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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, 2003                                            
|           |  |                                                                                         
|           |  | OR                                                                                      
|           |  |                                                                                         
|[   ]      |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|           |  |                                                                                         
|           |  | For the transition period from
to                                                       

Commission File Number: 001-11914

THORNBURG MORTGAGE, INC.

(Exact name of Registrant as specified in its Charter)


|                                                                        |  |                                                   
|----------------------------------------------------------------------- |  | --------------------------------------------------
|Maryland
(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             

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.

Yes   [X]   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. [  ]

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

Yes   [X]   No[  ]


At June 30, 2003, the aggregate market value of the voting stock held by
non-affiliates was $1,517,892,682, based on the closing price of the common
stock on the New York Stock Exchange.

Number of shares of Common Stock outstanding at February 29, 2004: 79,527,779

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 20,
2004, are incorporated by reference into Part III.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|                                                  |                                                                                                         |  |  |  |  |  |  | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|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 PRICE OF AND DIVIDENDS ON 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 FINANCIAL DISCLOSURE               
|                                                  | Item 9A. CONTROLS AND PROCEDURES                                                                       
|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. PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                        
|PART IV                                          
|                                                  | Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K                               
|CONSOLIDATED FINANCIAL STATEMENTS                
|SIGNATURES                                       
|Exhibit Index                                    
|Amendment No.1 to Amended/Restated Incentive Plan
|Consent of Independent Accountants               
|Certification of CEO Pursuant to Rule 13a-14(a)  
|Certification of COO Pursuant to Rule 13a-14(a)  
|Certification of CFO Pursuant to Rule 13a-14(a)  
|Certification of CEO Pursuant to Section 906     
|Certification of COO Pursuant to Section 906     
|Certification of CFO Pursuant to Section 906     



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THORNBURG MORTGAGE, Inc.
2003 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 PRICE OF AND DIVIDENDS ON 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          |     |  | 25 | 
|ITEM 7A.             |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISKS                                    |     |  | 48 | 
|ITEM 8.              |  | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                                    |     |  | 48 | 
|ITEM 9.              |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE           |     |  | 48 | 
|ITEM 9A.             |  | CONTROLS AND PROCEDURES                                                                        |     |  | 48 | 
|PART III            
|ITEM 10.             |  | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                                             |     |  | 48 | 
|ITEM 11.             |  | EXECUTIVE COMPENSATION                                                                         |     |  | 48 | 
|ITEM 12.             |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED SHAREHOLDER MATTERS |     |  | 48 | 
|ITEM 13.             |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                 |     |  | 49 | 
|ITEM 14.             |  | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                         |     |  | 49 | 
|PART IV             
|ITEM 15.             |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K                                |     |  | 49 | 
|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
thereby providing capital to the single-family residential housing market. Our
ARM assets are comprised of traditional ARM securities and loans, which have
interest rates that reprice in a year or less (Traditional ARMs), and hybrid
ARM securities and loans, which have a fixed interest rate for an initial
period of three to ten years before converting to Traditional ARMs for their
remaining terms to maturity (Hybrid ARMs). ARM securities represent
interests in pools of ARM loans, which are publicly rated and include
guarantees or other third party credit enhancements against losses from loan
defaults. ARM Loans consist of securitized ARM loans, ARM loans
collateralizing long-term debt and ARM loans held for securitization. Like
traditional banking institutions, our income is generated primarily from the
net spread or difference between the interest income we earn on our ARM assets
and the cost of our borrowings. Our strategy is to maximize the long-term
sustainable difference between the yield on our investments and the cost of
financing these assets, and to maintain that difference through interest rate
and credit cycles.

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 finance the purchases and originations of
our ARM assets with equity capital, unsecured debt and short-term borrowings
such as reverse repurchase agreements, whole loan financing facilities,
floating-rate long-term collateralized debt obligations (CDOs) and other
collateralized financings that we may establish with approved institutional
lenders. When we borrow short-term or floating rate funds to finance our
Hybrid ARM assets, we also enter into interest rate hedging transactions, which
fix our borrowing costs during the fixed rate period of the Hybrid ARM asset.
We have a policy to operate with an Adjusted Equity-to-Assets Ratio of at
least 8% and we typically operate with a 9-10% Adjusted Equity-to-Assets Ratio.
(See Capital Utilization on page 36 for a calculation of our Adjusted
Equity-to-Assets ratio.) Since all of the assets we hold are ARM assets and we
pursue a matched funding strategy, we believe our exposure to changes in
interest rates can be prudently managed. Moreover, we focus on acquiring
primarily high quality assets to ensure our access to financing. Similarly, we
maintain strict credit underwriting standards and have experienced cumulative
credit losses of only $174,000 on our loan portfolio since we began acquiring
loans in 1997. Our low cost operating structure has resulted in operating
costs well below those of other mortgage originators. We believe 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, pay
substantially all of our earnings in the form of dividends to shareholders,
without paying federal or state income tax at the corporate level.

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 anyone 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.

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Corporate Governance

We pride ourselves on maintaining an ethical workplace in which the highest
standards of professional conduct are practiced. Accordingly, we would like to
highlight the following facts relating to corporate governance:



| |  |  | Our Board of Directors is, and has always been, composed of a
majority of independent directors. The Audit, Nominating/Corporate
Governance and Compensation Committees of the Board of Directors are,
and always have been, composed exclusively of independent directors.                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We have adopted both a Code of Business Conduct and Ethics and
Corporate Governance Guidelines that cover a wide range of business
practices and procedures, that apply to all of the Managers employees
and all of our officers and directors, and that foster the highest
standards of ethics and conduct in all of our business relationships.                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | We have an Insider Trading Policy that prohibits 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, and prohibits communicating material nonpublic
information to others.                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | We are managed by an external Manager under the terms of the
Management Agreement, subject to the supervision of our Board of
Directors. The Managers compensation is based on formulas tied to our
success in increasing common equity capitalization and generating net
income above defined targets. The Compensation Committee and the
independent directors annually evaluate the Managers performance and
determine that the compensation paid to the Manager is reasonable in
relation to the nature and quality of services performed.                                                                                                                                                       
|
| |  |  | During the first quarter of 2003, our long-term incentive plan was
amended to exclude 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. Also
during 2003, the Board of Directors chose to reduce the level of
participation in awards granted under the long-term incentive plan.                                                                                                                                                                                                                                                                                               
|
| |  |  | We have established a formal internal audit function to further the
effective functioning of our internal controls and procedures. Our
internal audit plan is based on a formal risk assessment conducted early
in 2003 and 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 also begun the implementation of Section 404 of
the Sarbanes-Oxley Act of 2002, which requires an evaluation of internal
control over financial reporting in association with our financial
statements for the year ending December 31, 2004.
|
| |  |  | During the fourth quarter of 2003, all of the previously outstanding
notes receivable from directors, officers and employees resulting from
our financing a portion of the purchase of shares of common stock
through the exercise of stock options were repaid.                                                                                                                                                                                                                                                                                                                                                                                                                                       

Operating Policies and Strategies

Portfolio Strategies

Our business strategy is to acquire and originate ARM assets to hold in our
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 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 providers, including mortgage bankers,
banks, savings and loan institutions, home builders and other firms involved in
originating, packaging and selling mortgage loans. We believe we have a
competitive advantage in acquiring and investing in these ARM assets due to the
low cost of our operations relative to traditional mortgage investors and
originators.

We originate ARM loans for our portfolio through our correspondent lending
program, which currently includes approximately 129 approved and active
correspondents, and we originate loans direct to consumers through our wholly
owned mortgage loan origination subsidiary, Thornburg Mortgage Home Loans, Inc.
(TMHL). Currently, TMHL is

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authorized to lend in 48 states and the District
of Columbia. We believe that diversifying our sources for 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.

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 securities guaranteed by an agency of the federal government (Ginnie
Mae), a government-sponsored corporation or federally-chartered corporation
(Fannie Mae or Freddie Mac) (collectively, Agency Securities), or
privately issued (generally publicly registered) ARM pass-through securities,
multi-class pass-through securities, floating rate classes of collateralized
mortgage obligations (CMOs), A or prime quality ARM loans that we intend to
securitize, securities issued by others where we have purchased all of the
resulting classes, fixed rate mortgage-backed securities (MBS) with an
expected duration of one year or less or other short-term investments that
either mature within one year or have an interest rate that reprices within one
year.

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) |  | ARM securities and securitized ARM loans 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 and securitized loans 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 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 that are rated at
least Investment Grade at the time of purchase. Investment Grade
generally means a security rating of BBB, 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 or are acquired as part of a loan
securitization effected by third parties in which we purchase all of the
classes of the loan securitization, and that equal an amount no greater
than 17.5% of shareholders equity, measured on a historical cost basis.

Our ARM assets 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. In April 2003, our Board of Directors increased the limitation on our
ownership of Hybrid ARM assets with fixed rate periods of greater than five
years from 10% to 20% of our total assets. We also have a policy to maintain a
net duration, or duration gap, of one year or less on our Hybrid ARM assets
(including commitments to purchase Hybrid ARM assets), related borrowings and
Hybrid Hedging Instruments. We use interest rate swap agreements (Swap
Agreements), interest rate cap agreements (Cap Agreements) and Eurodollar
futures contracts (Eurodollar Transactions) (collectively, Hybrid Hedging
Instruments), as hedges to fix, or cap, the interest rates on our short-term
borrowings and on our CDOs.

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
effective 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.

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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.

Acquisition, Securitization and Retention of Traditional ARM and Hybrid ARM
Loans

We acquire and originate A quality mortgage loans through TMHL from three
sources: (i) correspondent lending, (ii) direct retail loan originations, and
(iii) bulk acquisitions. Correspondent lending involves acquiring individual
loans from correspondent lenders whom we have approved and who originate the
individual loans using our product pricing, underwriting criteria and
guidelines, or criteria and guidelines that we have approved. Direct retail
loan originations are loans that we originate through retail channels. Bulk
acquisitions involve acquiring pools of whole loans, which are originated using
the sellers guidelines and underwriting criteria. The loans we acquire or
originate are financed through warehouse borrowing arrangements pending
securitization for our portfolio.

The loans acquired or originated by TMHL are first lien, single-family
residential Traditional 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 2003 represented 89.8% of total loan
production during that period.

All ARM loans that we acquire or originate for our portfolio bear an interest
rate tied to an interest rate index. Most loans have periodic and lifetime
constraints on how much the loan interest rate can change on any predetermined
interest rate reset date. The interest rate on each Traditional ARM loan
resets monthly, semi-annually or annually. The Traditional ARM loans generally
adjust to a margin over a U.S. Treasury index or a LIBOR index. The Hybrid ARM
loans have a fixed rate for an initial period, generally 3 to 10 years, and
then convert to Traditional ARM loans for their remaining term to maturity.

We acquire ARM loans for our portfolio with the intention of securitizing them
into pools of High Quality ARM securities and retaining them in our portfolio
as securitized ARM loans. Alternatively, we may also use our loans as
collateral for CDOs. In order to facilitate the securitization or financing of
our loans, we generally create subordinate certificates, which provide a
specified amount of credit enhancement. Upon securitization, we generally
retain the securities issued, including the subordinate certificates, and
either finance them in the repurchase agreement market or through the issuance
of CDOs in the capital markets. Our investment policy limits the amount we may
retain of these below Investment Grade subordinate certificates, and
subordinate classes that we purchase in connection with a whole pool
securitization effected by third parties, to 17.5% of shareholders equity,
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 we originate and certain
loans we acquire. We believe this program promotes customer retention and
reduces loan prepayments. Under the terms of this program, a borrower pays a
fee to modify the mortgage loan to any then-available Hybrid or Traditional ARM
product that we offer at the offered retail interest rate plus 1/8%. During
2003, we modified 1,151 loans with balances totaling $620.4 million. At
December 31, 2003, the pipeline of loans to be modified totaled $14.0 million
which represents a significant decline in mortgage loan modification activity
due to an increase in interest rates.

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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 that have been pre-approved by us.

Prior to purchase, we review all of the loans generated by our correspondents
to ensure product quality and compliance with our guidelines. We perform a
full underwriting review of each loan file, including all credit and appraisal
information. After closing, we contract with a third party to perform an
additional quality control review of a selection of 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 between the
borrower and us, whenever possible, we expect to originate high quality
mortgage loans for retention in our portfolio at attractive yields, while
offering our customers innovative mortgage products at competitive rates and
fees.

We originate mortgage loans through TMHL. As of February 29, 2004, TMHL was
authorized to originate loans in forty-eight states and the District of
Columbia. We have pending applications in the two remaining states,
Pennsylvania and New Jersey, and expect to be licensed in those states by the
first quarter of 2004.

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 third party, private label
fulfillment vendors for the processing, underwriting and closing of our retail
loans. Another third party service provider has staffed a mortgage loan call
center for our benefit. 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. 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.

We use two approaches 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, seek advice and counseling regarding qualifying
for a loan and the approval process, and complete a mortgage application. The
completed mortgage loan application along with a request for additional
supporting documentation is then 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.

As with correspondent lending, we contract with a third party to perform an
additional quality control review of a selection of direct retail loans in
order to verify that such loans were properly underwritten and to confirm that
the loan documents are complete and properly executed.

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Bulk Acquisitions

Third party mortgage originators or aggregators sell us pools of single-family
residential Traditional 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 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 ratio, 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 in making a loan that we purchase 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 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.

Mortgage Loan Servicing

We purchase the servicing rights on some of the loans we acquire through the
bulk and correspondent loan acquisition programs, with the intention of
providing borrowers with 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 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, loan modification processing, loss mitigation, foreclosure,
bankruptcy and real estate-owned management services. We actively monitor and
manage the activities of our subservicer, and pay fees for this service based
on a fixed fee schedule per mortgage loan. We also advance funds to the
subservicer as needed when there is a shortfall in the escrow activity.

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, 2003, our borrowers had an average FICO
score (which is a credit score ranging from 300 to 850, 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 at least one appraisal, and for larger loan amounts,
multiple appraisals or field reviews. 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 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. It is our policy that loans with loan-to-value ratios
greater than 80% must either have mortgage insurance or additional collateral
securing the loan.

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Financing Strategies

We finance our ARM assets using equity capital, unsecured debt, short-term
borrowings such as reverse repurchase agreements, lines of credit, CDOs, and

other collateralized financings that we may establish with approved
institutional lenders. See Hedging Strategiesbelow for a discussion of how
we convert short-term borrowings into long-term fixed rate financing for
purposes of managing our interest rate risk. We have established lines of
credit and collateralized financing agreements with 24 different financial
institutions. 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. Because we borrow money under these
agreements based on the fair value of our ARM assets, our borrowing ability
under these agreements could be limited and lenders could initiate margin calls
in the event interest rate changes or the value of our ARM assets declines for
other reasons.

We generally enter into two types of reverse repurchase agreements: variable
rate term reverse repurchase agreements and fixed rate reverse repurchase
agreements. Our variable rate term reverse repurchase agreements are
financings with original maturities ranging from two to twenty-five months.
The interest rates on these variable rate term reverse repurchase agreements
are generally indexed to either the one-month or three-month LIBOR rate, and
reprice accordingly. The fixed rate reverse repurchase agreements have
original maturities generally ranging from 30 to 180 days. 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.

We have also financed the purchase of ARM assets by issuing floating-rate CDOs
in the capital markets, which are collateralized by ARM loans 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. This structure enables us to
make more efficient use of our capital because the capital requirement to
support these financings is less than the amount required to support the same
amount of financings in the reverse repurchase agreement market. These
transactions represent permanent financing of these loans and are not subject
to margin calls.

We also have financing facilities, or credit lines, 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.

We have issued senior unsecured notes (Senior Notes) in the amount of $255
million. The Senior Notes bear interest at 8.0%, payable each May 15 and
November 15, and mature on May 15, 2013. The Senior Notes are redeemable at a
declining premium, in whole or in part, beginning on May 15, 2008, and at par
beginning on May 15, 2011. The Senior Notes may also be redeemed under limited
circumstances on or before May 15, 2006.

Capital Utilization

Our Board has approved a policy that limits our capacity to borrow funds to
finance mortgage assets based on our equity capital and unsecured debt. We
monitor the relationship between our assets, borrowings and equity capital
using a variety of different measures. The primary operating policy that
limits our borrowings and leverage is our Adjusted Equity-to-Assets Ratio, a
non-GAAP measurement, which we must maintain at a minimum of 8%. Our Adjusted
Equity-to-Assets Ratio represents the long-term capital (both equity and Senior
Notes) supporting our recourse or marginable debt. Recourse or marginable debt
generally consists of reverse repurchase agreements and whole loan financing
facilities. These forms of borrowing are short-term in nature, mature on a
frequent basis (typically 30 days), need to be rolled over at each maturity and
are subject to margin call based on collateral value changes or changes in
margin requirements. Because of the short-term nature of these forms of
financing, our policy requires that we maintain significant excess capital and
liquidity to meet margin calls as a result of unexpected changes in margin
requirements and collateral value. Our policy is to maintain a capital cushion
equal to approximately twice the margin requirement when using these forms of
borrowings. Our margin requirements typically range between 4% and 5% for
these borrowings, so our policy requires that we maintain capital of at least
8%, and typically 9% to 10%, against the financing of these assets. This
capital cushion has proved to be more than adequate to support our borrowing
arrangements through a variety of interest rate and credit cycles.

As we replace our reverse repurchase agreement borrowings with CDO financings,
the risk of margin calls, changes in margin requirements and potential rollover
risk is eliminated because CDO financings represent permanent non-recourse
financing whose terms are established at the time of the financing and are not
subject to change. As a result, the need to maintain a capital cushion
comparable to what we maintain on our recourse borrowings is eliminated. For
purposes of maintaining an

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adequate capital cushion, our policy allows us to
eliminate all assets (and the associated equity capital) associated with CDO
financing from our operating capital ratio. Additionally, we eliminate from
our Adjusted Equity-to-Assets Ratio any unrealized market value adjustments,
referred to as Accumulated other comprehensive loss from our equity accounts,
and we include our Senior Notes as an additional form of long-term capital as
if the notes were equity capital. Because the CDOs only require approximately
2% of equity capital to support the CDO financing, versus the 8% to 10% policy
requirement on our recourse borrowings, we are able to use this freed-up
capital to acquire additional assets. We expect that we will be able to retain
and carry an increased amount of assets in the future as a percentage of our
equity capital base. Further, because we treat our Senior Notes as a
substitute form of equity capital, our asset base is expected to grow even
further. See Managements Discussion and Analysis of Financial Condition and
Results of Operations on page 25 for further discussion.

Hedging Strategies

We attempt to mitigate our interest rate risk by funding our ARM assets with
borrowings and hedging instruments whose combined maturities approximately
match 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, Eurodollar Transactions and Cap Agreements that
fix the interest rate on the borrowings such that the net duration of the
Hybrid ARM portfolio and the associated Hybrid Hedging Instruments is one year
or less. A lower duration indicates a lower expected volatility of earnings
given future changes in interest rates. When we enter into a Swap Agreement,
we agree to pay a fixed rate of interest and to receive a variable interest
rate, generally based on LIBOR. We also enter into Eurodollar Transactions in
order to fix the interest rate changes on our forecasted three-month
LIBOR-based liabilities. Each Eurodollar futures contract is a three-month
contract with a price that represents the forecasted three-month LIBOR rate.
Selling Eurodollar futures contracts locks in a future interest rate. The
difference between these two values results in a gain or loss that offsets the
change in the three-month LIBOR rate and locks-in the forecasted three-month
LIBOR rate for financing purposes. We purchase Cap Agreements by incurring a
one-time fee or premium. Pursuant to the terms of the Cap Agreements, we will
receive cash payments if the interest rate index specified in any such Cap
Agreement increases above contractually specified levels. Therefore, such Cap
Agreements have the effect of capping the interest rate on a portion of our
borrowings above a level specified by the Cap Agreement. The notional balances
of the Hybrid Hedging Instruments generally decline over the life of these
instruments. As of December 31, 2003, our Hybrid Hedging Instruments had a
remaining average term to maturity of 3.3 years before considering the effects
of prepayments and when combined with our Hybrid ARM assets and related
borrowings had a net duration of approximately 3.4 months, including the
effects of prepayments.

In general, our Traditional 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 also entered into Cap Agreements, so that the net margin on
our Traditional ARM assets with maximum lifetime interest rate caps will be
protected in high interest rate environments. These Cap Agreements are
referred to as Life Cap Hedging Instruments. Pursuant to the terms of these
Life Cap Hedging Instruments owned as of December 31, 2003, we will receive
cash payments if the applicable index, generally the three-month or six-month
LIBOR index, increases above contractually specified levels. 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. We are not currently purchasing Life
Cap Hedging Instruments because current interest rates are significantly lower
than the contractual life caps on our ARM assets.

In addition, some Traditional 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. However, we believe the impact of the
periodic caps is somewhat mitigated because we own our ARM assets at a net
price above par and, therefore, the yield on our ARM assets can change by an
amount greater than the associated periodic cap due to changes in the
amortization of the net price above par. Further, 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, 2003, $1.4 billion of our
Traditional ARM assets have periodic caps, representing 7.3% 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.

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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 to mitigate risk from changing interest
rates.

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 investment policies
and strategies, and any revisions in such policies and strategies require the
approval of the Board of Directors, including a majority of the independent
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).

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 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 ability to borrow funds
to acquire additional assets 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 - ARM Securities -
Privately Issued ARM Securities.

PORTFOLIO OF MORTGAGE 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.

ARM Securities

Our investments in ARM securities are concentrated in High Quality ARM
securities. These securities consist of Fannie Mae, Freddie Mac and privately
issued ARM securities that meet our High Quality credit criteria. See
Business  Operating Policies and Strategies - Investment Strategies. The
High Quality ARM securities 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 securities secured by
liens on other types of real estate-related properties.

The following is a discussion of each type of ARM security that we held as of
December 31, 2003:

Freddie Mac ARM Securities

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

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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.

Fannie Mae ARM Securities

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 Securities

Privately issued ARM securities are issued by originators of, and investors in,
mortgage loans, including savings and loan associations, savings banks,
commercial banks, mortgage banks, investment banks and special purpose
subsidiaries of such institutions. Privately issued ARM securities 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,
subordination or over-collateralization. Accordingly, privately issued ARM
securities typically are not guaranteed by an entity having the credit status
of Freddie Mac or Fannie Mae.

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

CMOs are debt obligations, ordinarily issued in series and backed by a pool of
fixed rate mortgage loans, Hybrid ARM loans, Traditional ARM loans or ARM
securities, 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.

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Scheduled payments of principal and interest on the mortgage-related assets and
other collateral securing a series of CMOs 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 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 generally 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 or as part of the purchase of all
of the classes of a loan securitization created by a third party.

ARM Loans

Our ARM loans are comprised of securitized ARM loans, ARM loans collateralizing
CDOs and ARM loans held for securitization (collectively referred to as ARM
Loans). All of our ARM loans are either Traditional ARM loans or Hybrid ARM
loans. Securitized ARM loans are loans that we have originated or acquired and
securitized after March 31, 2001 in which we retain 100% of the beneficial
ownership interests. ARM loans collateralizing CDOs are also loans we have
securitized that provide credit support for AAA certificates issued to third
party investors in our CDO structured financing arrangements. ARM loans held
for securitization are loans we have acquired or originated that we intend to
securitize and retain.

When originating or acquiring Traditional 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 Traditional 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 was 65.3% as of December 31, 2003.

If a Traditional 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 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 caps 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 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
a Prime Rate index.

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RISK FACTORS

FORWARD-LOOKING STATEMENTS

Certain information contained in this Annual Report on Form 10-K constitutes
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934
that are based on our current expectations, estimates and projections. Pursuant
to those sections, we may 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 expressed in the forward-looking statements. Statements
that are not historical facts, including statements about our beliefs and
expectations, are forward-looking statements. The words believe,
anticipate, intend, aim, expect, will, strive, target and
project and similar words identify forward-looking statements. Such
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. Important
factors that may impact our actual results or may cause our actual results to
differ materially from those expressed in any forward-looking statements made
by us or on our behalf include, but are not limited to, changes in interest
rates, changes in yields available for purchase on adjustable and variable rate
mortgage assets, changes in the yield curve, changes in prepayment rates,
changes in the supply of mortgage-backed securities and loans, our ability to
obtain financing and the terms of any financing that we do obtain. We do not
undertake, and specifically disclaim, any obligation to publicly release the
result of any revisions that may be made to any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or circumstances
after the date of such statements.

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 our 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 also may
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 our
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 securities will result in a reduction of our book value
due to the accounting rules that we follow.                                                                                                            

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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 income we earn on our ARM
assets. Declining interest rates could adversely affect our
earnings and dividends if the interest income we receive on our
ARM assets declines 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.                                                                                                                                                                                                                                                 
|
| |  |  | 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 ARM assets that have fixed interest rate periods.



| |  |  | A decline in interest rates may result in an increase in
prepayment of our Hybrid ARM assets, 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 ARM assets, 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 ARM assets
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-                                                      

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| |  |  | term interest rate borrowings that we acquire to
finance the remaining year of the fixed rate period of our
Hybrid ARM assets 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.                                                                                                                                       
|
| |  |  | We must comply with the applicable licensing and other
regulatory requirements of each jurisdiction in which we are
authorized to lend. We are subject to examination by each
jurisdiction, and if it is determined that we are not in
compliance with the applicable requirements, we may be fined and
our license to lend may be suspended or revoked.
|
| |  |  | 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
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 as a REIT
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.                                                                                                                                                                                                                                                                                                      

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 of 1940, as
amended. If we were to become regulated as an investment company,
we would not be able to operate as we currently do.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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 return on equity. Undue
emphasis placed on maximization of our short-term return on
equity at the expense of other criteria could result in increased
risk to our long-term return on equity.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

COMPETITION

In acquiring ARM assets, we compete with other mortgage REITs, investment
banking firms, savings and loan institutions, 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, 2003, 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. To date since
the inception of our operations, the Manager has not engaged in any other
activities besides the management of our operations although it is permitted to
do so under the terms of the Management Agreement. As of December 31, 2003,
the Manager had 69 employees, 43 of whom were directly engaged in the
activities of TMHL.

The Management Agreement

We entered into the Management Agreement with the Manager for a ten-year term,
expiring July 15, 2009, with an annual review required as to the Managers
performance and the reasonableness of the compensation paid to the Manager. 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.

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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 independent 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 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

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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.

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, which 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 Internal Revenue Service (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 90% distribution test. We believe that our
Dividend Reinvestment and Stock Purchase Plan 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. 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

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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

In each year that we qualify as a REIT, we generally will not be subject to
federal income tax on that portion of our REIT taxable income or capital gain
that we distribute to our shareholders. 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.










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, which are leased from
the Manager.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 3. LEGAL PROCEEDINGS



| |  | At December 31, 2003, 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 2003.
| |  | ------------------------------------------------------------------------------------------

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PART II




Item 5. MARKET PRICE OF AND DIVIDENDS ON 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 12, 2004, we had 75,102,846 shares of common
stock outstanding, held by 4,722 holders of record and approximately 91,713
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
|                                       |  |              |       |           |  |       |       |          
|2003                                   |  |              |       |           |  |       |       |           |  |   |       |  |  |      |       |    
|Fourth Quarter ended December 31, 2003 |  | $            | 27.83 |           |  | $     | 25.36 |           |  | $ | 27.20 |  |  | $    | 0.64  | (1)
|Third Quarter ended September 30, 2003 |  |              | 27.96 |           |  |       | 21.61 |           |  |   | 25.33 |  |  |      | 0.63  |    
|Second Quarter ended June 30, 2003     |  |              | 26.89 |           |  |       | 20.50 |           |  |   | 24.70 |  |  |      | 0.62  |    
|First Quarter ended March 31, 2003     |  |              | 20.99 |           |  |       | 19.40 |           |  |   | 20.63 |  |  |      | 0.60  |    
|2002                                   |  |              |       |           |  |       |       |           |  |   |       |  |  |      |       |    
|Fourth Quarter ended December 31, 2002 |  | $            | 20.94 |           |  | $     | 16.20 |           |  | $ | 20.10 |  |  | $    | 0.585 | (2)
|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  |    



---

|(1) |  | The 2003 fourth quarter dividend was declared in December 2003 and paid
in January 2004.
|--- |  | ----------------------------------------------------------------------------------------
|   
|(2) |  | The 2002 fourth quarter dividend was declared in December 2002 and paid
in January 2003.

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 and Stock Purchase Plan

We have a Dividend Reinvestment and Stock Purchase Plan (the DRSPP) that
allows shareholders of our common stock to have their dividends reinvested in
additional shares of our common stock. The common stock to be acquired under
the DRSPP may be purchased from us at a discount from the then prevailing
market price, or in the open market or in privately negotiated transactions, at
our sole discretion. Shareholders and non-shareholders may also make additional
monthly cash purchases of common stock, subject to a minimum of $100 per month
($500 minimum initial investment for new investors) and a maximum of $10
thousand per month for each optional cash purchase, although we may waive the
limitation on the maximum amount upon request, at our sole discretion.
American Stock Transfer & Trust Company, our transfer agent (the Agent), is
the trustee and administrator of the DRSPP. Shareholders who own stock that is
registered in their own name and want to participate in the DRSPP 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 DRSPP 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 DRSPP (including a prospectus) and
forms are available from the Agent or us.

