UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

     [X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

                  FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2008

                                       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: 1-13447

                         ANNALY CAPITAL MANAGEMENT, INC.
             (Exact name of Registrant as specified in its Charter)

           MARYLAND                                        22-3479661
 (State or other jurisdiction                  (IRS Employer Identification No.)
of incorporation or organization)

                     1211 AVENUE OF THE AMERICAS, SUITE 2902
                               NEW YORK, NEW YORK
                    (Address of principal executive offices)

                                      10036
                                   (Zip Code)

                                 (212) 696-0100
              (Registrant's telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all documents and
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 whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
                         Smaller reporting company |_|

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes |_|   No |X|


                      APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date:

  Class                                   Outstanding at August 8, 2008
Common Stock, $.01 par value                      538,549,916




                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

                                    FORM 10-Q

                                TABLE OF CONTENTS





Part I.     FINANCIAL INFORMATION

            Item 1.  Financial Statements:

                                                                                       
            Consolidated Statements of Financial Condition at June 30, 2008               2
               (Unaudited) and December 31, 2007 (Derived from the audited
               consolidated statement of financial condition at December 31, 2007)

             Consolidated Statements of Operations and Comprehensive Income (Loss)
               (Unaudited) for the quarters and six                                       3
               months ended June 30, 2008 and 2007

             Consolidated Statement of Stockholders' Equity (Unaudited) for the
               quarters ended March 31, 2008 and June 30, 2008                            4

            Consolidated Statements of Cash Flows (Unaudited) for the quarters
               and six months ended June 30, 2008 and 2007                                5

            Notes to Consolidated Financial Statements (Unaudited)                        6

            Item 2. Management's Discussion and Analysis of Financial Condition
              and Results of Operations                                                  20

            Item 3. Quantitative and Qualitative Disclosures about Market Risk           37

            Item 4. Controls and Procedures                                              39

Part II.    OTHER INFORMATION

            Item 1. Legal Proceedings                                                    40

            Item 1A. Risk Factors                                                        40

            Item 4. Submission of Matters to a Vote of Security Holders                  40

            Item 6. Exhibits                                                             41

            SIGNATURES                                                                   43






Part I
Item1.  Financial Statements




                             ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                              CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                              (dollars in thousands, except for share data)
                                                                              (Unaudited)     December 31,
                                                                             June 30, 2008      2007(1)
                                                                           ---------------------------------
                                    ASSETS
                                    ------
                                                                                           
     Cash and cash equivalents                                                  $1,462,737       $  103,960
     Reverse repurchase agreements                                                  49,964                -
     Mortgage-Backed Securities, at fair value                                  58,017,305       52,879,528
     Agency debentures, at fair value                                              731,995          253,915
     Available for sale equity securities, at fair value                            32,631           64,754
     Trading securities, at fair value                                              23,478           11,675
     Receivable for Mortgage-Backed Securities sold                                824,308          276,737
     Accrued interest and dividends receivable                                     303,228          271,996
     Receivable for advisory and service fees                                        4,703            3,598
     Intangible for customer relationships, net                                      7,604            9,842
     Goodwill                                                                       22,966           22,966
     Other assets                                                                    3,216            4,543
                                                                           ---------------------------------

          Total assets                                                         $61,484,135       $53,903,514
                                                                           =================================

                     LIABILITIES AND STOCKHOLDERS' EQUITY
                     ------------------------------------
     Liabilities:
       Repurchase agreements                                                   $51,839,663      $46,046,560
       Payable for Investment Securities purchased                               1,405,109        1,677,131
       Trading securities sold, not yet purchased, at fair value                    48,718           32,835
       Accrued interest payable                                                    154,615          257,608
       Dividends payable                                                           296,201          136,618
       Accounts payable and other liabilities                                       36,625           36,688
       Interest rate swaps, at fair value                                          400,998          398,096
                                                                           ---------------------------------

          Total liabilities                                                     54,181,929       $48,585,536
                                                                           ---------------- ----------------

     Minority interest in equity of consolidated affiliate                               -            1,574
                                                                           ---------------------------------

     6.00% Series B Cumulative Convertible Preferred Stock:
       4,600,000 shares authorized, 4,496,525 and 4,600,000 shares issued
       and outstanding                                                             108,957          111,466
                                                                           ---------------------------------

     Commitments and contingencies (Note 12)                                             -                -

     Stockholders' Equity:
     7.875% Series A Cumulative Redeemable Preferred Stock:
       7,412,500 shares authorized, issued and outstanding                         177,088          177,088
      Common stock: par value $.01 per share; 987,987,500 shares
        authorized, 538,546,666 and 401,822,703 issued and outstanding,
        respectively                                                                 5,385            4,018
     Additional paid-in capital                                                  7,592,161        5,297,922
     Accumulated other comprehensive loss                                        (478,791)        (152,197)
     Accumulated deficit                                                         (102,594)        (121,893)
                                                                           ---------------------------------

          Total stockholders' equity                                             7,193,249         5,204,938
                                                                           ---------------------------------

     Total liabilities, minority interest, Series B Cumulative Convertible
       Preferred Stock and stockholders' equity                                 $61,484,135      $53,903,514
                                                                           =================================

     (1) Derived from the audited consolidated statement of financial condition
     at December 31, 2007. See notes to consolidated financial statements.




                                       2





                                       ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                             CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
                                                           (UNAUDITED)
                                      (dollars in thousands, except per share amounts)

                                                             For the            For the         For the Six        For the Six
                                                          Quarter Ended      Quarter Ended      Months Ended       Months Ended
                                                          June 30, 2008      June 30, 2007      June 30, 2008      June 30, 2007
                                                         ------------------------------------------------------------------------
                                                                                                      
Interest income                                          $       773,359    $       556,262    $     1,564,487    $     1,005,826

Interest expense                                                 442,251            468,748            979,857            848,912

                                                         ------------------------------------------------------------------------
Net interest income                                              331,108             87,514            584,630            156,914
                                                         ------------------------------------------------------------------------

Other income:
   Investment advisory and service fees                            6,406              5,366             13,004             10,928
   Gain on sale of Investment Securities                           2,830              7,293             12,247             13,438
   Gain on termination of interest rate swaps                         --                 --                 --                 67
   Income from trading securities                                  2,180                243              4,034              3,672
   Dividend income from available-for-sale equity                    580                 --              1,521
securities
   Loss on other-than-temporarily impaired securities                 --               (698)                --             (1,189)

                                                         ------------------------------------------------------------------------
     Total other income                                           11,996             12,204             30,806             26,916
                                                         ------------------------------------------------------------------------

Expenses:
  Distribution fees                                                  370                861              1,003              1,765
  General and administrative expenses                             27,215             12,272             51,210             25,158
                                                         ------------------------------------------------------------------------
     Total expenses                                               27,585             13,133             52,213             26,923
                                                         ------------------------------------------------------------------------

 Income before income taxes and minority interest                315,519             86,585            563,223            156,907

 Income taxes                                                      7,527                839             12,137              3,443

                                                         ------------------------------------------------------------------------
 Income before minority interest                                 307,992             85,746            551,086            153,464

 Minority interest                                                    --                 13                 58                299

                                                         ------------------------------------------------------------------------
 Net income                                                      307,992             85,733            551,028            153,165

Dividends on preferred stock                                       5,334              5,373             10,707             10,746

                                                         ------------------------------------------------------------------------
Net income available to common shareholders              $       302,658    $        80,360    $       540,321    $       142,419
                                                         ========================================================================

Net income available per share to common shareholders:
  Basic                                                  $          0.60    $          0.30    $          1.14    $          0.59
                                                         ========================================================================
  Diluted                                                $          0.59    $          0.30    $          1.13    $          0.58
                                                         ========================================================================

Weighted average number of common shares outstanding:
                                                             503,758,079        264,990,422        473,785,256        241,371,530
  Basic
                                                         ========================================================================

 Diluted                                                     512,678,975        273,578,836        482,813,463        249,924,374
                                                         ========================================================================

Net income                                               $       307,992    $        85,733    $       551,028    $       153,165
                                                         ------------------------------------------------------------------------
Other comprehensive loss:
  Unrealized gain on available-for-sale securities              (529,008)          (535,413)          (311,445)          (489,465)
  Unrealized loss (gain) on interest rate swaps                  388,861            134,408             (2,902)           110,253
  Reclassification adjustment for net gains
    included in net income                                        (2,830)            (6,595)           (12,247)           (12,316)
                                                         ------------------------------------------------------------------------
  Other comprehensive loss                                      (142,977)          (407,600)          (326,594)          (391,528)
                                                         ------------------------------------------------------------------------
Comprehensive income (loss)                              $       165,015    ($      321,867)   $       224,434    ($      238,363)
                                                         ========================================================================
See notes to consolidated financial statements.



                                       3




                                             ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                                              CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                                             FOR THE QUARTERS ENDED MARCH 31 AND JUNE 30, 2008
                                                                (UNAUDITED)
                                               (dollars in thousands, except per share data)


                                                                                             Other
                                                                                             Accu-
                                                                                            mulated
                                                                Common      Additional       Comp-          Accu-
                                                 Preferred      Stock         Paid-In      rehensive       mulated
                                                   Stock       Par Value      Capital        Loss          Deficit          Total
                                                -----------   -----------   -----------   -----------    -----------    -----------

                                                                                                      
BALANCE JANUARY 1, 2008                         $   177,088   $     4,018   $ 5,297,922   ($  152,197)   ($  121,893)   $ 5,204,938

  Net income                                             --            --            --            --        243,036        243,036
  Other comprehensive loss                               --            --            --      (183,617)            --       (183,617)
  Exercise of stock options                              --             2         1,633            --             --          1,635
  Stock option expense                                   --            --           322            --             --            322
  Net proceeds from direct purchase and
    dividend reinvestment                                --            33        54,524            --             --         54,557
  Net proceeds from follow-on offerings                  --           587     1,080,244            --             --      1,080,831
  Net proceeds from ATM programs                         --            44        71,788            --             --         71,832
  Conversion of Series B Cumulative
    Convertible Preferred Stock                          --            --            61            --             --             61
  Series A Cumulative Redeemable Preferred
    Stock dividends declared, $0.492188
     per share                                           --            --            --            --         (3,648)        (3,648)
  Series B Cumulative Convertible Preferred
    Stock dividends  declared, $0.375 per
     share                                               --            --            --            --         (1,725)        (1,725)
  Common dividends declared, $0.48 per share             --            --            --            --       (224,823)      (224,823)
                                                -----------   -----------   -----------   -----------    -----------    -----------

BALANCE, MARCH 31, 2008                             177,088         4,684     6,506,494      (335,814)      (109,053)     6,243,399

  Net income                                             --            --            --            --        307,992        307,992
  Other comprehensive loss                               --            --            --      (142,977)            --       (142,977)
  Exercise of stock options                              --            --           195            --             --            195
  Stock option expense                                   --            --           517            --             --            517
  Net proceeds from direct purchase and
    dividend reinvestment                                --             9        16,481            --             --         16,490
  Net proceeds from follow-on offerings                  --           690     1,066,028            --             --      1,066,718
  Conversion of Series B Cumulative
    Convertible Preferred Stock                          --             2         2,446            --             --          2,448
  Series A Cumulative Redeemable Preferred
    Stock dividends declared, $0.492188
     per share                                           --            --            --            --         (3,647)        (3,647)
  Series B Cumulative Convertible Preferred
    Stock dividends  declared, $0.375 per share          --            --            --            --         (1,685)        (1,685)
  Common dividends declared, $0.55 per share             --            --            --            --       (296,201)      (296,201)
                                                -----------   -----------   -----------   -----------    -----------    -----------

BALANCE, JUNE 30, 2008                          $   177,088   $     5,385   $ 7,592,161   ($  478,791)   ($  102,594)   $ 7,193,249
                                                ===========   ===========   ===========   ===========    ===========    ===========


See notes to consolidated financial statements.




                                       4




                                           ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                                                CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                              (UNAUDITED)
                                                        (dollars in thousands)


                                                                      For the         For the        For the Six       For the Six
                                                                   Quarter Ended    Quarter Ended    Months Ended      Months Ended
                                                                       June             June             June              June
                                                                     30, 2008         30, 2007         30, 2008          30, 2007
                                                                   ----------------------------------------------------------------


Cash flows from operating activities:
                                                                                                          
Net income                                                         $     307,992    $      85,733    $     551,028    $     153,165
Adjustments to reconcile net income to net cash provided
  by operating activities:
    Amortization of Mortgage Backed Securities premiums
    and discounts, net                                                    26,613           16,737           54,126           32,106
    Amortization of intangibles                                            1,236              349            2,238              705
    Amortization of trading securities premiums and discounts                 --               (3)              (3)              (3)
    Gain on sale of Investment Securities                                 (2,830)          (7,293)         (12,247)         (13,438)
    Gain on termination of interest rate swaps                                --               --               --              (67)
    Stock option and long-term compensation expense                          517              362              839              673
    Net realized gain on trading investments                              (1,837)            (346)          (7,130)          (1,016)
    Unrealized depreciation (appreciation) on trading investments            351              813            4,778             (848)
    Loss on other-than-temporarily impaired securities                        --              698               --            1,189
    Increase in accrued interest receivable                              (17,040)         (17,900)         (32,350)         (50,462)
    Decrease (increase) in other assets                                    1,131              (22)           1,327             (867)
    Purchase of trading securities                                       (11,270)          (9,697)         (12,016)         (13,562)
    Proceeds from sale of trading securities                                  --            4,592            9,926            9,158
    Purchase from trading securities sold, not yet purchased              (1,987)          (3,951)          (6,032)         (11,783)
    Proceeds for securities sold, not yet purchased                        4,551            2,388           14,399           20,074
    Decrease in trading sales receivable                                      --               --              157               --
    (Increase) decrease in advisory and service fees receivable             (123)              (5)          (1,105)             224
    Increase (decrease) in interest payable                              (17,960)          25,094         (102,993)          20,458
    Increase (decrease) in accrued expenses and other liabilities         16,501            6,578              (63)          (4,296)
                                                                   ----------------------------------------------------------------
         Net cash provided by operating activities                       305,845          104,127          464,879          141,410
                                                                   ----------------------------------------------------------------
Cash flows from investing activities:
  Purchase of Mortgage-Backed Securities                              (6,802,127)      (5,303,629)     (17,255,754)     (14,893,805)
  Proceeds from sale of Investment Securities                          1,497,894        1,458,787        5,658,254        2,868,879
  Principal payments of Mortgage-Backed Securities                     2,793,143        1,952,728        5,329,720        3,627,304
  Purchase of agency debentures                                               --               --         (500,000)         (54,567)
  Proceeds from termination of swaps                                          --               --               --               67
  Purchase of reverse repurchase agreements                              750,036               --          (49,964)              --
                                                                   ----------------------------------------------------------------
       Net cash used in investing activities                          (1,761,054)      (1,892,114)      (6,817,744)      (8,452,122)
                                                                   ----------------------------------------------------------------
Cash flows from financing activities:
  Proceeds from repurchase agreements                                108,736,743      103,964,854      223,326,233      201,021,927
  Principal payments on repurchase agreements                       (108,221,087)    (102,219,009)    (217,533,130)    (193,442,092)
  Proceeds from exercise of stock options                                    195               64            1,830              481
  Proceeds from direct purchase and dividend reinvestment                 16,490           29,456           71,047           29,456
  Net proceeds from follow-on offerings                                1,066,718             (178)       2,147,549          737,071
  Net proceeds from ATM programs                                              --           65,908           71,832           65,908
  Minority interest                                                           --               13           (1,573)             299
  Dividends paid                                                        (230,154)         (57,950)        (372,146)        (102,339)
                                                                   ----------------------------------------------------------------
       Net cash provided by financing activities                       1,368,905        1,783,158        7,711,642        8,310,711
                                                                   ----------------------------------------------------------------

Net (decrease) increase in cash and cash equivalents                     (86,304)          (4,829)       1,358,777               (1)

Cash and cash equivalents, beginning of period                         1,549,041           96,610          103,960           91,782
                                                                   ----------------------------------------------------------------

Cash and cash equivalents, end of period                           $   1,462,737    $      91,781    $   1,462,737    $      91,781
                                                                   ================================================================

Supplemental disclosure of cash flow information:
  Interest paid                                                    $     460,211    $     443,654    $   1,082,849    $     828,454
                                                                   ================================================================
  Taxes paid                                                       $       9,091    $       2,105    $       9,340    $       4,581
                                                                   ================================================================
Noncash financing activities:

Net change in unrealized loss on available-for-sale securities
      and  interest rate swaps, net of reclassification adjustment ($    142,977)   ($    407,600)   ($    326,594)   ($    391,528)
                                                                   ================================================================
  Dividends declared, not yet paid                                 $     296,201    $      64,652    $     296,201    $      64,652
                                                                   ================================================================

See notes to consolidated financial statements.




