policies without the consent of our shareholders.

We have elected to qualify as a REIT for tax purposes. We have adopted certain
compliance guidelines, which include restrictions on our acquisition, holding
and sale of assets, thus limiting the investment strategies that we may employ.
Substantially all the assets that we have acquired and will acquire for
investment are expected to be real estate assets (Qualified REIT Assets) as
defined by the Internal Revenue Code of 1986, as amended (the Code). Our
whole loans and our ARM securities and other MBS fall within the definition of
Qualified REIT Assets.

We closely monitor our purchases of ARM assets and the income from such assets,
including from our hedging strategies, so that we maintain our qualification as
a REIT at all times. We developed certain accounting systems and testing
procedures

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with the help of qualified accountants and tax experts to facilitate our
ongoing compliance with the REIT provisions of the Code. See Federal Income
Tax Considerations  Requirements for Qualification as a REIT.

We intend to conduct our business so as not to become regulated as an
investment company under the Investment Company Act of 1940, as amended. If we
were to become regulated as an investment company, our 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, we must
maintain at least 55% of our assets directly in Qualifying Interests as defined
in the Code. We closely monitor our compliance with this requirement and we
intend to maintain our exempt status. We have been able to maintain our
exemption so far through the purchase of whole pool Agency Securities and
privately issued ARM securities and loans that qualify for the exemption. See
Portfolio of Mortgage Assets  Pass-Through Certificates  Privately Issued
ARM Pass-Through Certificates.

PORTFOLIO OF MORTGAGE ASSETS

As of December 31, 2002, ARM assets comprised 99.0% of our total assets. We
have invested in the following types of ARM assets in accordance with the
operating policies established by our Board of Directors and described in
Business  Operating Policies and Strategies  Operating Restrictions.

Pass-Through Certificates

Our investments in mortgage assets are concentrated in High Quality ARM
pass-through certificates, which account for 90.0% of the ARM assets that we
hold. These certificates consist of Fannie Mae, Freddie Mac and privately
issued ARM pass-through certificates that meet the High Quality credit
criteria. See Business  Operating Policies and Strategies  Investment
Strategies. The High Quality ARM pass-through certificates that we acquire
represent interests in ARM loans that are secured primarily by first liens on
single-family (one-to-four units) residential properties, although we may also
acquire ARM pass-through certificates secured by liens on other types of real
estate-related properties. We also include in this category of assets a
portion of the ARM and hybrid ARM loans that have been deposited in a trust and
held as collateral for our notes payable in the amount equivalent to the AAA
portion of the debt issued by the trust.

The following is a discussion of each type of pass-through certificate that we
held as of December 31, 2002:

Freddie Mac ARM Programs

Freddie Mac is a shareholder-owned, federally chartered enterprise created
pursuant to an Act of Congress on July 24, 1970. The principal activity of
Freddie Mac consists of the purchase of first lien, conventional residential
mortgages, including both whole loans and participation interests in such
mortgages and the resale of the loans and participations in the form of
guaranteed mortgage assets. Each Freddie Mac ARM Certificate issued to date
has been issued in the form of a pass-through certificate representing an
undivided interest in a pool of ARM loans purchased by Freddie Mac. The ARM
loans included in each pool are fully amortizing, conventional mortgage loans
with original terms to maturity of up to 40 years secured by first liens on
one-to-four unit family residential properties or multi-family properties. The
interest rates paid on Freddie Mac ARM Certificates adjust periodically on the
first day of the month following the month in which the interest rates on the
underlying mortgage loans adjust.

Freddie Mac guarantees to each holder of its ARM Certificates the timely
payment of interest at the applicable pass-through rate and the ultimate
collection of all principal on the holders pro rata share of the unpaid
principal balance of the related ARM loans, but does not guarantee the timely
payment of scheduled principal of the underlying mortgage loans. The
obligations of Freddie Mac under its guarantees are solely those of Freddie Mac
and are not backed by the full faith and credit of the U.S. Government. If
Freddie Mac were unable to satisfy such obligations, distributions to holders
of Freddie Mac ARM Certificates would consist solely of payments and other
recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of Freddie Mac ARM Certificates would be affected by
delinquent payments and defaults on such mortgage loans.

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Fannie Mae ARM Programs

Fannie Mae is a government sponsored, privately owned corporation organized and
existing under the Federal National Mortgage Association Charter Act. Fannie
Mae provides funds to the mortgage market primarily by purchasing home mortgage
loans from mortgage loan originators, thereby replenishing their funds for
additional lending. Fannie Mae established its first ARM programs in 1982 and
currently has several ARM programs under which ARM certificates may be issued,
including programs for the issuance of assets through REMICS under the Code.
Each Fannie Mae ARM Certificate issued to date has been issued in the form of a
pass-through certificate representing a fractional undivided interest in a pool
of ARM loans formed by Fannie Mae. The ARM loans included in each pool are
fully amortizing conventional mortgage loans secured by a first lien on either
one-to-four family residential properties or multi-family properties. The
original term to maturity of the mortgage loans generally does not exceed 40
years. Fannie Mae has issued several different series of ARM Certificates.
Each series bears an initial interest rate and margin tied to an index based on
all loans in the related pool, less a fixed percentage representing servicing
compensation and Fannie Maes guarantee fee.

Fannie Mae guarantees to the registered holder of a Fannie Mae ARM Certificate
that it will distribute amounts representing scheduled principal and interest
(at the rate provided by the Fannie Mae ARM Certificate) on the mortgage loans
in the pool underlying the Fannie Mae ARM Certificate, whether or not received,
and the full principal amount of any such mortgage loan foreclosed or otherwise
finally liquidated, whether or not the principal amount is actually received.
The obligations of Fannie Mae under its guarantees are solely those of Fannie
Mae and are not backed by the full faith and credit of the U.S. Government. If
Fannie Mae were unable to satisfy such obligations, distributions to holders of
Fannie Mae ARM Certificates would consist solely of payments and other
recoveries on the underlying mortgage loans and, accordingly, monthly
distributions to holders of Fannie Mae ARM Certificates would be affected by
delinquent payments and defaults on such mortgage loans.

Privately Issued ARM Pass-Through Certificates

Privately issued ARM pass-through certificates are structured similar to the
agency certificates discussed above but are issued by originators of, and
investors in, mortgage loans, including us, savings and loan associations,
savings banks, commercial banks, mortgage banks, investment banks and special
purpose subsidiaries of such institutions. Privately issued ARM pass-through
certificates are usually backed by a pool of conventional ARM loans and are
generally structured with one or more types of credit enhancement, including
pool insurance, guarantees, or subordination. Accordingly, privately issued
ARM pass-through certificates typically are not guaranteed by an entity having
the credit status of Freddie Mac or Fannie Mae.

Privately issued ARM pass-through certificates that are credit enhanced by
mortgage pool insurance provide us with an alternative source of ARM assets
(other than agency ARM assets) that meet the Qualifying Interests test for
purposes of maintaining our exemption under the Investment Company Act.
However, since many providers of mortgage pool insurance have stopped providing
such insurance, privately issued ARM pass-through certificates are not commonly
available.

Collateralized Mortgage Obligations (CMOs), Multi-class Pass-Through
Securities and Collateralized Bond Obligations (CBOs)

CMOs are debt obligations, ordinarily issued in series and most commonly backed
by a pool of fixed rate mortgage loans or pass-through certificates, each of
which consists of several serially maturing classes. Multi-class pass-through
securities are equity interests in a trust composed of similar underlying
mortgage assets. Generally, principal and interest payments received on the
underlying mortgage-related assets securing a series of CMOs or multi-class
pass-through securities are applied to principal and interest due on one or
more classes of the CMOs of such series or to pay scheduled distributions of
principal and interest on multi-class pass-throughs.

The CBOs that we have acquired are debt obligations, but are collateralized by
security interests in portfolios of High Quality, low duration,
mortgage-backed, asset-backed and other fixed and floating rate securities
managed by third parties. We only acquire CBOs that have portfolios that
consist primarily of High Quality mortgage-backed securities. In a CBO
transaction, principal and interest payments are used to pay current period
interest and any excess is reinvested into the portfolio. The amount of
proceeds at maturity on the CBO classes that we own is generally dependent upon
the total rate of return performance of the underlying collateral and can
result in a final redemption value that is less than the face value of the
investment. CBOs typically do not amortize monthly; rather, they mature on a
specific maturity date.

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Scheduled payments of principal and interest on the mortgage-related assets and
other collateral securing a series of CMOs, CBOs or multi-class pass-throughs
are intended to be sufficient to make timely payments of principal and interest
on such issues or securities and to retire each class of such obligations at
their stated maturity.

The multi-class pass-through securities that we create or purchase are
typically backed by ARM securities or ARM loans, however we also purchase
variable rate classes of CMOs and CBOs that are backed by both fixed- and
adjustable-rate mortgages that are issued by a U.S. Government agency,
federally chartered or government-sponsored enterprises or other private
issuers.

Multi-class pass-through securities are usually structured with credit
enhancement whereby certain classes are given priority of payment over other
classes. Credit enhancement takes the form of internal credit support via
allocation of losses to lower rated classes. Accordingly, the higher the rating
level, the more likely it is that cash flows from the underlying mortgage loans
will be sufficient to meet the scheduled payments of interest and principal on
any given class.

The classes of securities we have purchased were all rated at least Investment
Grade by one of the Rating Agencies at the time of purchase, and in most cases
are High Quality. We do not purchase classes with below Investment Grade
ratings. We do own securities rated below Investment Grade that were created
as a result of securitizing our loans.

ARM and hybrid ARM Loans

When originating or acquiring ARM and hybrid ARM loans, we focus our attention
on all aspects of a borrowers profile and the characteristics of a mortgage
loan product that we believe are most important in insuring excellent loan
performance and minimal credit exposure. Our borrowers generally make large
down payments and have adequate liquid asset reserves, verified income, job
stability and excellent credit (as measured by a credit report and a credit
score). In addition, full real estate appraisals are underwritten to ensure
the property collateral is well valued, appropriate to the neighborhood and
located in a stable market. The ARM and hybrid ARM loans we have acquired are
all first mortgages on single-family residential properties. Some have
additional collateral in the form of pledged financial assets. Pledged assets
are limited to marketable equity securities, investment grade bonds, cash or
other approved securities. We acquire loans that are generally underwritten to
A quality standards. We consider loans to be A quality when they are
underwritten so as to assure that the borrower has adequate verified income to
make the required loan payment, adequate verified equity in the underlying
property, adequate liquid asset reserves, job stability and is willing and able
to repay the mortgage as demonstrated by an excellent credit history. As a
result, the loans we acquire are generally fully documented loans, generally
with 80% or lower effective loan-to-value ratios based on independently
appraised property values, or are seasoned loans with good payment history.
The average original effective loan-to-value ratio of our loans averaged 66.7%
as of December 31, 2002.

If an ARM or hybrid ARM loan acquired has a loan-to-value ratio above 80%, we
require the borrower to pay for private mortgage insurance or acquire
additional collateral, providing additional protection to us against credit
risk. We only acquire loans with original maturities of forty years or less.
The ARM and hybrid ARM loans are either fully amortizing or are interest only,
generally up to ten years, and fully amortizing thereafter. All ARM loans we
acquire bear an interest rate tied to an interest rate index. Some loans have
periodic and lifetime constraints on how much the loan interest rate can change
on any predetermined interest rate reset date. In general, the interest rate
on each ARM loan resets at a frequency that is either monthly, semi-annual or
annual. The ARM loans generally adjust based upon the following indices: a
U.S. Treasury Bill index, a LIBOR index, a Certificate of Deposit index, a Cost
of Funds index or Prime Rate index. The hybrid ARM loans have an initial fixed
rate period, generally 3 to 10 years, and then convert to an ARM loan with the
features of an ARM loan described above.

RISK FACTORS

FORWARD-LOOKING STATEMENTS

In accordance with the Private Securities Litigation Reform Act of 1995 (the
1995 Act), we can obtain a safe harbor for forward-looking statements by
identifying those statements and by accompanying those statements with
cautionary statements, which identify factors that could cause actual results
to differ from those in the forward-looking statements. Statements that are
not historical facts, including statements about our beliefs or expectations,
are forward-looking statements. The words believe, anticipate, intend,
aim, expect, will, and similar words identify forward-looking statements.
Such

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statements are not guarantees of future performance, events or results and
involve potential risks and uncertainties. Accordingly, our actual results may
differ from our current expectations, estimates and projections. Readers
should understand that many factors govern whether any forward-looking
statement will be or can be achieved. Any one of those factors could cause
actual results to differ materially from those projected.

We actively manage the risks associated with our business. Interest rate
risks, credit risks, earnings volatility, REIT qualification risks and other
risks are monitored, measured and quantified by management in order to assure
minimal earnings and dividend fluctuations. However, investors should
understand the nature of the risks that we face. Those key risks are discussed
below. If we fail to manage these risks, our actual results could differ from
our expectations.

ARM yields change as short term interest rates change.



| |  |  | In low short term interest rate environments, the yields
on our ARM assets will be low, reducing return on equity.                                                                                                                                                                                                                           
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We own ARM assets tied to various interest rate indices.
If the interest rate indices applicable to our ARM assets change
independently of other market interest rates, our ARM yields,
spreads and earnings may be adversely affected.                                                                                                      
|
| |  |  | We own ARM assets with various repricing, or interest
rate adjustment frequencies. The yields on these assets may also
respond to changes in their underlying indices on a delayed basis
due to borrower notification requirements. As a result, our
yields and earnings on these assets could be temporarily below
longer term expectations.
|
| |  |  | Increases in interest rates may result in a decline in
the fair value of our ARM assets. A decrease in the fair value of
our ARM assets will result in a reduction of our book value due to
the accounting rules that we follow.                                                                                                             

We borrow money to fund the purchase of additional ARM assets. A significant
contributor to our earnings is the interest margin between the yield on our ARM
assets and the cost of our borrowings.



| |  |  | All of the risks highlighted above could be magnified
because we use borrowed funds to acquire additional ARM assets for
our portfolio.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Our ability to borrow and our cost of borrowing could be
adversely affected by deterioration in the quality or fair value
of our ARM assets or by general availability of credit in the
mortgage market.                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | We borrow funds based on the fair value of our ARM assets
less a margin amount. If either the fair value of our ARM assets
declines, or our margin requirements increase, we could be subject
to margin calls that would require us to either pledge additional
ARM assets as collateral or reduce our borrowings. If we did not
have sufficient unpledged assets or liquidity to meet these
requirements, we may need to sell assets under adverse market
conditions to satisfy our lenders.                                                                                                                                                     
|
| |  |  | Our borrowings are tied primarily to the LIBOR interest
rates, while our assets are indexed to LIBOR and other various
interest rate indices. If these other short-term indices move
differently than LIBOR, our earnings could be adversely affected
to the extent of the difference.                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | The interest rate adjustment or repricing characteristics
of our ARM assets and borrowings may not be perfectly matched.
Rising interest rates could adversely affect our earnings and
dividends if the interest payments that we must make on our
borrowings rise faster than the interest payments we earn on our
ARM assets. Declining interest rates could adversely affect our
earnings and dividends if the interest payments we receive on our
ARM assets decline more quickly than the interest payments that we
must make on our borrowings. In general, our borrowings adjust
more frequently than the interest rates on our ARM assets.
|
| |  |  | Some of our ARM assets have caps that limit the amount
that the interest rate can change for a given change in an
underlying index. Our borrowings do not have similar limitations.
If the interest rate change on our ARM assets is limited while
the interest rates on our borrowings increase, our portfolio
margins and earnings may be adversely affected.                                                                                                                                                                                                                                                                                   
|
| |  |  | We employ various hedging and funding strategies to
minimize the adverse impact that changing interest rates might
have on our earnings, but our strategies may prove to be less
effective in practice than we anticipate, or our ability to use
such strategies may be limited due to our need to comply with
federal income tax requirements that are necessary to preserve our
REIT status.                                                                                                                                                                                                                                                    

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| |  |  | The fair value of the hedging instruments that we use to
manage our interest rate risk may decline during periods of
declining interest rates, adversely affecting our book value
because of the accounting rules that we follow.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our mortgage assets may be prepaid at any time at the borrowers option.



| |  |  | Mortgage prepayment rates typically rise during falling
interest rate environments. If mortgages prepay, the prepayment
proceeds may be invested in lower yielding assets, thus reducing
earnings.                                                                                                                                                                                                     
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Mortgage prepayment rates typically fall during rising
interest rate environments. If mortgages do not prepay, we would
have less cash flow to use to purchase new mortgage assets in a
higher interest rate environment, potentially adversely affecting
earnings.                                                                                                                                    
|
| |  |  | We purchase and originate ARM assets at prices greater
than par. We amortize the premiums over the expected life of the
ARM asset. To the extent that we have purchased such assets, our
yields, spreads and earnings could be adversely affected if
mortgage prepayment rates are greater than anticipated at the time
of acquisition because we would have to amortize the premiums at a
faster rate.

We acquire hybrid ARMs that have fixed interest rate periods.



| |  |  | A decline in interest rates may result in an increase in
prepayment of our hybrid ARMs, which could cause the amount of our
fixed rate financing to increase relative to the total amount of
our hybrid ARM assets. This may result in a decline in our net
spread on hybrid ARM assets as replacement hybrid ARM assets may
have a lower yield than the assets that are paying off.                                                                                                                                                                 
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | An increase in interest rates may result in a decline in
prepayment of our hybrid ARMs, requiring us to finance a greater
amount of hybrid ARM assets than originally anticipated at a time
when interest rates may be higher, which would result in a decline
in our net spread on hybrid ARM assets.                                                                                                                                                                                                                                               
|
| |  |  | We typically do not borrow fixed rate funds to cover the
last year of the fixed rate period of our hybrid ARMs because, at
that point, the next repricing period is within one year which is
consistent with our investment policy of investing in ARM assets
that reprice within one year or less. As a result, higher short
term interest rate borrowings that we acquire to finance the
remaining year of the fixed rate period of our hybrid ARMs could
adversely affect our portfolio margins and earnings due to a
reduced net interest margin.

We originate and acquire ARM loans and ARM securities and have risk of loss due
to mortgage loan defaults.



| |  |  | The ability of our borrowers to make timely principal and
interest payments could be adversely affected by a rise in
interest rates, a recession, declining real estate property values
or other economic events, resulting in losses to us.                                                                       
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | If a borrower defaults on a mortgage loan that we own and
if the liquidation proceeds from the sale of the property do not
cover our loan amount and our legal, broker and selling costs, we
would experience a loss.                                                                                              
|
| |  |  | We bear the risk of loss on loans we have originated or
acquired due to hazard losses such as earthquakes, floods, fires
or similar hazards, unless the homeowner had insurance for such
hazards.                                                                                                                  
|
| |  |  | We could experience losses if we fail to detect that a
borrower has misrepresented its financial situation, or that an
appraisal misrepresented the value of the property collateralizing
our loan.                                                                                                                
|
| |  |  | We purchase ARM securities that have various degrees of
third-party credit protection and are rated at least Investment
Grade at the time of purchase. It is possible that default and
loan loss experience on the underlying securitized loans could
exceed any credit enhancement, subjecting us to risk of loss.

Our expansion into mortgage loan origination may not be successful.



| |  |  | We rely on third party providers who specialize in the
underwriting processing, servicing and closing of mortgage loans.
We are dependent upon the availability and quality of the
performance of such providers and we cannot guarantee that they
will successfully perform the services for which we engage them.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | As a mortgage lender we are subject to changes in
consumer and real estate related laws and regulations that could
subject us to lawsuits or adversely affect our profitability or
ability to remain competitive.                                                                                                  

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| |  |  | We are competing for mortgage loans against much larger,
better-known mortgage originators that could affect our ability to
acquire or originate ARM assets at attractive yields and spreads.                                                            
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | ARM assets may not always be readily available for
purchase or origination in the marketplace at attractive yields
because their availability is somewhat dependent on the
relationship between 30 year fixed rate mortgage rates and ARM
mortgage rates.

Our REIT tax status creates certain risks.



| |  |  | The requirements to qualify for REIT tax status are
complex and technical, and we may not be able to qualify for
reasons beyond our control. Even though we currently exceed all
of the requirements for qualifying, a failure to qualify could
subject our earnings to taxation at regular corporate rates,
thereby reducing the amount of money available for distributions
to our shareholders.                                                                                                                                                                                                                                                          
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The REIT tax rules require that we distribute the
majority of our earnings as dividends, leaving us limited ability
to maintain our future dividend payments if our earnings decline.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | Because we must distribute the majority of our earnings
to shareholders in the form of dividends, we have a limited amount
of capital available to internally fund our growth.                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | Additionally, because we cannot retain earnings to grow,
we must issue additional shares of stock to grow, which could
result in the dilution of our outstanding stock and an
accompanying decrease in its market price.                                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | Changes in tax laws related to REIT qualifications or
taxation of dividends could adversely affect us. On January 7,
2003, the Bush Administration released a tax proposal intended to
eliminate one level of the federal double taxation that is
currently imposed on corporate income for regular C corporations.
The Bush Administrations proposal, if enacted, could decrease the
investment attraction of a REIT relative to that of a regular C
corporation. It is not possible to predict whether the proposal
will be ultimately enacted, the form that it might take, and, if
enacted, the effects it may have on the value of our common stock.

The price of our common stock or preferred stock could be adversely affected
due to changes in investor perception or preference for income-producing
investments, or due to poor performance by other financial services companies,
REIT in general, mortgage REIT or other similar companies.

The loss of the Investment Company Act exemption could adversely affect us.



| |  |  | We conduct our business so as not to become regulated as
an investment company under the Investment Company Act. If we
were to become regulated as an investment company, we would not be
able to operate as we currently do.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We are dependent on certain key personnel.



| |  |  | The loss of the services of certain officers and key
employees could have an adverse effect on our operations.
| | - |  | --------------------------------------------------------------------------------------------------------------

Some of our directors and officers have ownership interests in the Manager,
which may create conflicts of interest.



| |  |  | The Manager is entitled to receive performance-based
compensation based on our annualized net income. Undue emphasis
placed on maximization of our short-term income at the expense of
other criteria could result in increased risk to our long-term
earnings.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We may change our policies without shareholder approval.



| |  |  | Our Board of Directors establishes all of our operating
policies, including our investment, financing and dividend
policies. The Board of Directors has the ability and authority
to revise or amend those policies without shareholder approval.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



COMPETITION

In acquiring ARM assets, we compete with other mortgage REITs, investment
banking firms, savings and loan associations, banks, mortgage bankers,
insurance companies, mutual funds, lenders, Fannie Mae, Freddie Mac and other
entities purchasing ARM assets, many of which have greater financial resources
than we do. The existence of such entities may increase the competition for
the acquisition of ARM assets resulting in higher prices and lower yields on
such mortgage assets.

EMPLOYEES

As of December 31, 2002, we had no employees. Rather, the Manager provides our
management and employees, subject to the supervision of our Board of Directors
and under the terms of the Management Agreement discussed below.

The Management Agreement

We entered into the Management Agreement with the Manager for a ten-year term,
with an annual review required. If we terminate the Management Agreement other
than for cause, we must pay the Manager a minimum fee. The Management
Agreement also provides that in the event a person or entity obtains more than
20% of our common stock, we are combined with another entity, or we terminate
the Management Agreement other than for cause, we are obligated to acquire
substantially all of the Managers assets through an exchange of shares with a
value based on a formula tied to the Managers net profits. We have the right
to terminate the Management Agreement upon the occurrence of certain specific
events, including a material breach by the Manager of any provision contained
in the Management Agreement.

The Manager at all times is subject to the supervision of our Board of
Directors and has only such functions and authority as we may delegate to it.
The Manager is responsible for our operations and performs all such services
and activities relating to the management of our assets and operations. In
addition, our wholly owned subsidiaries have entered into separate management
agreements with the Manager for additional management services.

The Manager receives an annual base management fee based on average
shareholders equity, adjusted for liabilities that are not incurred to finance
assets (Average Shareholders Equity or Average Net Invested Assets as
defined in the Management Agreement), payable monthly in arrears. The base
management fee formula is subject to an annual increase based on any increase
in the Consumer Price Index over the previous twelve-month period. The Manager
is also entitled to receive as incentive compensation for each fiscal quarter
an amount equal to 20% of our Net Income (as defined in the Management
Agreement), before incentive compensation, in excess of the amount that would
produce an annualized return on equity equal to 1% over the Ten Year U.S.
Treasury Rate. The Management Agreement also requires us to reimburse the
Manager for expenses it incurs related to acquiring, securitizing, selling,
hedging, and servicing our portfolio of ARM loans. For further information
regarding the base management fee, incentive compensation reimbursable expenses
and applicable definitions, see our Proxy Statement dated March 20, 2003 under
the caption Certain Relationships and Related Transactions.

Subject to the limitations set forth below, we pay all our operating expenses
except those that the Manager is specifically required to pay under the
Management Agreement. The operating expenses that the Manager is required to
pay include the compensation of personnel who are performing management
services for the Manager and the cost of office space, equipment and other
personnel required for the management of our day-to-day operations. The
expenses that we are required to pay include costs incident to the acquisition,
disposition, securitization and financing of mortgage loans, the compensation
and expenses of operating personnel, marketing expenses, regular legal and
auditing fees and expenses, the fees and expenses of our directors, the costs
of printing and mailing proxies and reports to shareholders, the fees and
expenses of our custodian and transfer agent, if any, and the reimbursement of
any obligation of the Manager for any New Mexico Gross Receipts Tax liability.
The expenses we are required to pay, which are attributable to our operations,
are limited to an amount per year equal to the greater of 2% of our Average Net
Invested Assets or 25% of our Net Income for that year. The determination of
Net Income for purposes of calculating the expense limitation is the same as
for calculating the Managers incentive compensation except that it includes
any incentive compensation payable for such period. The Manager must pay
expenses in excess of such amount, unless the unaffiliated directors determine
that, based upon unusual or non-recurring factors, a higher level of expenses
is justified for such fiscal year. In that event, the Manager may recover such
expenses in succeeding years to the extent that expenses in succeeding quarters
are below the limitation of expenses. We are also required to pay expenses

18



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associated with litigation and other extraordinary or non-recurring expenses.
Expense reimbursement is made monthly, subject to adjustment at the end of each
year.

Expenses excluded from the expense limitation are those incurred in connection
with the servicing of mortgage loans, the raising of capital, the acquisition
and disposition of assets, interest expenses, taxes and license fees, non-cash
costs and the incentive management fee.

FEDERAL INCOME TAX CONSIDERATIONS

General

We have elected to be treated as a REIT for federal income tax purposes. In
brief, if we meet certain detailed conditions imposed by the REIT provisions of
the Code, such as investing primarily in real estate and mortgage loans, we
will not be taxed at the corporate level on the taxable income that we
currently distribute to our shareholders. We can therefore avoid most of the
double taxation (at the corporate level and then again at the shareholder
level when the income is distributed) that we would otherwise experience if we
were a corporation.

If we do not qualify as a REIT in any given year, we would be subject to
federal income tax as a domestic corporation, which would reduce the amount of
the after-tax cash available for distribution to our shareholders. We believe
that we have satisfied the requirements for qualification as a REIT since the
year ended 1993. We intend at all times to continue to comply with the
requirements for qualification as a REIT under the Code, as described below.

Requirements for Qualification as a REIT

To qualify for tax treatment as a REIT under the Code, we must meet certain
tests, as described briefly below.

Ownership of Common Stock

For all taxable years after the first taxable year for which we elected to be a
REIT, a minimum of 100 persons must hold our shares of capital stock for at
least 335 days of a 12-month year (or a proportionate part of a short tax
year). In addition, at all times during the second half of each taxable year,
no more than 50% in value of our capital stock may be owned directly or
indirectly by five or fewer individuals. We are required to maintain records
regarding the ownership of our shares and to demand statements from persons who
own more than a certain number of our shares regarding their ownership of
shares. We must keep a list of those shareholders who fail to reply to such a
demand.

We are required to use the calendar year as our taxable year for income tax
purposes.

Nature of Assets

On the last day of each calendar quarter, at least 75% of the value of our
assets must consist of Qualified REIT Assets, government assets, cash and cash
items. We expect that substantially all of our assets will continue to be
Qualified REIT Assets. On the last day of each calendar quarter, of the assets
not included in the foregoing 75% assets test, the value of securities that we
hold issued by any one issuer may not exceed 5% in value of our total assets
and we may not own more than 10% of any one issuers outstanding securities
(with an exception for a qualified electing taxable REIT subsidiary or a
qualified REIT subsidiary). Under that exception, the aggregate value of
business that we may undertake through taxable subsidiaries is limited to 20%
or less of our total assets. We monitor the purchase and holding of our assets
in order to comply with the above asset tests.

We may from time to time hold, through one or more taxable REIT subsidiaries,
assets that, if we held directly, could otherwise generate income that would
have an adverse effect on our qualification as a REIT or on certain classes of
our shareholders. We do not reasonably expect that the value of such taxable
subsidiaries, in the aggregate, will ever exceed 20% of our assets.

19



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Sources of Income

We must meet the following separate income-based tests each year:

1.     The 75% Test.At least 75% of our gross income for the taxable year
must be derived from Qualified REIT Assets including interest (other than
interest based in whole or in part on the income or profits of any person) on
obligations secured by mortgages on real property or interests in real
property. The investments that we have made and will continue to make will
give rise primarily to mortgage interest qualifying under the 75% income test.

2.     The 95% Test.In addition to deriving 75% of our gross income from the
sources listed above, at least an additional 20% of our gross income for the
taxable year must be derived from those sources, or from dividends, interest or
gains from the sale or disposition of stock or other assets that are not dealer
property. We intend to limit substantially all of the assets that we acquire
(other than stock in certain affiliate corporations as discussed below) to
Qualified REIT Assets. Our policy to maintain REIT status may limit the type
of assets, including hedging contracts and other assets, that we otherwise
might acquire.

Distributions

We must distribute to our shareholders on a pro rata basis each year an amount
equal to at least (i) 90% of our taxable income before deduction of dividends
paid and excluding net capital gain, plus (ii) 90% of the excess of the net
income from foreclosure property over the tax imposed on such income by the
Code, less (iii) any excess noncash income. We intend to make distributions
to our shareholders in sufficient amounts to meet the distribution requirement.

The Service has ruled that if a REITs dividend reinvestment plan allows
shareholders of the REIT to elect to have cash distributions reinvested in
shares of the REIT at a purchase price equal to at least 95% of fair market
value on the distribution date, then such cash distributions qualify under the
95% distribution test. We believe that our DRP complies with this ruling.

Taxation of Shareholders

For any taxable year in which we are treated as a REIT for federal income
purposes, the amounts that we distribute to our shareholders out of current or
accumulated earnings and profits will be includable by the shareholders as
ordinary income for federal income tax purposes unless properly designated by
us as capital gain dividends. Our distributions will not be eligible for the
dividends received deduction for corporations. Shareholders may not deduct any
of our net operating losses or capital losses.

If we make distributions to our shareholders in excess of our current and
accumulated earnings and profits, those distributions will be considered first
a tax-free return of capital, reducing the tax basis of a shareholders shares
until the tax basis is zero. Such distributions in excess of the tax basis
will be taxable as gain realized from the sale of our shares. We will withhold
30% of dividend distributions to shareholders that we know to be foreign
persons unless the shareholder provides us with a properly completed Service
form for claiming the reduced withholding rate under an applicable income tax
treaty.

The provisions of the Code are highly technical and complex. This summary is
not intended to be a detailed discussion of the Code or its rules and
regulations, or of related administrative and judicial interpretations. We
have not obtained a ruling from the Service with respect to tax considerations
relevant to our organization or operation, or to an acquisition of our common
stock. This summary is not intended to be a substitute for prudent tax
planning and each of our shareholders is urged to consult his or her own tax
advisor with respect to these and other federal, state and local tax
consequences of the acquisition, ownership and disposition of shares of our
stock and any potential changes in applicable law.

Taxation of the Company

We are subject to corporate level taxation on any undistributed income. In
addition, we face corporate level taxation due to any failure to make timely
distributions, on the built-in gain on assets acquired from a taxable
corporation such as a taxable REIT subsidiary, on the income from any property
that we take in foreclosure and on which we make a foreclosure property
election, and on the gain from any property that is treated as dealer
property in our hands.

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Item 2. PROPERTIES



| |  | Our principal executive offices are located in Santa Fe, New Mexico and are provided by the Manager in accordance with
the Management Agreement. Our subsidiaries have their principal offices in Santa Fe, New Mexico and are leased from
the Manager.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 3. LEGAL PROCEEDINGS



| |  | At December 31, 2002, there were no pending legal proceedings to which we were a party or to which any of our property
was subject.
| |  | -----------------------------------------------------------------------------------------------------------------------------------




Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



| |  | No matters were submitted to a vote of our shareholders during the fourth quarter of 2002.
| |  | ------------------------------------------------------------------------------------------

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PART II




Item 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

Our common stock is traded on the New York Stock Exchange under the trading
symbol TMA. As of February 25, 2003, we had 56,936,385 shares of common
stock outstanding, held by 2,999 holders of record and approximately 55,904
beneficial owners.