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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, 2003, 2002, 2001, 2000, and 1999.
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

|                                                        |  |                         |         |      |  |      |         |      |  |      |        |   |  |   |        |   |  |   |        |  
|------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------ | - |  | - | ------ | - |  | - | ------ | -
|                                                        |  | Year Ended December 31,
|                                                        |  |                        
|                                                        |  | 2003                    |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                        |  |                         |         |      |  |      |         |      |  |     
|Net interest income                                     |  | $                       | 233,953 |      |  | $    | 157,929 |      |  | $    | 78,765 |   |  | $ | 36,630 |   |  | $ | 34,015 |  
|Net income                                              |  | $                       | 176,504 |      |  | $    | 120,016 |      |  | $    | 58,460 |   |  | $ | 29,165 |   |  | $ | 25,584 |  
|Earnings per share (basic)                              |  | $                       | 2.73    |      |  | $    | 2.60    |      |  | $    | 2.09   |   |  | $ | 1.05   |   |  | $ | 0.88   |  
|Earnings per share (diluted)                            |  | $                       | 2.71    |      |  | $    | 2.59    |      |  | $    | 2.09   |   |  | $ | 1.05   |   |  | $ | 0.88   |  
|Average common shares - basic                           |  |                         | 63,485  |      |  |      | 43,590  |      |  |      | 24,754 |   |  |   | 21,506 |   |  |   | 21,490 |  
|Average
common shares - diluted                         |  |                         | 65,217  |      |  |      | 46,350  |      |  |      | 24,803 |   |  |   | 21,519 |   |  |   | 21,490 |  
|Taxable income per share (1)                            |  | $                       | 2.81    |      |  | $    | 2.64    |      |  | $    | 2.13   |   |  | $ | 1.07   |   |  | $ | 0.99   |  
|Dividends declared per common share (2)                 |  | $                       | 2.49    |      |  | $    | 2.285   |      |  | $    | 1.75   |   |  | $ | 0.96   |   |  | $ | 0.92   |  
|Yield on ARM assets                                     |  |                         | 4.05    | %    |  |      | 4.63    | %    |  |      | 5.09   | % |  |   | 7.06   | % |  |   | 6.38   | %
|Yield on net interest earning assets
(Portfolio Margin) |  |                         | 1.61    | %    |  |      | 1.88    | %    |  |      | 1.67   | % |  |   | 0.86   | % |  |   | 0.77   | %
|Return on average common equity                         |  |                         | 17.31   | %    |  |      | 17.66   | %    |  |      | 16.69  | % |  |   | 9.87   | % |  |   | 7.38   | %
|Noninterest expense to average assets                   |  |                         | 0.42    | %    |  |      | 0.45    | %    |  |      | 0.38   | % |  |   | 0.16   | % |  |   | 0.12   | %

Balance Sheet Highlights

|                                    |  |                   |            |      |  |      |            |      |  |      |           |  |  |   |           |  |  |   |           | 
|----------------------------------- |  | ----------------- | ---------- | ---- |  | ---- | ---------- | ---- |  | ---- | --------- |  |  | - | --------- |  |  | - | --------- | 
|                                    |  | As of December 31
|                                    |  |                  
|                                    |  | 2003              |            | 2002 |  | 2001 |            | 2000 |  | 1999
|                                    |  |                   |            |      |  |      |            |      |  |     
|Adjustable-rate mortgage assets     |  | $                 | 18,852,166 |      |  | $    | 10,335,213 |      |  | $    | 5,732,145 |  |  | $ | 4,139,461 |  |  | $ | 4,326,098 | 
|Total assets                        |  | $                 | 19,118,799 |      |  | $    | 10,512,932 |      |  | $    | 5,803,648 |  |  | $ | 4,190,167 |  |  | $ | 4,375,965 | 
|CDOs                                |  | $                 | 3,114,047  |      |  | $    | 255,415    |      |  | $    | 432,581   |  |  | $ | 603,910   |  |  | $ | 886,722   | 
|Senior Notes                        |  | $                 | 251,080    |      |  | $    |           |      |  | $    |          |  |  | $ |          |  |  | $ |          | 
|Shareholders equity                |  | $                 | 1,239,104  |      |  | $    | 833,042    |      |  | $    | 532,658   |  |  | $ | 317,538   |  |  | $ | 310,887   | 
|Historical book value per share (1) |  | $                 | 18.68      |      |  | $    | 16.54      |      |  | $    | 15.12     |  |  | $ | 15.30     |  |  | $ | 15.28     | 
|Book value per share                |  | $                 | 16.75      |      |  | $    | 14.54      |      |  | $    | 14.02     |  |  | $ | 11.67     |  |  | $ | 11.40     | 
|Number of common shares outstanding |  |                   | 73,985     |      |  |      | 52,763     |      |  |      | 33,305    |  |  |   | 21,572    |  |  |   | 21,490    | 



---

|(1) |  | See reconciliation of non-GAAP financial measurements to comparable GAAP
financial measurements on page 24.
|--- |  | -----------------------------------------------------------------------------------------------------------
|   
|(2) |  | For the applicable year as reported in our quarterly earnings
announcements.                               

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##### Table of Contents



Reconciliation of non-GAAP financial measurements to comparable GAAP financial
measurements

Taxable income per share

As a REIT, we pay substantially all of our taxable earnings in the form of
dividends to shareholders. Therefore, taxable income per share is a meaningful
financial measurement for both management and investors. A reconciliation of
taxable income per common share to earnings per share (basic) follows:

Reconciliation of Taxable Income Per Share to Earnings Per Share

|                           |                                                                         |   |                                  |       |      |   |      |       |      |   |      |       |   |   |      |       |   |   |      |       |  
|-------------------------- | ----------------------------------------------------------------------- | - | -------------------------------- | ----- | ---- | - | ---- | ----- | ---- | - | ---- | ----- | - | - | ---- | ----- | - | - | ---- | ----- | -
|                           |                                                                         |   | For the Years Ended December 31,
|                           |                                                                         |   |                                 
|                           |                                                                         |   | 2003                             |       | 2002 |   | 2001 |       | 2000 |   | 1999
|                           |                                                                         |   |                                  |       |      |   |      |       |      |   |     
|Taxable income per share   |                                                                         | $ | 2.81                             |       |      | $ | 2.67 |       |      | $ | 2.13 |       |   | $ | 1.00 |       |   | $ | 0.99 |      
|Additions:                 |                                                                         |   |                                  |       |      |   |      |       |      |   |      |       |   |   |      |       |   |   |      |      
|                           | Hedging instruments, net                                                |   |                                  | 0.04  |      |   |      |      |      |   |      |      |   |   |      |      |   |   |      |      |  
|                           | Gain on purchase loan commitments                                       |   |                                  | 0.04  |      |   |      |      |      |   |      |      |   |   |      |      |   |   |      |      |  
|                           | Payments under long-term incentive plan                                 |   |                                  | 0.02  |      |   |      |      |      |   |      |      |   |   |      |      |   |   |      |      |  
|                           | Actual credit losses on ARM securities                                  |   |                                  |      |      |   |      | 0.01  |      |   |      | 0.01  |   |   |      | 0.04  |   |   |      | 0.04  |  
|                           | Conversion of taxable REIT subsidiary to
qualified REIT subsidiary, net |   |                                  |      |      |   |      | 0.02  |      |   |      |      |   |   |      |      |   |   |      |      |  
|                           | Other                                                                   |   |                                  |      |      |   |      |      |      |   |      | (0.01 | ) |   |      | 0.07  |   |   |      | (0.02 | )
|Deductions:                |                                                                         |   |                                  |       |      |   |      |       |      |   |      |       |   |   |      |       |   |   |      |      
|                           | Provision for credit losses, net                                        |   |                                  | (0.01 | )    |   |      |      |      |   |      | (0.03 | ) |   |      | (0.05 | ) |   |      | (0.13 | )
|                           | Long-term incentive plan expense                                        |   |                                  | (0.16 | )    |   |      | (0.10 | )    |   |      | (0.01 | ) |   |      | (0.01 | ) |   |      |      |  
|                           | Issuance of CDOs                                                        |   |                                  | (0.01 | )    |   |      |      |      |   |      |      |   |   |      |      |   |   |      |      |  
|                           |                                                                         |   |                                  |       |      |   |      |       |      |   |      |       |   |   |      |       |   |   |      |      
|Earnings per share (basic) |                                                                         | $ | 2.73                             |       |      | $ | 2.60 |       |      | $ | 2.09 |       |   | $ | 1.05 |       |   | $ | 0.88 |      
|                           |                                                                         |   |                                  |       |      |   |      |       |      |   |      |       |   |   |      |       |   |   |      |      

Historical book value per share

Historical book value per share excludes unrealized market value adjustments
recorded on our ARM securities and hedging instruments. Since we are a
portfolio lender and retain the majority of our assets for investment, we
believe this provides a more consistent measurement for analysis of the trend
than does the comparable GAAP measurement, which reflects unrealized gains
(losses) at a single point in time. In addition, GAAP requires that we record
unrealized gains (losses) on our purchased ARM securities as of the period end
while prohibiting us from recording unrealized gains (losses) on ARM loans,
resulting in dissimilar treatment of what we believe to be assets of like
quality. Unrealized gains (losses) on our ARM securities are primarily a
result of current market expectation as to future interest rates as compared to
the current weighted average coupon on our ARM securities. A reconciliation of
historical book value per share to GAAP book value per share follows:

Reconciliation of Historical Book Value Per Share to GAAP Book Value Per Share

|                                |                                                  |   |                    |       |      |   |       |       |      |   |       |       |   |   |       |       |   |   |       |       |  
|------------------------------- | ------------------------------------------------ | - | ------------------ | ----- | ---- | - | ----- | ----- | ---- | - | ----- | ----- | - | - | ----- | ----- | - | - | ----- | ----- | -
|                                |                                                  |   | As of December 31,
|                                |                                                  |   |                   
|                                |                                                  |   | 2003               |       | 2002 |   | 2001  |       | 2000 |   | 1999 
|                                |                                                  |   |                    |       |      |   |       |       |      |   |      
|Historical book value per share |                                                  | $ | 18.68              |       |      | $ | 16.54 |       |      | $ | 15.12 |       |   | $ | 15.30 |       |   | $ | 15.28 |      
|                                | Unrealized gains (losses)
on ARM securities      |   |                    | (0.58 | )    |   |       | 0.84  |      |   |       | (0.26 | ) |   |       | (3.64 | ) |   |       | (3.88 | )
|                                | Unrealized gains (losses)
on Hedging Instruments |   |                    | (1.35 | )    |   |       | (2.84 | )    |   |       | (0.84 | ) |   |       |      |   |   |       |      |  
|                                |                                                  |   |                    |       |      |   |       |       |      |   |       |       |   |   |       |       |   |   |       |      
|GAAP book value per share       |                                                  | $ | 16.75              |       |      | $ | 14.54 |       |      | $ | 14.02 |       |   | $ | 11.66 |       |   | $ | 11.40 |      
|                                |                                                  |   |                    |       |      |   |       |       |      |   |       |       |   |   |       |       |   |   |       |      

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

Executive Overview

Our goal is to acquire or originate ARM assets for our portfolio and manage
them in such a way that we can create earnings and dividend stability in the
near term and earnings and dividend growth in future periods. In order to
achieve these objectives, we must mitigate key risks in the mortgage portfolio
lending business and, simultaneously, pursue earnings growth strategies. Two
of the principal risks in the mortgage lending business are credit risk and
interest rate risk. Our three primary growth strategies are to increase our
higher margin, more profitable mortgage loan origination business, to raise new
equity capital accretively in order to grow our assets and book value over time
and to better use our existing capital base by diversifying our funding sources
relying less on reverse repurchase agreements and more on CDOs to finance our
balance sheet.

During 2003, our assets grew 82% from $10.5 billion to $19.1 billion and our
net earnings for the year increased 5% from $2.59 to $2.71 per share, on a
diluted basis. Over the course of the year, we raised $432.1 million of new
equity capital by issuing 18.4 million common shares at an average net cost of
$23.41 per share. Primarily as a result of raising this new common equity, our
book value per common share rose 15% from $14.54 per share to $16.75 per share.
Our book value growth outpaced our earnings growth because we experienced a
margin decline over the course of the year due to the costs associated with
diversifying our funding sources and increasing our hedged position.

Asset Growth and Channel Mix

Our ability to raise new equity capital at a premium to book value combined
with the high level of portfolio prepayments we experienced resulted in
significant asset acquisition activity and growth during the year. We acquired
$10.3 billion of ARM securities during 2003, 99.7% of which were rated High
Quality by the Rating Agencies. We also continued to develop our A quality
residential ARM loan origination business through approved correspondents and
by directly originating ARM loans to retail customers. This source of ARM
assets grew 75% in 2003 to $4.0 billion, up from $2.3 billion in 2002. We also
acquired $1.3 billion of loans through bulk acquisitions as compared to $562.8
million during 2002. As a result of these ARM loan originations and
acquisitions, as of the end of 2003, we owned $7.3 billion in ARM loans, which
amounts to 38% of our total assets. During 2003, we also securitized $6.1
billion of our loans and either financed the retained securities with reverse
repurchase agreements or issued CDOs as a form of permanent financing. We do
not account for any of our ARM loan securitizations as sales. Of the
securities created from our loans, 99% were rated High Quality by the Rating
Agencies.

According to the Mortgage Bankers Association (MBA), in 2003, mortgage
originations industry-wide reached an unprecedented $3.8 trillion, a 53%
increase over the $2.5 trillion originated in 2002. This record activity was
primarily the result of low interest rates, which provided borrowers an
opportunity to refinance their mortgage debt. For 2004, the MBA is
forecasting that overall residential loan originations will decline 47% to $2.0
trillion based on an assumption that refinancing activity will decline by 73%,
generally as a result of higher interest rates and the belief that most people
who had an opportunity to refinance have done so. The same forecast also
estimates that residential ARM loan origination will only decline 25% in 2004,
since, generally speaking, in higher interest rate environments, ARM products
become more attractive relative to 30-year fixed rate mortgage products.
Although the impact of this outlook is difficult to determine, management
believes our loan origination volume will only decline by approximately 8% in
2004 to $3.7 billion. We believe we can continue to outperform industry trends
in the near term because, in addition to our already competitive mortgage
interest rates, our focus on ARM loans and our innovative product menu, we now
have lending approval in 48 states and the District of Columbia versus 42
states at the end of 2002, and expect to obtain lending approval in the two
remaining states by the first quarter of 2004. In addition, we have increased
our network of approved and active correspondents to 129 from 93 a year ago,
grown our internal sales force to help generate more loan production through
correspondents, financial planners, corporate affinity groups and residential
home builders, and are increasing our marketing budget from $2.1 million in
2003 to $4.0 million in 2004. We want to grow the percentage of originated
assets in our portfolio, because they have proven to be more profitable for us
than purchased mortgage assets. If we meet our $3.7 billion loan origination
goal, and our other portfolio growth targets remain unchanged, 40% of our
annual portfolio acquisitions in 2004 would come from originations, compared to
26% in 2003.

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##### Table of Contents



Funding Diversification

During 2003, we took several steps to diversify our funding sources. As of
December 31, 2003, we had completed three CDO transactions in which we
permanently financed $3.5 billion of ARM loans. In these transactions, we
issue MBS to third party investors. These securities receive principal and
interest payments from the ARM loans placed in a trust, and these financings
have no further recourse to us. Unlike reverse repurchase agreement borrowings
that are subject to margin calls, based on the change in fair value of the
collateral or changes in margin requirements, CDOs are not subject to any
margin calls. A typical reverse repurchase agreement borrowing requires
between 4% and 5% of initial capital plus an additional capital reserve in
order to meet any margin calls. As a result, we have developed a policy to
maintain no less than 8% of capital against our assets financed with recourse
debt, which includes a combination of our reverse repurchase agreement
borrowings and our whole loan financing lines. To the extent we have been able
to fund a portion of our balance sheet with CDOs, we have reduced our capital
requirement dramatically and can utilize that freed up capital to acquire
additional ARM assets. As of December 31, 2003, the $3.1 billion of CDO
financing outstanding required approximately 2% of equity capital, freeing up
approximately $185 million of capital for the acquisition of approximately $1.3
billion of additional ARM assets. During 2003, we also issued $255 million of
Senior Notes, maturing on May 15, 2013. We consider the Senior Notes another
form of long-term capital and utilized the proceeds to acquire additional
Hybrid ARM assets.

Credit Quality

We acquire excellent credit quality ARM assets and securitize the ARM loans we
originate and acquire because these strategies create significant portfolio
liquidity and allow us to easily finance our portfolio, and, if necessary, to
easily sell assets in the secondary market. As of December 31, 2003, 96.3% of
our ARM asset portfolio was High Quality as compared to 91.8% as of December
31, 2002. Many of our High Quality ARM assets consist of ARM loans that we
have either securitized for our own portfolio or have placed in a trust to
facilitate our CDO financings. Regardless, we retain the risk of potential
credit losses on these loans. Importantly, we did not experience any credit
losses on ARM loans during 2003 and have only experienced $174 thousand in
credit losses since we began acquiring ARM loans in 1997. Although we believe
our credit performance is reflective of the high credit quality of our
borrowers, our prudent underwriting, and property appraisal methods and
policies, we also recognize that our portfolio was, on average, only
approximately 16 months old. Due to this lack of seasoning and, therefore,
lack of relevant historical data, we have recorded a loan loss allowance of
$8.0 million as of December 31, 2003 based on industry loss experience on
similar loans.

Interest Rate Risk Management

We continue our strategy of hedging our financing cost such that we maintain a
net duration of our Hybrid ARM assets, related borrowings and Hybrid Hedging
Instruments of less than one year. As of the end of 2003, we had entered into
Swap Agreements and Eurodollar Transactions with a current notional balance of
$12.5 billion and a delayed Swap Agreement with a notional balance of $270
million that became effective in February 2004. Additionally, we had Cap
Agreements with a current notional balance of $2.3 billion. As a result, as of
December 31, 2003, we measured the net duration applicable to our Hybrid ARM
portfolio, related borrowings and Hybrid Hedging Instruments as approximately
3.4 months. Although we have experienced a declining interest rate environment
since January 2001, we continue to employ a matched funding strategy as we
acquire Hybrid ARM assets in order to ensure stable earnings during periods of
rising interest rates. In essence, as we acquire ARM assets, we attempt to
lock-in a spread that is expected to provide a total return at or above our
threshold requirement. In order to stabilize the spread over the expected life
of our ARM assets, we use hedging instruments in conjunction with our
borrowings to approximate the repricing characteristics of our ARM assets.
Given the prepayment uncertainties of our ARM assets, there is no sure way to
lock-in a spread between the yield on our ARM assets and the related
borrowing. However, through active management, we believe we can continue to
mitigate a significant amount of net interest income volatility. See a
discussion of Effects of Interest Rate Changes on page 46 and a discussion of
Risk Factors beginning on page 15.

Consistent Profitability

We possess a number of strategic advantages that allow us to generate
consistent profitability. One of these strategic advantages is our low
operating expense structure. During 2003, our operating expenses as a percent
of average assets were 0.42%, compared to 0.45% during 2002. We are able to
operate at this low level of operating expenses relative to the size of our
portfolio because we do not operate like a traditional mortgage lender. We
acquire many of our assets through MBS purchases and originate loans by
developing strategic partnerships with correspondent lenders, financial
planners and other intermediaries. We also use web-based marketing and a third
party call center so we do not have a retail branch network or

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##### Table of Contents



commissioned
loan officers. We also do not acquire loans through mortgage brokers. In
addition, we have developed other strategic partnerships that provide
outsourced services to our customers in the name of Thornburg Mortgage that are
based on
a variable cost model. We believe that this low, variable-cost model has
allowed us to operate profitably with a lower interest rate spread on our
portfolio, enabling us to mitigate significant risks normally associated with
mortgage origination and portfolio lending activities. One of the strategic
decisions we have been able to make as a result of our low-cost operating model
is to invest primarily in Agency, AAA, AA or A quality ARM loans. This
strategy has resulted in very low credit losses, a very liquid and readily
financeable portfolio, and a portfolio that has had low price volatility as
compared to a portfolio of 30-year fixed-rate mortgage assets. Additionally,
we have been able to mitigate interest rate risk by entering into hedging
transactions and still achieve acceptable returns for our shareholders.
Finally, by employing a portfolio lending strategy, we do not depend on gain on
sale income, which can fluctuate significantly with loan origination volume.

The increase in our earnings in 2003 compared to prior periods can be
attributed to a number of factors, including selling additional shares of
common stock at a premium to book value and increasing our use of capital
relative to the amount of common equity outstanding through the use of CDOs and
Senior Notes as discussed above. Although we experienced a decline in our
net interest spread from 1.58% during 2002 to 1.39% during 2003, we
generated $76.0 million more in net interest income due to the growth in our
capital. This capital growth led to an expansion of our balance sheet, and our
ability to more efficiently use shareholders equity. The decline in our net
interest spread is partially the result of the additional interest rate cost of
CDOs compared to reverse repurchase agreement borrowings and the interest rate
on the Senior Notes. The interest rate on CDO transactions, including the cost
of issuing the CDOs, was approximately 0.30% higher during 2003 compared to the
average cost of our reverse repurchase agreement borrowings, which had a 0.03%
impact on increasing our average cost of funds. The effective cost of the
Senior Notes during 2003 was 8.51%, which increased our average cost of funds
by 0.07%. See further discussion of the change in our interest rate spreads in
Results of Operations - 2003 compared to 2002 and 2001, beginning on page 39.

Critical Accounting Policies and Estimates

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 SEC guidance, those material accounting
policies and estimates 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, commitments to purchase ARM
loans from correspondent lenders and Hybrid Hedging Instruments at
fair value. The fair values of our ARM securities and Hybrid Hedging
Instruments 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, Hybrid
Hedging Instrument 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,
Hybrid Hedging Instrument or other financial instrument, based on
characteristics of the security we receive from the issuer and
available market information. The net unrealized gain or loss on
loans expected to be purchased from correspondent lenders and bulk
sellers is calculated using the same methodologies that are used to
value our ARM loans, adjusted for anticipated fallout for interest
rate lock commitments that will likely not be funded. The fair values
reported reflect estimates and may not necessarily be indicative of
the amounts we could realize in a current market exchange.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Loan Loss Reserves on ARM Loans. We maintain an allowance for loan
losses based on managements estimate of credit losses inherent in our
portfolio of ARM Loans. The estimation of the allowance is based on a
variety of factors including, but not limited to, current economic
conditions, loan portfolio composition, delinquency trends, credit
losses to date on underlying loans and remaining credit protection.
If the credit performance of our ARM Loans is different than expected,
we adjust the allowance for loan losses to a level deemed appropriate
by management to provide for estimated losses inherent in our ARM Loan
portfolio. Two critical assumptions used in estimating the loan loss
reserves are an assumed rate of default, which is the expected rate at
which loans go into foreclosure over the life of the loans, and an
assumed rate of loss severity, which represents the expected rate of
realized loss upon disposition of the properties that have gone into
foreclosure.                                                                                                                                                                                                                                                                                               

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| |  | The following table presents a sensitivity analysis to show the impact on our
allowance for loan loss reserves of using different assumptions (dollars in
thousands):
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         |  |                      |        |  
|---------------------------------------- |  | -------------------- | ------ | -
|                                         |  | Increase (Decrease) 
|Changed Assumption                       |  | in Loan Loss Reserve
|                                         |  |                     
|Default assumption increased by 10%      |  | $                    | 1,311  |  
|Default assumption decreased by 10%      |  | $                    | (1,239 | )
|Loss severity assumption increased by 5% |  | $                    | 1,531  |  
|Loss severity assumption decreased by 5% |  | $                    | (1,531 | )



|  |  | The purpose of this analysis is to provide an indication of the impact
defaults and loss severity assumptions have on our estimate of the allowance
for loan losses. It is not intended to imply our expectation of future
default levels or changes in loss severity. We believe the current
assumptions used for defaults and loss severity are appropriate.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | Basis Adjustments on ARM securities. Basis adjustments are a designated component of the purchase discount on our ARM
securities. Certain of our ARM securities are rated less than Investment Grade and represent subordinated interests in pools of
high-quality, first lien residential mortgage loans. As a result of these characteristics, we generally purchase the less than
Investment Grade classes at a discount. Based upon managements use of analytical tools and judgment, a portion of the purchase
discount is subsequently accreted as interest income under the effective yield method while the remaining portion of the purchase
discount is treated as a basis adjustment which reflects the estimated unrealized loss on the securities due to credit and interest
rate exposure. Basis adjustments are increased by recognizing an impairment loss when management determines that there is a decline
in the fair value of an ARM security that is considered other than temporary and decreased when there is improvement in the risk
exposures. Any such determinations are based on managements assessment of numerous factors affecting the fair value of ARM
securities, including, but not limited to, current economic conditions, delinquency trends, credit losses to date on underlying
mortgages and remaining credit protection. If management ultimately concludes that the basis adjustments will not represent
realized losses, the balances are accreted into earnings over the remaining life of the security.
| 
| |  | 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 ARM
assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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

Financial Condition

Asset Quality

At December 31, 2003, we held total assets of $19.1 billion, $18.9 billion of
which consisted of ARM assets. That compares to $10.5 billion in total assets
and $10.3 billion of ARM assets at December 31, 2002. Since commencing
operations, we have purchased either ARM securities (backed by Agency
Securities or privately-issued MBS) or ARM loans generally originated to A
quality underwriting standards. At December 31, 2003, 96.1% 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.

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The following table presents a schedule of ARM assets owned at December 31,
2003 and December 31, 2002 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, 2003 |            | December 31, 2002
|                   |                                  |                        |                            |           |                   |            |                  
|                   |                                  |                        |                            |           | Carrying          |            | Portfolio         |      | Carrying |       | Portfolio
|                   |                                  |                        |                            |           | Value             |            | Mix               |      | Value    |       | Mix      
|                   |                                  |                        |                            |           |                   |            |                   |      |          |       |          
|High Quality:      |                                  |                        |                            |           |                   |            |                   |      |          |       |           |           |           |            |      |     
|                   | Agency Securities                |                        | $                          | 2,323,974 |                   |            |                   | 12.3 | %        |       | $         | 2,682,555 |           |            |      | 26.0 | %   
|                   | Privately Issued MBS:            |                        |                            |           |                   |            |                   |      |          |       |           |           |           |            |      |      |     
|                   |                                  | AAA/Aaa Rating         |                            |           | 15,398,038        | (1)        |                   |      | 81.7     |       |           |           | 6,409,860 | (2)        |      |      | 62.0 |      
|                   |                                  | AA/Aa Rating           |                            |           | 436,184           |            |                   |      | 2.3      |       |           |           | 394,096   |            |      |      | 3.8  |      
|                   |                                  |                        |                            |           |                   |            |                   |      |          |       |           |           |           |            |      |      |     
|                   |                                  |                        | Total Privately Issued MBS |           |                   | 15,834,222 |                   |      |          | 84.0  |           |           |           | 6,803,956  |      |      |      | 65.8  |  
|                   |                                  |                        |                            |           |                   |            |                   |      |          |       |           |           |           |            |      |      |     
|                   |                                  |                        | Total High Quality         |           |                   | 18,158,196 |                   |      |          | 96.3  |           |           |           | 9,486,511  |      |      |      | 91.8  |  
|                   |                                  |                        |                            |           |                   |            |                   |      |          |       |           |           |           |            |      |      |     
|Other Investment:  |                                  |                        |                            |           |                   |            |                   |      |          |       |           |           |           |            |      |     
|                   | Privately Issued MBS:            |                        |                            |           |                   |            |                   |      |          |       |           |           |           |            |      |      |     
|                   |                                  | A Rating               |                            |           | 111,082           |            |                   |      | 0.6      |       |           |           | 63,198    |            |      |      | 0.6  |      
|                   |                                  | BBB/Baa Rating         |                            |           | 43,787            |            |                   |      | 0.2      |       |           |           | 31,657    |            |      |      | 0.3  |      
|                   |                                  | BB/Ba Rating and Below |                            |           | 49,846            | (1)        |                   |      | 0.3      |       |           |           | 44,060    | (2)        |      |      | 0.4  |      
|                   | ARM loans pending securitization |                        |                            | 497,248   |                   |            |                   | 2.6  |          |       |           | 709,887   |           |            |      | 6.9  |     
|                   |                                  |                        |                            |           |                   |            |                   |      |          |       |           |           |           |            |      |      |     
|                   |                                  |                        | Total Other Investment     |           |                   | 701,963    |                   |      |          | 3.7   |           |           |           | 848,802    |      |      |      | 8.2   |  
|                   |                                  |                        |                            |           |                   |            |                   |      |          |       |           |           |           |            |      |      |     
|Loan Loss Reserves |                                  |                        | (7,993                     | )         |                   |            | (0.0              | )    |          |       | (100      | )         |           |            | (0.0 | )   
|                   |                                  |                        |                            |           |                   |            |                   |      |          |       |           |           |           |            |      |      |     
|                   |                                  |                        | Total ARM Portfolio        |           | $                 | 18,852,166 |                   |      |          | 100.0 | %         |           | $         | 10,335,213 |      |      |      | 100.0 | %
|                   |                                  |                        |                            |           |                   |            |                   |      |          |       |           |           |           |            |      |      |     



| | (1) |  | As of December 31, 2003, the AAA Rating category includes $3.1
billion of ARM loans collateralizing CDOs that have been credit enhanced
to AAA through overcollateralization in the amount of $6.1 million and
unrated subordinated interest-only certificates retained in the amount
of $18.0 million. The subordinated interest-only certificates are
included in the BB/Ba Rating and below category.       
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | As of December 31, 2002, the AAA Rating category includes $261.3
million of ARM loans collateralizing CDOs 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 in the amount of
$31.7 million as of December 31, 2002. The subordinated certificate is
included in the BB/Ba Rating and below category.

As of December 31, 2003, 12 of the 10,223 loans in our ARM loan portfolio were
considered seriously delinquent (60 days or more delinquent) and had an
aggregate balance of $3.5 million. At December 31, 2003, the ARM loan
portfolio included one real estate-owned property totaling approximately $140.3
thousand that we acquired as a result of foreclosure procedures. The average
original effective loan-to-value ratio on the delinquent loans and the acquired
property was 63.1%. We believe that our current level of basis adjustments and
allowance for loan losses is adequate to cover estimated losses from these
loans and this property.

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ARM Loan Portfolio Characteristics

The following table presents various characteristics of our ARM loan portfolio
as of December 31, 2003. This information pertains to loans held for
securitization, loans held as collateral for CDOs 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 $7.3 billion.