                                       5


                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   FOR THE QUATER ENDED JUNE 30, 2008 AND 2007
--------------------------------------------------------------------------------

1.    ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

        Annaly Capital Management, Inc. ("Annaly" or the "Company") was
incorporated in Maryland on November 25, 1996. The Company commenced its
operations of purchasing and managing an investment portfolio of mortgage-backed
securities on February 18, 1997, upon receipt of the net proceeds from the
private placement of equity capital, and completed its initial public offering
on October 14, 1997. The Company is a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986, as amended. Fixed Income Discount
Advisory Company ("FIDAC") is a registered investment advisor and is a wholly
owned taxable REIT subsidiary of the Company. On June 27, 2006, the Company made
a majority equity investment in an affiliated investment fund (the "Fund"),
which is now wholly owned by the Company. The Company acquired approximately 3.6
million shares of common stock of Chimera Investment Corporation ("Chimera") for
approximately $54.3 million on November 21, 2007. Chimera is a newly-formed,
publicly traded, specialty finance company that invests in residential mortgage
loans, residential mortgage-backed securities, real estate related securities
and various other asset classes. Chimera is externally managed by FIDAC and
intends to elect and qualify to be taxed as a REIT for federal income tax
purposes.

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

        Basis of Presentation - The accompanying unaudited consolidated
financial statements have been prepared in conformity with the instructions to
Form 10-Q and Article 10, Rule 10-01 of Regulation S-X for interim financial
statements. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United
States of America ("GAAP"). The consolidated interim financial statements are
unaudited; however, in the opinion of the Company's management, all adjustments,
consisting only of normal recurring accruals, necessary for a fair statement of
the financial positions, results of operations, and cash flows have been
included. These unaudited consolidated financial statements should be read in
conjunction with the audited consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2007. The
nature of the Company's business is such that the results of any interim period
are not necessarily indicative of results for a full year.

         The consolidated financial statements include the accounts of the
Company, FIDAC and the Fund. All intercompany balances and transactions have
been eliminated. The minority shareholder's interest in the Fund is reflected as
minority interest in the consolidated financial statements.

       Cash and Cash Equivalents - Cash and cash equivalents include cash on
hand and cash held in money market funds overnight.

      Reverse Repurchase Agreements - The Company may invest its daily available
cash balances via reverse repurchase agreements to provide additional yield on
its assets. These investments will typically be recorded as short term
investments and will mature daily. Reverse repurchase agreements are recorded at
cost and are collateralized by mortgage-backed securities pledged by the
counterparty to the agreement.

      Mortgage-Backed Securities and Agency Debentures - The Company invests
primarily in mortgage pass-through certificates, collateralized mortgage
obligations and other mortgage-backed securities representing interests in or
obligations backed by pools of mortgage loans, and in certificates guaranteed by
the Government National Mortgage Association ("GNMA") (collectively,
"Mortgage-Backed Securities"). The Company also invests in agency debentures
issued by Federal Home Loan Bank ("FHLB"), Federal Home Loan Mortgage
Corporation ("FHLMC"), and Federal National Mortgage Association ("FNMA"). The
Mortgage-Backed Securities and agency debentures are collectively referred to
herein as "Investment Securities."

      Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS 115"), requires the
Company to classify its Investment Securities as either trading investments,
available-for-sale investments or held-to-maturity investments. Although the
Company generally intends to hold most of its Investment Securities until
maturity, it may, from time to time, sell any of its Investment Securities as
part of its overall management of its portfolio. Accordingly, SFAS 115 requires
the Company to classify all of its Investment Securities as available-for-sale.
All assets classified as available-for-sale are reported at estimated fair
value, based on market prices from independent sources, with unrealized gains
and losses excluded from earnings and reported as a separate component of
stockholders' equity. The Company's investment in Chimera is accounted for as
available-for-sale equity securities under the provisions of SFAS 115.


                                       6


      Management evaluates securities for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or market concerns
warrant such evaluation. Consideration is given to (1) the length of time and
the extent to which the fair value has been lower than carrying value, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent
and ability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value.
Unrealized losses on Investment Securities that are considered other than
temporary, as measured by the amount of decline in fair value attributable to
other-than-temporary factors, are recognized in income and the cost basis of the
Investment Securities is adjusted. For the quarter and six months ended June 30,
2008, there was no loss on other-than-temporarily impaired securities. For the
quarter and six months ended June 30, 2007, the loss on other-than-temporarily
impaired securities was $698,00 and $1.2 million, respectively.

      SFAS No. 107, Disclosure About Fair Value of Financial Instruments,
requires disclosure of the fair value of financial instruments for which it is
practicable to estimate that value. The estimated fair value of Investment
Securities, available-for-sale equity securities and interest rate swaps is
equal to their carrying value presented in the consolidated statements of
financial condition. The estimated fair value of trading securities and trading
securities sold, not yet purchased, is equal to their carrying value presented
in the consolidated statements of financial condition. The estimated fair value
of cash and cash equivalents, accrued interest receivable, receivable for
securities sold, receivable for advisory and service fees, repurchase agreements
with maturities shorter than one year, payable for mortgage-backed securities
purchased, dividends payable, accounts payable, and accrued interest payable,
generally approximates cost as of June 30, 2008 due to the short term nature of
these financial instruments.

      Interest income is accrued based on the outstanding principal amount of
the Investment Securities and their contractual terms. Premiums and discounts
associated with the purchase of the Investment Securities are amortized into
interest income over the projected lives of the securities using the interest
method. The Company's policy for estimating prepayment speeds for calculating
the effective yield is to evaluate historical performance, consensus prepayment
speeds, and current market conditions. Dividend income on available-for-sale
equity securities is recorded on the ex- date on an accrual basis.

      Investment Securities transactions are recorded on the trade date.
Purchases of newly-issued securities are recorded when all significant
uncertainties regarding the characteristics of the securities are removed,
generally shortly before settlement date. Realized gains and losses on sales of
Investment Securities are determined on the specific identification method.


      Derivative Financial Instruments/Hedging Activity - The Company hedges
interest rate risk through the use of derivative financial instruments comprised
of interest rate caps and interest rate swaps (collectively, "Hedging
Instruments"). The Company accounts for Hedging Instruments in accordance with
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"), as amended and interpreted. The Company carries all Hedging
Instruments at their fair value, as assets, if their fair value is positive, or
as liabilities, if their fair value is negative. As the Company's interest rate
swaps are designated as cash flow hedges under SFAS 133, the change in the fair
value of any such derivative is recorded in other comprehensive income or loss
for hedges that qualify as effective. At June 30, 2008, the Company did not have
any interest rate caps. The ineffective amount of all Hedging Instruments, if
any, is recognized in earnings each quarter. To date, the Company has not
recognized any change in the value of its interest rate swaps in earnings as a
result of a hedge or a portion thereof being ineffective.

      Upon entering into hedging transactions, the Company documents the
relationship between the Hedging Instruments and the hedged liability. The
Company also documents its risk-management policies, including objectives and
strategies, as they relate to its hedging activities. The Company assesses, both
at inception of a hedge and on an on-going basis, whether or not the hedge is
"highly effective," as defined by SFAS 133. The Company discontinues hedge
accounting on a prospective basis with changes in the estimated fair value
reflected in earnings when (i) it is determined that the derivative is no longer
effective in offsetting cash flows of a hedged item (including hedged items such
as forecasted transactions); (ii) it is no longer probable that the forecasted
transaction will occur; or (iii) it is determined that designating the
derivative as a Hedging Instrument is no longer appropriate.


                                       7


      When the Company enters into an interest rate swap, it agrees to pay a
fixed rate of interest and to receive a variable interest rate, generally based
on the London Interbank Offered Rate ("LIBOR"). The Company's interest rate
swaps are designated as cash flow hedges against the benchmark interest rate
risk associated with the Company's 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, the related gain or
loss in accumulated other comprehensive income or loss would be reclassified to
income or loss.

      Realized gains and losses resulting from the termination of an interest
rate swap are initially recorded in accumulated other comprehensive income or
loss as a separate component of stockholders' equity. The gain or loss from a
terminated interest rate swap remains in accumulated other comprehensive income
or loss until the forecasted interest payments affect earnings. If it becomes
probable that the forecasted interest payments will not occur, the entire gain
or loss would be recognized in earnings.

      Credit Risk - The Company has limited its exposure to credit losses on
its portfolio of Investment Securities by only purchasing securities issued by
FHLMC, FNMA, or GNMA and agency debentures issued by the FHLB, FHLMC and FNMA.
The payment of principal and interest on the FHLMC and FNMA Mortgage-Backed
Securities are guaranteed by those respective agencies, and the payment of
principal and interest on the GNMA Mortgage-Backed Securities are backed by the
full faith and credit of the U.S. government. Principal and interest on agency
debentures are guaranteed by the agency issuing the debenture. All of the
Company's Investment Securities have an actual or implied "AAA" rating. The
Company faces credit risk on the portions of its portfolio which are not
Investment Securities.

      Market Risk - The current situation in the sub-prime mortgage sector, and
the current weakness in the broader mortgage market, could adversely affect one
or more of the Company's lenders and could cause one or more of the Company's
lenders to be unwilling or unable to provide additional financing. This could
potentially increase the Company's financing costs and reduce liquidity. If one
or more major market participants fails, it could negatively impact the
marketability of all fixed income securities, including government mortgage
securities, and this could negatively impact the value of the securities in the
Company's portfolio, thus reducing its net book value. Furthermore, if many of
the Company's lenders are unwilling or unable to provide additional financing,
the Company could be forced to sell its Investment Securities at an inopportune
time when prices are depressed. Even with the current situation in the sub-prime
mortgage sector, the Company does not anticipate having difficulty converting
its assets to cash or extending financing terms due to the fact that its
Investment Securities have an actual or implied "AAA" rating and principal
payment is guaranteed by FHLMC, FNMA, or GNMA.

     Trading Securities and Trading Securities sold, not yet purchased - Trading
securities and trading securities sold, not yet purchased, are presented in the
consolidated statements of financial conditions as a result of consolidating the
financial statements of the Fund, and are carried at fair value. The realized
and unrealized gains and losses, as well as other income or loss from trading
securities, are recorded in the income from trading securities balance in the
accompanying consolidated statements of operations.

     Trading securities sold, not yet purchased, represent obligations of the
Fund to deliver the specified security at the contracted price, and thereby
create a liability to purchase the security in the market at prevailing prices.

      Repurchase Agreements - The Company finances the acquisition of its
Investment Securities through the use of repurchase agreements. Repurchase
agreements are treated as collateralized financing transactions and are carried
at their contractual amounts, including accrued interest, as specified in the
respective agreements.


                                       8


      Cumulative Convertible Preferred Stock- The Company classifies its Series
B Cumulative Convertible Preferred Stock ("Series B Preferred Stock") on the
consolidated statements of financial condition using the guidance in SEC
Accounting Series Release No. 268, Presentation in Financial Statements of
"Redeemable Preferred Stocks," and Emerging Issues Task Force ("EITF") Topic
D-98, Classification and Measurement of Redeemable Securities. The Series B
Preferred Stock contains fundamental change provisions that allow the holder to
redeem the Series B Preferred Stock for cash if certain events occur. As
redemption under these provisions is not solely within the Company's control,
the Company has classified the Series B Preferred Stock as temporary equity in
the accompanying consolidated statements of financial condition.

      The Company has analyzed whether the embedded conversion option should be
bifurcated under the guidance in SFAS 133 and EITF Issue No. 00-19, Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock, and has determined that bifurcation is not necessary.

      Income Taxes - The Company has elected to be taxed as a REIT and intends
to comply with the provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), with respect thereto. Accordingly, the Company will not be
subjected to federal income tax to the extent of its distributions to
shareholders and as long as certain asset, income and stock ownership tests are
met. The Company and FIDAC have made a joint election to treat FIDAC as a
taxable REIT subsidiary. As such, FIDAC is taxable as a domestic C corporation
and subject to federal and state and local income taxes based upon its taxable
income.

      Use of Estimates - The preparation of the consolidated financial
statements in conformity with GAAP 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.

      Goodwill and Intangible assets - The Company's acquisition of FIDAC was
accounted for using the purchase method. Under the purchase method, net assets
and results of operations of acquired companies are included in the consolidated
financial statements from the date of acquisition. In addition, the cost of
FIDAC was allocated to the assets acquired, including identifiable intangible
assets, and the liabilities assumed based on their estimated fair values at the
date of acquisition. The excess of purchase price over the fair value of the net
assets acquired was recognized as goodwill. Intangible assets are periodically
(but not less frequently than annually) reviewed for potential impairment.
Intangible assets with an estimated useful life are expected to amortize over a
6.4 year weighted average time period. During the quarters and six months ended
June 30, 2008 and 2007, there were no impairment losses on goodwill and
intangible assets.

        Stock Based Compensation - The Company accounts for its stock-based
compensation in accordance with SFAS No. 123 (Revised 2004) - Share-Based
Payment ("SFAS 123R"). SFAS 123R requires the Company to measure and recognize
in the consolidated financial statements the compensation cost relating to
share-based payment transactions. The compensation cost should be reassessed
based on the fair value of the equity instruments issued.

        The Company recognizes compensation expense on a straight-line basis
over the requisite service period for the entire award (that is, over the
requisite service period of the last separately vesting portion of the award).
The Company estimated fair value using the Black-Scholes valuation model.

      Recent Accounting Pronouncements - In September 2006, the FASB issued SFAS
No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value,
establishes a framework for measuring fair value and requires enhanced
disclosures about fair value measurements. SFAS 157 requires companies to
disclose the fair value of their financial instruments according to a fair value
hierarchy (i.e., levels 1, 2, and 3, as defined). Additionally, companies are
required to provide enhanced disclosure regarding instruments in the level 3
category (the valuation of which require significant management judgment),
including a reconciliation of the beginning and ending balances separately for
each major category of assets and liabilities. SFAS 157 was adopted by the
Company on January 1, 2008. SFAS 157 did not have an impact on the manner in
which the Company estimates fair value, but it requires additional disclosure,
which is included in Note 5.

      In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115 ("SFAS 159"). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. SFAS 159 was
effective for the Company commencing January 1, 2008. The Company did not elect
the fair value option for any of its financial instruments.


                                       9


      In April 2007, the FASB issued a FASB Staff Position FIN 39-1 ("FSP FIN
39-1") which modifies FASB Interpretation No. 39, Offsetting of Amounts relating
to Certain Contracts ("FIN 39"). FSP FIN 39-1 addresses whether a reporting
entity that is party to a master netting arrangement can offset fair value
amounts recognized for the right to reclaim cash collateral (a receivable) or
the obligation to return cash collateral (a payable) against fair value amounts
recognized for derivative instruments that have been offset under the same
master netting arrangement in accordance with FIN 39. Upon adoption of this
guidance, a reporting entity is permitted to change its accounting policy to
offset or not offset fair value amounts recognized for derivative instruments
under master netting arrangements. This guidance was effective for the Company
on January 1, 2008. The implementation did not have an effect on the financial
statements of the Company.

      In February 2008, FASB issued FASB Staff Position No. FAS 140-3 Accounting
for Transfers of Financial Assets and Repurchase Financing Transactions, ("FSP
FAS 140-3"). FSP FAS 140-3 addresses whether transactions where assets purchased
from a particular counterparty and financed through a repurchase agreement with
the same counterparty can be considered and accounted for as separate
transactions, or are required to be considered "linked" transactions and may be
considered derivatives under SFAS 133. FSP FAS 140-3 requires purchases and
subsequent financing through repurchase agreements be considered linked
transactions unless all of the following conditions apply: (1) the initial
purchase and the use of repurchase agreements to finance the purchase are not
contractually contingent upon each other; (2) the repurchase financing entered
into between the parties provides full recourse to the transferee and the
repurchase price is fixed; (3) the financial assets are readily obtainable in
the market; and (4) the financial instrument and the repurchase agreement are
not coterminous. This FSP is effective for the Company on January 1, 2009. The
Company is currently evaluating FSP FAS 140-3 but does not expect its
application to have a significant impact on its financial reporting.

      In March 2008, the FASB issued SFAS No. 161 ("SFAS 161"), Disclosures
about Derivative Instruments and Hedging Activities, and an amendment of FASB
Statement No. 133. SFAS 161 attempts to improve the transparency of financial
reporting by providing additional information about how derivative and hedging
activities affect an entity's financial position, financial performance and cash
flows. This statement changes the disclosure requirements for derivative
instruments and hedging activities by requiring enhanced disclosure about (1)
how and why an entity uses derivative instruments, (2) how derivative
instruments and related hedged items are accounted for under SFAS Statement 133
and its related interpretations, and (3) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. To meet these objectives, SFAS 161 requires qualitative disclosures
about objectives and strategies for using derivatives, quantitative disclosures
about fair value amounts and of gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. This disclosure framework is intended to better convey the purpose
of derivative use in terms of the risks that an entity is intending to manage.
SFAS 161 is effective for the Company on January 1, 2009. The Company expects
that adoption of SFAS 161 will increase footnote disclosure to comply with the
disclosure requirements for financial statements issued after January 1, 2009.


