SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K


                                   (MARK ONE)

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

                  FOR THE FISCAL YEAR ENDED: DECEMBER 31, 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 of                   (I.R.S. Employer
  incorporation of organization)                 Identification Number)

                     1211 Avenue of the Americas, Suite 2902
                            New York, New York 10036
               (Address of Principal Executive Offices) (Zip Code)

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

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


                                                           
Title of Each Class                                           Name of Each Exchange on Which Registered

Common Stock, par value $.01 per share                                 New York Stock Exchange

7.875% Series A Cumulative Redeemable Preferred Stock                  New York Stock Exchange

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


         None.

Indicate by check mark whether the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes X  No
                                                          --
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.  Yes  No  X
                                                              --

                                       1


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

                                                               Yes X  No
                                                                   --    --

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

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer or a smaller reporting company.
See definition of "accelerated filer and large accelerated filer" in Rule 12b-2
of the Exchange Act. (Check one):



                                                              
 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 Act). Yes   No X.
                                      --    --
At June 30, 2008, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $8,306,036,131.

The number of shares of the Registrant's Common Stock outstanding on February
25, 2009 was 544,290,086.

                       Documents Incorporated by Reference


The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2008. Portions of such proxy statement are incorporated by reference into Part
III of this Form 10-K.


                                       2


                         ANNALY CAPITAL MANAGEMENT, INC.
                          2008 FORM 10-K ANNUAL REPORT
                                TABLE OF CONTENTS




                                                                                                     
                                     PART I
                                                                                                         PAGE


ITEM 1.           BUSINESS                                                                                 1

ITEM 1A.          RISK FACTORS                                                                            17

ITEM 1B.          UNRESOLVED STAFF COMMENTS                                                               28

ITEM 2.           PROPERTIES                                                                              28

ITEM 3.           LEGAL PROCEEDINGS                                                                       28

ITEM 4.           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                     28

                                     PART II

ITEM 5.           MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
                  STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES                           29

ITEM 6.           SELECTED FINANCIAL DATA                                                                 31

ITEM 7.           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                  RESULTS OF OPERATIONS                                                                   33

ITEM 7A.          QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                              52

ITEM 8.           FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                             54

ITEM 9.           CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                  FINANCIAL DISCLOSURE                                                                    54

ITEM 9A.          CONTROLS AND PROCEDURES                                                                 54

ITEM 9B.          OTHER INFORMATION                                                                       55

                                    PART III

ITEM 10.          DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                  55

ITEM 11.          EXECUTIVE COMPENSATION                                                                  55

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
                  RELATED STOCKHOLDER MATTERS                                                             55

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
                  INDEPENDENCE                                                                            55

ITEM 14.          PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                  55

                                     PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                                       56
EXHIBIT INDEX                                                                                             56
FINANCIAL STATEMENTS                                                                                      F-1

SIGNATURES                                                                                                II-1



                                       i


                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         Certain statements contained in this annual 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 the Private
Securities Litigation Reform Act of 1995. 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:

         o    changes in interest rates,

         o    changes in the yield curve,

         o    changes in prepayment rates,

         o    the availability of mortgage-backed securities and other
              securities for purchase,

         o    the availability of financing,

         o    changes in the market value of our assets,

         o    changes in business conditions and the general economy,

         o    changes in government regulations affecting our business,

         o    our ability to maintain our qualification as a REIT for federal
              income tax purposes,

         o    risks associated with the investment advisory business of our
              wholly owned subsidiaries, including:

              o   the removal by clients of assets managed,

              o   their regulatory requirements, and

              o   competition in the investment advisory business and

         o    risks associated with the broker-dealer business of our
              subsidiary.

For a discussion of the risks and uncertainties which could cause actual results
to differ from those contained in the forward-looking statements, please see the
information under the caption "Risk Factors" described in this Form 10-K. 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.


                                       ii


                                     PART I
ITEM 1.  BUSINESS
-----------------

                                   THE COMPANY

         Background

         Annaly Capital Management, Inc. owns, manages, and finances a portfolio
of investment securities, including mortgage pass-through certificates,
collateralized mortgage obligations (or CMOs), agency callable debentures, and
other securities representing interests in or obligations backed by pools of
mortgage loans. 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 cost of borrowings to finance our acquisition
of investment securities. We are a Maryland corporation that commenced
operations on February 18, 1997. We are self-advised and self-managed.

         We acquired Fixed Income Discount Advisory Company (or FIDAC) on June
4, 2004 and Merganser Capital Management, Inc. (or Merganser) on October 31,
2008. Both are registered investment advisors and are taxable REIT subsidiaries.
FIDAC and Merganser manage a number of investment vehicles and separate accounts
for which they earn fee income. Our subsidiary, RCap Securities Inc. (or RCap),
which will operate as a broker-dealer, was granted membership in the Financial
Industry Regulatory Authority (or FINRA) in January 2009. RCap is a taxable REIT
subsidiary.

         We have elected and believe that we are organized and have operated in
a manner that qualifies us to be taxed as a real estate investment trust (or
REIT) under the Internal Revenue Code of 1986, as amended (or the Code). If we
qualify for taxation as a REIT, we generally will not be subject to federal
income tax on our taxable income that is distributed to our stockholders.
Therefore, substantially all of our assets, other than FIDAC, Merganser and
RCap, our taxable REIT subsidiaries, consist of qualified REIT real estate
assets (of the type described in Section 856(c)(5)(B) of the Code). We have
financed our purchases of investment securities with the net proceeds of equity
offerings and borrowings under repurchase agreements whose interest rates adjust
based on changes in short-term market interest rates.

         As used herein, "Annaly," the "Company," "we," "our" and similar terms
refer to Annaly Capital Management, Inc., unless the context indicates
otherwise.

         Assets

         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 but
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.

         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.



                                       1


         To date, all of the mortgage-backed securities that we have acquired
have been agency mortgage-backed securities which, although not rated, carry an
implied "AAA" rating. Agency mortgage-backed securities are mortgage-backed
securities for which a government agency or federally chartered corporation,
such as the Federal Home Loan Mortgage Corporation ("FHLMC" or "Freddie Mac"),
the Federal National Mortgage Association ("FNMA" or "Fannie Mae"), or the
Government National Mortgage Association ("GNMA" or "Ginnie Mae"), guarantees
payments of principal or interest on the securities. Agency mortgage-backed
securities consist of agency pass-through certificates and CMOs issued or
guaranteed by an agency. Pass-through certificates provide for a pass-through of
the monthly interest and principal payments made by the borrowers on the
underlying mortgage loans. CMOs divide a pool of mortgage loans into multiple
tranches with different principal and interest payment characteristics.

         At December 31, 2008, approximately 28% of our investment securities
were adjustable-rate pass-through certificates, approximately 64% of our
investment securities were fixed-rate pass-through certificates or CMOs, and
approximately 8% of our investment securities were CMO floaters. Our
adjustable-rate pass-through certificates are backed by adjustable-rate mortgage
loans and have coupon rates which adjust over time, subject to interest rate
caps and lag periods, in conjunction with changes in short-term interest rates.
Our fixed-rate pass-through certificates are backed by fixed-rate mortgage loans
and have coupon rates which do not adjust over time. CMO floaters are tranches
of mortgage-backed securities where the interest rate adjusts in conjunction
with changes in short-term interest rates. CMO floaters may be backed by
fixed-rate mortgage loans or, less often, by adjustable-rate mortgage loans. In
this Form 10-K, except where the context indicates otherwise, we use the term
"adjustable-rate securities" or "adjustable-rate investment securities" to refer
to adjustable-rate pass-through certificates, CMO floaters, and Agency
debentures. At December 31, 2008, the weighted average yield on our portfolio of
earning assets was 5.03% and the weighted average term to next rate adjustment
on adjustable rate securities was 36 months.

         We may also invest in Federal Home Loan Bank ("FHLB"), FHLMC, and FNMA
debentures. We refer to the mortgage-backed securities and agency debentures
collectively as "Investment Securities." We intend to continue to invest in
adjustable-rate pass-through certificates, fixed-rate mortgage-backed
securities, CMO floaters, and Agency debentures. We may also invest on a limited
basis in mortgage derivative securities such as interest rate swaps, and other
derivative securities which 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. We have not and will not invest in real estate mortgage
investment conduit ("REMIC") residuals and other CMO residuals.

         Borrowings

         We attempt to structure our borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate basis,
correspond generally to the interest rate adjustment indices and periods of our
adjustable-rate investment securities. However, periodic rate adjustments on our
borrowings are generally more frequent than rate adjustments on our investment
securities. At December 31, 2008, the weighted average cost of funds for all of
our borrowings was 4.08%, with the effect of swaps, the weighted average
original term to maturity was 287 days, and the weighted average term to next
rate adjustment of these borrowings was 238 days.

         We generally expect to maintain a ratio of debt-to-equity of between
8:1 and 12:1, although the ratio may vary from time to time depending upon
market conditions and other factors that our management deems relevant. For
purposes of calculating this ratio, our equity is equal to the value of our
investment portfolio on a mark-to-market basis, less the book value of our
obligations under repurchase agreements and other collateralized borrowings. At
December 31, 2008, our ratio of debt-to-equity was 6.4:1.