ARM Loan Portfolio Characteristics

|                         |  |         |         |      |  |     |           |   |  |   |        |  
|------------------------ |  | ------- | ------- | ---- |  | --- | --------- | - |  | - | ------ | -
|                         |  | Average |         | High |  | Low
|                         |  |         |         |      |  |    
|Original loan balance    |  | $       | 455,352 |      |  | $   | 7,875,000 |   |  | $ | 26,000 |  
|Unpaid principal balance |  | $       | 446,998 |      |  | $   | 7,875,000 |   |  | $ | 378    |  
|Coupon rate on loans     |  |         | 4.33    | %    |  |     | 9.13      | % |  |   | 1.51   | %
|Pass-through rate        |  |         | 4.18    | %    |  |     | 8.60      | % |  |   | 1.49   | %
|Pass-through margin      |  |         | 1.91    | %    |  |     | 4.73      | % |  |   | 0.23   | %
|Lifetime cap             |  |         | 10.42   | %    |  |     | 19.90     | % |  |   | 7.13   | %
|Original term (months)   |  |         | 360     |      |  |     | 480       |   |  |   | 120    |  
|Remaining term (months)  |  |         | 346     |      |  |     | 479       |   |  |   | 30     |  

|                                                   |                              |                       |           |     |      |  
|-------------------------------------------------- | ---------------------------- | --------------------- | --------- | --- | ---- | -
|Geographic distribution (top 5 states):            |                              |                       |           |    
|                                                   |                              | California            |           |     | 26.6 | %
|                                                   |                              | Georgia               |           |     | 11.8 |  
|                                                   |                              | Colorado              |           |     | 7.4  |  
|                                                   |                              | New York              |           |     | 7.3  |  
|                                                   |                              | Florida               |           |     | 6.5  |  
|                                                   |                              |                       |           |    
|Occupancy status:                                  |                              |                       |           |    
|                                                   |                              | Owner occupied        |           |     | 83.8 | %
|                                                   |                              | Second home           |           |     | 12.5 |  
|                                                   |                              | Investor              |           |     | 3.7  |  
|                                                   |                              |                       |           |    
|Documentation type:                                |                              |                       |           |    
|                                                   |                              | Full/Alternative      |           |     | 91.8 | %
|                                                   |                              | Other                 |           |     | 8.2  |  
|                                                   |                              |                       |           |    
|Loan purpose:                                      |                              |                       |           |    
|                                                   |                              | Purchase              |           |     | 34.7 | %
|                                                   |                              | Cash out refinance    |           |     | 29.9 |  
|                                                   |                              | Rate & term refinance |           |     | 35.4 |  
|                                                   |                              |                       |           |    
|Original effective
loan-to-value:                  |                              |                       |           |    
|                                                   |                              | 80.01%-and over (2)   |           |     | 3.0  | %
|                                                   |                              | 70.01%-80.00%         |           |     | 41.5 |  
|                                                   |                              | 60.01%-70.00%         |           |     | 24.5 |  
|                                                   |                              | 50.01%-60.00%         |           |     | 13.1 |  
|                                                   |                              | 50.00% or less        |           |     | 17.9 |  
|                                                   |                              |                       |           |    
|Weighted average effective original
loan-to-value: |                              |                       | 65.3      | %  
|                                                   |                              |                       |           |    
|Property type:                                     |                              |                       |           |    
|                                                   |                              | Single-family         |           |     | 85.0 | %
|                                                   |                              | Condominium           |           |     | 9.7  |  
|                                                   |                              | Other residential     |           |     | 5.3  |  
|                                                   |                              |                       |           |    
|ARM Loan type:                                     |                              |                       |           |    
|                                                   |                              | Traditional ARM loans |           |     | 30.2 | %
|                                                   |                              | Hybrid ARM loans      |           |     | 69.8 |  
|                                                   |                              |                       |           |    
|ARM Interest Rate Caps:                            |                              |                       |           |    
|                                                   | Initial Cap on Hybrid loans: |                       |           |     |     
|                                                   |                              | 3.00% or less         |           |     | 3.6  | %
|                                                   |                              | 3.01%-4.00%           |           |     | 20.3 |  
|                                                   |                              | 4.01%-5.00%           |           |     | 61.0 |  
|                                                   |                              | 5.01%-6.00%           |           |     | 15.1 |  
|                                                   |                              |                       |           |    
|Periodic Cap on Traditional ARM loans:             |                              |                       |           |    
|                                                   |                              | None                  |           |     | 44.0 | %
|                                                   |                              | 1.00% or less         |           |     | 47.7 |  
|                                                   |                              | Over 1.00%            |           |     | 8.3  |  
|                                                   |                              |                       |           |    
|Percent of interest only loan balances:            |                              |                       | 84.6      | %  
|Weighted average length of interest only period:   |                              |                       | 8.2 years
|                                                   |                              |                       |           |    
|FICO scores:                                       |                              |                       |           |    
|                                                   |                              | 801 and over          |           |     | 2.5  | %
|                                                   |                              | 751 to 800            |           |     | 42.2 |  
|                                                   |                              | 701 to 750            |           |     | 33.9 |  
|                                                   |                              | 651 to 700            |           |     | 18.4 |  
|                                                   |                              | 650 or less           |           |     | 3.0  |  
|                                                   |                              |                       |           |    
|Weighted average FICO score                        |                              |                       | 737       | (1)



---

|(1) |  | FICO is a credit score, ranging from 300 to 850, with 850 being the
best score, based upon the credit evaluation methodology developed by
Fair, Isaac and Company, a consulting firm specializing in creating
credit evaluation models.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | All loans with an effective original loan-to-value ratio over 80% have
mortgage insurance.                                                                                                                                             

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As of December 31, 2003, we serviced $4.7 billion of our loans and had 10,223
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.

Asset Repricing Characteristics

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

ARM Mortgage Assets by Index and Repricing Frequency
(Dollar amounts in thousands)

|                        |                         |                  |                                     |   |                   |           |                   |   |          |     |            |   |           |           |       |   |      |      |  
|----------------------- | ----------------------- | ---------------- | ----------------------------------- | - | ----------------- | --------- | ----------------- | - | -------- | --- | ---------- | - | --------- | --------- | ----- | - | ---- | ---- | -
|                        |                         |                  |                                     |   | December 31, 2003 |           | December 31, 2002
|                        |                         |                  |                                     |   |                   |           |                  
|                        |                         |                  |                                     |   | Carrying          |           | Portfolio         |   | Carrying |     | Portfolio 
|                        |                         |                  |                                     |   | Value             |           | Mix               |   | Value    |     | Mix       
|                        |                         |                  |                                     |   |                   |           |                   |   |          |     |           
|Traditional ARM assets: |                         |                  |                                     |   |                   |           |                   |   |          |     |            |   |           |           |       |  
|                        | Index:                  |                  |                                     |   |                   |           |                   |   |          |     |            |   |           |           |       |   |     
|                        |                         |                  | One-month LIBOR                     |   | $                 | 598,989   |                   |   |          | 3.2 | %          |   | $         | 576,837   |       |   |      | 5.6  | %
|                        |                         |                  | Six-month LIBOR                     |   |                   | 1,777,494 |                   |   |          | 9.4 |            |   |           | 834,709   |       |   |      | 8.1  |  
|                        |                         |                  | One-year Constant Maturity Treasury |   |                   | 1,079,970 |                   |   |          | 5.7 |            |   |           | 1,095,945 |       |   |      | 10.6 |  
|                        |                         |                  | Other                               |   |                   | 124,440   |                   |   |          | 0.7 |            |   |           | 359,605   |       |   |      | 3.4  |  
|                        |                         |                  |                                     |   |                   |           |                   |   |          |     |            |   |           |           |       |   |      |      |  
|                        |                         |                  | 3,580,893                           |   |                   |           | 19.0              |   |          |     | 2,867,096  |   |           |           | 27.7  |  
|                        |                         |                  |                                     |   |                   |           |                   |   |          |     |            |   |           |           |       |   |      |      |  
|Hybrid ARM assets:      |                         |                  |                                     |   |                   |           |                   |   |          |     |            |   |           |           |       |  
|                        | Remaining fixed period: |                  |                                     |   |                   |           |                   |   |          |     |            |   |           |           |       |   |     
|                        |                         | Within 1-5 years |                                     |   | 12,691,728        |           |                   |   | 67.3     |     |            |   | 6,859,456 |           |       |   | 66.4 |     
|                        |                         | Over 5 years     |                                     |   | 2,587,538         |           |                   |   | 13.7     |     |            |   | 608,761   |           |       |   | 5.9  |     
|                        |                         |                  |                                     |   |                   |           |                   |   |          |     |            |   |           |           |       |   |      |      |  
|                        |                         |                  | 15,279,266                          |   |                   |           | 81.0              |   |          |     | 7,468,217  |   |           |           | 72.3  |  
|Loan Loss Reserves      |                         |                  | (7,993                              | ) |                   |           | (0.0              | ) |          |     | (100       | ) |           |           | (0.0  | )
|                        |                         |                  |                                     |   |                   |           |                   |   |          |     |            |   |           |           |       |   |      |      |  
|                        |                         | $                | 18,852,166                          |   |                   |           | 100.0             | % |          | $   | 10,335,213 |   |           |           | 100.0 | %
|                        |                         |                  |                                     |   |                   |           |                   |   |          |     |            |   |           |           |       |   |      |      |  

The ARM portfolio had a current weighted average coupon of 4.38% at December
31, 2003. This consisted of a weighted average coupon of 4.35% on the hybrid
portion of the portfolio and a weighted average coupon of 3.77% on the rest of
the portfolio. If the portfolio had been fully indexed, the weighted average
coupon of the portfolio would have been 4.28%, 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 3.26%, 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 2004 until it reaches
the fully indexed rate.

As of December 31, 2002, the ARM portfolio had a weighted average coupon of
4.99%. This consisted of a weighted average coupon of 5.23% on the hybrid
portion of the portfolio and a weighted average coupon of 4.27% 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
4.82%, based upon the composition of the portfolio and the applicable indices
at that time.

At December 31, 2003, the current yield of the ARM assets portfolio was 4.04%,
compared to 4.63% as of December 31, 2002. The decrease in the yield of 59
basis points as of December 31, 2003, compared to December 31, 2002, is
primarily due to the decreased weighted average interest rate coupon discussed
above, which decreased by 61 basis points. 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 2 basis points.
The current yield includes the impact of the amortization of applicable
premiums and discounts and the impact of principal payment receivables.

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Interest Rate Risk Management

Our ARM asset portfolio had a weighted average term to the next repricing date
of 3.7 years as of December 31, 2003, compared to 2.8 years as of December 31,
2002. The Traditional ARM portion of the portfolio had a weighted average term
to the next repricing date of 85 days and the Hybrid ARM portion had a weighted
average term to the next repricing date of 4.4 years at December 31, 2003. As
of December 31, 2003, the Hybrid ARM portfolio comprised 81.0% of the total ARM
portfolio, compared to 72.3% as of the end of 2002. We attempt to mitigate our
interest rate risk by funding our ARM assets with borrowings and Hybrid Hedging
Instruments with maturities approximately matching the interest rate adjustment
periods on our ARM assets. 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, our Hybrid ARM
portfolio is financed with short-term borrowings that are hedged with Hybrid
Hedging Instruments that fix the interest rate on those borrowings such that
the net duration of the Hybrid ARM portfolio and the associated fixed-rate
hedged borrowings is one year or less. Duration is a calculation expressed in
months that measures the expected price change of financial instruments based
on changes in interest rates. By maintaining a net duration of less than one
year, which is our maximum duration policy limit, the combined price change of
our Hybrid ARM portfolio, associated Hybrid Hedging Instruments and other
borrowings funding our Hybrid ARM portfolio is expected to be a maximum of 1%
for a 1% parallel shift in interest rates. A lower duration indicates a lower
expected volatility of earnings given future changes in interest rates. As of
December 31, 2003, the net duration applicable to our Hybrid ARM portfolio was
approximately 3.4 months.

As of December 31, 2003, we were counterparty to Swap Agreements and Eurodollar
Transactions having an aggregate current notional balance of $12.5 billion. In
addition, as of December 31, 2003, we had entered into one delayed Swap
Agreement with a notional balance of $270 million that became effective in
February 2004. As of December 31, 2003, these Swap Agreements and Eurodollar
Transactions had a weighted average maturity of 3.1 years. In accordance with
the Swap Agreements, we 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. The combined weighted average fixed rate payable of the
Swap Agreements and Eurodollar Transactions was 3.02% and 3.74% at December 31,
2003 and December 31, 2002, respectively. As of December 31, 2003, ARM assets
with a carrying value of $62.6 million, including accrued interest, and cash
totaling $36.5 million collateralized the Swap Agreements. The net fair value
of Swap Agreements at December 31, 2003 of ($85.5) million included Swap
Agreements with gross unrealized gains of $14.9 million and gross unrealized
losses of $100.4 million and is included in Hedging instruments on the
balance sheet. As of December 31, 2003, the net unrealized loss on Swap
Agreements, deferred gains from terminated Swap Agreements and deferred gains
and losses on Eurodollar Transactions recorded in Accumulated other
comprehensive loss was a net loss of $93.2 million. We estimate that over the
next twelve months, $43.8 million of these net unrealized losses will be
reclassified from Accumulated other comprehensive loss to interest expense.

In 2003, we purchased Cap Agreements with current notional balances totaling
$1.6 billion at a cost of $31.7 million in order to manage our interest rate
risk exposure on the financing of the Hybrid ARM loans collateralizing our
CDOs. These Cap Agreements had a remaining notional amount of $1.4 billion as
of December 31, 2003. Included in the 2003 Cap Agreement purchases are Cap
Agreements with start dates ranging from 2006 to 2008 and notional balances
totaling $371.1 million at a cost of $2.6 million. The fair value of our Cap
Agreements at December 31, 2003 was $25.4 million and is included in Hedging
instruments on the balance sheet. The unrealized loss on these Cap Agreements
of $6.3 million is included in Accumulated other comprehensive loss.
Pursuant to the terms of these Cap Agreements, the notional amount of the Cap
Agreements declines such that it is expected to equal the balance of the Hybrid
ARM loans collateralizing our CDOs. Under these Cap Agreements, we will
receive cash payments should the one-month LIBOR increase above the contract
rates of these Hedging Instruments, which range from 3.25% to 4.61% and average
3.81%. The Cap Agreements had an average maturity of 5.2 years as of December
31, 2003. The initial aggregate notional amount of the Cap Agreements declines
over the period of the agreements, which expire between 2006 and 2013.

Our Traditional ARM assets generally have a maximum lifetime interest rate cap
or ceiling, meaning that each Traditional 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 that have the effect of
offsetting a portion of our borrowing costs above a level specified by the Cap
Agreement so that the net margin on our Traditional ARM assets will be
protected in high interest rate environments. As of December 31, 2003, our
Traditional ARM assets had an average lifetime interest rate cap of 11.54%, far
exceeding the current level of interest rates. At December 31, 2003, these Cap
Agreements had a remaining notional balance of $841.3 million with an average
final maturity of eight months, compared to a remaining notional balance of
$1.8 billion with an average final maturity of one year at December 31, 2002.
At December 31, 2003, the fair value of these Cap Agreements was $9.0 thousand
compared to a fair value of $84.7 thousand as of December 31, 2002. Pursuant
to the terms of

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the Cap Agreements, we will receive cash payments if the one
month or three month LIBOR indices increase above contractually specified
levels, which range from 6.00% to 12.00% and average approximately 10.50%. Due
to the current
low level of interest rates, we have decided not to purchase additional Cap
Agreements for Traditional ARM assets at this time, but will reevaluate this
policy on an ongoing basis. We do not currently apply hedge accounting to our
Cap Agreements that are used to manage the interest rate risk on our assets
with contractual lifetime interest rate caps and, as a result, we record the
change in fair value of these Cap Agreements as hedging expense in current
earnings.

During the fourth quarter of 2003, we entered into Eurodollar Transactions to
manage interest rate risk associated with commitments to originate ARM loans.
We refer to these Eurodollar Transactions as Pipeline Hedging Instruments and
do not currently apply hedge accounting to them. Therefore, the change in fair
value and the realized gains (losses) on these Pipeline Hedging Instruments are
recorded in current earnings. The net gain (loss) related to Pipeline Hedging
Instruments is reflected in Gain on ARM assets on the Consolidated Statement of
Operations as an offset to the net gain (loss) recorded for the change in fair
value of the loan commitments recorded pursuant to SFAS 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities.

On December 11, 2003, the SEC staff announced that it will soon release a Staff
Accounting Bulletin (SAB) that will require all registrants to begin
accounting for their issued loan commitments (including interest rate lock
commitments) subject to Statement 133 as written options that would be reported
as liabilities until either they are exercised (and a loan is made) or they
expire unexercised. This SAB is intended to eliminate the current diversity in
practice that exists related to the accounting for loan commitments. As a
result of this announcement, we will cease the recognition of mark-to-market
gains on our loan commitments effective April 1, 2004 and will implement the
new guidance provided by the SAB upon its effective date. Based on our current
understanding of the SEC comments regarding the expected SAB and our
anticipated ability to hedge our interest rate lock commitments, we do not
believe the impact of the adoption of this new policy will have a material
impact on our balance sheet or results of operations

Asset Acquisitions

During the year ended December 31, 2003, we purchased $10.3 billion of ARM
securities, 100.0% of which were High Quality assets and $5.3 billion of ARM
loans, generally originated to A quality underwriting standards. Of the ARM
assets acquired during 2003, 92.3% were Hybrid ARM assets and 7.7% were
Traditional ARM assets generally indexed to LIBOR. The following table
compares our ARM asset acquisition and origination activity for 2003, 2002 and
2001:

ARM Asset Acquisitions
(Dollar amounts in thousands)

|                |                                |  |            |            |      |  |           |           |  |  |           |           | 
|--------------- | ------------------------------ |  | ---------- | ---------- | ---- |  | --------- | --------- |  |  | --------- | --------- | 
|                |                                |  | 2003       |            | 2002 |  | 2001     
|                |                                |  |            |            |      |  |          
|ARM securities: |                                |  |            |            |      |  |           |           |  |  |           |          
|                | Agency Securities              |  | $          | 953,172    |      |  | $         | 3,042,122 |  |  | $         | 1,657,004 | 
|                | High Quality, privately
issued |  |            | 9,276,029  |      |  |           | 3,537,400 |  |  |           | 959,096   | 
|                | Other privately issued         |  |            | 30,421     |      |  |           |          |  |  |           | 54,462    | 
|                |                                |  |            |            |      |  |           |           |  |  |           |           | 
|                |                                |  | 10,259,622 |            |      |  | 6,579,522 |           |  |  | 2,670,562 |          
|                |                                |  |            |            |      |  |           |           |  |  |           |           | 
|ARM Loans:      |                                |  |            |            |      |  |           |           |  |  |           |          
|                | Bulk acquisitions              |  |            | 1,316,324  |      |  |           | 562,809   |  |  |           | 595,027   | 
|                | Correspondent originations     |  |            | 3,440,151  |      |  |           | 1,906,499 |  |  |           | 482,166   | 
|                | Direct retail originations     |  |            | 564,461    |      |  |           | 379,785   |  |  |           | 108,084   | 
|                |                                |  |            |            |      |  |           |           |  |  |           |           | 
|                |                                |  | 5,320,936  |            |      |  | 2,849,093 |           |  |  | 1,185,277 |          
|                |                                |  |            |            |      |  |           |           |  |  |           |           | 
|                | Total acquisitions             |  | $          | 15,580,558 |      |  | $         | 9,428,615 |  |  | $         | 3,855,839 | 
|                |                                |  |            |            |      |  |           |           |  |  |           |           | 

Since 1997, we have emphasized acquiring ARM assets at substantially lower
prices relative to par in order to reduce the potential impact on our earnings
as a result of rapid prepayments. In doing so, the average premium paid for
ARM assets acquired in 2003 and 2002 was 1.01% and 0.86%, of par, respectively,
as compared to 3.29% of par in 1997. In part, as a result of this strategy,
the book price of our ARM assets, excluding unrealized gains and losses, was
101.16% of par as of December 31, 2003, down from 102.77% of par as of the end
of 1997. This is a non-GAAP measurement that provides the average amount of
cash we have paid, net of amortization we have expensed, for the assets we hold
in our ARM portfolio as a

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percentage of par. We amortize all premiums and
discounts over the expected life of the ARM assets. However, our ARM assets
can be paid off at any time, which could result in accelerated amortization.
That is why we provide this non-GAAP measurement. The corresponding GAAP
measurement of book price, including unrealized losses of $42.7 million and
$12.5
million at December 31, 2003 and December 31, 1997, respectively, was 100.93%
at December 31, 2003, compared to 102.49% at December 31, 1997.

As of December 31, 2003, we had commitments to purchase $602.4 million of ARM
securities and $447.5 million of ARM loans through origination channels.

Securitization Activity

During 2003, we securitized $6.1 billion of our ARM loans into a series of
multi-class ARM securities. The securitization process benefits us by creating
highly liquid assets that can be readily financed in the reverse repurchase
agreement market or by enabling us to issue floating-rate CDOs that represent
permanent financing and are not subject to margin calls. While TMHL
transferred substantially all of the ARM loans to separate bankruptcy-remote
legal entities, on a consolidated basis: (i) our securitizations are not
accounted for as sales and (ii) we retain economic interest and risk with
regard to the loans. All discussions relating to securitizations in this Form
10-K are on a consolidated basis and do not reflect the separate legal
ownership of the loans by various bankruptcy-remote legal entities that are our
wholly-owned subsidiaries. Of the loans that we securitized during 2003, 99.9%
of our resulting investment was rated at least Investment Grade and 0.1% of our
investment was rated below Investment Grade and provided credit support to the
Investment Grade securities.

Prepayment Experience

For the quarter ended December 31, 2003, our mortgage assets paid down at an
approximate average annualized Constant Paydown Rate (CPR) of 29%, compared
to 37% for the quarter ended December 31, 2002 and 39% for the quarter ended
September 30, 2003. The constant prepayment rate averaged approximately 33%
during the full year of 2003 compared to 32% during 2002. When prepayment
experience increases, we have to amortize our premiums over a shorter time
period, 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.

Liquidity and Capital Resources

We manage liquidity to ensure that we have the continuing ability to maintain
cash flows that are adequate to fund operations and meet commitments on a
timely and cost-effective basis. At December 31, 2003, we had unencumbered
assets of $483.5 million, consisting of unpledged ARM assets and cash and cash
equivalents. Our principal sources of liquidity are the reverse repurchase
agreement market, the issuance of CDOs, whole loan financing facilities as well
as principal and interest payments from ARM assets. The reverse repurchase
agreement market is a $6 trillion market that has been a readily available
source of financing for mortgage assets, particularly those rated AA or better.
There is also a robust market for AAA-rated CDOs of the type that we issue and
this type of financing effectively eliminates rollover and margin call risk for
the related portion of our balance sheet. To supplement our funding sources,
we also issue equity securities and unsecured long-term debt. We believe that
our liquidity level is in excess of that necessary to satisfy our operating
requirements and we expect to continue to use diverse funding sources to
maintain our financial flexibility.

Sources of Funds

Our primary sources of funds for the year ended December 31, 2003 consisted of
reverse repurchase agreements, floating-rate CDOs and whole loan financing
facilities. Our other significant sources of funds for the year ended December
31, 2003 consisted primarily of payments of principal and interest from our ARM
assets and the proceeds from the issuance of Senior Notes. In the future, we
expect our primary sources of funds to remain the same.

We have arrangements to enter into reverse repurchase agreements with 24
different financial institutions and on December 31, 2003, had borrowed funds
from 18 of these firms. Reverse repurchase agreement borrowings outstanding at
December 31, 2003, had a weighted average effective cost of 1.27%. The reverse
repurchase agreements had a weighted average remaining term to maturity of 4.9
months, although we utilize Swap Agreements and Eurodollar Transactions to
extend the re-pricing characteristic of total borrowings to 2.3 years. As of
December 31, 2003, $13.5 billion of these borrowings were

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variable rate term
reverse repurchase agreements. 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 declines for
other reasons. Additionally, 1.1% 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, 2003. 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.

During 2003, we completed three CDO transactions in which we permanently
financed $3.5 billion of mortgage loans from our ARM loan portfolio. In these
transactions, we issued AAA and AA rated floating-rate MBS to third party
investors. Such a structure enables us to use our capital more efficiently
because the capital required to support these financings is less than the
amount required by our policy to support the same amount of financings in the
reverse repurchase agreement market and these transactions represent permanent
financing of these loans that are not subject to future margin calls. At
December 31, 2003, we had $3.1 billion of CDOs outstanding at an effective cost
of 1.59%.

As of December 31, 2003, we had entered into four whole loan financing
facilities. The first whole loan financing facility has a committed borrowing
capacity of $600 million and an uncommitted capacity of $100 million and
matures in November 2004. The second financing facility has a committed
borrowing capacity of $300 million and matures in March 2004. The third
financing facility has a committed borrowing capacity of $300 million and an
uncommitted capacity of $250 million and matures in March 2004. The fourth
facility has a committed borrowing capacity of $150 million and matures in
September 2004. We expect to renew these facilities in the ordinary course of
business. As of December 31, 2003, we had $369.3 million borrowed against
these whole loan financing facilities at an effective cost of 2.32%.

Capital Utilization

Our Board has approved a policy that limits our capacity to borrow funds to
finance mortgage assets based on our equity capital and unsecured debt. We
monitor the relationship between our assets, borrowings and equity capital
using a variety of different measures. The primary operating policy that
limits our borrowings and leverage is our Adjusted Equity-to-Assets Ratio, a
non-GAAP measurement, which we must maintain at a minimum of 8%. Our Adjusted
Equity-to-Assets Ratio represents the long-term capital (both equity and Senior
Notes) supporting our recourse or marginable debt. Recourse or marginable debt
generally consists of reverse repurchase agreements and whole loan financing
facilities. These forms of borrowing are short-term in nature, mature on a
frequent basis (typically 30 days), need to be rolled over at each maturity and
are subject to margin call based on collateral value changes or changes in
margin requirements. Because of the short-term nature of these forms of
financing, our policy requires that we maintain significant excess capital and
liquidity to meet margin calls as a result of unexpected changes in margin
requirements and collateral value. Our policy is to maintain a capital cushion
equal to approximately twice the margin requirement when using these forms of
borrowings. Our margin requirements typically range between 4% and 5% for
these borrowings, so our policy requires that we maintain capital of at least
8%, and typically 9%, against the financing of these assets. This capital
cushion has proved to be more than adequate to support our borrowing
arrangements through a variety of interest rate and credit cycles.

As we replace our reverse repurchase agreement borrowings with CDO financings,
the risk of margin calls, changes in margin requirements and potential rollover
risk is eliminated, because CDO financings represent permanent non-recourse
financing whose terms are established at the time of the financing and are not
subject to change. As a result, the need to maintain a capital cushion
comparable to what we maintain on our recourse borrowings is eliminated. For
purposes of maintaining an adequate capital cushion, our policy allows us to
eliminate all assets (and the associated equity capital) associated with CDO
financing from our operating capital ratio. Additionally, we eliminate from
our Adjusted Equity-to-Assets Ratio any unrealized market value adjustments,
referred to as Accumulated other comprehensive loss from our equity accounts,
and we include our Senior Notes as an additional form of long-term capital as
if the notes were equity capital. Because the CDOs only require approximately
2% of equity capital to support the CDO financing, versus the 8% to 10% policy
requirement on our recourse borrowings, we are able to use this freed-up
capital to acquire additional assets. We expect that we will be able to retain
and carry an increased amount of assets in the future as a percentage of our
equity capital base. Further, because we treat our Senior Notes as a
substitute form of equity capital, our asset base is expected to grow even
further.

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The following table presents the calculation of our Adjusted Equity-to-Assets
ratio, a non-GAAP measurement:

|                              |                                              |                                |                                                                   |                   |            |            |            |          |          |            |  
|----------------------------- | -------------------------------------------- | ------------------------------ | ----------------------------------------------------------------- | ----------------- | ---------- | ---------- | ---------- | -------- | -------- | ---------- | -
|(dollar amounts in thousands) |                                              | December 31, 2003              |                                                                   | December 31, 2002
|                              |                                              |                                |                                                                   |                  
|Assets                        |                                              | $                              | 19,118,799                                                        |                   |            | $          | 10,512,932 |         
|Adjustments:                  |                                              |                                |                                                                   |                   |            |            |            |         
|                              | Net unrealized loss (gain) on ARM securities |                                |                                                                   | 42,717            |            |            |            | (44,682  | )       
|                              | Net unrealized gain on hedging instruments   |                                |                                                                   | (8,655            | )          |            |            |         |         
|                              | ARM loans collateralizing CDOs               |                                |                                                                   | (3,146,961        | )          |            |            | (289,783 | )       
|                              | Cap agreements                               |                                |                                                                   | (31,692           | )          |            |            |         |         
|                              |                                              |                                |                                                                   |                   |            |            |            |         
|                              |                                              |                                | Adjusted assets                                                   |                   | $          | 15,974,208 |            |          | $        | 10,178,467 |  
|                              |                                              |                                |                                                                   |                   |            |            |            |         
|Shareholders equity          |                                              | $                              | 1,239,104                                                         |                   |            | $          | 833,042    |         
|Adjustments:                  |                                              |                                |                                                                   |                   |            |            |            |         
|                              | Accumulated other comprehensive loss         |                                |                                                                   | 142,778           |            |            |            | 105,254  |         
|                              | Equity supporting CDOs:                      |                                |                                                                   |                   |            |            |            |          |         
|                              |                                              | CDOs                           |                                                                   |                   | 3,114,047  |            |            |          | 255,415  |           
|                              |                                              | ARM loans collateralizing CDOs |                                                                   |                   | (3,146,961 | )          |            |          | (289,783 | )         
|                              |                                              | Cap agreements                 |                                                                   |                   | (31,692    | )          |            |          |         |           
|                              |                                              |                                |                                                                   |                   |            |            |            |         
|                              |                                              |                                | (64,606                                                           | )                 |            |            | (34,368    | )       
|                              | Senior notes                                 |                                |                                                                   | 251,080           |            |            |            |         |         
|                              |                                              |                                |                                                                   |                   |            |            |            |         
|                              |                                              |                                | Adjusted shareholders equity                                     |                   | $          | 1,568,356  |            |          | $        | 903,928    |  
|                              |                                              |                                |                                                                   |                   |            |            |            |         
|                              |                                              |                                | Adjusted equity-to-assets ratio                                   |                   |            | 9.82       | %          |          |          | 8.88       | %
|                              |                                              |                                |                                                                   |                   |            |            |            |         
|                              |                                              |                                | GAAP equity-to-assets ratio                                       |                   |            | 6.48       | %          |          |          | 7.92       | %
|                              |                                              |                                |                                                                   |                   |            |            |            |         
|                              |                                              |                                | Ratio of historical equity
plus Senior Notes to
historical assets |                   |            | 8.53       | %          |          |          | 8.96       | %
|                              |                                              |                                |                                                                   |                   |            |            |            |         
|                              |                                              |                                | Estimated total risk-based
capital /risk-weighted assets          |                   |            | 26.26      | %          |          |          | 34.05      | %
|                              |                                              |                                |                                                                   |                   |            |            |            |         

The above table also presents three alternative capital utilization
measurements to our Adjusted Equity-to-Assets ratio. The first capital
utilization measurement is our GAAP equity-to-assets ratio, a calculation that
simply divides total equity by total assets. While the simplest of all
equity-to-assets calculations, it is not used by management to manage our
balance sheet because it includes factors such as unrealized gains and losses
on assets and hedging instruments deemed to be less important to the long-term
operating nature of our business, since our assets are not for sale and since
the unrealized gains and losses are not permanent impairments of our equity or
of these assets and hedging instruments. This ratio has declined since
December 31, 2002 due to the use of CDO financing that allows us to acquire
additional assets against the equity capital that is freed up as a result of
entering into these permanent financing transactions, and the fact that we
treat our unsecured debt as an alternative form of equity capital.

The second alternative capital utilization measurement is the ratio of
historical equity plus Senior Notes to historical assets. This is a non-GAAP
measurement that eliminates the market value adjustment of our assets and
hedging instruments included

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in Accumulated other comprehensive loss. This
calculation also includes Senior Notes as a component of our long-term capital
base. This measurement is calculated by dividing the sum of the assets, net
unrealized gain (loss) on ARM securities and net unrealized gain on hedging
instruments in the table above by the sum of shareholders equity and Senior
Notes in the
table above. We monitor this ratio in order to have a complete picture of the
relationship between our total asset and long-term capital position.

The third alternative capital utilization measurement is a calculation of
estimated total risk-based capital divided by risk-weighted assets, a
regulatory calculation required to be made by banks and savings and loan
institutions that complies with Federal Reserve Board capital requirements.
Risk-based capital measures capital requirements for assets based on their
credit exposure as defined by the regulation, with lower credit risk assets
requiring less capital and higher credit risk assets requiring more capital.
Although we are not subject to these regulatory requirements, we focus our
efforts on only high quality assets. Therefore, our risk-based capital ratio
tends to be quite high when compared to banking institutions, and well in
excess of the 8% bank and savings and loan regulatory minimum for qualification
as well-capitalized.

Equity Transactions

During the year ended December 31, 2003, we issued 5,906,968 shares of common
stock through at-market transactions under controlled equity offering
programs and received net proceeds of $143.0 million.

In February 2003, we completed a public offering of 3,473,500 shares of common
stock and received net proceeds of $65.9 million. In August 2003, we completed
a public offering of 4,000,000 shares of common stock and received net proceeds
of $104.6 million.

During the year ended December 31, 2003, we issued 5,081,457 shares of common
stock under the DRSPP and received net proceeds of $118.6 million.