                                       10


      2. MORTGAGE-BACKED SECURITIES

         The following tables present the Company's available-for-sale
Mortgage-Backed Securities portfolio as of June 30, 2008 and December 31, 2007,
which were carried at their fair value:





                          Federal Home Loan      Federal National         Government
                               Mortgage              Mortgage         National Mortgage      Total Mortgage-
June 30, 2008                Corporation           Association           Association        Backed Securities
                          ------------------------------------------------------------------------------------
                                                        (dollars in thousands)
Mortgage-Backed
                                                                                
 Securities, gross        $       21,744,712    $       35,454,105    $          348,861    $       57,547,678
Unamortized discount                 (28,693)              (42,005)               (1,164)              (71,862)
Unamortized premium                  209,209               361,951                 2,162               573,322
                          ------------------------------------------------------------------------------------
Amortized cost                    21,925,228            35,774,051               349,859            58,049,138

Gross unrealized gains               129,339               193,718                 1,554               324,611
Gross unrealized losses             (125,118)             (229,059)               (2,267)             (356,444)
                          ------------------------------------------------------------------------------------

Estimated fair value      $       21,929,449    $       35,738,710    $          349,146    $       58,017,305
                          ====================================================================================
                                                Gross Unrealized     Gross Unrealized         Estimated Fair
                            Amortized Cost            Gain                 Loss                   Value
                          ------------------------------------------------------------------------------------
                                                        (dollars in thousands)

Adjustable rate           $       18,333,869   $          130,357    ($         140,838)    $       18,323,388

Fixed rate                        39,715,269              194,254              (215,606)            39,693,917
                          ------------------------------------------------------------------------------------

Total                     $       58,049,138   $          324,611    ($         356,444)    $       58,017,305
                          ====================================================================================
                          Federal Home Loan      Federal National         Government
                               Mortgage              Mortgage         National Mortgage      Total Mortgage-
December 31, 2007            Corporation           Association           Association        Backed Securities
                          ------------------------------------------------------------------------------------
                                                        (dollars in thousands)
Mortgage-Backed
 Securities, gross        $       19,789,792    $       32,155,740    $          367,066    $       52,312,598
Unamortized discount                 (30,679)              (45,496)                 (506)              (76,681)
Unamortized premium                  136,780               266,357                 2,678               405,815
                          ------------------------------------------------------------------------------------
Amortized cost                    19,895,893            32,376,601               369,238            52,641,732

Gross unrealized gains               141,248               224,795                 2,229               368,272
Gross unrealized losses              (52,623)              (75,949)               (1,904)             (130,476)
                          ------------------------------------------------------------------------------------

Estimated fair value      $       19,984,518    $       32,525,447    $          369,563    $       52,879,528
                          ====================================================================================
                                                Gross Unrealized     Gross Unrealized       Estimated Fair
                            Amortized Cost            Gain                 Loss                 Value
                          ------------------------------------------------------------------------------------
                                                        (dollars in thousands)


Adjustable rate           $       15,361,031   $           96,310    ($          76,853)    $       15,380,488

Fixed rate                        37,280,701              271,962               (53,623)            37,499,040
                          ------------------------------------------------------------------------------------

Total                     $       52,641,732   $          368,272    ($         130,476)    $       52,879,528
                          ====================================================================================



                                       11


         Actual maturities of Mortgage-Backed Securities are generally shorter
than stated contractual maturities because actual maturities of Mortgage-Backed
Securities are affected by the contractual lives of the underlying mortgages,
periodic payments of principal, and prepayments of principal. The following
table summarizes the Company's Mortgage-Backed Securities on June 30, 2008 and
December 31, 2007, according to their estimated weighted-average life
classifications:




                                                       June 30, 2008             December 31, 2007
                                                                Amortized                   Amortized
        Weighted-Average Life                     Fair Value      Cost        Fair Value      Cost
                                                                  (dollars in thousands)
------------------------------------------------------------------------------------------------------
                                                                               
Less than one year                               $   318,991   $   324,216   $   324,495   $   326,754
Greater than one year and less than five years    30,640,030    30,606,547    35,772,813    35,586,721
Greater than or equal to five years               27,058,284    27,118,375    16,782,220    16,728,257

                                                 -----------------------------------------------------
Total                                            $58,017,305   $58,049,138   $52,879,528   $52,641,732
                                                 =====================================================



         The weighted-average lives of the Mortgage-Backed Securities at June
30, 2008 and December 31, 2007 in the table above are based upon data provided
through subscription-based financial information services, assuming constant
principal prepayment rates to the reset date of each security. The prepayment
model considers current yield, forward yield, steepness of the yield curve,
current mortgage rates, mortgage rate of the outstanding loans, loan age, margin
and volatility.

        The following table presents the gross unrealized losses, and estimated
fair value of the Company's Mortgage-Backed Securities by length of time that
such securities have been in a continuous unrealized loss position at June 30,
2008.




                                          Unrealized Loss Position For:
-------------------------------------------------------------------------------------------------------------------
         Less than 12 Months                     12 Months or More                           Total
-------------------------------------------------------------------------------------------------------------------
                                                                                  
  Estimated Fair     Unrealized Losses   Estimated Fair    Unrealized Losses   Estimated Fair    Unrealized Losses
       Value                                  Value                                 Value
-------------------------------------------------------------------------------------------------------------------
                                             (dollars in thousands)
    $24,295,525         ($284,431)          $3,268,428          ($72,013)        $27,563,953        ($356,444)



        The decline in value of these securities is solely due to market
conditions and not the quality of the assets. All of the Mortgage-Backed
Securities are "AAA" rated or carry an implied "AAA" rating. The investments are
not considered other-than-temporarily impaired because the Company currently has
the ability and intent to hold the investments to maturity or for a period of
time sufficient for a forecasted market price recovery up to or beyond the cost
of the investments. Also, the Company is guaranteed payment of the principal
amount of the securities by the government agency which created them.

         The adjustable rate Mortgage-Backed Securities are limited by periodic
caps (generally interest rate adjustments are limited to no more than 1% every
nine months) and lifetime caps. The weighted average lifetime cap was 9.9% at
June 30, 2008 and December 31, 2007.

         During the quarter and six months ended June 30, 2008, the Company
realized $2.8 million and $12.2 million in net gains from sales of Investment
Securities. During the quarter and six months ended June 30, 2007, the Company
realized $7.3 million and $13.4 million in net gains from sales of Investment
Securities, respectively.

3.       AVAILABLE FOR SALE EQUITY SECURITIES

         All of the equity securities are shares of Chimera. The Company
purchased shares of Chimera for $54.3 million and they had a fair value of $32.6
million at June 30, 2008.


                                       12


         The Company evaluated the near-term prospects of Chimera in relation to
the severity and duration of the impairment. Based on that evaluation and the
Company's ability and intent to hold this investment for a reasonable period of
time sufficient for a forecasted recovery of fair value, the Company does not
consider those investments to be other-than-temporarily impaired at June 30,
2008.

4.       REVERSE REPURCHASE AGREEMENT

         At June 30, 2008, the Company had lent $50.0 million in an overnight
reverse repurchase agreement. The interest rate at June 30, 2008 was 3.96%. The
collateral for this loan is non-Agency mortgage-backed securities.

5.       FAIR VALUE MEASUREMENTS

         SFAS 157 defines fair value, establishes a framework for measuring fair
value, establishes a three-level valuation hierarchy for disclosure of fair
value measurement and enhances disclosure requirements for fair value
measurements. The valuation hierarchy is based upon the transparency of inputs
to the valuation of an asset or liability as of the measurement date. The three
levels are defined as follow:

         Level 1- inputs to the valuation methodology are quoted prices
         (unadjusted) for identical assets and liabilities in active markets.

         Level 2 - inputs to the valuation methodology include quoted prices for
         similar assets and liabilities in active markets, and inputs that are
         observable for the asset or liability, either directly or indirectly,
         for substantially the full term of the financial instrument.

         Level 3 - inputs to the valuation methodology are unobservable and
         significant to fair value.

         Available for sale equity securities, trading securities, and trading
securities sold, not yet purchased are valued based on quoted prices
(unadjusted) in an active market. Investment Securities and interest rate swaps
are valued using quoted prices for similar assets and dealer quotes. The dealer
will incorporate common market pricing methods, including a spread measurement
to the Treasury curve or interest rate swap curve as well as underlying
characteristics of the particular security including coupon, periodic and life
caps, rate reset period and expected life of the security. Management reviews
all prices used to ensure that current market conditions are represented. This
review includes comparisons of similar market transactions and comparisons to a
pricing model. The Company's financial assets and liabilities carried at fair
value on a recurring basis are valued as follows:




                                                      Level 1       Level 2      Level 3
                                                            (dollars in thousands)
------------------------------------------------------------------------------------------
                                                                     
Assets:
  Mortgage-Backed Securities                                --   $58,017,305            --
  Agency debentures                                         --       731,995            --
  Available for sale equity securities             $    32,631            --            --
  Trading securities                                    23,478            --            --

Liabilities:
  Trading securities sold, not yet purchased            48,718            --            --
  Interest rate swaps                                       --       400,998            --



6.       REPURCHASE AGREEMENTS

         The Company had outstanding $51.8 billion and $46.0 billion of
repurchase agreements with weighted average borrowing rates of 3.40% and 4.76%,
after giving effect to the Company's interest rate swaps, and weighted average
remaining maturities of 224 days and 234 days as of June 30, 2008 and December
31, 2007, respectively. Investment Securities pledged as collateral under these
repurchase agreements and interest rate swaps had an estimated fair value of
$55.6 billion at June 30, 2008 and $48.3 billion at December 31, 2007.


                                       13


         At June 30, 2008 and December 31, 2007, the repurchase agreements had
the following remaining maturities:

                                               June 30, 2008   December 31, 2007
                                                      (dollars in thousands)
                                               ---------------------------------

Within 30 days                                 $39,995,989           $34,940,600
30 to 59 days                                    4,107,944             4,005,960
60 to 89 days                                       85,730               300,000
90 to 119 days                                          --                    --
Over 120 days                                    7,650,000             6,800,000
                                               ---------------------------------
Total                                          $51,839,663           $46,046,560
                                               =================================

      The Company did not have an amount at risk greater than 10% of the equity
of the Company with any counterparty as of June 30, 2008 or December 31, 2007.

           The Company has entered into repurchase agreements which provide the
counterparty with the right to call the balance prior to maturity date. These
repurchase agreements totaled $7.7 billion and the fair value of the option to
call was ($199.5 million) at June 30, 2008. The repurchase agreements totaled
$6.4 billion and the market value of the option to call was ($176.7 million) at
December 31, 2007. Management has determined that the call option is not
required to be bifurcated under the provisions of SFAS 133 as it is deemed
clearly and closely related to the debt instrument, therefore the option value
is not recorded in the consolidated financial statements.

7.       INTEREST RATE SWAPS

           In connection with the Company's interest rate risk management
strategy, the Company hedges a portion of its interest rate risk by entering
into derivative financial instrument contracts. As of June 30, 2008, such
instruments are comprised of interest rate swaps, which in effect modify the
cash flows on repurchase agreements. The use of interest rate swaps creates
exposure to credit risk relating to potential losses that could be recognized if
the counterparties to these instruments fail to perform their obligations under
the contracts. In the event of a default by the counterparty, the Company could
have difficulty obtaining its Mortgage-Backed Securities pledged as collateral
for swaps. The Company does not anticipate any defaults by its counterparties.

         The Company's swaps are used to lock-in the fixed rate related to a
portion of its current and anticipated future 30-day term repurchase agreements.

      The table below presents information about the Company's swaps outstanding
at June 30, 2008 and December 31, 2007.




                                                                                         Net Estimated Fair
                              Notional Amount     Weighted Average   Weighted Average    Value/Carrying Value
                          (dollars in thousands)      Pay Rate         Receive Rate     (dollars in thousands)
                          ------------------------------------------------------------------------------------

                                                                                   
   June 30, 2008                $17,689,150              4.78%              2.47%              ($400,998)

   December 31, 2007            $16,243,500              5.03%              5.06%              ($398,096)



8.     PREFERRED STOCK AND COMMON STOCK

         (A)  Common Stock Issuances

         On May 13, 2008 the Company entered into an underwriting agreement
pursuant to which it sold 69,000,000 shares of its common stock for net proceeds
following underwriting expenses of approximately $1.1 billion. This transaction
settled on May 19, 2008.


                                       14


         On January 23, 2008 the Company entered into an underwriting agreement
pursuant to which it sold 58,650,000 shares of its common stock for net proceeds
following underwriting expenses of approximately $1.1 billion. This transaction
settled on January 29, 2008.

         During the quarter and six months ended June 30, 2008, the Company
raised $16.5 million and $71.1 million by issuing 957,091 and 4.3 million
shares, respectively, through the Direct Purchase and Dividend Reinvestment
Program.

         During the quarter and six months ended June 30, 2008, 16,600 and
187,217 options were exercised under the Long-Term Stock Incentive Plan, or
Incentive Plan, for an aggregate exercise price of $195,000 and $1.8 million,
respectively.

         On August 3, 2006, the Company entered into an ATM Equity Offering(sm)
Sales Agreement with Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, relating to the sale of shares of its common stock from time
to time through Merrill Lynch. Sales of the shares, if any, are made by means of
ordinary brokers' transaction on the New York Stock Exchange. During the six
months ended June 30, 2008, 588,000 shares of the Company's common stock were
issued pursuant to this program, totaling $11.5 million in net proceeds. On
August 3, 2006, the Company entered into an ATM Equity Sales Agreement with UBS
Securities LLC, relating to the sale of shares of its common stock from time to
time through UBS Securities. Sales of the shares, if any, will be made by means
of ordinary brokers' transaction on the New York Stock Exchange. During the six
months ended June 30, 2008, 3.8 million shares of the Company's common stock
were issued pursuant to this program, totaling $60.3 million in net proceeds.
During the quarter ended June 30, 2008, the Company did not issue stock under
either of these ATM programs.

         (B) Preferred Stock

         At June 30, 2008, the Company had issued and outstanding 7,412,500
shares of Series A Cumulative Redeemable Preferred Stock ("Series A Preferred
Stock"), with a par value $0.01 per share and a liquidation preference of $25.00
per share plus accrued and unpaid dividends (whether or not declared). The
Series A Preferred Stock must be paid a dividend at a rate of 7.875% per year on
the $25.00 liquidation preference before the common stock is entitled to receive
any dividends. The Series A Preferred Stock is redeemable at $25.00 per share
plus accrued and unpaid dividends (whether or not declared) exclusively at the
Company's option commencing on April 5, 2009 (subject to the Company's right
under limited circumstances to redeem the Series A Preferred Stock earlier in
order to preserve its qualification as a REIT). The Series A Preferred Stock is
senior to the Company's common stock and is on parity with the Series B
Preferred Stock with respect to dividends and distributions, including
distributions upon liquidation, dissolution or winding up. The Series A
Preferred Stock generally does not have any voting rights, except if the Company
fails to pay dividends on the Series A Preferred Stock for six or more quarterly
periods (whether or not consecutive). Under such circumstances, the Series A
Preferred Stock, together with the Series B Preferred Stock, will be entitled to
vote to elect two additional directors to the Board, until all unpaid dividends
have been paid or declared and set apart for payment. In addition, certain
material and adverse changes to the terms of the Series A Preferred Stock cannot
be made without the affirmative vote of holders of at least two-thirds of the
outstanding shares of Series A Preferred Stock and Series B Preferred Stock.
Through June 30, 2008, the Company had declared and paid all required quarterly
dividends on the Series A Preferred Stock.

         At June 30, 2008, the Company had issued and outstanding 4,496,525
shares of Series B Preferred Stock, with a par value $0.01 per share and a
liquidation preference of $25.00 per share plus accrued and unpaid dividends
(whether or not declared). The Series B Preferred Stock must be paid a dividend
at a rate of 6% per year on the $25.00 liquidation preference before the common
stock is entitled to receive any dividends.

         The Series B Preferred Stock is not redeemable. The Series B Preferred
Stock is convertible into shares of common stock at a conversion rate that
adjusts from time to time upon the occurrence of certain events, including if
the Company distributes to its common shareholders in any calendar quarter cash
dividends in excess of $0.11 per share. Initially, the conversion rate was
1.7730 shares of common shares per $25 liquidation preference. At June 30, 2008,
the conversion ratio was 1.9554 shares of common stock per $25 liquidation
preference. Commencing April 5, 2011, the Company has the right in certain
circumstances to convert each Series B Preferred Stock into a number of common
shares based upon the then prevailing conversion rate. The Series B Preferred
Stock is also convertible into common shares at the option of the Series B
preferred shareholder at anytime at the then prevailing conversion rate. The
Series B Preferred Stock is senior to the Company's common stock and is on
parity with the Series A Preferred Stock with respect to dividends and
distributions, including distributions upon liquidation, dissolution or winding
up. The Series B Preferred Stock generally does not have any voting rights,
except if the Company fails to pay dividends on the Series B Preferred Stock for
six or more quarterly periods (whether or not consecutive). Under such
circumstances, the Series B Preferred Stock, together with the Series A
Preferred Stock, will be entitled to vote to elect two additional directors to
the Board, until all unpaid dividends have been paid or declared and set apart
for payment. In addition, certain material and adverse changes to the terms of
the Series B Preferred Stock cannot be made without the affirmative vote of
holders of at least two-thirds of the outstanding shares of Series B Preferred
Stock and Series A Preferred Stock. Through June 30, 2008, the Company had
declared and paid all required quarterly dividends on the Series B Preferred
Stock. During the quarter ended June 30, 2008, 101,025 shares of Series B
Preferred Stock were converted into 192,151 shares of common stock.