The following table sets forth, for the periods indicated, the high, low and
closing sales prices per share of our common stock as reported on the New York
Stock Exchange composite tape and the cash dividends declared per share of
common stock.

|                                       |  |              |       |           |  |       |       |           |  |   |       |  |  |      |       |    
|-------------------------------------- |  | ------------ | ----- | --------- |  | ----- | ----- | --------- |  | - | ----- |  |  | ---- | ----- | ---
|                                       |  |              |       |           |  |       |       |           |  |   |       |  |  | Cash
|                                       |  | Stock Prices |       | Dividends
|                                       |  |              |       | Declared 
|                                       |  | High         |       | Low       |  | Close |       | Per Share
|                                       |  |              |       |           |  |       |       |          
|2002                                   |  |              |       |           |  |       |       |           |  |   |       |  |  |      |       |    
|Fourth Quarter ended December 31, 2002 |  | $            | 20.94 |           |  | $     | 16.20 |           |  | $ | 20.10 |  |  | $    | 0.585 | (1)
|Third Quarter ended September 30, 2002 |  |              | 20.84 |           |  |       | 16.70 |           |  |   | 18.79 |  |  |      | 0.58  |    
|Second Quarter ended June 30, 2002     |  |              | 21.33 |           |  |       | 18.92 |           |  |   | 19.68 |  |  |      | 0.57  |    
|First Quarter ended March 31, 2002     |  |              | 21.20 |           |  |       | 17.75 |           |  |   | 20.04 |  |  |      | 0.55  |    
|                                       |  |              |       |           |  |       |       |           |  |   |       |  |  |      |       |    
|2001                                   |  |              |       |           |  |       |       |           |  |   |       |  |  |      |       |    
|Fourth Quarter ended December 31, 2001 |  | $            | 21.50 |           |  | $     | 16.10 |           |  | $ | 19.70 |  |  | $    | 0.55  | (2)
|Third Quarter ended September 30, 2001 |  |              | 18.45 |           |  |       | 13.70 |           |  |   | 16.57 |  |  |      | 0.50  |    
|Second Quarter ended June 30, 2001     |  |              | 16.01 |           |  |       | 11.55 |           |  |   | 15.51 |  |  |      | 0.40  |    
|First Quarter ended March 31, 2001     |  |              | 12.24 |           |  |       | 9.13  |           |  |   | 12.21 |  |  |      | 0.30  |    



---

|(1) |  | The 2002 fourth quarter dividend was declared in December 2002 and paid
in January 2003.
|--- |  | ----------------------------------------------------------------------------------------
|   
|(2) |  | The 2001 fourth quarter dividend was declared in December 2001 and paid
in January 2002.

In order to qualify for the tax benefits accorded to a REIT under the Code, we
intend to pay quarterly dividends such that all or substantially all of our
taxable income each year (subject to certain adjustments) is distributed to our
shareholders. All of the distributions that we make will be at the discretion
of our Board of Directors and will depend on our earnings and financial
condition, maintenance of REIT status and any other factors that the Board of
Directors deems relevant.

Dividend Reinvestment Plan

We have a Dividend Reinvestment and Stock Purchase Plan (the DRP) that allows
both common and preferred shareholders to reinvest their dividends in, and to
purchase, additional shares of our common stock. At our discretion,
shareholders may purchase common stock under the DRP directly from us at a
discount from the then prevailing market price or in the open market.
Shareholders and non-shareholders may also make additional monthly purchases of
stock, subject to a minimum of $100 ($500 for non-shareholders) and a maximum
of $10 thousand for each optional cash purchase. American Stock Transfer &
Trust Company, our transfer agent (the Agent), is the trustee and
administrator of the DRP. Shareholders who own stock that is registered in
their own name and want to participate in the DRP must deliver a completed
enrollment form to the Agent. Shareholders who own stock that is registered in
a name other than their own (e.g., broker or bank nominee) and want to
participate in the DRP must either request the broker or nominee to participate
on their behalf or request that the broker or nominee re-register the stock in
the shareholders name and deliver a completed enrollment form to the Agent.
Additional information about the DRP (including a prospectus) and forms are
available from the Agent or us. It is also available on our website.

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Item 6. SELECTED FINANCIAL DATA

The following selected financial data is derived from our audited financial
statements for the years ended December 31, 2002, 2001, 2000, 1999, and 1998.
You should read the selected financial data together with the more detailed
information contained in the Financial Statements and associated Notes and
Managements Discussion and Analysis of Financial Condition and Results of
Operations included elsewhere in this Form 10-K (dollars in thousands, except
per share data).

Operations Statement Highlights

|                                                        |  |      |         |      |  |      |        |      |  |      |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------ | ---- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                        |  | 2002 |         | 2001 |  | 2000 |        | 1999 |  | 1998
|                                                        |  |      |         |      |  |      |        |      |  |     
|Net interest income                                     |  | $    | 157,929 |      |  | $    | 78,765 |      |  | $    | 36,630 |   |  | $ | 34,015 |   |  | $ | 31,040 |  
|Net income                                              |  | $    | 120,016 |      |  | $    | 58,460 |      |  | $    | 29,165 |   |  | $ | 25,584 |   |  | $ | 22,695 |  
|Basic earnings per share                                |  | $    | 2.60    |      |  | $    | 2.09   |      |  | $    | 1.05   |   |  | $ | 0.88   |   |  | $ | 0.75   |  
|Diluted earnings per share                              |  | $    | 2.59    |      |  | $    | 2.09   |      |  | $    | 1.05   |   |  | $ | 0.88   |   |  | $ | 0.75   |  
|Average common shares  Basic                           |  |      | 43,590  |      |  |      | 24,754 |      |  |      | 21,506 |   |  |   | 21,490 |   |  |   | 21,488 |  
|Average common shares  Diluted                         |  |      | 46,350  |      |  |      | 24,803 |      |  |      | 21,519 |   |  |   | 21,490 |   |  |   | 21,488 |  
|Taxable income per average common share                 |  | $    | 2.64    |      |  | $    | 2.13   |      |  | $    | 1.07   |   |  | $ | 0.99   |   |  | $ | 0.84   |  
|Dividends declared per average common
share(1)          |  | $    | 2.285   |      |  | $    | 1.75   |      |  | $    | 0.96   |   |  | $ | 0.92   |   |  | $ | 1.14   |  
|Yield on net interest earning assets
(Portfolio Margin) |  |      | 1.88    | %    |  |      | 1.67   | %    |  |      | 0.86   | % |  |   | 0.77   | % |  |   | 0.64   | %
|Return on average common equity                         |  |      | 16.49   | %    |  |      | 13.82  | %    |  |      | 6.90   | % |  |   | 5.81   | % |  |   | 4.80   | %
|Noninterest expense to average assets                   |  |      | 0.45    | %    |  |      | 0.38   | %    |  |      | 0.16   | % |  |   | 0.12   | % |  |   | 0.13   | %

Balance Sheet Highlights

|                                              |  |                   |            |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|--------------------------------------------- |  | ----------------- | ---------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- | - |  | - | --------- | - |  | - | --------- | -
|                                              |  | As of December 31
|                                              |  |                  
|                                              |  | 2002              |            | 2001 |  | 2000 |           | 1999 |  | 1998
|                                              |  |                   |            |      |  |      |           |      |  |     
|Adjustable-rate mortgage assets               |  | $                 | 10,335,213 |      |  | $    | 5,732,145 |      |  | $    | 4,139,461 |   |  | $ | 4,326,098 |   |  | $ | 4,268,417 |  
|Total assets                                  |  | $                 | 10,512,932 |      |  | $    | 5,803,648 |      |  | $    | 4,190,167 |   |  | $ | 4,375,965 |   |  | $ | 4,344,633 |  
|Shareholders equity(2)                       |  | $                 | 938,296    |      |  | $    | 569,224   |      |  | $    | 395,965   |   |  | $ | 394,241   |   |  | $ | 395,484   |  
|Historical book value per share(3)            |  | $                 | 16.54      |      |  | $    | 15.12     |      |  | $    | 15.30     |   |  | $ | 15.28     |   |  | $ | 15.34     |  
|Market value adjusted book value
per share(4) |  | $                 | 14.54      |      |  | $    | 14.02     |      |  | $    | 11.67     |   |  | $ | 11.40     |   |  | $ | 11.45     |  
|Number of common shares outstanding           |  |                   | 52,763     |      |  |      | 33,305    |      |  |      | 21,572    |   |  |   | 21,490    |   |  |   | 21,490    |  
|Yield on ARM assets                           |  |                   | 4.63       | %    |  |      | 5.09      | %    |  |      | 7.06      | % |  |   | 6.38      | % |  |   | 5.86      | %



---

|(1) |  | For the applicable year as reported in our quarterly earnings
announcements.                                                                                                               
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Shareholders equity before unrealized market value adjustments of
($105,254), ($36,566), ($78,427), ($83,354) and ($83,661) at December 31,
2002, 2001, 2000, 1999 and 1998, respectively.

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|(3) |  | Shareholders equity before unrealized market value adjustments and
excluding $65,805 of preferred stock, divided by common shares
outstanding.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|   
|(4) |  | Shareholders equity after unrealized market value adjustments and
excluding preferred stock, divided by common shares outstanding.            




Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Policies

Our financial statements are prepared in conformity with generally accepted
accounting principles, many of which require the use of estimates and
assumptions. In accordance with recent Securities and Exchange Commission
guidance, those material accounting policies that we believe are the most
critical to an investors understanding of our financial results and condition
and require complex management judgment have been expanded and discussed below.



| |  | Fair Value. We record our ARM securities, Cap Agreements, Swap
Agreements and Eurodollar Transactions at fair value. The fair values
of our ARM securities, Cap Agreements, Swap Agreements and Eurodollar
Transactions are generally based on market prices provided by certain
dealers who make markets in these financial instruments or third-party
pricing services. If the fair value of an ARM security or other
financial instrument is not reasonably available from a dealer or a
third-party pricing service, management estimates the fair value.
This requires management judgment in determining how the market would
value a particular ARM security based on characteristics of the
security we receive from the issuer and available market information.
The fair values reported reflect estimates and may not necessarily be
indicative of the amounts we could realize in a current market
exchange.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Basis Adjustments on ARM Securities. In general, we securitize all of
our loans and retain the resulting securities in our ARM portfolio.
At the time of securitization, we obtain a credit review of the loans
being securitized by one or more of the Rating Agencies. Based on
this review, a determination is made, which requires management
judgment regarding the expected losses to be realized in the future
and we adjust the basis of the securities to their expected realizable
value. This is referred to as a basis adjustment. In doing so, we
establish an account, similar to a loss reserve, to absorb the
expected credit losses. The actual losses could be more or less than
the amount estimated by management at the time of securitization.
Therefore, we monitor the delinquencies and losses on the underlying
mortgage loans backing our ARM securities. If the credit performance
of the underlying mortgage loans is not as expected, we make a
provision for additional probable credit losses at a level deemed
appropriate by management to provide for known losses as well as
estimated losses inherent in our ARM securities portfolio. Any such
provision is based on managements assessment of numerous factors
affecting our portfolio of ARM assets including, but not limited to,
current economic conditions, delinquency status, credit losses to date
on underlying mortgages and remaining credit protection. The basis
adjustment for ARM securities is made by reducing the cost basis of
the individual security for the decline in fair value, which is other
than temporary, and the amount of such write-down is recorded as a
realized loss, thereby reducing earnings.
| 
| |  | Loan Securitization. We do not sell any of the securities created
when we securitize loans for our ARM securities portfolio, but rather
retain the beneficial and economic interests of the loans. The
securitizations of our loans are not accounted for as sales and we do
not record any servicing assets or liabilities as a result of this
process.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| 
| |  | Revenue Recognition. Interest income on ARM assets is a combination
of accruing interest based on the outstanding balance and contractual
terms of the assets and the amortization of yield adjustments using
generally accepted interest methods, principally the amortization of
purchase premiums and discounts. Premiums and discounts associated
with the purchase of ARM assets are amortized into interest income
over the lives of the assets using the effective yield method adjusted
for the effects of estimated prepayments. Estimating prepayments and
estimating the remaining lives of our ARM assets requires management
judgment, which involves consideration of possible future interest
rate environments and an estimate of how borrowers will behave in
those environments. The actual lives could be more or less than the
amount estimated by management at the time of purchase of the ARMs.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

For additional information on our significant accounting policies, see Note 1
to the Consolidated Financial Statements.

24



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Financial Condition

At December 31, 2002, we held total assets of $10.5 billion, $10.3 billion of
which consisted of ARM assets. That compares to $5.8 billion in total assets
and $5.7 billion of ARM assets at December 31, 2001. Since commencing
operations, we have purchased either ARM securities (backed by Agency
Securities or privately-issued, generally publicly registered, mortgage assets,
most of which are rated AA or higher by at least one of the Rating Agencies) or
ARM loans generally originated to A quality underwriting standards. At
December 31, 2002, 92.0% of the assets we held, including cash and cash
equivalents, were High Quality assets, far exceeding our investment policy
minimum requirement of investing at least 70% of our total assets in High
Quality ARM assets and cash and cash equivalents. Of the ARM assets that we
owned as of December 31, 2002, 97.8% are in the form of adjustable-rate
pass-through certificates or ARM loans. The remainder is floating rate classes
of CMOs (0.4%) or investments in floating rate classes of CBOs (1.8%) backed
primarily by ARM mortgaged-backed securities.

The following table presents a schedule of ARM assets owned at December 31,
2002 and December 31, 2001 classified by High Quality and Other Investment
assets and further classified by type of issuer and by ratings categories.

ARM Assets by Issuer and Credit Rating
(Dollar amounts in thousands)

|                  |                                  |                        |                        |           |                   |            |                   |      |          |       |           |           |           |           |  |      |      |       |  
|----------------- | -------------------------------- | ---------------------- | ---------------------- | --------- | ----------------- | ---------- | ----------------- | ---- | -------- | ----- | --------- | --------- | --------- | --------- |  | ---- | ---- | ----- | -
|                  |                                  |                        |                        |           | December 31, 2002 |            | December 31, 2001
|                  |                                  |                        |                        |           |                   |            |                  
|                  |                                  |                        |                        |           | Carrying          |            | Portfolio         |      | Carrying |       | Portfolio
|                  |                                  |                        |                        |           | Value             |            | Mix               |      | Value    |       | Mix      
|                  |                                  |                        |                        |           |                   |            |                   |      |          |       |          
|High Quality:     |                                  |                        |                        |           |                   |            |                   |      |          |       |           |           |           |           |  |     
|                  | Agency Securities                |                        | $                      | 2,682,555 |                   |            |                   | 26.0 | %        |       | $         | 2,401,831 |           |           |  | 41.9 | %   
|                  | Privately Issued:                |                        |                        |           |                   |            |                   |      |          |       |           |           |           |           |  |      |     
|                  |                                  | AAA/Aaa Rating         |                        |           | 6,409,860         | (1)        |                   |      | 62.0     |       |           |           | 2,699,868 | (1)       |  |      | 47.1 |      
|                  |                                  | AA/Aa Rating           |                        |           | 394,096           |            |                   |      | 3.8      |       |           |           | 372,413   |           |  |      | 6.5  |      
|                  |                                  |                        |                        |           |                   |            |                   |      |          |       |           |           |           |           |  |      |     
|                  |                                  |                        | Total Privately Issued |           |                   | 6,803,956  |                   |      |          | 65.8  |           |           |           | 3,072,281 |  |      |      | 53.6  |  
|                  |                                  |                        |                        |           |                   |            |                   |      |          |       |           |           |           |           |  |      |     
|                  |                                  |                        |                        |           |                   |            |                   |      |          |       |           |           |           |           |  |      |     
|                  |                                  |                        | Total High Quality     |           |                   | 9,486,511  |                   |      |          | 91.8  |           |           |           | 5,474,112 |  |      |      | 95.5  |  
|                  |                                  |                        |                        |           |                   |            |                   |      |          |       |           |           |           |           |  |      |     
|Other Investment: |                                  |                        |                        |           |                   |            |                   |      |          |       |           |           |           |           |  |     
|                  | Privately Issued:                |                        |                        |           |                   |            |                   |      |          |       |           |           |           |           |  |      |     
|                  |                                  | A Rating               |                        |           | 63,198            |            |                   |      | 0.6      |       |           |           | 49,627    |           |  |      | 0.9  |      
|                  |                                  | BBB/Baa Rating         |                        |           | 31,657            |            |                   |      | 0.3      |       |           |           | 69,698    |           |  |      | 1.2  |      
|                  |                                  | BB/Ba Rating and Below |                        |           | 44,060            | (1)        |                   |      | 0.4      |       |           |           | 39,942    | (1)       |  |      | 0.7  |      
|                  | ARM loans pending securitization |                        |                        | 709,787   |                   |            |                   | 6.9  |          |       |           | 98,766    |           |           |  | 1.7  |     
|                  |                                  |                        |                        |           |                   |            |                   |      |          |       |           |           |           |           |  |      |     
|                  |                                  |                        | Total Other Investment |           |                   | 848,702    |                   |      |          | 8.2   |           |           |           | 258,033   |  |      |      | 4.5   |  
|                  |                                  |                        |                        |           |                   |            |                   |      |          |       |           |           |           |           |  |      |     
|                  |                                  |                        | Total ARM Portfolio    |           | $                 | 10,335,213 |                   |      |          | 100.0 | %         |           | $         | 5,732,145 |  |      |      | 100.0 | %
|                  |                                  |                        |                        |           |                   |            |                   |      |          |       |           |           |           |           |  |      |     



---

|(1) |  | The AAA Rating category includes $261.3 million and $442.2 million of
whole loans as of December 31, 2002 and 2001, respectively, that have
been credit enhanced to AAA by a combination of an insurance policy
purchased from a third-party and an unrated subordinated certificate
retained by the Company in the amount of $31.7 million and $31.8 million
as of December 31, 2002 and 2001, respectively. The subordinated
certificate is included in the BB/Ba Rating and Below category.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As of December 31, 2002 and 2001, we had reduced the carrying value of our
securitized ARM loans by $13.8 million and $7.9 million, respectively, due to
estimated credit losses (other than temporary declines in fair value). In
addition, we had reduced the cost basis of other ARM securities by $858.8
thousand and $1.2 million, as of the same dates, respectively, related to Other
Investments that we purchased at a discount that included an estimate of credit
losses.

As of December 31, 2002, 8 of the 9,421 loans in our ARM loan portfolio were
considered seriously delinquent (60 days or more delinquent) and had an
aggregate balance of $3.4 million. At that date, the ARM loan portfolio also
included two real

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estate-owned properties that we acquired as the result of foreclosure processes
in the amount of $391.4 thousand. The average original effective loan-to-value
ratio on the delinquent loans and the acquired properties was 63.6%. We
believe that our current level of basis adjustments and allowance for loan
losses is adequate to cover estimated losses from these loans and properties.

The following table presents a summary of the basis adjustments on our
securitized ARM loans, the basis adjustments on our purchased ARM securities
and allowance for losses on our ARM loans (dollar amounts in thousands):

|                                                         |  |                   |        |               |  |           |       |       |  |               |     |  |  |   |        |  
|-------------------------------------------------------- |  | ----------------- | ------ | ------------- |  | --------- | ----- | ----- |  | ------------- | --- |  |  | - | ------ | -
|                                                         |  |                   |        |               |  |           |       |       |  | Allowance for |     |  |  |  
|                                                         |  | Basis Adjustments |        | Losses        |  |           |       |      
|                                                         |  |                   |        |               |  |           |       |      
|                                                         |  | Thornburg         |        |               |  |           |       |       |  |               |     |  |  |  
|                                                         |  | Securitized       |        | Purchased ARM |  |           |       |       |  |               |     | 
|                                                         |  | ARM Loans         |        | Securities    |  | ARM Loans |       | Total
|                                                         |  |                   |        |               |  |           |       |      
|Balance, December 31, 2001                               |  | $                 | 7,925  |               |  | $         | 1,151 |       |  | $             | 100 |  |  | $ | 9,176  |  
|Basis adjustment recorded at
time of loan securitization |  |                   | 5,839  |               |  |           |      |       |  |               |    |  |  |   | 5,839  |  
|Charge-offs                                              |  |                   |       |               |  |           | (509  | )     |  |               |    |  |  |   | (509   | )
|Recoveries                                               |  |                   |       |               |  |           | 217   |       |  |               |    |  |  |   | 217    |  
|                                                         |  |                   |        |               |  |           |       |       |  |               |     |  |  |   |        |  
|Balance, December 31, 2002                               |  | $                 | 13,764 |               |  | $         | 859   |       |  | $             | 100 |  |  | $ | 14,723 |  
|                                                         |  |                   |        |               |  |           |       |       |  |               |     |  |  |   |        |  

The following table classifies our portfolio of ARM and short-term mortgage
assets by type of interest rate index.

ARM and Short-term Mortgage Assets by Index
(Dollar amounts in thousands)

|                               |        |                                      |            |                   |           |                   |       |          |      |           |           |   |           |  |       |   |      |  
|------------------------------ | ------ | ------------------------------------ | ---------- | ----------------- | --------- | ----------------- | ----- | -------- | ---- | --------- | --------- | - | --------- |  | ----- | - | ---- | -
|                               |        |                                      |            | December 31, 2002 |           | December 31, 2001
|                               |        |                                      |            |                   |           |                  
|                               |        |                                      |            | Carrying          |           | Portfolio         |       | Carrying |      | Portfolio
|                               |        |                                      |            | Value             |           | Mix               |       | Value    |      | Mix      
|                               |        |                                      |            |                   |           |                   |       |          |      |          
|ARM assets:                    |        |                                      |            |                   |           |                   |       |          |      |           |           |   |           |  |       |  
|                               | Index: |                                      |            |                   |           |                   |       |          |      |           |           |   |           |  |       |   |     
|                               |        | One-month LIBOR                      |            | $                 | 576,837   |                   |       |          | 5.6  | %         |           | $ | 633,758   |  |       |   | 11.1 | %
|                               |        | Three-month LIBOR                    |            |                   | 187,624   |                   |       |          | 1.8  |           |           |   | 171,262   |  |       |   | 3.0  |  
|                               |        | Six-month LIBOR                      |            |                   | 834,709   |                   |       |          | 8.1  |           |           |   | 261,245   |  |       |   | 4.6  |  
|                               |        | Six-month Certificate of Deposit     |            |                   | 93,064    |                   |       |          | 0.9  |           |           |   | 140,887   |  |       |   | 2.5  |  
|                               |        | Six-month Constant Maturity Treasury |            |                   | 10,752    |                   |       |          | 0.1  |           |           |   | 16,809    |  |       |   | 0.3  |  
|                               |        | One-year Constant Maturity Treasury  |            |                   | 1,095,945 |                   |       |          | 10.6 |           |           |   | 1,651,453 |  |       |   | 28.8 |  
|                               |        | Cost of Funds                        |            |                   | 68,165    |                   |       |          | 0.6  |           |           |   | 182,437   |  |       |   | 3.2  |  
|                               |        |                                      |            |                   |           |                   |       |          |      |           |           |   |           |  |       |   |      |  
|                               |        |                                      | 2,867,096  |                   |           |                   | 27.7  |          |      |           | 3,057,851 |   |           |  | 53.5  |  
|                               |        |                                      |            |                   |           |                   |       |          |      |           |           |   |           |  |       |   |      |  
|Hybrid ARM assets              |        |                                      | 7,468,117  |                   |           |                   | 72.3  |          |      |           | 2,397,629 |   |           |  | 41.7  |  
|One-year maturity  fixed rate |        |                                      |           |                   |           |                   |      |          |      |           | 276,665   |   |           |  | 4.8   |  
|                               |        |                                      |            |                   |           |                   |       |          |      |           |           |   |           |  |       |   |      |  
|                               |        | $                                    | 10,335,213 |                   |           |                   | 100.0 | %        |      | $         | 5,732,145 |   |           |  | 100.0 | %
|                               |        |                                      |            |                   |           |                   |       |          |      |           |           |   |           |  |       |   |      |  

The ARM portfolio had a current weighted average coupon of 4.99% at December
31, 2002. This consisted of an average coupon of 5.23% on the hybrid portion
of the portfolio and an average coupon of 4.27% on the rest of the portfolio.
If the portfolio had been fully indexed, the weighted average coupon of the
portfolio would have been 4.82%, based upon the current composition of the
portfolio and the applicable indices. Additionally, if the non-hybrid portion
of the portfolio had been fully indexed, the weighted average coupon of that
portion of the portfolio would have been 3.61%, also based upon the current
composition of the portfolio and the applicable indices. The term fully
indexed refers to an ARM asset that has an interest rate currently equal to
its applicable index plus a margin to the index that is specified by the terms
of the ARM asset. The average interest rate on the ARM portion of the
portfolio is expected to decrease during 2003 until it reaches the fully
indexed rate.

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As of December 31, 2001, the ARM portfolio had a weighted average coupon of
5.96%. This consisted of an average coupon of 6.26% on the hybrid portion of
the portfolio and an average coupon of 5.71% on the rest of the portfolio. If
the non-hybrid portion of the portfolio had been fully indexed, the weighted
average coupon of the ARM portfolio would have been 5.16%, based upon the
composition of the portfolio and the applicable indices at that time.

At December 31, 2002, the current yield of the ARM assets portfolio was 4.63%,
compared to 5.09% as of December 31, 2001. The decrease in the yield of 0.46%
as of December 31, 2002, compared to December 31, 2001, is due to the decreased
weighted average interest rate coupon discussed above, which decreased by
0.97%. This decline in the average interest rate coupon was partially offset
by a lower level of net premium amortization, which had the effect of
increasing the yield by 0.38%. Additionally, the relative level of non-interest
earning principal payment receivables also increased the portfolio yield by
0.13%. The current yield includes the impact of the amortization of applicable
premiums and discounts and the impact of principal payment receivables.

The ARM portfolio had an average term to the next repricing date of 2.8 years
as of December 31, 2002, compared to 1.7 years as of December 31, 2001. The
non-hybrid portion of the portfolio had an average term to the next repricing
date of 72 days and the hybrid portion had an average term to the next
repricing date of 3.9 years at December 31, 2002. As of December 31, 2002, the
hybrid ARM portfolio comprised 72.3% of the total ARM portfolio, compared to
41.7% as of the end of 2001. We attempt to mitigate our interest rate risk by
funding our ARM assets with borrowings with maturities approximately matching
the interest rate adjustment periods on our ARM assets. Therefore, some of
our borrowings bear variable or short term (one year or less) fixed interest
rates because a portion of our ARM assets have interest rates that adjust
within one year. However, we finance our hybrid ARM portfolio with borrowings
hedged with Swap Agreements and Eurodollar Transactions that fix the interest
rate on the borrowings such that the duration difference of the fixed interest
rate period of the hybrid ARM portfolio and the associated fixed-rate
liabilities is one year or less. Duration is a calculation that measures the
expected price volatility of financial instruments based on changes in interest
rates. By maintaining a duration difference of less than one year, the price
change of our hybrid ARM portfolio is expected to be a maximum of 1% for a 1%
parallel shift in interest rates, net of the fair value change of our Swap
Agreements and other borrowings funding our hybrid ARM portfolio. A lower
duration indicates a lower expected volatility of earnings given future changes
in interest rates. As of December 31, 2002, the duration difference applicable
to our hybrid ARM portfolio was approximately 3 months.

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The following table presents various characteristics of our ARM and hybrid ARM
loan portfolio as of December 31, 2002. This information pertains to loans
held for securitization, loans held as collateral for the notes payable and
loans securitized for our own portfolio for which we retained credit loss
exposure. The combined amount of the loans included in this information is
$3.7 billion.

ARM and Hybrid ARM Loan Portfolio Characteristics

|                         |  |         |         |      |  |     |           |   |  |   |        |  
|------------------------ |  | ------- | ------- | ---- |  | --- | --------- | - |  | - | ------ | -
|                         |  | Average |         | High |  | Low
|                         |  |         |         |      |  |    
|Original loan balance    |  | $       | 405,180 |      |  | $   | 6,000,000 |   |  | $ | 31,000 |  
|Unpaid principal balance |  |         | 396,745 |      |  |     | 6,000,000 |   |  |   | 808    |  
|Coupon rate on loans     |  |         | 5.29    | %    |  |     | 9.13      | % |  |   | 2.13   | %
|Pass-through rate        |  |         | 5.10    | %    |  |     | 8.73      | % |  |   | 2.11   | %
|Pass-through margin      |  |         | 1.92    | %    |  |     | 4.98      | % |  |   | 0.23   | %
|Lifetime cap             |  |         | 11.39   | %    |  |     | 18.00     | % |  |   | 8.13   | %
|Original term (months)   |  |         | 358     |      |  |     | 480       |   |  |   | 169    |  
|Remaining term (months)  |  |         | 341     |      |  |     | 479       |   |  |   | 43     |  

|                                        |  |      |   |                               |  |      |      | 
|--------------------------------------- |  | ---- | - | ----------------------------- |  | ---- | ---- | 
|Geographic distribution (top 5 states): |  |      |   | Property type:                |  |      |      | 
|California                              |  | 26.1 | % | Single-family                 |  | 86.7 | %(1) | 
|Georgia                                 |  | 15.2 |   | Condominium                   |  | 8.0  |      | 
|Colorado                                |  | 7.2  |   | Other residential             |  | 5.3  |      | 
|New York                                |  | 6.2  |   |                               |  |      |      | 
|Florida                                 |  | 5.1  |   |                               |  |      |      | 
|                                        |  |      |   |                               |  |      |      | 
|                                        |  |      |   | ARM Interest Rate Caps:       |  |      |      | 
|Occupancy status:                       |  |      |   | Initial Cap on hybrid loans:  |  |      |      | 
|Owner occupied                          |  | 86.3 | % | 3.00% or less                 |  | 8.4  | %    | 
|Second home                             |  | 11.2 |   | 3.01%-4.00%                   |  | 15.1 |      | 
|Investor                                |  | 2.5  |   | 4.01%-5.00%                   |  | 29.3 |      | 
|                                        |  |      |   | 5.01%-6.00%                   |  | 14.8 |      | 
|Documentation type:                     |  |      |   | Periodic Cap on non-hybrid    |  |      |      | 
|Full/Alternative                        |  | 93.6 | % | loans:                        |  |      |      | 
|Other                                   |  | 6.4  |   | None                          |  | 20.2 | %    | 
|                                        |  |      |   | 1.00% or less                 |  | 9.3  |      | 
|                                        |  |      |   | Over 1.00%                    |  | 2.9  |      | 
|                                        |  |      |   |                               |  |      |      | 
|Loan purpose:                           |  |      |   |                               |  |      |      | 
|Purchase                                |  | 34.5 | % |                               |  |      |      | 
|Cash out refinance                      |  | 29.4 |   | Percent of loan balances that |  |      |      | 
|Rate & term refinance                   |  | 36.1 |   | are interest only:            |  | 79.5 | %(2) | 
|                                        |  |      |   |                               |  |      |      | 
|Effective original                      |  |      |   | FICO scores:                  |  |      |      | 
|loan-to-value:                          |  |      |   | 801 and over                  |  | 2.8  | %    | 
|90.01% and over (4)                     |  | 0.8  | % | 751 to 800                    |  | 40.3 |      | 
|80.01%-90.00% (4)                       |  | 1.8  |   | 701 to 750                    |  | 34.2 |      | 
|70.01%-80.00%                           |  | 39.1 |   | 651 to 700                    |  | 18.8 |      | 
|60.01%-70.00%                           |  | 26.3 |   | 601 to 650                    |  | 3.3  |      | 
|50.01%-60.00%                           |  | 14.4 |   | 600 or less                   |  | 1.6  |      | 
|50.00% or less                          |  | 17.6 |   |                               |  |      |      | 
|                                        |  |      |   |                               |  |      |      | 
|Average effective original              |  |      |   | Average FICO score            |  | 737  | (3)  | 
|loan-to-value:                          |  | 66.7 | % |                               |  |      |      | 



---

|(1) |  | Single-family properties include DeMinimus PUD properties (a premise
within a planned unit development property in which the common property
has less than a 2% influence upon the value of the premise) representing
25.2% of the loan portfolio.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| | (2) |  | The average effective original loan-to-value on interest only loans
is 70.3%.                                                                                                 
| | --- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (3) |  | FICO is a credit score based upon the credit evaluation methodology
developed by Fair, Isaac and Company, a consulting firm specializing in
creating credit evaluation models.
|
| | (4) |  | All loans with an effective original loan-to-value ratio over 80%
have mortgage insurance.                                                                                    

As of December 31, 2002, we serviced $2.0 billion of our loans and had 4,778
customer relationships. We hold all of the loans that we service in our
portfolio in the form of ARM securities or loans to be securitized for our
portfolio. We have not capitalized any servicing rights.