         Hedging

         To the extent consistent with our election to qualify as a REIT, we
enter into hedging transactions to attempt to protect our investment securities
and related borrowings against the effects of major interest rate changes. This
hedging would be used to mitigate declines in the market value of our investment
securities during periods of increasing or decreasing interest rates and to
limit or cap the interest rates on our borrowings. These transactions would be
entered into solely for the purpose of hedging interest rate or prepayment risk
and not for speculative purposes. In connection with our interest rate risk
management strategy, we hedge a portion of our interest rate risk by entering
into derivative financial instrument contracts. As of December 31, 2008, we had
$17.6 billion in interest rate swaps, which in effect modify the cash flows on
repurchase agreements.

                                       2


         Compliance with REIT and Investment Company Requirements

         We constantly monitor our investment securities and the income from
these securities and, to the extent we enter into hedging transactions, we
monitor income from our hedging transactions as well, so as to ensure at all
times that we maintain our qualification as a REIT and our exemption from
registration under the Investment Company Act of 1940, as amended.

         Executive Officers of the Company

         The following table sets forth certain information as of February 25,
2009 concerning our executive officers:


                                       

               Name                       Age                        Position held with the Company
               ----                       ---                        ------------------------------

Michael A.J. Farrell                      57        Chairman of the Board, Chief Executive Officer and President

Wellington J. Denahan-Norris              45        Vice Chairman of the Board, Chief Investment Officer and Chief
                                                    Operating Officer

Kathryn F. Fagan                          42        Chief Financial Officer and Treasurer

R. Nicholas Singh                         49        Executive Vice President, General Counsel, Secretary and Chief
                                                    Compliance Officer

James P. Fortescue                        35        Managing Director and Head of Liabilities

Kristopher Konrad                         34        Managing Director and  Co-Head Portfolio Management

Rose-Marie Lyght                          35        Managing Director and  Co-Head Portfolio Management

Jeremy Diamond                            45        Managing Director

Ronald Kazel                              41        Managing Director


         Mr. Farrell and Ms. Denahan-Norris have an average of 25 years
experience in the investment banking and investment management industries where,
in various capacities, they have each managed portfolios of mortgage-backed
securities, arranged collateralized borrowings and utilized hedging techniques
to mitigate interest rate and other risk within fixed-income portfolios. Ms.
Fagan is a certified public accountant and, prior to becoming our Chief
Financial Officer and Treasurer, served as Chief Financial Officer and
Controller of a publicly owned savings and loan association. Mr. Singh joined
Annaly in February 2005. Prior to that, he was a partner in the law firm of
McKee Nelson LLP. Mr. Fortescue joined Annaly in 1997. Mr. Konrad joined Annaly
in 1997. Ms. Lyght joined Annaly in April 1999. Mr. Diamond joined Annaly in
March 2002. Mr. Kazel joined Annaly in December 2001. We and our subsidiaries
had 65 full-time employees at December 31, 2008.

         Distributions

        To maintain our qualification as a REIT, we must distribute
substantially all of our taxable income to our stockholders for each year. We
have done this in the past and intend to continue to do so in the future. We
also have declared and paid regular quarterly dividends in the past and intend
to do so in the future. We have adopted a dividend reinvestment plan to enable
holders of common stock to reinvest dividends automatically in additional shares
of common stock.

                                       3


                                BUSINESS STRATEGY

General

         Our principal business objective is to generate income for distribution
to our stockholders, primarily from the net cash flows on our investment
securities. Our net cash flows result primarily from the difference between the
interest income on our investment securities and borrowing costs of our
repurchase agreements and from dividends we receive from our taxable REIT
subsidiaries. To achieve our business objective and generate dividend yields,
our strategy is:

         |X|  to purchase mortgage-backed securities, the majority of which we
              expect to have adjustable interest rates based on changes in
              short-term market interest rates;

         |X|  to acquire mortgage-backed securities that we believe:

              -   we have the necessary expertise to evaluate and manage;

              -   we can readily finance;

              -   are consistent with our balance sheet guidelines and risk
                  management objectives; and

              -   provide attractive investment returns in a range of scenarios;

         |X|  to finance purchases of mortgage-backed securities with the
              proceeds of equity offerings and, to the extent permitted by our
              capital investment policy, to utilize leverage to increase
              potential returns to stockholders through borrowings;

         |X|  to attempt to structure our borrowings to have interest rate
              adjustment indices and interest rate adjustment periods that, on
              an aggregate basis, generally correspond to the interest rate
              adjustment indices and interest rate adjustment periods of our
              adjustable-rate mortgage-backed securities;

         |X|  to seek to minimize prepayment risk by structuring a diversified
              portfolio with a variety of prepayment characteristics and through
              other means; and

         |X|  to issue new equity or debt and increase the size of our balance
              sheet when opportunities in the market for mortgage-backed
              securities are likely to allow growth in earnings per share.

         We believe we are able to obtain cost efficiencies through our
facilities-sharing arrangement with FIDAC and RCap and by virtue of our
management's experience in managing portfolios of mortgage-backed securities and
arranging collateralized borrowings. We will strive to become even more
cost-efficient over time by:

         |X|  seeking to raise additional capital from time to time in order to
              increase our ability to invest in mortgage-backed securities;

         |X|  striving to lower our effective borrowing costs by seeking direct
              funding with collateralized lenders, rather than using financial
              intermediaries, and investigating the possibility of using
              commercial paper and medium term note programs;

         |X|  improving the efficiency of our balance sheet structure by
              investigating the issuance of uncollateralized subordinated debt,
              preferred stock and other forms of capital; and

         |X|  utilizing information technology in our business, including
              improving our ability to monitor the performance of our investment
              securities and to lower our operating costs.

                                       4


Mortgage-Backed Securities

         General

         To date, all of the mortgage-backed securities that we have acquired
have been agency mortgage-backed securities which, although not rated, carry an
implied "AAA" rating. Agency mortgage-backed securities are mortgage-backed
securities where a government agency or federally chartered corporation, such as
FHLMC, FNMA or GNMA, guarantees payments of principal or interest on the
securities. Agency mortgage-backed securities consist of agency pass-through
certificates and CMOs issued or guaranteed by an agency.

         Even though to date we have only acquired mortgage backed securities
with an implied "AAA" rating, under our capital investment policy, we have the
ability to acquire securities of lower quality. Under our policy, at least 75%
of our total assets must be high quality mortgage-backed securities and
short-term investments. High quality securities are securities (1) that are
rated within one of the two highest rating categories by at least one of the
nationally recognized rating agencies, (2) that are unrated but are guaranteed
by the United States government or an agency of the United States government, or
(3) that are unrated or whose ratings have not been updated but that our
management determines are of comparable quality to rated high quality
mortgage-backed securities.

         Under our capital investment policy, the remainder of our assets,
comprising not more than 25% of total assets, may consist of mortgage-backed
securities and 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 S&P or the equivalent by another nationally recognized rating
organization) 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. We
intend to structure our portfolio to maintain a minimum weighted average rating
(including our deemed comparable ratings for unrated mortgage-backed securities)
of our mortgage-backed securities of at least single "A" under the S&P rating
system and at the comparable level under the other rating systems.

         Our allocation of investments among the permitted investment types may
vary from time-to-time based on the evaluation by our board of directors of
economic and market trends and our perception of the relative values available
from these types of investments, except that in no event will our investments
that are not high quality exceed 25% of our total assets.

         We intend to acquire only those mortgage-backed securities that we
believe we have the necessary expertise to evaluate and manage, that are
consistent with our balance sheet guidelines and risk management objectives and
that we believe we can readily finance. Since we generally hold the
mortgage-backed securities we acquire until maturity, we generally do not seek
to acquire assets whose investment returns are attractive in only a limited
range of scenarios. We believe that future interest rates and mortgage
prepayment rates are very difficult to predict. Therefore, we seek to acquire
mortgage-backed securities which we believe will provide acceptable returns over
a broad range of interest rate and prepayment scenarios.

         At December 31, 2008, our mortgage-backed securities consisted of
pass-through certificates and collateralized mortgage obligations issued or
guaranteed by FHLMC, FNMA or GNMA. We have not, and will not, invest in REMIC
residuals and other CMO residuals.

Recent Developments

         Recently, the government passed the Housing and Economic Recovery Act
of 2008. Fannie Mae and Freddie Mac have recently been placed into the
conservatorship of the Federal Housing Finance Agency, or FHFA, their federal
regulator, pursuant to its powers under The Federal Housing Finance Regulatory
Reform Act of 2008, a part of the Housing and Economic Recovery Act of 2008. As
the conservator of Fannie Mae and Freddie Mac, the FHFA controls and directs the
operations of Fannie Mae and Freddie Mac and may (1) take over the assets of and
operate Fannie Mae and Freddie Mac with all the powers of the shareholders, the
directors, and the officers of Fannie Mae and Freddie Mac and conduct all
business of Fannie Mae and Freddie Mac; (2) collect all obligations and money
due to Fannie Mae and Freddie Mac; (3) perform all functions of Fannie Mae and
Freddie Mac which are consistent with the conservator's appointment; (4)
preserve and conserve the assets and property of Fannie Mae and Freddie Mac; and
(5) contract for assistance in fulfilling any function, activity, action or duty
of the conservator.