                                       15


 (C) Distributions to Shareholders

         During the quarter ended June 30, 2008, the Company declared dividends
to common shareholders totaling $296.2 million or $0.55 per share, which were
paid to shareholders on July 29, 2008. During the quarter ended June 30, 2008,
the Company declared dividends to Series A Preferred shareholders totaling
approximately $3.6 million or $0.492188 per share, and Series B shareholders
totaling approximately $1.7 million or $0.375 per share, which were paid to
shareholders on June 30, 2008.

9.       NET INCOME PER COMMON SHARE

         The following table presents a reconciliation of the net income and
shares used in calculating basic and diluted earnings per share for the quarters
and six months ended June 30, 2008 and 2007.




                                                     For the Quarters Ended      For the Six Months Ended
                                                            June 30,                      June 30,
                                                   ---------------------------------------------------------
                                                       2008           2007           2008            2007
                                                                    (dollars in thousands)
                                                   ---------------------------------------------------------

                                                                                    
Net income                                         $    307,992   $     85,733   $    551,028   $    153,165
Less: Preferred stock dividends
                                                          5,334          5,373         10,707         10,746
                                                   ---------------------------------------------------------
Net income available to common shareholders,
  prior to adjustment for Series B dividends, if
  necessary                                        $    302,658   $     80,360   $    540,321   $    142,419
Add: Preferred Series B dividends, if Series B
  shares are dilutive                                     1,685          1,725          3,410          3,450
                                                   ---------------------------------------------------------
Net income, as adjusted                            $    304,343   $     82,085   $    543,731   $    145,869
                                                   =========================================================

Weighted average shares of common stock
  outstanding-basic                                     503,758        264,990        473,785        241,372

Add:  Effect of dilutive stock options and                  128            228            235            191

Series B Cumulative Convertible Preferred Stock           8,793          8,361          8,793          8,361
                                                   ---------------------------------------------------------
Weighted average shares of common
  stock outstanding-diluted                             512,679        273,579        482,813        249,924
                                                   =========================================================



         Options to purchase 1.8 million and 572,000 shares of common stock,
respectively, were outstanding and considered anti-dilutive as their exercise
price exceeded the average stock price for the quarter and six months ended June
30, 2008. Options to purchase 2,471,375 shares of common stock were outstanding
and considered anti-dilutive as their exercise price exceeded the average stock
price for the quarter and six months ended June 30, 2007.


                                       16


10.    LONG-TERM STOCK INCENTIVE PLAN

         The Company has adopted a long term stock incentive plan for executive
officers, key employees and non-employee directors (the "Incentive Plan"). The
Incentive Plan authorizes the Compensation Committee of the board of directors
to grant awards, including non-qualified options as well as incentive stock
options as defined under Section 422 of the Code. The Incentive Plan authorizes
the granting of options or other awards for an aggregate of the greater of
500,000 shares or 9.5% of the diluted outstanding shares of the Company's common
stock, up to ceiling of 8,932,921 shares. Stock options are issued at the
current market price on the date of grant, subject to an immediate or four year
vesting in four equal installments with a contractual term of 5 or 10 years. The
grant date fair value is calculated using the Black-Scholes option valuation
model.




                                                                      For the six months ended June 30,
                                                                  2008                                2007
                                                   ----------------------------------------------------------------------
                                                                        Weighted                            Weighted
                                                      Number of         Average          Number of          Average
                                                       Shares        Exercise Price        Shares        Exercise Price
                                                   ----------------------------------------------------------------------

                                                                                                      
Options outstanding at the beginning of period           3,437,267            $15.23         2,984,995            $15.10
Granted                                                  1,004,900             16.45           687,250             15.69
Exercised                                                (187,217)              9.77          (47,238)             10.91
Forfeited                                                  (2,550)             16.16         (174,240)             16.06
Expired                                                    (5,000)             20.70           (5,000)             20.35
                                                   ----------------------------------------------------------------------
Options outstanding at the end of period                 4,247,400            $15.76         3,445,767            $15.22
                                                   ======================================================================
Options exercisable at the end of the period             2,060,750            $15.92         1,294,504            $14.97
                                                   ======================================================================



         The weighted average remaining contractual term was approximately 7.4
years for stock options outstanding and approximately 5.9 years for stock
options exercisable as of June 30, 2008. The weighted average remaining
contractual term was approximately 7.5 years for stock options outstanding and
approximately 5.8 years for stock options exercisable as of June 30, 2007. As of
June 30, 2008, there was approximately $5.3 million of total unrecognized
compensation cost related to nonvested share-based compensation awards. That
cost is expected to be recognized over a weighted average period of 3.2 years.

         During the year ended December 31, 2007, the Company granted 7,000
shares of restricted common stock to certain of its employees. As of June 30,
2008, 5,250 of these restricted shares were unvested and subject to forfeiture.

11.   INCOME TAXES

         As a REIT, the Company is not subject to federal income tax on earnings
distributed to its shareholders. Most states recognize REIT status as well. The
Company has decided to distribute the majority of its income and retain a
portion of the permanent difference between book and taxable income arising from
Section 162(m) of the Code pertaining to employee remuneration.

         During the quarter and six months ended June 30, 2008, FIDAC recorded
$856,000 and $1.6 million, respectively, of income tax expense for income
attributable to FIDAC, its taxable REIT subsidiary, and the portion of earnings
retained based on Code Section 162(m) limitations. During the quarter and six
months ended June 30, 2008, Annaly recorded $6.7 million and $10.5 million,
respectively, of income tax expense for a portion of earnings retained based on
Section 162(m) limitations. The effective tax rate was 52% for the quarter ended
June 30, 2008.

         During the quarter and six months ended June 30, 2007, the Company
recorded approximately $497,000 and $925,000, respectively, of income tax
expense for income attributable to FIDAC, its taxable REIT subsidiary, and the
portion of earnings retained based on Section 162(m) limitations. During the
quarter and six months ended June 30, 2007, Annaly recorded approximately
$342,000 and $2.5 million, respectively, of income tax expense for a portion of
earnings retained based on Section 162(m) limitations.


                                       17


         The statutory combined federal, state, and city corporate tax rate is
45%. This amount is applied to the amount of estimated REIT taxable income
retained (if any, and only up to 10% of ordinary income as all capital gain
income is distributed) and to taxable income earned at the taxable subsidiaries.
Thus, as a REIT, the Company's effective tax rate is significantly less as it is
allowed to deduct dividend distributions.

 12.     LEASE COMMITMENTS AND CONTINGENCIES

         The Company has a non-cancelable lease for office space, which
  commenced in May 2002 and expires in December 2009. The Company's aggregate
  future minimum lease payments are as follows:

                                                     Total per Year
                                                 (dollars in thousands)
                                                 ---------------------
          2008 (remainder)                       $                 266
          2009                                                     532
                                                 ---------------------
          Total remaining lease payments         $                798
                                                 =====================


         From time to time, the Company is involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
effect on the Company's consolidated financial statements.


13.     INTEREST RATE RISK

   The primary market risk to the Company is interest rate risk. Interest rates
are highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations and
other factors beyond the Company's control. Changes in the general level of
interest rates can affect net interest income, which is the difference between
the interest income earned on interest-earning assets and the interest expense
incurred in connection with the interest-bearing liabilities, by affecting the
spread between the interest-earning assets and interest-bearing liabilities.
Changes in the level of interest rates also can affect the value of the
Investment Securities and the Company's ability to realize gains from the sale
of these assets. A decline in the value of the Investment Securities pledged as
collateral for borrowings under repurchase agreements could result in the
counterparties demanding additional collateral pledges or liquidation of some of
the existing collateral to reduce borrowing levels. Liquidation of collateral at
losses could have an adverse accounting impact, as discussed in Note 1.

         The Company seeks to manage the extent to which net income changes as a
function of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. The Company may seek to mitigate the potential impact
on net income of periodic and lifetime coupon adjustment restrictions in the
portfolio of Investment Securities by entering into interest rate agreements
such as interest rate caps and interest rate swaps. As of June 30, 2008, the
Company entered into interest rate swaps to pay a fixed rate and receive a
floating rate of interest, with a total notional amount of $17.7 billion.

         Changes in interest rates may also have an effect on the rate of
mortgage principal prepayments and, as a result, prepayments on Mortgage-Backed
Securities. The Company will seek to mitigate the effect of changes in the
mortgage principal repayment rate by balancing assets purchased at a premium
with assets purchased at a discount. To date, the aggregate premium exceeds the
aggregate discount on the Mortgage-Backed Securities. As a result, prepayments,
which result in the expensing of unamortized premium, will reduce net income
compared to what net income would be absent such prepayments.

14.      RELATED PARTY TRANSACTIONS

         In March 2008, the Company entered into a repurchase agreement with
Chimera. This agreement contains customary representations, warranties and
covenants contained in such agreements. As of June 30, 2008, Chimera owed the
Company $50.0 million under this repurchase agreement, with a term of one day
and an interest rate of 3.96%. The collateral is non-Agency mortgage-backed
securities.


                                       18


15.      SUBSEQUENT EVENTS


         As of June 30, 2008, the Company had lent $50.0 million to Chimera
under the repurchase agreement. As of August 6, 2008, the Company had $606.4
million outstanding under this agreement.

         The Company has signed a definitive merger agreement to acquire
Merganser Capital Management Limited Partnership, a Boston-based institutional
fixed-income manager which, at June 30, 2008, had $4.8 billion in assets under
management. The acquisition is expected to close in the fourth quarter of 2008.


                                       19


ITEM 2.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
              ----------------------------------------------------------------
              RESULTS OF OPERATIONS
              ---------------------

Special Note Regarding Forward-Looking Statements

         Certain statements contained in this quarterly report, and certain
statements contained in our future filings with the Securities and Exchange
Commission (the "SEC" or the "Commission"), in our press releases or in our
other public or shareholder communications may not be based on historical facts
and are "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. Forward-looking statements, which are based on various
assumptions, (some of which are beyond our control) may be identified by
reference to a future period or periods, or by the use of forward-looking
terminology, such as "may," "will," "believe," "expect," "anticipate,"
"continue," or similar terms or variations on those terms, or the negative of
those terms. Actual results could differ materially from those set forth in
forward-looking statements due to a variety of factors, including, but not
limited to, changes in interest rates, changes in yield curve, changes in
prepayment rates, the availability of mortgage-backed securities for purchase,
the availability of financing, and, if available, the terms of any financings,
changes in the market value of our assets, changes in business conditions and
the general economy, and risks associated with the investment advisory business
of FIDAC, including the removal by FIDAC's clients of assets FIDAC manages,
FIDAC's regulatory requirements, and competition in the investment advisory
business, changes in governmental regulations affecting our business, and our
ability to maintain our classification as a REIT for federal income tax
purposes. For a discussion of the risks and uncertainties which could cause
actual results to differ from those contained in the forward-looking statements,
see our most recent Annual Report on Form 10-K and any subsequent Quarterly
Reports on Form 10-Q. We do not undertake and specifically disclaim any
obligation, to publicly release the result of any revisions which 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.

Overview

         We are a REIT that owns and manages a portfolio of mortgage-backed
securities. Our principal business objective is to generate net income for
distribution to our stockholders from the spread between the interest income on
our investment securities and the costs of borrowing to finance our acquisition
of investment securities and from dividends we receive from FIDAC. FIDAC is our
wholly-owned taxable REIT subsidiary, and is a registered investment advisor
that generates advisory and service fee income. We acquired approximately 3.6
million shares of common stock of Chimera Investment Corporation, or Chimera,
for approximately $54.3 million in connection with Chimera's initial public
offering on November 21, 2007. In addition to our investment, Chimera raised net
proceeds of approximately $479.3 million in its initial public offering. Chimera
is a newly-formed, publicly traded, specialty finance company that invests in
residential mortgage loans, residential mortgage-backed securities, real estate
related securities and various other asset classes. Chimera is externally
managed by FIDAC and intends to elect and qualify to be taxed as a REIT for
federal income tax purposes. We also own 100% of an investment fund.

         We are primarily engaged in the business of investing, on a leveraged
basis, in mortgage pass-through certificates, collateralized mortgage
obligations and other mortgage-backed securities representing interests in or
obligations backed by pools of mortgage loans (collectively, "Mortgage-Backed
Securities"). We also invest in Federal Home Loan Bank ("FHLB"), Federal Home
Loan Mortgage Corporation ("FHLMC"), and Federal National Mortgage Association
("FNMA") debentures. The Mortgage-Backed Securities and agency debentures are
collectively referred to herein as "Investment Securities."

         Under our capital investment policy, at least 75% of our total assets
must be comprised of high-quality mortgage-backed securities and short-term
investments. High quality securities means securities that (1) are rated within
one of the two highest rating categories by at least one of the nationally
recognized rating agencies, (2) are unrated but are guaranteed by the United
States government or an agency of the United States government, or (3) are
unrated but we determine them to be of comparable quality to rated high-quality
mortgage-backed securities.

         The remainder of our assets, comprising not more than 25% of our total
assets, may consist of other qualified REIT real estate assets which are unrated
or rated less than high quality, but which are at least "investment grade"
(rated "BBB" or better by Standard & Poor's Corporation ("S&P") or the
equivalent by another nationally recognized rating agency) or, if not rated, we
determine them to be of comparable credit quality to an investment which is
rated "BBB" or better. In addition, we may directly or indirectly invest part of
this remaining 25% of our assets in other types of securities, including without
limitation, unrated debt, equity or derivative securities, to the extent
consistent with our REIT qualification requirements. The derivative securities
in which we invest may include securities representing the right to receive
interest only or a disproportionately large amount of interest, as well as
inverse floaters, which may have imbedded leverage as part of their structural
characteristics.


                                       20


         We may acquire Mortgage-Backed Securities backed by single-family
residential mortgage loans as well as securities backed by loans on
multi-family, commercial or other real estate related properties. To date, all
of the Mortgage-Backed Securities that we have acquired have been backed by
single-family residential mortgage loans.

         We have elected to be taxed as a REIT for federal income tax purposes.
Pursuant to the current federal tax regulations, one of the requirements of
maintaining our status as a REIT is that we must distribute at least 90% of our
REIT taxable income (determined without regard to the deduction for dividends
paid and by excluding any net capital gain) to our stockholders, subject to
certain adjustments.

         The results of our operations are affected by various factors, many of
which are beyond our control. Our results of operations primarily depend on,
among other things, our net interest income, the market value of our assets and
the supply of and demand for such assets. Our net interest income, which
reflects the amortization of purchase premiums and accretion of discounts,
varies primarily as a result of changes in interest rates, borrowing costs and
prepayment speeds, all of which involve various risks and uncertainties.
Prepayment speeds, as reflected by the Constant Prepayment Rate, or CPR, and
interest rates vary according to the type of investment, conditions in financial
markets, competition and other factors, none of which can be predicted with any
certainty. In general, as prepayment speeds on our Mortgage-Backed Securities
portfolio increase, related purchase premium amortization increases, thereby
reducing the net yield on such assets. The CPR on our Mortgage-Backed Securities
portfolio averaged 16% and 15% for the quarters ended June 30, 2008 and 2007,
respectively. Since changes in interest rates may significantly affect our
activities, our operating results depend, in large part, upon our ability to
effectively manage interest rate risks and prepayment risks while maintaining
our status as a REIT.

         The current situation in the sub-prime mortgage sector, and the current
weakness in the broader mortgage market, could adversely affect one or more of
our lenders and could cause one or more of our lenders to be unwilling or unable
to provide us with additional financing. This could potentially increase our
financing costs and reduce liquidity. If one or more major market participants
fails, it could negatively impact the marketability of all fixed income
securities, including government mortgage securities, and this could negatively
impact the value of the securities in our portfolio, thus reducing its net book
value. Furthermore, if many of our lenders are unwilling or unable to provide us
with additional financing, we could be forced to sell our Investment Securities
at an inopportune time when prices are depressed. Even with the current
situation in the sub-prime mortgage sector we do not anticipate having
difficulty converting our assets to cash or extending financing term, due to the
fact that our investment securities have an actual or implied "AAA" rating and
principal payment is guaranteed FHLMC, FNMA, or GNMA.

           The table below provides quarterly information regarding our average
balances, interest income, yield on assets, average repurchase agreement
balances, interest expense, cost of funds, net interest income and net interest
rate spreads for the quarterly periods presented.