During the year ended December 31, 2002, we purchased $6.6 billion of ARM
securities, 100.0% of which were High Quality assets and $2.8 billion of ARM
loans, generally originated to A quality underwriting standards. Of the ARM
assets acquired during 2002, 79.7% were hybrid ARM assets, 4.9% were
fixed-rate, short-term securities and 15.3% were indexed to LIBOR. The
following table compares our ARM asset acquisition and origination activity for
each of the consecutive quarters of 2002, along with total activity for 2002:

ARM Asset Acquisitions by Quarter
(Dollar amounts in thousands)

|                |                                |  |              |           |              |  |              |           |              |  |           |           |  |  |           |           |  |  |           |           | 
|--------------- | ------------------------------ |  | ------------ | --------- | ------------ |  | ------------ | --------- | ------------ |  | --------- | --------- |  |  | --------- | --------- |  |  | --------- | --------- | 
|                |                                |  | Mar 31, 2002 |           | Jun 30, 2002 |  | Sep 30, 2002 |           | Dec 31, 2002 |  | Full Year
|                |                                |  |              |           |              |  |              |           |              |  |          
|ARM securities: |                                |  |              |           |              |  |              |           |              |  |           |           |  |  |           |           |  |  |           |          
|                | Agency Securities              |  | $            | 1,702,698 |              |  | $            | 730,152   |              |  | $         | 183,604   |  |  | $         | 425,668   |  |  | $         | 3,042,122 | 
|                | High Quality, privately
issued |  |              | 84,425    |              |  |              | 1,142,260 |              |  |           | 1,296,422 |  |  |           | 1,014,293 |  |  |           | 3,537,400 | 
|                |                                |  |              |           |              |  |              |           |              |  |           |           |  |  |           |           |  |  |           |           | 
|                |                                |  | 1,787,123    |           |              |  | 1,872,412    |           |              |  | 1,480,026 |           |  |  | 1,439,961 |           |  |  | 6,579,522 |          
|                |                                |  |              |           |              |  |              |           |              |  |           |           |  |  |           |           |  |  |           |           | 
|Loans:          |                                |  |              |           |              |  |              |           |              |  |           |           |  |  |           |           |  |  |           |          
|                | Bulk acquisitions              |  |              | 200,812   |              |  |              | 167,638   |              |  |           | 79,744    |  |  |           | 114,615   |  |  |           | 562,809   | 
|                | Correspondent originations     |  |              | 311,603   |              |  |              | 380,872   |              |  |           | 527,829   |  |  |           | 686,195   |  |  |           | 1,906,499 | 
|                | Direct retail originations     |  |              | 86,942    |              |  |              | 70,004    |              |  |           | 78,814    |  |  |           | 144,025   |  |  |           | 379,785   | 
|                |                                |  |              |           |              |  |              |           |              |  |           |           |  |  |           |           |  |  |           |           | 
|                |                                |  | 599,357      |           |              |  | 618,514      |           |              |  | 686,387   |           |  |  | 944,835   |           |  |  | 2,849,093 |          
|                |                                |  |              |           |              |  |              |           |              |  |           |           |  |  |           |           |  |  |           |           | 
|                | Total acquisitions             |  | $            | 2,386,480 |              |  | $            | 2,490,926 |              |  | $         | 2,166,413 |  |  | $         | 2,384,796 |  |  | $         | 9,428,615 | 
|                |                                |  |              |           |              |  |              |           |              |  |           |           |  |  |           |           |  |  |           |           | 

Since 1997, we have emphasized purchasing High Quality ARM and hybrid ARM
assets, floating rate collateralized mortgages and short term, fixed rate
securities at substantially lower prices relative to par in order to reduce the
potential impact of rapid prepayments. In doing so, the average
premium/(discount) paid for ARM assets acquired in 2002 and 2001 was 0.86% and
0.12%, of par, respectively, as compared to 3.29% of par in 1997 when we
emphasized the purchase of seasoned ARM assets. In part, as a result of this
strategy, the book price of our ARM assets, excluding unrealized gains and
losses, was 101.01% of par as of December 31, 2002, down from 102.77% of par as
of the end of 1997.

During 2002, we securitized $2.3 billion of our ARM loans into a series of
privately issued multi-class ARM securities, all of which we retained for our
ARM portfolio. We securitize the ARM loans that we acquire into ARM securities
for our own portfolio in order to reduce the cost of financing the portfolio
and in order to enhance the high quality and highly liquid characteristics of
our portfolio, thereby improving our access to financing. In doing so, we
retain the economic interest and risk of the loans. Of the loans that we
securitized during 2002, 99.7% were at least Investment Grade securities and
0.3% were subordinate securities that provide credit support to the Investment
Grade securities.

As of December 31, 2002, we had commitments to purchase $22.2 million of ARM
securities, $261.6 million of ARM loans through wholesale channels and $728.7
million of ARM loans through origination channels.

For the quarter ended December 31, 2002, our mortgage assets paid down at an
approximate average annualized Constant Paydown Rate (CPR) of 37%, compared
to 29% for the quarter ended December 31, 2001 and 30% for the quarter ended
September 30, 2002. The constant prepayment rate averaged approximately 32%
during the full year of 2002 compared to 27% during 2001. When prepayment
experience increases, we have to amortize our premiums over a shorter time
period,

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resulting in a reduced yield to maturity on our ARM assets. Conversely, if
actual prepayment experience decreases, we would amortize the premium over a
longer time period, resulting in a higher yield to maturity. We monitor our
prepayment experience on a monthly basis and adjust the amortization of the net
premium, as appropriate.

The amount of the adjustment to the fair value on the ARM assets classified as
available-for-sale improved from a negative adjustment of $5.3 million as of
December 31, 2001, to a positive adjustment of $44.7 million as of December 31,
2002. All of our ARM securities are classified as available-for-sale and are
carried at their fair value. This price improvement was primarily due to the
effect of declining medium to long-term interest rates on the fair value of our
hybrid ARM assets.

Our ARM assets generally have a maximum lifetime interest rate cap or ceiling,
meaning that each ARM asset contains a contractual maximum interest rate.
Since our borrowings are not subject to equivalent interest rate caps, we have
entered into Cap Agreements which have the effect of offsetting a portion of
our borrowing costs, thereby reducing the effect of the lifetime cap feature on
our ARM assets and protecting the net margin on our ARM assets in high interest
rate environments. As of December 31, 2002, our ARM assets had an average
lifetime interest rate cap of 11.64%, far exceeding the current level of
interest rates. At December 31, 2002, our Cap Agreements had a remaining
notional balance of $1.8 billion with an average final maturity of 1.0 year,
compared to a remaining notional balance of $2.3 billion with an average final
maturity of 1.5 years at December 31, 2001. At December 31, 2002, the fair
value of our Cap Agreements was $84.7 thousand compared to a fair value of
$430.5 thousand as of December 31, 2001. Pursuant to the terms of the Cap
Agreements, we will receive cash payments if the one month or three month LIBOR
indices increase above certain specified levels, which range from 6.00% to
12.00% and average 10.00%. Due to the current low level of interest rates, we
have decided not to purchase additional Cap Agreements at this time.

The following table presents information about our Cap Agreement portfolio as
of December 31, 2002:

Cap Agreement Contracts Stratified by Strike Price
(Dollar amounts in thousands)

| |  |             |           |          |  |                  |       |              |  |                |           |         |  |          |       |   |  |           |     | 
| |  | ----------- | --------- | -------- |  | ---------------- | ----- | ------------ |  | -------------- | --------- | ------- |  | -------- | ----- | - |  | --------- | --- | 
| |  | Hedged      |           | Weighted |  |                  |       |              |  |                |           |         |  | Weighted
| |  | ARM Assets  |           | Average  |  | Cap Agreement    |       |              |  |                |           | Average
| |  | Balance (1) |           | Life Cap |  | Notional Balance |       | Strike Price |  | Remaining Term
| |  |             |           |          |  |                  |       |              |  |               
| |  | $           | 74,992    |          |  |                  | 8.93  | %            |  | $              | 67,441    |         |  |          | 6.42  | % |  | 0.9 Years
| |  |             | 222,536   |          |  |                  | 9.95  |              |  |                | 200,000   |         |  |          | 7.50  |   |  |           | 1.0 | 
| |  |             | 444,210   |          |  |                  | 10.99 |              |  |                | 400,000   |         |  |          | 8.06  |   |  |           | 1.1 | 
| |  |             | 123,174   |          |  |                  | 11.04 |              |  |                | 111,000   |         |  |          | 10.02 |   |  |           | 0.3 | 
| |  |             | 15,774    |          |  |                  | 11.29 |              |  |                | 14,000    |         |  |          | 10.50 |   |  |           | 0.7 | 
| |  |             | 427,614   |          |  |                  | 11.59 |              |  |                | 385,000   |         |  |          | 11.00 |   |  |           | 0.9 | 
| |  |             | 311,013   |          |  |                  | 12.09 |              |  |                | 280,000   |         |  |          | 11.50 |   |  |           | 1.6 | 
| |  |             | 575,692   |          |  |                  | 13.09 |              |  |                | 350,000   |         |  |          | 12.00 |   |  |           | 0.8 | 
| |  |             |           |          |  |                  |       |              |  |                |           |         |  |          |       |   |  |           |     | 
| |  | $           | 2,195,005 |          |  |                  | 11.64 | %            |  | $              | 1,807,441 |         |  |          | 10.00 | % |  | 1.0 Years
| |  |             |           |          |  |                  |       |              |  |                |           |         |  |          |       |   |  |           |     | 



---

|(1) |  | Excludes ARM assets that do not have lifetime caps or are hybrids that are match-funded during
their fixed rate period, in accordance with our investment policy.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

We enter into Swap Agreements and Eurodollar Transactions in order to manage
our interest rate exposure when financing our ARM assets. We generally borrow
money based on short term interest rates, either by entering into fixed-rate
borrowings with maturity terms ranging from one month to twelve months, or by
entering into variable-rate borrowings with maturity terms of six months to two
years that reprice based on a frequency ranging from one month to three months.
Our non-hybrid ARM assets generally have interest rates that reprice based on
frequency terms of one to twelve months. Our hybrid ARM assets generally have
an initial fixed interest rate period of three to ten years. As a result, our
existing and forecasted borrowings reprice to a new interest rate on a more
frequent basis than these ARM assets. When we enter into a Swap Agreement, we
agree to pay a fixed rate of interest and to receive a variable interest rate
based on LIBOR. Both Swap Agreements and Eurodollar Transactions have the
effect of converting our variable rate debt into fixed rate debt over the life
of the Swap Agreements and Eurodollar Transactions. We use Swap Agreements and
Eurodollar Transactions as a cost

30



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##### Table of Contents



effective way to lengthen the average repricing period of our variable rate and
short term borrowings such that the average repricing period of our borrowings
more closely matches the average repricing period of our ARM assets.

As of December 31, 2002, we were counterparty to forty-six Swap Agreements
having an aggregate notional balance of $4.7 billion and we had also entered
into Eurodollar Transactions with an aggregate notional balance of $317.0
million. In addition, we also entered into two delayed Swap Agreements with an
aggregate notional balance of $600.0 million that become effective in 2003.
These Swap Agreements and Eurodollar Transactions hedged the fixed interest
rate period of hybrid ARM assets and had a weighted average maturity of 2.8
years. As a result of entering into these Swap Agreements and Eurodollar
Transactions, we have reduced the interest rate variability of our cost to
finance our hybrid ARM assets. The average remaining fixed rate term of our
hybrid ARM assets as of December 31, 2002 was 3.9 years. Furthermore, the
difference between the duration of hybrid ARM assets and the duration of the
combination of our borrowings, Swap Agreements and Eurodollar Transactions
funding hybrid ARM assets, as of December 31, 2002, was approximately 3 months.

In accordance with Financial Accounting Standards No. 133 (FAS 133), we
designate all of these Swap Agreements as cash flow hedges and, as of December
31, 2002, carry them on the balance sheet as a liability with a fair value of
$147.2 million. As of December 31, 2002, the fair value adjustment for Swap
Agreements was a decrease to Accumulated other comprehensive income in the
amount of $142.6 million. The Swap Agreements and the short term borrowings
they hedge have nearly identical terms and characteristics with respect to the
applicable index and interest rate repricing dates, and we have calculated the
effectiveness of these cash flow hedges to be approximately 100%. As a result,
we have recorded all changes in the unrealized gains and losses on Swap
Agreements in Accumulated other comprehensive income and we have reclassified
all such changes to earnings as interest expense is recognized on our hedged
borrowings.

During 2002, we paid $4.9 million to terminate two Swap Agreements that had
been hedging the financing of certain hybrid ARM assets that were sold during
2002.

Also, in accordance with FAS 133, we designate all of the Eurodollar
Transactions as cash flow hedges and, as of December 31, 2002, carry them on
the balance sheet as a liability with a fair value of $8.1 million. The
Eurodollar Transactions hedge the change in the three-month LIBOR interest rate
index and are designated as hedges of our short term borrowings. We have also
entered into short term borrowings indexed to three-month LIBOR with re-pricing
dates that correspond to the expiration dates of the Eurodollar Transactions.
As a result, there has not been any measurable ineffectiveness from this
hedging strategy. Therefore, we have recorded the gains and losses in
Accumulated other comprehensive income and we will reclassify the gains and
losses to earnings as interest expense is recognized on our hedged short-term
borrowings.

Results of Operations  2002 Compared to 2001

For the year ended December 31, 2002, our net income was $120.0 million, or
$2.60 and $2.59 per share for Basic and Diluted EPS, respectively, based on a
weighted average of 43.6 million and 46.4 million shares outstanding for Basic
and Diluted EPS, respectively. That compares to $58.5 million, or $2.09 per
share (Basic and Diluted EPS), based on a weighted average of 24.8 million
shares outstanding for the year ended December 31, 2001, a 24.4% increase in
our earnings per share.

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

Components of Return on Average Common Equity (1)

|             |  |          |       |          |  |         |      |           |  |             |      |          |  |           |      |         |  |           |      |           |  |     |      |         |  |         |      |   |  |  |       |   |  |  |      |   |  |           |       |  
|------------ |  | -------- | ----- | -------- |  | ------- | ---- | --------- |  | ----------- | ---- | -------- |  | --------- | ---- | ------- |  | --------- | ---- | --------- |  | --- | ---- | ------- |  | ------- | ---- | - |  |  | ----- | - |  |  | ---- | - |  | --------- | ----- | -
|             |  |          |       |          |  |         |      |           |  |             |      |          |  |           |      |         |  |           |      |           |  |     |      |         |  |         |      |   |  |  |       |   |  |  |      |   |  | ROE in   
|             |  |          |       |          |  |         |      |           |  |             |      |          |  |           |      |         |  |           |      |           |  |     |      |         |  |         |      |   |  |  |       |   |  |  |      |   |  | Excess of
|             |  | Net      |       |          |  |         |      | Provision |  | Gain (Loss) |      | G & A    |  |           |      |         |  |           |      |           |  | Net |      | 10-Year |  | 10-Year
|For the      |  | Interest |       | Hedging  |  | For     |      | on ARM    |  | Expense     |      | Perform. |  | Preferred |      | Income/ |  | US Treas. |      | US Treas.
|Quarter      |  | Income/  |       | Expense/ |  | Losses/ |      | Sales/    |  | (2)/        |      | Fee/     |  | Dividend/ |      | Equity  |  | Average   |      | Average  
|Ended        |  | Equity   |       | Equity   |  | Equity  |      | Equity    |  | Equity      |      | Equity   |  | Equity    |      | (ROE)   |  | Yield     |      | Yield    
|             |  |          |       |          |  |         |      |           |  |             |      |          |  |           |      |         |  |           |      |          
|Mar 31, 2000 |  |          | 11.47 | %        |  |         |      |           |  |             | 0.41 | %        |  |           |     |         |  |           | 1.81 | %         |  |     |     |         |  |         | 2.06 | % |  |  | 7.20  | % |  |  | 6.47 | % |  |           | 0.73  | %
|Jun 30, 2000 |  |          | 10.74 | %        |  |         |      |           |  |             | 0.47 | %        |  |           | 0.06 | %       |  |           | 1.78 | %         |  |     |     |         |  |         | 2.05 | % |  |  | 6.50  | % |  |  | 6.18 | % |  |           | 0.32  | %
|Sep 30, 2000 |  |          | 11.01 | %        |  |         |      |           |  |             | 0.33 | %        |  |           |     |         |  |           | 2.07 | %         |  |     |     |         |  |         | 2.05 | % |  |  | 6.56  | % |  |  | 5.89 | % |  |           | 0.67  | %
|Dec 31, 2000 |  |          | 11.77 | %        |  |         |      |           |  |             | 0.21 | %        |  |           | 0.29 | %       |  |           | 2.37 | %         |  |     | 0.06 | %       |  |         | 2.05 | % |  |  | 7.37  | % |  |  | 5.57 | % |  |           | 1.80  | %
|Mar 31, 2001 |  |          | 17.40 | %        |  |         | 0.18 | %         |  |             | 0.22 | %        |  |           |     |         |  |           | 2.59 | %         |  |     | 1.12 | %       |  |         | 2.03 | % |  |  | 11.24 | % |  |  | 5.04 | % |  |           | 6.21  | %
|Jun 30, 2001 |  |          | 18.50 | %        |  |         | 0.55 | %         |  |             | 0.18 | %        |  |           |     |         |  |           | 2.81 | %         |  |     | 1.26 | %       |  |         | 1.97 | % |  |  | 11.73 | % |  |  | 5.28 | % |  |           | 6.45  | %
|Sep 30, 2001 |  |          | 21.36 | %        |  |         | 0.55 | %         |  |             | 0.25 | %        |  |           |     |         |  |           | 3.07 | %         |  |     | 1.76 | %       |  |         | 1.80 | % |  |  | 13.94 | % |  |  | 4.99 | % |  |           | 8.95  | %
|Dec 31, 2001 |  |          | 25.25 | %        |  |         | 0.19 | %         |  |             | 0.08 | %        |  |           |     |         |  |           | 3.51 | %         |  |     | 2.70 | %       |  |         | 1.46 | % |  |  | 17.31 | % |  |  | 4.76 | % |  |           | 12.55 | %
|Mar 31, 2002 |  |          | 23.16 | %        |  |         | 0.23 | %         |  |             |     |          |  |           |     |         |  |           | 2.80 | %         |  |     | 2.34 | %       |  |         | 1.22 | % |  |  | 16.56 | % |  |  | 5.08 | % |  |           | 11.49 | %
|Jun 30, 2002 |  |          | 22.53 | %        |  |         | 0.38 | %         |  |             |     |          |  |           | 0.05 | %       |  |           | 2.90 | %         |  |     | 2.27 | %       |  |         | 1.02 | % |  |  | 16.01 | % |  |  | 5.11 | % |  |           | 10.90 | %
|Sep 30, 2002 |  |          | 23.15 | %        |  |         | 0.09 | %         |  |             |     |          |  |           | 0.01 | %       |  |           | 2.56 | %         |  |     | 2.75 | %       |  |         | 0.91 | % |  |  | 16.85 | % |  |  | 4.27 | % |  |           | 12.58 | %
|Dec 31, 2002 |  |          | 23.05 | %        |  |         | 0.16 | %         |  |             |     |          |  |           | 0.39 | %       |  |           | 3.24 | %         |  |     | 2.74 | %       |  |         | 0.82 | % |  |  | 16.49 | % |  |  | 4.00 | % |  |           | 12.48 | %



---

|(1) |  | Average common equity excludes unrealized gain (loss) on
available-for-sale ARM securities.              
|--- |  | ---------------------------------------------------------------------------------------------------------
|   
|(2) |  | General and administrative (G & A) expense excludes performance fees
and is net of loan servicing fees.

Our return on average common equity was 16.49% for the year ended December 31,
2002 compared to 13.82% for the year ended December 31, 2001. Our return on
equity improved in this past year compared to the prior year primarily because
our net interest income improved due to lower cost of funds of our borrowings
and because the yield on our ARM portfolio is benefiting from acquisitions of
loans and other ARM and hybrid ARM assets acquired at average prices close to
par, replacing lower yielding ARM assets that paid off.

The following table presents the components of our net interest income for
the years ended December 31, 2002 and 2001:

Comparative Net Interest Income Components
(Dollar amounts in thousands)

|                                     |                  |   |         |         |      |   |         |         | 
|------------------------------------ | ---------------- | - | ------- | ------- | ---- | - | ------- | ------- | 
|                                     |                  |   | 2002    |         | 2001
|                                     |                  |   |         |         |     
|Coupon interest income on ARM assets |                  | $ | 419,456 |         |      | $ | 299,911 |        
|Amortization of net premium          |                  |   | (19,229 | )       |      |   | (22,696 | )      
|Cash and cash equivalents            |                  |   | 1,740   |         |      |   | 1,379   |        
|                                     |                  |   |         |         |      |   |         |        
|                                     | Interest income  |   |         | 401,967 |      |   |         | 278,594 | 
|                                     |                  |   |         |         |      |   |         |        
|Reverse repurchase agreements        |                  |   | 135,346 |         |      |   | 146,577 |        
|Collateralized notes payable         |                  |   | 8,436   |         |      |   | 26,000  |        
|Other borrowings                     |                  |   | 11,260  |         |      |   | 9,459   |        
|Interest rate swaps                  |                  |   | 88,996  |         |      |   | 17,793  |        
|                                     |                  |   |         |         |      |   |         |        
|                                     | Interest expense |   |         | 244,038 |      |   |         | 199,829 | 
|                                     |                  |   |         |         |      |   |         |        
|Net interest income                  |                  | $ | 157,929 |         |      | $ | 78,765  |        
|                                     |                  |   |         |         |      |   |         |        

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As presented in the table above, our net interest income increased by $79.2
million in 2002 compared to 2001. The change was attributable to a $123.4
million increase in interest income primarily due to an increased asset base,
partially offset by a $44.2 million increase in interest expense.

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

Average Balance, Rate and Interest Income/Expense Table
(Dollar amounts in thousands)

|                                         |                                 |   |                                  |           |           |  |         |      |         |   |           |         |         |   |           |           |          |  |      |      |   |   |         |         | 
|---------------------------------------- | ------------------------------- | - | -------------------------------- | --------- | --------- |  | ------- | ---- | ------- | - | --------- | ------- | ------- | - | --------- | --------- | -------- |  | ---- | ---- | - | - | ------- | ------- | 
|                                         |                                 |   | For the years ended December 31,
|                                         |                                 |   |                                 
|                                         |                                 |   | 2002                             |           | 2001     
|                                         |                                 |   |                                  |           |          
|                                         |                                 |   |                                  |           |           |  |         |      |         |   | Interest  |         |         |   |           |           | Interest |  |      |      |  
|                                         |                                 |   | Average                          |           | Effective |  | Income/ |      | Average |   | Effective |         | Income/
|                                         |                                 |   | Balance                          |           | Rate      |  | Expense |      | Balance |   | Rate      |         | Expense
|                                         |                                 |   |                                  |           |           |  |         |      |         |   |           |         |        
|Interest Earning Assets:                 |                                 |   |                                  |           |           |  |         |      |         |   |           |         |         |   |           |           |          |  |      |      |   |   |         |        
|                                         | Adjustable-rate mortgage assets |   | $                                | 8,303,133 |           |  |         | 4.82 | %       |   | $         | 400,227 |         |   | $         | 4,657,324 |          |  |      | 5.95 | % |   | $       | 277,215 | 
|                                         | Cash and cash equivalents       |   |                                  | 99,285    |           |  |         | 1.75 |         |   |           | 1,740   |         |   |           | 48,487    |          |  |      | 2.84 |   |   |         | 1,379   | 
|                                         |                                 |   |                                  |           |           |  |         |      |         |   |           |         |         |   |           |           |          |  |      |      |   |   |         |        
|                                         |                                 |   | 8,402,418                        |           |           |  | 4.78    |      |         |   | 401,967   |         |         |   | 4,705,812 |           |          |  | 5.92 |      |   |   | 278,594 |        
|                                         |                                 |   |                                  |           |           |  |         |      |         |   |           |         |         |   |           |           |          |  |      |      |   |   |         |        
|Interest Bearing Liabilities:            |                                 |   |                                  |           |           |  |         |      |         |   |           |         |         |   |           |           |          |  |      |      |   |   |         |        
|                                         | Reverse repurchase agreements   |   |                                  | 6,886,784 |           |  |         | 3.26 |         |   |           | 224,342 |         |   |           | 3,544,267 |          |  |      | 4.64 |   |   |         | 164,370 | 
|                                         | Collateralized notes payable    |   |                                  | 332,726   |           |  |         | 2.54 |         |   |           | 8,436   |         |   |           | 524,773   |          |  |      | 4.95 |   |   |         | 26,000  | 
|                                         | Other borrowings                |   |                                  | 407,234   |           |  |         | 2.77 |         |   |           | 11,260  |         |   |           | 202,188   |          |  |      | 4.68 |   |   |         | 9,459   | 
|                                         |                                 |   |                                  |           |           |  |         |      |         |   |           |         |         |   |           |           |          |  |      |      |   |   |         |        
|                                         |                                 |   | 7,626,744                        |           |           |  | 3.20    |      |         |   | 244,038   |         |         |   | 4,271,228 |           |          |  | 4.68 |      |   |   | 199,829 |        
|                                         |                                 |   |                                  |           |           |  |         |      |         |   |           |         |         |   |           |           |          |  |      |      |   |   |         |        
|                                         |                                 |   |                                  |           |           |  |         |      |         |   |           |         |         |   |           |           |          |  |      |      |   |   |         |        
|Net Interest Earning Assets and Spread   |                                 | $ | 775,674                          |           |           |  | 1.58    | %    |         | $ | 157,929   |         |         | $ | 434,584   |           |          |  | 1.24 | %    |   | $ | 78,765  |        
|                                         |                                 |   |                                  |           |           |  |         |      |         |   |           |         |         |   |           |           |          |  |      |      |   |   |         |        
|Yield on Net Interest Earning Assets (1) |                                 |   |                                  |           |           |  | 1.88    | %    |         |   |           |         |         |   |           |           |          |  | 1.67 | %    |   |   |         |        
|                                         |                                 |   |                                  |           |           |  |         |      |         |   |           |         |         |   |           |           |          |  |      |      |   |   |         |        



---

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

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

|                    |                               |   |                          |         |        |   |         |         |   |   |         |         |  
|------------------- | ----------------------------- | - | ------------------------ | ------- | ------ | - | ------- | ------- | - | - | ------- | ------- | -
|                    |                               |   | Years Ended December 31,
|                    |                               |   | 2002 versus 2001        
|                    |                               |   |                         
|                    |                               |   | Rate                     |         | Volume |   | Total  
|                    |                               |   |                          |         |        |   |        
|Interest Income:    |                               |   |                          |         |        |   |         |         |   |   |         |        
|                    | ARM assets                    |   | $                        | (52,723 | )      |   | $       | 175,735 |   |   | $       | 123,012 |  
|                    | Cash and cash equivalents     |   |                          | (529    | )      |   |         | 890     |   |   |         | 361     |  
|                    |                               |   |                          |         |        |   |         |         |   |   |         |         |  
|                    |                               |   | (53,252                  | )       |        |   | 176,625 |         |   |   | 123,373 |        
|                    |                               |   |                          |         |        |   |         |         |   |   |         |         |  
|Interest Expense:   |                               |   |                          |         |        |   |         |         |   |   |         |        
|                    | Reverse repurchase agreements |   |                          | (48,913 | )      |   |         | 108,885 |   |   |         | 59,972  |  
|                    | Collateralized notes payable  |   |                          | (12,695 | )      |   |         | (4,869  | ) |   |         | (17,564 | )
|                    | Other borrowings              |   |                          | (3,868  | )      |   |         | 5,669   |   |   |         | 1,801   |  
|                    |                               |   |                          |         |        |   |         |         |   |   |         |         |  
|                    |                               |   | (65,476                  | )       |        |   | 109,685 |         |   |   | 44,209  |        
|                    |                               |   |                          |         |        |   |         |         |   |   |         |         |  
|Net interest income |                               | $ | 12,224                   |         |        | $ | 66,940  |         |   | $ | 79,164  |        
|                    |                               |   |                          |         |        |   |         |         |   |   |         |         |  

As presented in the table above, net interest income increased by $79.2
million. This increase in net interest income is both a favorable rate
variance and a favorable volume variance. As a result of the yield on our
interest-earning assets decreasing to 4.78% during 2002 from 5.92% during 2001,
a decrease of 1.14%, and our cost of funds decreasing even more to 3.20% from
4.68% during the same time period, a decrease of 1.48%, there was a net
favorable rate variance of $12.2 million. This was

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primarily due to a favorable rate variance on borrowings that increased net
interest income by $65.5 million, partially offset by an unfavorable rate
variance on our ARM assets portfolio and other interest-earning assets in the
amount of $53.3 million. The increased average size of our portfolio during
2002 compared to 2001 increased net interest income in the amount of $66.9
million. The average balance of our interest-earning assets was $8.4 billion
during 2002, compared to $4.7 billion during 2001  an increase of 78.5%.

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

Components of Net Interest Spread and Yield on Net Interest Earning Assets (1)
(Dollar amounts in millions)

|             |  |          |          |         |  |          |      |          |  |          |      |         |  |          |      |         |  |              |      |   |  |  |      |          |  |  |      |   |  |  |      |  
|------------ |  | -------- | -------- | ------- |  | -------- | ---- | -------- |  | -------- | ---- | ------- |  | -------- | ---- | ------- |  | ------------ | ---- | - |  |  | ---- | -------- |  |  | ---- | - |  |  | ---- | -
|             |  |          |          |         |  | Weighted |      |          |  |          |      |         |  |          |      |         |  |              |      |   |  |  |      |          |  |  |      |   |  | 
|             |  | Average  |          | Average |  |          |      |          |  |          |      |         |  | Yield on |      |         |  |              |      |   |  |  |      | Yield on
|As of the    |  | Interest |          | Fully   |  | Weighted |      | Yield    |  | Interest |      |         |  |          |      | Net     |  | Net Interest
|Quarter      |  | Earning  |          | Indexed |  | Average  |      | Adjust-  |  | Earning  |      | Cost of |  | Interest |      | Earning
|Ended        |  | Assets   |          | Coupon  |  | Coupon   |      | ment (2) |  | Assets   |      | Funds   |  | Spread   |      | Assets 
|             |  |          |          |         |  |          |      |          |  |          |      |         |  |          |      |        
|Mar 31, 2000 |  | $        | 4,471.0  |         |  |          | 7.77 | %        |  |          | 7.26 | %       |  |          | 0.68 | %       |  |              | 6.58 | % |  |  | 6.32 | %        |  |  | 0.26 | % |  |  | 0.83 | %
|Jun 30, 2000 |  | $        | 4,344.6  |         |  |          | 7.87 | %        |  |          | 7.48 | %       |  |          | 0.59 | %       |  |              | 6.89 | % |  |  | 6.75 | %        |  |  | 0.14 | % |  |  | 0.81 | %
|Sep 30, 2000 |  | $        | 4,066.1  |         |  |          | 7.84 | %        |  |          | 7.68 | %       |  |          | 0.68 | %       |  |              | 7.00 | % |  |  | 6.72 | %        |  |  | 0.28 | % |  |  | 0.88 | %
|Dec 31, 2000 |  | $        | 4,131.4  |         |  |          | 7.46 | %        |  |          | 7.75 | %       |  |          | 0.69 | %       |  |              | 7.06 | % |  |  | 6.75 | %        |  |  | 0.31 | % |  |  | 0.93 | %
|Mar 31, 2001 |  | $        | 4,260.2  |         |  |          | 6.64 | %        |  |          | 7.47 | %       |  |          | 0.79 | %       |  |              | 6.68 | % |  |  | 5.48 | %        |  |  | 1.20 | % |  |  | 1.34 | %
|Jun 30, 2001 |  | $        | 4,394.4  |         |  |          | 6.06 | %        |  |          | 6.84 | %       |  |          | 0.97 | %       |  |              | 5.87 | % |  |  | 4.75 | %        |  |  | 1.12 | % |  |  | 1.43 | %
|Sep 30, 2001 |  | $        | 4,641.4  |         |  |          | 5.63 | %        |  |          | 6.49 | %       |  |          | 0.85 | %       |  |              | 5.64 | % |  |  | 3.74 | %        |  |  | 1.90 | % |  |  | 1.71 | %
|Dec 31, 2001 |  | $        | 5,522.5  |         |  |          | 5.16 | %        |  |          | 5.96 | %       |  |          | 0.89 | %       |  |              | 5.07 | % |  |  | 3.01 | %        |  |  | 2.06 | % |  |  | 2.10 | %
|Mar 31, 2002 |  | $        | 6,421.7  |         |  |          | 5.05 | %        |  |          | 5.42 | %       |  |          | 0.53 | %       |  |              | 4.89 | % |  |  | 3.28 | %        |  |  | 1.61 | % |  |  | 1.97 | %
|Jun 30, 2002 |  | $        | 7,846.1  |         |  |          | 5.06 | %        |  |          | 5.27 | %       |  |          | 0.30 | %       |  |              | 4.97 | % |  |  | 3.17 | %        |  |  | 1.80 | % |  |  | 1.88 | %
|Sep 30, 2002 |  | $        | 9,237.3  |         |  |          | 4.92 | %        |  |          | 5.10 | %       |  |          | 0.41 | %       |  |              | 4.69 | % |  |  | 3.12 | %        |  |  | 1.57 | % |  |  | 1.84 | %
|Dec 31, 2002 |  | $        | 10,104.7 |         |  |          | 4.82 | %        |  |          | 4.99 | %       |  |          | 0.40 | %       |  |              | 4.59 | % |  |  | 2.79 | %        |  |  | 1.80 | % |  |  | 1.85 | %



---

|(1) |  | Yield on Net Interest Earning Assets is computed by dividing
annualized net interest income for the applicable quarter by the average
daily balance of interest earning assets during the quarter.                      
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Yield adjustments include the impact of amortizing premiums and
discounts, the effect of hedging activities, the amortization of
deferred gains from hedging activities and the impact of principal
payment receivables.

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##### Table of Contents



The following table presents these components of the yield adjustments for
the dates presented in the table above.