Off-Balance Sheet Commitments

As of December 31, 2003, we had commitments in the ordinary course of business
to purchase or originate the following amounts of ARM assets (dollar amounts in
thousands):

|                                       |  |   |           | 
|-------------------------------------- |  | - | --------- | 
|ARM securities  agency                |  | $ | 301,266   | 
|ARM securities  private high quality  |  |   | 301,125   | 
|ARM loans  correspondent originations |  |   | 396,000   | 
|ARM loans  direct originations        |  |   | 51,451    | 
|                                       |  |   |           | 
|                                       |  | $ | 1,049,842 | 
|                                       |  |   |           | 

We also have entered into transactions whereby we expect to acquire the
remaining balance of certain AAA-rated Hybrid ARM securities, at a price of
par, between 2004 and 2008, when the fixed-rate period of the Hybrid ARM
securities terminates and the securities convert into Traditional ARM
securities with characteristics similar to the Traditional ARM securities held
in the current portfolio. We view these transactions as an alternative source
of Traditional ARM assets. The current balance of the Hybrid ARM securities is
approximately $2.6 billion, but is expected to be less than 25% of that, and
could be zero, at the time they convert into Traditional ARM securities. If we
decide not to acquire the Hybrid ARM securities when they convert into
Traditional ARM securities, then we are committed to pay or receive the
difference between par and the fair value of the Traditional ARM securities at
that time, as determined by an auction of the Traditional ARM securities. As
of December 31, 2003, we had delivered cash and ARM assets with a carrying
value totaling $10.0 million as collateral in connection with these
transactions.

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Contractual Obligations

As of December 31, 2003, we had the following contractual obligations (dollar
amounts in thousands):

|                                |           |   |                        |            |      |   |             |            |       |   |         |         |       |   |           |        |  |   |           |           | 
|------------------------------- | --------- | - | ---------------------- | ---------- | ---- | - | ----------- | ---------- | ----- | - | ------- | ------- | ----- | - | --------- | ------ |  | - | --------- | --------- | 
|                                |           |   | Payments Due by Period
|                                |           |   |                       
|                                |           |   |                        |            |      |   | Less than 1 |            |       |   |         |         | 3  5 |   | More than
|                                |           |   | Total                  |            | year |   | 1  3 years |            | years |   | 5 years
|                                |           |   |                        |            |      |   |             |            |       |   |        
|Reverse repurchase agreements   |           | $ | 13,926,858             |            |      | $ | 13,821,383  |            |       | $ | 105,475 |         |       | $ |          |        |  | $ |          |          
|CDOs (1)                        |           |   | 3,114,047              |            |      |   | 7,534       |            |       |   | 16,647  |         |       |   | 34,905    |        |  |   | 3,054,961 |          
|Whole loan financing facilities |           |   | 369,343                |            |      |   | 369,343     |            |       |   |        |         |       |   |          |        |  |   |          |          
|Senior Notes                    |           |   | 251,080                |            |      |   |            |            |       |   |        |         |       |   |          |        |  |   | 251,080   |          
|Purchase commitments            |           |   | 1,049,842              |            |      |   | 1,049,842   |            |       |   |        |         |       |   |          |        |  |   |          |          
|                                |           |   |                        |            |      |   |             |            |       |   |         |         |       |   |           |        |  |   |           |          
|                                | Total (2) |   | $                      | 18,711,170 |      |   | $           | 15,248,102 |       |   | $       | 122,122 |       |   | $         | 34,905 |  |   | $         | 3,306,041 | 
|                                |           |   |                        |            |      |   |             |            |       |   |         |         |       |   |           |        |  |   |           |          



|(1) |  | Maturities of our CDOs are dependent upon cash flows received from the
underlying loans receivable. Our estimate of their repayment is based on
scheduled principal payments on the underlying loans receivable. This
estimate will differ from actual amounts to the extent we experience
prepayments and/or loan losses.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Our Consolidated Balance Sheet includes a liability for Hedging
Instruments with negative market values, which are not reflected in this
table.                                                                                                                                                                           

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Results of Operations - 2003 Compared to 2002 and 2001

The table below presents our net income and Basic and Diluted earnings per
share for the years ended December 31, 2003, 2002 and 2001:

|                             |  |                                 |         |      |  |          |         |      |  |          |      |   |  |   |        |  |  |  |       |  
|---------------------------- |  | ------------------------------- | ------- | ---- |  | -------- | ------- | ---- |  | -------- | ---- | - |  | - | ------ |  |  |  | ----- | -
|                             |  | For the year ended December 31,
|                             |  |                                
|                             |  | 2003                            |         | 2002 |  | % Change |         | 2001 |  | % Change
|                             |  |                                 |         |      |  |          |         |      |  |         
|Net income                   |  | $                               | 176,504 |      |  | $        | 120,016 |      |  |          | 47.1 | % |  | $ | 58,460 |  |  |  | 105.3 | %
|Earnings per share (Basic)   |  |                                 | 2.73    |      |  |          | 2.60    |      |  |          | 5.0  | % |  |   | 2.09   |  |  |  | 24.4  | %
|Earnings per share (Diluted) |  |                                 | 2.71    |      |  |          | 2.59    |      |  |          | 4.6  | % |  |   | 2.09   |  |  |  | 23.9  | %

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 year that is applicable to the computation of the
Managers performance fee:

Components of Return on Average Common Equity

|             |  |          |       |         |  |        |      |           |  |        |      |           |  |         |      |          |  |           |       |    |  |     |      |    |  |         |       |   |  |         |      |           |  |        |       |  
|------------ |  | -------- | ----- | ------- |  | ------ | ---- | --------- |  | ------ | ---- | --------- |  | ------- | ---- | -------- |  | --------- | ----- | -- |  | --- | ---- | -- |  | ------- | ----- | - |  | ------- | ---- | --------- |  | ------ | ----- | -
|             |  |          |       |         |  |        |      |           |  |        |      |           |  |         |      |          |  |           |       |    |  |     |      |    |  |         |       |   |  |         |      |           |  | ROE in
|             |  |          |       |         |  |        |      |           |  |        |      |           |  |         |      |          |  |           |       |    |  |     |      |    |  |         |       |   |  | 10-Year |      | Excess of
|             |  | Net      |       | G & A   |  |        |      |           |  |        |      |           |  |         |      |          |  |           |       |    |  | Net |      | US |  | 10-Year
|For the      |  | Interest |       | Expense |  | Mgmt   |      | Incentive |  | Other  |      | Preferred |  | Income/ |      | Treasury |  | US Treas.
|Year         |  | Income/  |       | (1)/    |  | Fee/   |      | Fee/      |  | (2)/   |      | Dividend/ |  | Equity  |      | Average  |  | Average  
|Ended        |  | Equity   |       | Equity  |  | Equity |      | Equity    |  | Equity |      | Equity    |  | (ROE)   |      | Yield    |  | Yield    
|             |  |          |       |         |  |        |      |           |  |        |      |           |  |         |      |          |  |          
|Dec 31, 2001 |  |          | 25.39 | %       |  |        | 2.10 | %         |  |        | 1.58 | %         |  |         | 2.16 | %        |  |           | 0.71  | %  |  |     | 2.15 | %  |  |         | 16.69 | % |  |         | 5.02 | %         |  |        | 11.67 | %
|Dec 31, 2002 |  |          | 24.61 | %       |  |        | 1.88 | %         |  |        | 1.22 | %         |  |         | 2.73 | %        |  |           | 0.08  | %  |  |     | 1.04 | %  |  |         | 17.66 | % |  |         | 4.62 | %         |  |        | 13.05 | %
|Dec 31, 2003 |  |          | 23.39 | %       |  |        | 2.02 | %         |  |        | 1.15 | %         |  |         | 2.79 | %        |  |           | (0.21 | )% |  |     | 0.33 | %  |  |         | 17.31 | % |  |         | 4.02 | %         |  |        | 13.29 | %



---

|(1) |  | General and administrative (G & A) expense excludes management and
performance fees and is net of fee income.
|--- |  | ---------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Other includes gain on ARM assets, hedging expense and provision for
credit losses.                            

Our return on equity declined slightly in this past year compared to the prior
year primarily because the yield on our ARM asset portfolio reflects the
prepayment of higher yielding assets in a declining interest rate environment
and we experienced higher costs of funds on our borrowings due to the addition
of Hybrid Hedging Instruments on Hybrid ARM assets. The decline in our net
interest spread was partially offset by more effective use of capital. Our
return on equity increased from 2001 to 2002 primarily because our net interest
income improved due to lower cost of funds on our borrowings and because the
yield on our ARM asset portfolio benefited from the acquisition of ARM assets
at average prices closer to par which replaced lower yielding ARM assets that
paid off.

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The following table presents the components of our net interest income for the
years ended December 31, 2003, 2002 and 2001:

Comparative Net Interest Income Components
(Dollar amounts in thousands)

|                                     |                  |   |         |         |      |   |         |         |  |   |         |         | 
|------------------------------------ | ---------------- | - | ------- | ------- | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                                     |                  |   | 2003    |         | 2002 |   | 2001   
|                                     |                  |   |         |         |      |   |        
|Coupon interest income on ARM assets |                  | $ | 621,456 |         |      | $ | 419,456 |         |  | $ | 299,911 |        
|Amortization of net premium          |                  |   | (35,076 | )       |      |   | (19,229 | )       |  |   | (22,696 | )      
|Cash and cash equivalents            |                  |   | 3,235   |         |      |   | 1,740   |         |  |   | 1,379   |        
|                                     |                  |   |         |         |      |   |         |         |  |   |         |        
|                                     | Interest income  |   |         | 589,615 |      |   |         | 401,967 |  |   |         | 278,594 | 
|                                     |                  |   |         |         |      |   |         |         |  |   |         |        
|Reverse repurchase agreements        |                  |   | 150,985 |         |      |   | 135,346 |         |  |   | 146,577 |        
|CDOs                                 |                  |   | 18,873  |         |      |   | 8,436   |         |  |   | 26,000  |        
|Whole loan financing facilities      |                  |   | 16,904  |         |      |   | 11,260  |         |  |   |        |        
|Senior Notes                         |                  |   | 10,798  |         |      |   |        |         |  |   | 9,459   |        
|Interest rate swaps                  |                  |   | 158,102 |         |      |   | 88,996  |         |  |   | 17,793  |        
|                                     |                  |   |         |         |      |   |         |         |  |   |         |        
|                                     | Interest expense |   |         | 355,662 |      |   |         | 244,038 |  |   |         | 199,829 | 
|                                     |                  |   |         |         |      |   |         |         |  |   |         |        
|Net interest income                  |                  | $ | 233,953 |         |      | $ | 157,929 |         |  | $ | 78,765  |        
|                                     |                  |   |         |         |      |   |         |         |  |   |         |        

As presented in the table above, our net interest income increased by $76.0
million in 2003 compared to 2002. The change from 2002 to 2003 was
attributable to a $187.6 million increase in interest income primarily due to
an increased asset base, partially offset by a $111.6 million increase in
interest expense. Included in this increase in interest expense is a $69.1
million increase resulting from the impact of Swap Agreements and Eurodollar
Transactions which is commensurate with the increase in borrowings financing
our Hybrid ARM assets. Our net interest income was $79.2 million higher during
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. Hybrid ARM assets
totaled $15.3 billion and $7.5 billion at December 31, 2003 and 2002,
respectively.

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,
|                                         |                                 |   |                                 
|                                         |                                 |   | 2003                             |            | 2002           |  | 2001           
|                                         |                                 |   |                                  |            |                |  |                
|                                         |                                 |   | Average Balance                  |            | Effective Rate |  | Average Balance |      | Effective Rate |   | Average Balance |           | Effective Rate
|                                         |                                 |   |                                  |            |                |  |                 |      |                |   |                 |           |               
|Interest Earning Assets:                 |                                 |   |                                  |            |                |  |                 |      |                |   |                 |           |                |  |      |      |   |   |           |           |  |  |      |     
|                                         | ARM assets                      |   | $                                | 14,266,035 |                |  |                 | 4.11 | %              |   | $               | 8,303,133 |                |  |      | 4.82 | % |   | $         | 4,657,324 |  |  |      | 5.95 | %
|                                         | Cash and cash equivalents       |   |                                  | 300,460    |                |  |                 | 1.08 |                |   |                 | 99,285    |                |  |      | 1.75 |   |   |           | 48,487    |  |  |      | 2.84 |  
|                                         |                                 |   |                                  |            |                |  |                 |      |                |   |                 |           |                |  |      |      |   |   |           |           |  |  |      |      |  
|                                         |                                 |   | 14,566,495                       |            |                |  | 4.05            |      |                |   | 8,402,418       |           |                |  | 4.78 |      |   |   | 4,705,811 |           |  |  | 5.92 |     
|                                         |                                 |   |                                  |            |                |  |                 |      |                |   |                 |           |                |  |      |      |   |   |           |           |  |  |      |      |  
|Interest Bearing Liabilities:            |                                 |   |                                  |            |                |  |                 |      |                |   |                 |           |                |  |      |      |   |   |           |           |  |  |      |     
|                                         | Reverse repurchase agreements   |   |                                  | 11,247,005 |                |  |                 | 2.75 |                |   |                 | 6,886,784 |                |  |      | 3.26 |   |   |           | 3,544,267 |  |  |      | 4.64 |  
|                                         | CDOs                            |   |                                  | 1,151,669  |                |  |                 | 1.64 |                |   |                 | 332,726   |                |  |      | 2.54 |   |   |           | 524,773   |  |  |      | 4.95 |  
|                                         | Whole loan financing facilities |   |                                  | 850,356    |                |  |                 | 1.99 |                |   |                 | 407,234   |                |  |      | 2.77 |   |   |           | 202,188   |  |  |      | 4.68 |  
|                                         | Senior Notes                    |   |                                  | 126,862    |                |  |                 | 8.51 |                |   |                 |          |                |  |      |     |   |   |           |          |  |  |      |     |  
|                                         |                                 |   |                                  |            |                |  |                 |      |                |   |                 |           |                |  |      |      |   |   |           |           |  |  |      |      |  
|                                         |                                 |   | 13,375,892                       |            |                |  | 2.66            |      |                |   | 7,626,744       |           |                |  | 3.20 |      |   |   | 4,271,228 |           |  |  | 4.68 |     
|                                         |                                 |   |                                  |            |                |  |                 |      |                |   |                 |           |                |  |      |      |   |   |           |           |  |  |      |      |  
|Net Interest Earning Assets and
Spread   |                                 | $ | 1,190,603                        |            |                |  | 1.39            | %    |                | $ | 775,674         |           |                |  | 1.58 | %    |   | $ | 434,583   |           |  |  | 1.24 | %   
|                                         |                                 |   |                                  |            |                |  |                 |      |                |   |                 |           |                |  |      |      |   |   |           |           |  |  |      |      |  
|Yield on Net Interest Earning
Assets (1) |                                 |   |                                  |            |                |  | 1.61            | %    |                |   |                 |           |                |  | 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.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------

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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, |         | Years Ended December 31,
|                    |                                 |   | 2003 versus 2002         |         | 2002 versus 2001        
|                    |                                 |   |                          |         |                         
|                    |                                 |   | Rate                     |         | Volume                   |   | Total   |         | Rate |   | Volume  |         | Total
|                    |                                 |   |                          |         |                          |   |         |         |      |   |         |         |      
|Interest Income:    |                                 |   |                          |         |                          |   |         |         |      |   |         |         |       |   |         |         |   |   |         |         |   |   |         |        
|                    | ARM assets                      |   | $                        | (58,942 | )                        |   | $       | 245,095 |      |   | $       | 186,153 |       |   | $       | (52,723 | ) |   | $       | 175,735 |   |   | $       | 123,012 |  
|                    | Cash and cash equivalents       |   |                          | (672    | )                        |   |         | 2,167   |      |   |         | 1,495   |       |   |         | (529    | ) |   |         | 890     |   |   |         | 361     |  
|                    |                                 |   |                          |         |                          |   |         |         |      |   |         |         |       |   |         |         |   |   |         |         |   |   |         |         |  
|                    |                                 |   | (59,614                  | )       |                          |   | 247,262 |         |      |   | 187,648 |         |       |   | (53,252 | )       |   |   | 176,625 |         |   |   | 123,373 |        
|                    |                                 |   |                          |         |                          |   |         |         |      |   |         |         |       |   |         |         |   |   |         |         |   |   |         |         |  
|Interest Expense:   |                                 |   |                          |         |                          |   |         |         |      |   |         |         |       |   |         |         |   |   |         |         |   |   |         |        
|                    | Reverse repurchase agreements   |   |                          | (35,083 | )                        |   |         | 119,828 |      |   |         | 84,745  |       |   |         | (48,913 | ) |   |         | 108,885 |   |   |         | 59,972  |  
|                    | CDOs                            |   |                          | (2,983  | )                        |   |         | 13,420  |      |   |         | 10,437  |       |   |         | (12,695 | ) |   |         | (4,869  | ) |   |         | (17,564 | )
|                    | Whole loan financing facilities |   |                          | (3,165  | )                        |   |         | 8,809   |      |   |         | 5,644   |       |   |         | (3,868  | ) |   |         | 5,669   |   |   |         | 1,801   |  
|                    | Senior Notes                    |   |                          |        |                          |   |         | 10,798  |      |   |         | 10,798  |       |   |         |        |   |   |         |        |   |   |         |        |  
|                    |                                 |   |                          |         |                          |   |         |         |      |   |         |         |       |   |         |         |   |   |         |         |   |   |         |         |  
|                    |                                 |   | (41,231                  | )       |                          |   | 152,855 |         |      |   | 111,624 |         |       |   | (65,476 | )       |   |   | 109,685 |         |   |   | 44,209  |        
|                    |                                 |   |                          |         |                          |   |         |         |      |   |         |         |       |   |         |         |   |   |         |         |   |   |         |         |  
|Net interest income |                                 | $ | (18,383                  | )       |                          | $ | 94,407  |         |      | $ | 76,024  |         |       | $ | 12,224  |         |   | $ | 66,940  |         |   | $ | 79,164  |        
|                    |                                 |   |                          |         |                          |   |         |         |      |   |         |         |       |   |         |         |   |   |         |         |   |   |         |         |  

Net interest income increased by $76.0 million from 2002 to 2003. This
increase in net interest income is composed of an unfavorable rate variance and
a favorable volume variance. As a result of the yield on our interest-earning
assets decreasing to 4.05% during 2003 from 4.78% during 2002, a decrease of 73
basis points, and our cost of funds decreasing to 2.66% from 3.20% during the
same time period, a decrease of 54 basis points, there was a net unfavorable
rate variance of $18.4 million. This was primarily due to an unfavorable rate
variance on our ARM assets portfolio and other interest-earning assets that
decreased net interest income by $59.6 million, partially offset by a favorable
rate variance on borrowings in the amount of $41.2 million. The increased
average size of our portfolio during 2003 compared to 2002 increased net
interest income in the amount of $94.4 million. The average balance of our
interest-earning assets was $14.6 billion during 2003, compared to $8.4 billion
during 2002  an increase of 73.8%.

The increased average size of our portfolio during 2002 compared to 2001
increased net interest income in the amount of $66.9 million. The potential
volatility in the rate variance is reduced through our use of Hybrid Hedging
Instruments and the net improvement in interest income is primarily a result of
the benefits resulting from the ARM asset investments we have made with
proceeds from the issuance of additional common equity. As a net result of the
yield on our interest-earning assets decreasing to 4.78% during 2002 from 5.92%
during 2001 and our cost of funds decreasing to 3.20% from 4.68%, our net
interest income increased by $79.2 million from 2002 to 2001. This was
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 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%.

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

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

|             |  |          |        |            |  |          |      |          |  |          |      |          |  |         |      |          |  |  |      |     |  |  |      |   |  |          |      |  
|------------ |  | -------- | ------ | ---------- |  | -------- | ---- | -------- |  | -------- | ---- | -------- |  | ------- | ---- | -------- |  |  | ---- | --- |  |  | ---- | - |  | -------- | ---- | -
|             |  |          |        |            |  |          |      |          |  |          |      |          |  |         |      |          |  |  |      |     |  |  |      |   |  | Yield on
|             |  | Average  |        | Historical |  |          |      |          |  | Yield on |      |          |  |         |      |          |  |  |      | Net
|For the      |  | Interest |        | Weighted   |  | Yield    |      | Interest |  |          |      |          |  | Net     |      | Interest
|Year         |  | Earning  |        | Average    |  | Adjust-  |      | Earning  |  | Cost of  |      | Interest |  | Earning
|Ended        |  | Assets   |        | Coupon     |  | ment (2) |      | Assets   |  | Funds    |      | Spread   |  | Assets 
|             |  |          |        |            |  |          |      |          |  |          |      |          |  |        
|Dec 31, 2001 |  | $        | 4,706  |            |  |          | 6.71 | %        |  |          | 0.79 | %        |  |         | 5.92 | %        |  |  | 4.68 | %   |  |  | 1.24 | % |  |          | 1.67 | %
|Dec 31, 2002 |  | $        | 8,402  |            |  |          | 5.24 | %        |  |          | 0.46 | %        |  |         | 4.78 | %        |  |  | 3.20 | %   |  |  | 1.58 | % |  |          | 1.88 | %
|Dec 31, 2003 |  | $        | 14,566 |            |  |          | 4.56 | %        |  |          | 0.51 | %        |  |         | 4.05 | %        |  |  | 2.66 | %   |  |  | 1.39 | % |  |          | 1.61 | %



---

|(1) |  | Yield on Net Interest Earning Assets is computed by dividing net
interest income by the average daily balance of interest earning assets
during the year.                
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Yield adjustments include the impact of amortizing premiums and
discounts, the impact of principal payment receivables and the impact of
interest earning non-ARM assets.

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

|             |  |              |      |            |  |           |      |            |  |       |      |   |  |  |      |  
|------------ |  | ------------ | ---- | ---------- |  | --------- | ---- | ---------- |  | ----- | ---- | - |  |  | ---- | -
|             |  |              |      |            |  | Impact of |      |            |  |       |      |   |  | 
|For the      |  | Premium/     |      | Principal  |  |           |      |            |  | Total
|Year         |  | Discount     |      | Payments   |  |           |      |            |  | Yield
|Ended        |  | Amortization |      | Receivable |  | Other (1) |      | Adjustment
|             |  |              |      |            |  |           |      |           
|Dec 31, 2001 |  |              | 0.59 | %          |  |           | 0.16 | %          |  |       | 0.04 | % |  |  | 0.79 | %
|Dec 31, 2002 |  |              | 0.29 | %          |  |           | 0.13 | %          |  |       | 0.04 | % |  |  | 0.46 | %
|Dec 31, 2003 |  |              | 0.32 | %          |  |           | 0.14 | %          |  |       | 0.05 | % |  |  | 0.51 | %



|(1) |  | Other includes the impact of interest earning cash and cash equivalents
and restricted cash.
|--- |  | --------------------------------------------------------------------------------------------

We recorded hedging expense during 2003 of $692.8 thousand. At December 31,
2003, the fair value of our Cap Agreements was $9.0 thousand compared to a fair
value of $84.7 thousand as of December 31, 2002, a decrease in fair value of
$75.7 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 2003, we incurred hedging expenses of
$20.4 thousand related to Eurodollar Transactions and we also reclassified to
earnings $596.7 thousand of the transition adjustment recorded in Accumulated
other comprehensive loss on January 1, 2002, in connection with the
implementation of FAS 133. For the year 2002, we recorded hedging
ineffectiveness in the amount of $850.9 thousand, hedging expenses of $32.4
thousand related to Eurodollar Transactions and reclassified to earnings $542.5
thousand of the transition adjustment, for total hedging expense of $1.4
million.

Since we began acquiring whole loans in 1997, we have only experienced losses
on three loans, for a total amount of $174.0 thousand. We continue to evaluate
our estimated credit losses on loans prior to their securitization and we may
readjust our current policy if the circumstances warrant. As of December 31,
2003, our whole loans, including those that we have securitized, but with
respect to which we have retained credit loss exposure, accounted for 38.9% of
our portfolio of ARM assets or $7.3 billion. During the year ended December
31, 2003, we recorded loan loss provisions totaling $3.1 million to reserve for
estimated credit losses on loans. No provision was recorded in 2002, while a
provision of $653.3 thousand was recorded in 2001.

We recorded a net gain on ARM assets of $6.0 million during 2003. This gain
consists of a $2.7 million net release of previously recorded credit losses, a
$910.5 thousand gain upon the maturity of a collateralized bond obligation, a
$1.5 million gain on ARM assets sold and an unrealized gain net of pipeline
hedging of $905.0 thousand on loans expected to be purchased from correspondent
lenders and bulk sellers at December 31, 2003. During 2002, we sold $702.0
million of ARM assets for a net gain of $5.8 million and terminated two Swap
Agreements at a loss of $4.9 million.

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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, 2003, 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 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,
|                                                              |                                                                         |   |                                 
|                                                              |                                                                         |   | 2003                             |        | 2002 |   | 2001   
|                                                              |                                                                         |   |                                  |        |      |   |        
|Net income                                                    |                                                                         | $ | 176,504                          |        |      | $ | 120,016 |        |   | $ | 58,460 |       
|Additions:                                                    |                                                                         |   |                                  |        |      |   |         |        |   |   |        |       
|                                                              | Provision for credit losses, net                                        |   |                                  | 479    |      |   |         |       |   |   |        | 630    |  
|                                                              | Long-term incentive plan expense                                        |   |                                  | 9,923  |      |   |         | 4,144  |   |   |        | 180    |  
|                                                              | Issuance of CDOs                                                        |   |                                  | 821    |      |   |         |       |   |   |        |       |  
|Deductions:                                                   |                                                                         |   |                                  |        |      |   |         |        |   |   |        |       
|                                                              | Dividend on Series A Preferred Shares                                   |   |                                  | (3,340 | )    |   |         | (6,679 | ) |   |        | (6,679 | )
|                                                              | Hedging instruments, net                                                |   |                                  | (2,363 | )    |   |         | 27     |   |   |        | (53    | )
|                                                              | Gain on purchase loan commitments                                       |   |                                  | (2,317 | )    |   |         |       |   |   |        |       |  
|                                                              | Payments under long-term incentive plan                                 |   |                                  | (1,029 | )    |   |         | (186   | ) |   |        | (9     | )
|                                                              | Actual credit losses on ARM assets                                      |   |                                  |       |      |   |         | (292   | ) |   |        | (198   | )
|                                                              | Conversion of taxable REIT subsidiary to qualified
REIT subsidiary, net |   |                                  | (312   | )    |   |         | (846   | ) |   |        |       |  
|                                                              | Other                                                                   |   |                                  | (117   | )    |   |         | 6      |   |   |        | 430    |  
|                                                              |                                                                         |   |                                  |        |      |   |         |        |   |   |        |       
|Taxable net income available to common
shareholders           |                                                                         | $ | 178,249                          |        |      | $ | 116,190 |        |   | $ | 52,761 |       
|                                                              |                                                                         |   |                                  |        |      |   |         |        |   |   |        |       
|Taxable net income available to common
shareholders per share |                                                                         | $ | 2.81                             |        |      | $ | 2.67    |        |   | $ | 2.13   |       
|                                                              |                                                                         |   |                                  |        |      |   |         |        |   |   |        |       

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, 2001 |  |                  | 0.17 | %          |  |                  | 0.07 | %              |  |  | 0.14 | %     |  |  | 0.38 | %
|Dec 31, 2002 |  |                  | 0.17 | %          |  |                  | 0.07 | %              |  |  | 0.21 | %     |  |  | 0.45 | %
|Dec 31, 2003 |  |                  | 0.17 | %          |  |                  | 0.06 | %              |  |  | 0.19 | %     |  |  | 0.42 | %

The most significant single increase to our operating expenses in 2003 was the
$10.4 million increase in the performance-based fee that the Manager earned as
a result of our achieving a return on shareholders equity in excess of the
threshold as defined in the Management Agreement with the Manager. Our return
on equity prior to the effect of the performance-based fee of $27.9 million for
2003 was 20.10%, whereas the threshold, the average 10-year treasury rate plus
1%, was 4.02%.

The remaining $13.1 million increase in operating expenses from 2002 to 2003
related primarily to increased base management fees, expanded operations of
TMHL, expenses associated with our issuance of Dividend Equivalent Rights
(DERs) and Phantom Stock Rights (PSRs), and other corporate matters. The
base management fee paid to the Manager

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increased $3.7 million due to our
increased average shareholders equity, TMHLs operations increased $2.2
million, and our issuance of DERs and PSRs together with our improved stock
price accounted for $5.8 million of the increase.

The most significant single increase to our expenses from 2001 to 2002 was the
performance-based fee increase of $10.8 million that the Manager earned 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 of $17.5 million for 2002 was
19.61%, whereas the threshold, the average 10-year treasury rate plus 1%,
averaged 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
TMHL 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 loan institutions. 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: 1.23% of the first $300 million of average shareholders
equity, plus 0.90% of average shareholders equity above $300 million, subject
to an annual inflation adjustment based on changes in the Consumer Price Index.
Since the 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. In order for the
Manager to earn a performance fee, the rate of return on the shareholders
investment, as defined in the Management Agreement, must exceed the average
10-year U.S. Treasury rate during the quarter plus 1%.

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. Rather, our market risk exposure is largely due 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 the sensitivity of the market value of our portfolio
using a discounted cash flow simulation model. Application of this method
results in an estimation of the percentage change in the market value of our
assets, liabilities and hedging instruments per 100 basis point (bp) shift in
interest rates expressed in years  a measure commonly referred to as duration.
Positive portfolio duration indicates that the market value of the total
portfolio will decline if interest rates rise and increase if interest rates
decline. The closer duration is to zero, the less interest rate changes are
expected to affect earnings. Included in the table is a Base Case duration
calculation for an interest rate scenario that assumes future rates are those
implied by the yield curve as of December 31, 2003. The other two scenarios
assume interest rates are instantaneously 100 and 200 bps higher that those
implied by market rates as of December 31, 2003.

The use of Hybrid Hedging Instruments is a critical part of our interest rate
risk management strategies, and the effects of these Hybrid Hedging Instruments
on the market value of the portfolio are reflected in the models output. This
analysis also takes into consideration the value of options embedded in our
mortgage assets including constraints on the repricing of the

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interest rate of
ARM assets resulting from periodic and lifetime cap features, as well as
prepayment options. Assets and liabilities that are not interest
rate-sensitive such as cash, payment receivables, prepaid expenses, payables
and accrued expenses are excluded. The duration calculated from this model is
a key measure of the effectiveness of our interest rate risk management
strategies.

Changes in assumptions including, but not limited to, volatility, mortgage and
financing spreads, prepayment behavior, defaults, as well as the timing and
level of interest rate changes will affect the results of the model.
Therefore, actual results are likely to vary from modeled results.

Net Portfolio Duration
December 31, 2003

|                       |                  |  |           |       |                   |  |                   |       |       |  |       |       |      
|---------------------- | ---------------- |  | --------- | ----- | ----------------- |  | ----------------- | ----- | ----- |  | ----- | ----- | -----
|                       |                  |  | Base Case |       | Parallel +100 bps |  | Parallel +200 bps
|                       |                  |  |           |       |                   |  |                  
|Assets:                |                  |  |           |       |                   |  |                   |       |       |  |       |      
|                       | Traditional ARMs |  |           | 0.94  | Years             |  |                   | 1.10  | Years |  |       | 1.26  | Years
|                       | Hybrid ARMs      |  |           | 2.24  |                   |  |                   | 2.49  |       |  |       | 2.63  |      
|                       |                  |  |           |       |                   |  |                   |       |       |  |       |       |      
|                       | Total ARM assets |  |           | 2.07  |                   |  |                   | 2.31  |       |  |       | 2.45  |      
|                       |                  |  |           |       |                   |  |                   |       |       |  |       |       |      
|Borrowings and hedges  |                  |  | (1.67     | )     |                   |  | (1.67             | )     |       |  | (1.67 | )    
|                       |                  |  |           |       |                   |  |                   |       |       |  |       |       |      
|Net portfolio duration |                  |  | 0.30      | Years |                   |  | 0.43              | Years |       |  | 0.51  | Years
|                       |                  |  |           |       |                   |  |                   |       |       |  |       |       |      

Based on the assumptions used, the model output suggests a very low degree of
portfolio price change given increases in interest rates, which implies that
our cash flow and earning characteristics should be relatively stable for
comparable changes in interest rates. As a comparison, the approximate base
case duration of an unhedged 10 year treasury, a conforming 30-year fixed
mortgage and a conforming 5/1 Hybrid ARM are 7.9, 5.2 and 2.6 years
respectively.