                                       5


         In addition to FHFA becoming the conservator of Fannie Mae and Freddie
Mac, (i) the U.S. Department of Treasury and FHFA have entered into preferred
stock purchase agreements between the U.S. Department of Treasury and Fannie Mae
and Freddie Mac pursuant to which the U.S. Department of Treasury will ensure
that each of Fannie Mae and Freddie Mac maintains a positive net worth; (ii) the
U.S. Department of Treasury has established a new secured lending credit
facility which will be available to Fannie Mae, Freddie Mac, and the Federal
Home Loan Banks, which is intended to serve as a liquidity backstop, which will
be available until December 2009; and (iii) the U.S. Department of Treasury has
initiated a temporary program to purchase RMBS issued by Fannie Mae and Freddie
Mac.

Description of Mortgage-Backed Securities

         The mortgage-backed securities that we acquire provide funds for
mortgage loans made primarily to residential homeowners. Our securities
generally represent interests in pools of mortgage loans made by savings and
loan institutions, mortgage bankers, commercial banks and other mortgage
lenders. These pools of mortgage loans are assembled for sale to investors (like
us) by various government, government-related and private organizations.

         Mortgage-backed securities differ from other forms of traditional debt
securities, which normally provide for periodic payments of interest in fixed
amounts with principal payments at maturity or on specified call dates. Instead,
mortgage-backed securities provide for a monthly payment, which consists of both
interest and principal. In effect, these payments are a "pass-through" of the
monthly interest and principal payments made by the individual borrower on the
mortgage loans, net of any fees paid to the issuer or guarantor of the
securities. Additional payments result from prepayments of principal upon the
sale, refinancing or foreclosure of the underlying residential property, net of
fees or costs which may be incurred. Some mortgage-backed securities, such as
securities issued by GNMA, are described as "modified pass-through." These
securities entitle the holder to receive all interest and principal payments
owed on the mortgage pool, net of certain fees, regardless of whether the
mortgagors actually make mortgage payments when due.

         The investment characteristics of pass-through mortgage-backed
securities differ from those of traditional fixed-income securities. The major
differences include the payment of interest and principal on the mortgage-backed
securities on a more frequent schedule, as described above, and the possibility
that principal may be prepaid at any time due to prepayments on the underlying
mortgage loans or other assets. These differences can result in significantly
greater price and yield volatility than is the case with traditional
fixed-income securities.

         Various factors affect the rate at which mortgage prepayments occur,
including changes in interest rates, general economic conditions, the age of the
mortgage loan, the location of the property and other social and demographic
conditions. Generally prepayments on mortgage-backed securities increase during
periods of falling mortgage interest rates and decrease during periods of rising
mortgage interest rates. We may reinvest prepayments at a yield that is higher
or lower than the yield on the prepaid investment, thus affecting the weighted
average yield of our investments.

         To the extent mortgage-backed securities are purchased at a premium,
faster than expected prepayments result in a faster than expected amortization
of the premium paid. Conversely, if these securities were purchased at a
discount, faster than expected prepayments accelerate our recognition of income.

         CMOs may allow for shifting of prepayment risk from slower-paying
tranches to faster-paying tranches. This is in contrast to mortgage pass-through
certificates where all investors share equally in all payments, including all
prepayments, on the underlying mortgages.

                                       6


         FHLMC Certificates

         FHLMC is a privately-owned government-sponsored enterprise created
pursuant to an Act of Congress on July 24, 1970. The principal activity of FHLMC
currently consists of the purchase of mortgage loans or participation interests
in mortgage loans and the resale of the loans and participations in the form of
guaranteed mortgage-backed securities. FHLMC guarantees to each holder of FHLMC
certificates the timely payment of interest at the applicable pass-through rate
and ultimate collection of all principal on the holder's pro rata share of the
unpaid principal balance of the related mortgage loans, but does not guarantee
the timely payment of scheduled principal of the underlying mortgage loans. The
obligations of FHLMC under its guarantees are solely those of FHLMC and are not
backed by the full faith and credit of the United States. If FHLMC were unable
to satisfy these obligations, distributions to holders of FHLMC certificates
would consist solely of payments and other recoveries on the underlying mortgage
loans and, accordingly, defaults and delinquencies on the underlying mortgage
loans would adversely affect monthly distributions to holders of FHLMC
certificates.

         FHLMC certificates may be backed by pools of single-family mortgage
loans or multi-family mortgage loans. These underlying mortgage loans may have
original terms to maturity of up to 40 years. FHLMC certificates may be issued
under cash programs (composed of mortgage loans purchased from a number of
sellers) or guarantor programs (composed of mortgage loans acquired from one
seller in exchange for certificates representing interests in the mortgage loans
purchased).

         FHLMC certificates may pay interest at a fixed rate or an adjustable
rate. The interest rate paid on adjustable-rate FHLMC certificates ("FHLMC
ARMs") adjusts periodically within 60 days prior to the month in which the
interest rates on the underlying mortgage loans adjust. The interest rates paid
on certificates issued under FHLMC's standard ARM programs adjust in relation to
the Treasury index. Other specified indices used in FHLMC ARM programs include
the 11th District Cost of Funds Index published by the Federal Home Loan Bank of
San Francisco, LIBOR and other indices. Interest rates paid on fully-indexed
FHLMC ARM certificates equal the applicable index rate plus a specified number
of basis points. The majority of series of FHLMC ARM certificates issued to date
have evidenced pools of mortgage loans with monthly, semi-annual or annual
interest adjustments. Adjustments in the interest rates paid are generally
limited to an annual increase or decrease of either 100 or 200 basis points and
to a lifetime cap of 500 or 600 basis points over the initial interest rate.
Certain FHLMC programs include mortgage loans which allow the borrower to
convert the adjustable mortgage interest rate to a fixed rate. Adjustable-rate
mortgages which are converted into fixed-rate mortgage loans are repurchased by
FHLMC or by the seller of the loan to FHLMC at the unpaid principal balance of
the loan plus accrued interest to the due date of the last adjustable rate
interest payment.

         FNMA Certificates

         FNMA is a privately-owned, federally-chartered corporation organized
and existing under the Federal National Mortgage Association Charter Act. FNMA
provides funds to the mortgage market primarily by purchasing home mortgage
loans from local lenders, thereby replenishing their funds for additional
lending. FNMA guarantees to the registered holder of a FNMA certificate that it
will distribute amounts representing scheduled principal and interest on the
mortgage loans in the pool underlying the FNMA certificate, whether or not
received, and the full principal amount of any such mortgage loan foreclosed or
otherwise finally liquidated, whether or not the principal amount is actually
received. The obligations of FNMA under its guarantees are solely those of FNMA
and are not backed by the full faith and credit of the United States. If FNMA
were unable to satisfy its obligations, distributions to holders of FNMA
certificates would consist solely of payments and other recoveries on the
underlying mortgage loans and, accordingly, defaults and delinquencies on the
underlying mortgage loans would adversely affect monthly distributions to
holders of FNMA.

         FNMA certificates may be backed by pools of single-family or
multi-family mortgage loans. The original term to maturity of any such mortgage
loan generally does not exceed 40 years. FNMA certificates may pay interest at a
fixed rate or an adjustable rate. Each series of FNMA ARM certificates bears an
initial interest rate and margin tied to an index based on all loans in the
related pool, less a fixed percentage representing servicing compensation and
FNMA's guarantee fee. The specified index used in different series has included
the Treasury Index, the 11th District Cost of Funds Index published by the
Federal Home Loan Bank of San Francisco, LIBOR and other indices. Interest rates
paid on fully-indexed FNMA ARM certificates equal the applicable index rate plus
a specified number of basis points. The majority of series of FNMA ARM
certificates issued to date have evidenced pools of mortgage loans with monthly,
semi-annual or annual interest rate adjustments. Adjustments in the interest
rates paid are generally limited to an annual increase or decrease of either 100
or 200 basis points and to a lifetime cap of 500 or 600 basis points over the
initial interest rate. Certain FNMA programs include mortgage loans which allow
the borrower to convert the adjustable mortgage interest rate of the ARM to a
fixed rate. Adjustable-rate mortgages which are converted into fixed-rate
mortgage loans are repurchased by FNMA or by the seller of the loans to FNMA at
the unpaid principal of the loan plus accrued interest to the due date of the
last adjustable rate interest payment. Adjustments to the interest rates on FNMA
ARM certificates are typically subject to lifetime caps and periodic rate or
payment caps.