Components of the Yield Adjustments on ARM Assets

|             |  |              |      |            |  |           |      |           |  |            |      |             |  |              |       |    |  |  |      |  
|------------ |  | ------------ | ---- | ---------- |  | --------- | ---- | --------- |  | ---------- | ---- | ----------- |  | ------------ | ----- | -- |  |  | ---- | -
|             |  |              |      |            |  |           |      |           |  |            |      |             |  | Amortization |       |    |  | 
|             |  |              |      |            |  | Impact of |      |           |  |            |      | of Deferred |  |              |       |   
|As of the    |  | Premium/     |      | Principal  |  | Hedging   |      | Gain From |  | Total     
|Quarter      |  | Discount     |      | Payments   |  | Activity/ |      | Hedging   |  | Yield     
|Ended        |  | Amortization |      | Receivable |  | Other     |      | Activity  |  | Adjustment
|             |  |              |      |            |  |           |      |           |  |           
|Mar 31, 2000 |  |              | 0.57 | %          |  |           | 0.07 | %         |  |            | 0.07 | %           |  |              | (0.03 | )% |  |  | 0.68 | %
|Jun 30, 2000 |  |              | 0.46 | %          |  |           | 0.10 | %         |  |            | 0.06 | %           |  |              | (0.03 | )% |  |  | 0.59 | %
|Sep 30, 2000 |  |              | 0.56 | %          |  |           | 0.10 | %         |  |            | 0.05 | %           |  |              | (0.03 | )% |  |  | 0.68 | %
|Dec 31, 2000 |  |              | 0.54 | %          |  |           | 0.13 | %         |  |            | 0.05 | %           |  |              | (0.03 | )% |  |  | 0.69 | %
|Mar 31, 2001 |  |              | 0.61 | %          |  |           | 0.14 | %         |  |            | 0.04 | %           |  |              |      |    |  |  | 0.79 | %
|Jun 30, 2001 |  |              | 0.74 | %          |  |           | 0.20 | %         |  |            | 0.03 | %           |  |              |      |    |  |  | 0.97 | %
|Sep 30, 2001 |  |              | 0.69 | %          |  |           | 0.14 | %         |  |            | 0.02 | %           |  |              |      |    |  |  | 0.85 | %
|Dec 31, 2001 |  |              | 0.68 | %          |  |           | 0.20 | %         |  |            | 0.01 | %           |  |              |      |    |  |  | 0.89 | %
|Mar 31, 2002 |  |              | 0.33 | %          |  |           | 0.16 | %         |  |            | 0.04 | %           |  |              |      |    |  |  | 0.53 | %
|Jun 30, 2002 |  |              | 0.19 | %          |  |           | 0.11 | %         |  |            | 0.00 | %           |  |              |      |    |  |  | 0.30 | %
|Sep 30, 2002 |  |              | 0.23 | %          |  |           | 0.16 | %         |  |            | 0.02 | %           |  |              |      |    |  |  | 0.41 | %
|Dec 31, 2002 |  |              | 0.29 | %          |  |           | 0.07 | %         |  |            | 0.04 | %           |  |              |      |    |  |  | 0.40 | %

We recorded hedging expense during 2002 of $1.4 million. At December 31, 2002,
the fair value of our Cap Agreements was $84.7 thousand compared to a fair
value of $430.5 thousand as of December 31, 2001, a decrease in fair value of
$850.9 thousand, after adjusting for purchasing Cap Agreements during 2002 for
$505.0 thousand. Since we are not currently applying hedge accounting to our
Cap Agreements, we recorded this change in fair value of the Cap Agreements as
hedging expense. Additionally, during 2002, we incurred hedging expenses of
$32.4 thousand related to Eurodollar Transactions and we also reclassified to
earnings $542.5 thousand of the transition adjustment recorded in Accumulated
other comprehensive income on January 1, 2001, in connection with the
implementation of FAS 133. For the year 2001, we recorded hedging
ineffectiveness in the amount of $758.3 thousand and reclassified to earnings
$578.7 thousand of the transition adjustment, for total hedging expense of $1.3
million.

We have recorded no provision for estimated credit losses in 2002 compared to a
provision of $653.3 thousand in 2001. Since we began acquiring whole loans in
1997, we have only experienced losses on three loans, for the total amount of
$173.9 thousand. In addition, in November of 2001, we made the determination
that virtually all of our loans were expected to be securitized and that none
of our loans were expected to experience a loss prior to securitization.
Therefore, we discontinued our provision for estimated loan losses. We
completed two loan securitization transactions in November and December 2001
and transferred the loan loss reserve associated with the securitized loans to
the cost basis of the resulting securities. We will continue to evaluate our
estimated credit losses on loans that are not expected to be securitized and
for estimated credit losses that become probable prior to securitization. As
of December 31, 2002, our whole loans, including those held as collateral for
notes payable and those that we have securitized but for which we have retained
credit loss exposure, accounted for 36.9% of our portfolio of ARM assets or
$3.7 billion.

During 2002, we sold $697.9 million of ARM securities for a net gain of $5.8
million and $4.1 million of ARM loans for a net loss of $8.1 thousand. We also
terminated two Swap Agreements during 2002 at a loss of $4.9 million. During
2001, we sold $108.4 million of ARM assets for a net gain of $1.4 thousand.

As a REIT, we are required to declare dividends amounting to at least 85% of
each years taxable income by the end of each calendar year and to declare
dividends amounting to at least 90% of our taxable income for each year by the
time we file our applicable tax return. Therefore, we generally pass through
substantially all of our earnings to shareholders without paying federal income
tax at the corporate level. As of December 31, 2002, we had met all of the
dividend distribution requirements of a REIT. Since we, as a REIT, pay
dividends based on taxable earnings, the dividends may at times be more or less
than

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##### Table of Contents



reported earnings. The following table provides a reconciliation between our
earnings as reported based on generally accepted accounting principles and our
taxable income before our common dividend deduction:

Reconciliation of Reported Net Income to Taxable Net Income
(Dollar amounts in thousands, except per share amounts)

|                                                              |                                                            |   |                                  |        |      |   |        |        |  
|------------------------------------------------------------- | ---------------------------------------------------------- | - | -------------------------------- | ------ | ---- | - | ------ | ------ | -
|                                                              |                                                            |   | For the Years Ended December 31,
|                                                              |                                                            |   |                                 
|                                                              |                                                            |   | 2002                             |        | 2001
|                                                              |                                                            |   |                                  |        |     
|Net income                                                    |                                                            | $ | 120,016                          |        |      | $ | 58,460 |       
|Additions:                                                    |                                                            |   |                                  |        |      |   |        |       
|                                                              | Provision for credit losses                                |   |                                  |       |      |   |        | 653    |  
|                                                              | Net compensation related items & other                     |   |                                  | 2,213  |      |   |        | 406    |  
|                                                              | Hedging expense & effect of change in
accounting principle |   |                                  | 1,426  |      |   |        | 1,539  |  
|                                                              | Non-REIT Subsidiary taxable loss                           |   |                                  |       |      |   |        | 141    |  
|Deductions:                                                   |                                                            |   |                                  |        |      |   |        |       
|                                                              | Dividend on Series A Preferred Shares                      |   |                                  | (6,679 | )    |   |        | (6,679 | )
|                                                              | Amortization of hedges                                     |   |                                  | (1,399 | )    |   |        | (1,569 | )
|                                                              | Actual credit losses on ARM securities                     |   |                                  | (292   | )    |   |        | (198   | )
|                                                              |                                                            |   |                                  |        |      |   |        |       
|Taxable net income available to common shareholders           |                                                            | $ | 115,285                          |        |      | $ | 52,753 |       
|                                                              |                                                            |   |                                  |        |      |   |        |       
|Taxable net income available to common
shareholders per share |                                                            | $ | 2.64                             |        |      | $ | 2.13   |       
|                                                              |                                                            |   |                                  |        |      |   |        |       

For the year ended December 31, 2002, our ratio of operating expenses to
average assets was 0.45% compared to 0.38% for the year 2001. The most
significant single increase to our expenses was the performance-based fee of
$17.5 million that the Manager earned during 2002 as a result of our achieving
a return on shareholder equity in excess of the threshold as defined in the
Management Agreement. Our return on equity prior to the effect of the
performance-based fee was 19.03%, whereas the threshold, the average 10-year
treasury rate plus 1%, was 5.62% during 2002. The Manager earned a
performance-based fee in the amount of $6.7 million in 2001. The expense of
our long-term incentive awards increased by $2.7 million from 2001 to 2002,
primarily due to the improvement in our stock price and the increase in our
dividend. Our other expenses increased by $3.4 million from 2001 to 2002,
primarily due to the operations of our mortgage banking subsidiary and other
corporate matters. The operations of TMHL accounted for $3.0 million of this
increase. Our expense ratios are among the lowest of any company originating
and investing in mortgage assets, giving us what we believe to be a significant
competitive advantage over more traditional mortgage portfolio lending
institutions such as banks and savings and loans. This competitive advantage
enables us to operate with less risk, such as credit and interest rate risk,
and still generate an attractive long-term return on equity when compared to
more traditional mortgage portfolio lending institutions.

We pay the Manager an annual base management fee, generally based on average
shareholders equity as defined in the Management Agreement, payable monthly in
arrears as follows: 1.20% of the first $300 million of average shareholders
equity, plus 0.88% of average shareholders equity above $300 million, subject
to an annual inflation adjustment based on changes in the Consumer Price Index.
Since this management fee is based on shareholders equity and not assets, the
fee increases as we raise additional equity capital and thereby manage a larger
amount of invested capital on behalf of our shareholders.

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##### Table of Contents



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

Annualized Operating Expense Ratios

|             |  |                  |      |            |  |                  |      |                |  |  |      |       |  |  |      |  
|------------ |  | ---------------- | ---- | ---------- |  | ---------------- | ---- | -------------- |  |  | ---- | ----- |  |  | ---- | -
|             |  | Management Fee & |      |            |  |                  |      |                |  |  |      | Total
|For the      |  | Other Expenses/  |      | TMHL       |  | Performance Fee/ |      | G & A Expense/
|Year Ended   |  | Average Assets   |      | Operations |  | Average Assets   |      | Average Assets
|             |  |                  |      |            |  |                  |      |               
|Dec 31, 2000 |  |                  | 0.15 | %          |  |                  | 0.01 | %              |  |  |     |       |  |  | 0.16 | %
|Dec 31, 2001 |  |                  | 0.17 | %          |  |                  | 0.07 | %              |  |  | 0.14 | %     |  |  | 0.38 | %
|Dec 31, 2002 |  |                  | 0.17 | %          |  |                  | 0.07 | %              |  |  | 0.21 | %     |  |  | 0.45 | %

Results of Operations  2001 Compared to 2000

For the year ended December 31, 2001, our net income was $58.5 million, or
$2.09 per share (Basic and Diluted EPS), based on a weighted average of 24.8
million shares outstanding. That compares to $29.2 million, or $1.05 per share
(Basic and Diluted EPS), based on a weighted average of 21.2 million shares
outstanding for the year ended December 31, 2000. Net interest income for the
year totaled $78.8 million, compared to $36.6 million for the same period in
2000. Net interest income is comprised of the interest income earned on
portfolio assets less interest expense from borrowings. During 2001, we
recorded a net gain on the sale of ARM assets of $1.4 thousand as compared to a
net gain of $286.8 thousand during 2000. Additionally, during 2001, we reduced
our earnings and the carrying value of our ARM assets by reserving $653.3
thousand for estimated credit losses, compared to $1.2 million during 2000.
During 2001, we incurred operating expenses of $18.2 million, consisting of a
base management fee of $4.9 million, a performance-based fee of $6.7 million
and other operating expenses of $6.6 million. During 2000, we incurred
operating expenses of $6.6 million, consisting of a base management fee of $4.2
million, a performance-based fee of $45.9 thousand and other operating expenses
of $2.4 million.

Our return on average common equity was 13.82% for the year ended December 31,
2001 compared to 6.90% for the year ended December 31, 2000. The table below
highlights the historical trend in the components of return on average common
equity and the 10-year U. S. Treasury average yield applicable to the
computation of the Managers performance fee during each respective year:

Components of Return on Average Common Equity (1)

|             |  |          |       |          |  |         |      |           |  |             |      |          |  |           |       |         |  |           |      |           |  |     |      |         |  |         |      |   |  |  |       |   |  |  |      |   |  |           |       |  
|------------ |  | -------- | ----- | -------- |  | ------- | ---- | --------- |  | ----------- | ---- | -------- |  | --------- | ----- | ------- |  | --------- | ---- | --------- |  | --- | ---- | ------- |  | ------- | ---- | - |  |  | ----- | - |  |  | ---- | - |  | --------- | ----- | -
|             |  |          |       |          |  |         |      |           |  |             |      |          |  |           |       |         |  |           |      |           |  |     |      |         |  |         |      |   |  |  |       |   |  |  |      |   |  | ROE in   
|             |  |          |       |          |  |         |      |           |  |             |      |          |  |           |       |         |  |           |      |           |  |     |      |         |  |         |      |   |  |  |       |   |  |  |      |   |  | Excess of
|             |  | Net      |       |          |  |         |      | Provision |  | Gain (Loss) |      | G & A    |  |           |       |         |  |           |      |           |  | Net |      | 10-Year |  | 10-Year
|For the      |  | Interest |       | Hedging  |  | For     |      | on ARM    |  | Expense     |      | Perform. |  | Preferred |       | Income/ |  | US Treas. |      | US Treas.
|Year         |  | Income/  |       | Expense/ |  | Losses/ |      | Sales/    |  | (2)/        |      | Fee/     |  | Dividend/ |       | Equity  |  | Average   |      | Average  
|Ended        |  | Equity   |       | Equity   |  | Equity  |      | Equity    |  | Equity      |      | Equity   |  | Equity    |       | (ROE)   |  | Yield     |      | Yield    
|             |  |          |       |          |  |         |      |           |  |             |      |          |  |           |       |         |  |           |      |          
|Dec 31, 1998 |  |          | 9.29  | %        |  |         |     |           |  |             | 0.61 | %        |  |           | -0.08 | %       |  |           | 1.58 | %         |  |     | 0.23 | %       |  |         | 2.00 | % |  |  | 4.80  | % |  |  | 5.28 | % |  |           | -0.48 | %
|Dec 31, 1999 |  |          | 10.45 | %        |  |         |     |           |  |             | 0.88 | %        |  |           | 0.01  | %       |  |           | 1.72 | %         |  |     |     |         |  |         | 2.05 | % |  |  | 5.81  | % |  |  | 5.64 | % |  |           | 0.17  | %
|Dec 31, 2000 |  |          | 11.25 | %        |  |         |     |           |  |             | 0.36 | %        |  |           | 0.09  | %       |  |           | 2.01 | %         |  |     | 0.01 | %       |  |         | 2.05 | % |  |  | 6.90  | % |  |  | 6.03 | % |  |           | 0.88  | %
|Dec 31, 2001 |  |          | 21.03 | %        |  |         | 0.41 | %(3)      |  |             | 0.17 | %        |  |           |      |         |  |           | 3.04 | %         |  |     | 1.79 | %       |  |         | 1.78 | % |  |  | 13.82 | % |  |  | 5.02 | % |  |           | 8.81  | %
|Dec 31, 2002 |  |          | 22.97 | %        |  |         | 0.21 | %         |  |             |     |          |  |           | 0.13  | %       |  |           | 2.89 | %         |  |     | 2.55 | %       |  |         | 0.97 | % |  |  | 16.49 | % |  |  | 4.62 | % |  |           | 11.87 | %



---

|(1) |  | Average common equity excludes unrealized gain (loss) on
available-for-sale ARM securities.
|--- |  | -------------------------------------------------------------------------------------------
|   
|(2) |  | Excludes performance fees and net of loan servicing fees.                                  
|   
|(3) |  | Reflects implementation of FAS 133.                                                        

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The following table presents the components of our net interest income for the
years ended December 31, 2001 and 2000:

Comparative Net Interest Income Components
(Dollar amounts in thousands)

|                                           |                  |   |         |         |      |   |         |         | 
|------------------------------------------ | ---------------- | - | ------- | ------- | ---- | - | ------- | ------- | 
|                                           |                  |   | 2001    |         | 2000
|                                           |                  |   |         |         |     
|Coupon interest income on ARM assets       |                  | $ | 299,911 |         |      | $ | 306,142 |        
|Amortization of net premium                |                  |   | (22,696 | )       |      |   | (16,273 | )      
|Amortization of Cap Agreements             |                  |   |        |         |      |   | (2,386  | )      
|Amortization of deferred gain from hedging |                  |   |        |         |      |   | 1,183   |        
|Cash and cash equivalents                  |                  |   | 1,379   |         |      |   | 1,307   |        
|                                           |                  |   |         |         |      |   |         |        
|                                           | Interest income  |   |         | 278,594 |      |   |         | 289,973 | 
|                                           |                  |   |         |         |      |   |         |        
|Reverse repurchase agreements              |                  |   | 146,577 |         |      |   | 202,309 |        
|Collateralized notes payable               |                  |   | 26,000  |         |      |   | 52,336  |        
|Other borrowings                           |                  |   | 9,459   |         |      |   | 3,512   |        
|Interest rate swaps                        |                  |   | 17,793  |         |      |   | (4,814  | )      
|                                           |                  |   |         |         |      |   |         |        
|                                           | Interest expense |   |         | 199,829 |      |   |         | 253,343 | 
|                                           |                  |   |         |         |      |   |         |        
|Net interest income                        |                  | $ | 78,765  |         |      | $ | 36,630  |        
|                                           |                  |   |         |         |      |   |         |        

As presented in the table above, our net interest income was $42.1 million
higher during 2001 compared to 2000. The most significant change was the
decline in interest expense of $53.5 million.

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

Average Balance And Rate Table
(Dollar amounts in thousands)

|                                         |                                 |   |                    |           |                    |  |         |      |           |   |           |           |  |  |      |      |  
|---------------------------------------- | ------------------------------- | - | ------------------ | --------- | ------------------ |  | ------- | ---- | --------- | - | --------- | --------- |  |  | ---- | ---- | -
|                                         |                                 |   | For the Year Ended |           | For the Year Ended
|                                         |                                 |   | December 31, 2001  |           | December 31, 2000 
|                                         |                                 |   |                    |           |                   
|                                         |                                 |   | Average            |           | Effective          |  | Average |      | Effective
|                                         |                                 |   | Balance            |           | Rate               |  | Balance |      | Rate     
|                                         |                                 |   |                    |           |                    |  |         |      |          
|Interest Earning Assets:                 |                                 |   |                    |           |                    |  |         |      |           |   |           |           |  |  |      |     
|                                         | Adjustable-rate mortgage assets |   | $                  | 4,657,324 |                    |  |         | 5.95 | %         |   | $         | 4,233,933 |  |  |      | 6.82 | %
|                                         | Cash and cash equivalents       |   |                    | 48,487    |                    |  |         | 2.84 |           |   |           | 19,332    |  |  |      | 6.76 |  
|                                         |                                 |   |                    |           |                    |  |         |      |           |   |           |           |  |  |      |      |  
|                                         |                                 |   | 4,705,812          |           |                    |  | 5.92    |      |           |   | 4,253,265 |           |  |  | 6.82 |     
|                                         |                                 |   |                    |           |                    |  |         |      |           |   |           |           |  |  |      |      |  
|Interest Bearing Liabilities:            |                                 |   |                    |           |                    |  |         |      |           |   |           |           |  |  |      |     
|                                         | Borrowings                      |   |                    | 4,271,228 |                    |  |         | 4.68 |           |   |           | 3,875,118 |  |  |      | 6.54 |  
|                                         |                                 |   |                    |           |                    |  |         |      |           |   |           |           |  |  |      |      |  
|Net Interest Earning Assets and Spread   |                                 | $ | 434,584            |           |                    |  | 0.28    | %    |           | $ | 378,147   |           |  |  | 0.28 | %   
|                                         |                                 |   |                    |           |                    |  |         |      |           |   |           |           |  |  |      |      |  
|Yield on Net Interest Earning Assets (1) |                                 |   |                    |           |                    |  | 1.67    | %    |           |   |           |           |  |  | 0.86 | %   
|                                         |                                 |   |                    |           |                    |  |         |      |           |   |           |           |  |  |      |     



---

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

As a net result of the yield on our interest-earning assets decreasing to 5.92%
during 2001 from 6.82% during 2000 and our cost of funds decreasing to 4.68%
from 6.54%, our net interest income increased by $42.1 million. This increase
in net interest income is the combined result of a favorable rate variance and
a favorable volume variance. There was a net favorable rate variance of $33.4
million, which consisted of an unfavorable variance of $37.4 million resulting
from the lower yield on our ARM assets portfolio and other interest-earning
assets and a favorable variance of $71.3 million resulting from

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the decrease in our cost of funds. The higher average amount of interest
earning assets during 2001 produced a favorable volume variance of $26.0
million, but this was partially offset by the higher average balance of
borrowings that produced an unfavorable volume variance of $17.8 million,
resulting in a net favorable volume variance of $8.3 million.

Our provision for estimated credit losses decreased to $653.3 thousand in 2001
from $1.2 million in 2000, in part, because we decided to discontinue our rate
of providing for losses on our whole loan credit exposure late in 2000. During
our 2000 third quarter review of the level of our allowance for loan losses and
after considering our identifiable loss exposure to delinquent loans and the
lack of any significant losses to date recorded in the portfolio, we concluded
that our allowance for loan losses had reached a level that it was appropriate
to reduce the rate at which we were recording provisions.

During 2001, we realized $1.4 thousand of net gains on the sale of $108.4
million of ARM assets. During 2000, we realized a net gain of $286.8 thousand
from the sale of ARM assets in the amount of $120.0 million.

The following table provides a reconciliation between our earnings as reported
based on generally accepted accounting principles and our taxable income before
our common dividend deduction:

Reconciliation of Reported Net Income to Taxable Net Income
(Dollar amounts in thousands)

|                                       |             |            |                                                            |  |                           |        |        |  |  |        |  
|-------------------------------------- | ----------- | ---------- | ---------------------------------------------------------- |  | ------------------------- | ------ | ------ |  |  | ------ | -
|                                       |             |            |                                                            |  | Years Ending December 31,
|                                       |             |            |                                                            |  |                          
|                                       |             |            |                                                            |  | 2001                      |        | 2000  
|                                       |             |            |                                                            |  |                           |        |       
|Net income                             |             | $          | 58,460                                                     |  |                           | $      | 29,165 | 
|                                       |             | Additions: |                                                            |  |                           |        |        |  |  |       
|                                       |             |            | Provision for credit losses                                |  |                           | 653    |        |  |  | 1,158  |  
|                                       |             |            | Net compensation related items                             |  |                           | 406    |        |  |  | 554    |  
|                                       |             |            | Hedging expense & effect of change in
accounting principle |  |                           | 1,539  |        |  |  |       |  
|                                       |             |            | Non-REIT Subsidiary taxable loss                           |  |                           | 141    |        |  |  | 59     |  
|                                       | Deductions: |            |                                                            |  |                           |        |        |  | 
|                                       |             |            | Dividend on Series A Preferred Shares                      |  |                           | (6,679 | )      |  |  | (6,679 | )
|                                       |             |            | Amortization of hedges                                     |  |                           | (1,569 | )      |  |  |       |  
|                                       |             |            | Actual credit losses on ARM securities                     |  |                           | (198   | )      |  |  | (941   | )
|                                       |             |            | Use of capital loss carry forward                          |  |                           |       |        |  |  | (230   | )
|                                       |             |            |                                                            |  |                           |        |        | 
|Taxable net income available to common |             | $          | 52,753                                                     |  |                           | $      | 23,086 | 
|                                       |             |            |                                                            |  |                           |        |        | 
|Taxable net income available to common |             | $          | 2.13                                                       |  |                           | $      | 1.07   | 
|                                       |             |            |                                                            |  |                           |        |        | 

For the year ended December 31, 2001, our ratio of operating expenses to
average assets was 0.38% compared to 0.16% for 2000. The most significant
single increase to our expenses was the performance-based fee of $6.7 million
that the Manager earned during 2001 as a result of our achieving a return on
shareholder equity in excess of the threshold as defined in the Management
Agreement. Our return on equity, prior to the effect of the performance-based
fee, was 15.6% whereas the threshold, the average 10-year treasury rate plus
1%, averaged 6.02% during 2001. The Manager earned a performance-based fee in
the amount of $45.9 thousand in 2000. Our other expenses increased by $4.2
million from 2000 to 2001, primarily due the operations of our mortgage banking
subsidiary, expenses associated with the issuance of DERs, PSRs and restricted
stock and other corporate matters. The operations of TMHL accounted for $2.9
million of this increase and the issuance of DERs, PSRs and restricted stock
accounted for $1.2 million of the increase.

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Liquidity and Capital Resources

Our primary source of funds for the year ended December 31, 2002 consisted of
reverse repurchase agreements totaling $8.6 billion, new equity capital of
$363.4 million, collateralized notes payable of $255.4 million and whole loan
financing facilities of $589.1 million. Our other significant sources of funds
for the year ended December 31, 2002 consisted primarily of payments of
principal and interest from our ARM assets in the amount of $4.6 billion. In
the future, we expect our primary sources of funds to continue to consist of
borrowed funds under reverse repurchase agreement transactions with one month
to two year maturities, funds borrowed from whole loan financing facilities,
capital market financing transactions collateralized by ARM and hybrid ARM
loans, proceeds from monthly payments of principal and interest on our ARM
assets portfolio, proceeds from sales of new equity and occasional asset sales.
Our liquid assets generally consist of unpledged ARM assets, cash and cash
equivalents.

Total borrowings outstanding at December 31, 2002, had a weighted average
effective cost of 1.65%. The reverse repurchase agreements had a weighted
average remaining term to maturity of 4.6 months, although we utilize Swap
Agreements and Eurodollar Transactions to extend the re-pricing characteristic
of total borrowings to 1.6 years. In January 2003, we called the AAA
collateralized notes payable. We expect to re-securitize the loan collateral
securitizing these notes payable in a future loan securitization in 2003. The
whole loan financing facilities are committed facilities that mature in March
2003, November 2003 and January 2004. The Company expects to renew these
facilities. As of December 31, 2002, $4.9 billion of our borrowings were
variable rate term reverse repurchase agreements. Term reverse repurchase
agreements are committed financings with original maturities that range from
six months to twenty-four months. The interest rates on these term reverse
repurchase agreements are indexed to either the one- or three-month LIBOR rate,
and reprice accordingly. The interest rate on the collateralized AAA notes
adjusts monthly based on changes in the one-month LIBOR rate. The interest
rates on the whole loan financing facilities are indexed to the one-month LIBOR
index and are subject to either daily or monthly adjustment.

We have arrangements to enter into reverse repurchase agreements with 22
different financial institutions and on December 31, 2002, had borrowed funds
with 14 of these firms. Because we borrow money under these agreements based on
the fair value of our ARM assets, and because changes in interest rates can
negatively impact the valuation of ARM assets, our borrowing ability under
these agreements may be limited and lenders may initiate margin calls in the
event interest rates change or the value of our ARM assets decline for other
reasons. Additionally, 1.3% of our ARM securities are rated less than AA by
the Rating Agencies and have less liquidity than assets that are rated AA or
higher. Mortgage assets rated AA or higher by the Rating Agencies derive their
credit rating based on subordination, guarantees or other credit enhancements.
In the event of dramatic changes in interest rates or performance of credit
support, we might find it difficult to borrow against such assets. External
disruptions to credit markets might also impair access to additional liquidity
and, therefore, we might be required to sell certain mortgage assets in order
to maintain liquidity. If required, such sales might be at prices lower than
the carrying value of the assets, which would result in losses. We had
adequate liquidity throughout the year ended December 31, 2002. We believe we
will continue to have sufficient liquidity to meet our future cash requirements
from our primary sources of funds for the foreseeable future without needing to
sell assets.

As of December 31, 2002, we had entered into three whole loan financing
facilities. One of the whole loan financing facilities has a committed
borrowing capacity of $600 million and matures in January 2004. The other two
facilities have a committed borrowing capacity of $300 million each and mature
in March 2003 and November 2003. We expect to renew these facilities. As of
December 31, 2002, we had $589.1 million borrowed against these whole loan
financing facilities at an effective cost of 2.11%.

As of December 31, 2002, the Company had commitments to purchase or originate
the following amounts of ARM assets (dollar amounts in thousands):

|                                  |  |   |           | 
|--------------------------------- |  | - | --------- | 
|Agency securities                 |  | $ | 22,194    | 
|Whole loans  bulk purchase       |  |   | 261,591   | 
|Whole loans  correspondent       |  |   | 560,541   | 
|Whole loans  direct originations |  |   | 168,176   | 
|                                  |  |   |           | 
|                                  |  | $ | 1,012,502 | 
|                                  |  |   |           | 

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During 2002, the Company entered into two transactions whereby the Company
expects to acquire the remaining balance of certain AAA rated, hybrid ARM
securities, at a price of par, in 2006 and 2007, when the fixed-rate period of
the hybrid ARM securities terminates and they convert into ARM securities that
have characteristics similar to the ARM securities held in the current
portfolio and, therefore, the Company views these as an alternative source of
ARM assets. The current balance of the hybrid ARM securities is approximately
$2.0 billion, but is expected to be less than 25% of that, and could be zero,
at the time they convert into ARM securities. If the Company decides not to
acquire the hybrid ARM securities when they convert into ARM securities, then
it is committed to pay or receive the difference between par and the fair value
of the ARM securities at that time, as determined by an auction of the ARM
securities. As of December 31, 2002, the Company has delivered $4.1 million of
collateral in connection with these transactions.

During February 2002, we completed a public offering of 6,210,000 shares of
common stock and received net proceeds of $113.5 million under our shelf
registration statement that was declared effective by the SEC on July 6, 2001.
We filed a shelf registration statement registering an additional $400 million
of equity securities that was declared effective on August 30, 2002. During
December 2002, we completed a public offering of 1,150,000 million shares of
common stock and received net proceeds of $20.9 million under the July 2001
shelf registration statement. During 2002, we issued 7,103,100 shares of
common stock and received net proceeds of $132.0 million under continuous
equity offering programs under the July 2001 and August 2002 shelf registration
statements. As of December 31, 2002, $25.1 million and $343.1 million of the
Companys registered securities remained available for future issuance and sale
under our currently effective July 2001 and August 2002 shelf registration
statements, respectively.

We have a Dividend Reinvestment and Stock Purchase Plan (the DRP) designed to
provide a convenient and economical way for existing shareholders to
automatically reinvest their dividends in additional shares of common stock and
for new and existing shareholders to purchase shares at a discount to the
current market price of the common stock, as defined in the DRP. As a result
of participation in the DRP during 2002, we issued 5,050,774 new shares of
common stock and received $97.0 million of new equity capital.

Market Risks

The market risk management discussion and the amounts estimated from the
analysis that follows are forward-looking statements that assume that certain
market conditions occur. Actual results may differ materially from these
projected results due to changes in our ARM portfolio and borrowings mix and
due to developments in the domestic and global financial and real estate
markets. Developments in the financial markets include the likelihood of
changing interest rates and the relationship of various interest rates and
their impact on our ARM portfolio yield, cost of funds and cash flows. The
analytical methods that we use to assess and mitigate these market risks should
not be considered projections of future events or operating performance.

As a financial institution that has only invested in U.S.-dollar denominated
instruments, primarily residential mortgage instruments, and has only borrowed
money in the domestic market, we are not subject to foreign currency exchange
or commodity price risk, but rather our market risk exposure is limited solely
to interest rate risk. Interest rate risk is defined as the sensitivity of our
current and future earnings to interest rate volatility, variability of spread
relationships, the difference in repricing intervals between our assets and
liabilities and the effect that interest rates may have on our cash flows,
especially ARM portfolio prepayments. Interest rate risk impacts our interest
income, interest expense and the market value on a large portion of our assets
and liabilities. The management of interest rate risk attempts to maximize
earnings and to preserve capital by minimizing the negative impacts of changing
market rates, asset and liability mix, and prepayment activity.

The table below presents our consolidated interest rate risk using the static
gap methodology. This method reports the difference between interest
rate-sensitive assets and liabilities at specific points in time as of December
31, 2002, based on the earlier of term to repricing or the term to repayment of
the asset or liability. The table does not include assets and liabilities that
are not interest rate-sensitive such as payment receivables, prepaid expenses,
payables and accrued expenses. The table provides a projected repricing or
maturity based on scheduled rate adjustments, scheduled payments, and estimated
prepayments. For many of our assets and certain of our liabilities, the
maturity date is not determinable with certainty. In general, our ARM assets
can be prepaid before contractual amortization and/or maturity. Likewise, our
AAA rated notes payable are paid down as the related ARM asset collateral pays
down. The static gap report reflects our investment policy that allows for
only the acquisition of ARM assets that reprice within one year, short-term
fixed rate assets with an average life of one year or less or hybrid ARM assets
that are match funded to within a duration mismatch of one-year.

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The difference between assets and liabilities repricing or maturing in a given
period is one approximate measure of interest rate sensitivity. More assets
than liabilities repricing in a period (a positive gap) implies earnings will
rise as interest rates rise and decline as interest rates decline. More
liabilities repricing than assets (a negative gap) implies declining income as
rates rise and increasing income as rates decline. The static gap analysis
does not take into consideration constraints on the repricing of the interest
rate of ARM assets in a given period resulting from periodic and lifetime cap
features nor the behavior of various indices applicable to our assets and
liabilities. Different interest rate indices exhibit different degrees of
volatility in the same interest rate environment due to other market factors
such as, but not limited to, government fiscal policies, market concern
regarding potential credit losses, changes in spread relationships among
different indices and global market disruptions.

The use of interest rate instruments such as Swaps Agreements, Eurodollar
Transactions and Cap Agreements are integrated into our interest rate risk
management. The notional amounts of these instruments are not reflected in our
balance sheet. The Swap Agreements and Eurodollar Transactions that hedge the
financing of our hybrid ARM assets are included in the static gap report for
purposes of analyzing interest rate risk because they have the effect of
adjusting the repricing characteristics of our liabilities. The Cap Agreements
that hedge the lifetime cap on our ARM assets are not considered in a static
gap report because they do not affect the timing of the repricing of the
instruments they hedge, but rather they, in effect, remove the limit on the
amount of interest rate change that can occur relative to the applicable hedged
asset.