Although market value sensitivity analysis 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 changes in business volumes. Accordingly, we
make extensive use of an earnings simulation model to further analyze our level
of interest rate risk.

There are a number of key assumptions in 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 and 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, 2003, based on the earnings simulation model, our potential
earnings increase (decrease) from a parallel 100 and 200 basis point rise in
market interest rates over the next twelve months and a commensurate slowdown
in prepayment speeds as interest rates rise, was 0.7% and (2.7%) of projected
net income for the twelve months ended December 31, 2004, respectively, and
(0.8%) and (4.8%) of projected net income for the twelve months ended December
31, 2005, respectively. All of these earnings projections result in earnings
that are higher than the current level. 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 could 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 and alter our strategies as appropriate based on our view of interest
rates and other developments in our business.

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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 and portfolio
funding strategies 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 may be shorter time periods than
that of the ARM assets. Second, interest rates on Traditional ARM assets may
be limited to an increase of either 1% or 2% per
adjustment period (commonly referred to as the periodic cap), while our
borrowings do not have similar limitations. At December 31, 2003, 7.3% of our
total ARM assets were Traditional 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 our Hybrid
ARM assets and have a policy to hedge the financing of the Hybrid ARM assets
such that the net duration of our borrowed funds, Hedging Instruments and the
Hybrid ARM assets is less than one year. 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.

Interest rate changes can also affect the availability and pricing of ARM
assets, which affects our investment opportunities. During a rising interest
rate environment, there may be less total loan origination and refinance
activity. At the same time, a rising interest rate environment may result in a
larger percentage of ARM products being originated, mitigating the impact of
lower overall loan origination and refinance activity. Conversely, during a
declining interest rate environment, consumers, in general, may favor fixed
rate mortgage products, but there may be above average loan origination and
refinancing volume in the industry such that even a small percentage of ARM
product volume may result in sufficient investment opportunities.
Additionally, a flat yield curve may be an adverse environment for ARM products
because there may be little incentive for a consumer to choose an ARM product
over a 30 year fixed-rate mortgage loan and, conversely, in a steep yield curve
environment, ARM products may enjoy an above average advantage over 30 year
fixed-rate mortgage loans, increasing our investment opportunities. The
availability and fluctuations in the volume of ARM loans being originated can
also affect their yield to us as an investment opportunity. During periods of
time when there is a shortage of ARM products, their yield as an investment may
decline due to market forces and conversely, when there is an above average
supply of ARM products, their yield to us as an investment may improve due to
the same market forces. To date, we have always been able to find sufficient
investment and loan origination opportunities at attractive prices in all
interest rate environments we have faced so that we have been able to generate
positive earnings and grow our portfolio as appropriate.

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 a portion of such assets
are purchased 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.

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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, 2003, 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, 2003,
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 44 through 45 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 Auditors thereon are set forth on pages F-3 through
F-31 in this Form 10-K.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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

Item 9A. CONTROLS AND PROCEDURES



| |  | We carried out an evaluation as of the end of the period covered by this
report, 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 as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that
evaluation, the Chief Executive Officer, the 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, during the quarter ended December 31, 2003, there has been no
significant change in the Companys internal control over financial
reporting that has materially affected, or is reasonably likely to
materially affect, the Companys internal control over financial
reporting.
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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, 2003 pursuant to General Instruction
G(3).                                                                                                                           
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | We have adopted a Code of Business Conduct and Ethics (Code) that
applies to all of the Managers employees and all of our officers and
directors. The Code is available on our website at
www.thornburgmortgage.com. The Code is also available in print to
anyone who requests it by writing to us at the following address:
|
| |  | Thornburg Mortgage, Inc.
150 Washington Avenue, Suite 302
Santa Fe, New Mexico 87501;                                                                                                                                                                                                                                           
|
| |  | or by phoning us at (505) 989-1900.                                                                                                                                                                                                                                                                                             
|
| |  | We will disclose on our website any amendments to, or waivers from, any
provision of the Code that applies to any of our directors or executive
officers.                                                                                                                                                                       

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, 2003 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, 2003 pursuant to General Instruction
G(3).
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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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, 2003 pursuant to General Instruction G(3).
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



| |  | The information required by Item 14 is incorporated herein by reference
to the Proxy Statement to be filed with the SEC within 120 days after
December 31, 2003 pursuant to General Instruction G(3).
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




PART IV




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-10K:                        
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|
| |    |  | Report of Independent Auditors;                                                                                                             
| |    |  | Consolidated Balance Sheets as of December 31, 2003 and 2002;                                                                               
| |    |  | Consolidated Income Statements for the years ended December 31,
2003, 2002 and 2001;                                                        
| |    |  | Consolidated Statements of Shareholders Equity for the years
ended December 31, 2003, 2002 and
2001;                                       
| |    |  | Consolidated Statements of Cash Flows for the years ended
December 31, 2003, 2002 and 2001 and                                              
| |    |  | Notes to Consolidated Financial Statements.                                                                                                 
|
| | 2. |  | Schedules to Consolidated Financial Statements:                                                                                             
|
| |    |  | Consolidated financial statement schedule, Mortgage Loans on
Real Estate, is included in Part II, Item 8 of this Annual
Report on Form 10-K.
|
| | 3. |  | Exhibits:                                                                                                                                   
|
| |    |  | See Exhibit Index.                                                                                                                        



| | (b) |  | Reports on Form 8-K                                                                                                              
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------
|
| |     |  | The Company filed or furnished the following Current Reports on Form
8-K with the SEC during the quarter ended December 31, 2003:



| | (i)   |  | Current Report on Form 8-K, furnished on October 24,
2003, attaching the Companys Press Release, dated October 20,
2003, announcing the Companys earnings for the quarter ending
September 30, 2003.                                              
| | ----- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii)  |  | Current Report on Form 8-K, filed on November 18, 2003,
attaching the Companys Press Release, dated November 17, 2003,
announcing the Companys intention to raise capital through an
unregistered offering of $55 million of 10-year Senior Notes.
|
| | (iii) |  | Current Report on Form 8-K, filed on December 11, 2003,
attaching the Companys Press Release, dated December 2, 2003,
announcing the Companys completion of an unregistered offering of
$55 million of 10-year Senior Notes                       

49



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THORNBURG MORTGAGE, INC.
AND SUBSIDIARIES




CONSOLIDATED FINANCIAL STATEMENTS

AND

REPORT OF INDEPENDENT AUDITORS

For Inclusion in Form 10-K

Filed with

Securities and Exchange Commission

December 31, 2003





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##### Table of Contents



THORNBURG MORTGAGE, INC.
AND SUBSIDIARIES

Index to Consolidated Financial Statements

|                                                |  |     
|----------------------------------------------- |  | ----
|                                                |  | Page
|                                                |  |     
|FINANCIAL STATEMENTS:                           |  |     
|Report of Independent Auditors                  |  | 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  Mortgage Loans on Real Estate        |  | F-29

F-2



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##### Table of Contents



Report of Independent Auditors

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

In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a) (1) present fairly, in all material respects, the
financial position of Thornburg Mortgage, Inc. and its subsidiaries at
December 31, 2003 and 2002, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States
of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 15(a)(2) 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 financial statement schedule are the responsibility of the
Companys management; our responsibility is to express an opinion on these
financial statements and 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 their
accounting or derivative instruments.

/s/ PricewaterhouseCoopers LLP

Dallas, Texas
February 16, 2004, except for Note 11 as to
     which the date is February 23, 2004

F-3



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##### Table of Contents



THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)

|                     |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |          |           |   |            | 
|-------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------- | ---------------------------------------------------------------------- | ----------------------------------------------- | ---------- | ----------- | ---------- | -------- | --------- | - | ---------- | 
|                     |                                                                                                                                                                 |                                          |                                                                        |                                                 |            | December 31
|                     |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |            
|                     |                                                                                                                                                                 |                                          |                                                                        |                                                 |            | 2003        |            | 2002    
|                     |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |         
|ASSETS               |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |         
|                     |                                                                                                                                                                 | Adjustable-rate mortgage (ARM) assets: |                                                                        |                                                 |            |             |            |          |           |  
|                     |                                                                                                                                                                 |                                          |                                                                        | ARM securities, net                             |            | $           | 11,520,741 |          |           | $ | 6,640,312  | 
|                     |                                                                                                                                                                 |                                          |                                                                        | ARM loans:                                      |            |             |            |          |           |   |            | 
|                     |                                                                                                                                                                 |                                          |                                                                        | Securitized ARM loans, net                      |            |             | 3,687,466  |          |           |   | 2,695,331  | 
|                     |                                                                                                                                                                 |                                          |                                                                        | ARM loans collateralizing debt obligations, net |            |             | 3,146,961  |          |           |   | 289,783    | 
|                     |                                                                                                                                                                 |                                          |                                                                        | ARM loans held for securitization, net          |            |             | 496,998    |          |           |   | 709,787    | 
|                     |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |         
|                     |                                                                                                                                                                 |                                          |                                                                        | ARM loans                                       |            |             | 7,331,425  |          |           |   | 3,694,901  | 
|                     |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |         
|                     |                                                                                                                                                                 |                                          |                                                                        | ARM assets                                      |            |             | 18,852,166 |          |           |   | 10,335,213 | 
|                     | Cash and cash equivalents                                                                                                                                       |                                          |                                                                        | 85,366                                          |            |             |            | 47,817   |          
|                     | Restricted cash                                                                                                                                                 |                                          |                                                                        | 51,600                                          |            |             |            | 74,403   |          
|                     | Hedging instruments                                                                                                                                             |                                          |                                                                        | 40,356                                          |            |             |            |         |          
|                     | Accrued interest receivable                                                                                                                                     |                                          |                                                                        | 73,702                                          |            |             |            | 47,435   |          
|                     | Prepaid expenses and other                                                                                                                                      |                                          |                                                                        | 15,609                                          |            |             |            | 8,064    |          
|                     |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |         
|                     |                                                                                                                                                                 | $                                        | 19,118,799                                                             |                                                 |            | $           | 10,512,932 |         
|                     |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |         
|LIABILITIES          |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |         
|                     |                                                                                                                                                                 | Reverse repurchase agreements            |                                                                        | $                                               | 13,926,858 |             |            | $        | 8,425,729 |  
|                     |                                                                                                                                                                 | Collateralized debt obligations (CDOs) |                                                                        |                                                 | 3,114,047  |             |            |          | 255,415   |  
|                     |                                                                                                                                                                 | Whole loan financing facilities          |                                                                        |                                                 | 369,343    |             |            |          | 589,081   |  
|                     |                                                                                                                                                                 | Hedging instruments                      |                                                                        |                                                 | 113,518    |             |            |          | 142,531   |  
|                     |                                                                                                                                                                 | Senior notes                             |                                                                        |                                                 | 251,080    |             |            |          |          |  
|                     |                                                                                                                                                                 | Payable for assets purchased             |                                                                        |                                                 |           |             |            |          | 202,844   |  
|                     |                                                                                                                                                                 | Accrued interest payable                 |                                                                        |                                                 | 26,114     |             |            |          | 17,234    |  
|                     |                                                                                                                                                                 | Dividends payable                        |                                                                        |                                                 | 47,350     |             |            |          | 32,536    |  
|                     |                                                                                                                                                                 | Accrued expenses and other               |                                                                        |                                                 | 31,385     |             |            |          | 14,520    |  
|                     |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |         
|                     |                                                                                                                                                                 |                                          | 17,879,695                                                             |                                                 |            |             | 9,679,890  |         
|                     |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |         
|COMMITMENTS          |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |         
|SHAREHOLDERS EQUITY |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |         
|                     | Preferred stock: par value $.01 per share;                                                                                                                      |                                          |                                                                        |                                                 |            |             |            |          |          
|                     | Series A 9.68% Cumulative Convertible shares,
aggregate preference in liquidation $69,000; 0 and 2,760
shares authorized, issued and outstanding, respectively; |                                          |                                                                        |                                                |            |             |            | 65,805   |          
|                     |                                                                                                                                                                 |                                          | Series B Cumulative, 22 shares authorized,
none issued and outstanding |                                                 |            |            |            |          |           |  |           
|                     | Common stock: par value $.01 per share; 499,978 and 497,218
shares authorized, 73,985 and 52,763 shares
issued and outstanding, respectively                    |                                          |                                                                        | 740                                             |            |             |            | 528      |          
|                     | Additional paid-in-capital                                                                                                                                      |                                          |                                                                        | 1,376,879                                       |            |             |            | 878,929  |          
|                     | Accumulated other comprehensive loss                                                                                                                            |                                          |                                                                        | (142,778                                        | )          |             |            | (105,254 | )        
|                     | Notes receivable from stock sales                                                                                                                               |                                          |                                                                        |                                                |            |             |            | (7,437   | )        
|                     | Retained earnings                                                                                                                                               |                                          |                                                                        | 4,263                                           |            |             |            | 471      |          
|                     |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |         
|                     |                                                                                                                                                                 |                                          | 1,239,104                                                              |                                                 |            |             | 833,042    |         
|                     |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |         
|                     |                                                                                                                                                                 | $                                        | 19,118,799                                                             |                                                 |            | $           | 10,512,932 |         
|                     |                                                                                                                                                                 |                                          |                                                                        |                                                 |            |             |            |         

See Notes to Consolidated Financial Statements.

F-4



---



##### Table of Contents



THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED INCOME STATEMENTS
(Amounts in thousands, except per share data)

|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |         |         |          |        |        |        | 
|---------------------------------------------------- | ------------------------------------ | --------------------------------------------------------------------- | ------------------- | ------ | ---------------------- | ------- | -------- | ------ | ------- | ------- | -------- | ------ | ------ | ------ | 
|                                                     |                                      |                                                                       |                     |        | Year ended December 31
|                                                     |                                      |                                                                       |                     |        |                       
|                                                     |                                      |                                                                       |                     |        | 2003                   |         | 2002     |        | 2001   
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |        
|Interest income from ARM assets and cash equivalents |                                      | $                                                                     | 589,615             |        |                        | $       | 401,967  |        |         | $       | 278,594  |       
|Interest expense on borrowed funds                   |                                      |                                                                       | (355,662            | )      |                        |         | (244,038 | )      |         |         | (199,829 | )     
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |         |         |          |       
|                                                     |                                      |                                                                       | Net interest income |        |                        | 233,953 |          |        |         | 157,929 |          |        |        | 78,765 | 
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |         |         |          |       
|Fee income                                           |                                      |                                                                       | 1,883               |        |                        |         | 592      |        |         |         | 49       |       
|Gain on ARM assets, net                              |                                      |                                                                       | 6,005               |        |                        |         | 903      |        |         |         | 1        |       
|Hedging expense                                      |                                      |                                                                       | (693                | )      |                        |         | (1,426   | )      |         |         | (1,337   | )     
|Provision for credit losses                          |                                      |                                                                       | (3,137              | )      |                        |         |         |        |         |         | (653     | )     
|Management fee                                       |                                      |                                                                       | (11,510             | )      |                        |         | (7,831   | )      |         |         | (4,897   | )     
|Performance fee                                      |                                      |                                                                       | (27,897             | )      |                        |         | (17,518  | )      |         |         | (6,716   | )     
|Long-term incentive awards                           |                                      |                                                                       | (9,923              | )      |                        |         | (4,114   | )      |         |         | (1,454   | )     
|Other operating expenses                             |                                      |                                                                       | (12,177             | )      |                        |         | (8,519   | )      |         |         | (5,096   | )     
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |         |         |          |       
|                                                     |                                      | Net income before cumulative effect of
change in accounting principle |                     |        | 176,504                |         |          |        | 120,016 |         |          |        | 58,662 |       
|                                                     |                                      | Cumulative effect of change in accounting
principle                   |                     |        |                       |         |          |        |        |         |          |        | (202   | )     
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |         |         |          |       
|                                                     |                                      |                                                                       | NET INCOME          |        | $                      | 176,504 |          |        | $       | 120,016 |          |        | $      | 58,460 | 
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |         |         |          |       
|Net income                                           |                                      | $                                                                     | 176,504             |        |                        | $       | 120,016  |        |         | $       | 58,460   |       
|Dividend on preferred stock                          |                                      |                                                                       | (3,340              | )      |                        |         | (6,679   | )      |         |         | (6,679   | )     
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |         |         |          |       
|Net income available to common shareholders          |                                      | $                                                                     | 173,164             |        |                        | $       | 113,337  |        |         | $       | 51,781   |       
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |         |         |          |       
|Basic earnings per share:                            |                                      |                                                                       |                     |        |                        |         |          |        |         |         |          |       
|                                                     | Net income                           |                                                                       | $                   | 2.73   |                        |         | $        | 2.60   |         |         | $        | 2.09   |       
|                                                     | Average number of shares outstanding |                                                                       |                     | 63,485 |                        |         |          | 43,590 |         |         |          | 24,754 |       
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |         |         |          |       
|Diluted earnings per share                           |                                      |                                                                       |                     |        |                        |         |          |        |         |         |          |       
|                                                     | Net income                           |                                                                       | $                   | 2.71   |                        |         | $        | 2.59   |         |         | $        | 2.09   |       
|                                                     | Average number of shares outstanding |                                                                       |                     | 65,217 |                        |         |          | 46,350 |         |         |          | 24,803 |       
|                                                     |                                      |                                                                       |                     |        |                        |         |          |        |         |         |          |       

See Notes to Consolidated Financial Statements.

F-5



---



##### Table of Contents



THORNBURG MORTGAGE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Three Years Ended December 31, 2003
(Dollar amounts in thousands, except per share data)

|                                                                     |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |           |         |  |  |          |  
|-------------------------------------------------------------------- | --------------------------- | -------------------- | -------------------------- | -------------------------------------------------------- |  | --------- | --- | ------ |  | --------------- | --------- | ------------- |  | ----- | -------- | --------- |  | ----------- | -------- | ---------- |  | -------- | -------- | ------- |  | - | ------ | ------- |  | ------- | ------- | ------- |  | - | --------- | ------- |  |  | -------- | -
|                                                                     |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  | Accumulated |          | Notes      |  |          |          |         |  |   |        |         |  |         |         |         |  |   |           |        
|                                                                     |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  | Other       |          | Receivable |  |          |          |         |  |   |        |         |  | Compre- |         |         |  |  
|                                                                     |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  | Compre-     |          | From       |  | Retained |          |         |  |   |        | hensive |  |         |         |        
|                                                                     |                             |                      |                            |                                                          |  | Preferred |     | Common |  | Additional      |           | hensive       |  | Stock |          | Earnings/ |  | Treasury    |          | Income     |  |          |          |        
|                                                                     |                             |                      |                            |                                                          |  | Stock     |     | Stock  |  | Paid-in Capital |           | Income (Loss) |  | Sales |          | (Deficit) |  | Stock       |          | (Loss)     |  | Total   
|                                                                     |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |         
|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                                    |  |           |     |        |  |                 |           |               |  |       |          |           |  |             | 71,392   |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   | 71,392    |         |  |  | 71,392   |  
|                                                                     |                             |                      | Hedging Instruments:       |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |           |         |  |  |         
|                                                                     |                             |                      |                            | Cumulative adjustment for change
in accounting principle |  |           |     |        |  |                 |           |               |  |       |          |           |  |             | (629     | )          |  |          |          |         |  |   |        |         |  |         |         |         |  |   | (629      | )       |  |  | (629     | )
|                                                                     |                             |                      |                            | Fair value adjustment, net of
amortization               |  |           |     |        |  |                 |           |               |  |       |          |           |  |             | (28,902  | )          |  |          |          |         |  |   |        |         |  |         |         |         |  |   | (28,902   | )       |  |  | (28,902  | )
|                                                                     |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |           |        
|Comprehensive income                                                 |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  | $       | 100,321 |         |  |   |           |        
|                                                                     |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |           |        
|Issuance of common stock                                             |                             |                      |                            |                                                          |  |           | 112 |        |  |                 | 172,132   |               |  |       |          |           |  |             | (2,677   | )          |  |          |          |         |  |   | 4,666  |         |  |         |         |         |  |   | 174,233   |        
|Interest and principal payments on
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   |  
|                                                                     |                             | Hedging Instruments: |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |           |         |  | 
|                                                                     |                             |                      |                            | 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   |               |  |       | (105,254 | )         |  |             | (7,437   | )          |  |          | 471      |         |  |   |       |         |  |         |         |         |  |   | 833,042   |        
|Comprehensive income:                                                |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |           |        
|                                                                     | Net income                  |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          | 176,504 |  |   |        |         |  |         | $       | 176,504 |  |   |           | 176,504 | 
|                                                                     | Other comprehensive income: |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |           |         | 
|                                                                     |                             |                      | Available-for-sale assets: |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |           |         |  |  |         
|                                                                     |                             |                      |                            | Fair value adjustment                                    |  |           |     |        |  |                 |           |               |  |       |          |           |  |             | (86,803  | )          |  |          |          |         |  |   |        |         |  |         |         |         |  |   | (86,803   | )       |  |  | (86,803  | )
|                                                                     |                             |                      | Hedging Instruments:       |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |           |         |  |  |         
|                                                                     |                             |                      |                            | Fair value adjustment, net of
amortization               |  |           |     |        |  |                 |           |               |  |       |          |           |  |             | 49,279   |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   | 49,279    |         |  |  | 49,279   |  
|                                                                     |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |           |        
|Comprehensive income                                                 |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  | $       | 138,980 |         |  |   |           |        
|                                                                     |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |           |        
|Issuance of common stock                                             |                             |                      |                            |                                                          |  |           | 184 |        |  |                 | 431,918   |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   | 432,102   |        
|Conversion of preferred stock to
common stock                        |                             |                      | (65,805                    | )                                                        |  |           | 28  |        |  |                 | 65,777    |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |          |        
|Interest and principal payments on
notes receivable from stock sales |                             |                      |                            |                                                          |  |           |     |        |  |                 | 255       |               |  |       |          |           |  |             | 7,437    |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   | 7,692     |        
|Dividends declared on preferred
stock  $1.21 per share              |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          | (3,340   | )       |  |   |        |         |  |         |         |         |  |   | (3,340    | )      
|Dividends declared on common
stock  $2.49 per share                 |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          | (169,372 | )       |  |   |        |         |  |         |         |         |  |   | (169,372  | )      
|                                                                     |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |           |        
|Balance, December 31, 2003                                           |                             | $                    |                           |                                                          |  | $         | 740 |        |  | $               | 1,376,879 |               |  | $     | (142,778 | )         |  | $           |         |            |  | $        | 4,263    |         |  | $ |       |         |  |         |         |         |  | $ | 1,239,104 |        
|                                                                     |                             |                      |                            |                                                          |  |           |     |        |  |                 |           |               |  |       |          |           |  |             |          |            |  |          |          |         |  |   |        |         |  |         |         |         |  |   |           |        

See Notes to Consolidated Financial Statements.

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##### Table of Contents



THORNBURG MORTGAGE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)

|                                               |                                                                                   |                                                                         |                    |                                           |             |                        |            |           |            |            |            |           |            |            |            |  
|---------------------------------------------- | --------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ------------------ | ----------------------------------------- | ----------- | ---------------------- | ---------- | --------- | ---------- | ---------- | ---------- | --------- | ---------- | ---------- | ---------- | -
|                                               |                                                                                   |                                                                         |                    |                                           |             | Year ended December 31
|                                               |                                                                                   |                                                                         |                    |                                           |             |                       
|                                               |                                                                                   |                                                                         |                    |                                           |             | 2003                   |            | 2002      |            | 2001      
|                                               |                                                                                   |                                                                         |                    |                                           |             |                        |            |           |            |           
|Operating Activities:                          |                                                                                   |                                                                         |                    |                                           |             |                        |            |           |            |            |            |          
|                                               | Net income                                                                        |                                                                         | $                  | 176,504                                   |             |                        | $          | 120,016   |            |            | $          | 58,460    |           
|                                               | Adjustments to reconcile net income to
net cash provided by operating activities: |                                                                         |                    |                                           |             |                        |            |           |            |            |            |           |           
|                                               |                                                                                   | Amortization                                                            |                    |                                           | 43,487      |                        |            |           | 18,215     |            |            |           | 20,095     |           
|                                               |                                                                                   | Gain on ARM assets, net                                                 |                    |                                           | (6,005      | )                      |            |           | (903       | )          |            |           | (1         | )         
|                                               |                                                                                   | Provision for credit losses                                             |                    |                                           | 3,137       |                        |            |           |           |            |            |           | 653        |           
|                                               |                                                                                   | Hedging expense and cumulative effect of
change in accounting principle |                    |                                           | 693         |                        |            |           | 1,426      |            |            |           | 1,539      |           
|                                               |                                                                                   | Change in assets and liabilities:                                       |                    |                                           |             |                        |            |           |            |            |            |           |            |           
|                                               |                                                                                   |                                                                         |                    | Accrued interest receivable               |             |                        | (26,267    | )         |            |            | (13,952    | )         |            |            | (753       | )
|                                               |                                                                                   |                                                                         |                    | Prepaid expenses and other                |             |                        | (7,631     | )         |            |            | (4,274     | )         |            |            | 1,166      |  
|                                               |                                                                                   |                                                                         |                    | Accrued interest payable                  |             |                        | 8,880      |           |            |            | 5,074      |           |            |            | (8,359     | )
|                                               |                                                                                   |                                                                         |                    | Accrued expenses and other                |             |                        | 16,865     |           |            |            | 5,568      |           |            |            | 7,573      |  
|                                               |                                                                                   |                                                                         |                    |                                           |             |                        |            |           |            |            |            |          
|                                               |                                                                                   |                                                                         |                    | Net cash provided by operating activities |             |                        | 209,663    |           |            |            | 131,170    |           |            |            | 80,373     |  
|                                               |                                                                                   |                                                                         |                    |                                           |             |                        |            |           |            |            |            |          
|Investing Activities:                          |                                                                                   |                                                                         |                    |                                           |             |                        |            |           |            |            |            |          
|                                               | ARM securities:                                                                   |                                                                         |                    |                                           |             |                        |            |           |            |            |            |           |           
|                                               |                                                                                   | Purchases                                                               |                    |                                           | (10,462,465 | )                      |            |           | (6,391,779 | )          |            |           | (2,775,122 | )         
|                                               |                                                                                   | Proceeds on sales                                                       |                    |                                           | 300,738     |                        |            |           | 703,646    |            |            |           | 108,056    |           
|                                               |                                                                                   | Principal payments                                                      |                    |                                           | 4,981,394   |                        |            |           | 3,330,739  |            |            |           | 1,762,682  |           
|                                               | Securitized ARM loans:                                                            |                                                                         |                    |                                           |             |                        |            |           |            |            |            |           |           
|                                               |                                                                                   |                                                                         | Issuance costs     |                                           |             | (3,457                 | )          |           |            | (3,023     | )          |           |            | (2,258     | )         
|                                               |                                                                                   |                                                                         | Principal payments |                                           |             | 1,242,735              |            |           |            | 613,955    |            |           |            | 239,295    |           
|                                               | ARM loans collateralizing long-term debt:                                         |                                                                         |                    |                                           |             |                        |            |           |            |            |            |           |           
|                                               |                                                                                   |                                                                         | Principal payments |                                           |             | 365,202                |            |           |            | 177,932    |            |           |            | 172,714    |           
|                                               | ARM loans held for securitization:                                                |                                                                         |                    |                                           |             |                        |            |           |            |            |            |           |           
|                                               |                                                                                   |                                                                         | Purchases          |                                           |             | (5,317,478             | )          |           |            | (2,849,093 | )          |           |            | (1,185,277 | )         
|                                               |                                                                                   |                                                                         | Proceeds on sales  |                                           |             |                       |            |           |            | 4,061      |            |           |            | 339        |           
|                                               |                                                                                   |                                                                         | Principal payments |                                           |             | 55,337                 |            |           |            | 31,718     |            |           |            | 25,928     |           
|                                               | Purchase of interest rate cap agreements                                          |                                                                         |                    |                                          |             |                        |            | (505      | )          |            |            |          |           
|                                               | Termination of interest rate swap agreements                                      |                                                                         |                    |                                          |             |                        |            | (4,855    | )          |            |            |          |           
|                                               |                                                                                   |                                                                         |                    |                                           |             |                        |            |           |            |            |            |          
|                                               |                                                                                   |                                                                         |                    | Net cash used in investing activities     |             |                        | (8,837,994 | )         |            |            | (4,387,204 | )         |            |            | (1,653,643 | )
|                                               |                                                                                   |                                                                         |                    |                                           |             |                        |            |           |            |            |            |          
|Financing Activities:                          |                                                                                   |                                                                         |                    |                                           |             |                        |            |           |            |            |            |          
|                                               | Net borrowings from reverse repurchase agreements                                 |                                                                         |                    | 5,501,129                                 |             |                        |            | 3,720,835 |            |            |            | 1,750,516 |           
|                                               | Net borrowings of CDOs                                                            |                                                                         |                    | 2,858,632                                 |             |                        |            | (177,166  | )          |            |            | (171,329  | )         
|                                               | Net whole loan financing facilities borrowings                                    |                                                                         |                    | (219,738                                  | )           |                        |            | 548,798   |            |            |            | (118,310  | )         
|                                               | Net unsecured senior debt proceeds                                                |                                                                         |                    | 250,738                                   |             |                        |            |          |            |            |            |          |           
|                                               | Receipts/(payments made) on Eurodollar contracts                                  |                                                                         |                    | 2,112                                     |             |                        |            | (9,634    | )          |            |            |          |           
|                                               | Proceeds from common stock issued, net                                            |                                                                         |                    | 432,102                                   |             |                        |            | 363,303   |            |            |            | 174,234   |           
|                                               | Dividends paid                                                                    |                                                                         |                    | (157,898                                  | )           |                        |            | (102,470  | )          |            |            | (41,586   | )         
|                                               | Payments on notes receivable from stock sales                                     |                                                                         |                    | 7,692                                     |             |                        |            | 704       |            |            |            | 524       |           
|                                               | Purchase of interest rate cap agreements                                          |                                                                         |                    | (31,692                                   | )           |                        |            |          |            |            |            |          |           
|                                               | Net (increase) decrease in restricted cash                                        |                                                                         |                    | 22,803                                    |             |                        |            | (66,972   | )          |            |            | (7,131    | )         
|                                               |                                                                                   |                                                                         |                    |                                           |             |                        |            |           |            |            |            |          
|                                               |                                                                                   | Net cash provided by financing activities                               |                    |                                           | 8,665,880   |                        |            |           | 4,277,398  |            |            |           | 1,586,918  |           
|                                               |                                                                                   |                                                                         |                    |                                           |             |                        |            |           |            |            |            |          
|Net increase in cash and cash equivalents      |                                                                                   |                                                                         | 37,549             |                                           |             |                        | 21,364     |           |            |            | 13,648     |          
|Cash and cash equivalents at beginning of year |                                                                                   |                                                                         | 47,817             |                                           |             |                        | 26,453     |           |            |            | 12,805     |          
|                                               |                                                                                   |                                                                         |                    |                                           |             |                        |            |           |            |            |            |          
|Cash and cash equivalents at end of year       |                                                                                   | $                                                                       | 85,366             |                                           |             | $                      | 47,817     |           |            | $          | 26,453     |          
|                                               |                                                                                   |                                                                         |                    |                                           |             |                        |            |           |            |            |            |          

See noncash disclosures in Note 2 and Note 4.