                                       7


         GNMA Certificates

         GNMA is a wholly owned corporate instrumentality of the United States
within the Department of Housing and Urban Development ("HUD"). The National
Housing Act of 1934 authorizes GNMA to guarantee the timely payment of the
principal of and interest on certificates which represent an interest in a pool
of mortgages insured by the Federal Housing Administration ("FHA") or partially
guaranteed by the Department of Veterans Affairs and other loans eligible for
inclusion in mortgage pools underlying GNMA certificates. Section 306(g) of the
Housing Act provides that the full faith and credit of the United States is
pledged to the payment of all amounts which may be required to be paid under any
guaranty by GNMA.

         At present, most GNMA certificates are backed by single-family mortgage
loans. The interest rate paid on GNMA certificates may be a fixed rate or an
adjustable rate. The interest rate on GNMA certificates issued under GNMA's
standard ARM program adjusts annually in relation to the Treasury index.
Adjustments in the interest rate are generally limited to an annual increase or
decrease of 100 basis points and to a lifetime cap of 500 basis points over the
initial coupon rate.

         Single-Family and Multi-Family Privately-Issued Certificates

         Single-family and multi-family privately-issued certificates are
pass-through certificates that are not issued by one of the agencies and that
are backed by a pool of conventional single-family or multi-family mortgage
loans. These certificates are issued by originators of, investors in, and other
owners of mortgage loans, including savings and loan associations, savings
banks, commercial banks, mortgage banks, investment banks and special purpose
"conduit" subsidiaries of these institutions.

         While agency pass-through certificates are backed by the express
obligation or guarantee of one of the agencies, as described above,
privately-issued certificates are generally covered by one or more forms of
private (i.e., non-governmental) credit enhancements. These credit enhancements
provide an extra layer of loss coverage in the event that losses are incurred
upon foreclosure sales or other liquidations of underlying mortgaged properties
in amounts that exceed the equity holder's equity interest in the property.
Forms of credit enhancements include limited issuer guarantees, reserve funds,
private mortgage guaranty pool insurance, over-collateralization and
subordination.

         Subordination is a form of credit enhancement frequently used and
involves the issuance of classes of senior and subordinated mortgage-backed
securities. These classes are structured into a hierarchy to allocate losses on
the underlying mortgage loans and also for defining priority of rights to
payment of principal and interest. Typically, one or more classes of senior
securities are created which are rated in one of the two highest rating levels
by one or more nationally recognized rating agencies and which are supported by
one or more classes of mezzanine securities and subordinated securities that
bear losses on the underlying loans prior to the classes of senior securities.
Mezzanine securities, as used in this Form 10-K, refers to classes that are
rated below the two highest levels, but no lower than a single "B" rating under
the S&P rating system (or comparable level under other rating systems) and are
supported by one or more classes of subordinated securities which bear realized
losses prior to the classes of mezzanine securities. Subordinated securities, as
used in this Form 10-K, refers to any class that bears the "first loss" from
losses from underlying mortgage loans or that is rated below a single "B" level
(or, if unrated, we deem it to be below that level). In some cases, only classes
of senior securities and subordinated securities are issued. By adjusting the
priority of interest and principal payments on each class of a given series of
senior-subordinated mortgage-backed securities, issuers are able to create
classes of mortgage-backed securities with varying degrees of credit exposure,
prepayment exposure and potential total return, tailored to meet the needs of
sophisticated institutional investors.

                                       8


         Collateralized Mortgage Obligations and Multi-Class Pass-Through
         Securities

         We may also invest in CMOs and multi-class pass-through securities.
CMOs are debt obligations issued by special purpose entities that are secured by
mortgage loans or mortgage-backed certificates, including, in many cases,
certificates issued by government and government-related guarantors, including,
GNMA, FNMA and FHLMC, together with certain funds and other collateral.
Multi-class pass-through securities are equity interests in a trust composed of
mortgage loans or other mortgage-backed securities. Payments of principal and
interest on underlying collateral provide the funds to pay debt service on the
CMO or make scheduled distributions on the multi-class pass-through securities.
CMOs and multi-class pass-through securities may be issued by agencies or
instrumentalities of the U.S. Government or by private organizations. The
discussion of CMOs in the following paragraphs is similarly applicable to
multi-class pass-through securities.

         In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is issued at a
specific coupon rate (which, as discussed below, may be an adjustable rate
subject to a cap) and has a stated maturity or final distribution date.
Principal prepayments on collateral underlying a CMO may cause it to be retired
substantially earlier than the stated maturity or final distribution date.
Interest is paid or accrues on all classes of a CMO on a monthly, quarterly or
semi-annual basis. The principal and interest on underlying mortgages may be
allocated among the several classes of a series of a CMO in many ways. In a
common structure, payments of principal, including any principal prepayments, on
the underlying mortgages are applied to the classes of the series of a CMO in
the order of their respective stated maturities or final distribution dates, so
that no payment of principal will be made on any class of a CMO until all other
classes having an earlier stated maturity or final distribution date have been
paid in full.

         Other types of CMO issues include classes such as parallel pay CMOs,
some of which, such as planned amortization class CMOs ("PAC bonds"), provide
protection against prepayment uncertainty. Parallel pay CMOs are structured to
provide payments of principal on certain payment dates to more than one class.
These simultaneous payments are taken into account in calculating the stated
maturity date or final distribution date of each class which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC bonds generally require payment of a
specified amount of principal on each payment date so long as prepayment speeds
on the underlying collateral fall within a specified range.

         Other types of CMO issues include targeted amortization class CMOs (or
TAC bonds), which are similar to PAC bonds. While PAC bonds maintain their
amortization schedule within a specified range of prepayment speeds, TAC bonds
are generally targeted to a narrow range of prepayment speeds or a specified
prepayment speed. TAC bonds can provide protection against prepayment
uncertainty since cash flows generated from higher prepayments of the underlying
mortgage-related assets are applied to the various other pass-through tranches
so as to allow the TAC bonds to maintain their amortization schedule.

         A CMO may be subject to the issuer's right to redeem the CMO prior to
its stated maturity date, which may diminish the anticipated return on our
investment. Privately-issued CMOs are supported by private credit enhancements
similar to those used for privately-issued certificates and are often issued as
senior-subordinated mortgage-backed securities. We will only acquire CMOs or
multi-class pass-through certificates that constitute debt obligations or
beneficial ownership in grantor trusts holding mortgage loans, or regular
interests in REMICs, or that otherwise constitute qualified REIT real estate
assets under the Internal Revenue Code (provided that we have obtained a
favorable opinion of our tax advisor or a ruling from the IRS to that effect).

         Adjustable-Rate Mortgage Pass-Through Certificates and Floating Rate
         Mortgage-Backed Securities

         Some of the mortgage pass-through certificates we acquire are
adjustable-rate mortgage pass-through certificates. This means that their
interest rates may vary over time based upon changes in an objective index, such
as:

        o    LIBOR or the London Interbank Offered Rate.  The interest rate that
             banks in London offer for deposits in London of U.S. dollars.

        o    Treasury Index.  A monthly or weekly average yield of benchmark
             U.S. Treasury securities, as published by the Federal Reserve
             Board.

                                       9


        o    CD Rate. The weekly average of secondary market interest rates on
             six-month negotiable certificates of deposit, as published by the
             Federal Reserve Board.

These indices generally reflect short-term interest rates. The underlying
mortgages for adjustable-rate mortgage pass-through certificates are
adjustable-rate mortgage loans ("ARMs").

       We also acquire CMO floaters. One or more tranches of a CMO may have
coupon rates that reset periodically at a specified increment over an index such
as LIBOR. These adjustable-rate tranches are sometime known as CMO floaters and
may be backed by fixed or adjustable-rate mortgages.

       There are two main categories of indices for adjustable-rate mortgage
pass-through certificates and floaters: (1) those based on U.S. Treasury
securities, and (2) those derived from calculated measures such as a cost of
funds index or a moving average of mortgage rates. Commonly utilized indices
include the one-year Treasury note rate, the three-month Treasury bill rate, the
six-month Treasury bill rate, rates on long-term Treasury securities, the 11th
District Federal Home Loan Bank Costs of Funds Index, the National Median Cost
of Funds Index, one-month or three-month LIBOR, the prime rate of a specific
bank, or commercial paper rates. Some indices, such as the one-year Treasury
rate, closely mirror changes in market interest rate levels. Others, such as the
11th District Home Loan Bank Cost of Funds Index, tend to lag changes in market
interest rate levels. We seek to diversify our investments in adjustable-rate
mortgage pass-through certificates and floaters among a variety of indices and
reset periods so that we are not at any one time unduly exposed to the risk of
interest rate fluctuations. In selecting adjustable-rate mortgage pass-through
certificates and floaters for investment, we will also consider the liquidity of
the market for the different mortgage-backed securities.

       We believe that adjustable-rate mortgage pass-through certificates and
floaters are particularly well-suited to our investment objective of high
current income, consistent with modest volatility of net asset value, because
the value of adjustable-rate mortgage pass-through certificates and floaters
generally remains relatively stable as compared to traditional fixed-rate debt
securities paying comparable rates of interest. While the value of
adjustable-rate mortgage pass-through certificates and floaters, like other debt
securities, generally varies inversely with changes in market interest rates
(increasing in value during periods of declining interest rates and decreasing
in value during periods of increasing interest rates), the value of
adjustable-rate mortgage pass-through certificates and floaters should generally
be more resistant to price swings than other debt securities because the
interest rates on these securities move with market interest rates.