Interest Rate Sensitivity Gap Analysis
(Dollar amounts in thousands)
December 31, 2002

|                                                                                                         |                                 |                                    |         |            |           |   |          |           |           |   |         |         |         |   |         |        |        |   |         |           |            |  | 
|-------------------------------------------------------------------------------------------------------- | ------------------------------- | ---------------------------------- | ------- | ---------- | --------- | - | -------- | --------- | --------- | - | ------- | ------- | ------- | - | ------- | ------ | ------ | - | ------- | --------- | ---------- |  | 
|                                                                                                         |                                 |                                    |         |            |           |   |          |           | Over 1    |   | Over 3  |         |         |   |         |        |        |   |        
|                                                                                                         |                                 |                                    |         |            | 1 Year    |   | Year to  |           | Years to  |   | Over    |         |         |   |        
|                                                                                                         |                                 |                                    |         |            | or less   |   | 3 Years  |           | 5 Years   |   | 5 Years |         | Total  
|                                                                                                         |                                 |                                    |         |            |           |   |          |           |           |   |         |         |        
|Interest-earning assets:                                                                                 |                                 |                                    |         |            |           |   |          |           |           |   |         |         |         |   |         |        |        |   |         |          
|                                                                                                         | ARM securities                  |                                    | $       | 2,615,355  |           |   | $        |          |           |   | $       |        |         |   | $       |       |        |   | $       | 2,615,355 |           
|                                                                                                         | Hybrid
ARM securities and loans |                                    |         | 2,783,076  |           |   |          | 3,708,162 |           |   |         | 915,888 |         |   |         | 34,174 |        |   |         | 7,441,300 |           
|                                                                                                         | Cash and cash equivalents       |                                    |         | 122,220    |           |   |          |          |           |   |         |        |         |   |         |       |        |   |         | 122,220   |           
|                                                                                                         |                                 |                                    |         |            |           |   |          |           |           |   |         |         |         |   |         |        |        |   |         |          
|                                                                                                         |                                 | Total interest-earning assets      |         |            | 5,520,651 |   |          |           | 3,708,162 |   |         |         | 915,888 |   |         |        | 34,174 |   |         |           | 10,178,875 | 
|                                                                                                         |                                 |                                    |         |            |           |   |          |           |           |   |         |         |         |   |         |        |        |   |         |          
|Interest-bearing liabilities:                                                                            |                                 |                                    |         |            |           |   |          |           |           |   |         |         |         |   |         |        |        |   |         |          
|                                                                                                         | Reverse repurchase agreements   |                                    |         | 8,314,816  |           |   |          | 110,913   |           |   |         |        |         |   |         |       |        |   |         | 8,425,729 |           
|                                                                                                         | Collateralized notes payable    |                                    |         | 255,415    |           |   |          |          |           |   |         |        |         |   |         |       |        |   |         | 255,415   |           
|                                                                                                         | Whole loan financing facilities |                                    |         | 589,081    |           |   |          |          |           |   |         |        |         |   |         |       |        |   |         | 589,081   |           
|                                                                                                         | Swap Agreements                 |                                    |         | (4,559,572 | )         |   |          | 3,861,489 |           |   |         | 688,547 |         |   |         | 9,536  |        |   |         |          |           
|                                                                                                         |                                 |                                    |         |            |           |   |          |           |           |   |         |         |         |   |         |        |        |   |         |          
|                                                                                                         |                                 | Total interest bearing
liabilities |         |            | 4,559,740 |   |          |           | 3,972,402 |   |         |         | 688,547 |   |         |        | 9,536  |   |         |           | 9,270,225  | 
|                                                                                                         |                                 |                                    |         |            |           |   |          |           |           |   |         |         |         |   |         |        |        |   |         |          
|Interest rate sensitivity gap                                                                            |                                 | $                                  | 920,911 |            |           | $ | (264,239 | )         |           | $ | 277,341 |         |         | $ | 24,638  |        |        | $ | 908,650 |          
|                                                                                                         |                                 |                                    |         |            |           |   |          |           |           |   |         |         |         |   |         |        |        |   |         |          
|Cumulative interest rate
sensitivity gap                                                                 |                                 | $                                  | 920,911 |            |           | $ | 656,671  |           |           | $ | 884,012 |         |         | $ | 908,650 |        |        |   |         |          
|                                                                                                         |                                 |                                    |         |            |           |   |          |           |           |   |         |         |         |   |         |        |        |   |         |          
|Cumulative interest rate sensitivity
gap as a percentage of total assets
before market value adjustments |                                 |                                    | 8.82    | %          |           |   | 6.29     | %         |           |   | 8.47    | %       |         |   | 8.70    | %      |        |   |         |          
|                                                                                                         |                                 |                                    |         |            |           |   |          |           |           |   |         |         |         |   |         |        |        |   |         |          

Although the static gap methodology is widely accepted in identifying interest
rate risk, it does not take into consideration changes that may occur such as,
but not limited to, changes in investment and financing strategies, changes in
market spreads and relationships among different indices, changes in asset
yields, which can change more quickly than the underlying interest coupon on
ARM assets, changes in hedging strategy, changes in prepayment speeds and
changes in business volumes. Accordingly, we make extensive usage of an
earnings simulation model to analyze our level of interest rate risk. This

42



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analytical technique used to measure and manage interest rate risk includes the
impact of all on-balance-sheet and off-balance-sheet financial instruments.

There are a number of key assumptions made in using our earnings simulation
model. These key assumptions include changes in market conditions that affect
interest rates, the pricing of ARM products, the availability of ARM products,
and the availability and the cost of financing for ARM products. Other key
assumptions made in using the simulation model include prepayment speeds,
managements investment, financing and hedging strategies, and the issuance of
new equity. We typically run the simulation model under a variety of
hypothetical business scenarios that may include different interest rate
scenarios, different investment strategies, different prepayment possibilities
and other scenarios that provide us with a range of possible earnings outcomes
in order to assess potential interest rate risk. The assumptions used
represent our estimate of the likely effect of changes in interest rates and do
not necessarily reflect actual results. The earnings simulation model takes
into account periodic and lifetime caps embedded in our ARM assets in
determining the earnings at risk.

At December 31, 2002, based on the earnings simulation model, our potential
earnings at risk from a parallel 100 and 200 basis point rise in market
interest rates over the next twelve months and a commensurate slow down in
prepayment speeds as interest rates rise, was 2.7% and 4.5% of projected 2003
net income, respectively. The assumptions used in the earnings simulation
model are inherently uncertain and as a result, the analysis cannot precisely
predict the impact of higher interest rates on net income. Actual results
would differ from simulated results due to timing, magnitude and frequency of
interest rate changes, changes in prepayment speed other than what was assumed
in the model, and changes in other market conditions and management strategies
to offset our potential exposure, among other factors. This measure of risk
represents our exposure to higher interest rates at a particular point in time.
Our actual risk is always changing. We continuously monitor our risk profile
as it changes and alter our strategies as appropriate in our view of the likely
course of interest rates and other developments in our business.

Effects of Interest Rate Changes

Changes in interest rates impact our earnings in various ways. While we invest
primarily in ARM assets, rising short-term interest rates may temporarily
negatively affect our earnings, and, conversely, falling short-term interest
rates may temporarily increase our earnings. This impact can occur for several
reasons and may be mitigated by portfolio prepayment activity as discussed
below. First, our borrowings may react to changes in interest rates sooner
than our ARM assets because the weighted average next repricing dates of the
borrowings are usually shorter time periods than that of the ARM assets.
Second, interest rates on non-hybrid ARM assets may be limited to an increase
of either 1.00% or 2.00% per adjustment period (commonly referred to as the
periodic cap), and our borrowings do not have similar limitations. At December
31, 2002, 16.5% of our total ARM assets were non-hybrid ARM assets subject to
periodic caps. Third, our ARM assets typically lag changes in the applicable
interest rate indices by 45 days, due to the notice period provided to ARM
borrowers when the interest rates on their loans are scheduled to change.

Interest rates can also affect our net return on hybrid ARM assets (net of the
cost of financing hybrid ARM assets). We estimate the duration of the fixed
rate period of our hybrid ARM assets and have a policy to hedge the financing
of the hybrid ARM assets such that the duration difference between our borrowed
funds and the hybrid ARM assets is less than one year. The cost of financing
the unhedged, fixed rate, remaining period of one year or less is subject to
prevailing interest rates on the remaining balance of the hybrid ARM assets at
the expiration of the hedged period. As a result, if our cost of short-term
funds is higher at the expiration of the hedged period, our net interest spread
on the remaining balance of a hybrid ARM asset will be affected unfavorably,
and, conversely, if our cost of short-term funds is lower, the net interest
spread will be affected favorably. In addition, during a declining interest
rate environment, the prepayment of hybrid ARM assets may accelerate causing
the amount of fixed rate financing to increase relative to the amount of hybrid
ARM assets, possibly resulting in a decline in our net return on hybrid ARM
assets, as replacement hybrid ARM assets may have a lower yield than the ones
paying off. In contrast, during an increasing interest rate environment,
hybrid ARM assets may prepay slower than expected, requiring us to finance a
higher amount of hybrid ARM assets than originally anticipated at a time when
interest rates may be higher, resulting in a decline in our net return on
hybrid ARM assets. In order to manage our exposure to changes in the
prepayment speed of hybrid ARM assets, we regularly monitor the balance of
hybrid ARM assets and make adjustments to the amounts anticipated to be
outstanding in future periods and, on a regular basis, make adjustments to the
amount of our fixed-rate borrowing obligations in future periods.

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Interest rate changes may also impact our ARM assets and borrowings differently
because our ARM assets are indexed to various indices, whereas the interest
rate on our borrowings generally move with changes in LIBOR. During times of
global economic instability, U.S. Treasury rates generally decline as foreign
and domestic investors increase their investment in U.S. Treasury instruments,
because they are considered to be a safe haven for investments. Our non-hybrid
ARM assets indexed to U.S. Treasury rates then decline in yield as U.S.
Treasury rates decline, whereas our borrowings and other non-hybrid ARM assets
may not be affected by the same pressures or to the same degree. As a result,
our income can increase or decrease, depending on the relationship between the
various indices to which our non-hybrid ARM assets are indexed, compared to
changes in our cost of funds. At December 31, 2002, 10.7% of our ARM assets
were non-hybrid ARM assets indexed to U.S. Treasury rates.

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

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

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

Other Matters

The Code requires that at least 75% of our total assets must be Qualified REIT
Assets. The Code also requires that we meet a defined 75% source of income
test and a 90% source of income test. As of December 31, 2002, we calculated
that we were in compliance with all of these requirements. We also met all
REIT requirements regarding the ownership of our common stock and the
distributions of our net income. Therefore, as of December 31, 2002, we
believe that we continue to qualify as a REIT under the provisions of the Code.

We intend to conduct our business so as not to become regulated as an
investment company under the Investment Company Act of 1940. If we were to
become regulated as an investment company, our 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, we must maintain at least 55% of our assets
directly in Qualifying Interests as defined in the Code. In addition, unless
certain mortgage securities represent all the certificates issued with respect
to an underlying pool of mortgages, such mortgage securities may be treated as
securities separate from the underlying mortgage loans and, thus, may not be
considered Qualifying Interests for purposes of the 55% requirement. We
calculated that we are in compliance with this requirement.

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Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



| |  |  | The information called for by Item 7A is incorporated by
reference from the information in Item 7 under the caption
Market Risks set forth on pages 41 through 43 in this Form
10-K.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



| |  |  | The financial statements of the Company, the related notes and
schedule to the financial statements, together with the Report of
Independent Accountants thereon are set forth on pages F-3
through F-28 in this Form 10-K.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.



| |  |  | None.
| |  |  | -----




PART III




Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT



| |  |  | The information required by Item 10 is incorporated herein by
reference to the Proxy Statement to be filed with the SEC within
120 days after December 31, 2002 pursuant to General Instruction
G(3).
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 11. EXECUTIVE COMPENSATION



| |  |  | The information required by Item 11 is incorporated herein by
reference to the Proxy Statement to be filed with the SEC within
120 days after December 31, 2002 pursuant to General Instruction
G(3).
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




|         |  |                                                                                               
|-------- |  | ----------------------------------------------------------------------------------------------
|Item 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS



| |  |  | The information required by Item 12 is incorporated herein by
reference to the Proxy Statement to be filed with the SEC within
120 days after December 31, 2002 pursuant to General Instruction
G(3).
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



| |  |  | The information required by Item 13 is incorporated herein by
reference to the Proxy Statement to be filed with the SEC within
120 days after December 31, 2002 pursuant to General Instruction
G(3).
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 14. CONTROLS AND PROCEDURES



| |  |  | In February 2003, we carried out an evaluation, under the supervision
and with the participation of the Companys management, including our
Chief Executive Officer, Chief Operating Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14
and 15d-14. Based upon that evaluation, the Chief Executive Officer,
Chief Operating Officer and the Chief Financial Officer concluded that
our disclosure controls and procedures are effective to timely alert
them to any material information relating to the Company (including its
consolidated subsidiaries) that must be included in our periodic SEC
filings. In addition, there have been no significant changes in the
Companys internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



| | (a) |  | Documents filed as part of this report:
| | --- |  | ---------------------------------------

| |  |  |    |  |  |                                                                                                                   
| |  |  | -- |  |  | ------------------------------------------------------------------------------------------------------------------
| |  |  | 1. |  |  | The following Financial Statements of the Company
are included in Part II, Item 8 of this Annual Report on
Form-K:
| |  |  |    |  |  |                                                                                                                   
| |  |  |    |  |  | Report of Independent Accountants;                                                                                
| |  |  |    |  |  |                                                                                                                   
| |  |  |    |  |  | Consolidated Balance Sheets as of December 31, 2002 and 2001;                                                     
| |  |  |    |  |  |                                                                                                                   
| |  |  |    |  |  | Consolidated Income Statements for the years ended December 31,
2002, 2001 and 2000;                              
| |  |  |    |  |  |                                                                                                                   
| |  |  |    |  |  | Consolidated Statements of Shareholders Equity for the years
ended December 31, 2002, 2001 and 2000;             
| |  |  |    |  |  |                                                                                                                   
| |  |  |    |  |  | Consolidated Statements of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 and                    
| |  |  |    |  |  |                                                                                                                   
| |  |  |    |  |  | Notes to Consolidated Financial Statements.                                                                       
| |  |  |    |  |  |                                                                                                                   
| |  |  | 2. |  |  | Schedules to Consolidated Financial Statements:                                                                   
| |  |  |    |  |  |                                                                                                                   
| |  |  |    |  |  | All consolidated financial statement schedules are included in
Part II, Item 8 of this Annual Report on Form-K.   
| |  |  |    |  |  |                                                                                                                   
| |  |  | 3. |  |  | Exhibits:                                                                                                         
| |  |  |    |  |  |                                                                                                                   
| |  |  |    |  |  | See Exhibit Index                                                                                               



| | (b) |  | Reports on Form 8-K
| | --- |  | -------------------



| |  |  | The Company filed the following Current Report on Form 8-K during the
quarter ended December 31, 2002:
| |  |  | ------------------------------------------------------------------------------------------------------



| |  |  | (i) |  | Current Report on Form 8-K, filed on December 13, 2002,
regarding the Registrants public offering of 1,150,000 shares and
related underwriting agreement.
| |  |  | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------

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THORNBURG MORTGAGE, INC.
AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

AND

REPORT OF INDEPENDENT ACCOUNTANTS

For Inclusion in Form 10-K

Filed with

Securities and Exchange Commission

December 31, 2002

F-1



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THORNBURG MORTGAGE, INC.
AND SUBSIDIARIES




Index to Consolidated Financial Statements

|                                                |  |      |      | 
|----------------------------------------------- |  | ---- | ---- | 
|                                                |  | Page
|                                                |  |     
|FINANCIAL STATEMENTS:                           |  |      |      | 
|Report of Independent Accountants               |  |      | F-3  | 
|Consolidated Balance Sheets                     |  |      | F-4  | 
|Consolidated Income Statements                  |  |      | F-5  | 
|Consolidated Statements of Shareholders Equity |  |      | F-6  | 
|Consolidated Statements of Cash Flows           |  |      | F-7  | 
|Notes to Consolidated Financial Statements      |  |      | F-8  | 
|FINANCIAL STATEMENT SCHEDULE:                   |  |      |      | 
|Schedule IV  Mortgage Loans on Real Estate     |  |      | F-27 | 

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Report of Independent Accountants

To the Board of Directors and Shareholders
Thornburg Mortgage, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated income statements, shareholders equity and cash flows present
fairly, in all material respects, the financial position of Thornburg Mortgage,
Inc. and its subsidiaries (the Company) at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our
opinion, the accompanying financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and the financial statement schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these financial
statements and the financial statement schedule based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

As described in Note 1, on January 1, 2001 the Company changed its accounting
for derivative instruments.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas
January 21, 2003, except for Note 10,
     as to which the date is February 26, 2003

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THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

|                                                                       |                                                                                                                                                                                        |                                     |            |           |             |   |           |           |           |  | 
|---------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------- | ---------- | --------- | ----------- | - | --------- | --------- | --------- |  | 
|                                                                       |                                                                                                                                                                                        |                                     |            |           | December 31
|                                                                       |                                                                                                                                                                                        |                                     |            |           |            
|                                                                       |                                                                                                                                                                                        |                                     |            |           | 2002        |   | 2001     
|                                                                       |                                                                                                                                                                                        |                                     |            |           |             |   |          
|ASSETS                                                                 |                                                                                                                                                                                        |                                     |            |           |             |   |           |          
|                                                                       | Adjustable-rate mortgage (ARM) assets:                                                                                                                                               |                                     |            |           |             |   |           |           |          
|                                                                       |                                                                                                                                                                                        | ARM securities                      |            | $         | 9,335,643   |   |           | $         | 5,162,627 | 
|                                                                       |                                                                                                                                                                                        | Collateral for collateralized notes |            |           | 289,783     |   |           |           | 470,752   | 
|                                                                       |                                                                                                                                                                                        | ARM loans held for securitization   |            |           | 709,787     |   |           |           | 98,766    | 
|                                                                       |                                                                                                                                                                                        |                                     |            |           |             |   |           |           |           | 
|                                                                       |                                                                                                                                                                                        |                                     | 10,335,213 |           |             |   | 5,732,145 |          
|                                                                       | Cash and cash equivalents                                                                                                                                                              |                                     |            | 122,220   |             |   |           | 33,884    |          
|                                                                       | Accrued interest receivable                                                                                                                                                            |                                     |            | 47,435    |             |   |           | 33,483    |          
|                                                                       | Prepaid expenses and other                                                                                                                                                             |                                     |            | 8,064     |             |   |           | 4,136     |          
|                                                                       |                                                                                                                                                                                        |                                     |            |           |             |   |           |           |           | 
|                                                                       |                                                                                                                                                                                        | $                                   | 10,512,932 |           |             | $ | 5,803,648 |          
|                                                                       |                                                                                                                                                                                        |                                     |            |           |             |   |           |           |           | 
|LIABILITIES                                                            |                                                                                                                                                                                        |                                     |            |           |             |   |           |          
|                                                                       | Reverse repurchase agreements                                                                                                                                                          |                                     | $          | 8,568,260 |             |   | $         | 4,738,827 |          
|                                                                       | Collateralized notes                                                                                                                                                                   |                                     |            | 255,415   |             |   |           | 432,581   |          
|                                                                       | Whole loan financing facilities                                                                                                                                                        |                                     |            | 589,081   |             |   |           | 40,283    |          
|                                                                       | Payable for assets purchased                                                                                                                                                           |                                     |            | 202,844   |             |   |           | 18,200    |          
|                                                                       | Accrued interest payable                                                                                                                                                               |                                     |            | 17,234    |             |   |           | 12,160    |          
|                                                                       | Dividends payable                                                                                                                                                                      |                                     |            | 32,536    |             |   |           | 19,987    |          
|                                                                       | Accrued expenses and other                                                                                                                                                             |                                     |            | 14,520    |             |   |           | 8,952     |          
|                                                                       |                                                                                                                                                                                        |                                     |            |           |             |   |           |           |           | 
|                                                                       |                                                                                                                                                                                        |                                     | 9,679,890  |           |             |   | 5,270,990 |          
|                                                                       |                                                                                                                                                                                        |                                     |            |           |             |   |           |           |           | 
|COMMITMENTS                                                            |                                                                                                                                                                                        |                                     |            |           |             |   |           |          
|                                                                       |                                                                                                                                                                                        |                                     |            |           |             |   |           |          
|SHAREHOLDERS EQUITY                                                   |                                                                                                                                                                                        |                                     |            |           |             |   |           |          
|                                                                       | Preferred stock: par value $.01 per share;
Series A 9.68% Cumulative Convertible shares,
aggregate preference in liquidation $69,000,
2,760 shares authorized, issued and outstanding; |                                     |            | 65,805    |             |   |           | 65,805    |          
|Series B Cumulative, 22 shares authorized,
none issued and outstanding |                                                                                                                                                                                        |                                     |           |           |             |   |          |          
|                                                                       | Common stock: par value $.01 per share; 497,218 and
47,218 shares authorized, 52,763 and 33,305 shares
issued and outstanding, respectively                                            |                                     |            | 528       |             |   |           | 333       |          
|                                                                       | Additional paid-in-capital                                                                                                                                                             |                                     |            | 878,929   |             |   |           | 515,516   |          
|                                                                       | Accumulated other comprehensive loss                                                                                                                                                   |                                     |            | (105,254  | )           |   |           | (36,566   | )        
|                                                                       | Notes receivable from stock sales                                                                                                                                                      |                                     |            | (7,437    | )           |   |           | (7,904    | )        
|                                                                       | Retained earnings (deficit)                                                                                                                                                            |                                     |            | 471       |             |   |           | (4,526    | )        
|                                                                       |                                                                                                                                                                                        |                                     |            |           |             |   |           |           |           | 
|                                                                       |                                                                                                                                                                                        |                                     | 833,042    |           |             |   | 532,658   |          
|                                                                       |                                                                                                                                                                                        |                                     |            |           |             |   |           |           |           | 
|                                                                       |                                                                                                                                                                                        | $                                   | 10,512,932 |           |             | $ | 5,803,648 |          
|                                                                       |                                                                                                                                                                                        |                                     |            |           |             |   |           |           |           | 

See Notes to Consolidated Financial Statements.

F-4



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THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS

(Amounts in thousands, except per share data)

|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |        |        |          |        |        |        | 
|---------------------------------------------------- | ------------------------------------ | --------------------------------------------------------------------- | ------------------- | ------ | ---------------------- | ------- | -------- | ------ | ------ | ------ | -------- | ------ | ------ | ------ | 
|                                                     |                                      |                                                                       |                     |        | Year ended December 31
|                                                     |                                      |                                                                       |                     |        |                       
|                                                     |                                      |                                                                       |                     |        | 2002                   |         | 2001     |        | 2000  
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |       
|Interest income from ARM assets and cash equivalents |                                      | $                                                                     | 401,967             |        |                        | $       | 278,594  |        |        | $      | 289,973  |       
|Interest expense on borrowed funds                   |                                      |                                                                       | (244,038            | )      |                        |         | (199,829 | )      |        |        | (253,343 | )     
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |        |        |          |       
|                                                     |                                      |                                                                       | Net interest income |        |                        | 157,929 |          |        |        | 78,765 |          |        |        | 36,630 | 
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |        |        |          |       
|Fee income                                           |                                      |                                                                       | 592                 |        |                        |         | 49       |        |        |        |         |       
|Gain on sale of ARM assets, net                      |                                      |                                                                       | 903                 |        |                        |         | 1        |        |        |        | 287      |       
|Hedging expense                                      |                                      |                                                                       | (1,426              | )      |                        |         | (1,337   | )      |        |        |         |       
|Provision for credit losses                          |                                      |                                                                       |                    |        |                        |         | (653     | )      |        |        | (1,158   | )     
|Management fee                                       |                                      |                                                                       | (7,831              | )      |                        |         | (4,897   | )      |        |        | (4,158   | )     
|Performance fee                                      |                                      |                                                                       | (17,518             | )      |                        |         | (6,716   | )      |        |        | (46      | )     
|Long-term incentive awards                           |                                      |                                                                       | (4,114              | )      |                        |         | (1,454   | )      |        |        | (274     | )     
|Other operating expenses                             |                                      |                                                                       | (8,519              | )      |                        |         | (5,096   | )      |        |        | (2,116   | )     
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |        |        |          |       
|                                                     |                                      | Net income before cumulative effect of
change in accounting principle |                     |        | 120,016                |         |          |        | 58,662 |        |          |        | 29,165 |       
|                                                     |                                      | Cumulative effect of change in accounting
principle                   |                     |        |                       |         |          |        | (202   | )      |          |        |       |       
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |        |        |          |       
|                                                     |                                      |                                                                       | NET INCOME          |        | $                      | 120,016 |          |        | $      | 58,460 |          |        | $      | 29,165 | 
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |        |        |          |       
|Net income                                           |                                      | $                                                                     | 120,016             |        |                        | $       | 58,460   |        |        | $      | 29,165   |       
|Dividend on preferred stock                          |                                      |                                                                       | (6,679              | )      |                        |         | (6,679   | )      |        |        | (6,679   | )     
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |        |        |          |       
|Net income available to common shareholders          |                                      | $                                                                     | 113,337             |        |                        | $       | 51,781   |        |        | $      | 22,486   |       
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |        |        |          |       
|Basic earnings per share:                            |                                      |                                                                       |                     |        |                        |         |          |        |        |        |          |       
|                                                     | Net income                           |                                                                       | $                   | 2.60   |                        |         | $        | 2.09   |        |        | $        | 1.05   |       
|                                                     | Average number of shares outstanding |                                                                       |                     | 43,590 |                        |         |          | 24,754 |        |        |          | 21,506 |       
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |        |        |          |       
|Diluted earnings per share                           |                                      |                                                                       |                     |        |                        |         |          |        |        |        |          |       
|                                                     | Net income                           | $                                                                     | 2.59                |        |                        | $       | 2.09     |        |        | $      | 1.05     |       
|                                                     | Average number of shares outstanding |                                                                       |                     | 46,350 |                        |         |          | 24,803 |        |        |          | 21,519 |       
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |        |        |          |       

See Notes to Consolidated Financial Statements.

F-5



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##### Table of Contents






THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

Three Years Ended December 31, 2002
(Dollar amounts in thousands, except per share data)

|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |         |  |  |          |  
|-------------------------------------------------------------------- | --------------------------- | ---------------- | -------------------------------------------- | -------------------------------------------------------- |  | --------- | --- | ------------ |  | --------------- | ------- | ------------- |  | ------- | -------- | --------- |  | ----------- | -------- | ---------- |  | -------- | -------- | ------- |  | - | ------ | ------- |  | ------- | ------- | ------- |  | - | -------- | ------- |  |  | -------- | -
|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  | Accumulated |          | Notes      |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        
|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  | Other       |          | Receivable |  |          |          |         |  |   |        |         |  | Compre- |         |         |  |  
|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  | Compre-     |          | From       |  | Retained |          |         |  |   |        | hensive |  |         |         |        
|                                                                     |                             |                  |                                              |                                                          |  | Preferred |     |              |  |                 |         | Additional    |  | hensive |          | Stock     |  | Earnings/   |          | Treasury   |  | Income   |          |         |  |  
|                                                                     |                             |                  |                                              |                                                          |  | Stock     |     | Common Stock |  | Paid-in Capital |         | Income (Loss) |  | Sales   |          | (Deficit) |  | Stock       |          | (Loss)     |  | Total   
|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |         
|Balance, December 31, 1999                                           |                             | $                | 65,805                                       |                                                          |  | $         | 220 |              |  | $               | 342,026 |               |  | $       | (82,489  | )         |  | $           | (4,632   | )          |  | $        | (5,377   | )       |  | $ | (4,666 | )       |  |         |         |         |  | $ | 310,887  |        
|Comprehensive income:                                                |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        
|                                                                     | Net income                  |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          | 29,165  |  |   |        |         |  |         | $       | 29,165  |  |   |          | 29,165  | 
|                                                                     | Other comprehensive income: |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |         | 
|                                                                     |                             |                  | Available-for-sale assets:                   |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |         |  |  |         
|                                                                     |                             |                  |                                              | Fair value adjustment                                    |  |           |     |              |  |                 |         |               |  |         |          |           |  |             | 4,927    |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   | 4,927    |         |  |  | 4,927    |  
|                                                                     |                             |                  |                                              | Deferred gain on sale of
hedges, net of amortization     |  |           |     |              |  |                 |         |               |  |         |          |           |  |             | (865     | )          |  |          |          |         |  |   |        |         |  |         |         |         |  |   | (865     | )       |  |  | (865     | )
|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        
|Comprehensive income                                                 |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  | $       | 33,227  |         |  |   |          |        
|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        
|Issuance of common stock                                             |                             |                  |                                              |                                                          |  |           | 1   |              |  |                 | 730     |               |  |         |          |           |  |             | (686     | )          |  |          |          |         |  |   |        |         |  |         |         |         |  |   | 45       |        
|Interest from notes receivable from
stock sales                      |                             |                  |                                              |                                                          |  |           |     |              |  |                 | 280     |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   | 280      |        
|Dividends declared on preferred
stock  $2.42 per share              |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          | (6,679   | )       |  |   |        |         |  |         |         |         |  |   | (6,679   | )      
|Dividends declared on common
stock  $0.94 per share                 |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          | (20,222  | )       |  |   |        |         |  |         |         |         |  |   | (20,222  | )      
|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        
|Balance, December 31, 2000                                           |                             |                  | 65,805                                       |                                                          |  |           | 221 |              |  |                 | 343,036 |               |  |         | (78,427  | )         |  |             | (5,318   | )          |  |          | (3,113   | )       |  |   | (4,666 | )       |  |         |         |         |  |   | 317,538  |        
|Comprehensive income:                                                |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        
|                                                                     | Net income                  |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          | 58,460  |  |   |        |         |  |         | $       | 58,460  |  |   |          | 58,460  | 
|                                                                     | Other comprehensive income: |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |         | 
|                                                                     |                             |                  | Available-for-sale assets:                   |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |         |  |  |         
|                                                                     |                             |                  |                                              | Fair value adjustment                                    |  |           |     |              |  |                 |         |               |  |         |          |           |  |             | 71,391   |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   | 71,391   |         |  |  | 71,391   |  
|                                                                     |                             | Swap agreements: |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |         |  | 
|                                                                     |                             |                  |                                              | Cumulative adjustment for
change in accounting
principle |  |           |     |              |  |                 |         |               |  |         |          |           |  |             | (629     | )          |  |          |          |         |  |   |        |         |  |         |         |         |  |   | (629     | )       |  |  | (629     | )
|                                                                     |                             |                  |                                              | Fair value adjustment, net of
amortization               |  |           |     |              |  |                 |         |               |  |         |          |           |  |             | (28,901  | )          |  |          |          |         |  |   |        |         |  |         |         |         |  |   | (28,901  | )       |  |  | (28,901  | )
|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        
|Comprehensive income                                                 |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  | $       | 100,321 |         |  |   |          |        
|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        
|Issuance of common stock                                             |                             |                  |                                              |                                                          |  |           | 112 |              |  |                 | 172,132 |               |  |         |          |           |  |             | (2,677   | )          |  |          |          |         |  |   | 4,666  |         |  |         |         |         |  |   | 174,233  |        
|Interest from notes receivable from
stock sales                      |                             |                  |                                              |                                                          |  |           |     |              |  |                 | 348     |               |  |         |          |           |  |             | 91       |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   | 439      |        
|Dividends declared on preferred
stock  $2.42 per share              |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          | (6,679   | )       |  |   |        |         |  |         |         |         |  |   | (6,679   | )      
|Dividends declared on common
stock  $2.00 per share                 |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          | (53,194  | )       |  |   |        |         |  |         |         |         |  |   | (53,194  | )      
|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        
|Balance, December 31, 2001                                           |                             |                  | 65,805                                       |                                                          |  |           | 333 |              |  |                 | 515,516 |               |  |         | (36,566  | )         |  |             | (7,904   | )          |  |          | (4,526   | )       |  |   |       |         |  |         |         |         |  |   | 532,658  |        
|Comprehensive income:                                                |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        
|                                                                     | Net income                  |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          | 120,016 |  |   |        |         |  |         | $       | 120,016 |  |   |          | 120,016 | 
|                                                                     | Other comprehensive income: |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |         | 
|                                                                     |                             |                  | Available-for-sale assets:                   |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |         |  |  |         
|                                                                     |                             |                  |                                              | Fair value adjustment                                    |  |           |     |              |  |                 |         |               |  |         |          |           |  |             | 50,524   |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   | 50,524   |         |  |  | 50,524   |  
|                                                                     |                             |                  | Swap agreements and Eurodollar
Transactions: |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |         |  |  |         
|                                                                     |                             |                  |                                              | Fair value adjustment, net of
amortization               |  |           |     |              |  |                 |         |               |  |         |          |           |  |             | (119,212 | )          |  |          |          |         |  |   |        |         |  |         |         |         |  |   | (119,212 | )       |  |  | (119,212 | )
|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        
|Comprehensive income                                                 |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  | $       | 51,328  |         |  |   |          |        
|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        
|Issuance of common stock                                             |                             |                  |                                              |                                                          |  |           | 195 |              |  |                 | 363,108 |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   | 363,303  |        
|Interest and principal payments on
notes receivable from stock sales |                             |                  |                                              |                                                          |  |           |     |              |  |                 | 305     |               |  |         |          |           |  |             | 467      |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   | 772      |        
|Dividends declared on preferred
stock  $2.42 per share              |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          | (6,679   | )       |  |   |        |         |  |         |         |         |  |   | (6,679   | )      
|Dividends declared on common
stock  $2.285 per share                |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          | (108,340 | )       |  |   |        |         |  |         |         |         |  |   | (108,340 | )      
|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        
|Balance, December 31, 2002                                           |                             | $                | 65,805                                       |                                                          |  | $         | 528 |              |  | $               | 878,929 |               |  | $       | (105,524 | )         |  | $           | (7,437   | )          |  | $        | 471      |         |  | $ |       |         |  |         |         |         |  | $ | 833,042  |        
|                                                                     |                             |                  |                                              |                                                          |  |           |     |              |  |                 |         |               |  |         |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        

See Notes to Consolidated Financial Statements.