See Notes to Consolidated Financial Statements.

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##### Table of Contents



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



| |  | Recently adopted accounting pronouncements
| |  | ------------------------------------------



| |  |  | In April 2003, the Financial Accounting Standards Board (FASB)
issued SFAS 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, which provides clarification on
the definition of derivative instruments within the scope of SFAS
133. Generally, this Statement is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships
designated after June 30, 2003. Prior to SFAS 149, the Companys net
unrealized gain on loans expected to be purchased from correspondent
lenders and bulk sellers did not meet the definition of derivatives
under SFAS 133. In accordance with SFAS 149, effective July 1,
2003, the Companys net unrealized gain on purchase loan commitments
from correspondent lenders and bulk sellers is recorded at fair
value as a component of ARM loans, net on the Consolidated Balance
Sheet with changes in fair value recorded in Gain on ARM assets on
the Consolidated Income Statement.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | On December 11, 2003, the SEC staff announced that it will soon
release a Staff Accounting Bulletin (SAB) that will require all
registrants to begin accounting for their issued loan commitments
(including interest rate lock commitments) subject to Statement 133
as written options that would be reported as liabilities until
either they are exercised (and a loan is made) or they expire
unexercised. This SAB is intended to eliminate the current
diversity in practice that exists related to the accounting for loan
commitments. As a result of this announcement, the Company will
cease the recognition of mark-to-market gains on its loan
commitments effective April 1, 2004 and will implement the new
guidance provided by the SAB upon its effective date. Based on the
Companys current understanding of the SEC comments regarding the expected SAB and the anticipated ability to
hedge interest rate lock commitments, it is                                         

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| |  |  | believed that the impact
of the adoption of this new policy will not have a material impact
on the balance sheet or results of operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | In May 2003, the FASB issued SFAS 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity (SFAS 150). This statement establishes standards for how an
issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an
issuer classify a financial instrument that is within its scope as a
liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. This statement is
effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. On November 7,
2003, the FASB deferred for an indefinite period certain provisions
of SFAS 150 relating to the classification and measurement of
mandatorily redeemable non-controlling interests. The Company
believes it does not have any such interests. The implementation of
the remaining effective provisions of SFAS 150 did not impact the
Companys financial condition, results of operation or liquidity.                                                                                                                                                                        
|
| |  |  | FASB Interpretation (FIN) No. 46, Consolidation of Variable
Interest Entities, an interpretation of ARB 51 was issued in
January 2003. In December 2003, FASB issued FIN No. 46R which
replaced FIN 46 and clarified ARB 51. This interpretation provides
guidance on how to identify a variable interest entity and determine
when the assets, liabilities, non-controlling interests and results
of operations of a variable interest entity should be consolidated
by the primary beneficiary. The primary beneficiary is the
enterprise that will absorb a majority of the variable interest
entitys expected losses or receive a majority of the expected
residual returns as a result of holding variable interests. This
FIN requires the consolidation of results of variable interest
entities in which the Company is the primary beneficiary of the
variable interest entity. As of December 31, 2003, the Company did
not own an interest in a variable interest entity that met the
consolidation requirements and as such the adoption of FIN No. 46R
did not have a material effect on the financial condition, results
of operations, or liquidity of the Company. Interests in entities
acquired or created after December 31, 2003 will be evaluated based
on FIN No. 46R criteria and consolidated, if required.



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



| |  | Restricted cash
| |  | ---------------



| |  |  | Restricted cash is primarily cash collateral held by counter-parties
in connection with reverse repurchase agreements and hedging
instruments. The carrying amount of restricted cash approximates
its fair value.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Adjustable-rate mortgage (ARM) assets
| |  | ---------------------------------------



| |  |  | The Companys ARM assets are comprised of ARM securities,
securitized ARM loans, ARM loans collateralizing long-term debt and
ARM loans held for securitization (collectively referred to as ARM
Loans). All of the Companys ARM assets are either traditional ARM
securities and loans, which have interest rates that reprice in a
year or less (Traditional ARMs), or hybrid ARM securities and
loans that have a fixed interest rate for an initial period of three
to ten years and then convert to Traditional ARMs for their
remaining terms to maturity (Hybrid ARMs).                                                                                                                                                                              
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | ARM securities are composed mainly of ARM securities purchased from
third parties; also included in this balance are ARM securities
relating to loans securitized by the Company prior to April 1, 2001.
The Company 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. Any unrealized loss deemed to be other than temporary is
recorded as realized loss. Realized gains or losses on the sale of
ARM securities are recorded in earnings at the time of sale and are
determined by the difference between net sale proceeds and the cost
of the securities.
|
| |  |  | ARM Loans are designated as held-for-investment as the Company has
the intent and ability to hold them for the foreseeable future, and
until maturity or payoff. ARM Loans are carried at their unpaid
principal balances, net of unamortized premium or discount and
allowance for loan losses.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

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| |  |  | Securitized ARM loans are loans originated or acquired by the
Company and securitized after March 31, 2001 with the Company
retaining 100% of the beneficial ownership interests.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | ARM loans collateralizing long-term debt are loans the Company has
securitized that provide credit support for AAA certificates issued
to third party investors in structured financing arrangements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | ARM loans held for securitization are loans the Company has acquired
or originated and are intended to be securitized and retained by the
Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | The Company does not sell any of the securities created from its
securitizations to generate gain on sale income. The loan
securitization process benefits the Company by either creating
highly liquid securitized assets that can be readily financed in the
reverse repurchase agreement market or enabling the Company to enter
into floating-rate long-term collateralized debt obligations
(CDOs) which represent permanent financing that are not subject to
margin calls.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  |  | Prior to June 30, 2003, the Companys securitized ARM loans created
after April 1, 2001 were accounted for under a securities accounting
methodology, in which these assets were carried at their fair market
value and the unrealized gains and losses were recorded in
Accumulated other comprehensive loss, a component of shareholders
equity. Management determined that pursuant to SFAS 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, these securitized ARM loans should
be accounted for as loans rather than as securities. Effective June
30, 2003, management changed its accounting for such securities to
be in compliance with SFAS 140. The securitized ARM loans are now
carried at amortized cost and their fair value change is not
reflected in Accumulated other comprehensive loss, but is disclosed
in Note 2 to these financial statements. The effect of this change
was to reduce ARM assets and to decrease shareholders equity by $34
million from the Companys prior practice as of June 30, 2003 due to
the elimination of a net unrealized gain related to securitized ARM
loans.
|
| |  |  | 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. Loan origination fees, net of certain direct loan
origination costs, are deferred and amortized as an interest income
yield adjustment over the life of the related loans using the
interest method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   



| |  | Credit risk and allowance for loan losses
| |  | -----------------------------------------



| |  |  | The Company limits its exposure to credit losses on its portfolio of
ARM securities by 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)
(collectively Agency Securities). An Investment Grade security
generally has a security rating of BBB, Baa or better by at least
one of two nationally recognized rating agencies, Standard & Poors,
Inc. or Moodys Investors Service, Inc. (the Rating Agencies).
Additionally, the Company purchases and originates ARM loans or
purchases all classes of a third party ARM loan securitization
(including the classes rated less than Investment Grade). When the
Company acquires classes of securities that are below Investment
Grade, the purchase price generally includes a discount for probable
credit losses; this reduction, or basis adjustment, is recorded
as part of the purchase price of that security. In the event of
impairment, the Company revises its estimate of probable losses and
any difference between the initial estimate and the new estimate of
losses is recorded in earnings. The Company 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), including the subordinate classes
of securities retained as part of the Companys securitization of
loans or purchases of 100% of the classes from other loan
securitizations, to no more than 30% of total assets.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company maintains an allowance for loan losses based on
managements estimate of credit losses inherent in the Companys
portfolio of ARM Loans. The estimation of the allowance is based on
a variety of factors including, but not limited to, current economic
conditions, loan portfolio composition, delinquency trends, credit
losses to date on underlying loans and remaining credit protection.
If the credit                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

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| |  |  | performance of its ARM Loans is different than
expected, the Company adjusts the allowance for loan losses to a
level deemed appropriate by management to provide for estimated
losses inherent in its ARM Loan portfolio. Additionally, once a
loan is 90 days or more delinquent, or a borrower declares
bankruptcy, the Company adjusts the value of its accrued interest
receivable to what it believes to be collectible and stops accruing
interest on that loan.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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 and securitized ARM
loans are generally based on market prices provided by certain
dealers who make markets in these financial instruments, or by third
party pricing services. If the fair value of an ARM security or
securitized ARM loan 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 on available market information.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The fair values for ARM loans, other than securitized 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, interest rate, margin, length of fixed-rate
period, life cap, periodic cap, underwriting standards, age and
credit.                                              
|
| |  |  | The net unrealized gain on commitments to purchase ARM loans from
correspondent lenders and bulk sellers is calculated using the same
methodologies that are used to value the Companys ARM loans,
adjusted for anticipated fallout for interest rate lock commitments
that will likely not be funded.                                                                                                                                                                                                                             
|
| |  |  | The fair values of the Companys CDOs, senior notes, interest rate
swap agreements (Swap Agreements) and interest rate cap agreements
(Cap Agreements) are based on market values provided by dealers
who are familiar with the terms of the debt, senior notes, Swap
Agreements and Cap Agreements.                                                                                                                                                                                                                            
|
| |  |  | The fair value of futures contracts is determined on a daily basis
by the closing price on the Chicago Mercantile Exchange.                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | The fair values reported reflect estimates and may not necessarily
be indicative of the amounts the Company could realize if these
instruments were sold. Cash and cash equivalents, restricted cash,
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.                                                                      



| |  | Hedging instruments
| |  | -------------------



| |  |  | All of the Companys hedging instruments are derivative financial
instruments (interest rate cap agreements, interest rate swap
agreements and Eurodollar futures contracts) (collectively, Hedging
Instruments) and are carried on the balance sheet at their fair
value as an asset, if their fair value is positive, or as a
liability, if their fair value is negative. In general, most of the
Companys Hedging Instruments are designated as cash flow hedges,
and the effective amount of change in the fair value of the
derivative instrument is recorded in Accumulated other comprehensive
income (loss) and transferred to earnings as the hedged item affects
earnings. The ineffective amount of all Hedging Instruments is
recognized in earnings each quarter. Eurodollar futures contracts
(Eurodollar Transactions) have not been designated as cash flow
hedges since they are an economic hedge, hedging the fair value
change of the Companys purchase loan commitments. As such, the
change in their fair value is recorded in our Statements of
Operations as Gain on ARM assets.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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 Hedging
Instruments are                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

F-11



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##### Table of Contents





| |  |  | 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. If it is determined that a
hedge is not highly effective, the Company discontinues hedge
accounting prospectively.                                                                                                                                                                                                  
|
| |  |  | Hybrid Hedging Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|
| |  |  | The Company enters into Swap Agreements, Eurodollar Transactions and
Cap Agreements in order to manage its interest rate exposure when
financing its Hybrid ARM assets (collectively, Hybrid Hedging
Instruments). The Company generally borrows money based on
short-term interest rates. 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 Hybrid ARM
assets.                                                                                                                                                                                                            
|
| |  |  | When the Company enters into a Swap Agreement, it agrees to pay a
fixed rate of interest and to receive a variable interest rate,
generally based on the London InterBank Offer Rate (LIBOR). The
Company also enters into Eurodollar Transactions in order to fix the
interest rate on its forecasted three-month LIBOR-based liabilities.
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.                                                                                                                                                                                                           
|
| |  |  | The Company also purchases Cap Agreements by incurring a one-time
fee or premium. 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 contractually
specified levels. Therefore, such Cap Agreements have the effect of
capping the interest rate on a portion of the Companys borrowings
above a level specified by the Cap Agreement.                                                                                                                                                                                                                                                                                                         
|
| |  |  | The notional balances of the Hybrid Hedging Instruments generally
decline over the life of these instruments approximating the
declining balance of the Hybrid ARM assets being financed. These
Hybrid Hedging Instruments are used to fix the interest rate on the
Companys borrowings during the expected fixed rate period of the
Companys Hybrid ARM assets such that the Company maintains a
duration on the borrowings and Hybrid Hedging Instruments that
closely matches the duration of the Companys Hybrid ARM assets.                                                                                                                                                                                                                             
|
| |  |  | All of these Swap Agreements and Eurodollar Transactions are
designated as cash flow hedges against the benchmark interest rate
risk associated with the Companys borrowings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | All changes in the unrealized gains and losses on Swap Agreements
and certain Eurodollar Transactions have been recorded in
Accumulated other comprehensive income (loss) 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 Accumulated
other comprehensive income (loss) would be reclassified to income.
|
| |  |  | The unrealized gain/loss on Swap Agreements is based on 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 gain/loss in Accumulated other comprehensive income
(loss) and the carrying value of the Swap Agreements adjust to zero
and the Company realizes a fixed cost of money over the life of the
Hedging Instrument.                                                                                                                                                                                                                                                                            

F-12



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##### Table of Contents





| |  |  | In the course of managing its liquidity and balance sheet, the
Company has terminated and/or replaced certain Swap Agreements.
Since the Companys adoption of FAS 133, realized gains and losses
resulting from the termination of Swap Agreements are initially
recorded in Accumulated other comprehensive income (loss) as a
separate component of equity. The gain or loss from the terminated
Swap Agreements remains in Accumulated other comprehensive income
(loss) 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 income.           
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company designates its Cap Agreements used to manage interest
rate exposure when financing its Hybrid ARM assets as cash flow
hedges. All changes in the unrealized gains and losses on these Cap
Agreements are recorded in Accumulated other comprehensive income
(loss) and are reclassified to earnings, along with the fee paid to
fix the interest rate on the applicable forecasted transaction, as
interest expense when each of the forecasted financing transactions
occurs. The carrying value of these Cap Agreements is included in
Hedging instruments on the balance sheet.                                                                                            
|
| |  |  | Life Cap Hedging Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | The Company also purchases Cap Agreements to manage interest rate
risk on the financing of a portion of its Traditional ARM assets
that have a contractual maximum interest rate (Life Cap), which is
a component of the fair value of an ARM asset (Life Cap Hedging
Instruments).                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | The Company does not currently apply hedge accounting to its Life
Cap Hedging Instruments and, as a result, the Company records the
change in fair value of these Cap Agreements as hedging expense in
current earnings. The carrying value of the Life Cap Hedging
Instruments is included in Hedging instruments on the balance sheet.                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Pipeline Hedging Instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | During the fourth quarter of 2003, the Company entered into
Eurodollar Transactions to manage interest rate risk associated with
commitments to purchase ARM loans. The Company does not currently
apply hedge accounting to its Pipeline Hedging Instruments and,
therefore, the change in fair value and the realized gains (losses)
on these Pipeline Hedging Instruments are recorded in current
earnings. The net gain (loss) related to Pipeline Hedging
Instruments is reflected in Gain on ARM assets on the Consolidated
Statement of Operations as an offset to the net gain (loss) recorded
for the change in fair value of the loan commitments recorded
pursuant to SFAS 149.



| |  | Accumulated other comprehensive income (loss)
| |  | ---------------------------------------------



| |  |  | The Financial Accounting Standard Boards Statement 130, Reporting
Comprehensive Income, divides comprehensive income into net income
and other comprehensive income (loss), which includes unrealized
gains and losses on marketable securities defined as
available-for-sale and unrealized gains and losses on derivative
financial instruments that qualify for hedge accounting under FAS
133.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The net unrealized gain on the Companys ARM Loans of $7.9 million
and $18.9 million at December 31, 2003 and 2002, respectively, is
not included in Accumulated other comprehensive income because, in
accordance with generally accepted accounting principles, the ARM
Loans are carried at their amortized cost basis.                                                                           



| |  | 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 year ended December 31,
2001, TMHL had an immaterial taxable loss. 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.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-13



---



##### Table of Contents





| |  |  | The Company declared a $0.64 common dividend on December 16, 2003,
which was paid in January 2004. This dividend will be taken as a
dividend deduction on the Companys 2003 income tax return and is
therefore taxable dividend income for common shareholders for 2003.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Basic EPS amounts are computed by dividing net income (adjusted for
dividends declared on preferred stock) by the weighted average
number of common shares outstanding. Diluted EPS amounts assume the
conversion, exercise or issuance of all potential common stock
instruments, unless the effect is to reduce a loss or increase the
earnings per common share.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Following is information about the computation of the earnings per
share data for the years ended December 31, 2003, 2002 and 2001
(Amounts in thousands except per share data):                                                                                                                                                                                   

|                                                   |                             |      |         |        |  |        |        |           |  |   |      |          |  | 
|-------------------------------------------------- | --------------------------- | ---- | ------- | ------ |  | ------ | ------ | --------- |  | - | ---- | -------- |  | 
|                                                   |                             |      |         |        |  |        |        |           |  |   |      | Earnings
|                                                   |                             |      |         | Income |  | Shares |        | Per Share
|                                                   |                             |      |         |        |  |        |        |          
|                                                   |                             | 2003 |         |        |  |        |        |           |  |   |      |          |  | 
|Net income                                         |                             | $    | 176,504 |        |  |        |        |           |  |   |      |         
|Less preferred stock dividends                     |                             |      | (3,340  | )      |  |        |        |           |  |   |      |         
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|Basic EPS, income available to
common shareholders |                             |      | 173,164 |        |  |        | 63,485 |           |  | $ | 2.73 |         
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|Effect of dilutive securities:                     |                             |      |         |        |  |        |        |           |  |   |      |         
|                                                   | Convertible preferred stock |      |         | 3,340  |  |        |        | 1,732     |  |   |      |          | 
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|Diluted EPS                                        |                             | $    | 176,504 |        |  |        | 65,217 |           |  | $ | 2.71 |         
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         
|                                                   |                             | 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 |         
|                                                   |                             |      |         |        |  |        |        |           |  |   |      |         



| |  |  | 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 years ended December 31, 2003 and 2002. The
Company granted options to directors and officers of the Company and
employees of the Manager to purchase 35,666 shares of common stock
at an average price of $10.56 per share during the year ended
December 31, 2001. As of December 31, 2003, all of the previously
granted options to purchase shares of common stock had either been
exercised, cancelled or had expired.

F-14



---



##### Table of Contents





| |  | Use of estimates
| |  | ----------------



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

Note 2. Adjustable-Rate Mortgage Assets



| |  | The following tables present the Companys ARM assets as of December
31, 2003 and 2002 (dollar amounts in thousands):
| |  | ---------------------------------------------------------------------------------------------------------------------

|                                                 |                     |      |            |            |  |             |           |                 |  |                |           |           |  |           |         |         |  |   |            |            |  | 
|------------------------------------------------ | ------------------- | ---- | ---------- | ---------- |  | ----------- | --------- | --------------- |  | -------------- | --------- | --------- |  | --------- | ------- | ------- |  | - | ---------- | ---------- |  | 
|                                                 |                     |      |            |            |  |             |           |                 |  |                |           | ARM loans |  | ARM loans |         |         |  |  
|                                                 |                     |      |            | ARM        |  | Securitized |           | collateralizing |  | held for       |           |           |  |          
|                                                 |                     |      |            | securities |  | ARM loans   |           | CDOs            |  | securitization |           | Total    
|                                                 |                     |      |            |            |  |             |           |                 |  |                |           |          
|                                                 |                     | 2003 |            |            |  |             |           |                 |  |                |           |           |  |           |         |         |  |   |            |            |  | 
|Principal balance outstanding                    |                     | $    | 11,368,988 |            |  | $           | 3,664,183 |                 |  | $              | 3,130,008 |           |  | $         | 494,271 |         |  | $ | 18,657,450 |           
|Net unamortized premium                          |                     |      | 183,559    |            |  |             | 23,561    |                 |  |                | 18,036    |           |  |           | 2,435   |         |  |   | 227,591    |           
|Loan loss reserves                               |                     |      |           |            |  |             | (6,660    | )               |  |                | (1,083    | )         |  |           | (250    | )       |  |   | (7,993     | )         
|Basis adjustments                                |                     |      | (3,395     | )          |  |             |          |                 |  |                |          |           |  |           |        |         |  |   | (3,395     | )         
|Net unrealized gain on
purchase loan commitments |                     |      |           |            |  |             |          |                 |  |                |          |           |  |           | 542     |         |  |   | 542        |           
|Principal payment receivable                     |                     |      | 14,306     |            |  |             | 6,382     |                 |  |                |          |           |  |           |        |         |  |   | 20,688     |           
|                                                 |                     |      |            |            |  |             |           |                 |  |                |           |           |  |           |         |         |  |   |            |           
|                                                 | Amortized cost, net |      |            | 11,563,458 |  |             |           | 3,687,466       |  |                |           | 3,146,961 |  |           |         | 496,998 |  |   |            | 18,894,883 | 
|Gross unrealized gains                           |                     |      | 40,373     |            |  |             | 28,988    |                 |  |                | 6,249     |           |  |           | 1,158   |         |  |   | 76,768     |           
|Gross unrealized losses                          |                     |      | (83,090    | )          |  |             | (13,034   | )               |  |                | (14,576   | )         |  |           | (885    | )       |  |   | (111,585   | )         
|                                                 |                     |      |            |            |  |             |           |                 |  |                |           |           |  |           |         |         |  |   |            |           
|                                                 | Fair value          |      | $          | 11,520,741 |  |             | $         | 3,703,420       |  |                | $         | 3,138,634 |  |           | $       | 497,271 |  |   | $          | 18,860,066 | 
|                                                 |                     |      |            |            |  |             |           |                 |  |                |           |           |  |           |         |         |  |   |            |           
|                                                 | Carrying value      |      | $          | 11,520,741 |  |             | $         | 3,687,466       |  |                | $         | 3,146,961 |  |           | $       | 496,998 |  |   | $          | 18,852,166 | 
|                                                 |                     |      |            |            |  |             |           |                 |  |                |           |           |  |           |         |         |  |   |            |           

|                              |                     |      |           |            |  |             |           |                 |  |                |         |           |  |           |         |         |  |   |            |            |  | 
|----------------------------- | ------------------- | ---- | --------- | ---------- |  | ----------- | --------- | --------------- |  | -------------- | ------- | --------- |  | --------- | ------- | ------- |  | - | ---------- | ---------- |  | 
|                              |                     |      |           |            |  |             |           |                 |  |                |         | ARM loans |  | ARM loans |         |         |  |  
|                              |                     |      |           | ARM        |  | Securitized |           | collateralizing |  | held for       |         |           |  |          
|                              |                     |      |           | securities |  | ARM loans   |           | CDOs            |  | securitization |         | Total    
|                              |                     |      |           |            |  |             |           |                 |  |                |         |          
|                              |                     | 2002 |           |            |  |             |           |                 |  |                |         |           |  |           |         |         |  |   |            |            |  | 
|Principal balance outstanding |                     | $    | 6,498,437 |            |  | $           | 2,664,310 |                 |  | $              | 287,409 |           |  | $         | 706,965 |         |  | $ | 10,157,121 |           
|Net unamortized premium       |                     |      | 85,774    |            |  |             | 22,791    |                 |  |                | 5,613   |           |  |           | 2,922   |         |  |   | 117,100    |           
|Loan loss reserves            |                     |      |          |            |  |             |          |                 |  |                |        |           |  |           | (100    | )       |  |   | (100       | )         
|Basis adjustments             |                     |      | (1,778    | )          |  |             | (9,606    | )               |  |                | (3,239  | )         |  |           |        |         |  |   | (14,623    | )         
|Principal payment receivable  |                     |      | 26,546    |            |  |             | 4,487     |                 |  |                |        |           |  |           |        |         |  |   | 31,033     |           
|                              |                     |      |           |            |  |             |           |                 |  |                |         |           |  |           |         |         |  |   |            |           
|                              | Amortized cost, net |      |           | 6,608,979  |  |             |           | 2,681,982       |  |                |         | 289,783   |  |           |         | 709,787 |  |   |            | 10,290,531 | 
|Gross unrealized gains        |                     |      | 55,542    |            |  |             | 18,262    |                 |  |                | 2,297   |           |  |           | 3,505   |         |  |   | 79,606     |           
|Gross unrealized losses       |                     |      | (24,209   | )          |  |             | (4,913    | )               |  |                | (120    | )         |  |           | (160    | )       |  |   | (29,402    | )         
|                              |                     |      |           |            |  |             |           |                 |  |                |         |           |  |           |         |         |  |   |            |           
|                              | Fair value          |      | $         | 6,640,312  |  |             | $         | 2,695,331       |  |                | $       | 291,960   |  |           | $       | 713,132 |  |   | $          | 10,340,735 | 
|                              |                     |      |           |            |  |             |           |                 |  |                |         |           |  |           |         |         |  |   |            |           
|                              | Carrying value      |      | $         | 6,640,312  |  |             | $         | 2,695,331       |  |                | $       | 289,783   |  |           | $       | 709,787 |  |   | $          | 10,335,213 | 
|                              |                     |      |           |            |  |             |           |                 |  |                |         |           |  |           |         |         |  |   |            |           



| |  |  | During 2003, the Company recorded a net gain on ARM assets of $6.0
million. This gain consists of a $2.7 million net release of
previously recorded credit losses, a $910.5 thousand gain upon the
maturity of a collateralized bond obligation, a $1.5 million gain on
the sale of $299.2 million of ARM assets sold and a net unrealized gain
of $905.0 thousand on loans expected to be purchased from correspondent
lenders and bulk sellers at December 31, 2003. During 2002, the
Company realized $5.8 million in gains and $51.5 thousand in losses on
the sale of $702.0 million of ARM assets. 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 2003, the Company securitized $6.1 billion of its ARM loans into
a series of private-label multi-class ARM securities. The Company
retained $2.6 billion of the securities created for its securitized ARM
loan portfolio and placed $3.5 billion of the securities with third
party investors, thereby providing a long-term collateralized financing
for the Companys assets. The Company did not account for these
securitizations as sales and, therefore, did not record any gain or
loss in connection with the securitizations. As of December 31, 2003,
the Company had $6.9 billion of ARM assets that have resulted from the
Companys securitization efforts.                                                                    

F-15



---



##### Table of Contents





| |  |  | Beginning in April 2003, a portion of the cost basis of ARM loans held
for securitization was allocated to mortgage servicing rights when the
ARM loans were securitized. Mortgage servicing rights capitalized upon
the securitization of ARM loans during 2003 totaled $9.4 million.
Mortgage servicing rights of $8.6 million, net of amortization during
2003 of $735.8 thousand, are included in Prepaid Expenses and Other on
the Consolidated Balance Sheet at December 31, 2003. Mortgage
servicing rights are carried at the lower of cost or fair value and are
periodically evaluated for impairment using a discounted future cash
flow model that considers portfolio characteristics and assumptions
regarding prepayments speed, delinquency rates and other economic
factors. At December 31, 2003, the fair value of the mortgage
servicing rights exceeded their cost basis. Mortgage servicing rights
are amortized in proportion to, and over the expected period of, the
estimated future net servicing income.
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | During 2003, the Company recorded loan loss provisions totaling $3.1
million to reserve for estimated credit losses on ARM loans bringing
its total loan loss reserve to $8.0 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|
| |  |  | As of December 31, 2003 and 2002, the Company had basis adjustments of
$3.4 million and $1.8 million, respectively, on its ARM securities due
to estimated credit losses (other than temporary declines in fair
value) related to ARM securities purchased at a discount. As part of
its purchase price, the Company recorded basis adjustments of $2.3
million related to ARM securities purchased during 2003 on which the
Company had first loss credit exposure. These securities were
purchased as part of the $1.6 billion of third party loan
securitizations in which the Company purchased all classes of the
securitizations, including the subordinated classes.                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | The following table shows the gross unrealized losses and fair value of
ARM securities, aggregated by credit rating and length of time that the
317 individual securities have been in a continuous unrealized loss
position, at December 31, 2003 (dollar amounts in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

Unrealized Losses on ARM Securities as of December 31, 2003

|                       |  |                     |           |                   |  |            |         |      |  |       |         |            |  |      |         |            |  |   |           |  |  |   |         |  
|---------------------- |  | ------------------- | --------- | ----------------- |  | ---------- | ------- | ---- |  | ----- | ------- | ---------- |  | ---- | ------- | ---------- |  | - | --------- |  |  | - | ------- | -
|                       |  | Less Than 12 Months |           | 12 Months or More |  | Total     
|                       |  |                     |           |                   |  |           
|                       |  |                     |           |                   |  | Unrealized |         |      |  |       |         | Unrealized |  | Fair |         | Unrealized
|                       |  | Fair Value          |           | Loss              |  | Fair Value |         | Loss |  | Value |         | Loss      
|                       |  |                     |           |                   |  |            |         |      |  |       |         |           
|Agency Securities      |  | $                   | 119,629   |                   |  | $          | (1,124  | )    |  | $     | 257,207 |            |  | $    | (4,258  | )          |  | $ | 376,836   |  |  | $ | (5,382  | )
|AAA/Aaa Rating         |  |                     | 5,561,121 |                   |  |            | (52,107 | )    |  |       | 237,560 |            |  |      | (11,113 | )          |  |   | 5,798,681 |  |  |   | (63,220 | )
|AA/Aa Rating           |  |                     | 120,329   |                   |  |            | (2,875  | )    |  |       | 42,571  |            |  |      | (9,696  | )          |  |   | 162,900   |  |  |   | (12,571 | )
|A Rating               |  |                     | 17,258    |                   |  |            | (103    | )    |  |       | 4,362   |            |  |      | (118    | )          |  |   | 21,620    |  |  |   | (221    | )
|BBB/Baa Rating         |  |                     | 2,622     |                   |  |            | (32     | )    |  |       | 6,625   |            |  |      | (1,494  | )          |  |   | 9,247     |  |  |   | (1,526  | )
|BB/Ba Rating and
Below |  |                     | 3,750     |                   |  |            | (170    | )    |  |       |        |            |  |      |        |            |  |   | 3,750     |  |  |   | (170    | )
|                       |  |                     |           |                   |  |            |         |      |  |       |         |            |  |      |         |            |  |   |           |  |  |   |         |  
|Total                  |  | $                   | 5,824,709 |                   |  | $          | (56,411 | )    |  | $     | 548,325 |            |  | $    | (26,679 | )          |  | $ | 6,373,034 |  |  | $ | (83,090 | )
|                       |  |                     |           |                   |  |            |         |      |  |       |         |            |  |      |         |            |  |   |           |  |  |   |         |  



| |  |  | The unrealized losses in the above table are temporary impairments due
to changes in market interest rates and, based upon review of credit
ratings, delinquency data and other information, are not reflective of
credit deterioration.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-16



