WASHINGTON (AP) - Mortgage-market giant Freddie Mac disclosed Friday that it had inflated its earnings for 2001 in financial reports by $1 billion, the first time in its months-long accounting crisis that it acknowledged overstating profits.

The disclosure came as Freddie Mac said its overall earnings are being restated higher by $5 billion in a long-awaited adjustment. The underreported earnings of $4.4 billion for 2000-2002 were close to what the government-sponsored company had estimated in September. In addition, Freddie Mac said that $600 million had been underreported for periods prior to 2000.

Prior to Friday's report, Freddie Mac had only acknowledged understating its earnings, giving the company a unique status among other big corporations embroiled in accounting scandals. While other companies may have overstated earnings, Freddie Mac executives have said it understated its results for several years to smooth out volatility in profits and uphold its image on Wall Street as a steady performer.

The latest accounting change is expected to reduce Freddie Mac's income by an equivalent amount during the next few years and make earnings more volatile. The company warned Friday of further volatility to come, also saying that its restated results show "significantly greater" turbulence than it previously reported.

It said the $1 billion error in its 2001 earnings was due to failure to account for losses from derivatives, the financial instruments that Freddie Mac and larger rival Fannie Mae use to hedge against swings in interest rates.

The company, which has ousted two chief executives since its accounting troubles came to light in June and is under investigation by federal prosecutors and securities regulators, said Friday that its financial condition was sound and its ability to manage risk uncompromised.

"The restatement is a significant step in Freddie Mac's progress toward achieving accurate and timely financial reporting and controls," said Shaun O'Malley, the company's chairman. "Freddie Mac completed this restatement while maintaining our business momentum and delivering on our congressional mandate to lower mortgage costs for America's homeowners."

The company is the second-largest U.S. buyer of home mortgages with revenue of some $40 billion a year.

In morning trading on the New York Stock Exchange, Freddie Mac shares were up $1.26, or 2.3 percent, to $56.90.

TBO

-- Anonymous, November 21, 2003