F-6



---



##### Table of Contents






THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollar amounts in thousands)

|                                               |                                                                                   |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |          |          |         |        |  
|---------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------- | ---------- | ---------------------- | ------- | --------- | ---------- | ---------- | ------ | -------- | -------- | ------- | ------ | -
|                                               |                                                                                   |                                                                         |                                                     |                                           |            | Year ended December 31
|                                               |                                                                                   |                                                                         |                                                     |                                           |            |                       
|                                               |                                                                                   |                                                                         |                                                     |                                           |            | 2002                   |         | 2001      |            | 2000      
|                                               |                                                                                   |                                                                         |                                                     |                                           |            |                        |         |           |            |           
|Operating Activities:                          |                                                                                   |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |         
|                                               | Net income                                                                        |                                                                         | $                                                   | 120,016                                   |            |                        | $       | 58,460    |            |            | $      | 29,165   |         
|                                               | Adjustments to reconcile net income to
net cash provided by operating activities: |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |          |         
|                                               |                                                                                   | Amortization                                                            |                                                     |                                           | 18,215     |                        |         |           | 20,095     |            |        |          | 17,476   |        
|                                               |                                                                                   | Net gain from investing activities                                      |                                                     |                                           | (903       | )                      |         |           | (1         | )          |        |          | (287     | )      
|                                               |                                                                                   | Provision for credit losses                                             |                                                     |                                           |           |                        |         |           | 653        |            |        |          | 1,158    |        
|                                               |                                                                                   | Hedging expense and cumulative effect of change in
accounting principle |                                                     |                                           | 1,426      |                        |         |           | 1,539      |            |        |          |         |        
|                                               |                                                                                   | Change in assets and liabilities:                                       |                                                     |                                           |            |                        |         |           |            |            |        |          |          |        
|                                               |                                                                                   |                                                                         |                                                     | Accrued interest receivable               |            |                        | (13,952 | )         |            |            | (753   | )        |          |         | (802   | )
|                                               |                                                                                   |                                                                         |                                                     | Prepaid expenses and other                |            |                        | (4,274  | )         |            |            | 1,166  |          |          |         | 2,834  |  
|                                               |                                                                                   |                                                                         |                                                     | Accrued interest payable                  |            |                        | 5,074   |           |            |            | (8,359 | )        |          |         | 1,655  |  
|                                               |                                                                                   |                                                                         |                                                     | Accrued expenses and other                |            |                        | 5,568   |           |            |            | 7,573  |          |          |         | (2,229 | )
|                                               |                                                                                   |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |          |         
|                                               |                                                                                   |                                                                         |                                                     | Net cash provided by operating activities |            |                        | 131,170 |           |            |            | 80,373 |          |          |         | 48,970 |  
|                                               |                                                                                   |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |          |         
|Investing Activities:                          |                                                                                   |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |         
|                                               | Available-for-sale ARM securities:                                                |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |          |         
|                                               |                                                                                   | Purchases                                                               |                                                     |                                           | (6,394,802 | )                      |         |           | (2,777,381 | )          |        |          | (736,568 | )      
|                                               |                                                                                   | Proceeds on sales                                                       |                                                     |                                           | 703,646    |                        |         |           | 108,056    |            |        |          | 120,149  |        
|                                               |                                                                                   | Principal payments                                                      |                                                     |                                           | 3,944,694  |                        |         |           | 2,001,978  |            |        |          | 686,912  |        
|                                               | Collateral for collateralized notes:                                              |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |          |         
|                                               |                                                                                   | Principal payments                                                      |                                                     |                                           | 177,932    |                        |         |           | 172,714    |            |        |          | 284,326  |        
|                                               | ARM Loans:                                                                        |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |          |         
|                                               |                                                                                   | Purchases                                                               |                                                     |                                           | (2,849,093 | )                      |         |           | (1,185,277 | )          |        |          | (176,027 | )      
|                                               |                                                                                   | Proceeds on sales                                                       |                                                     |                                           | 4,061      |                        |         |           | 339        |            |        |          | 107      |        
|                                               |                                                                                   | Principal payments                                                      |                                                     |                                           | 31,718     |                        |         |           | 25,928     |            |        |          | 9,029    |        
|                                               | Purchase of interest rate cap                                                     |                                                                         |                                                     | (505                                      | )          |                        |         |          |            |            |        | (1,048   | )       
|                                               | Termination of interest rate swap agreements                                      |                                                                         |                                                     | (4,855                                    | )          |                        |         |           |            |            |        |          |         
|                                               |                                                                                   |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |          |         
|                                               |                                                                                   |                                                                         | Net cash provided by (used in) investing activities |                                           |            | (4,387,204             | )       |           |            | (1,653,643 | )      |          |          | 186,880 |       
|                                               |                                                                                   |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |          |         
|Financing Activities:                          |                                                                                   |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |         
|                                               | Net borrowings from (repayments of) reverse repurchase
agreements                 |                                                                         |                                                     | 3,720,835                                 |            |                        |         | 1,750,516 |            |            |        | (60,894  | )       
|                                               | Repayments of collateralized notes                                                |                                                                         |                                                     | (177,166                                  | )          |                        |         | (171,329  | )          |            |        | (282,813 | )       
|                                               | Net borrowings from (repayments of) other borrowings                              |                                                                         |                                                     | 548,798                                   |            |                        |         | (118,310  | )          |            |        | 137,303  |         
|                                               | Payments made on Eurodollar contracts                                             |                                                                         |                                                     | (9,634                                    | )          |                        |         |           |            |            |        |          |         
|                                               | Proceeds from common stock issued, net                                            |                                                                         |                                                     | 363,303                                   |            |                        |         | 174,234   |            |            |        | 45       |         
|                                               | Dividends paid                                                                    |                                                                         |                                                     | (102,470                                  | )          |                        |         | (41,586   | )          |            |        | (26,900  | )       
|                                               | Payments on notes receivable from stock sales                                     |                                                                         |                                                     | 704                                       |            |                        |         | 524       |            |            |        | 280      |         
|                                               |                                                                                   |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |          |         
|                                               |                                                                                   | Net cash provided by (used in) financing activities                     |                                                     |                                           | 4,344,370  |                        |         |           | 1,594,049  |            |        |          | (232,979 | )      
|                                               |                                                                                   |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |          |         
|Net increase in cash and cash equivalents      |                                                                                   |                                                                         | 88,336                                              |                                           |            |                        | 20,779  |           |            |            | 2,871  |         
|Cash and cash equivalents at beginning of year |                                                                                   |                                                                         | 33,884                                              |                                           |            |                        | 13,105  |           |            |            | 10,234 |         
|                                               |                                                                                   |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |          |         
|Cash and cash equivalents at end of year       |                                                                                   | $                                                                       | 122,220                                             |                                           |            | $                      | 33,884  |           |            | $          | 13,105 |         
|                                               |                                                                                   |                                                                         |                                                     |                                           |            |                        |         |           |            |            |        |          |         

See Notes to Consolidated Financial Statements.

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THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Significant Accounting Policies



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Thornburg Mortgage, Inc. was incorporated in Maryland on July 28, 1992.
The Company commenced its operations of purchasing and managing for
investment a portfolio of adjustable-rate mortgage assets on June 25,
1993, upon receipt of the net proceeds from the initial public offering
of the Companys common stock.                                                                                                                                                                                                          
|
| | Thornburg Mortgage, Inc. is a single-family residential mortgage
lending company that originates, acquires and retains investments in
adjustable and variable rate mortgage (ARM) assets comprised of ARM
securities and ARM loans, thereby providing capital to the
single-family residential housing market. The Company uses its equity
capital and borrowed funds to invest in ARM assets and seeks to
generate income based on the difference between the yield on its ARM
assets portfolio and the cost of its borrowings.
|
| | The Companys wholly owned mortgage banking subsidiary, Thornburg
Mortgage Home Loans, Inc. (TMHL), conducts the Companys mortgage
loan acquisition, origination, processing, underwriting, and
securitization activities. TMHL acquires mortgage loans through three
channels: bulk acquisitions, correspondent lending and retail
originations. TMHL finances the loans through warehouse borrowing
arrangements, pools loans for securitization and sale to its parent,
and occasionally sells loans to third parties.      
|
| | A summary of the Companys significant accounting policies follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                               



| |                                                      
| | -----------------------------------------------------
| | Basis of presentation and principles of consolidation



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The consolidated financial statements include the accounts of
Thornburg Mortgage, Inc (together with its subsidiaries referred to
hereafter as the Company) and its wholly owned bankruptcy-remote
special purpose finance subsidiaries, Thornburg Mortgage Funding
Corporation (TMFC) and Thornburg Mortgage Acceptance Corporation
(TMAC), its wholly owned mortgage banking subsidiary, TMHL, and
TMHLs two wholly owned special purpose finance subsidiaries,
Thornburg Mortgage Funding Corporation II and Thornburg Mortgage
Acceptance Corporation II. As of January 1, 2002, all of the
Companys subsidiaries are wholly owned qualified REIT subsidiaries
and are consolidated with the Company for financial statement and
tax reporting purposes. During 2001, TMHL and its subsidiaries
operated as taxable REIT subsidiaries and were consolidated with the
Company for financial statement purposes and were not consolidated
with the Company for tax reporting purposes. All material
intercompany accounts and transactions are eliminated in
consolidation.



| |                          
| | -------------------------
| | Cash and cash equivalents



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



| |                                
| | -------------------------------
| | Adjustable-rate mortgage assets



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys ARM assets are comprised of ARM securities, ARM loans
and collateral for AAA notes payable, which also consists of ARM
securities and ARM loans. Included in the Companys ARM assets are
hybrid ARM securities and loans that have a fixed interest rate for
an initial period, generally three to ten years, and then convert to
an adjustable-rate for their remaining term to maturity.                                                                                                                                                                                                                  
|
| | Management has designated all of its ARM securities as
available-for-sale. Therefore, they are reported at fair value, with
unrealized gains and losses reported in Accumulated other
comprehensive income (loss) as a separate component of
shareholders equity.                                                                                                                                                                                                                                                                                                                                                       
|
| | The Company securitizes loans for its ARM securities portfolio. The
Company does not sell any of the securities created from this
securitization process, but rather retains all of the beneficial and
economic interests of the loans. The securitizations of the
Companys loans are not accounted for as sales and the Company does
not capitalize any servicing rights or obligations as a result of
this process. The fair value reflected in the Companys financial
statements for these securities is generally based on market prices
provided by certain dealers who make markets in these financial
instruments.

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In general, ARM assets have a maximum lifetime interest rate cap, or
ceiling, meaning that individual ARM assets contain a contractual
maximum interest rate (Life Cap). ARM securities typically have a
Life Cap that not only places a constraint on the ability of an ARM
security to adjust to higher interest rates, but also affects the
changes in fair value of an ARM security. In addition, interest
rates on non-hybrid ARM assets are generally limited to an increase
of either 1.00% or 2.00% per adjustment period (Periodic Cap).
Hybrid ARM assets generally have a higher initial Periodic Cap, up
to 6.00%, that is applicable at the end of their fixed interest rate
period and then are generally subject to a typical (non-hybrid)
Periodic Cap thereafter.
|
| | Management has the intent and ability to hold the Companys ARM
loans for the foreseeable future and until maturity or payoff.
Therefore, these loans are carried at their unpaid principal
balances, net of unamortized premium or discount and allowance for
loan losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | The collateral for the AAA notes payable includes ARM securities and
ARM loans, which are accounted for in the same manner as the ARM
securities and ARM loans that are not held as collateral.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | Interest income on ARM assets is accrued based on the outstanding
principal amount and contractual terms of the assets. Premiums and
discounts associated with the purchase of the ARM assets are
amortized into interest income over the lives of the assets using
the effective yield method adjusted for the effects of estimated
prepayments.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| | ARM asset transactions are recorded on the date the ARM assets are
purchased or sold. Purchases of new issue ARM securities and all
ARM loans are recorded when all significant uncertainties regarding
the characteristics of the assets are removed and, in the case of
loans, underwriting due diligence has been completed, generally
shortly before the settlement date. Realized gains and losses on
ARM asset transactions are determined on the specific identification
basis.                                                                                                                                                                                                                                                                                                



| |            
| | -----------
| | Credit Risk



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company limits its exposure to credit losses on its portfolio of
ARM securities by only purchasing ARM securities that have an
investment grade rating at the time of purchase and have some form
of credit enhancement or are guaranteed by an agency of the federal
government, (Ginnie Mae) or a government-sponsored or
federally-chartered corporation (Fannie Mae or Freddie Mac). An
investment grade security generally has a security rating of BBB or
Baa or better by at least one of two nationally recognized rating
agencies, Standard & Poors, Inc. or Moodys Investor Services, Inc.
(the Rating Agencies). Additionally, the Company also purchases
and originates ARM loans and limits its exposure to credit losses by
restricting its whole loan purchases and originations to ARM loans
generally originated to A quality underwriting standards. The
Company further limits its exposure to credit risk by limiting its
investment in investment grade securities that are rated A or
equivalent, BBB or equivalent, or ARM loans originated to A
quality underwriting standards (Other Investments) to no more than
30% of the portfolio, including the subordinate classes of
securities retained as part of the Companys securitization of
loans.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company, in general, securitizes all of its loans and retains
the resulting securities in its ARM portfolio. At the time of
securitization, the Company obtains a credit review by one or more
Rating Agencies of the loans being securitized. Based on this
review, the Company makes a determination regarding the expected
losses to be realized in the future and adjusts the basis of the
securities to their expected realizable value. In doing so, the
Company establishes a basis adjustment amount to absorb the expected
credit losses. The Company then monitors the delinquencies and
losses on the underlying mortgage loans backing its ARM securities.
If the credit performance of the underlying mortgage loans is not as
good as expected, the Company records a provision for additional
probable credit losses at a level deemed appropriate by management
to provide for known losses as well as estimated losses inherent in
its ARM securities portfolio. The provision is based on
managements assessment of numerous factors affecting the Companys
portfolio of ARM assets including, but not limited to, current
economic conditions, delinquency status, credit losses to date on
underlying mortgages and remaining credit protection. The provision
for ARM securities is made by reducing the cost basis of the
individual security for the decline in fair value (which is other
than temporary) and the amount of such write-down is recorded as a
realized loss, thereby reducing earnings. Additionally, once a loan
within one of these securities is 90 days or more delinquent or a
borrower declares bankruptcy, the Company adjusts the value of its
accrued interest receivable to what it

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | believes to be collectible and stops accruing interest on that
portion of the security collateralized by the loan.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | Prior to November 2001, the Company also recorded a monthly
provision for estimated credit losses on its portfolio of ARM loans,
which is an increase to the allowance for loan losses. In November
2001, the Company made the determination that virtually all of its
loans were expected to be securitized and that none of its loans
were expected to experience a loss prior to securitization. The
Company completed two loan securitization transactions in November
and December 2001 and transferred the allowance for loan losses
associated with the securitized loans to the cost basis of the
resulting securities. The Company will continue to evaluate its
estimated credit losses on loans that are not expected to be
securitized and for estimated credit losses that become probable
prior to securitization. The provision for estimated credit losses
on loans is based on loss statistics of the real estate industry for
similar loans, taking into consideration factors including, but not
limited to, underwriting characteristics, seasoning, geographic
location and current economic conditions. When a loan or a portion
of a loan is deemed to be uncollectible, the portion deemed to be
uncollectible is charged against the allowance and subsequent
recoveries, if any, are credited to the allowance. Additionally,
once a loan is 90 days or more delinquent or a borrower declares
bankruptcy, the Company adjusts the value of the accrued interest
receivable to what it believes to be collectible and stops accruing
interest on the loan.
|
| | In addition, credit losses on pools of loans held as collateral for
AAA notes payable are also covered by third-party insurance policies
that protect the Company from credit losses above a specified level,
limiting the Companys exposure to credit losses on such loans. The
Company reduces the cost basis of the subordinated security retained
at the time the collateralized notes payable are issued to take into
consideration estimated credit losses on the underlying loans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Loans that are not yet securitized are also reviewed for probable
losses. The Companys loans are held for securitization, which
generally occurs within a few months of acquisition or origination.
As a result, although the Company reviews its unsecuritized loans
for probable losses, it is unlikely a loan would incur a loss prior
to securitization. If a loss were estimated on an unsecuritized
loan, the Company would record a provision, which would reduce
earnings, and establish a loan loss reserve.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | Provisions for credit losses do not reduce taxable income and thus
do not affect the dividends paid by the Company to shareholders in
the period the provisions are taken. Actual losses realized by the
Company do reduce taxable income in the period the actual loss is
realized and would affect the dividends paid to shareholders for
that tax year.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |                  
| | -----------------
| | Valuation Methods



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The fair values of the Companys ARM securities are generally based
on market prices provided by certain dealers who make markets in
these financial instruments or third-party pricing services. If the
fair value of an ARM security is not reasonably available from a
dealer or a third-party pricing service, management estimates the
fair value based on characteristics of the security that the Company
receives from the issuer and available market information. The fair
values for ARM loans are estimated by the Company by using the same
pricing models employed by the Company in the process of determining
a price to bid for loans in the open market, taking into
consideration the aggregated characteristics of groups of loans such
as, but not limited to, collateral type, index, margin, life cap,
periodic cap, underwriting standards, age and credit. The fair
value of the Companys collateralized notes payable, interest rate
swap agreements and interest rate cap agreements is based on market
values provided by dealers who are familiar with the terms of the
notes, swap agreements and cap agreements. The fair values reported
reflect estimates and may not necessarily be indicative of the
amounts the Company could realize in a current market exchange.
Cash and cash equivalents, interest receivable, reverse repurchase
agreements, other borrowings and other liabilities are reflected in
the financial statements at their amortized cost, which approximates
their fair value because of the short-term nature of these
instruments.



| |                                 
| | --------------------------------
| | Derivative Financial Instruments



| |                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January 1, 2001, the Company adopted Financial Accounting
Standard 133 (FAS 133), Accounting for Derivative Instruments and
Hedging Activities,as amended and interpreted. FAS 133
established accounting and reporting standards for derivative
instruments and hedging activities, including derivatives embedded
in other instruments. In accordance with FAS 133, all derivative
financial

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | instruments (interest rate cap agreements, interest rate swap
agreements and eurodollar futures contracts) are carried on the
balance sheet at their fair value. If a derivative is designated as
a fair value hedge, the changes in the fair value of the
derivative instrument and the changes in the fair value of the
hedged item are both recognized in earnings. If a derivative is
designated as a cash flow hedge, the effective amount of change in
the fair value of the derivative instrument is recorded in Other
comprehensive income and is transferred from Other comprehensive
income to earnings as the hedged item affects earnings. The
ineffective amount of all hedges is recognized in earnings each
quarter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | As the Company enters into hedging transactions, it formally
documents the relationship between the hedging instruments and the
hedged items. The Company has also documented its risk-management
policies, including objectives and strategies, as they relate to its
hedging activities. The Company assesses, both at inception of a
hedging activity and on an on-going basis, whether or not the
hedging activity is highly effective. When it is determined that a
hedge is not highly effective, the Company discontinues hedge
accounting prospectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Interest rate swap agreements and Eurodollar futures contracts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| | The Company enters into interest rate swap agreements (Swap
Agreements) and Eurodollar futures contracts (Eurodollar
Transactions) in order to manage its interest rate exposure when
financing its ARM assets. The Company generally borrows money based
on short-term interest rates, either by entering into borrowings
with maturity terms of less than one year, and frequently one to
three months, or by entering into borrowings with longer maturities
of one to two years that have an interest rate that is reset based
on a frequency that is commonly one to three months. The Companys
ARM assets generally have an interest rate that reprices based on
frequency terms of one to twelve months. The Companys hybrid ARM
assets have an initial fixed interest rate period of three to ten
years. As a result, the Companys existing and forecasted
borrowings reprice to a new rate on a more frequent basis than do
the Companys ARM assets. When the Company enters into a Swap
Agreement, it generally agrees to pay a fixed rate of interest and
to receive a variable interest rate, generally based on LIBOR. The
Company also enters into Eurodollar Transactions in order to hedge
changes in its forecasted three-month LIBOR based liabilities. The
notional balances of the Swap Agreements and the total contract size
of the Eurodollar Transactions generally decline over the life of
these instruments. These Swap Agreements and Eurodollar
Transactions have the effect of converting the Companys
variable-rate debt into fixed-rate debt over the life of the Swap
Agreements and Eurodollar Transactions. These instruments are used
as a cost effective way to lengthen the average repricing period of
the Companys variable rate and short-term borrowings such that the
average repricing of the borrowings more closely matches the average
repricing of the Companys ARM assets.                                                                                      
|
| | All Swap Agreements are designated as cash flow hedges against the
benchmark interest rate risk associated with the Companys
borrowings. Although the terms and characteristics of the Companys
Swap Agreements and hedged borrowings are nearly identical, due to
the explicit requirements of FAS 133, the Company does not account
for these hedges under a method defined in FAS 133 as the shortcut
method, but rather the Company calculates the effectiveness of these
hedges on an ongoing basis, and to date, has calculated
effectiveness of approximately 100%. Eurodollar Transactions are
also designated as cash flow hedges and are accounted for in
accordance with FAS 133 implementation issue No. G7, Method 1:
Change in Variable Cash Correspondent Method, and application of
this method has resulted in no measured ineffectiveness. All
changes in the unrealized gains and losses on Swap Agreements and
the Eurodollar Transactions have been recorded in Other
comprehensive income and are reclassified to earnings as interest
expense is recognized on the Companys hedged borrowings. If it
becomes probable that the forecasted transaction, which in this case
refers to interest payments to be made under the Companys
short-term borrowing agreements, will not occur by the end of the
originally specified time period, as documented at the inception of
the hedging relationship, or within an additional two-month time
period thereafter, then the related gain or loss in Other
comprehensive income would be reclassified to income. As of
December 31, 2002, the net unrealized loss on Swap Agreements,
deferred gains from terminated Swap Agreements and deferred gains
and losses on Eurodollar Transactions recorded in Other
comprehensive income was a net loss of $150.4 million. The Company
estimates that over the next twelve months, $77.9 million of these
net unrealized losses will be reclassified from Other comprehensive
income to earnings.
|
| | The loss on Swap Agreements is the discounted value of the remaining
future net interest payments expected to be made over the remaining
life of the Swap Agreements. Therefore, over time, as the actual
payments are made, the unrealized loss in Other comprehensive
income and the carrying value of the                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Swap Agreements adjusts to zero and the Company realizes a fixed
cost of money over the life of the hedging instrument. The carrying
value of the Swap Agreements, in the amount of $142.5 million as of
December 31, 2002, is included in Reverse repurchase agreements in
the accompanying balance sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| | As of January 1, 2001, with the adoption of FAS 133, the Company
recorded a cumulative adjustment for a change in accounting
principle in Other comprehensive income in the net amount of $2.3
million to record the unrealized loss on its Swap Agreements, which
had previously been off balance sheet. This amount was comprised of
an unrealized loss on Swap Agreements of $7.6 million and a deferred
gain from terminated Swap Agreement activity in the amount of $5.3
million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | The Company has terminated and replaced Swap Agreements as an
additional source of liquidity when it was able to do so while
maintaining compliance with its hedging policies. Since the
Companys adoption of FAS 133, realized gains and losses resulting
from the termination of Swap Agreements are initially recorded in
Other comprehensive income as a separate component of equity. The
gain or loss from the terminated Swap Agreements remains in Other
comprehensive income until the forecasted interest payments affect
earnings. If it becomes probable that the forecasted interest
payments will not occur, then the entire gain or loss would be
reclassified to earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | Interest rate cap agreements                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | The Company purchases interest rate cap agreements (Cap
Agreements) to manage interest rate risk on a portion of its
assets. In general, ARM assets have a Life Cap, which is a
component of the fair value of an ARM asset. Pursuant to the terms
of the Cap Agreements, the Company will receive cash payments if the
interest rate index specified in any such Cap Agreement increases
above certain specified levels. Therefore, such Cap Agreements have
the effect of offsetting a portion of the Companys borrowing costs,
thereby reducing the effect of the lifetime cap feature on the
Companys ARM assets so that the net margin on the Companys ARM
assets will be protected in high interest rate environments. The
Cap Agreements the Company has purchased also have the effect of
offsetting a portion of the fair value change in the Companys ARM
assets related to the Life Cap.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|
| | The Company does not currently apply hedge accounting to its Cap
Agreements and, as a result, the Company records the change in fair
value of the Cap Agreements as hedging expense in current earnings.
The Company purchases Cap Agreements by incurring a one-time fee or
premium and carries them at fair value. The carrying value of the
Cap Agreements is included in Prepaid expenses and other on the
balance sheet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| | All Cap Agreements were designated as fair value hedges against the
value of the Life Cap components of available-for-sale ARM
securities upon the adoption of FAS 133. In accordance with the
adoption of FAS 133, and subject to meeting certain hedging
requirements, the change in the fair value of the Cap Agreements is
recognized in earnings and was, during a portion of the first and
second quarters of 2001, compared to the change in the fair value of
the related hedged asset to ensure the hedging relationship was
highly effective. The change in fair value associated with the Life
Cap component of the hedged portion of the ARM securities portfolio
was also recorded in earnings, subject to meeting certain tests of
hedging effectiveness. To the extent the change in fair value of
the Life Cap component of the hedged ARM securities and the change
in fair value of the hedging instruments did not offset each other,
there was hedge ineffectiveness, which was reported in the Companys
Consolidated Income Statements as Hedging expense. The Company
determined that this hedge utilizing Cap Agreements was not
effective during the third and fourth quarters of 2001 and all of
2002 and, as a result, the Company recorded the change in fair value
of the Cap Agreements as hedging expense with no offsetting amount
associated with the change in fair value of the hedged assets. The
carrying value of the Cap Agreements is included in Prepaid
expenses and other on the Consolidated Balance Sheet.
|
| | Upon the adoption of FAS 133, the Company recorded a cumulative
adjustment for a change in accounting principles in the amount of
$201.8 thousand, which reduced net income. This amount was
primarily the unrealized loss on certain Cap Agreements that had
previously been designated as hedging the Companys borrowing cost
during the fixed rate period of certain hybrid ARM assets. The
Company recorded this unrealized loss in earnings because there was
no change in the intrinsic value of the Cap Agreements since the
inception of the hedge to the date of adopting FAS 133. The Company
re-designated these Cap Agreements as fair value hedges that hedge
the value of the Life Cap component of its ARM assets consistent
with the rest of the Companys portfolio of Cap Agreements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In addition, prior to the adoption of FAS 133, the Company had
designated the remainder of its Cap Agreements and all of its option
contracts as a hedge against available-for-sale securities and ARM
loans and had recorded the unrealized gains and losses on the Cap
Agreements, option contracts and available-for-sale securities in
Other comprehensive income. Upon the adoption of FAS 133, the
Company designated its Cap Agreements and Option Contracts as fair
value hedges against the Life Cap component of its ARM securities.
As of the FAS 133 transition date, the fair value of the Life Cap
component of its ARM securities was determined to be $1.3 million
and the Cap Agreements and Option Contracts had a fair value of $1.3
million. Therefore, the transition adjustment to record the
reclassification of the fair value of the Cap Agreements and Option
Contracts from Other comprehensive income to earnings and the
offsetting reclassification of the fair value of the Life Cap
component of available-for-sale ARM securities, also from Other
comprehensive income to earnings, resulted in no material net
effect on either earnings or Other comprehensive income.
|
| | Other hedging activity                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | Prior to March 31, 2000, the Company entered into hedging
transactions in connection with the purchase of hybrid ARM assets
between the trade date and the settlement date. Generally, the
Company had hedged the cost of obtaining future fixed rate financing
by entering into a commitment to sell similar duration fixed-rate
mortgage-backed securities (MBS) on the trade date and settled the
commitment by purchasing the same fixed-rate MBS on the purchase
date. Realized gains and losses were deferred and amortized as a
yield adjustment over the fixed rate period of the financing. Upon
the adoption of FAS 133, the Company recorded a cumulative
adjustment for a change in accounting principle in Other
comprehensive income in the amount of $1.7 million to record the
deferred gains from Other hedging activity, previously included in
Reverse repurchase agreements in the Companys Consolidated Balance
Sheets. As of December 31, 2002, $162.2 thousand of deferred gains
from other hedging activity remained in Other comprehensive income
which the Company estimates will be reclassified to earnings over
the next twelve months.                                       



| |             
| | ------------
| | Income taxes



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company elected to be taxed as a Real Estate Investment Trust
(REIT) and believes it complies with the provisions of the
Internal Revenue Code of 1986, as amended (the Code) with respect
thereto. Accordingly, the Company will not be subject to Federal
income tax on that portion of its income that is distributed to
shareholders, as long as certain asset, income and stock ownership
tests are met. During 2001, TMHL and each of its subsidiaries were
taxable REIT subsidiaries and, as such, were subject to both federal
and state corporate income tax. For the years ended December 31,
2001 and 2000, TMHL had immaterial taxable losses. As of January 1,
2002, the Company revoked its election to operate TMHL and its
subsidiaries as taxable REIT subsidiaries and as a result they are
now qualified REIT subsidiaries.



| |                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company declared a $0.585 common dividend on December 17, 2002,
which was paid in January 2003. This dividend will be taken as a
dividend deduction on the Companys 2002 income tax return and is
therefore taxable income for common shareholders for 2002, as well
as the four common dividends paid during 2002.



| |                       
| | ----------------------
| | Net earnings per share



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

F-13



---



##### Table of Contents





| |                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Following is information about the computation of the earnings per
share data for the years ended December 31, 2002, 2001 and 2000
(Amounts in thousands except per share data):

|                                                   |                             |      |         |        |  |        |        |           |  |   |      |          |  | 
|-------------------------------------------------- | --------------------------- | ---- | ------- | ------ |  | ------ | ------ | --------- |  | - | ---- | -------- |  | 
|                                                   |                             |      |         |        |  |        |        |           |  |   |      | Earnings
|                                                   |                             |      |         | Income |  | Shares |        | Per Share
|                                                   |                             |      |         |        |  |        |        |          
|                                                   |                             | 2002 |         |        |  |        |        |           |  |   |      |          |  | 
|Net income                                         |                             | $    | 120,016 |        |  |        |        |           |  |   |      |         
|Less preferred stock dividends                     |                             |      | (6,679  | )      |  |        |        |           |  |   |      |         
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|Basic EPS, income available to
common shareholders |                             |      | 113,337 |        |  |        | 43,590 |           |  | $ | 2.60 |         
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|Effect of dilutive securities:                     |                             |      |         |        |  |        |        |           |  |   |      |         
|                                                   | Convertible preferred stock |      |         | 6,679  |  |        |        | 2,760     |  |   |      |          | 
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|Diluted EPS                                        |                             | $    | 120,016 |        |  |        | 46,350 |           |  | $ | 2.59 |         
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|                                                   |                             | 2001 |         |        |  |        |        |           |  |   |      |          |  | 
|Net income                                         |                             | $    | 58,460  |        |  |        |        |           |  |   |      |         
|Less preferred stock dividends                     |                             |      | (6,679  | )      |  |        |        |           |  |   |      |         
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|Basic EPS, income available to
common shareholders |                             |      | 51,781  |        |  |        | 24,754 |           |  | $ | 2.09 |         
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|Effect of dilutive securities:                     |                             |      |         |        |  |        |        |           |  |   |      |         
|                                                   | Stock options               |      |         |       |  |        |        | 49        |  |   |      |          | 
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|Diluted EPS                                        |                             | $    | 51,781  |        |  |        | 24,803 |           |  | $ | 2.09 |         
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|                                                   |                             | 2000 |         |        |  |        |        |           |  |   |      |          |  | 
|Net income                                         |                             | $    | 29,165  |        |  |        |        |           |  |   |      |         
|Less preferred stock dividends                     |                             |      | (6,679  | )      |  |        |        |           |  |   |      |         
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|Basic EPS, income available to
common shareholders |                             |      | 22,486  |        |  |        | 21,506 |           |  | $ | 1.05 |         
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|Effect of dilutive securities:                     |                             |      |         |        |  |        |        |           |  |   |      |         
|                                                   | Stock options               |      |         |       |  |        |        | 13        |  |   |      |          | 
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|Diluted EPS                                        |                             | $    | 22,486  |        |  |        | 21,519 |           |  | $ | 1.05 |         
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         



| |                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Basic and diluted earnings per share were reduced by $0.01 in 2001
due to the impact of the adoption of FAS 133 relating to the
accounting for derivative instruments and hedging activities.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company did not grant any options to purchase shares of common
stock during the year ended December 31, 2002. The Company granted
options to directors and officers of the Company and employees of
the Manager to purchase 35,666 and 210,022 shares of common stock at
average prices of $10.56 and $7.43 per share during the years ended
December 31, 2001 and 2000, respectively. As of December 31, 2002,
all of the previously granted options to purchase shares of common
stock had either been exercised, cancelled or had expired.



| |                 
| | ----------------
| | 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.