---



##### Table of Contents





| |  |  | The Company has credit exposure on its ARM Loans. The following tables
summarize ARM Loan delinquency information as of December 31, 2003 and
2002 (dollar amounts in thousands):
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 2003                                                                                                                                                                             

|                   |  |       |    |         |  |        |       |              |  |         |      |   |  |  |      |  
|------------------ |  | ----- | -- | ------- |  | ------ | ----- | ------------ |  | ------- | ---- | - |  |  | ---- | -
|                   |  |       |    |         |  |        |       |              |  | Percent |      |   |  | 
|                   |  | Loan  |    | Loan    |  | of ARM |       | Percent of  
|Delinquency Status |  | Count |    | Balance |  | Loans  |       | Total Assets
|                   |  |       |    |         |  |        |       |             
|60 to 89 days      |  |       | 0  |         |  | $      |      |              |  |         | 0.00 | % |  |  | 0.00 | %
|90 days or more    |  |       | 0  |         |  |        |      |              |  |         | 0.00 |   |  |  | 0.00 |  
|In foreclosure     |  |       | 12 |         |  |        | 3,501 |              |  |         | 0.05 |   |  |  | 0.02 |  
|                   |  |       |    |         |  |        |       |              |  |         |      |   |  |  |      |  
|                   |  |       | 12 |         |  | $      | 3,501 |              |  |         | 0.05 | % |  |  | 0.02 | %
|                   |  |       |    |         |  |        |       |              |  |         |      |   |  |  |      |  



| |  |  | 2002
| |  |  | ----

|                   |  |       |   |         |  |        |       |              |  |         |      |   |  |  |      |  
|------------------ |  | ----- | - | ------- |  | ------ | ----- | ------------ |  | ------- | ---- | - |  |  | ---- | -
|                   |  |       |   |         |  |        |       |              |  | Percent |      |   |  | 
|                   |  | Loan  |   | Loan    |  | of ARM |       | Percent of  
|Delinquency Status |  | Count |   | Balance |  | Loans  |       | 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 | %
|                   |  |       |   |         |  |        |       |              |  |         |      |   |  |  |      |  



| |  |  | As of December 31, 2003, the Company owned one real estate property as
a result of foreclosing on delinquent loans that are included in ARM
loans on the Consolidated Balance Sheet in the aggregate amount of
$140.0 thousand (not included in the table above.) The Company
believes that its current level of reserves is adequate to cover any
loss, should one occur, from the sale of this property.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | As of December 31, 2003, the Company had commitments to purchase or
originate the following amounts of ARM assets (dollar amounts in
thousands):                                                                                                                                                                                                                                                          

|                                       |  |   |           | 
|-------------------------------------- |  | - | --------- | 
|ARM securities  agency                |  | $ | 602,391   | 
|ARM loans  correspondent originations |  |   | 396,000   | 
|ARM loans  direct originations        |  |   | 51,451    | 
|                                       |  |   |           | 
|                                       |  | $ | 1,049,842 | 
|                                       |  |   |           | 



| |  |  | The Company has entered into transactions whereby the Company expects
to acquire the remaining balance of certain AAA rated Hybrid ARM
securities, at a price of par, between 2004 and 2008, when the
fixed-rate period of the Hybrid ARM securities terminates and the
securities convert into Traditional ARM securities with characteristics
similar to the Traditional ARM securities held in the current
portfolio. The Company views these transactions as an alternative
source of Traditional ARM assets. The current balance of the Hybrid
ARM securities is approximately $2.6 billion, but is expected to be
less than 25% of that, and could be zero, at the time they convert into
Traditional ARM securities. If the Company decides not to acquire the
Hybrid ARM securities when they convert into Traditional ARM
securities, then it is committed to pay or receive the difference
between par and the fair value of the Traditional ARM securities at
that time, as determined by an auction of the Traditional ARM
securities. The Company received a premium of $2.3 million related to
these transactions, which is being amortized over the declining balance
of the related securities. As of December 31, 2003, the Company had
delivered ARM assets with a carrying value of $6.9 million and $3.1
million in cash as collateral in connection with these transactions.
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 3. Hedging Instruments



| |  | Hybrid Hedging Instruments
| |  | --------------------------



| |  |  | As of December 31, 2003, the Company was counterparty to Swap
Agreements and Eurodollar Transactions having an aggregate current
notional balance of $12.5 billion. In addition, as of December 31,
2003, the Company entered into a delayed Swap Agreement with a notional
balance of $270 million becoming effective in February 2004. As of
December 31, 2003, these Swap Agreements and Eurodollar Transactions
had a weighted average maturity of 3.1 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. As of December 31, 2003, ARM
assets with a carrying value of $62.6 million, including accrued
interest, and cash totaling $36.5 million collateralized the Swap
Agreements.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-17



---



##### Table of Contents





| |  |  | The net fair value of Swap Agreements at December 31, 2003 of $85.5
million included Swap Agreements with gross unrealized gains of $14.9
million and gross unrealized losses of $100.4 million and is included
in Hedging instruments on the balance sheet.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | As of December 31, 2003, the net unrealized loss on Swap Agreements and
deferred gains and losses on Eurodollar Transactions recorded in
Accumulated other comprehensive loss was a net loss of $93.2 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  |  | The Company estimates that over the next twelve months, $43.8 million
of these net unrealized losses will be reclassified from Accumulated
other comprehensive loss to interest expense.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  |  | In 2003, the Company purchased Cap Agreements with notional balances
totaling $1.6 billion at a cost of $31.7 million in order to manage its
interest rate risk exposure on the financing of the Hybrid ARM loans
collateralizing the Companys CDOs. These Cap Agreements had a
remaining notional amount of $1.4 billion as of December 31, 2003.
Included in the 2003 Cap Agreement purchases are Cap Agreements with
start dates ranging from 2006 to 2008 and notional balances totaling
$371.1 million at a cost of $2.6 million. The fair value of these Cap
Agreements at December 31, 2003 was $25.4 million and is included in
Hedging instruments on the balance sheet. The unrealized loss on these
Cap Agreements of $6.3 million is included in Accumulated other
comprehensive income (loss). In the twelve month period following
December 31, 2003, $80.3 thousand of this unrealized loss is expected
to be realized. Pursuant to the terms of these Cap Agreements, the
notional amount of the Cap Agreements declines such that it is expected
to equal the balance of the Hybrid ARM loans collateralizing the
Companys CDOs. Under these Cap Agreements, the Company will receive
cash payments should the one-month LIBOR increase above the contract
rates of these Hedging Instruments, which range from 3.25% to 4.61% and
average 3.81%. The Cap Agreements had an average maturity of 5.2 years
as of December 31, 2003. The initial aggregate notional amount of the
Cap Agreements declines over the period of the agreements, which expire
between 2006 and 2013.
|
| |  |  | The Company hedges the funding of its Hybrid ARM assets such that the
weighted average net duration of borrowed funds, Hybrid Hedging
Instruments and Hybrid ARM assets is less than one year. At December
31, 2003, the financing and hedging of the Companys Hybrid ARM assets
resulted in a net duration of approximately 3.4 months.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  |  | Interest expense for the years ended December 31, 2003 and 2002
includes net payments on Hybrid Hedging Instruments of $158.1 million
and $89.0 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           



| |  | Life Cap Hedging Instruments
| |  | ----------------------------



| |  |  | The fair value of the Life Cap Hedging Instruments at December 31, 2003
and 2002 amounted to $9.0 thousand and $84.7 thousand, respectively,
and is included in Hedging instruments on the balance sheet. Purchased
Cap Agreements had a remaining notional amount of $841.3 million and
$1.8 billion as of December 31, 2003 and 2002, respectively. The
notional amount of the Life Cap Hedging Instruments declines at a rate
that is expected to approximate the amortization of the Traditional ARM
assets. The Company will receive cash payments should the one-month or
three-month LIBOR increase above the contract rates of these Hedging
Instruments, which range from 6.00% to 12.00% and average 10.50%. The
Life Cap Hedging Instruments had an average final maturity of 8 months
as of December 31, 2003 and expire between 2004 and 2005. During the
years ended December 31, 2003 and 2002, the Company recognized expenses
of $692.8 thousand and $1.4 million, respectively, which is reported as
Hedging expense in the Companys Consolidated Income Statements.
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Pipeline Hedging Instruments
| |  | ----------------------------



| |  |  | The fair value of the Pipeline Hedging Instruments at December 31, 2003
was $953.4 thousand at December 31, 2003 and is included in Hedging
instruments on the balance sheet. Pipeline Hedging Instruments had a
remaining notional balance of $283.0 million at December 31, 2003.
During the year ended December 31, 2003, the Company recognized a $1.4
million loss on Pipeline Hedging Instruments, which is included in Gain
on ARM assets in the Companys Consolidated Income Statements and
partially offsets the $2.3 million gain recorded on loan commitments
pursuant to SFAS 149.
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-18



---



##### Table of Contents



Note 4. Borrowings



| |  | Reverse Repurchase Agreements
| |  | -----------------------------



| |  |  | The Company has arrangements to enter into reverse repurchase
agreements, a form of collateralized short-term borrowing, with 24
different financial institutions, and as of December 31, 2003, had
borrowed funds from 18 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 declines for other reasons.                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |  |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | As of December 31, 2003, the Company had $13.9 billion of reverse
repurchase agreements outstanding with a weighted average borrowing
rate of 1.25% and a weighted average remaining maturity of 4.9 months.
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.
As of December 31, 2003, $13.5 billion of the Companys borrowings were
variable-rate term reverse repurchase agreements with original
maturities that range from two to twenty-five 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 $14.5 billion, including accrued interest, and
cash totaling $1.9 million, collateralized the reverse repurchase
agreements at December 31, 2003. Citigroup Inc. holds collateral, net
of reverse repurchase borrowings with a weighted average maturity of
6.2 months, of $130.0 million.
|
| |  |  | At December 31, 2003, the reverse repurchase agreements had the
following remaining maturities (dollar amounts in thousands):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

|               |  |   |            | 
|-------------- |  | - | ---------- | 
|Within 30 days |  | $ | 2,024,153  | 
|31 to 89 days  |  |   | 1,856,198  | 
|90 to 365 days |  |   | 9,941,032  | 
|Over 365 days  |  |   | 105,475    | 
|               |  |   |            | 
|               |  | $ | 13,926,858 | 
|               |  |   |            | 



| |  | CDOs
| |  | ----



| |  |  | On April 3, 2003, $1.1 billion of mortgage loans from the Companys ARM
loan portfolio were transferred to Thornburg Mortgage Securities Trust
2003-2 and were securitized. On August 28, 2003, $1.4 billion of
mortgage loans from the Companys ARM loan portfolio were transferred
to Thornburg Mortgage Securities Trust 2003-4 and were securitized. On
December 22, 2003, $1.1 billion of mortgage loans from the Companys
ARM loan portfolio were transferred to Thornburg Mortgage Securities
Trust 2003-6 and were securitized. Approximately $3.5 billion of the
securities created by these securitizations were issued to third party
investors in the form of AAA-rated floating rate pass-through
certificates. In connection with the issuance of the CDOs, the Company
incurred costs of $10.8 million, which were deducted from the proceeds
of the transactions and are being amortized over the expected life of
the CDOs. These transactions were accounted for as financings of the
loans and represent permanent financing that is not subject to margin
calls. The Company retained the AA and A certificates totaling $76.6
million. The structure of these transactions also include
overcollateralization certificates that currently provide $6.1 million
of credit support based on the estimated exposure to credit losses on
the loans collateralizing the debt. As of December 31, 2003, the CDOs
had a net balance of $3.1 billion and an effective interest cost of
1.59%, which changes each month at a spread to one-month LIBOR. As of
December 31, 2003, the CDOs were collateralized by ARM loans with a
principal balance of $3.1 billion. The debt matures between 2033 and
2043 and is callable by the Company at par once the total balance of
the loans collateralizing the debt is reduced to 20% of their original
balance. The balance of this debt is reduced as the underlying loan
collateral is paid down and is expected to have an average life of
three to four years.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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 represented the Companys maximum exposure to credit losses on
the loans
collateralizing the Notes. On January 25, 2003, the Company called the
Notes. The Company re-securitized the loan collateral securitizing
these notes payable in a loan securitization in April 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-19



---



##### Table of Contents





| |  | Whole Loan Financing Facilities
| |  | -------------------------------



| |  |  | As of December 31, 2003, the Company had entered into four whole loan
financing facilities. The interest rates on these facilities are
indexed to one-month LIBOR and reprice accordingly. The first whole
loan financing facility has a committed borrowing capacity of $600
million and an uncommitted capacity of $100 million and matures in
November 2004. The second financing facility has a committed borrowing
capacity of $300 million and matures in March 2004. The third
financing facility has a committed borrowing capacity of $300 million
and an uncommitted capacity of $250 million and matures in March 2004.
The fourth financing facility has a committed capacity of $150 million
and matures in September 2004. The Company expects to renew these
facilities. As of December 31, 2003, the Company had $369.3 million
borrowed against these whole loan financing facilities at an effective
cost of 2.32%. As of December 31, 2002, the Company had $589.1 million
borrowed against whole loan financing facilities at an effective cost
of 2.11%. The amount borrowed on the whole loan financing facilities
at December 31, 2003 was collateralized by ARM loans with a carrying
value of $381.0 million, including accrued interest. These facilities
have covenants that are standard for industry practice; the Company is
in compliance with all such covenants at December 31, 2003.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The whole loan financing facility with a borrowing capacity of $300.0
million and maturing in March 2004 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     



| |  | Senior Notes
| |  | ------------



| |  |  | On May 15, 2003, the Company entered into an Indenture and a First
Supplemental Indenture with Deutsche Bank Trust Company Americas as
Trustee, relating to the completion by the Company of an unregistered
offering of $200.0 million in senior unsecured notes at par (Senior
Notes). On December 2, 2003, the Company completed an add-on private
placement of $55.0 million of Senior Notes. The Senior Notes bear
interest at 8.0%, payable each May 15 and November 15, and mature on
May 15, 2013. The Senior Notes are redeemable at a declining premium,
in whole or in part, beginning on May 15, 2008, and at par beginning on
May 15, 2011. The Senior Notes may also be redeemed under limited
circumstances on or before May 15, 2006. In connection with the
issuance of the Senior Notes, the Company incurred costs of $4.5
million, which are being amortized to interest expense over the
expected life of the Senior Notes. At December 31, 2003, the balance
of the Senior Notes outstanding, net of unamortized issuance costs, was
$251.1 million.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | As of December 31, 2003, $200 million of Senior Notes had been
exchanged for new registered Senior Notes with terms substantially
identical to the original Senior Notes, pursuant to an exchange offer
concluded by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  |  | The Companys Senior Note obligations contain both financial and
non-financial covenants. Significant financial covenants include
limitations on the Companys ability to incur indebtedness beyond
specified levels, restrictions on the Companys ability to incur liens
on assets and limitations on the amount and type of restricted
payments, such as repurchases of its own equity securities, that the
Company makes. As of December 31, 2003, the Company is in compliance
with all financial and non-financial covenants on its Senior Note
obligations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          



| |  | Other
| |  | -----



| |  |  | The total cash paid for interest was $340.1 million, $236.5 million and
$205.7 million for 2003, 2002 and 2001 respectively.
| |  |  | ----------------------------------------------------------------------------------------------------------------------------

F-20



---



##### Table of Contents





| |  | Contractual Obligations
| |  | -----------------------



| |  |  | As of December 31, 2003, the Company had the following contractual
obligations (dollar amounts in thousands):
| |  |  | -------------------------------------------------------------------------------------------------------------

|                                |           |   |                        |            |                  |   |             |            |       |   |                   |         |  |   |        |        |  |   |           |           | 
|------------------------------- | --------- | - | ---------------------- | ---------- | ---------------- | - | ----------- | ---------- | ----- | - | ----------------- | ------- |  | - | ------ | ------ |  | - | --------- | --------- | 
|                                |           |   | Payments Due by Period
|                                |           |   |                       
|                                |           |   |                        |            |                  |   |             |            |       |   |                   |         |  |   | 3  5  |        |  |   |          
|                                |           |   | Total                  |            | Less than 1 year |   | 1  3 years |            | years |   | More than 5 years
|                                |           |   |                        |            |                  |   |             |            |       |   |                  
|Reverse repurchase agreements   |           | $ | 13,926,858             |            |                  | $ | 13,821,383  |            |       | $ | 105,475           |         |  | $ |       |        |  | $ |          |          
|CDOs (1)                        |           |   | 3,114,047              |            |                  |   | 7,534       |            |       |   | 16,647            |         |  |   | 34,905 |        |  |   | 3,054,961 |          
|Whole loan financing facilities |           |   | 369,343                |            |                  |   | 369,343     |            |       |   |                  |         |  |   |       |        |  |   |          |          
|Senior Notes                    |           |   | 251,080                |            |                  |   |            |            |       |   |                  |         |  |   |       |        |  |   | 251,080   |          
|Purchase commitments            |           |   | 1,049,842              |            |                  |   | 1,049,842   |            |       |   |                  |         |  |   |       |        |  |   |          |          
|                                |           |   |                        |            |                  |   |             |            |       |   |                   |         |  |   |        |        |  |   |           |          
|                                | Total (2) |   | $                      | 18,711,170 |                  |   | $           | 15,248,102 |       |   | $                 | 122,122 |  |   | $      | 34,905 |  |   | $         | 3,306,041 | 
|                                |           |   |                        |            |                  |   |             |            |       |   |                   |         |  |   |        |        |  |   |           |          



|(1) |  | Maturities of the Companys CDOs are dependent upon cash
flows received from the underlying loans receivable. The estimate
of their repayment is based on scheduled principal payments on the
underlying loans receivable. This estimate will differ from actual
amounts to the extent prepayments and/or loan losses are
experienced.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The Consolidated Balance Sheet includes a liability for
Hedging Instruments with negative market values, which are not
reflected in this table.                                                                                                                                                                                       

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, 2003 and
2002 (dollar amounts in thousands):
| |  |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|             |                                   |  |                   |            |                   |  |          |            |       |  |   |           |     |  |   |           |    
|------------ | --------------------------------- |  | ----------------- | ---------- | ----------------- |  | -------- | ---------- | ----- |  | - | --------- | --- |  | - | --------- | ---
|             |                                   |  | December 31, 2003 |            | December 31, 2002
|             |                                   |  |                   |            |                  
|             |                                   |  | Carrying          |            | Fair              |  | Carrying |            | Fair 
|             |                                   |  | Amount            |            | Value             |  | Amount   |            | Value
|             |                                   |  |                   |            |                   |  |          |            |      
|Assets:      |                                   |  |                   |            |                   |  |          |            |       |  |   |           |     |  |   |          
|             | ARM securities                    |  | $                 | 11,520,741 |                   |  | $        | 11,520,741 |       |  | $ | 6,640,312 |     |  | $ | 6,640,312 |    
|             | Securitized ARM loans             |  |                   | 3,687,466  |                   |  |          | 3,703,420  |       |  |   | 2,695,331 |     |  |   | 2,695,331 |    
|             | ARM loans collateralizing CDOs    |  |                   | 3,146,961  |                   |  |          | 3,138,634  |       |  |   | 289,783   |     |  |   | 291,960   |    
|             | ARM loans held for securitization |  |                   | 496,998    |                   |  |          | 497,271    |       |  |   | 709,787   |     |  |   | 713,132   |    
|             | Hedging instruments               |  |                   | 40,356     |                   |  |          | 40,356     |       |  |   | 85        | (1) |  |   | 85        | (1)
|Liabilities: |                                   |  |                   |            |                   |  |          |            |       |  |   |           |     |  |   |          
|             | Reverse repurchase agreements     |  |                   | 13,926,858 |                   |  |          | 13,926,858 |       |  |   | 8,425,729 |     |  |   | 8,425,729 |    
|             | CDOs                              |  |                   | 3,114,047  |                   |  |          | 3,134,560  |       |  |   | 255,415   |     |  |   | 255,863   |    
|             | Whole loan financing facilities   |  |                   | 369,343    |                   |  |          | 369,343    |       |  |   | 589,081   |     |  |   | 589,081   |    
|             | Senior Notes                      |  |                   | 251,080    |                   |  |          | 267,750    |       |  |   |          |     |  |   |          |    
|             | Hedging instruments               |  |                   | 113,518    |                   |  |          | 113,518    |       |  |   | 142,531   |     |  |   | 142,531   |    



|(1) |  | Life Cap Hedging Instruments were included in Other assets on the
balance sheet as of December 31, 2002.
|--- |  | --------------------------------------------------------------------------------------------------------

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##### Table of Contents



Note 6. Common and Preferred Stock



| |  |  | On August 18, 2003, the Company redeemed all 2,760,000 shares of Series
A 9.68% Cumulative Convertible Preferred Stock, or Series A Preferred
Stock, by converting each share of Series A Preferred Stock to one
share of common stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |  |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | 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 2003, the Company completed a public offering of
3,473,500 shares of common stock and received net proceeds of $65.9
million. During August 2003, the Company completed a public offering
of 4,000,000 shares of common stock and received net proceeds of $104.6
million. During 2003 and 2002, the Company issued 5,906,968 and
7,103,100 shares, respectively, of common stock and received net
proceeds of $143.0 million and $132.0 million, respectively, under
continuous equity offering programs. As of December 31, 2003, $16.5
million of the Companys registered securities remained available for
future issuance and sale under its then current shelf registration
statements.                                                                                                                                                                                                                                                    
|
| |  |  | During 2003 and 2002, the Company issued 5,081,457 and 5,050,774
shares, respectively, of common stock under the Dividend Reinvestment
and Stock Purchase Plan (the DRSPP) and received net proceeds of
$118.6 million and $97.0 million, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

Note 7. Comprehensive Income (Loss)



| |  |  | Comprehensive income is composed of net income and other comprehensive
income (loss), which includes the change in unrealized gains and losses
on available-for-sale ARM securities and Hedging Instruments. The
following table presents other comprehensive income (loss) (OCI)
balances (dollar amounts in thousands):
| |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                           |            |   |                   |         |                |   |               |          |             |   |          |         |  
|-------------------------- | ---------- | - | ----------------- | ------- | -------------- | - | ------------- | -------- | ----------- | - | -------- | ------- | -
|                           |            |   |                   |         |                |   | Unrealized    |          | Accumulated
|                           |            |   | Unrealized        |         | gains (losses) |   | Other        
|                           |            |   | gains (losses)    |         | on Hedging     |   | Comprehensive
|                           |            |   | on ARM securities |         | Instruments    |   | Income       
|                           |            |   |                   |         |                |   |              
|Balance, December 31, 2000 |            | $ | (78,427           | )       |                | $ |              |          |             | $ | (78,427  | )      
|                           | Net change |   |                   | 71,392  |                |   |               | (29,531  | )           |   |          | 41,861  |  
|                           |            |   |                   |         |                |   |               |          |             |   |          |        
|Balance, December 31, 2001 |            |   | (7,035            | )       |                |   | (29,531       | )        |             |   | (36,566  | )      
|                           | Net change |   |                   | 50,524  |                |   |               | (119,212 | )           |   |          | (68,688 | )
|                           |            |   |                   |         |                |   |               |          |             |   |          |        
|Balance, December 31, 2002 |            |   | 43,489            |         |                |   | (148,743      | )        |             |   | (105,254 | )      
|                           | Net change |   |                   | (86,803 | )              |   |               | 49,279   |             |   |          | (37,524 | )
|                           |            |   |                   |         |                |   |               |          |             |   |          |        
|Balance, December 31, 2003 |            | $ | (43,314           | )       |                | $ | (99,464       | )        |             | $ | (142,778 | )      
|                           |            |   |                   |         |                |   |               |          |             |   |          |        

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##### Table of Contents





| |  |  | The following table (dollar amounts in thousands) presents the changes
for net unrealized holdings gains (losses) and reclassification
adjustments in unrealized gain and losses on available-for-sale ARM
securities and Hedging Instruments. Reclassification adjustments
include amounts recognized in net income during the current year that
had been previously recorded in OCI.
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                      |  |   |                         |   |      |   |          |   |  |   |         |   | 
|--------------------------------------------------------------------- |  | - | ----------------------- | - | ---- | - | -------- | - |  | - | ------- | - | 
|                                                                      |  |   | Year ended December 31,
|                                                                      |  |   |                        
|                                                                      |  |   | 2003                    |   | 2002 |   | 2001    
|                                                                      |  |   |                         |   |      |   |         
|Unrealized gains (losses) on ARM securities                           |  |   |                         |   |      |   |          |   |  |   |         |  
|Net unrealized holdings gains (losses) arising during the period      |  | $ | (84,969                 | ) |      | $ | 55,748   |   |  | $ | 70,812  |  
|Reclassification adjustment for net
(gains) losses included in income |  |   | (1,834                  | ) |      |   | (5,224   | ) |  |   | 580     |  
|                                                                      |  |   |                         |   |      |   |          |   |  |   |         |  
|Net change                                                            |  | $ | (86,803                 | ) |      | $ | 50,524   |   |  | $ | 71,392  |  
|                                                                      |  |   |                         |   |      |   |          |   |  |   |         |  
|Unrealized gains (losses) on Hedging
Instruments                      |  |   |                         |   |      |   |          |   |  |   |         |  
|Net unrealized holdings gains (losses) arising during the period      |  | $ | (116,842                | ) |      | $ | (211,952 | ) |  | $ | (43,295 | )
|Reclassification adjustment for net
(gains) losses included in income |  |   | 166,121                 |   |      |   | 92,740   |   |  |   | 13,764  |  
|                                                                      |  |   |                         |   |      |   |          |   |  |   |         |  
|Net change                                                            |  | $ | 49,279                  |   |      | $ | (119,212 | ) |  | $ | (29,531 | )
|                                                                      |  |   |                         |   |      |   |          |   |  |   |         |  

Note 8. Long-Term Incentive Awards



| |  |  | The Companys Board of Directors adopted the Amended and Restated 2002
Long-Term Incentive Plan (the Plan), effective September 29, 2002.
The Board of Directors further amended the Plan in January 2003 to
exclude the authorization of stock options. The amended Plan
authorizes the Companys Compensation Committee to grant Dividend
Equivalent Rights (DERs), Stock Appreciation Rights (SARs) and
Phantom Stock Rights (PSRs).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |  |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Under the Plan, management directors, executive officers and key
management employees receive an aggregate grant of PSRs equivalent to
the value of options to purchase common stock for that number of shares
equal to 3% of new common shares sold to the public. Prior to April 1,
2003, these individuals had also received an aggregate grant of DERs
equal to 2.25% of new common shares sold to the public. The
Compensation Committee allocates the aggregate awards of PSRs and DERs
among the eligible individuals. In March 2003, the Compensation
Committee voted to discontinue granting additional DERs to these
individuals for new common shares sold to the public after March 31,
2003. The Compensation Committee also has the discretion to grant
additional DERs, PSRs and SARs to these individuals under the Plan.                                                                                                                                                                                                                                                                                                                                                               
|
| |  |  | The PSRs vest over either a two or three-year period, determined by the
Compensation Committee at the time of grant, at a rate of one-half or
one-third at the end of each year, respectively. Dividends are paid on
vested and non-vested PSRs granted on or before October 20, 2003 and
can be paid in the form of cash or additional PSRs equal to the cash
dividend value. At the October 20, 2003 Board of Directors meeting,
the Board decided that PSRs granted after October 20, 2003 would not
earn a dividend until they are vested.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  |  | 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.