                                       21






                                                  Yield on
                         Average                  Average       Average                                        Net
                         Interest      Total      Interest     Balance of              Average       Net     Interest
                      Earning Assets  Interest    Earning      Repurchase   Interest   Cost of     Interest   Rate
                         Held (1)      Income      Assets      Agreements    Expense    Funds       Income    Spread
----------------------------------------------------------------------------------------------------------------------
                           (ratios for the quarters have been annualized, dollars in thousands)

                                                                                      
   Quarter Ended        $56,197,550   $773,359     5.50%      $50,359,825    $442,251    3.51%     $331,108   1.99%
     June 30, 2008
   Quarter Ended
     March 31, 2008     $56,119,584   $791,128     5.64%      $51,399,101    $537,606    4.18%     $253,522   1.46%
   Quarter Ended
     December 31, 2007  $49,619,857   $720,925     5.81%      $45,272,782    $558,435    4.93%     162,490    0.88%
   Quarter Ended
     September 30,
     2007               $43,075,489   $628,696     5.84%      $40,201,513    $519,118    5.17%     $109,578   0.67%
   Quarter Ended
     June 30, 2007      $38,822,274   $556,262     5.73%      $36,560,359    $468,748    5.13%     $87,514    0.60%
   Quarter Ended
     March 31, 2007     $31,682,974   $449,564     5.68%      $29,834,208    $380,164    5.10%     $69,400    0.58%
(1) Does not reflect unrealized gains/(losses).



         The following table presents the CPR experienced on our Mortgage-Backed
Securities portfolio, on an annualized basis, for the quarterly periods
presented.

Quarter Ended                           CPR
-------------                           ---
June 30, 2008                           16%
March 31, 2008                          15%
December 31, 2007                       12%
September 30, 2007                      14%
June 30, 2007                           15%
March 31, 2007                          17%

         We believe that the CPR in future periods will depend, in part, on
changes in and the level of market interest rates across the yield curve, with
higher CPRs expected during periods of declining interest rates and lower CPRs
expected during periods of rising interest rates.

         We continue to explore alternative business strategies, alternative
investments and other strategic initiatives to complement our core business
strategy of investing, on a leveraged basis, in high quality Investment
Securities. No assurance, however, can be provided that any such strategic
initiative will or will not be implemented in the future.

        For the purposes of computing ratios relating to equity measures,
throughout this report, equity includes Series B preferred stock, which has been
treated under GAAP as temporary equity. Even though it is treated as temporary
equity for GAAP purposes, we believe that for financial performance measures it
should be considered equity to provide a more realistic measure of our
performance.

Critical Accounting Policies

         Management's discussion and analysis of financial condition and results
of operations is based on the amounts reported in our financial statements.
These financial statements are prepared in conformity with accounting principles
generally accepted in the United States of America. In preparing the financial
statements, management is required to make various judgments, estimates and
assumptions that affect the reported amounts. Changes in these estimates and
assumptions could have a material effect on our financial statements. The
following is a summary of our policies most affected by management's judgments,
estimates and assumptions.

         Valuation of Investment Securities: All assets classified as
available-for-sale are reported at fair value, based on market prices. Although
we generally intend to hold most of our Investment Securities until maturity, we
may, from time to time, sell any of our Investment Securities as part our
overall management of our portfolio. Accordingly, we are required to classify
all of our Investment Securities as available-for-sale. Our policy is to obtain
market values from independent sources. Management evaluates securities for
other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concerns warrant such evaluation. The
determination of whether a security is other-than-temporarily impaired involves
judgments and assumptions based on subjective and objective factors.
Consideration is given to (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Investments with unrealized losses are not
considered other-than-temporarily impaired if the Company has the ability and
intent to hold the investments for a period of time, to maturity if necessary,
sufficient for a forecasted market price recovery up to or beyond the cost of
the investments. Unrealized losses on Investment Securities that are considered
other than temporary, as measured by the amount of decline in fair value
attributable to factors other than temporary, are recognized in income and the
cost basis of the Investment Securities is adjusted.


                                       22


         Interest income: Interest income is accrued based on the outstanding
principal amount of the Investment Securities and their contractual terms.
Premiums and discounts associated with the purchase of the Investment Securities
are amortized or accreted into interest income over the projected lives of the
securities using the interest method. Our policy for estimating prepayment
speeds for calculating the effective yield is to evaluate historical
performance, Wall Street consensus prepayment speeds, and current market
conditions. If our estimate of prepayments is incorrect, we may be required to
make an adjustment to the amortization or accretion of premiums and discounts
that would have an impact on future income.


         Income Taxes: We have elected to be taxed as a REIT and intend to
comply with the provisions of the Internal Revenue Code of 1986, as amended (or
the Code), with respect thereto. Accordingly, we will not be subjected to
federal income tax to the extent of its distributions to shareholders and as
long as certain asset, income and stock ownership tests are met. We and FIDAC
have made a joint election to treat FIDAC as a taxable REIT subsidiary. As such,
FIDAC is taxable as a domestic C corporation and subject to federal and state
and local income taxes based upon its taxable income.

         Impairment of Goodwill and Intangibles: Our acquisition of FIDAC was
accounted for using the purchase method. The cost of FIDAC was allocated to the
assets acquired, including identifiable intangible assets, and the liabilities
assumed based on their estimated fair values at the date of acquisition. The
excess of cost over the fair value of the net assets acquired was recognized as
goodwill. Goodwill and finite-lived intangible assets are periodically reviewed
for potential impairment. This evaluation requires significant judgment.

         Recent Accounting Pronouncements: In September 2006, the FASB issued
SFAS No. 157, Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value,
establishes a framework for measuring fair value and requires enhanced
disclosures about fair value measurements. SFAS 157 requires companies to
disclose the fair value of their financial instruments according to a fair value
hierarchy (i.e., levels 1, 2, and 3, as defined). Additionally, companies are
required to provide enhanced disclosure regarding instruments in the level 3
category (the valuation of which require significant management judgment),
including a reconciliation of the beginning and ending balances separately for
each major category of assets and liabilities. SFAS 157 was adopted by us on
January 1, 2008. SFAS 157 did not have an impact on the manner in which we
estimate fair value, but it requires additional disclosures.

      In February 2007, the FASB issued SFAS No 159, The Fair Value Option for
Financial Assets and Financial Liabilities - including an amendment of FASB
Statement No. 115 ("SFAS 159"). SFAS 159 permits entities to choose to measure
many financial instruments and certain other items at fair value. Unrealized
gains and losses on items for which the fair value option has been elected will
be recognized in earnings at each subsequent reporting date. SFAS 159 was
effective for us commencing January 1, 2008. We are not expecting SFAS 159 to
have an effect on the consolidated financial statements. We did not elect the
fair value option for any existing eligible financial instruments.

      In April 2007, the FASB issued a FASB Staff Position FIN 39-1 ("FSP FIN
39-1") which modifies FASB Interpretation No. 39, Offsetting of Amounts relating
to Certain Contracts ("FIN 39"). FSP FIN 39-1 addresses whether a reporting
entity that is party to a master netting arrangement can offset fair value
amounts recognized for the right to reclaim cash collateral (a receivable) or
the obligation to return cash collateral (a payable) against fair value amounts
recognized for derivative instruments that have been offset under the same
master netting arrangement in accordance with FIN 39. Upon adoption of this
guidance, a reporting entity is permitted to change its accounting policy to
offset or not offset fair value amounts recognized for derivative instruments
under master netting arrangements. This guidance was effective for the Company
on January 1, 2008. The implementation did not have an effect on our financial
statements.


                                       23


      In February 2008, the FASB issued FASB Staff Position No. FAS 140-3
Accounting for Transfers of Financial Assets and Repurchase Financing
Transactions, ("SFAS FAS 140-3"). SFAS FAS 140-3 addresses whether transactions
where assets purchased from a particular counterparty and financed through a
repurchase agreement with the same counterparty can be considered and accounted
for as separate transactions, or are required to be considered "linked"
transactions and may be considered derivatives under SFAS No. 133. SFAS FAS
140-3 requires purchases and subsequent financing through repurchase agreements
be considered linked transactions unless all of the following conditions apply:
(1) the initial purchase and the use of repurchase agreements to finance the
purchase are not contractually contingent upon each other; (2) the repurchase
financing entered into between the parties provides full recourse to the
transferee and the repurchase price is fixed; (3) the financial assets are
readily obtainable in the market; and (4) the financial instrument and the
repurchase agreement are not coterminous. This SFAS is effective for the Company
on January 1, 2009. We are currently evaluating SFAS FAS 140-3 but do not expect
its application to have a significant impact on our financial reporting.

      In March 2008, the FASB issued SFAS No. 161 ("SFAS 161"), Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133. SFAS 161 attempts to improve the transparency of financial
reporting by providing additional information about how derivative and hedging
activities affect an entity's financial position, financial performance and cash
flows. This statement changes the disclosure requirements for derivative
instruments and hedging activities by requiring enhanced disclosure about (a)
how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under SFAS 133 and its
related interpretations, and (c) how derivative instruments and related hedged
items affect an entity's financial position, financial performance, and cash
flows. To meet these objectives, SFAS 161 requires qualitative disclosures about
objectives and strategies for using derivatives, quantitative disclosures about
fair value amounts and of gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. This disclosure framework is intended to better convey the purpose
of derivative use in terms of the risks that an entity is intending to manage.
SFAS 161 is effective for us January 1, 2009. We utilize interest rate swaps
which are designated as cash flow hedges under SFAS 133 and therefore expect
that adoption of SFAS 161 will increase footnote disclosure to comply with the
disclosure requirements for financial statements issued after January 1, 2009.



Results of Operations: For the Quarters and Six Months Ended June 30, 2008 and
2007

         Net Income Summary

         For the quarter ended June 30, 2008, our net income was $308.0 million
or $0.60 basic income per average share related to common shareholders, as
compared to $85.7 million or $0.30 basic net income per average share for the
quarter ended June 30, 2007. Net income per average share increased by $0.30 per
average share available to common shareholders and total net income increased
$222.3 million for the quarter ended June 30, 2008, when compared to the quarter
ended June 30, 2007. We attribute the increase in total net income for the
quarter ended June 30, 2008 from the quarter ended June 30, 2007 to an increase
in net interest income, resulting from the increased asset base, and the
increase in interest rate spread. Net interest income increased by $243.6
million for the quarter ended June 30, 2008, as compared to the quarter ended
June 30, 2007.

         For the six months ended June 30, 2008, our net income was $551.0
million, or $1.14 net income per average share related to common shareholders,
as compared to net income of $153.2 million, or $0.59 net income per average
share available to common shareholders, for the six months ended June 30, 2007.
We attribute the majority of the increase in net income for the six months ended
June 30, 2008 from the six months ended June 30, 2007 to the increase in our
asset base and the increase in net interest spread. For the six months ended
June 30, 2008, net interest income was $584.6 million, as compared to $156.9
million for the six months ended June 30, 2007.


                                       24





                                                   Net Income Summary
                                    (dollars in thousands, except for per share data)
                                    -------------------------------------------------
                                      (ratios for the quarters have been annualized)
                                      ----------------------------------------------

                                                  Quarter            Quarter           Six Months         Six Months
                                                   Ended              Ended               Ended              Ended
                                               June 30, 2008      June 30, 2007       June 30, 2008      June 30, 2007
                                              ---------------    ---------------     ---------------    ---------------
                                                                                            
Interest income                               $       773,359    $       556,262     $     1,564,487    $     1,005,826
Interest expense                                      442,251            468,748             979,857            848,912
                                              ---------------    ---------------     ---------------    ---------------
Net interest income                                   331,108             87,514             584,630            156,914
                                              ---------------    ---------------     ---------------    ---------------
Other income:
  Investment advisory and service fees                  6,406              5,366              13,004             10,928
  Gain on sale of investment securities                 2,830              7,293              12,247             13,438
  Gain on termination of interest rate
    swaps                                                  --                 --                 --                  67
  Income from trading securities                        2,180                243               4,034              3,672
  Dividend income from available-for-sale
    equity securities                                     580                 --               1,521                 --
  Loss on other-than-temporarily impaired
    securities                                             --               (698)                 --             (1,189)
                                              ---------------    ---------------     ---------------    ---------------
     Total other income                                11,996             12,204              30,806             26,916
                                              ---------------    ---------------     ---------------    ---------------
Expenses:
  Distribution fees                                       370                861               1,003              1,765
  General and administrative expenses                  27,215             12,272              51,210             25,158
                                              ---------------    ---------------     ---------------    ---------------
     Total expenses                                    27,585             13,133              52,213             26,923
                                              ---------------    ---------------     ---------------    ---------------
Income before income  taxes and minority
    interest                                          315,519             86,585             563,223            156,907
Income taxes                                            7,527                839              12,137              3,443
                                              ---------------    ---------------     ---------------    ---------------
Income before minority interest                       307,992             85,746             551,086            153,464
Minority interest                                          --                 13                  58                299
                                              ---------------    ---------------     ---------------    ---------------
Net Income                                            307,992             85,733             551,028            153,165
Dividends on preferred stock                            5,334              5,373              10,707             10,746
                                              ---------------    ---------------     ---------------    ---------------
Net income available to common
shareholders                                  $       302,658    $        80,360     $       540,321    $       142,419
                                              ===============    ===============     ===============    ===============

Weighted average number of basic common
shares outstanding                                503,758,079        264,990,422         473,785,256        241,371,530
Weighted average number of diluted common
shares outstanding                                512,678,975        273,578,836         482,813,463        249,924,374

Basic net income per average common share     $          0.60    $          0.30     $          1.14    $          0.59

Diluted net income per average common share   $          0.59    $          0.30     $          1.13    $          0.58

Average total assets                          $    60,617,914    $    39,385,992     $    58,379,781    $    36,495,988
Average equity                                $     6,828,505    $     3,269,898     $     6,324,471    $     3,064,768

Return on average total assets                           2.03%              0.87%               1.85%              0.84%
Return on average equity                                18.04%             10.49%              17.43%             10.00%



                                       25



         Interest Income and Average Earning Asset Yield

         We had average earning assets of $56.2 billion for the quarter ended
June 30, 2008 and $38.8 billion for the quarter ended June 30, 2007. Our
interest income was $773.4 million for the quarter ended June 30, 2008, and
$556.3 million for the quarter ended June 30, 2007. The yield on average
Investment Securities was 5.50% and 5.73% for the quarters ended June 30, 2008
and 2007, respectively. The prepayment speeds increased to an average of 16% CPR
for the quarter ended June 30, 2008 from an average of 15% CPR for the quarter
ended June 30, 2007. Even though the yield on assets declined by 0.23%, the
total interest income increased by $217.1 million, primarily due to the increase
in average earning assets.

         We had average earning assets of $56.2 billion and $35.3 billion for
the six months ended June 30, 2008 and 2007, respectively. Our interest income
was $1.6 billion for the six months ended June 30, 2008 and $1.0 billion for the
six months ended June 30, 2007. The yield on average Investment Securities
decreased from 5.71% for the six months ended June 30, 2007 to 5.57% for the six
months ended June 30, 2008. Our average earning asset balance increased by $20.9
billion and interest income increased by $558.7 million for the six months ended
June 30, 2008 as compared to the six months ended June 30, 2007. Even though
yield on assets declined by 0.14%, the increase in interest income for the six
months ended June 30, 2008, when compared to the six months ended June 30, 2007,
resulted from the increased asset base.

         Interest Expense and the Cost of Funds

         Our largest expense is the cost of borrowed funds. We had average
borrowed funds of $50.4 billion and total interest expense of $442.3 million for
the quarter ended June 30, 2008. We had average borrowed funds of $36.6 billion
and total interest expense of $468.7 million for the quarter ended June 30,
2007. Our average cost of funds was 3.51% for the quarter ended June 30, 2008
and 5.13% for the quarter ended June 30, 2007. The cost of funds rate decreased
by 162 basis points and the average borrowed funds increased by $13.8 billion
for the quarter ended June 30, 2008 when compared to the quarter ended June 30,
2007. Interest expense for the quarter ended June 30, 2008 decreased by $26.5
million due to the decline in the cost of funding. We had average borrowed funds
of $50.9 billion and interest expense of $979.9 million for the six months ended
June 30, 2008. We had average borrowed funds of $33.2 billion and interest
expense of $848.9 million for the six months ended June 30, 2007. Our average
cost of funds was 3.85% for the six months ended June 30, 2008 and 5.11% for the
six months ended June 30, 2007. Interest expense increased by $131.0 million
because the average borrowed funds increased by $17.7 billion, even though the
average cost of funds decreased by 1.26%.

         Since a portion of our repurchase agreements are short term, changes in
market rates are directly reflected in our interest expense. In addition to
short term financing, we have entered into longer term repurchase agreements
which provide the counterparty with the right to call the balance prior to
maturity date. Our average cost of funds was 0.92% above average one-month LIBOR
and 0.58% above average six-month LIBOR for the quarter ended June 30, 2008. Our
average cost of funds was 0.19% below average one-month LIBOR and 0.24% below
average six-month LIBOR for the quarter ended June 30, 2007. Our cost of funds,
when compared to six-month LIBOR and one-month LIBOR, increased in the second
quarter of 2008 because, in addition to short term financing, we have entered
into longer term repurchase agreements which typically have a higher cost of
funds.