       Accordingly, as interest rates change, the value of our shares should be
more stable than the value of funds which invest primarily in securities backed
by fixed-rate mortgages or in other non-mortgage-backed debt securities, which
do not provide for adjustment in the interest rates in response to changes in
market interest rates.

       Adjustable-rate mortgage pass-through certificates and floaters typically
have caps, which limit the maximum amount by which the interest rate may be
increased or decreased at periodic intervals or over the life of the security.
To the extent that interest rates rise faster than the allowable caps on the
adjustable-rate mortgage pass-through certificates and floaters, these
securities will behave more like fixed-rate securities. Consequently, interest
rate increases in excess of caps can be expected to cause these securities to
behave more like traditional debt securities than adjustable-rate securities
and, accordingly, to decline in value to a greater extent than would be the case
in the absence of these caps.

       Adjustable-rate mortgage pass-through certificates and floaters, like
other mortgage-backed securities, differ from conventional bonds in that
principal is to be paid back over the life of the security rather than at
maturity. As a result, we receive monthly scheduled payments of principal and
interest on these securities and may receive unscheduled principal payments
representing prepayments on the underlying mortgages. When we reinvest the
payments and any unscheduled prepayments we receive, we may receive a rate of
interest on the reinvestment which is lower than the rate on the existing
security. For this reason, adjustable-rate mortgage pass-through certificates
and floaters are less effective than longer-term debt securities as a means of
"locking in" longer-term interest rates. Accordingly, adjustable-rate mortgage
pass-through certificates and floaters, while generally having less risk of
price decline during periods of rapidly rising interest rates than fixed-rate
mortgage-backed securities of comparable maturities, have less potential for
capital appreciation than fixed-rate securities during periods of declining
interest rates.

                                       10


       As in the case of fixed-rate mortgage-backed securities, to the extent
these securities are purchased at a premium, faster than expected prepayments
would accelerate our amortization of the premium. Conversely, if these
securities were purchased at a discount, faster than expected prepayments would
accelerate our recognition of income.

       As in the case of fixed-rate CMOs, floating-rate CMOs may allow for
shifting of prepayment risk from slower-paying tranches to faster-paying
tranches. This is in contrast to mortgage pass-through certificates where all
investors share equally in all payments, including all prepayments, on the
underlying mortgages.

       Other Floating Rate Instruments

       We may also invest in structured floating-rate notes issued or guaranteed
by government agencies, such as FNMA and FHLMC. These instruments are typically
structured to reflect an interest rate arbitrage (i.e., the difference between
the agency's cost of funds and the income stream from specified assets of the
agency) and their reset formulas may provide more attractive returns than other
floating rate instruments. The indices used to determine resets are the same as
those described above.

         Mortgage Loans

         As of December 31, 2008, we have not invested directly in mortgage
loans, but we may from time-to-time invest a small percentage of our assets
directly in single-family, multi-family or commercial mortgage loans. We expect
that the majority of these mortgage loans would be ARM pass-through
certificates. The interest rate on an ARM pass-through certificate is typically
tied to an index (such as LIBOR or the interest rate on Treasury bills), and is
adjustable periodically at specified intervals. These mortgage loans are
typically subject to lifetime interest rate caps and periodic interest rate or
payment caps. The acquisition of mortgage loans generally involves credit risk.
We may obtain credit enhancement to mitigate this risk; however, there can be no
assurances that we will be able to obtain credit enhancement or that credit
enhancement would mitigate the credit risk of the underlying mortgage loans.

Capital Investment Policy

         Asset Acquisitions

         Our capital investment policy provides that at least 75% of our total
assets will be comprised of high quality mortgage-backed securities and
short-term investments. The remainder of our assets (comprising not more than
25% of total assets), may consist of mortgage-backed securities and 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) or, if
not rated, are determined by us 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.

         Our capital investment policy requires that we structure our portfolio
to maintain a minimum weighted average rating (including our deemed comparable
ratings for unrated mortgage-backed securities) of our mortgage-backed
securities of at least single "A" under the S&P rating system and at the
comparable level under the other rating systems. To date, all of the
mortgage-backed securities we have acquired have been pass-through certificates
or CMOs issued or guaranteed by FHLMC, FNMA or GNMA which, although not rated,
have an implied "AAA" rating.

         We intend to acquire only those mortgage-backed securities that we
believe we have the necessary expertise to evaluate and manage, that we can
readily finance and that are consistent with our balance sheet guidelines and
risk management objectives. Since we expect to hold our mortgage-backed
securities until maturity, we generally do not seek to acquire assets whose
investment returns are only attractive in a limited range of scenarios. We
believe that future interest rates and mortgage prepayment rates are very
difficult to predict and, as a result, we seek to acquire mortgage-backed
securities which we believe provide acceptable returns over a broad range of
interest rate and prepayment scenarios.

                                       11


         Among the asset choices available to us, our policy is to acquire those
mortgage-backed securities which we believe generate the highest returns on
capital invested, after consideration of the following:

         |X|  the amount and nature of anticipated cash flows from the asset;

         |X|  our ability to pledge the asset to secure collateralized
              borrowings;

         |X|  the increase in our capital requirement determined by our capital
              investment policy resulting from the purchase and financing of the
              asset; and

         |X|  the costs of financing, hedging and managing the asset.

Prior to acquisition, we assess potential returns on capital employed over the
life of the asset and in a variety of interest rate, yield spread, financing
cost, credit loss and prepayment scenarios.

         We also give consideration to balance sheet management and risk
diversification issues. We deem a specific asset which we are evaluating for
potential acquisition as more or less valuable to the extent it serves to
increase or decrease certain interest rate or prepayment risks which may exist
in the balance sheet, to diversify or concentrate credit risk, and to meet the
cash flow and liquidity objectives our management may establish for our balance
sheet from time-to-time. Accordingly, an important part of the asset evaluation
process is a simulation, using risk management models, of the addition of a
potential asset and our associated borrowings and hedges to the balance sheet
and an assessment of the impact this potential asset acquisition would have on
the risks in and returns generated by our balance sheet as a whole over a
variety of scenarios.

         We focus primarily on the acquisition of adjustable-rate
mortgage-backed securities, including floaters. We have, however, purchased a
significant amount of fixed-rate mortgage-backed securities and may continue to
do so in the future if, in our view, the potential returns on capital invested,
after hedging and all other costs, would exceed the returns available from other
assets or if the purchase of these assets would serve to reduce or diversify the
risks of our balance sheet.

         We may purchase the stock of mortgage REITs or similar companies when
we believe that these purchases would yield attractive returns on capital
employed. When the stock market valuations of these companies are low in
relation to the market value of their assets, these stock purchases can be a way
for us to acquire an interest in a pool of mortgage-backed securities at an
attractive price. We do not, however, presently intend to invest in the
securities of other issuers for the purpose of exercising control or to
underwrite securities of other issuers.

         We may acquire newly issued mortgage-backed securities, and also may
seek to expand our capital base in order to further increase our ability to
acquire new assets, when the potential returns from new investments appears
attractive relative to the return expectations of stockholders. We may in the
future acquire mortgage-backed securities by offering our debt or equity
securities in exchange for the mortgage-backed securities.

         We generally intend to hold mortgage-backed securities for extended
periods. In addition, the REIT provisions of the Internal Revenue Code limit in
certain respects our ability to sell mortgage-backed securities. We may decide
however to sell assets from time to time, for a number of reasons, including our
desire to dispose of an asset as to which credit risk concerns have arisen, to
reduce interest rate risk, to substitute one type of mortgage-backed security
for another, to improve yield or to maintain compliance with the 55% requirement
under the Investment Company Act, or generally to re-structure the balance sheet
when we deem advisable. Our board of directors has not adopted any policy that
would restrict management's authority to determine the timing of sales or the
selection of mortgage-backed securities to be sold.

         We do not invest in REMIC residuals or other CMO residuals.

         As a requirement for maintaining REIT status, we will distribute to
stockholders aggregate dividends equaling at least 90% of our REIT taxable
income (determined without regard to the deduction for dividends paid and by
excluding any net capital gain) for each taxable year. We will make additional
distributions of capital when the return expectations of the stockholders appear
to exceed returns potentially available to us through making new investments in
mortgage-backed securities. Subject to the limitations of applicable securities
and state corporation laws, we can distribute capital by making purchases of our
own capital stock or through paying down or repurchasing any outstanding
uncollateralized debt obligations.

                                       12


         Our asset acquisition strategy may change over time as market
conditions change and as we evolve.

         Credit Risk Management

         We have not taken on credit risk to date, but may do so in the future.
In that event, we will review credit risk and other risk of loss associated with
each investment and determine the appropriate allocation of capital to apply to
the investment under our capital investment policy. Our management will monitor
the overall portfolio risk and determine appropriate levels of provision for
loss.