F-14



---



##### Table of Contents



Note 2. Adjustable-Rate Mortgage Assets



| |                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following tables present the Companys ARM assets as of December
31, 2002 and 2001. The ARM securities classified as available-for-sale
are carried at their fair value, while the collateral for
collateralized notes payable and ARM loans are carried at their
amortized cost basis (dollar amounts in thousands):

|                                       |                     |   |                |           |                |   |           |         |       |   |         |         |  |   |            |            | 
|-------------------------------------- | ------------------- | - | -------------- | --------- | -------------- | - | --------- | ------- | ----- | - | ------- | ------- |  | - | ---------- | ---------- | 
|December 31, 2002:                     |                     |   |                |           |                |   |           |         |       |   |         |         |  |   |            |           
|                                       |                     |   | Available-     |           | Collateral for |   |           |         |       |   |         |         | 
|                                       |                     |   | for-Sale       |           | Collateralized |   |           |         |       |   |         |         | 
|                                       |                     |   | ARM Securities |           | Notes Payable  |   | ARM Loans |         | Total
|                                       |                     |   |                |           |                |   |           |         |      
|Principal balance outstanding          |                     | $ | 9,162,747      |           |                | $ | 287,409   |         |       | $ | 706,965 |         |  | $ | 10,157,121 |           
|Net unamortized premium                |                     |   | 108,565        |           |                |   | 5,613     |         |       |   | 2,922   |         |  |   | 117,100    |           
|Basis adjustments/Allowance
for losses |                     |   | (11,384        | )         |                |   | (3,239    | )       |       |   | (100    | )       |  |   | (14,723    | )         
|Principal payment receivable           |                     |   | 31,033         |           |                |   |          |         |       |   |        |         |  |   | 31,033     |           
|                                       |                     |   |                |           |                |   |           |         |       |   |         |         |  |   |            |           
|                                       | Amortized cost, net |   |                | 9,290,961 |                |   |           | 289,783 |       |   |         | 709,787 |  |   |            | 10,290,531 | 
|Gross unrealized gains                 |                     |   | 73,805         |           |                |   | 2,297     |         |       |   | 3,505   |         |  |   | 79,607     |           
|Gross unrealized losses                |                     |   | (29,123        | )         |                |   | (120      | )       |       |   | (160    | )       |  |   | (29,403    | )         
|                                       |                     |   |                |           |                |   |           |         |       |   |         |         |  |   |            |           
|                                       | Fair value          |   | $              | 9,335,643 |                |   | $         | 291,960 |       |   | $       | 713,132 |  |   | $          | 10,340,735 | 
|                                       |                     |   |                |           |                |   |           |         |       |   |         |         |  |   |            |           
|                                       | Carrying value      |   | $              | 9,335,643 |                |   | $         | 289,783 |       |   | $       | 709,787 |  |   | $          | 10,335,213 | 
|                                       |                     |   |                |           |                |   |           |         |       |   |         |         |  |   |            |           

|                                       |                     |   |                |           |                |   |           |         |       |   |        |        |  |   |           |           | 
|-------------------------------------- | ------------------- | - | -------------- | --------- | -------------- | - | --------- | ------- | ----- | - | ------ | ------ |  | - | --------- | --------- | 
|December 31, 2001:                     |                     |   |                |           |                |   |           |         |       |   |        |        |  |   |           |          
|                                       |                     |   | Available-     |           | Collateral for |   |           |         |       |   |        |        | 
|                                       |                     |   | for-Sale       |           | Collateralized |   |           |         |       |   |        |        | 
|                                       |                     |   | ARM Securities |           | Notes Payable  |   | ARM Loans |         | Total
|                                       |                     |   |                |           |                |   |           |         |      
|Principal balance outstanding          |                     | $ | 5,092,713      |           |                | $ | 465,733   |         |       | $ | 98,711 |        |  | $ | 5,657,157 |          
|Net unamortized premium                |                     |   | 45,025         |           |                |   | 8,204     |         |       |   | 155    |        |  |   | 53,384    |          
|Basis adjustments/Allowance
for losses |                     |   | (5,891         | )         |                |   | (3,185    | )       |       |   | (100   | )      |  |   | (9,176    | )        
|Principal payment receivable           |                     |   | 36,080         |           |                |   |          |         |       |   |       |        |  |   | 36,080    |          
|                                       |                     |   |                |           |                |   |           |         |       |   |        |        |  |   |           |          
|                                       | Amortized cost, net |   |                | 5,167,927 |                |   |           | 470,752 |       |   |        | 98,766 |  |   |           | 5,737,445 | 
|Gross unrealized gains                 |                     |   | 35,439         |           |                |   | 4,346     |         |       |   | 216    |        |  |   | 40,001    |          
|Gross unrealized losses                |                     |   | (40,739        | )         |                |   | (2,768    | )       |       |   | (258   | )      |  |   | (43,765   | )        
|                                       |                     |   |                |           |                |   |           |         |       |   |        |        |  |   |           |          
|                                       | Fair value          |   | $              | 5,162,627 |                |   | $         | 472,330 |       |   | $      | 98,724 |  |   | $         | 5,733,681 | 
|                                       |                     |   |                |           |                |   |           |         |       |   |        |        |  |   |           |          
|                                       | Carrying value      |   | $              | 5,162,627 |                |   | $         | 470,752 |       |   | $      | 98,766 |  |   | $         | 5,732,145 | 
|                                       |                     |   |                |           |                |   |           |         |       |   |        |        |  |   |           |          



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2002, the Company sold $697.9 million of ARM securities and
realized $5.8 million in gains and $37.5 thousand in losses. In
addition, the Company sold $4.1 million of loans during 2002 and
realized a gross gain of $5.9 thousand and a gross loss of $14.0
thousand. During 2002, the Company also paid $4.9 million to terminate
two Swap Agreements. The net gain on sale during 2002 totaled $903.4
thousand. During 2001, the Company realized $246.4 thousand in gains
and $245.1 thousand in losses on the sale of $108.4 million of ARM
assets, and during 2000, the Company realized $286.8 thousand in gains
and no losses on the sale of $120.0 million of ARM assets. All of the
ARM securities sold were classified as available-for-sale.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2002, the Company securitized $2.3 billion of its ARM loans into
a series of privately issued multi-class ARM securities. The Company
retained, for its ARM portfolio, all of the classes of the securities
created. The Company did not account for any of these securitizations
as sales and, therefore, did not record any gain or loss in connection
with these securitizations. The Company carries the securities at fair
value, based primarily on market value prices received from dealers
familiar with similar securities. As of December 31, 2002, the Company
had $3.1 billion of ARM assets that have resulted from the Companys
securitization efforts.

F-15



---



##### Table of Contents





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

|                                          |                                            |   |         |   |  |  |               |       |               |  |  |       |   
|----------------------------------------- | ------------------------------------------ | - | ------- | - |  |  | ------------- | ----- | ------------- |  |  | ----- | --
|                                          |                                            |   |         |   |  |  | Dollar        |       | Percentage   
|                                          |                                            |   |         |   |  |  | Change in     |       | Change in    
|                                          |                                            |   |         |   |  |  | Fair Value    |       | Fair Value of
|                                          |                                            |   |         |   |  |  | of ARM Assets |       | ARM Assets   
|                                          |                                            |   |         |   |  |  |               |       |              
|Carrying amount                           |                                            | $ | 3,084.9 |   |  |  |               |       |               |  |  |      
|Fair value                                |                                            | $ | 3,087.0 |   |  |  |               |       |               |  |  |      
|Weighted average life in years            |                                            |   | 3.7     |   |  |  |               |       |               |  |  |      
|Prepayment speed assumption (annual rate) |                                            |   | 23.6    | % |  |  |               |       |               |  |  |      
|                                          | Impact on fair value of 10% adverse change |   |         |   |  |  | $             | (4.8  | )             |  |  | (0.16 | )%
|                                          | Impact on fair value of 20% adverse change |   |         |   |  |  | $             | (11.7 | )             |  |  | (0.38 | )%
|Projected credit losses (annual rate)     |                                            |   | 0.10    | % |  |  |               |       |               |  |  |      
|                                          | Impact on fair value of 10% adverse change |   |         |   |  |  | $             | (1.0  | )             |  |  | (0.03 | )%
|                                          | Impact on fair value of 20% adverse change |   |         |   |  |  | $             | (2.0  | )             |  |  | (0.07 | )%
|Cash flow discount rate                   |                                            |   | 3.71    | % |  |  |               |       |               |  |  |      
|                                          | Impact on fair value of 10% adverse change |   |         |   |  |  | $             | (36.6 | )             |  |  | (1.19 | )%
|                                          | Impact on fair value of 20% adverse change |   |         |   |  |  | $             | (72.4 | )             |  |  | (2.35 | )%



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



| |                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2002 and 2001, the Company had reduced the cost
basis of its securitized ARM loans by $13.8 million and $7.9 million,
respectively, due to estimated credit losses (other than temporary
declines in fair value). The reduction in the cost basis recorded
during 2002 of $5.8 million was recorded in connection with the
Companys securitization of $2.3 billion of loans.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2002 and 2001, the Company had reduced the cost
basis of other ARM securities by $858.8 thousand and $1.2 million,
respectively, due to estimated credit losses (other than temporary
declines in fair value). The estimated credit losses for these ARM
securities relate to Other Investments that the Company purchased at a
discount that included an estimate of credit losses. During 2002, the
Company recorded realized losses of $508.7 thousand on these ARM
securities and realized recoveries of $216.6 thousand, and in
accordance with its credit policies the Company did not reduce its cost
basis any further to provide for any additional estimated credit
losses.

F-16



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has credit exposure on loans it has securitized and loans
held for securitization. All of the loans that were delinquent as of
December 31, 2002 and 2001 were loans the Company had securitized. As
of December 31, 2002 and 2001, the Company had adjusted the basis of
its ARM securities to reflect credit exposure on loans it had
securitized by $13.8 million and $7.9 million, respectively. The
following tables summarize ARM loan delinquency information as of
December 31, 2002 and 2001 (dollar amounts in thousands):

|                   |  |       |   |         |  |           |       |              |  |         |      |   |  |  |      |  
|------------------ |  | ----- | - | ------- |  | --------- | ----- | ------------ |  | ------- | ---- | - |  |  | ---- | -
|2002               |  |       |   |         |  |           |       |              |  |         |      |   |  |  |      |  
|                   |  |       |   |         |  |           |       |              |  |         |      |   |  |  |      |  
|                   |  |       |   |         |  |           |       |              |  | Percent |      |   |  | 
|                   |  | Loan  |   | Loan    |  | of ARM    |       | Percent of  
|Delinquency Status |  | Count |   | Balance |  | Loans (1) |       | Total Assets
|                   |  |       |   |         |  |           |       |             
|60 to 89 days      |  |       | 2 |         |  | $         | 270   |              |  |         | 0.01 | % |  |  | 0.00 | %
|90 days or more    |  |       | 1 |         |  |           | 159   |              |  |         | 0.00 |   |  |  | 0.00 |  
|In foreclosure     |  |       | 5 |         |  |           | 2,970 |              |  |         | 0.08 |   |  |  | 0.03 |  
|                   |  |       |   |         |  |           |       |              |  |         |      |   |  |  |      |  
|                   |  |       | 8 |         |  | $         | 3,399 |              |  |         | 0.09 | % |  |  | 0.03 | %
|                   |  |       |   |         |  |           |       |              |  |         |      |   |  |  |      |  

|                   |  |       |   |         |  |          |       |              |  |         |      |   |  |  |      |  
|------------------ |  | ----- | - | ------- |  | -------- | ----- | ------------ |  | ------- | ---- | - |  |  | ---- | -
|2001               |  |       |   |         |  |          |       |              |  |         |      |   |  |  |      |  
|                   |  |       |   |         |  |          |       |              |  |         |      |   |  |  |      |  
|                   |  |       |   |         |  |          |       |              |  | Percent |      |   |  | 
|                   |  | Loan  |   | Loan    |  | of ARM   |       | Percent of  
|Delinquency Status |  | Count |   | Balance |  | Loans(1) |       | Total Assets
|                   |  |       |   |         |  |          |       |             
|60 to 89 days      |  |       | 3 |         |  | $        | 695   |              |  |         | 0.04 | % |  |  | 0.01 | %
|90 days or more    |  |       | 2 |         |  |          | 385   |              |  |         | 0.02 |   |  |  | 0.01 |  
|In foreclosure     |  |       | 4 |         |  |          | 552   |              |  |         | 0.03 |   |  |  | 0.01 |  
|                   |  |       |   |         |  |          |       |              |  |         |      |   |  |  |      |  
|                   |  |       | 9 |         |  | $        | 1,632 |              |  |         | 0.09 | % |  |  | 0.03 | %
|                   |  |       |   |         |  |          |       |              |  |         |      |   |  |  |      |  



---

|(1) |  | ARM loans include loans held for securitization and loans
the Company has securitized and for which it has retained first
loss credit exposure for total amounts of $3.7 billion and $1.9
billion at December 31, 2002 and 2001, respectively.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The allowance for loan losses is maintained at a level considered
adequate by management to provide for losses inherent in the portfolio
of ARM loans held for securitization. The allowance is based on a
periodic evaluation of the portfolio by management in which numerous
factors are considered, including economic conditions, portfolio
composition and prior loss experience. Loan principal and uncollected
interest are charged against the allowance for losses when management
believes collection is not probable. None of the Companys loans held
for securitization were delinquent as of December 31, 2002. The
following table summarizes the activity for the allowance for losses on
ARM loans held for securitization for the years ended December 31,
2002 and 2001 (dollar amounts in thousands):

|                                                                              |  |      |     |      |  |   |        |  
|----------------------------------------------------------------------------- |  | ---- | --- | ---- |  | - | ------ | -
|                                                                              |  | 2002 |     | 2001
|                                                                              |  |      |     |     
|Beginning balance                                                             |  | $    | 100 |      |  | $ | 3,100  |  
|Provision for losses                                                          |  |      |    |      |  |   | 513    |  
|Adjustment to allowance for losses in
connection with securitization of loans |  |      |    |      |  |   | (3,513 | )
|                                                                              |  |      |     |      |  |   |        |  
|Ending balance                                                                |  | $    | 100 |      |  | $ | 100    |  
|                                                                              |  |      |     |      |  |   |        |  



| |                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2002, the Company also owned two real estate
properties as a result of foreclosing on delinquent loans in the
aggregate amount of $391.4 thousand (not included in the table above.)
The Company believes that its current level of reserves is adequate to
cover any estimated loss, should one occur, from the sale of these
properties.



| |                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2002, the Company had commitments to purchase or
originate the following amounts of ARM assets (dollar amounts in
thousands):

|                                  |  |   |           | 
|--------------------------------- |  | - | --------- | 
|Agency securities                 |  | $ | 22,194    | 
|Whole loans  bulk purchase       |  |   | 261,591   | 
|Whole loans  correspondent       |  |   | 560,541   | 
|Whole loans  direct originations |  |   | 168,176   | 
|                                  |  |   |           | 
|                                  |  | $ | 1,012,502 | 
|                                  |  |   |           | 



| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2002, the Company entered into two transactions whereby the
Company expects to acquire the remaining balance of certain AAA rated,
hybrid ARM securities, at a price of par, in 2006 and 2007, when the
fixed-rate

F-17



---



##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | period of the hybrid ARM securities terminates and they convert into
ARM securities that have characteristics similar to the ARM securities
held in the current portfolio and, therefore, the Company views these
as a future alternative source of ARM assets. The current balance of
the hybrid ARM securities is $2.0 billion, but is expected to be less
than 25% of that, and could be zero, at the time they convert into ARM
securities. If the Company decides not to acquire the hybrid ARM
securities when they convert into ARM securities, then it is committed
to pay or receive the difference between par and the fair value of the
ARM securities at that time, as determined by an auction of the ARM
securities. As of December 31, 2002, the Company has delivered $4.1
million of collateral in connection with these transactions.

Note 3. Interest Rate Cap Agreements



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Included in Prepaid expenses and other are purchased Cap Agreements
with a remaining notional amount of $1.8 billion and $2.3 billion as of
December 31, 2002 and December 31, 2001, respectively. The notional
amount of the Cap Agreements purchased declines at a rate that is
expected to approximate the amortization of the ARM securities. Under
these Cap Agreements, the Company will receive cash payments should the
one-month or three-month London InterBank Offer Rate (LIBOR) increase
above the contract rates of these hedging instruments that range from
6.00% to 12.00% and average 10.00%. The Cap Agreements had an average
maturity of 1.0 year as of December 31, 2002. The initial aggregate
notional amount of the Cap Agreements declines to $1.8 billion over the
period of the agreements, which expire between 2003 and 2005. During
the years ended December 31, 2002 and 2001, the Company recognized
expenses of $1.4 million and $1.3 million, respectively, which is
reported as Hedging expense in the Companys Consolidated Income
Statements.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has credit risk to the extent that the counterparties to
the Cap Agreements do not perform their obligations under the Cap
Agreements. If one of the counterparties does not perform, the Company
would not receive the cash to which it would otherwise be entitled
under the conditions of the Cap Agreement. In order to mitigate this
risk and to achieve competitive pricing, the Company has entered into
Cap Agreements with six different counterparties, five of which are
rated AAA and one is rated A, but the Company has a two-way collateral
agreement protecting its credit exposure with this counterparty. The
fair value of the Cap Agreements at December 31, 2002 amounted to $84.7
thousand and is included in Prepaid expenses and other on the balance
sheet.

Note 4. Reverse Repurchase Agreements, Collateralized Notes Payable and Other Borrowings



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has arrangements to enter into reverse repurchase
agreements, a form of collateralized short-term borrowing, with 22
different financial institutions and on December 31, 2002, had borrowed
funds from 14 of these firms. Because the Company borrows money under
these agreements based on the fair value of its ARM assets, and because
changes in interest rates can negatively impact the valuation of ARM
assets, the Companys borrowing ability under these agreements could be
limited and lenders could initiate margin calls in the event interest
rates change or the value of the Companys ARM assets decline for other
reasons.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2002, the Company had $8.4 billion of reverse
repurchase agreements outstanding with a weighted average borrowing
rate of 1.59% and a weighted average remaining maturity of 4.6 months.
After including the $142.5 million carrying value of Swap Agreements,
the combined reverse repurchase agreements and Swap Agreements
outstanding of $8.6 billion as of December 31, 2002 had a weighted
average borrowing rate of 2.95% and a weighted average remaining
maturity of 1.7 years. As of December 31, 2001, the Company had $4.7
billion of reverse repurchase agreements outstanding with a weighted
average borrowing rate of 2.24% and a weighted average remaining
maturity of 2.8 months. As of December 31, 2002, $4.9 billion of the
Companys borrowings were variable-rate term reverse repurchase
agreements with original maturities that range from six months to
twenty-four months. The interest rates of these term reverse
repurchase agreements are indexed to either the one- or three-month
LIBOR rate and reprice accordingly. ARM assets with a carrying value
of $9.0 billion, including accrued interest and cash totaling $51.6
million, collateralized the reverse repurchase agreements at December
31, 2002.

F-18



---



##### Table of Contents





| |                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2002, the reverse repurchase agreements had the
following remaining maturities (dollar amounts in thousands):

|                |  |   |           | 
|--------------- |  | - | --------- | 
|Within 30 days  |  | $ | 3,021,884 | 
|31 to 89 days   |  |   | 572,273   | 
|90 to 365 days  |  |   | 4,720,659 | 
|Over 365 days   |  |   | 110,913   | 
|                |  |   |           | 
|                |  |   | 8,425,729 | 
|Swap Agreements |  |   | 142,531   | 
|                |  |   |           | 
|                |  | $ | 8,568,260 | 
|                |  |   |           | 



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2002, the Company had entered into three whole loan
financing facilities. One of the whole loan financing facilities has a
committed borrowing capacity of $600 million and matures in January
2004. The other two facilities have a committed borrowing capacity of
$300 million each and mature in March 2003 and November 2003. The
Company expects to renew these facilities. As of December 31, 2002,
the Company had $589.1 million borrowed against these whole loan
financing facilities at an effective cost of 2.11%. As of December 31,
2001, the Company had $37.7 million borrowed against whole loan
financing facilities at an effective cost of 2.53%. The amount
borrowed on the whole loan financing agreements at December 31, 2002
was collateralized by ARM loans with a carrying value of $610.3
million, including accrued interest.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The whole loan financing facility with a borrowing capacity of $300.0
million and maturing in March 2003 discussed above, is a securitization
transaction in which the Company transfers groups of whole loans to a
wholly owned bankruptcy remote special purpose subsidiary. The
subsidiary, in turn, simultaneously transfers its interest in the loans
to a trust, which issues beneficial interests in the loans in the form
of a note and a subordinated certificate. The note is then used to
collateralize borrowings. This whole loan financing facility works
similar to a secured line of credit whereby the Company can deliver
loans into the facility and take loans out of the facility at the
Companys discretion, subject to the terms and conditions of the
facility. This securitization transaction is accounted for as a
secured borrowing.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On December 18, 1998, the Company, through a wholly owned bankruptcy
remote special purpose finance subsidiary, issued $1.1 billion of notes
payable (Notes) collateralized by ARM loans and ARM securities. As
part of this transaction, the Company retained ownership of a
subordinated certificate in the amount of $32.4 million, which
represents the Companys maximum exposure to credit losses on the loans
collateralizing the Notes. As of December 31, 2002, the Notes had a
net balance of $255.4 million, with an effective interest cost of
2.13%, which changes each month at a spread to one-month LIBOR. As of
December 31, 2002, these Notes were collateralized by ARM loans with a
principal balance of $287.4 million. The Notes mature on January 25,
2029, but are callable by the Company at par once the balance of the
Notes is reduced to 25% of their original balance. In January 2003,
the Company called the Notes. The Company expects to re-securitize the
loan collateral securitizing these notes payable in a future loan
securitization in 2003.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2002, the Company was counterparty to forty-six
interest rate Swap Agreements and Eurodollar Transactions having an
aggregate current notional balance of $5.0 billion. In addition, the
Company also entered into two delayed Swap Agreements with an aggregate
notional balance of $600.0 million that become effective in 2003.
These Swap Agreements and Eurodollar Transactions hedge the cost of
financing hybrid ARM assets during their fixed rate term (generally
three to ten years). The Company limits the interest rate mismatch on
the funding of its hybrid ARM assets (the difference between the
duration of the fixed-rate period of hybrid ARM assets and the duration
of the fixed-rate liabilities) to a duration difference of no more than
one year. As of December 31, 2002, these Swap Agreements and
Eurodollar Transactions had a weighted average maturity of 2.8 years.
In accordance with the Swap Agreements, the Company will pay a fixed
rate of interest during the term of these Swap Agreements and receive a
payment that varies monthly with the one-month LIBOR rate. At December
31, 2002, the financing of our hybrid ARM assets resulted in a duration
of approximately 3 months. As of December 31, 2002, ARM assets with a
carrying value of $102.9 million, including accrued interest,
collateralized the Swap Agreements. In addition, cash in the amount of
$17.0 million collateralized the Swap Agreements at December 31, 2002.
During 2002, the Company paid $4.9 million to terminate two Swap
Agreements.



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | The total cash paid for interest was $236.5 million, $205.7 million and
$249.6 million for 2002, 2001 and 2000 respectively.

F-19



---



##### Table of Contents



Note 5. Fair Value of Financial Instruments and Off-Balance Sheet Credit Risk



| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table presents the carrying amounts and estimated fair
values of the Companys financial instruments at December 31, 2002 and
December 31, 2001 (dollar amounts in thousands):

|             |                                 |  |                   |            |                   |  |          |            |       |  |   |           |  |  |   |           | 
|------------ | ------------------------------- |  | ----------------- | ---------- | ----------------- |  | -------- | ---------- | ----- |  | - | --------- |  |  | - | --------- | 
|             |                                 |  | December 31, 2002 |            | December 31, 2001
|             |                                 |  |                   |            |                  
|             |                                 |  | Carrying          |            | Fair              |  | Carrying |            | Fair 
|             |                                 |  | Amount            |            | Value             |  | Amount   |            | Value
|             |                                 |  |                   |            |                   |  |          |            |      
|Assets:      |                                 |  |                   |            |                   |  |          |            |       |  |   |           |  |  |   |          
|             | ARM assets                      |  | $                 | 10,335,213 |                   |  | $        | 10,340,735 |       |  | $ | 5,732,145 |  |  | $ | 5,733,681 | 
|             | Cap Agreements                  |  |                   | 85         |                   |  |          | 85         |       |  |   | 431       |  |  |   | 431       | 
|Liabilities: |                                 |  |                   |            |                   |  |          |            |       |  |   |           |  |  |   |          
|             | Reverse repurchase agreements   |  |                   | 8,425,729  |                   |  |          | 8,425,729  |       |  |   | 4,704,895 |  |  |   | 4,704,895 | 
|             | Collateralized notes payable    |  |                   | 255,415    |                   |  |          | 255,863    |       |  |   | 432,581   |  |  |   | 434,469   | 
|             | Whole loan financing facilities |  |                   | 589,081    |                   |  |          | 589,081    |       |  |   | 40,283    |  |  |   | 40,283    | 
|             | Swap agreements                 |  |                   | 142,531    |                   |  |          | 142,531    |       |  |   | 33,932    |  |  |   | 33,932    | 



| |                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The above Cap Agreements are included in the balance sheet under the
caption Prepaid expenses and other. The carrying amount for
securities, which are categorized as available-for-sale, is their fair
value, whereas the carrying amount for loans, which are categorized as
held for the foreseeable future, is their amortized cost.

Note 6. Common and Preferred Stock



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has issued 2,760,000 shares of Series A 9.68% Cumulative
Convertible Preferred Stock at a price of $25.00 per share. Net
proceeds from this issuance were $65.8 million. The dividends are
cumulative commencing on the issue date and are payable quarterly, in
arrears. The dividends per share are equal to the greater of (i)
$0.605 per quarter, or (ii) the quarterly dividend declared on the
Companys common stock. Each share is convertible at the option of the
holder at any time into one share of common stock. The preferred
shares are redeemable by the Company on and after December 31, 1999, in
whole or in part, as follows: (i) for one share of common stock plus
accumulated, accrued but unpaid dividends, provided that for 20 trading
days within any period of 30 consecutive trading days the closing price
of the common stock equals or exceeds the conversion price of $25.00,
or (ii) for cash at the issue price of $25.00, plus any accumulated,
accrued but unpaid dividends through the redemption date. In the event
of liquidation, the holders of the preferred shares will be entitled to
receive out of the assets of the Company, prior to any distribution to
the common shareholders, the issue price of $25.00 per share in cash,
plus any accumulated, accrued and unpaid dividends.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On January 25, 2001, the Board of Directors adopted a Shareholder
Rights Agreement (the Rights Agreement). The Board of Directors
declared a dividend distribution of one Preferred Stock Purchase Right
(a Right) for each outstanding share of common stock, par value $0.01
per share, of the Company (the Common Stock) to shareholders of
record as of the close of business on April 6, 2001 (the Record
Date). In addition, one Right will automatically attach to each share
of Common Stock issued between the Record Date and the Distribution
Date (as defined in the Rights Agreement). Each Right entitles the
registered holder thereof to purchase from the Company a unit (a
Preferred Unit) consisting of one one-thousandth of a share of Series
B Cumulative Preferred Stock, par value $0.01 per share (the Preferred
Stock), at a cash exercise price of $50.00 per Preferred Unit (the
Exercise Price), subject to adjustment.



| |                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Company in a transaction not approved by the Board of Directors. The
Rights should not interfere with any merger or other business
combination approved by the Board of Directors.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During February 2002, the Company completed a public offering of
6,210,000 shares of common stock and received net proceeds of $113.5
million under its shelf registration statement that was declared
effective by the Securities and Exchange Commission (SEC) on July 6,
2001. During December 2002, the Company completed a public offering of
1,150,000 shares of common stock and received net proceeds of $20.9
million under the July 2001 shelf registration statement. On August
30, 2002, a new shelf registration statement that the Company filed in
order to register an additional $400 million of equity securities was
declared effective by the SEC. During 2002, the Company issued
7,103,100 shares of common stock and received net proceeds of $132.0
million under continuous equity offering programs under the July 2001
and August 2002 shelf

F-20



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##### Table of Contents





| |                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | registration statements. As of December 31, 2002, $25.1 million and
$343.1 million of the Companys registered securities remained
available for future issuance and sale under its currently effective
July 2001 and August 2002 shelf registration statements, respectively.



| |                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 26, 2002, the Company filed a Form S-3D to register an
additional 8,000,000 shares for issuance under the Dividend
Reinvestment and Stock Purchase Plan (the DRP). During 2002 and
2001, the Company issued 5,050,774 and 1,173,685 shares, respectively,
of common stock under the DRP and received net proceeds of $97.0
million and $20.7 million, respectively.

Note 7. Long-Term Incentive Awards



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Companys Board of Directors adopted the 2002 Long-Term Incentive
Plan (the Plan), effective September 29, 2002, which replaced the
Companys previous Stock Option and Incentive Plan that expired on
September 28, 2002. The Plan is intended to be a long-term incentive
program. The Plan was further amended by the Board of Directors in
January 2003 to exclude the authorization of stock options. The
amended Plan authorizes the Compensation Committee to grant Dividend
Equivalent Rights (DERs), Stock Appreciation Rights (SARs) and
Phantom Stock Rights (PSRs).



| |                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The present policy of the Compensation Committee and the Board is to
grant only PSR and DER awards under the Plan. The PSRs are granted in
lieu of stock options, based on equivalent values as calculated by a
Black Scholes option model.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The PSRs, when received as a grant, generally vest over a three-year
period. The Company usually issues DERs under a formula at the same
time that other awards under the Plan are granted. The DER and PSR
participants are allowed to elect to reinvest their PSR and DER cash
dividends into additional PSRs at the price of the Companys common
stock on the related dividend payment date. The PSRs are expensed over
the applicable vesting period. The DERs are fully expensed on the
Companys income statement.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Restricted shares of common stock had been granted under the Companys
previous Stock Option and Incentive Plan pursuant to the direction of
the Stock Option Committee (now renamed as the Compensation Committee)
and approval of the Board of Directors. Restricted shares of common
stock had generally been granted in lieu of Incentive Stock Options
(ISOs) and Nonstatutory Stock Options (NSOs), based on equivalent
values as calculated by a Black Scholes option model. The Board of
Directors determined a vesting period for the restricted shares granted
(generally three years). In general, a portion of the restricted
shares vested at the end of each year of the vesting period and the
shares participated in the common dividends declared during the vesting
period. The Company had been expensing the value of the restricted
shares over the vesting period, based on their value as of the date of
grant. In April 2002, the Companys Board of Directors cancelled all
previously granted restricted shares of common stock and replaced them
with PSRs of equal value. The replacement PSRs vest over the original
vesting period of the cancelled restricted shares.



| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In April 2002, the Companys Board of Directors, based on a
recommendation from the Compensation Committee, granted 72,105 PSRs to
replace 578,303 stock options that had been cancelled in January 2001.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of December 31, 2002, there were 1,331,758 DERs outstanding, of
which 1,303,597 were vested, and 454,963 PSRs outstanding, of which
245,041 were vested. The Company recorded an expense associated with
DERs and PSRs of $4.1 million, $1.5 million and $273.7 thousand for the
years ended December 31, 2002, 2001 and 2000, respectively. Of the
expense recorded in 2002, $2.8 million was the amount of dividend
equivalents paid on DERs and PSRs, $1.1 million was the amortization of
unvested PSRs and $249.9 thousand was the impact of the increase in the
Companys common stock price on the value of the PSRs which was
recorded as a fair value adjustment.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During 2001, stock options for 371,429 shares of common stock were
exercised at an average price of $8.46, and $2.7 million of notes
receivable were executed in connection with the exercise of these
options and the Company received net proceeds of $463.5 thousand.
During 2000, stock options for 82,797 shares of common stock were
exercised at an average price of $8.83 and $685.7 thousand of notes
receivable were executed in connection with the exercise of these
options and the Company received net proceeds of $45.3 thousand.
During 2002, there were no exercises of stock options and as of
December 31, 2002, all of the previously issued ISOs and NSOs had been
exercised, terminated or cancelled.