         The table below shows our average borrowed funds, interest expense and
average cost of funds as compared to average one-month and average six-month
LIBOR for the quarter ended June 30, 2008, March 31, 2008, the year ended
December 31, 2007 and four quarters in 2007.


                                       26


                              Average Cost of Funds
                              ---------------------
      (Ratios for the quarters have been annualized, dollars in thousands)


                                                                                   

                                                                                            Average            Average
                                                                                           One-Month Average   Cost of
                                                                                             LIBOR    Cost of   Funds
                                                                                            Relative   Funds   Relative
                                                                                              to      Relative    to
                                                                   Average Average Average  Average     to      Average
                                              Average               Cost     One-    Six-     Six-    Average    Six-
                                             Borrowed    Interest    of     Month   Month    Month   One-Month  Month
                                               Funds     Expense    Funds   LIBOR   LIBOR    LIBOR     LIBOR     LIBOR
                                            ---------------------------------------------------------------------------
For the Quarter Ended
 June 30, 2008                              $50,359,825 $  442,251   3.51%   2.59%   2.93%   (0.34%)    0.92%    0.58%
For the Quarter Ended March 31, 2008        $51,399,101 $  537,606   4.18%   3.31%   3.18%    0.13%     0.87%    1.00%
-----------------------------------------------------------------------------------------------------------------------
For the Year Ended
 December 31, 2007                          $37,967,215 $1,926,465   5.07%   5.19%   5.19%   (0.00%)   (0.12%)  (0.12%)
For the Quarter Ended
 December 31, 2007                          $45,272,782 $  558,435   4.93%   4.86%   4.85%    0.01%     0.07%    0.08%
For the Quarter Ended
 September 30, 2007                         $40,201,513 $  519,118   5.17%   5.37%   5.31%    0.07%    (0.20%)  (0.14%)
For the Quarter Ended
 June 30, 2007                              $36,560,359 $  468,748   5.13%   5.32%   5.37%   (0.05%)   (0.19%)  (0.24%)
For the Quarter Ended
 March 31, 2007                             $29,834,208 $  380,164   5.10%   5.26%   5.30%   (0.04%)   (0.16%)  (0.20%)


         Net Interest Income

         Our net interest income, which equals interest income less interest
expense, totaled $331.1 million for the quarter ended June 30, 2008, and $87.5
million for the quarter ended June 30, 2007. Our net interest income increased
for the quarter ended June 30, 2008, as compared to the quarter ended June 30,
2007, because of the increased average earning assets and the increased interest
rate spread. Our net interest rate spread, which equals the average yield for
the period less the average cost of funds for the period, was 1.99% for the
quarter ended June 30, 2008 as compared to 0.60% for the quarter ended June 30,
2007. This 139 basis point increase in interest rate spread was the result in
the decrease cost of funds of 162 basis points, partially offset by a decrease
in the average yield of 23 basis points.

         Our net interest income totaled $584.6 million for the six months ended
June 30, 2008 and $156.9 million for the six months ended June 30, 2007. Our net
interest income increased because of the increase in interest rate spread. Our
net interest rate spread, which equals the average for the period less the
average cost of funds for the period, was 1.72% for the six months ended June
30, 2008 as compared to 0.60% for the six months ended June 30, 2007.

         The table below shows our interest income by average Investment
Securities held, total interest income, yield on average interest earning
assets, average balance of repurchase agreements, interest expense, average cost
of funds, net interest income, and net interest rate spread for the quarters
ended June 30, 2008, March 31, 2008, the year ended December 31, 2007 and the
four quarters in 2007.

                                       27




                               Net Interest Income
      (Ratios for the quarters have been annualized, dollars in thousands)


                                                                               
                                                       Yield on                                             Net
                                  Average               Average   Average               Average           Interest
                                 Interest     Total     Interest  Balance of             Cost     Net       Rate
                                  Earning    Interest   Earning   Repurchase Interest     of     Interest  Spread
                                   Assets     Income     Assets   Agreements   Expense   Funds    Income
                                ----------------------------------------------------------------------------------
For the Quarter Ended
 June 30, 2008                  $56,197,550 $  773,359     5.50% $50,359,825 $  442,251   3.51%  $331,108    1.99%
For the Quarter Ended
 March 31, 2008                 $56,119,584 $  791,128     5.64% $51,399,101 $  537,606   4.18%  $253,522    1.46%
------------------------------------------------------------------------------------------------------------------
For the Year Ended
 December 31, 2007              $40,800,148 $2,355,447     5.77% $37,967,215 $1,926,465   5.07%  $428,982    0.70%
For the Quarter Ended
 December 31, 2007              $49,619,857 $  720,925     5.81% $45,272,782 $  558,435   4.93%  $162,490    0.88%
For the Quarter Ended
 September 30, 2007             $43,075,489 $  628,696     5.84% $40,201,513 $  519,118   5.17%  $109,578    0.67%
For the Quarter Ended
 June 30, 2007                  $38,822,274 $  556,262     5.73% $36,560,359 $  468,748   5.13%  $ 87,514    0.60%
For the Quarter Ended
 March 31, 2007                 $31,682,974 $  449,564     5.68% $29,834,208 $  380,164   5.10%  $ 69,400    0.58%


         Investment Advisory and Service Fees

         FIDAC is a registered investment advisor which specializes in managing
fixed income securities. FIDAC generally receives annual net investment advisory
fees on the gross assets it manages, assists in managing or supervises. FIDAC
expanded its line of business in 2007 to manage Chimera Investment Corporation,
a newly-formed specialty finance company that invests in residential mortgage
loans, residential mortgage-backed securities, real estate related securities
and various other asset classes. At June 30, 2008, FIDAC had under management
approximately $2.7 billion in net assets and $11.8 billion in gross assets,
compared to $2.6 billion in net assets and $15.7 billion in gross assets at June
30, 2007. Net investment advisory and service fees for the quarters ended June
30, 2008 and 2007 totaled $6.0 million and $4.5 million, respectively, net of
fees paid to third parties pursuant to distribution service agreements for
facilitating and promoting distribution of shares or units to FIDAC's clients.
Gross assets under management will vary from time to time because of changes in
the amount of net assets FIDAC manages as well as changes in the amount of
leverage used by the various funds and accounts FIDAC manages.

         Gains and Losses on Sales of Investment Securities and Interest Rate
Swaps

         For the quarter ended June 30, 2008, we sold Investment Securities with
a carrying value of $2.1 billion for an aggregate gain of $2.8 million. For the
quarter ended June 30, 2007, we sold Investment Securities with a carrying value
of $1.4 billion for an aggregate gain of $7.3 million. We do not expect to sell
assets on a frequent basis, but may from time to time sell existing assets to
move into new assets, which our management believes might have higher
risk-adjusted returns, or to manage our balance sheet as part of our
asset/liability management strategy.

         For the six months ended June 30, 2008, we sold Investment Securities
with a carrying value of $6.2 billion for an aggregate gain of $12.2 million.
For the six months ended June 30, 2007, we sold Investment Securities with an
aggregate historical amortized cost of $2.8 billion for an aggregate gain of
$13.4 million. The difference between the sale price and the carrying value of
our Mortgage-Backed Securities will be a realized gain or a realized loss, and
will increase or decrease income accordingly.

         Income from Trading Securities

         Gross income from trading securities held by our investment fund, which
is a combination of interest, dividends, and realized and unrealized gains and
losses, totaled $2.2 million for the quarter ended June 30, 2008 and $4.0
million for the six months ended June 30, 2008. Gross income from trading
securities totaled $243,000 for the quarter ended June 30, 2007 and $3.7 million
for the six months ended June 30, 2007.


                                       28


         Dividend Income from Available-For-Sale Equity Securities

         We acquired approximately 3.6 million shares of common stock of
Chimera. The investment in Chimera is accounted for as available-for-sale equity
securities.

         Dividend income from available-for-sale equity securities totaled
$580,000 for the quarter ended June 30, 2008, and $1.5 million for the six
months ended June 30, 2008. For the quarter ended June 30, 2007 we did not have
an investment in available-for-sale equity securities.

         Loss on Other-Than-Temporarily Impaired Securities

         At each quarter end, we review each of our securities to determine if
an other-than-temporary impairment charge would be necessary. We will take these
charges if we determine that we do not intend to hold securities that were in an
unrealized loss position for a period of time, to maturity if necessary,
sufficient for a forecasted market price recovery up to or beyond the cost of
the investments. For the quarter and six months ended June 30, 2008 there were
no losses on other-than-temporarily impaired securities. For the quarter and six
months ended June 30, 2007 the loss on other-than temporarily impaired
securities totaled $698,000 and $1.2 million, respectively.

         General and Administrative Expenses

         General and administrative (or G&A) expenses were $27.2 million for the
quarter ended June 30, 2008, and $12.3 million for the quarter ended June 30,
2007. G&A expenses as a percentage of average total assets was 0.18% and 0.12%
for the quarters ended June 30, 2008 and 2007, respectively. G&A expenses were
$51.2 million for the six months ended June 30, 2008, and $25.2 million for the
six months ended June 30, 2007. The increase in G&A expenses of $14.9 million
and $26.1 million for the quarter and six months ended June 30, 2008 was
primarily the result of increased salaries.

         The table below shows our total G&A expenses as compared to average
total assets and average equity for the quarters ended June 30, 2008, March 31,
2008, the year ended December 31, 2007 and the four quarters in 2007.


                                                                               
                    G&A Expenses and Operating Expense Ratios
                    -----------------------------------------
      (ratios for the quarters have been annualized, dollars in thousands)

                                                                    Total G&A        Total G&A
                                                        Total G&A Expenses/Average Expenses/Average
                                                         Expenses      Assets           Equity
                                                        ---------- --------------- -----------------
For the Quarter Ended June 30, 2008                     $  27,215            0.18%            1.59%
For the Quarter Ended March 31, 2008                    $  23,995            0.17%            1.64%
---------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2007                    $  62,666            0.15%            1.69%
For the Quarter Ended December 31, 2007                 $  20,174            0.16%            1.72%
For the Quarter Ended September 30, 2007                $  17,334            0.16%            1.94%
For the Quarter Ended June 30, 2007                     $  12,272            0.12%            1.50%
For the Quarter Ended March 31, 2007                    $  12,886            0.15%            1.70%


Net Income and Return on Average Equity

         Our net income was $308.0 million for the quarter ended June 30, 2008,
and net income was $85.7 million for the quarter ended June 30, 2007. Our return
on average equity was 18.04% for the quarter ended June 30, 2008 and 10.49% for
the quarter ended June 30, 2007. Even with the increase in G&A expenses, net
income for the quarter increased by $222.3 million. We attribute the increase in
total net income for the quarter ended June 30, 2008 over the quarter ended June
30, 2007 to the increase in net interest rate spread and increase in
interest-earning assets.

         Our net income was $551.1 million for the six months ended June 30,
2008, and $153.2 million for the six months ended June 30, 2007. Our return on
average equity was 17.43% for the six months ended June 30, 2008 and 10.00% for
the six months ended June 30, 2007. We attribute the increase in total net
income for the quarter ended June 30, 2008 over the quarter ended June 30, 2007
to the increase in net interest rate spread and increase in interest-earning
assets, resulting in an increase of net interest income of $427.7 million, which
was only partially offset by an increase in G&A expenses of $26.1 million.

                                       29


         The table below shows our net interest income, net investment advisory
and service fees, gain (loss) on sale of Mortgage-Backed Securities and
termination of interest rate swaps, loss on other-than-temporarily impaired
securities, income from equity investment, G&A expenses, income taxes, minority
interest, and dividend income from equity investment, each as a percentage of
average equity, and the return on average equity for the quarters ended June 30,
2008, March 31, 2008, the year ended December 31, 2007, and the four quarters in
2007.


                                                                                                      

                     Components of Return on Average Equity
                     --------------------------------------
                 (Ratios for the quarters have been annualized)

                                     Gain on
                                      Sale of
                                     Mortgage-
                                      Backed
                                     Securities   Loss on                         Dividend
                          Net           and      other-than-                       income
              Net      Investment    Interest    temporarily                        from
             Interest  Advisory and    Rate       impaired                        available-    G&A      Income  Minority   Return
             Income/     Service      Swaps/     securities/ Income from equity   for-sale    Expenses/ Taxes/    interest/    on
             Average   Fees/Average   Average     Average     investment/Average   equity     Average    Average  Average    Average
              Equity      Equity       Equity      Equity           Equity        securities   Equity    Equity    Equity    Equity
            ------------------------------------------------------------------------------------------------------------------------
For the
 Quarter
 Ended
June 30,
 2008          19.40%         0.35%       0.16%          -                 0.13%       0.03%    (1.59%)  (0.44%)        -     18.04%
For the
 Quarter
 Ended
March 31,
 2008          17.38%         0.41%       0.64%          -                 0.13%       0.06%    (1.64%)  (0.32%)     0.00%    16.66%
------------------------------------------------------------------------------------------------------------------------------------
For the Year
 Ended
December 31,
 2007          11.56%         0.50%       0.57%      (0.03%)               0.52%       0.00%    (1.69%)  (0.24%)    (0.02%)   11.17%
For the
 Quarter
 Ended
December 31,
 2007          13.89%         0.41%       0.16%          -                 0.61%       0.00%    (1.72%)  (0.26%)    (0.02%)   13.07%
For the
 Quarter
 Ended
September
 30, 2007      12.23%         0.49%       0.65%          -                 0.93%          -     (1.94%)  (0.26%)    (0.01%)   12.09%
For the
 Quarter
 Ended
June 30,
 2007          10.71%         0.55%       0.89%      (0.09%)               0.03%          -     (1.50%)  (0.10%)        -     10.49%
For the
 Quarter
 Ended
March 31,
 2007           9.14%         0.61%       0.82%      (0.06%)               0.45%          -     (1.70%)  (0.34%)    (0.04%)    8.88%



Financial Condition

         Investment Securities, Available for Sale

        All of our Mortgage-Backed Securities at June 30, 2008 were
adjustable-rate or fixed-rate mortgage-backed securities backed by single-family
mortgage loans. All of the mortgage assets underlying these mortgage-backed
securities were secured with a first lien position on the underlying
single-family properties. All of our mortgage-backed securities were FHLMC, FNMA
or GNMA mortgage pass-through certificates or CMOs, which carry an actual or
implied "AAA" rating. All of our agency debentures are callable and carry an
actual "AAA" rating. We carry all of our investment assets at fair value.

         We accrete discount balances as an increase in interest income over the
life of Investment Securities acquired at a discount and we amortize premium
balances as a decrease in interest income over the life of Investment Securities
acquired at a premium. At June 30, 2008 and December 31, 2007, we had on our
balance sheet a total of $72.6 million and $77.4 million, respectively, of
unamortized discount (which is the difference between the remaining principal
value and current historical amortized cost of our investment securities
acquired at a price below principal amount) and a total of $573.3 million and
$405.8 million, respectively, of unamortized premium (which is the difference
between the remaining principal amount and the current historical amortized cost
of our investment securities acquired at a price above principal amount).

         We received mortgage principal repayments of $2.8 billion for the
quarter ended June 30, 2008, and $2.0 billion for the quarter ended June 30,
2007. The average prepayment speed for the quarter ended June 30, 2008 and 2007
was 16%, and 15% respectively. Given our current portfolio composition, if
mortgage principal prepayment rates were to increase over the life of our
Mortgage-Backed Securities, all other factors being equal, our net interest
income would decrease during the life of these Mortgage-Backed Securities as we
would be required to amortize our net premium balance into income over a shorter
time period. Similarly, if mortgage principal prepayment rates were to decrease
over the life of our Mortgage-Backed Securities, all other factors being equal,
our net interest income would increase during the life of these Mortgage-Backed
Securities as we would amortize our net premium balance over a longer time
period.

                                       30



         The table below summarizes certain characteristics of our Investment
Securities at June 30, 2008, March 31, 2008, December 31, 2007, September 30,
2007, June 30, 2007, and March 31, 2007.


                              Investment Securities
                              ---------------------
                             (dollars in thousands)


                                                                                     
                                                                  Amortized                      Fair        Weighted
                                Principal    Net     Amortized   Cost/Principal              Value/Principal  Average
                                 Amount     Premium    Cost          Amount     Fair Value       Amount        Yield
                               ----------- -------- ----------- --------------- ----------- ---------------- --------
At June 30, 2008               $58,304,678 $500,721 $58,805,399         100.86% $58,749,300          100.76%    5.33%
At March 31, 2008              $56,006,707 $383,334 $56,390,041         100.68% $56,853,862          101.51%    5.36%
---------------------------------------------------------------------------------------------------------------------
At December 31, 2007           $52,569,598 $328,376 $52,897,974         100.62% $53,133,443          101.07%    5.75%
At September 30, 2007          $44,904,820 $229,713 $45,134,533         100.51% $44,890,633           99.97%    5.74%
At June 30, 2007               $39,102,277 $211,438 $39,313,715         100.54% $38,753,509           99.11%    5.71%
At March 31, 2007              $39,053,196 $195,649 $39,248,845         100.50% $39,230,648          100.45%    5.67%


         The table below summarizes certain characteristics of our Investment
Securities at June 30, 2008, March 31, 2008, December 31, 2007, September 30,
2007, June 30, 2007, and March 31, 2007. The index level for adjustable-rate
Investment Securities is the weighted average rate of the various short-term
interest rate indices, which determine the coupon rate.