F-23



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| |  |  | 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, 2003, there were 1,475,022 DERs outstanding all of
which were vested, and 682,334 PSRs outstanding, of which 489,775 were
vested. The Company recorded an expense associated with DERs and PSRs
of $9.9 million, $4.1 million and $1.5 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Of the expense
recorded in 2003, $4.7 million was the amount of dividend equivalents
paid on DERs and PSRs, $1.7 million was the amortization of unvested
PSRs and $3.5 million 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 2003 and 2002, there were no exercises of stock options and as
of December 31, 2003, all of the previously issued ISOs and NSOs had
been exercised, terminated or cancelled.                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | Notes receivable from stock sales arose 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 had maturity dates in 2010 and accrued interest at a rate of
3.91% per annum. In addition, the notes were full recourse promissory
notes and were secured by a pledge of the shares of the common stock
acquired. Interest, which was credited to paid-in-capital, was payable
quarterly, with the balance due at the maturity of the notes. All of
these notes were made prior to the enactment of the Sarbanes-Oxley Act
of 2003 (the Act). As of December 31, 2003, all of the notes
receivables related to stock sales had been repaid to the Company.                        
|
| |  |  | In April 2003, the Board approved a limited stock repurchase program
for the repurchase at current market value of shares of common stock.
The repurchase of shares is subject to the approval of the Compensation
Committee. Current market value is defined by the program as the
closing market price on the day of repurchase. As of December 31,
2003, no shares have been repurchased under this program.                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | 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 consistent with the provisions of SFAS No. 123, the
Companys net earnings would have been reduced by $40.0 thousand as
indicated in the pro forma amounts 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   
|                          |                         |   |        
|Net income - as reported  |                         | $ | 58,460  |      
|Net income - pro forma    |                         |   | 58,420  |      
|Basic EPS - as reported   |                         |   | 2.09    |      
|Basic EPS - pro forma     |                         |   | 2.09    |      
|Diluted EPS - as reported |                         |   | 2.09    |      
|Diluted EPS - pro forma   |                         |   | 2.09    |      
|Assumptions:              |                         |   |         |      
|                          | Dividend yield          |   |         | 10.00 | %
|                          | Expected volatility     |   |         | 33.4  | %
|                          | Risk-free interest rate |   |         | 5.19  | %
|                          | Expected lives          |   | 7 years

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##### Table of Contents





| |  |  | Information regarding stock options is as follows:
| |  |  | --------------------------------------------------

|                                                               |  |        |          |       |  |          |        | 
|-------------------------------------------------------------- |  | ------ | -------- | ----- |  | -------- | ------ | 
|                                                               |  | 2001  
|                                                               |  |       
|                                                               |  |        |          |       |  | Weighted
|                                                               |  |        |          |       |  | Average 
|                                                               |  |        |          |       |  | Exercise
|                                                               |  | Shares |          | Price
|                                                               |  |        |          |      
|Outstanding, beginning of year                                 |  |        | 916,698  |       |  | $        | 14.248 | 
|Granted                                                        |  |        | 35,666   |       |  |          | 10.563 | 
|Exercised                                                      |  |        | (371,429 | )     |  |          | 8.455  | 
|Cancelled/Expired                                              |  |        | (580,935 | )     |  |          | 17.725 | 
|                                                               |  |        |          |       |  |          |        | 
|Outstanding, end of year                                       |  |        |         |       |  | $        |       | 
|                                                               |  |        |          |       |  |          |        | 
|Weighted average fair value of options granted during the year |  | $      | 1.26     |       |  |          |        | 
|Options exercisable at year end                                |  |        |         |       |  |          |        | 



| |  |  | 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 9. Transactions with Affiliates



| |  |  | The Company has no employees and is managed externally by Thornburg
Mortgage Advisory Corporation (the Manager) 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, 2003, 2002 and
2001, the Company reimbursed the Manager $6.5 million, $3.5 million and
$1.7 million for expenses, respectively, in accordance with the terms
of the Agreement. As of December 31, 2003 and 2002, $421.9 thousand
and $237.0 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: 1.23% of the first $300 million of Average
Shareholders Equity, plus 0.90% of Average Shareholders Equity above
$300 million. The Agreement also has a 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, 2003, 2002 and 2001, the Company
incurred costs of $11.5 million, $7.8 million and $4.9 million,
respectively, in base management fees in accordance with the terms of
the Management Agreements. As of December 31, 2003 and 2002, $1.1
million and $741.6 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-25



---



##### 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, 2003, 2002 and 2001, the Manager earned
performance-based compensation in the amount of $27.9 million, $17.5
million and $6.7 million, respectively. As of December 31, 2003 and
2002, $7.6 million and $5.6 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, 2003, the aggregate balance of mortgage loans outstanding to
directors and officers of the Company, employees of the Manager and
other affiliates amounted to $30.8 million, had a weighted average
interest rate of 3.60%, 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, for the provision of certain marketing, promotional and
advertising services. This Agreement expired on December 31, 2003.
During 2003 and 2002, TMHL paid $50.0 thousand and $25.0 thousand,
respectively, to TSC pursuant to this Agreement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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##### Table of Contents



Note 10. 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, 2003
|                                                      |                                             |   |                             
|                                                      |                                             |   | Fourth                       |        | Third   |   | Second  |        | First  
|                                                      |                                             |   | Quarter                      |        | Quarter |   | Quarter |        | Quarter
|                                                      |                                             |   |                              |        |         |   |         |        |        
|Interest income from ARM assets and cash              |                                             | $ | 178,356                      |        |         | $ | 151,166 |        |         | $ | 136,897 |        |  | $ | 123,196 |       
|Interest expense on borrowed funds                    |                                             |   | (111,073                     | )      |         |   | (91,261 | )      |         |   | (82,166 | )      |  |   | (71,162 | )     
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|                                                      | Net interest income                         |   |                              | 67,283 |         |   |         | 59,905 |         |   |         | 54,731 |  |   |         | 52,034 | 
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|Fee income                                            |                                             |   | 518                          |        |         |   | 424     |        |         |   | 637     |        |  |   | 304     |       
|Gain on ARM assets, net                               |                                             |   | 605                          |        |         |   | 1,820   |        |         |   | 3,580   |        |  |   |        |       
|Hedging expense                                       |                                             |   | (151                         | )      |         |   | (145    | )      |         |   | (220    | )      |  |   | (177    | )     
|Provision for credit losses                           |                                             |   | (1,161                       | )      |         |   | (970    | )      |         |   | (1,006  | )      |  |   |        |       
|Management fee                                        |                                             |   | (3,271                       | )      |         |   | (3,068  | )      |         |   | (2,686  | )      |  |   | (2,485  | )     
|Performance fee                                       |                                             |   | (7,650                       | )      |         |   | (7,136  | )      |         |   | (6,924  | )      |  |   | (6,187  | )     
|General and administrative expenses                   |                                             |   | (6,703                       | )      |         |   | (5,062  | )      |         |   | (5,920  | )      |  |   | (4,415  | )     
|Dividend on preferred stock                           |                                             |   |                             |        |         |   |        |        |         |   | (1,670  | )      |  |   | (1,670  | )     
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|                                                      | Net income available to common shareholders |   | $                            | 49,470 |         |   | $       | 45,768 |         |   | $       | 40,522 |  |   | $       | 37,404 | 
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|Basic EPS                                             |                                             | $ | 0.69                         |        |         | $ | 0.69    |        |         | $ | 0.68    |        |  | $ | 0.67    |       
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|Diluted EPS                                           |                                             | $ | 0.69                         |        |         | $ | 0.68    |        |         | $ | 0.67    |        |  | $ | 0.67    |       
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|Average number of common shares
outstanding  Basic   |                                             |   | 72,130                       |        |         |   | 66,092  |        |         |   | 59,879  |        |  |   | 55,631  |       
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       
|Average number of common shares
outstanding  Diluted |                                             |   | 72,130                       |        |         |   | 67,532  |        |         |   | 62,639  |        |  |   | 58,391  |       
|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |       

|                                                      |                                             |   |                              |        |         |   |         |        |         |   |         |        |  |   |         |        | 
|----------------------------------------------------- | ------------------------------------------- | - | ---------------------------- | ------ | ------- | - | ------- | ------ | ------- | - | ------- | ------ |  | - | ------- | ------ | 
|                                                      |                                             |   | 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  |       

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Note 11. Subsequent Events

On January 8, 2004, the Company filed a shelf registration statement on Form
S-3 with the SEC. This shelf registration statement became effective on
January 21, 2004 and allows the Company to offer and sell any combination of
common stock, preferred stock, warrants to purchase common stock or preferred
stock, and debt securities in one or more offerings for total proceeds of up to
$750.0 million.

On February 17, 2004, the Company completed an exchange offer of $55.0 million
of Senior Notes for new registered Senior Notes of like term and amount.

On February 23, 2004, the Company completed a public offering of 4,000,000
shares of its common stock pursuant to its shelf registration statement on Form
S-3 declared effective on January 21, 2004, which includes 500,000 shares
purchased by the underwriters under a 30-day option. The Company received net
proceeds of $110.2 million in this offering.

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SCHEDULE  Mortgage Loans on Real Estate

Column A, Description: The Companys whole loan portfolio at December 31,
2003, 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     |            |           |  |          |       |                 |  |                        |             | Carrying |  | Principal Amount of
|Carrying Amounts              |               | of         |            | Interest  |  | Maturity |       | Amount of       |  | Loans Delinquent as to
|of Mortgages                  |               | Loans      |            | Rate      |  | Date     |       | Mortgages(1)(3) |  | Principal or Interest 
|                              |               |            |            |           |  |          |       |                 |  |                       
|                              |               | ARM Loans: |            |           |  |          |       |                 |  |                        |             |          |  |                     |                   |   |  |           |           |  |  |  
|                              |               |            |            | $0-250    |  |          | 1,684 |                 |  |                        | 1.75  7.25 |          |  |                     | 8/1/06 - 12/1/43  |   |  | $         | 275,773   |  |  | $ |    | 
|                              |               |            |            | 251-500   |  |          | 1,602 |                 |  |                        | 1.75  6.88 |          |  |                     | 10/1/15 - 1/1/44  |   |  |           | 578,487   |  |  |   |    | 
|                              |               |            |            | 501-750   |  |          | 702   |                 |  |                        | 2.13  4.75 |          |  |                     | 9/1/17 - 12/1/43  |   |  |           | 429,418   |  |  |   |    | 
|                              |               |            |            | 751-1,000 |  |          | 377   |                 |  |                        | 2.00  4.88 |          |  |                     | 6/1/13 - 9/1/43   |   |  |           | 340,400   |  |  |   |    | 
|                              |               |            | over 1,000 |           |  | 351      |       |                 |  | 2.25  4.75            |             |          |  | 5/1/22 - 8/1/43     |                   |   |  | 590,703   |           |  |  |  |    
|                              |               |            |            |           |  |          |       |                 |  |                        |             |          |  |                     |                   |   |  |           |           | 
|                              |               |            | 4,716      |           |  |          |       |                 |  |                        |             |          |  |                     | 2,214,781         |   |  |           |          | 
|                              |               |            |            |           |  |          |       |                 |  |                        |             |          |  |                     |                   |   |  |           |           | 
|                              | Hybrid Loans: |            |            |           |  |          |       |                 |  |                        |             |          |  |                     |                   |   |  |           |           |  | 
|                              |               |            |            | 0-250     |  |          | 4,044 |                 |  |                        | 2.63  9.13 |          |  |                     | 7/1/10 - 12/1/43  |   |  |           | 610,014   |  |  |   | 236 | 
|                              |               |            |            | 251-500   |  |          | 4,217 |                 |  |                        | 1.51  8.50 |          |  |                     | 10/1/17 - 1/1/44  |   |  |           | 1,571,863 |  |  |   | 256 | 
|                              |               |            |            | 501-750   |  |          | 1,722 |                 |  |                        | 2.50  7.50 |          |  |                     | 12/1/13 - 12/1/43 |   |  |           | 1,047,301 |  |  |   | 643 | 
|                              |               |            |            | 751-1,000 |  |          | 775   |                 |  |                        | 3.00  7.25 |          |  |                     | 9/1/17 - 8/1/43   |   |  |           | 692,769   |  |  |   |    | 
|                              |               |            | over 1,000 |           |  | 724      |       |                 |  | 3.25  7.45            |             |          |  | 9/1/18 - 7/1/43     |                   |   |  | 1,151,594 |           |  |  |  |    
|                              |               |            |            |           |  |          |       |                 |  |                        |             |          |  |                     |                   |   |  |           |           | 
|                              |               |            | 11,482     |           |  |          |       |                 |  |                        |             |          |  |                     | 5,073,541         |   |  |           | 1,135     | 
|                              |               |            |            |           |  |          |       |                 |  |                        |             |          |  |                     |                   |   |  |           |           | 
|Premium                       |               |            |            |           |  |          |       |                 |  |                        |             |          |  |                     |                   |   |  |           | 44,032    |  |  |   |     | 
|Allowance for Losses (2)      |               |            |            |           |  |          |       |                 |  |                        |             |          |  |                     | (7,993            | ) |  |           |           | 
|Principal Payments Receivable |               |            |            |           |  |          |       |                 |  |                        |             |          |  |                     | 6,382             |   |  |           |           | 
|                              |               |            |            |           |  |          |       |                 |  |                        |             |          |  |                     |                   |   |  |           |           | 
|                              |               |            | 16,198     |           |  |          |       |                 |  |                        |             |          |  | $                   | 7,330,743         |   |  | $         | 1,135     | 
|                              |               |            |            |           |  |          |       |                 |  |                        |             |          |  |                     |                   |   |  |           |           | 

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|                                                          |                                                    |                                       |                                                                               |           |           |           | 
|--------------------------------------------------------- | -------------------------------------------------- | ------------------------------------- | ----------------------------------------------------------------------------- | --------- | --------- | --------- | 
|Notes:                                                    |                                                    |                                       |                                                                               |          
|(1) Reconciliation of carrying amounts of mortgage loans: |                                                    |                                       |                                                                               |          
|                                                          | Balance at December 31, 2000                       |                                       | $                                                                             | 811,379   |          
|                                                          |                                                    | Additions during 2001:                |                                                                               |           |           |          
|                                                          |                                                    |                                       | Loan purchases                                                                |           |           | 1,185,280 | 
|                                                          |                                                    |                                       | Transfer of loan loss reserves at time of loan securitization                 |           |           | 3,513     | 
|                                                          |                                                    |                                       |                                                                               |           |          
|                                                          |                                                    |                                       | 1,188,793                                                                     |          
|                                                          |                                                    | Deductions during 2001:               |                                                                               |           |           |          
|                                                          |                                                    |                                       | Collections of principal                                                      |           |           | 198,121   | 
|                                                          |                                                    |                                       | Cost of mortgage loans securitized                                            |           |           | 1,223,921 | 
|                                                          |                                                    |                                       | Cost of mortgage loans sold                                                   |           |           | 333       | 
|                                                          |                                                    |                                       | Cost of mortgage loans transferred to REO                                     |           |           | 520       | 
|                                                          |                                                    |                                       | Provision for losses                                                          |           |           | 513       | 
|                                                          |                                                    |                                       | Amortization of premium                                                       |           |           | 4,350     | 
|                                                          |                                                    |                                       |                                                                               |           |          
|                                                          |                                                    |                                       | 1,427,758                                                                     |          
|                                                          |                                                    |                                       |                                                                               |           |          
|                                                          | 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 |          
|                                                          | Reclass of ARM securities to securitized ARM loans |                                       |                                                                               | 2,681,312 |          
|                                                          |                                                    |                                       |                                                                               |           |          
|                                                          |                                                    | Adjusted balance at December 31, 2002 |                                                                               |           | 3,683,731 |          
|                                                          |                                                    | Additions during 2003:                |                                                                               |           |           |          
|                                                          |                                                    |                                       | Loan purchases                                                                |           |           | 5,317,478 | 
|                                                          |                                                    |                                       | Cost of securitizing loans                                                    |           |           | 3,457     | 
|                                                          |                                                    |                                       |                                                                               |           |          
|                                                          |                                                    |                                       | 5,320,935                                                                     |          
|                                                          |                                                    | Deductions during 2003:               |                                                                               |           |           |          
|                                                          |                                                    |                                       | Collections of principal                                                      |           |           | 1,653,520 | 
|                                                          |                                                    |                                       | Allocation of cost of mortgage loans transferred
to mortgage servicing rights |           |           | 9,363     | 
|                                                          |                                                    |                                       | Provision for credit losses                                                   |           |           | 3,137     | 
|                                                          |                                                    |                                       | Cost of mortgage loans transferred to real
estate-owned properties            |           |           | 140       | 
|                                                          |                                                    |                                       | Amortization of premium                                                       |           |           | 7,763     | 
|                                                          |                                                    |                                       |                                                                               |           |          
|                                                          |                                                    |                                       | 1,673,923                                                                     |          
|                                                          |                                                    |                                       |                                                                               |           |          
|Balance at December 31, 2003                              |                                                    | $                                     | 7,330,743                                                                     |          
|                                                          |                                                    |                                       |                                                                               |           |          

F-30



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##### Table of Contents



(2)  The provision for losses is based on managements assessment of
probable credit loss based on various factors.

|                                |                              |                                                                                                 |   |       |        |  
|------------------------------- | ---------------------------- | ----------------------------------------------------------------------------------------------- | - | ----- | ------ | -
|Reconciliation of loss reserve: |                              |                                                                                                 |   |      
|                                | Balance at December 31, 2000 |                                                                                                 | $ | 3,100 |       
|                                |                              | Provision for losses                                                                            |   |       | 513    |  
|                                |                              | Adjustment for securitization of loans                                                          |   |       | (3,513 | )
|                                |                              |                                                                                                 |   |      
|                                | Balance at December 31, 2001 |                                                                                                 |   | 100   |       
|                                |                              | Provision for losses                                                                            |   |       |       |  
|                                |                              |                                                                                                 |   |      
|                                | Balance at December 31, 2002 |                                                                                                 |   | 100   |       
|                                |                              | Provision for losses                                                                            |   |       | 3,137  |  
|                                |                              | Transfer from basis adjustment upon reclassification
of ARM securities to securitized ARM loans |   |       | 4,756  |  
|                                |                              |                                                                                                 |   |      
|                                | Balance at December 31, 2003 |                                                                                                 | $ | 7,993 |       
|                                |                              |                                                                                                 |   |      

(3)  Cost for Federal income taxes is the same.

(4)  The geographic distribution of the Companys whole loan
portfolio at December 31, 2003 was as follows:

|                                       |       |       |           |                 |  |  |           |           | 
|-------------------------------------- | ----- | ----- | --------- | --------------- |  |  | --------- | --------- | 
|                                       |       |       | Number of |                 |  |  |          
|State or Territory                     |       | Loans |           | Carrying Amount
|                                       |       |       |           |                
|California                             |       |       | 3,139     |                 |  |  | 1,939,435 |          
|Colorado                               |       |       | 1,021     |                 |  |  | 541,529   |          
|Connecticut                            |       |       | 285       |                 |  |  | 200,587   |          
|Florida                                |       |       | 1,276     |                 |  |  | 475,894   |          
|Georgia                                |       |       | 2,494     |                 |  |  | 863,518   |          
|Illinois                               |       |       | 424       |                 |  |  | 158,048   |          
|Massachusetts                          |       |       | 417       |                 |  |  | 208,481   |          
|New Jersey                             |       |       | 451       |                 |  |  | 234,295   |          
|New Mexico                             |       |       | 558       |                 |  |  | 202,724   |          
|New York                               |       |       | 878       |                 |  |  | 530,823   |          
|North Carolina                         |       |       | 482       |                 |  |  | 175,666   |          
|South Carolina                         |       |       | 598       |                 |  |  | 237,084   |          
|Texas                                  |       |       | 575       |                 |  |  | 200,481   |          
|Virginia                               |       |       | 553       |                 |  |  | 228,175   |          
|Washington                             |       |       | 234       |                 |  |  | 107,544   |          
|Other states, less than
252 loans each |       |       | 2,813     |                 |  |  | 984,038   |          
|Premium                                |       |       |           |                 |  |  | 44,032    |          
|Allowance for losses                   |       |       |           |                 |  |  | (7,993    | )        
|Principal Payments Receivable          |       |       |           |                 |  |  | 6,382     |          
|                                       |       |       |           |                 |  |  |           |          
|                                       | TOTAL |       |           | 16,198          |  |  | $         | 7,330,743 | 
|                                       |       |       |           |                 |  |  |           |          

F-31



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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 3, 2004 |  | /s/ Garrett Thornburg                               
|                     |  |                                                     
|                     |  | Garrett Thornburg                                   
|                     |  | Chairman of the Board and Chief Executive Officer   
|                     |  | (Principal Executive Officer)                       
|                     |  |                                                     
|Dated: March 3, 2004 |  | /s/ Larry A. Goldstone                              
|                     |  |                                                     
|                     |  | Larry A. Goldstone                                  
|                     |  | President and Chief Operating Officer               
|                     |  | (authorized officer of registrant)                  
|                     |  |                                                     
|Dated: March 3, 2004 |  | /s/ Richard P. Story                                
|                     |  |                                                     
|                     |  | Richard P. Story                                    
|                     |  | Executive Vice President and Chief Financial Officer
|                     |  | (Principal Financial and Accounting 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 3, 2004
|                          |  | Director and Chief                     |  |              
|Garrett Thornburg         |  | Executive Officer                      |  |              
|                          |  |                                        |  |              
|/s/ Larry A. Goldstone    |  | President, Director and                |  | March 3, 2004
|                          |  | Chief Operating Officer                |  |              
|Larry A. Goldstone        |  |                                        |  |              
|                          |  |                                        |  |              
|/s/ Richard P. Story      |  | Executive Vice President, Director and |  | March 3, 2004
|                          |  | Chief Financial Officer                |  |              
|Richard P. Story          |  |                                        |  |              
|                          |  |                                        |  |              
|/s/ Joseph H. Badal       |  | Executive Vice President and Director  |  | March 3, 2004
|                          |  |                                        |  |              
|Joseph H. Badal           |  |                                        |  |              
|                          |  |                                        |  |              
|/s/ Anne-Drue M. Anderson |  | Director                               |  | March 3, 2004
|                          |  |                                        |  |              
|Anne-Drue M. Anderson     |  |                                        |  |              
|                          |  |                                        |  |              
|/s/ David A. Ater         |  | Director                               |  | March 3, 2004
|                          |  |                                        |  |              
|David A. Ater             |  |                                        |  |              
|                          |  |                                        |  |              
|/s/ Eliot R. Cutler       |  | Director                               |  | March 3, 2004
|                          |  |                                        |  |              
|Eliot R. Cutler           |  |                                        |  |              
|                          |  |                                        |  |              
|/s/ Ike Kalangis          |  | Director                               |  | March 3, 2004
|                          |  |                                        |  |              
|Ike Kalangis              |  |                                        |  |              





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|                          |  |          |  |              
|------------------------- |  | -------- |  | -------------
|/s/ Owen M. Lopez         |  | Director |  | March 3, 2004
|                          |  |          |  |              
|Owen M. Lopez             |  |          |  |              
|                          |  |          |  |              
|/s/ James H. Lorie        |  | Director |  | March 3, 2004
|                          |  |          |  |              
|James H. Lorie            |  |          |  |              
|                          |  |          |  |              
|/s/ Francis I. Mullin III |  | Director |  | March 3, 2004
|                          |  |          |  |              
|Francis I. Mullin III     |  |          |  |              
|                          |  |          |  |              
|/s/ Stuart C. Sherman     |  | Director |  | March 3, 2004
|                          |  |          |  |              
|Stuart C. Sherman         |  |          |  |              





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Exhibit Index

|               |  |                                                                                                                                                                                                                                                     |  |              |  | 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | 
|               |  |                                                                                                                                                                                                                                                     |  | Sequentially
|               |  |                                                                                                                                                                                                                                                     |  | Numbered    
|Exhibit Number |  | Exhibit Description                                                                                                                                                                                                                                 |  | Page        
|               |  |                                                                                                                                                                                                                                                     |  |             
|3.1            |  | Articles of Incorporation of the
Registrant (incorporated herein by
reference to Exhibit 3.1 filed with
the registrants registration
statement on Form S-11, which went
effective on June 18, 1993)                                               
|               |  |                                                                                                                                                                                                                                                    
|3.1.1          |  | Articles of Amendment to Articles of
Incorporation dated June 29, 1995
(incorporated herein by reference to
Exhibit 3.1 filed with the
registrants quarterly report for
the quarter ended June 30, 1995)                                          
|               |  |                                                                                                                                                                                                                                                    
|3.1.2          |  | Articles Supplementary dated January
21, 1997 (incorporated herein by
reference to Exhibit 3.1.2 filed
with the registrants registration
statement on Form 8-A on January 17,
1997)                                                               
|               |  |                                                                                                                                                                                                                                                    
|3.1.3          |  | Amendment to Articles of
Incorporation dated April 27, 2000
(incorporated herein by reference to
Exhibit 3.1.3 filed on May 8, 2000
with the registrants quarterly
report for the quarter ended March
31, 2000)                                   
|               |  |                                                                                                                                                                                                                                                    
|3.1.4          |  | Form of Articles Supplementary for
Series B Cumulative Preferred Stock
(incorporated herein by reference to
Exhibit 3.1.4 filed on March 28,
2001 with the registrants annual
report on Form 10-K for the year
ended December 31, 2000)           
|               |  |                                                                                                                                                                                                                                                    
|3.1.5          |  | Amendment to Articles of
Incorporation dated April 29, 2002
(incorporated herein by reference to
Exhibit 3.1.5 filed on May 14, 2002
with the registrants quarterly
report for the quarter ended March
31, 2002)                                  
|               |  |                                                                                                                                                                                                                                                    
|3.2.           |  | Amended and Restated Bylaws of the
Registrant (incorporated herein by
reference to Exhibit 3.2 filed with
the registrants registration
statement on Form S-8 dated July 1,
1994)                                                                  
|               |  |                                                                                                                                                                                                                                                    
|3.2.1.         |  | Amendment to the Amended and
Restated Bylaws of the Registrant
dated July 15, 1999 (incorporated
herein by reference to Exhibit
3.2.1.1 filed on November 12, 1999
with the registrants quarterly
report for the quarter ended
September 30, 1999)
|               |  |                                                                                                                                                                                                                                                    
|3.2.2          |  | Amendment to the Amended and
Restated Bylaws of the Registrant
dated October 22, 2001 (incorporated
herein by reference to Exhibit
3.2.1.2 filed with the registrants
current report on Form 8-K on
October 30, 2001)                             
|               |  |                                                                                                                                                                                                                                                    
|3.3.           |  | Audit Committee Charter, revised
January 21, 2003 (incorporated
herein by reference to Exhibit A
filed on March 20, 2003 with the
registrants proxy statement for the
2003 Annual Meeting of Shareholders)                                        
|               |  |                                                                                                                                                                                                                                                    
|4.1            |  | Form of Common Stock Certificate
(incorporated herein by reference to
Exhibit 4.3 filed on March 28, 2001
with the registrants annual report
on Form 10-K for the year ended
December 31, 2000)                                                   





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##### Table of Contents



|               |  |                                                                                                                                                                                                                                                                   |  |              |  | 
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | 
|               |  |                                                                                                                                                                                                                                                                   |  | Sequentially
|               |  |                                                                                                                                                                                                                                                                   |  | Numbered    
|Exhibit Number |  | Exhibit Description                                                                                                                                                                                                                                               |  | Page        
|               |  |                                                                                                                                                                                                                                                                   |  |             
|4.2            |  | Form of Preferred Stock Certificate
for Series B Cumulative Preferred
Stock (incorporated herein by
reference to Exhibit 4.4 filed on
March 28, 2001 with the registrants
annual report on Form 10-K for the
year ended December 31, 2000)                      
|               |  |                                                                                                                                                                                                                                                                  
|4.3            |  | Form of Right Certificate
(incorporated herein by reference to
Exhibit 4.5 filed on March 28, 2001
with the registrants annual report
on Form 10-K for the year ended
December 31, 2000)                                                                        
|               |  |                                                                                                                                                                                                                                                                  
|4.3.1          |  | Shareholder Rights Agreement dated
January 25, 2001 (incorporated
herein by reference to Exhibit 10.8
filed on March 28, 2001 with the
registrants annual report on Form
10-K for the year ended December 31,
2000)                                             
|               |  |                                                                                                                                                                                                                                                                  
|4.3.2          |  | Agreement of Substitution and
Amendment of Shareholder Rights
Agreement, dated May 9, 2002
(incorporated herein by reference to
Exhibit 10.9 filed with the
registrants registration statement
on Form S-3, filed on August 23,
2002)                           
|               |  |                                                                                                                                                                                                                                                                  
|4.4            |  | Indenture between Thornburg
Mortgage, Inc. and Deutsche Bank
Trust Company Americas, dated as of
May 15, 2003 (incorporated herein by
reference to Exhibit 10.11 filed
with the registrants current report
on Form 8-K on May 28, 2003)                         
|               |  |                                                                                                                                                                                                                                                                  
|4.4.1          |  | First Supplemental Indenture between
Thornburg Mortgage, Inc. and
Deutsche Bank Trust Company
Americas, dated as of May 15, 2003
(incorporated herein by reference to
Exhibit 10.11.1 filed with the
registrants current report on Form
8-K on May 28, 2003)    
|               |  |                                                                                                                                                                                                                                                                  
|4.5            |  | Form of Exchange Global Note
(incorporated herein by reference to
Exhibit 4.4 filed with the
registrants registration statement
on Form S-4, filed on December 19,
2003)                                                                                        
|               |  |                                                                                                                                                                                                                                                                  
|10.1           |  | Management Agreement between the
Registrant and Thornburg Mortgage
Advisory Corporation dated July 15,
1999 (incorporated herein by
reference to Exhibit 10.1 filed on
August 4, 1999 with the registrants
quarterly report for the quarter
ended June 30, 1999)
|               |  |                                                                                                                                                                                                                                                                  
|10.1.1         |  | Amendment No. 1 to the Management
Agreement dated October 17, 2000
(incorporated herein by reference to
Exhibit 10.1.1 filed on November 13,
2000 with the registrants quarterly
report for the quarter ended
September 30, 2000)                               
|               |  |                                                                                                                                                                                                                                                                  
|10.2           |  | Dividend Reinvestment and Stock
Purchase Plan (incorporated herein
by reference to the registrants
registration statement on Form S-3,
filed on June 16, 2003)                                                                                                  
|               |  |                                                                                                                                                                                                                                                                  
|10.3           |  | Form of Limited Stock Repurchase
Plan (incorporated herein by
reference to Exhibit 10.9 filed on
August 12, 2002 with the
registrants quarterly report for
the quarter ended June 30, 2002)                                                                     





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##### Table of Contents



|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |              |  | 
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | 
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Sequentially
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  | Numbered    
|Exhibit Number |  | Exhibit Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | Page        
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |  |             
|10.4           |  | Amended and Restated 2002 Long-Term
Incentive Plan, dated January 21,
2003 (incorporated herein by
reference to Exhibit 10.9 filed on
March 20, 2003 with the registrants
annual report on Form 10-K for the
year ended December 31, 2002)                                                                                                                                                                                                                                                                                                                   
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.4.1         |  | Amendment No. 1, dated as of October
21, 2003, to Amended and Restated
2002 Long-Term Incentive Plan*                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.5           |  | Trust, Pooling and Servicing
Agreement (the Trust Agreement),
dated as of March 1, 2003, with
Structured Asset Mortgage
Investments Inc. as Seller, Deutsche
Bank National Trust Company as
Trustee, Deutsche Bank Trust Company
Delaware as Delaware Trustee, Wells
Fargo Bank Minnesota, National
Association as Master Servicer and
as Securities Administrator and
Thornburg Mortgage Home Loans, Inc.
(TMHL) (TMST 2003-2) (incorporated
herein by reference to Exhibit 10.10
filed with the registrants current
report on Form 8-K on May 28, 2003)
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.5.1         |  | Amendment to Trust Agreement, dated
as of April 29, 2003, with the
Seller, the Trustee, the Delaware
Trustee, the Master Servicer and
Securities Administrator and TMHL
(TMST 2003-2) (incorporated herein
by reference to Exhibit 10.10.1
filed with the registrants current
report on Form 8-K on May 28, 2003)                                                                                                                                                                                                                                            
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.6           |  | Sale and Servicing Agreement dated
as of August 1, 2003 among Thornburg
Mortgage Securities Trust 2003-4,
Thornburg Mortgage Home Loans, Inc.,
Greenwich Capital Acceptance, Inc.,
Deutsche Bank National Trust Company
and Wells Fargo Bank Minnesota,
National Association (TMST 2003-4)
(incorporated herein by reference to
Exhibit 10.13 filed on November 13,
2003 with the registrants quarterly
report for the quarter ended
September 30, 2003)                                                                                                     
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.7           |  | Sale and Servicing Agreement dated
as of December 1, 2003 among
Thornburg Mortgage Securities Trust
2003-6, Thornburg Mortgage Home
Loans, Inc., Structured Assets
Securities Corporation, Deutsche
Bank National Trust Company and
Wells Fargo Bank Minnesota, National
Association (TMST 2003-6)
(incorporated herein by reference to
Exhibit 10.14 filed with the
registrants current report on Form
8-K on February 19, 2004)                                                                                                                            
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|10.7.1         |  | Indenture dated as of December 1,
2003, between Thornburg Mortgage
Securities Trust 2003-6, as Issuer,
and Deutsche Bank National Trust
Company, as Indenture Trustee (TMST
2003-6) (incorporated herein by
reference to Exhibit 10.14.1 filed
with the registrants current report
on Form 8-K on February 19, 2004)                                                                                                                                                                                                                                         
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|22.1           |  | Notice and Proxy Statement for the
Annual Meeting of Shareholders to be
held on April 20, 2004 (to be filed
within 120 days after the close of
the registrants fiscal year ended
December 31, 2003)                                                                                                                                                                                                                                                                                                                                                          
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|23.1           |  | Consent of Independent Accountants *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|31.1           |  | Certification of Chief Executive
Officer pursuant to Rule 13a-14(a)
and 15d-14(a) of the Securities
Exchange Act of 1934*                                                                                                                                                                                                                                                                                                                                                                                                                                     





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##### Table of Contents



|               |  |                                                                                                                                                                                 |  |              |  | 
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ |  | 
|               |  |                                                                                                                                                                                 |  | Sequentially
|               |  |                                                                                                                                                                                 |  | Numbered    
|Exhibit Number |  | Exhibit Description                                                                                                                                                             |  | Page        
|               |  |                                                                                                                                                                                 |  |             
|31.2           |  | Certification of President and Chief
Operating Officer pursuant to Rule
13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934*                                        
|               |  |                                                                                                                                                                                
|31.3           |  | Certification of Executive Vice
President and Chief Financial
Officer pursuant to Rule 13a-14(a)
and 15d-14(a) of the Securities
Exchange Act of 1934*                         
|               |  |                                                                                                                                                                                
|32.1           |  | 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 2003*                             
|               |  |                                                                                                                                                                                
|32.2           |  | 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 2003*               
|               |  |                                                                                                                                                                                
|32.3           |  | Certification of Executive Vice
President and Chief Financial
Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley
Act of 2003*

(a) * Being filed herewith