F-21



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Notes receivable from stock sales arise from the Company financing a
portion of the purchase of shares of common stock by directors,
officers and employees through the exercise of stock options. The
notes mature in 2010 and accrue interest at a rate of 3.91% per annum.
In addition, the notes are full recourse promissory notes and are
secured by a pledge of the shares of the common stock acquired.
Interest, which is credited to paid-in-capital, is payable quarterly,
with the balance due at the maturity of the notes. The payment of the
notes will be accelerated only upon the sale of the shares of common
stock pledged for the notes. The notes may be prepaid at any time at
the option of each borrower. As of December 31, 2002, there was $7.4
million of notes receivable outstanding from stock sales. All of these
notes were made prior to the enactment of the Sarbanes-Oxley Act of
2002 (the Act). As a result of the Act, the notes made to directors
and executive officers of the Company may not be modified and these
individuals are not eligible to participate in the Companys note
receivable program after the effective date of the Act. In April,
2002, the Board approved a limited stock repurchase program for the
repurchase at current market value of shares of common stock that were
acquired pursuant to the exercise of stock options under the previous
plan. The Company will first apply the proceeds from any such
repurchases to the repayment of any outstanding stock option notes
receivable due from the holders. As of December 31, 2002, no shares
have been repurchased under this program.



| |                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All of the stock options outstanding as of December 31, 2000 and the
ones granted during 2001 were either cancelled or exercised during
2001. As of December 31, 2002, there are no stock options outstanding
and the current long-term incentive plan does not provide for the
granting of stock options.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company accounted for stock options granted prior to 2002 under the
disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost was recognized for the Companys
stock option plan. Had compensation cost for the Companys stock
option plan been determined based on the fair value at the grant date
for awards in 2001 and 2000 consistent with the provisions of SFAS No.
123, the Companys net earnings and earnings per share would have been
reduced to the pro forma amounts indicated in the table below. The
fair value of each stock option grant was estimated on the date of
grant using the Black-Scholes option-pricing model (dollar amounts in
thousands, except per share data).

|                          |                         |   |         |       |         |   |        |       |  
|------------------------- | ----------------------- | - | ------- | ----- | ------- | - | ------ | ----- | -
|                          |                         |   | 2001    |       | 2000   
|                          |                         |   |         |       |        
|Net income  as reported  |                         | $ | 58,460  |       |         | $ | 29,165 |      
|Net income  pro forma    |                         |   | 58,420  |       |         |   | 28,989 |      
|Basic EPS  as reported   |                         |   | 2.09    |       |         |   | 1.05   |      
|Basic EPS  pro forma     |                         |   | 2.09    |       |         |   | 1.04   |      
|Diluted EPS  as reported |                         |   | 2.09    |       |         |   | 1.05   |      
|Diluted EPS  pro forma   |                         |   | 2.09    |       |         |   | 1.04   |      
|Assumptions:              |                         |   |         |       |         |   |        |      
|                          | Dividend yield          |   |         | 10.00 | %       |   |        | 10.00 | %
|                          | Expected volatility     |   |         | 33.4  | %       |   |        | 32.4  | %
|                          | Risk-free interest rate |   |         | 5.19  | %       |   |        | 6.29  | %
|                          | Expected lives          |   | 7 years |       | 7 years

F-22



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##### Table of Contents



Information regarding stock options is as follows:

|                                                               |  |        |          |                |  |                  |        |                |  |   |         |                  |  |   |        | 
|-------------------------------------------------------------- |  | ------ | -------- | -------------- |  | ---------------- | ------ | -------------- |  | - | ------- | ---------------- |  | - | ------ | 
|                                                               |  | 2001   |          | 2000          
|                                                               |  |        |          |               
|                                                               |  |        |          |                |  | Weighted Average |        |                |  |   |         | Weighted Average
|                                                               |  | Shares |          | Exercise Price |  | Shares           |        | Exercise Price
|                                                               |  |        |          |                |  |                  |        |               
|Outstanding, beginning of year                                 |  |        | 916,698  |                |  | $                | 14.248 |                |  |   | 789,473 |                  |  | $ | 15.494 | 
|Granted                                                        |  |        | 35,666   |                |  |                  | 10.563 |                |  |   | 210,022 |                  |  |   | 7.426  | 
|Exercised                                                      |  |        | (371,429 | )              |  |                  | 8.455  |                |  |   | (82,797 | )                |  |   | 8.829  | 
|Cancelled/Expired                                              |  |        | (580,935 | )              |  |                  | 17.725 |                |  |   |        |                  |  |   |       | 
|                                                               |  |        |          |                |  |                  |        |                |  |   |         |                  |  |   |        | 
|Outstanding, end of year                                       |  |        |         |                |  | $                |       |                |  |   | 916,698 |                  |  | $ | 14.248 | 
|                                                               |  |        |          |                |  |                  |        |                |  |   |         |                  |  |   |        | 
|Weighted average fair value of
options granted during the year |  | $      | 1.26     |                |  |                  |        |                |  | $ | 0.93    |                  |  |   |        | 
|Options exercisable at year end                                |  |        |         |                |  |                  |        |                |  |   | 804,053 |                  |  |   |        | 



| |                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2001, outstanding stock options for 578,303 shares at option
exercise prices of $15.00 per share and above were voluntarily
surrendered and cancelled by the officers and directors of the Company
and employees of the Manager who held the options.

Note 8. Transactions with Affiliates



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company has no employees and obtains all of its management
requirements from Thornburg Mortgage Advisory Corporation (the
Manager), an external manager or adviser, under the terms of a
Management Agreement (the Agreement) that is negotiated and approved
by the Board of Directors. Under the terms of this Agreement, the
Manager, subject to the supervision of the Companys Board of
Directors, is responsible for the management of all operations of the
Company and provides certain personnel and office space. According to
the terms of the Agreement, certain defined expenses of the Manager and
affiliates of the Manager are reimbursed by the Company, principally
expenses of TMHL, the Companys mortgage banking subsidiary, related to
mortgage loan acquisition, selling, servicing and securitization
activities, including the personnel and office space attributed to
these activities. During the years ended December 31, 2002, 2001 and
2000, the Company reimbursed the Manager $3.5 million, $1.7 million and
$201.4 thousand for expenses, respectively, in accordance with the
terms of the Agreement. As of December 31, 2002 and 2001, $237.0
thousand and $78.0 thousand, respectively, was payable by the Company
to the Manager for these reimbursable expenses. The Agreement has a
ten-year term expiring July 15, 2009, and provides for an annual review
of the Managers performance under the Agreement by the unaffiliated
directors of the Board of Directors. If the Company terminated the
Agreement for a reason other than for cause, a substantial cancellation
fee would be activated.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company pays the Manager an annual base management fee based on
average shareholders equity, adjusted for liabilities that are not
incurred to finance assets (Average Shareholders Equity or Average
Net Invested Assets as defined in the Agreement), payable monthly in
arrears as follows: 1.20% of the first $300 million of Average
Shareholders Equity, plus 0.88% of Average Shareholders Equity above
$300 million. The Agreement also has a cost of living clause that
adjusts the base management fee formula by the change in the Consumer
Price Index over the previous twelve-month period, effective as of each
annual review of the Agreement. In addition, the three wholly owned
subsidiaries of the Company and the two wholly owned subsidiaries of
TMHL have entered into separate Management Agreements with the Manager
for additional management services for a combined amount of $1.2
thousand per month, paid in arrears.



| |                                                                                                                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | For the years ended December 31, 2002, 2001 and 2000, the Company
incurred costs of $7.8 million, $4.9 million and $4.2 million,
respectively, in base management fees in accordance with the terms of
the Management Agreements. As of December 31, 2002 and 2001, $741.6
thousand and $508.4 thousand, respectively, was payable by the Company
to the Manager for the base management fee.



| |                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Manager is also entitled to earn performance-based compensation in
an amount equal to 20% of the Companys annualized net income, before
performance-based compensation, above an annualized Return on Equity
equal to the ten year U.S. Treasury Rate plus 1%. For purposes of the
performance fee calculation,

F-23



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | equity is generally defined as proceeds from issuance of common stock
before underwriters discount and other costs of issuance, plus
retained earnings. For the years ended December 31, 2002, 2001 and
2000, the Manager earned performance-based compensation in the amount
of $17.5 million, $6.7 million and $45.9 thousand, respectively. As of
December 31, 2002 and 2001, $5.6 million and $3.1 million,
respectively, was payable by the Company to the Manager for
performance-based compensation.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pursuant to an employee residential mortgage loan program approved by
the Board of Directors as part of the Companys residential loan
mortgage origination activities, certain of the directors, officers and
employees of the Company and of other affiliates of the Company have
obtained residential first lien mortgage loans from the Company. In
general, the terms of the loans and the underwriting requirements are
identical to the loan programs that the Company offers to unaffiliated
third parties, except that participants in the program qualify for an
employee discount on the interest rate. At the time each participant
enters into a loan agreement, such participant executes an addendum
that provides for the discount on the interest rate that is subject to
cancellation at the time such participants employment is terminated
for any reason. Effective with the enactment of the Sarbanes-Oxley Act
of 2002, on July 30, 2002, any new loans made to directors or executive
officers are not eligible for the employee discount. As of December
31, 2002, the aggregate balance of mortgage loans outstanding to
directors and officers of the Company, employees of the Manager and
other affiliates amounted to $21.3 million, had a weighted average
interest rate of 4.56%, and maturities ranging between 2016 and 2033.



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Effective January 1, 2002, TMHL entered into a Joint Marketing
Agreement with Thornburg Securities Corporation (TSC), a registered
broker-dealer. The initial term of the agreement expired December 31,
2002, but has been extended for successive three-month terms unless
terminated by either party. Under the terms of the agreement, TMHL
shall pay TSC an annual fee of $50 thousand for 2003, in quarterly
installments, as compensation for certain marketing, promotional and
advertising services and to provide marketing materials to brokers and
financial advisers. During 2002, TMHL paid $25 thousand to TSC
pursuant to this agreement.



| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Certain directors, officers and employees of the Company have obtained
loans from the Company to finance their purchase of shares of common
stock through the exercise of stock options as described in Note 7
above.

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##### Table of Contents



Note 9. Summarized Quarterly Results (Unaudited)



| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | The following is a presentation of the quarterly results of operations
(amounts in thousands, except per share amounts):

|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |        | 
|----------------------------------------------------- | ------------------------------------------- | - | ---------------------------- | ------ | ------- | - | ------- | ------ | ------- | - | ------- | ------ |  | - | ------- | ------ | 
|                                                      |                                             |   | Year Ended December 31, 2002
|                                                      |                                             |   |                             
|                                                      |                                             |   | Fourth                       |        | Third   |   | Second  |        | First  
|                                                      |                                             |   | Quarter                      |        | Quarter |   | Quarter |        | Quarter
|                                                      |                                             |   |                              |        |         |   |         |        |        
|Interest income from ARM assets and cash              |                                             | $ | 116,439                      |        |         | $ | 109,662 |        |         | $ | 96,439  |        |  | $ | 79,427  |       
|Interest expense on borrowed funds                    |                                             |   | (69,604                      | )      |         |   | (67,149 | )      |         |   | (59,482 | )      |  |   | (47,803 | )     
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|                                                      | Net interest income                         |   |                              | 46,835 |         |   |         | 42,513 |         |   |         | 36,957 |  |   |         | 31,624 | 
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|Hedging expense                                       |                                             |   | (317                         | )      |         |   | (173    | )      |         |   | (622    | )      |  |   | (314    | )     
|Gain (loss) on ARM assets                             |                                             |   | 801                          |        |         |   | 18      |        |         |   | 84      |        |  |   |        |       
|General and administrative expenses                   |                                             |   | (12,144                      | )      |         |   | (9,748  | )      |         |   | (8,481  | )      |  |   | (7,017  | )     
|Dividend on preferred stock                           |                                             |   | (1,669                       | )      |         |   | (1,670  | )      |         |   | (1,670  | )      |  |   | (1,670  | )     
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|                                                      | Net income available to common shareholders |   | $                            | 33,506 |         |   | $       | 30,940 |         |   | $       | 26,268 |  |   | $       | 22,623 | 
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|Basic EPS                                             |                                             | $ | 0.67                         |        |         | $ | 0.68    |        |         | $ | 0.63    |        |  | $ | 0.62    |       
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|Diluted EPS                                           |                                             | $ | 0.67                         |        |         | $ | 0.67    |        |         | $ | 0.63    |        |  | $ | 0.62    |       
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|Average number of common shares
outstanding  Basic   |                                             |   | 50,086                       |        |         |   | 45,733  |        |         |   | 41,950  |        |  |   | 36,417  |       
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|Average number of common shares
outstanding  Diluted |                                             |   | 52,846                       |        |         |   | 48,493  |        |         |   | 44,710  |        |  |   | 39,177  |       
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       

|                                                    |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |        | 
|--------------------------------------------------- | ------------------------------------------- | - | ---------------------------- | ------ | ------- | - | ------- | ------ | ------- | - | ------- | ------ |  | - | ------- | ------ | 
|                                                    |                                             |   | Year Ended December 31, 2001
|                                                    |                                             |   |                             
|                                                    |                                             |   | Fourth                       |        | Third   |   | Second  |        | First  
|                                                    |                                             |   | Quarter                      |        | Quarter |   | Quarter |        | Quarter
|                                                    |                                             |   |                              |        |         |   |         |        |        
|Interest income from ARM assets and cash            |                                             | $ | 71,441                       |        |         | $ | 66,249  |        |         | $ | 67,679  |        |  | $ | 73,225  |       
|Interest expense on borrowed funds                  |                                             |   | (42,507                      | )      |         |   | (46,456 | )      |         |   | (51,965 | )      |  |   | (58,901 | )     
|                                                    |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|                                                    | Net interest income                         |   |                              | 28,934 |         |   |         | 19,793 |         |   |         | 15,714 |  |   |         | 14,324 | 
|                                                    |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|Hedging expense                                     |                                             |   | (213                         | )      |         |   | (507    | )      |         |   | (466    | )      |  |   | (151    | )     
|Gain (loss) on ARM assets                           |                                             |   |                             |        |         |   |        |        |         |   | 1       |        |  |   |        |       
|Provision for credit losses                         |                                             |   | (91                          | )      |         |   | (231    | )      |         |   | (153    | )      |  |   | (178    | )     
|General and administrative expenses                 |                                             |   | (7,120                       | )      |         |   | (4,470  | )      |         |   | (3,458  | )      |  |   | (3,066  | )     
|Dividend on preferred stock                         |                                             |   | (1,670                       | )      |         |   | (1,670  | )      |         |   | (1,669  | )      |  |   | (1,670  | )     
|Cumulative effect of change in accounting
principle |                                             |   |                              |        |         |   |         |        |         |   |        |        |  |   | (202    | )     
|                                                    |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|                                                    | Net income available to common shareholders |   | $                            | 19,840 |         |   | $       | 12,915 |         |   | $       | 9,969  |  |   | $       | 9,057  | 
|                                                    |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|Basic EPS                                           |                                             | $ | 0.65                         |        |         | $ | 0.52    |        |         | $ | 0.46    |        |  | $ | 0.42    |       
|                                                    |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|Diluted EPS                                         |                                             | $ | 0.65                         |        |         | $ | 0.52    |        |         | $ | 0.46    |        |  | $ | 0.42    |       
|                                                    |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|Average number of common shares outstanding         |                                             |   | 30,434                       |        |         |   | 25,004  |        |         |   | 21,791  |        |  |   | 21,691  |       
|                                                    |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       

F-25



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##### Table of Contents



Note 10. Subsequent Events



| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On January 30, 2003, the Company completed a securitization of $777.7
million of loans from its ARM loans portfolio and 99.8% of the
resulting securities were rated at least Investment Grade.



| |                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On February 10, 2003, the Company issued 3,200,000 shares of its common
stock in a public offering. On February 26, 2003, the Company issued
273,500 shares pursuant to the underwriters 30-day option to purchase
additional shares to cover over-allotments in connection with the
offering. The Company raised aggregate net proceeds of $65.9 million
in this offering.

F-26



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##### Table of Contents



SCHEDULE IV  Mortgage Loans on Real Estate

Column A, Description: The Companys whole loan portfolio at December 31,
2002, which consists only of first mortgages on single-family residential
housing, is stratified as follows (dollar amounts in thousands):

|                 |            |                          |            |           |  |          |          |               |                        |             |                     |  |         |         |           |         |         |   |       |       |     |  |  | 
|---------------- | ---------- | ------------------------ | ---------- | --------- |  | -------- | -------- | ------------- | ---------------------- | ----------- | ------------------- |  | ------- | ------- | --------- | ------- | ------- | - | ----- | ----- | --- |  |  | 
|Column A         |            | Column B                 |            | Column C  |  | Column G | Column H
|                 |            |                          |            |           |  |          |         
|Description(4)   |            |                          |            |           |  |          |          |               |                        |             |                     |  |         |         |           |        
|                 |            |                          |            |           |  |          |          |               |                        |             |                     |  |         |         |           |        
|Range of         |            | Number                   |            |           |  |          |          | Final         |                        | Carrying    | Principal Amount of
|Carrying Amounts |            | of                       |            | Interest  |  | Maturity |          | Amount of     | Loans Delinquent as to
|of Mortgages     |            | Loans                    |            | Rate      |  | Date     |          | Mortgages (3) | Principal or Interest 
|                 |            |                          |            |           |  |          |          |               |                       
|                 | ARM Loans: |                          |            |           |  |          |          |               |                        |             |                     |  |         |         |           |         |         |   |       |       |    
|                 |            |                          |            | $0-250    |  |          | 842      |               |                        |             | 2.38 - 8.25         |  |         | Various |           | $       | 102,187 |   |       | $     | 230 | 
|                 |            |                          |            | 251-500   |  |          | 384      |               |                        |             | 2.50 - 8.13         |  |         | Various |           |         | 139,164 |   |       |       |    | 
|                 |            |                          |            | 501-750   |  |          | 141      |               |                        |             | 2.38 - 7.63         |  |         | Various |           |         | 86,167  |   |       |       |    | 
|                 |            |                          |            | 751-1,000 |  |          | 71       |               |                        |             | 2.63 - 7.63         |  |         | Various |           |         | 66,189  |   |       |       |    | 
|                 |            |                          | over 1,000 |           |  | 61       |          |               |                        | 2.63 - 7.50 |                     |  | Various |         |           | 98,407  |         |   |       | 1,598 |    
|                 |            |                          |            |           |  |          |          |               |                        |             |                     |  |         |         |           |         |         |   |       |      
|                 |            |                          | 1,499      |           |  |          |          |               |                        |             |                     |  |         |         | 492,113   |         |         |   | 1,829 |      
|                 |            |                          |            |           |  |          |          |               |                        |             |                     |  |         |         |           |         |         |   |       |      
|Hybrid Loans:    |            |                          |            |           |  |          |          |               |                        |             |                     |  |         |         |           |         |         |   |       |      
|                 |            |                          |            | 0-250     |  |          | 240      |               |                        |             | 3.50 - 7.00         |  |         | Various |           |         | 39,203  |   |       |       |    | 
|                 |            |                          |            | 251-500   |  |          | 408      |               |                        |             | 3.25 - 7.63         |  |         | Various |           |         | 151,007 |   |       |       |    | 
|                 |            |                          |            | 501-750   |  |          | 180      |               |                        |             | 3.88 - 7.38         |  |         | Various |           |         | 109,807 |   |       |       |    | 
|                 |            |                          |            | 751-1,000 |  |          | 78       |               |                        |             | 3.88 - 6.25         |  |         | Various |           |         | 69,213  |   |       |       |    | 
|                 |            |                          | over 1,000 |           |  | 82       |          |               |                        | 4.25 - 6.75 |                     |  | Various |         |           | 132,640 |         |   |       |      |    
|                 |            |                          |            |           |  |          |          |               |                        |             |                     |  |         |         |           |         |         |   |       |      
|                 |            |                          | 988        |           |  |          |          |               |                        |             |                     |  |         |         | 501,871   |         |         |   |      |      
|                 |            |                          |            |           |  |          |          |               |                        |             |                     |  |         |         |           |         |         |   |       |      
|                 |            |                          |            | Premium   |  |          |          |               |                        |             |                     |  |         |         |           |         |         |   | 8,535 |       |     |  |  | 
|                 |            | Allowance for losses (2) |            |           |  |          |          |               |                        |             |                     |  |         |         |           |         | (100    | ) |       |       |     | 
|                 |            |                          |            |           |  |          |          |               |                        |             |                     |  |         |         |           |         |         |   |       |      
|                 |            |                          | 2,487      |           |  |          |          |               |                        |             |                     |  |         | $       | 1,002,419 |         |         | $ | 1,829 |      
|                 |            |                          |            |           |  |          |          |               |                        |             |                     |  |         |         |           |         |         |   |       |      
|Notes:           |            |                          |            |           |  |          |          |               |                        |             |                     |  |         |         |           |         |         |   |       |      

|    |  |                                                      
|--- |  | -----------------------------------------------------
|(1) |  | Reconciliation of carrying amounts of
mortgage loans:

|                             |                              |                         |                                                                    |         |  |           | 
|---------------------------- | ---------------------------- | ----------------------- | ------------------------------------------------------------------ | ------- |  | --------- | 
|                             | Balance at December 31, 2001 |                         | $                                                                  | 572,414 | 
|                             |                              | Additions during 2002:  |                                                                    |         |  |          
|                             |                              |                         | Loan purchases                                                     |         |  | 2,849,511 | 
|                             |                              |                         | Loans transferred from Company securities
for modification         |         |  | 151,395   | 
|                             |                              |                         |                                                                    |        
|                             |                              |                         | 3,000,906                                                          |        
|                             |                              | Deductions during 2002: |                                                                    |         |  |          
|                             |                              |                         | Collections of principal                                           |         |  | 209,939   | 
|                             |                              |                         | Cost of mortgage loans securitized                                 |         |  | 2,353,685 | 
|                             |                              |                         | Cost of mortgage loans sold                                        |         |  | 4,059     | 
|                             |                              |                         | Cost of mortgage loans transferred to real
estate-owned properties |         |  | 204       | 
|                             |                              |                         | Amortization of premium                                            |         |  | 3,014     | 
|                             |                              |                         |                                                                    |        
|                             |                              |                         | 2,570,901                                                          |        
|                             |                              |                         |                                                                    |        
|Balance at December 31, 2002 |                              | $                       | 1,002,419                                                          |        
|                             |                              |                         |                                                                    |        

|    |  |                                                                                 
|--- |  | --------------------------------------------------------------------------------
|(2) |  | The provision for losses is based on managements assessment of
various factors.
|(3) |  | Cost for Federal income taxes is the same.                                      

F-27



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##### Table of Contents



|    |  |                                                                                                       
|--- |  | ------------------------------------------------------------------------------------------------------
|(4) |  | The geographic distribution of the Companys whole loan
portfolio at December 31, 2002 was as follows:

|                                      |       |       |           |                 |  |   |         |           | 
|------------------------------------- | ----- | ----- | --------- | --------------- |  | - | ------- | --------- | 
|                                      |       |       | Number of |                 |  |   |        
|State or Territory                    |       | Loans |           | Carrying Amount
|                                      |       |       |           |                
|Arizona                               |       |       | 40        |                 |  | $ | 14,477  |          
|California                            |       |       | 388       |                 |  |   | 231,440 |          
|Colorado                              |       |       | 131       |                 |  |   | 83,121  |          
|Connecticut                           |       |       | 44        |                 |  |   | 27,052  |          
|Florida                               |       |       | 218       |                 |  |   | 64,307  |          
|Georgia                               |       |       | 374       |                 |  |   | 129,624 |          
|Illinois                              |       |       | 47        |                 |  |   | 15,434  |          
|Massachusetts                         |       |       | 66        |                 |  |   | 33,037  |          
|New Jersey                            |       |       | 70        |                 |  |   | 25,892  |          
|New Mexico                            |       |       | 88        |                 |  |   | 30,709  |          
|New York                              |       |       | 208       |                 |  |   | 82,602  |          
|North Carolina                        |       |       | 63        |                 |  |   | 18,103  |          
|South Carolina                        |       |       | 107       |                 |  |   | 45,509  |          
|Texas                                 |       |       | 72        |                 |  |   | 22,833  |          
|Virginia                              |       |       | 47        |                 |  |   | 19,023  |          
|Other states, less than
55 loans each |       |       | 524       |                 |  |   | 150,733 |          
|Premium                               |       |       |           |                 |  |   | 8,535   |          
|Allowance for losses                  |       |       |           |                 |  |   | (100    | )        
|                                      |       |       |           |                 |  |   |         |          
|                                      | TOTAL |       |           | 2,487           |  |   | $       | 1,002,419 | 
|                                      |       |       |           |                 |  |   |         |          

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

|                      |  |                                                                                                                                   
|--------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------
|                      |  | THORNBURG MORTGAGE, INC.
(Registrant)                                                                                             
|                     
|Dated: March 20, 2003 |  | /s/ Garrett ThornburgGarrett Thornburg
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)            
|                     
|Dated: March 20, 2003 |  | /s/ Larry A. GoldstoneLarry A. Goldstone
President and Chief Operating Officer
(authorized officer of registrant)                 
|                     
|Dated: March 20, 2003 |  | /s/ Richard P. StoryRichard P. Story
Executive Vice President, Chief Financial Officer and
Treasurer
(Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

|                             |  |                                       |  |                |  |  |  | 
|---------------------------- |  | ------------------------------------- |  | -------------- |  |  |  | 
|Signature                    |  | Capacity                              |  | Date          
|                             |  |                                       |  |               
|/s/ Garrett Thornburg        |  | Chairman of the Board,                |  | March 20, 2003
|____________________________ |  | Director and Chief                    |  |                |  | 
|Garrett Thornburg            |  | Executive Officer                     |  |                |  | 
|                             |  |                                       |  |                |  |  |  | 
|/s/ Larry A. Goldstone       |  | President, Director and               |  | March 20, 2003
|____________________________ |  | Chief Operating Officer               |  |                |  | 
|Larry A. Goldstone           |  |                                       |  |                |  |  |  | 
|                             |  |                                       |  |                |  |  |  | 
|/s/ Richard P. Story         |  | Executive Vice President, Director,   |  | March 20, 2003
|____________________________ |  | Chief Financial Officer and Treasurer |  |                |  | 
|Richard P. Story             |  |                                       |  |                |  |  |  | 
|                             |  |                                       |  |                |  |  |  | 
|/s/ Joseph H. Badal          |  | Executive Vice President and Director |  | March 20, 2003
|____________________________ |  |                                       |  |                |  |  |  | 
|Joseph H. Badal              |  |                                       |  |                |  |  |  | 
|                             |  |                                       |  |                |  |  |  | 
|/s/ Jane Starrett            |  | Vice President and Controller         |  | March 20, 2003
|____________________________ |  |                                       |  |                |  |  |  | 
|Jane Starrett                |  |                                       |  |                |  |  |  | 
|                             |  |                                       |  |                |  |  |  | 
|/s/ David A. Ater            |  | Director                              |  | March 20, 2003
|____________________________ |  |                                       |  |                |  |  |  | 
|David A. Ater                |  |                                       |  |                |  |  |  | 
|                             |  |                                       |  |                |  |  |  | 
|/s/ Ike Kalangis             |  | Director                              |  | March 20, 2003
|____________________________ |  |                                       |  |                |  |  |  | 
|Ike Kalangis                 |  |                                       |  |                |  |  |  | 
|                             |  |                                       |  |                |  |  |  | 
|/s/ Owen M. Lopez            |  | Director                              |  | March 20, 2003
|____________________________ |  |                                       |  |                |  |  |  | 
|Owen M. Lopez                |  |                                       |  |                |  |  |  | 





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##### Table of Contents



|                             |  |          |  |                |  |  |  | 
|---------------------------- |  | -------- |  | -------------- |  |  |  | 
|Signature                    |  | Capacity |  | Date          
|                             |  |          |  |               
|/s/ James H. Lorie           |  | Director |  | March 20, 2003
|____________________________ |  |          |  |                |  |  |  | 
|James H. Lorie               |  |          |  |                |  |  |  | 
|                             |  |          |  |                |  |  |  | 
|/s/ Francis I. Mullin III    |  | Director |  | March 20, 2003
|____________________________ |  |          |  |                |  |  |  | 
|Francis I. Mullin III        |  |          |  |                |  |  |  | 
|                             |  |          |  |                |  |  |  | 
|/s/ Stuart C. Sherman        |  | Director |  | March 20, 2003
|____________________________ |  |          |  |                |  |  |  | 
|Stuart C. Sherman            |  |          |  |                |  |  |  | 





---



##### Table of Contents






CERTIFICATIONS

I, Garrett Thornburg, certify that:

1.     I have reviewed this annual report on Form 10-K of Thornburg Mortgage, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                     |  |     |  |                                                                                                  
|-------------------- |  | --- |  | -------------------------------------------------------------------------------------------------
|Date: March 20, 2003 |  | By: |  | /s/ Garrett ThornburgGarrett Thornburg
Chief Executive Officer
(authorized officer of registrant)





---



##### Table of Contents



CERTIFICATIONS

I, Larry A. Goldstone, certify that:

1.     I have reviewed this annual report on Form 10-K of Thornburg Mortgage, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                     |  |     |  |                                                                                                                  
|-------------------- |  | --- |  | -----------------------------------------------------------------------------------------------------------------
|Date: March 20, 2003 |  | By: |  | /s/ Larry A. GoldstoneLarry A. Goldstone
President and Chief Operating Officer
(authorized officer of registrant)





---



##### Table of Contents



CERTIFICATIONS

I, Richard P. Story, certify that:

1.     I have reviewed this annual report on Form 10-K of Thornburg Mortgage, Inc.;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and

c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):

a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants
auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrants internal controls;
and

6.     The registrants other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

|                     |  |     |  |                                                                                                                                        
|-------------------- |  | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|Date: March 20, 2003 |  | By: |  | /s/ Richard P. StoryRichard P. Story
Executive Vice President, Chief Financial Officer
and Treasurer
(authorized officer of registrant)



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##### Table of Contents






Exhibit Index

|               |  |                                                                                                                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit Number |  | Exhibit Description                                                                                                                                                                       
|               |  |                                                                                                                                                                                           
|3.1            |  | Articles of Incorporation of the Registrant (a)                                                                                                                                           
|3.1.1          |  | Articles of Amendment to Articles of Incorporation dated June 29, 1995 (b)                                                                                                                
|3.1.2          |  | Articles Supplementary dated January 21, 1997 (c)                                                                                                                                         
|3.1.3          |  | Amendment to Articles of Incorporation dated April 27, 2000 (d)                                                                                                                           
|3.1.4          |  | Form of Articles Supplementary for Series B Cumulative Preferred Stock (n)                                                                                                                
|3.1.5          |  | Amendment to Articles of Incorporation dated April 29, 2002 (e)                                                                                                                           
|3.2            |  | Amended and Restated Bylaws of the Registrant (f)                                                                                                                                         
|3.2.1.1        |  | Amendment to the Restated Bylaws of the Registrant (g)                                                                                                                                    
|3.3            |  | Audit Committee Charter dated January 25, 2001 (m)                                                                                                                                        
|3.3.1          |  | Amended Audit Committee Charter, dated as of April 23, 2002 (e)                                                                                                                           
|3.3.2          |  | Audit Committee Charter, revised January 21, 2003 (h)                                                                                                                                     
|4.2            |  | Specimen Preferred Stock Certificates (c)                                                                                                                                                 
|4.3            |  | Form of Common Stock Certificate (n)                                                                                                                                                      
|4.4            |  | Form of Preferred Stock Certificate for Series B Cumulative Preferred Stock (n)                                                                                                           
|4.5            |  | Form of Right Certificate (n)                                                                                                                                                             
|10.1           |  | Management Agreement between the Registrant and Thornburg Mortgage
Advisory Corporation dated July 15, 1999 (i)                                                                           
|10.1.1         |  | Amendment No. 1 to the Management Agreement dated October 17, 2000 (j)                                                                                                                    
|10.2           |  | Form of Servicing Agreement (a)                                                                                                                                                           
|10.3           |  | Dividend Reinvestment and Stock Purchase Plan (k)                                                                                                                                         
|10.4           |  | Trust Agreement dated as of December 1, 1998 (l)                                                                                                                                          
|10.5           |  | Indenture Agreement dated as of December 1, 1998 (l)                                                                                                                                      
|10.6           |  | Sales and Service Agreement dated as of December 1, 1998 (l)                                                                                                                              
|10.7           |  | Form of Shareholder Rights Agreement (n)                                                                                                                                                  
|10.7.1         |  | Agreement of Substitution and Amendment of Shareholder Rights Agreement,
dated May 9, 2002 (o)                                                                                            
|10.8           |  | Form of Limited Stock Repurchase Plan (p)                                                                                                                                                 
|10.9           |  | Amended and Restated 2002 Long-Term Incentive Plan, dated January 21, 2003*                                                                                                               
|22.1           |  | Notice and Proxy Statement for the Annual Meeting of Shareholders to be held on
April 22, 2003 (h)                                                                                        
|23.1           |  | Consent of Independent Accountants *                                                                                                                                                      
|99.1           |  | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*                                        
|99.2           |  | Certification of President and Chief Operating Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*                          
|99.3           |  | Certification of Executive Vice President, Chief Financial Officer and Treasurer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002*



---

|*   |  | Being filed herewith.                                                                                                                                                                    
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(a) |  | Previously filed with Registrants Form S-11 which went effective
on June 18, 1993 and incorporated herein by reference pursuant to
Rule 12b-32.                                         
|   
|(b) |  | Previously filed with Registrants Form 10-Q for the fiscal quarter
ended June 30, 1995 and incorporated herein by reference pursuant to
Rule 12b-32.                                    
|   
|(c) |  | Previously filed with Registrants Form 8-A dated January 17, 1997
and incorporated herein by reference pursuant to Rule 12b-32.                                                         
|   
|(d) |  | Previously filed with Registrants Form 10-Q for the fiscal quarter
ended March 31, 2000 and incorporated herein by reference pursuant
to Rule 12b-32.                                   
|   
|(e) |  | Previously filed with Registrants Form 10-Q for the fiscal quarter
ended March 31, 2002 and incorporated herein by reference pursuant
to Rule 12b-32.                                   
|   
|(f) |  | Previously filed with Registrants Form S-8 dated July 1, 1994 and
incorporated herein by reference pursuant to Rule 12b-32.                                                             
|   
|(g) |  | Previously filed with Registrants Form 10-Q for the fiscal quarter
ended September 30, 1999 and incorporated herein by reference
pursuant to Rule 12b-32.                               
|   
|(h) |  | To be filed within 120 days after the close of the Registrants
fiscal year ended December 31, 2002 and incorporated herein by
reference pursuant to Rule 12b-32.                        
|   
|(i) |  | Previously filed with Registrants Form 10-Q for the fiscal quarter
ended June 30, 1999 and incorporated herein by reference pursuant to
Rule 12b-32.                                    
|   
|(j) |  | Previously filed with Registrants Form 10-Q for the fiscal quarter
ended September 30, 2000 and incorporated herein by reference
pursuant to Rule 12b-32.                               
|   
|(k) |  | Previously filed with Registrants Form S-3D filed on June 26, 2002
and incorporated herein by reference pursuant to Rule 12b-32.                                                        
|   
|(l) |  | Previously filed with Registrants Form 10-K for the fiscal year
ended December 31, 1998 and incorporated herein by reference
pursuant to Rule 12b-32.                                   
|   
|(m) |  | Previously filed as Exhibit A to Registrants Proxy Statement filed
on March 29, 2001 and incorporated herein by reference pursuant to
Rule 12b-32.                                      
|   
|(n) |  | Previously filed with Registrants Form 10-K for the fiscal year
ended December 31, 2000 and incorporated by reference pursuant to
Rule 12b-32.                                          
|   
|(o) |  | Previously filed with Registrants Form S-3 which was filed on
August 23, 2002 and which went effective on August 30, 2002, and
incorporated herein by reference pursuant to Rule 12b-32.
|   
|(p) |  | Previously filed with Registrants Form 10-Q for the fiscal quarter
ended June 30, 2002 and incorporated herein by reference pursuant to
Rule 12b-32.