               Adjustable-Rate Investment Security Characteristics
               ---------------------------------------------------
                             (dollars in thousands)
                                                                          

                                                                                             Principal
                                                                                              Amount at
                                                               Weighted                       Period End
                                                     Weighted   Average   Weighted  Weighted   as % of
                                                      Average   Term to    Average   Average    Total
                                         Principal    Coupon     Next      Lifetime  Asset    Investment
                                            Amount     Rate    Adjustment    Cap      Yield   Securities
                                         ----------- -------- ----------- --------- -------- -----------
At June 30, 2008                         $18,418,637    5.16%   36 months     9.89%    4.54%      31.59%
At March 31, 2008                        $17,487,518    5.19%   35 months     9.73%    4.40%      31.22%
--------------------------------------------------------------------------------------------------------
At December 31, 2007                     $15,331,447    5.90%   39 months     9.89%    5.63%      29.16%
At September 30, 2007                    $13,148,355    5.99%   41 months    10.02%    5.68%      29.28%
At June 30, 2007                         $ 9,553,827    5.85%   32 months    10.11%    5.77%      24.43%
At March 31, 2007                        $ 9,657,221    5.79%   30 months    10.05%    5.66%      24.73%




                                                             

                 Fixed-Rate Investment Security Characteristics
                 ----------------------------------------------
                             (dollars in thousands)

                                                                          Principal
                                                                           Amount at
                                                                           Period End
                                                        Weighted Weighted   as % of
                                                         Average  Average    Total
                                            Principal    Coupon   Asset    Investment
                                               Amount     Rate     Yield   Securities
                                            ----------- -------- -------- -----------
At June 30, 2008                            $39,886,041    6.00%    5.70%      68.41%
At March 31, 2008                           $38,519,189    5.98%    5.80%      68.78%
-------------------------------------------------------------------------------------
At December 31, 2007                        $37,238,151    6.00%    5.80%      70.84%
At September 30, 2007                       $31,756,465    5.93%    5.76%      70.72%
At June 30, 2007                            $29,548,450    5.87%    5.69%      75.57%
At March 31, 2007                           $29,395,975    5.85%    5.67%      75.27%



         At June 30, 2008 and December 31, 2007, we held Investment Securities
with coupons linked to various indices. The following tables detail the
portfolio characteristics by index.

                                       31




                 Adjustable-Rate Investment Securities by Index
                 ----------------------------------------------
                                  June 30, 2008
                                  -------------
                                                                          

                                                                  11th              Monthly
                                   One-   Six-  Twelve 12-Month  District  1-Year    Federal
                                   Month  Month  Month  Moving   Cost of   Treasury  Cost of   Other
                                   Libor  Libor  Libor  Average   Funds     Index     Funds   Indexes(1)
                                   ----- ------ ------ -------- --------- --------- -------- -----------
Weighted Average Term
to Next Adjustment                 1 mo. 29 mo. 58 mo.    1 mo.     1 mo.    32 mo.    1 mo.      13 mo.
Weighted Average
Annual Period Cap                  6.27%  2.60%  2.00%    0.01%     1.73%     1.89%    0.00%       1.94%
Weighted Average
Lifetime Cap at
June 30, 2008                      6.92% 10.71% 10.96%    9.18%    10.84%    10.86%   13.42%      12.00%
Investment Principal
Value as Percentage of
Investment Securities at
June 30, 2008                      8.25%  2.40% 16.38%    0.66%     0.43%     3.29%    0.11%       0.07%


(1)       Combination of indexes that account for less than 0.05% of total
          investment securities.



                 Adjustable-Rate Investment Securities by Index
                 ----------------------------------------------
                                December 31, 2007
                                -----------------


                                                                                             

                                                                    11th                        Monthly   One-   Twelve
                                     One-   Six-  Twelve 12-Month  District  1-Year    3-Year    Federal  Month   Month
                                     Month  Month  Month  Moving   Cost of   Treasury  Treasury  Cost of  Libor-  Libor-   Other
                                     Libor  Libor  Libor  Average   Funds     Index     Index     Funds    USD     USD    Indexes(1)
                                    ------ ------ ------ -------- --------- --------- --------- -------- ------- ------- -----------
Weighted Average Term to
Next Adjustment                      1 mo. 38 mo. 72 mo.    1 mo.     1 mo.    36 mo.    18 mo.    1 mo.   1 mo.  60 mo.      10 mo.
Weighted Average Annual
Period Cap                           6.48%  1.72%  2.00%    0.42%     0.00%     1.88%     2.07%    0.00%   2.00%   2.00%       1.84%

Weighted Average Lifetime
Cap at December 31, 2007             7.13% 11.25% 11.08%    9.15%    12.08%    10.73%    13.18%   13.43%   12.8%  10.94%      10.73%

Investment Principal Value as
Percentage of Investment
Securities at December 31, 2007      8.24%  1.89%  7.23%    0.67%     0.19%     3.39%     0.05%    0.13%   0.19%   7.14%       0.04%


(1)      Combination of indexes that account for less than 0.05% of total
         investment securities.


         Trading Securities and Trading Securities Sold, Not Yet Purchased

         Trading securities and trading securities sold, not yet purchased, are
included in the balance sheet as a result of consolidating the financial
statements of an affiliated investment fund. The resulting realized and
unrealized gains and losses are reflected in the statements of operations. The
fair value of the trading securities was $23.5 million and the trading
securities sold, not yet purchased, was $48.8 million at June 30, 2008. The fair
value of the trading securities was $11.7 million and the trading securities
sold, not yet purchased, was $32.8 million at December 31, 2007.

         Borrowings

         To date, our debt has consisted entirely of borrowings collateralized
by a pledge of our Investment Securities. These borrowings appear on our
statement of financial condition as repurchase agreements. At June 30, 2008, we
had established uncommitted borrowing facilities in this market with 30 lenders
in amounts which we believe are in excess of our needs. All of our Investment
Securities are currently accepted as collateral for these borrowings. However,
we limit our borrowings, and thus our potential asset growth, in order to
maintain unused borrowing capacity and thus increase the liquidity and strength
of our balance sheet.

                                       32


         For the quarter ended June 30, 2008, the term to maturity of our
borrowings ranged from one day to ten years. We have entered into structured
borrowings giving the counterparty the right to call the balance prior to
maturity. The weighted average original term to maturity of our borrowings was
263 days at June 30, 2008. For the quarter ended June 30, 2007, the term to
maturity of our borrowings ranged from one day to three years, with a weighted
average original term to maturity of 249 days at June 30, 2007.

         At June 30, 2008, the weighted average cost of funds for all of our
borrowings was 3.40% with the effect of the interest rate swaps, and the
weighted average term to next rate adjustment was 224 days. At June 30, 2007,
the weighted average cost of funds for all of our borrowings 5.10% and the
weighted average term to next rate adjustment was 209 days.

         Liquidity

         Liquidity, which is our ability to turn non-cash assets into cash,
allows us to purchase additional investment securities and to pledge additional
assets to secure existing borrowings should the value of our pledged assets
decline. We may need to pledge additional assets to collateralize interest rate
swaps, if the value of the swaps decline. Potential immediate sources of
liquidity for us include cash balances and unused borrowing capacity. Unused
borrowing capacity will vary over time as the market value of our investment
securities varies. Our non-cash assets are largely actual or implied AAA assets,
and accordingly, we have not had, nor do we anticipate having, difficulty in
converting our assets to cash. Our balance sheet also generates liquidity on an
on-going basis through mortgage principal repayments and net earnings held prior
to payment as dividends. Should our needs ever exceed these on-going sources of
liquidity plus the immediate sources of liquidity discussed above, we believe
that in most circumstances our Investment Securities could be sold to raise
cash. The maintenance of liquidity is one of the goals of our capital investment
policy. Under this policy, we limit asset growth in order to preserve unused
borrowing capacity for liquidity management purposes.

         Borrowings under our repurchase agreements increased by $5.8 billion to
$51.8 billion at June 30, 2008, from $46.0 billion at December 31, 2007. The
increase in borrowings was the result of our deployment of additional capital
raised the first and second quarters of 2008, which permitted us to increase our
borrowings.

         We anticipate that, upon repayment of each borrowing under a repurchase
agreement, we will use the collateral immediately for borrowing under a new
repurchase agreement. We have not at the present time entered into any
commitment agreements under which the lender would be required to enter into new
repurchase agreements during a specified period of time, nor do we presently
plan to have liquidity facilities with commercial banks.

         Under our repurchase agreements, we may be required to pledge
additional assets to our repurchase agreement counterparties (i.e., lenders) in
the event the estimated fair value of the existing pledged collateral under such
agreements declines and such lenders demand additional collateral (a "margin
call"), which may take the form of additional securities or cash. Similarly, if
the estimated fair value of our Investment Securities increases due to changes
in market interest rates of market factors, lenders may release collateral back
to us. Specifically, margin calls result from a decline in the value of the our
Mortgage-Backed Securities securing our repurchase agreements, prepayments on
the mortgages securing such Mortgage-Backed Securities and to changes in the
estimated fair value of such Mortgage-Backed Securities generally due to
principal reduction of such Mortgage-Backed Securities from scheduled
amortization and resulting from changes in market interest rates and other
market factors. Through June 30, 2008, we did not have any margin calls on our
repurchase agreements that we were not able to satisfy with either cash or
additional pledged collateral. However, should prepayment speeds on the
mortgages underlying our Mortgage-Backed Securities and/or market interest rates
suddenly increase, margin calls on our repurchase agreements could result,
causing an adverse change in our liquidity position.

         The following table summarizes the effect on our liquidity and cash
flows from contractual obligations for repurchase agreements, interest expense
on repurchase agreements, the non-cancelable office lease and employment
agreements at June 30, 2008.

                                       33



                                                                                    

                                                                  (dollars in thousands)
                                             -----------------------------------------------------------------
                                                                                        More than
                                               Within One    One to Three   Three to       Five
Contractual Obligations                           Year           Years      Five Years     Years      Total
--------------------------------------------------------------------------------------------------------------
Repurchase agreements                        $    44,189,663 $   3,300,000 $  2,850,000 $1,500,000 $51,839,663
Interest expense on repurchase agreements            359,032       409,564      214,659    230,084   1,213,339
Long-term operating lease obligations                    266           532            -          -         798
Employment contracts                                  57,638             -            -          -      57,638
                                             -----------------------------------------------------------------
Total                                        $    44,606,599 $   3,710,096 $  3,064,659 $1,730,084 $53,111,438
                                             =================================================================


         Stockholders' Equity

         During the quarter ended June 30, 2008, we declared dividends to common
shareholders totaling $296.2 million or $0.55 per share, which were paid to
shareholders on July 29, 2008. During the quarter ended June 30, 2008, we
declared and paid dividends to Series A Preferred shareholders totaling $3.6
million or $0.492188 per share, and Series B Preferred shareholders totaling
$1.7 million or $0.375 per share. During the quarter ended June 30, 2007, we
declared dividends to common shareholders totaling $64.7 million or $0.24 per
share, which were paid on July 27, 2007. During the quarter ended June 30, 2007,
we declared and paid dividends to Series A Preferred shareholders totaling $3.6
million or $0.492188 per share, and Series B Preferred shareholders totaling
$1.7 million or $0.375 per share.

         On May 13, 2008, we entered into an underwriting agreement pursuant to
which we sold 69,000,000 shares of our common stock for net proceeds following
underwriting expenses of approximately $1.1 billion. This transaction settled on
May19, 2008.

         On January 23, 2008, we entered into an underwriting agreement pursuant
to which we sold 58,650,000 shares of our common stock for net proceeds
following underwriting expenses of approximately $1.1 billion. This transaction
settled on January 29, 2008.

         During the quarter and six months ended June 30, 2008, we raised $16.5
million and $71.1 million by issuing 957,091 shares and 4.3 million shares,
respectively, through the Direct Purchase and Dividend Reinvestment Program.

         During the quarter and six months ended June 30, 2008, 16,600 options
and 187,217 options were exercised under the Long-Term Stock Incentive Plan, or
Incentive Plan, for an aggregate exercise price of $195,000 and $1.8 million,
respectively.

         On August 3, 2006, the Company entered into an ATM Equity Offering(sm)
Sales Agreement with Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, relating to the sale of shares of its common stock from time
to time through Merrill Lynch. Sales of the shares, if any, are made by means of
ordinary brokers' transaction on the New York Stock Exchange. During the six
months ended June 30, 2008, 588,000 shares of the Company's common stock were
issued pursuant to this program, totaling $11.5 million in net proceeds. On
August 3, 2006, the Company entered into an ATM Equity Sales Agreement with UBS
Securities LLC, relating to the sale of shares of its common stock from time to
time through UBS Securities. Sales of the shares, if any, will be made by means
of ordinary brokers' transaction on the New York Stock Exchange. During the six
months ended June 30, 2008, 3.8 million shares of the Company's common stock
were issued pursuant to this program, totaling $60.3 million in net proceeds.
During the quarter ended June 30, 2008, we did not issue stock under either ATM
Equity Sales programs.

         Unrealized Gains and Losses

         With our "available-for-sale" accounting treatment, unrealized
fluctuations in fair values of assets do not impact our GAAP or taxable income
but rather are reflected on our statement of financial condition by changing the
carrying value of the asset with the change included in stockholders' equity
under "Accumulated Other Comprehensive Income (Loss)."

                                       34


         As a result of us using fair value accounting treatment, our book value
and book value per share are likely to fluctuate far more than if we used
historical amortized cost accounting. As a result, comparisons with companies
that use historical cost accounting for some or all of their investments may not
be meaningful.

         The table below shows unrealized gains and losses on the Investment
Securities, available-for-sale equity securities and interest rate swaps in our
portfolio.

                           Unrealized Gains and Losses
                           ---------------------------
                             (dollars in thousands)


                                                                                                     

                                           June 30,           March 31,     December 31,    September 30,   June 30,    March 31,
                                             2008                2008            2007            2007         2007          2007
                                    ------------------------------------------------------------------------------------------------
Unrealized gain                     $              324,612  $     654,506  $       379,348  $     68,015  $   102,641  $    138,211
Unrealized loss                                   (803,403)      (990,320)        (531,545)     (453,974)    (570,281)     (198,251)
                                    ------------------------------------------------------------------------------------------------
Net Unrealized loss                              ($478,791)     ($335,814)       ($152,197)    ($385,959)   ($467,640)     ($60,040)
                                    ================================================================================================



         Unrealized changes in the estimated net fair value of investment
securities have one direct effect on our potential earnings and dividends:
positive fair value changes increase our equity base and allow us to increase
our borrowing capacity while negative changes tend to limit borrowing capacity
under our capital investment policy. A very large negative change in the net
fair value of our investment securities might impair our liquidity position,
requiring us to sell assets with the likely result of realized losses upon sale.

         Leverage

         Our debt-to-equity ratio at June 30, 2008 and December 31, 2007 was
7.1:1 and 8.7:1, respectively. We generally expect to maintain a ratio of
debt-to-equity of between 8:1 and 12:1, although the ratio may vary from this
range from time to time based upon various factors, including our management's
opinion of the level of risk of our assets and liabilities, our liquidity
position, our level of unused borrowing capacity and over-collateralization
levels required by lenders when we pledge assets to secure borrowings.

         Our target debt-to-equity ratio is determined under our capital
investment policy. Should our actual debt-to-equity ratio increase above the
target level due to asset acquisition or market value fluctuations in assets, we
will cease to acquire new assets. Our management will, at that time, present a
plan to our board of directors to bring us back to our target debt-to-equity
ratio; in many circumstances, this would be accomplished over time by the
monthly reduction of the balance of our Mortgage-Backed Securities through
principal repayments.

         Asset/Liability Management and Effect of Changes in Interest Rates

         We continually review our asset/liability management strategy with
respect to interest rate risk, mortgage prepayment risk, credit risk and the
related issues of capital adequacy and liquidity. Our goal is to provide
attractive risk-adjusted stockholder returns while maintaining what we believe
is a strong balance sheet.

         We seek to manage the extent to which our net income changes as a
function of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. In addition, we have attempted to mitigate the
potential impact on net income of periodic and lifetime coupon adjustment
restrictions in our portfolio of investment securities by entering into interest
rate swaps. At June 30, 2008, we had entered into swap agreements with a total
notional amount of $17.7 billion. We agreed to pay a weighted average pay rate
of 4.78% and receive a floating rate based on one month LIBOR. At December 31,
2007, we entered into swap agreements with a total notional amount of $16.2
billion. We agreed to pay a weighted average pay rate of 5.03% and receive a
floating rate based on one month LIBOR. We may enter into similar derivative
transactions in the future by entering into interest rate collars, caps or
floors or purchasing interest-only securities.