         Capital and Leverage

         We expect generally to maintain a debt-to-equity ratio of between 8:1
and 12:1, although the ratio may vary from time-to-time depending upon market
conditions and other factors our management deems relevant, including the
composition of our balance sheet, haircut levels required by lenders, the market
value of the mortgage-backed securities in our portfolio and "excess capital
cushion" percentages (as described below) set by our board of directors from
time to time. For purposes of calculating this ratio, our equity (or capital
base) is equal to the value of our investment portfolio on a mark-to-market
basis less the book value of our obligations under repurchase agreements and
other collateralized borrowings. For the calculation of this ratio, equity
includes the Series B Cumulative Convertible Preferred Stock, which is not
included in equity under Generally Accepted Accounting Principles.

         Our goal is to strike a balance between the under-utilization of
leverage, which reduces potential returns to stockholders, and the
over-utilization of leverage, which could reduce our ability to meet our
obligations during adverse market conditions. Our capital investment policy
limits our ability to acquire additional assets during times when our
debt-to-equity ratio exceeds 12:1. At December 31, 2008, our ratio of
debt-to-equity was 6.4:1. Our capital base represents the approximate
liquidation value of our investments and approximates the market value of assets
that we can pledge or sell to meet over-collateralization requirements for our
borrowings. The unpledged portion of our capital base is available for us to
pledge or sell as necessary to maintain over-collateralization levels for our
borrowings.

         We are prohibited from acquiring additional assets during periods when
our capital base is less than the minimum amount required under our capital
investment policy, except as may be necessary to maintain REIT status or our
exemption from the Investment Company Act of 1940, as amended (the "Investment
Company Act"). In addition, when our capital base falls below our risk-managed
capital requirement, our management is required to submit to our board of
directors a plan for bringing our capital base into compliance with our capital
investment policy guidelines. We anticipate that in most circumstances we can
achieve this goal without overt management action through the natural process of
mortgage principal repayments. We anticipate that our capital base is likely to
exceed our risk-managed capital requirement during periods following new equity
offerings and during periods of falling interest rates and that our capital base
could fall below the risk-managed capital requirement during periods of rising
interest rates.

         The first component of our capital requirements is the current
aggregate over-collateralization amount or "haircut" the lenders require us to
hold as capital. The haircut for each mortgage-backed security is determined by
our lenders based on the risk characteristics and liquidity of the asset. Should
the market value of our pledged assets decline, we will be required to deliver
additional collateral to our lenders to maintain a constant
over-collateralization level on our borrowings.

         The second component of our capital requirement is the "excess capital
cushion." This is an amount of capital in excess of the haircuts required by our
lenders. We maintain the excess capital cushion to meet the demands of our
lenders for additional collateral should the market value of our mortgage-backed
securities decline. The aggregate excess capital cushion equals the sum of
liquidity cushion amounts assigned under our capital investment policy to each
of our mortgage-backed securities. We assign excess capital cushions to each
mortgage-backed security based on our assessment of the mortgage-backed
security's market price volatility, credit risk, liquidity and attractiveness
for use as collateral by lenders. The process of assigning excess capital
cushions relies on our management's ability to identify and weigh the relative
importance of these and other factors. In assigning excess capital cushions, we
also give consideration to hedges associated with the mortgage-backed security
and any effect such hedges may have on reducing net market price volatility,
concentration or diversification of credit and other risks in the balance sheet
as a whole and the net cash flows that we can expect from the interaction of the
various components of our balance sheet.

                                       13


         Our capital investment policy stipulates that at least 25% of the
capital base maintained to satisfy the excess capital cushion must be invested
in AAA-rated adjustable-rate mortgage-backed securities or assets with similar
or better liquidity characteristics.

         A substantial portion of our borrowings are short-term or variable-rate
borrowings. Our borrowings are implemented primarily through repurchase
agreements, but in the future may also be obtained through loan agreements,
lines of credit, dollar-roll agreements (an agreement to sell a security for
delivery on a specified future date and a simultaneous agreement to repurchase
the same or a substantially similar security on a specified future date) and
other credit facilities with institutional lenders and issuance of debt
securities such as commercial paper, medium-term notes, CMOs and senior or
subordinated notes. We enter into financing transactions only with institutions
that we believe are sound credit risks and follow other internal policies
designed to limit our credit and other exposure to financing institutions.

         We expect to continue to use repurchase agreements as our principal
financing device to leverage our mortgage-backed securities portfolio. 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. At present, we have entered into uncommitted facilities with 30
lenders for borrowings in the form of repurchase agreements. 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. We may, however, enter into such commitment agreements in the future. We
enter into repurchase agreements primarily with national broker-dealers,
commercial banks and other lenders which typically offer this type of financing.
We enter into collateralized borrowings only with financial institutions meeting
credit standards approved by our board of directors, and we monitor the
financial condition of these institutions on a regular basis.

         A repurchase agreement, although structured as a sale and repurchase
obligation, acts as a financing under which we effectively pledge our
mortgage-backed securities as collateral to secure a short-term loan. Generally,
the other party to the agreement makes the loan in an amount equal to a
percentage of the market value of the pledged collateral. At the maturity of the
repurchase agreement, we are required to repay the loan and correspondingly
receive back our collateral. While used as collateral, the mortgage-backed
securities continue to pay principal and interest which are for our benefit. In
the event of our insolvency or bankruptcy, certain repurchase agreements may
qualify for special treatment under the Bankruptcy Code, the effect of which,
among other things, would be to allow the creditor under the agreement to avoid
the automatic stay provisions of the Bankruptcy Code and to foreclose on the
collateral without delay. In the event of the insolvency or bankruptcy of a
lender during the term of a repurchase agreement, the lender may be permitted,
under applicable insolvency laws, to repudiate the contract, and our claim
against the lender for damages may be treated simply as an unsecured creditor.
In addition, if the lender is a broker or dealer subject to the Securities
Investor Protection Act of 1970, or an insured depository institution subject to
the Federal Deposit Insurance Act, our ability to exercise our rights to recover
our securities under a repurchase agreement or to be compensated for any damages
resulting from the lender's insolvency may be further limited by those statutes.
These claims would be subject to significant delay and, if and when received,
may be substantially less than the damages we actually incur.

         Substantially all of our borrowing agreements require us to deposit
additional collateral in the event the market value of existing collateral
declines, which may require us to sell assets to reduce our borrowings. We have
designed our liquidity management policy to maintain a cushion of equity
sufficient to provide required liquidity to respond to the effects under our
borrowing arrangements of interest rate movements and changes in market value of
our mortgage-backed securities, as described above. However, a major disruption
of the repurchase or other market that we rely on for short-term borrowings
would have a material adverse effect on us unless we were able to arrange
alternative sources of financing on comparable terms.

         Our articles of incorporation and bylaws do not limit our ability to
incur borrowings, whether secured or unsecured.

                                       14


         Interest Rate Risk Management

         To the extent consistent with our election to qualify as a REIT, we
follow an interest rate risk management program intended to protect our
portfolio of mortgage-backed securities and related debt against the effects of
major interest rate changes. Specifically, our interest rate risk management
program is formulated with the intent to offset the potential adverse effects
resulting from rate adjustment limitations on our mortgage-backed securities and
the differences between interest rate adjustment indices and interest rate
adjustment periods of our adjustable-rate mortgage-backed securities and related
borrowings.

         Our interest rate risk management program encompasses a number of
procedures, including the following:

         |X|      we attempt to structure our borrowings to have interest rate
                  adjustment indices and interest rate adjustment periods that,
                  on an aggregate basis, generally correspond to the interest
                  rate adjustment indices and interest rate adjustment periods
                  of our adjustable-rate mortgage-backed securities; and

         |X|      we attempt to structure our borrowing agreements relating to
                  adjustable-rate mortgage-backed securities to have a range of
                  different maturities and interest rate adjustment periods
                  (although substantially all will be less than one year).

         We adjust the average maturity adjustment periods of our borrowings on
an ongoing basis by changing the mix of maturities and interest rate adjustment
periods as borrowings come due and are renewed. Through use of these procedures,
we attempt to minimize the differences between the interest rate adjustment
periods of our mortgage-backed securities and related borrowings that may occur.

          We purchase from time-to-time interest rate swaps. We may enter into
interest rate collars, interest rate caps or floors, and purchase interest-only
mortgage-backed securities and similar instruments to attempt to mitigate the
risk of the cost of our variable rate liabilities increasing at a faster rate
than the earnings on our assets during a period of rising interest rates or to
mitigate prepayment risk. We may hedge as much of the interest rate risk as our
management determines is in our best interests, given the cost of the hedging
transactions and the need to maintain our status as a REIT. This determination
may result in our electing to bear a level of interest rate or prepayment risk
that could otherwise be hedged when management believes, based on all relevant
facts, that bearing the risk is advisable.