                                       35


         Changes in interest rates may also affect the rate of mortgage
principal prepayments and, as a result, prepayments on mortgage-backed
securities. We seek to mitigate the effect of changes in the mortgage principal
repayment rate by balancing assets we purchase at a premium with assets we
purchase at a discount. To date, the aggregate premium exceeds the aggregate
discount on our mortgage-backed securities. As a result, prepayments, which
result in the expensing of unamortized premium, will reduce our net income
compared to what net income would be absent such prepayments.

         Off-Balance Sheet Arrangements

         We do not have any relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special purpose entities, which would have been established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. Further, we have not guaranteed any obligations of
unconsolidated entities nor do we have any commitment or intent to provide
funding to any such entities. As such, we are not materially exposed to any
market, credit, liquidity or financing risk that could arise if we had engaged
in such relationships.

         Capital Resources

         At June 30, 2008, we had no material commitments for capital
expenditures.

         Inflation

         Virtually all of our assets and liabilities are financial in nature. As
a result, interest rates and other factors drive our performance far more than
does inflation. Changes in interest rates do not necessarily correlate with
inflation rates or changes in inflation rates. Our financial statements are
prepared in accordance with GAAP and our dividends are based upon our net income
as calculated for tax purposes; in each case, our activities and balance sheet
are measured with reference to historical cost or fair market value without
considering inflation.

         Other Matters

         We calculate that at least 75% of our assets were qualified REIT
assets, as defined in the Code for the quarters ended June 30, 2008 and 2007. We
also calculate that our revenue qualifies for the 75% source of income test and
for the 95% source of income test rules for the quarters ended June 30, 2008 and
2007. Consequently, we met the REIT income and asset test. We also met all REIT
requirements regarding the ownership of our common stock and the distribution of
our net income. Therefore, as of June 30, 2008 and December 31, 2007 we believe
that we qualified as a REIT under the Code.

         We at all times intend to conduct our business so as not to become
regulated as an investment company under the Investment Company Act of 1940, or
the Investment Company Act. If we were to become regulated as an investment
company, then 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 and at least 80% of our
assets in qualifying interests plus other real estate related assets. In
addition, unless certain mortgage securities represent all the certificates
issued with respect to an underlying pool of mortgages, the Mortgage-Backed
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 calculate that as of June 30, 2008 and December 31, 2007, we
were in compliance with this requirement.

                                       36


ITEM 3   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------

MARKET RISK
         Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which we are exposed is interest rate risk, which is
highly sensitive to many factors, including governmental monetary and tax
policies, domestic and international economic and political considerations and
other factors beyond our control. Changes in the general level of interest rates
can affect our net interest income, which is the difference between the interest
income earned on interest-earning assets and the interest expense incurred in
connection with our interest-bearing liabilities, by affecting the spread
between our interest-earning assets and interest-bearing liabilities. Changes in
the level of interest rates also can affect the value of our Mortgage-Backed
Securities and our ability to realize gains from the sale of these assets. We
may utilize a variety of financial instruments, including interest rate swaps,
caps, floors, inverse floaters and other interest rate exchange contracts, in
order to limit the effects of interest rates on our operations. When we use
these types of derivatives to hedge the risk of interest-earning assets or
interest-bearing liabilities, we may be subject to certain risks, including the
risk that losses on a hedge position will reduce the funds available for
payments to holders of securities and that the losses may exceed the amount we
invested in the instruments.

         Our profitability and the value of our portfolio (including interest
rate swaps) may be adversely affected during any period as a result of changing
interest rates. The following table quantifies the potential changes in net
interest income, portfolio value should interest rates go up or down 25, 50, and
75 basis points, assuming the yield curves of the rate shocks will be parallel
to each other and the current yield curve. All changes in income and value are
measured as percentage changes from the projected net interest income and
portfolio value at the base interest rate scenario. The base interest rate
scenario assumes interest rates at June 30, 2008 and various estimates regarding
prepayment and all activities are made at each level of rate shock. Actual
results could differ significantly from these estimates.


                                                                                          
                                                                                   Projected Percentage Change in
                                            Projected Percentage Change in         Portfolio Value, with Effect of
        Change in Interest Rate                   Net Interest Income                    Interest Rate Swaps
----------------------------------------------------------------------------------------------------------------------

-75 Basis Points                                         6.67%                                  1.32%
-50 Basis Points                                         4.03%                                  1.32%
-25 Basis Points                                         1.55%                                  1.19%
Base Interest Rate                                         -                                      -
+25 Basis Points                                        (2.72%)                                 0.50%
+50 Basis Points                                        (5.60%)                                (0.05%)
+75 Basis Points                                        (8.49%)                                (0.74%)


ASSET AND LIABILITY MANAGEMENT
         Asset and liability management is concerned with the timing and
magnitude of the repricing of assets and liabilities. We attempt to control
risks associated with interest rate movements. Methods for evaluating interest
rate risk include an analysis of our interest rate sensitivity "gap", which is
the difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category.
         The following table sets forth the estimated maturity or repricing of
our interest-earning assets and interest-bearing liabilities at June 30, 2008.
The amounts of assets and liabilities shown within a particular period were
determined in accordance with the contractual terms of the assets and
liabilities, except adjustable-rate loans, and securities are included in the
period in which their interest rates are first scheduled to adjust and not in
the period in which they mature and does include the effect of the interest rate
swaps. The interest rate sensitivity of our assets and liabilities in the table
could vary substantially based on actual prepayment experience.

                                       37



                                                                                                         

                                                                                                   More than 1
                                                                                                    Year to 3  3 Years
                                                   Within 3 Months            4-12 Months             Years     and Over   Total
                                                                               (dollars in thousands)
                                                 -----------------------------------------------------------------------------------
Rate Sensitive Assets:
 Investment Securities (Principal)               $        6,557,474     $1,812,219  $   8,399,008  $41,535,977          $ 58,304,678
 Cash Equivalents                                         1,462,737              -              -            -             1,462,737
 Reverse Repurchase Agreements                               49,964              -              -            -                49,964
                                                 -----------------------------------------------------------------------------------
  Total Rate Sensitive Assets                             8,070,175      1,812,219      8,399,008   41,535,977            59,817,379

Rate Sensitive Liabilities:
  Repurchase Agreements,
    with the effect of swaps                             26,988,463      2,967,550     13,452,300    8,431,350            51,839,663
                                                 -----------------------------------------------------------------------------------

Interest rate sensitivity gap                          ($18,918,288)   ($1,155,331)   ($5,053,292) $33,104,627          $  7,977,716
                                                 ===================================================================================

Cumulative rate sensitivity gap                        ($18,918,288)  ($20,073,619)  ($25,126,911)  $7,977,716
                                                 =======================================================================

Cumulative interest rate sensitivity gap as a
 percentage of total rate-sensitive assets                      (32%)          (34%)          (43%)         14 %
                                                 =======================================================================




        Our analysis of risks is based on management's experience, estimates,
models and assumptions. These analyses rely on models which utilize estimates of
fair value and interest rate sensitivity. Actual economic conditions or
implementation of investment decisions by our management may produce results
that differ significantly from the estimates and assumptions used in our models
and the projected results shown in the above tables and in this report. These
analyses contain certain forward-looking statements and are subject to the safe
harbor statement set forth under the heading, "Special Note Regarding
Forward-Looking Statements."

                                       38


ITEM 4.       CONTROLS AND PROCEDURES


         Our management, including our Chief Executive Officer (the "CEO") and
Chief Financial Officer (the "CFO"), reviewed and evaluated the effectiveness of
the design and operation of our disclosure controls and procedures (as defined
in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act) as of the end of
the period covered by this quarterly report. Based on that review and
evaluation, the CEO and CFO have concluded that our current disclosure controls
and procedures, as designed and implemented, (1) were effective in ensuring that
information regarding the Company and its subsidiaries is made known to our
management, including our CEO and CFO, by our employees, as appropriate to allow
timely decisions regarding required disclosure and (2) were effective in
providing reasonable assurance that information the Company must disclose in its
periodic reports under the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods prescribed by the SEC's rules
and forms. There have been no changes in our internal control over financial
reporting that occurred during the last fiscal quarter that have materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.


                                       39


PART II. OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

         From time to time, we are involved in various claims and legal actions
arising in the ordinary course of business. In the opinion of management, the
ultimate disposition of these matters will not have a material adverse effect on
our consolidated financial statements.

Item 1A. RISK FACTORS

         In addition to the other information set forth in this report, you
should carefully consider the factors discussed in Part I, "Item 1A. Risk
Factors" in our Annual Report on Form 10-K for the year ended December 31, 2007,
which could materially affect our business, financial condition or future
results. The materialization of any risks and uncertainties identified in our
forward looking statements contained in this report together with those
previously disclosed in the Form 10-K or those that are presently unforeseen
could result in significant adverse effects on our financial condition, results
of operations and cash flows. See Item 2. "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Special Note Regarding
Forward Looking Statements" in this quarterly report on Form 10-Q. The
information presented below updates and should be read in conjunction with the
risk factors and information disclosed in that Form 10-K.

         AGENCY MORTGAGE-BACKED SECURITIES THAT ARE GUARANTEED BY FNMA AND FHLMC
ARE SUBJECT TO THE RISK THAT THESE U.S. GOVERNMENT-SPONSORED ENTITIES MAY NOT BE
ABLE TO FULLY SATISFY THEIR GUARANTEE OBLIGATIONS, WHICH MAY ADVERSELY AFFECT
THE VALUE OF OUR INVESTMENT PORTFOLIO AND OUR ABILITY TO SELL OR FINANCE THESE
SECURITIES.

         The interest and principal payments we expect to receive on the
Mortgage-Backed Securities in which we intend to invest will be guaranteed by
FNMA, FHLMC, or GNMA. Unlike the GNMA certificates in which we may invest, the
principal and interest on securities issued by FNMA and FHLMC are not guaranteed
by the U.S. Government. All the Mortgage-Backed Securities in which we invest
depend on a steady stream of payments on the mortgages underlying the
securities. The recent economic challenges in the residential mortgage market
have affected the financial results of FNMA and FHLMC. and may continue to do
so. FNMA recently stated that it expects severe weakness in the housing market
to continue in 2008. If FNMA and FHLMC continue to suffer significant losses,
their ability to honor their respective Mortgage-Backed Securities guarantees
may be adversely affected. Further, any actual or perceived financial challenges
at either FNMA or FHLMC could cause the rating agencies to downgrade the
corporate credit ratings of FNMA or FHLMC.

         Any failure to honor guarantees on Mortgage-Backed Securities by FNMA
or FHLMC or any downgrade of securities issued by FNMA or FHLMC by the rating
agencies could cause a significant decline in the cash flow from, and the value
of, any Mortgage-Backed Securities we may own and the market for these
securities may be adversely affected for a significant period of time. We may be
unable to sell or finance Mortgage-Backed Securities on favorable terms or at
all and our financial position and results of operations could be adversely
affected.

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

     (a)  The annual meeting of stockholders of Annaly Capital Management, Inc.
          was held on May 20, 2008.

     (b)  All Class III director nominees were elected.



                                                                                
                  Director                       Votes Received               Votes Withheld
--------------------------------------- ---------------------------- ----------------------------
      Michael A.J. Farrell                              329,091,414                   59,680,024
      Jonathan D. Green                                 333,188,356                   55,585,082
      John A. Lambiase                                  324,344,675                   64,428,763


                                       40


               The continuing directors of the Company are Wellington J.
Denahan-Norris, Donnell A. Segalas, Kevin P. Brady, E. Wayne Nordberg and
Michael Haylon.  Mr. Haylon was appointed to the Board of Directors on June 13,
2008.

(c)  In addition to the election of the Class III directors, the ratification of
     the appointment of Deloitte & Touche LLP as our independent registered
     public accounting firm for 2008 was approved.


                                                                                 

                                                   Votes Cast
                                    ---------------------------------------------
                                                 For                  Against             Abstain
                                    -----------------------------------------------------------------
      Ratification of the
      appointment of independent
      registered public
      accounting firm for 2008                  383,655,691            4,871,137             246,340


      Proposals and Vote Tabulations

(d)  A special meeting of shareholders was held on April 21, 2008 to consider
     and vote on an amendment of our charter to increase the number of
     authorized shares to 1,000,000,000 shares. The proposal was approved as
     follows:


                                                                                 

                                                      Votes Cast
                                    ---------------------------------------------
                                                 For                  Against             Abstain
                                    -----------------------------------------------------------------
      Proposal to amend our
      charter to increase the
      number of authorized shares
      to 1,000,000,000 shares                   340,435,072           36,866,438             978,545



Item 6.  EXHIBITS

Exhibits:

The exhibits required by this item are set forth on the Exhibit Index attached
hereto.

                                  EXHIBIT INDEX
Exhibit
Number    Exhibit Description

3.1       Articles of Amendment and Restatement of the Articles of Incorporation
          of the Registrant (incorporated by reference to Exhibit 3.2 to the
          Registrant's Registration Statement on Form S-11 (Registration No.
          333-32913) filed with the Securities and Exchange Commission on August
          5, 1997).
3.2       Articles of Amendment of the Articles of Incorporation of the
          Registrant (incorporated by reference to Exhibit 3.1 of the
          Registrant's Registration Statement on Form S-3 (Registration
          Statement 333-74618) filed with the Securities and Exchange Commission
          on June 12, 2002).
3.3       Articles of Amendment of the Articles of Incorporation of the
          Registrant (incorporated by reference to Exhibit 3.1 of the
          Registrant's Form 8-K (filed with the Securities and Exchange
          Commission on August 3, 2006).
3.4       Articles of Amendment of the Registrant.
3.5       Form of Articles Supplementary designating the Registrant's 7.875%
          Series A Cumulative Redeemable Preferred Stock, liquidation preference
          $25.00 per share (incorporated by reference to Exhibit 3.3 to the
          Registrant's 8-A filed April 1, 2004).

                                       41


3.6       Articles Supplementary of the Registrant's designating an additional
          2,750,000 shares of the Company's 7.875% Series A Cumulative
          Redeemable Preferred Stock, as filed with the State Department of
          Assessments and Taxation of Maryland on October 15, 2004 (incorporated
          by reference to Exhibit 3.2 to the Registrant's 8-K filed October 4,
          2004).
3.7       Articles Supplementary designating the Registrant's 6% Series B
          Cumulative Convertible Preferred Stock, liquidation preference $25.00
          per share (incorporated by reference to Exhibit 3.1 to the
          Registrant's 8-K filed April 10, 2006).
3.8       Bylaws of the Registrant, as amended (incorporated by reference to
          Exhibit 3.3 to the Registrant's Registration Statement on Form S-11
          (Registration No. 333-32913) filed with the Securities and Exchange
          Commission on August 5, 1997).
4.1       Specimen Common Stock Certificate (incorporated by reference to
          Exhibit 4.1 to Amendment No. 1 to the Registrant's Registration
          Statement on Form S-11 (Registration No. 333-32913) filed with the
          Securities and Exchange Commission on September 17, 1997).
4.2       Specimen Preferred Stock Certificate (incorporated by reference to
          Exhibit 4.2 to the Registrant's Registration Statement on Form S-3
          (Registration No. 333-74618) filed with the Securities and Exchange
          Commission on December 5, 2001).
4.3       Specimen Series A Preferred Stock Certificate (incorporated by
          reference to Exhibit 4.1 of the Registrant's Registration Statement on
          Form 8-A filed with the SEC on April 1, 2004).
4.4       Specimen Series B Preferred Stock Certificate (incorporated by
          reference to Exhibit 4.1 to the Registrant's Form 8-K filed with the
          Securities and Exchange Commission on April 10, 2006).
31.1      Certification of Michael A.J. Farrell, Chairman, Chief Executive
          Officer, and President of the Registrant, pursuant to 18 U.S.C.
          Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley
          Act of 2002.
31.2      Certification of Kathryn F. Fagan, Chief Financial Officer and
          Treasurer of the Registrant, pursuant to 18 U.S.C. Section 1350 as
          adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1      Certification of Michael A.J. Farrell, Chairman, Chief Executive
          Officer, and President of the Registrant, pursuant to 18 U.S.C.
          Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
          Act of 2002.
32.2      Certification of Kathryn F. Fagan, Chief Financial Officer and
          Treasurer of the Registrant, pursuant to 18 U.S.C. Section 1350 as
          adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

                                       42



SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                               ANNALY CAPITAL MANAGEMENT, INC.

Dated:   August 8, 2008        By: /s/ Michael A.J. Farrell
                                  -------------------------
                                  Michael A.J. Farrell
                                 (Chairman of the Board, Chief Executive
                                  Officer, President and authorized officer of
                                  registrant)

Dated:    August 8, 2008      By: /s/ Kathryn F. Fagan
                                 ---------------------
                                 Kathryn F. Fagan
                                (Chief Financial Officer and Treasurer and
                                 principal financial and chief accounting
                                 officer)

                                       43