         We seek to build a balance sheet and undertake an interest rate risk
management program which is likely to generate positive earnings and maintain an
equity liquidation value sufficient to maintain operations given a variety of
potentially adverse circumstances. Accordingly, our interest rate risk
management program addresses both income preservation, as discussed above, and
capital preservation concerns. For capital preservation, we monitor our
"duration." This is the expected percentage change in market value of our assets
that would be caused by a 1% change in short and long-term interest rates. To
monitor weighted average duration and the related risks of fluctuations in the
liquidation value of our equity, we model the impact of various economic
scenarios on the market value of our mortgage-backed securities and liabilities.
At December 31, 2008, we estimate that the duration of our assets was 2.00 years
and giving effect to the swap transactions, our weighted average duration was
1.21 years. We believe that our interest rate risk management program will allow
us to maintain operations throughout a wide variety of potentially adverse
circumstances. Nevertheless, in order to further preserve our capital base (and
lower our duration) during periods when we believe a trend of rapidly rising
interest rates has been established, we may decide to increase hedging
activities or to sell assets. Each of these actions may lower our earnings and
dividends in the short term to further our objective of maintaining attractive
levels of earnings and dividends over the long term.

         We may elect to conduct a portion of our hedging operations through one
or more subsidiary corporations, each of which we would elect to treat as a
"taxable REIT subsidiary." To comply with the asset tests applicable to us as a
REIT, we could own 100% of the voting stock of such subsidiary, provided that
the value of the stock that we own in all such taxable REIT subsidiaries does
not exceed 25% of the value of our total assets at the close of any calendar
quarter. A taxable subsidiary, such as FIDAC, Merganser, and RCap, would not
elect REIT status and would distribute any net profit after taxes to us. Any
dividend income we receive from the taxable subsidiaries (combined with all
other income generated from our assets, other than qualified REIT real estate
assets) must not exceed 25% of our gross income.

                                       15


         We believe that we have developed a cost-effective asset/liability
management program to provide a level of protection against interest rate and
prepayment risks. However, no strategy can completely insulate us from interest
rate changes and prepayment risks. Further, as noted above, the federal income
tax requirements that we must satisfy to qualify as a REIT limit our ability to
hedge our interest rate and prepayment risks. We monitor carefully, and may have
to limit, our asset/liability management program to assure that we do not
realize excessive hedging income, or hold hedging assets having excess value in
relation to total assets, which could result in our disqualification as a REIT,
the payment of a penalty tax for failure to satisfy certain REIT tests under the
Internal Revenue Code, provided the failure was for reasonable cause. In
addition, asset/liability management involves transaction costs which increase
dramatically as the period covered by the hedging protection increases.
Therefore, we may be unable to hedge effectively our interest rate and
prepayment risks.

         Prepayment Risk Management

         We seek to minimize the effects of faster or slower than anticipated
prepayment rates through structuring a diversified portfolio with a variety of
prepayment characteristics, investing in mortgage-backed securities with
prepayment prohibitions and penalties, investing in certain mortgage-backed
security structures which have prepayment protections, and balancing assets
purchased at a premium with assets purchased at a discount. We monitor
prepayment risk through periodic review of the impact of a variety of prepayment
scenarios on our revenues, net earnings, dividends, cash flow and net balance
sheet market value.

Future Revisions in Policies and Strategies

         Our board of directors has established the investment policies and
operating policies and strategies set forth in this Form 10-K. The board of
directors has the power to modify or waive these policies and strategies without
the consent of the stockholders to the extent that the board of directors
determines that the modification or waiver is in the best interests of our
stockholders. Among other factors, developments in the market which affect our
policies and strategies or which change our assessment of the market may cause
our board of directors to revise our policies and strategies.

Potential Acquisitions, Strategic Alliances and Other Investments

         From time-to-time we have explored possible transactions to enhance our
operations and growth, including entering into new businesses, acquisitions of
other businesses or assets, investments in other entities, joint venture
arrangements, or strategic alliances. We are entering into the broker-dealer
business during the first quarter of January 2009, through our subsidiary RCap,
which was granted membership in FINRA in January 2009. On October 31, 2008 we
consummated our acquisition of Merganser which is a registered investment
advisor. In October 2008 we acquired approximately 11.7 million shares of common
stock of Chimera Investment Corporation, or Chimera, for approximately $26.3
million. During 2007 we acquired approximately 3.6 million shares of Chimera
common stock for approximately $54.3 million in connection with Chimera's
initial public offering on November 21, 2007. Chimera is a 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 an investment fund.

         We may, from time-to-time, continue to explore possible new businesses,
acquisitions, investments, joint venture arrangements and strategic alliances
which may enhance our operations and assist our and our subsidiaries' growth.

Dividend Reinvestment and Share Purchase Plan

         We have adopted a dividend reinvestment and share purchase plan. Under
the dividend reinvestment feature of the plan, existing shareholders can
reinvest their dividends in additional shares of our common stock. Under the
share purchase feature of the plan, new and existing shareholders can purchase
shares of our common stock. We have an effective shelf registration statement on
Form S-3 which registered 100,000,000 shares that could be issued under the
plan. We still sell shares covered by this registration statement under the
plan.

                                       16


At the Market Sales Programs

         We have entered into an ATM Equity Offeringsm Sales Agreement with
Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (or
Merrill Lynch), relating to the sale of shares of our common stock from time to
time through Merrill Lynch. We have also entered into a ATM Equity Sales
Agreement with UBS Securities LLC (or UBS Securities), relating to the sale of
shares of our common stock from time to time through UBS Securities. Under these
agreements, sales of the shares, if any, will be made by means of ordinary
brokers' transaction of the New York Stock Exchange at market prices.

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.

Employees

         As of December 31, 2008, we and our subsidiaries had 65 full time
employees. None of our employees are subject to any collective bargaining
agreements. We believe we have good relations with our employees.

Available Information

         Our investor relations website is www.annaly.com. We make available on
this website under "Financial Reports and SEC filings," free of charge, our
annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports as soon as reasonably practicable after
we electronically file or furnish such materials to the SEC.

                                   COMPETITION

        We believe that our principal competition in the acquisition and holding
of the types of mortgage-backed securities we purchase are financial
institutions such as banks, savings and loans, life insurance companies,
institutional investors such as mutual funds and pension funds, and certain
other mortgage REITs. Some of our competitors have greater financial resources
and access to capital than we do. Our competitors, as well as additional
competitors which may emerge in the future, may increase the competition for the
acquisition of mortgage-backed securities, which in turn may result in higher
prices and lower yields on assets.

ITEM 1A.      RISK FACTORS
--------------------------
         An investment in our stock involves a number of risks. Before making an
investment decision, you should carefully consider all of the risks described in
this Form 10-K. If any of the risks discussed in this Form 10-K actually occur,
our business, financial condition and results of operations could be materially
adversely affected. If this were to occur, the trading price of our stock could
decline significantly and you may lose all or part of your investment.

         Risks Related to Our Business

An increase in the interest payments on our borrowings relative to the interest
we earn on our investment securities may adversely affect our profitability

         We earn money based upon the spread between the interest payments we
earn on our investment securities and the interest payments we must make on our
borrowings. If the interest payments on our borrowings increase relative to the
interest we earn on our investment securities, our profitability may be
adversely affected.

         The interest payments on our borrowings may increase relative to the
interest we earn on our adjustable-rate investment securities for various
reasons discussed in this section.

                                       17


Differences in timing of interest rate adjustments on our investment securities
  and our borrowings may adversely affect our profitability

         We rely primarily on short-term borrowings to acquire investment
securities with long-term maturities. Accordingly, if short-term interest rates
increase, this may adversely affect our profitability.

         Most of the investment securities we acquire are adjustable-rate
securities. This means that their interest rates may vary over time based upon
changes in an objective index, such as:

          o    LIBOR.  The interest rate that banks in London offer for deposits
               in London of U.S. dollars.

          o    Treasury  Rate.  A monthly or weekly  average  yield of benchmark
               U.S.  Treasury  securities,  as published by the Federal  Reserve
               Board.

          o    CD Rate. The weekly average of secondary market interest rates on
               six-month negotiable certificates of deposit, as published by the
               Federal Reserve Board.

         These indices generally reflect short-term interest rates. On December
31, 2008, approximately 28% of our investment securities were adjustable-rate
securities.

         The interest rates on our borrowings similarly vary with changes in an
objective index. Nevertheless, the interest rates on our borrowings generally
adjust more frequently than the interest rates on our adjustable-rate investment
securities. For example, on December 31, 2008, our adjustable-rate investment
securities had a weighted average term to next rate adjustment of 36 months,
while our borrowings had a weighted average term to next rate adjustment of 238
days. Accordingly, in a period of rising interest rates, we could experience a
decrease in net income or a net loss because the interest rates on our
borrowings adjust faster than the interest rates on our adjustable-rate
investment securities.

Interest rate caps on our investment securities may adversely affect our
profitability

         Our adjustable-rate investment securities are typically subject to
periodic and lifetime interest rate caps. Periodic interest rate caps limit the
amount an interest rate can increase during any given period. Lifetime interest
rate caps limit the amount an interest rate can increase through maturity of an
investment security. Our borrowings are not subject to similar restrictions.
Accordingly, in a period of rapidly increasing interest rates, we could
experience a decrease in net income or experience a net loss because the
interest rates on our borrowings could increase without limitation while the
interest rates on our adjustable-rate investment securities would be limited by
caps.

Because we acquire fixed-rate securities, an increase in interest rates may
adversely affect our profitability

         In a period of rising interest rates, our interest payments could
increase while the interest we earn on our fixed-rate mortgage-backed securities
would not change. This would adversely affect our profitability. On December 31,
2008, approximately 64% of our investment securities were fixed-rate securities.

An increase in prepayment rates may adversely affect our profitability

         The mortgage-backed securities we acquire are backed by pools of
mortgage loans. We receive payments, generally, from the payments that are made
on these underlying mortgage loans. When borrowers prepay their mortgage loans
at rates that are faster than expected, this results in prepayments that are
faster than expected on the mortgage-backed securities. These faster than
expected prepayments may adversely affect our profitability.

         We often purchase mortgage-backed securities that have a higher
interest rate than the market interest rate at the time. In exchange for this
higher interest rate, we must pay a premium over the market value to acquire the
security. In accordance with accounting rules, we amortize this premium over the
term of the mortgage-backed security. If the mortgage-backed security is prepaid
in whole or in part prior to its maturity date, however, we must expense all or
a part of the remaining unamortized portion of the premium that was prepaid at
the time of the prepayment. This adversely affects our profitability.

                                       18


         Prepayment rates generally increase when interest rates fall and
decrease when interest rates rise, but changes in prepayment rates are difficult
to predict. Prepayment rates also may be affected by conditions in the housing
and financial markets, general economic conditions and the relative interest
rates on fixed-rate and adjustable-rate mortgage loans.

         We may seek to reduce prepayment risk by acquiring mortgage-backed
securities at a discount. If a discounted security is prepaid in whole or in
part prior to its maturity date, we will earn income equal to the amount of the
remaining discount. This will improve our profitability if the discounted
securities are prepaid faster than expected.

         We also can acquire mortgage-backed securities that are less affected
by prepayments. For example, we can acquire CMOs, a type of mortgage-backed
security. CMOs divide a pool of mortgage loans into multiple tranches that allow
for shifting of prepayment risks from slower-paying tranches to faster-paying
tranches. This is in contrast to pass-through or pay-through mortgage-backed
securities, where all investors share equally in all payments, including all
prepayments. As discussed below, the Investment Company Act of 1940 imposes
restrictions on our purchase of CMOs. As of December 31, 2008, approximately 24%
of our mortgage-backed securities were CMOs and approximately 76% of our
mortgage-backed securities were pass-through or pay-through securities.

         While we seek to minimize prepayment risk to the extent practical, in
selecting investments we must balance prepayment risk against other risks and
the potential returns of each investment. No strategy can completely insulate us
from prepayment risk.

An increase in interest rates may adversely affect our book value

         Increases in interest rates may negatively affect the market value of
our investment securities. Our fixed-rate securities, generally, are more
negatively affected by these increases. In accordance with accounting rules, we
reduce our book value by the amount of any decrease in the market value of our
investment securities.

Failure to procure funding on favorable terms, or at all, would adversely affect
our results and may, in turn, negatively affect the market price of shares of
our common stock.
         The current dislocation and weakness in the broader mortgage markets
could adversely affect one or more of our potential lenders and could cause one
or more of our potential lenders to be unwilling or unable to provide us with
financing. This could potentially increase our financing costs and reduce our
liquidity. If one or more major market participants fails or otherwise
experiences a major liquidity crisis, as was the case for Bear Stearns & Co. in
March 2008 and Lehman Brothers Holdings Inc. in September 2008, it could
negatively impact the marketability of all fixed income securities, including
Agency RMBS, and this could negatively impact the value of the securities we
acquire, thus reducing our net book value. Furthermore, if any of our potential
lenders or any of our lenders are unwilling or unable to provide us with
financing, we could be forced to sell our assets at an inopportune time when
prices are depressed.

         Since June 30, 2008, there have been increased market concerns about
Freddie Mac and Fannie Mae's ability to withstand future credit losses
associated with securities held in their investment portfolios, and on which
they provide guarantees, without the direct support of the federal government.
Recently, the government passed the Housing and Economic Recovery Act of 2008.
Fannie Mae and Freddie Mac have recently been placed into the conservatorship of
the Federal Housing Finance Agency, or FHFA, their federal regulator, pursuant
to its powers under The Federal Housing Finance Regulatory Reform Act of 2008, a
part of the Housing and Economic Recovery Act of 2008. As the conservator of
Fannie Mae and Freddie Mac, the FHFA controls and directs the operations of
Fannie Mae and Freddie Mac and may (1) take over the assets of and operate
Fannie Mae and Freddie Mac with all the powers of the shareholders, the
directors, and the officers of Fannie Mae and Freddie Mac and conduct all
business of Fannie Mae and Freddie Mac; (2) collect all obligations and money
due to Fannie Mae and Freddie Mac; (3) perform all functions of Fannie Mae and
Freddie Mac which are consistent with the conservator's appointment; (4)
preserve and conserve the assets and property of Fannie Mae and Freddie Mac; and
(5) contract for assistance in fulfilling any function, activity, action or duty
of the conservator.

         In addition to FHFA becoming the conservator of Fannie Mae and Freddie
Mac, (i) the U.S. Department of Treasury and FHFA have entered into preferred
stock purchase agreements between the U.S. Department of Treasury and Fannie Mae
and Freddie Mac pursuant to which the U.S. Department of Treasury will ensure
that each of Fannie Mae and Freddie Mac maintains a positive net worth; (ii) the
U.S. Department of Treasury has established a new secured lending credit
facility which will be available to Fannie Mae, Freddie Mac, and the Federal
Home Loan Banks, which is intended to serve as a liquidity backstop, which will
be available until December 2009; and (iii) the U.S. Department of Treasury has
initiated a temporary program to purchase RMBS issued by Fannie Mae and Freddie
Mac. Given the highly fluid and evolving nature of these events, it is unclear
how our business will be impacted. Based upon the further activity of the U.S.
government or market response to developments at Fannie Mae or Freddie Mac, our
business could be adversely impacted.

                                       19


Our strategy involves significant leverage

         We seek to maintain a ratio of debt-to-equity of between 8:1 and 12:1,
although our ratio may at times be above or below this amount. We incur this
leverage by borrowing against a substantial portion of the market value of our
investment securities. By incurring this leverage, we can enhance our returns.
Nevertheless, this leverage, which is fundamental to our investment strategy,
also creates significant risks.

     o   Our leverage may cause substantial losses

         Because of our significant leverage, we may incur substantial losses if
     our borrowing costs increase. Our borrowing costs may increase for any of
     the following reasons:

              o   short-term interest rates increase;

              o   the market value of our investment securities decreases;

              o   interest rate volatility increases; or

              o   the availability of financing in the market decreases.

      o Our leverage may cause margin calls and defaults and force us to sell
        assets under adverse market conditions

         Because of our leverage, a decline in the value of our investment
     securities may result in our lenders initiating margin calls. A margin call
     means that the lender requires us to pledge additional collateral to
     re-establish the ratio of the value of the collateral to the amount of the
     borrowing. Our fixed-rate mortgage-backed securities generally are more
     susceptible to margin calls as increases in interest rates tend to more
     negatively affect the market value of fixed-rate securities.

         If we are unable to satisfy margin calls, our lenders may foreclose on
     our collateral. This could force us to sell our investment securities under
     adverse market conditions. Additionally, in the event of our bankruptcy,
     our borrowings, which are generally made under repurchase agreements, may
     qualify for special treatment under the Bankruptcy Code. This special
     treatment would allow the lenders under these agreements to avoid the
     automatic stay provisions of the Bankruptcy Code and to liquidate the
     collateral under these agreements without delay.

     o   Liquidation of collateral may jeopardize our REIT status

         To continue to qualify as a REIT, we must comply with requirements
     regarding our assets and our sources of income. If we are compelled to
     liquidate our investment securities, we may be unable to comply with these
     requirements, ultimately jeopardizing our status as a REIT and our failure
     to qualify as a REIT will have adverse tax consequences.

     o   We may exceed our target leverage ratios

         We seek to maintain a ratio of debt-to-equity of between 8:1 and 12:1.
     However, we are not required to stay within this leverage ratio. If we
     exceed this ratio, the adverse impact on our financial condition and
     results of operations from the types of risks described in this section
     would likely be more severe.

                                       20


     o   We may not be able to achieve our optimal leverage

         We use leverage as a strategy to increase the return to our investors.
     However, we may not be able to achieve our desired leverage for any of the
     following reasons:

              o   we determine that the leverage would expose us to excessive
                  risk;

              o   our lenders do not make funding available to us at acceptable
                  rates; or

              o   our lenders require that we provide additional collateral to
                  cover our borrowings.

     o   We may incur increased borrowing costs which would adversely affect our
         profitability

         Currently, all of our borrowings are collateralized borrowings in the
     form of repurchase agreements. If the interest rates on these repurchase
     agreements increase, it would adversely affect our profitability.

         Our borrowing costs under repurchase agreements generally correspond to
     short-term interest rates such as LIBOR or a short-term Treasury index,
     plus or minus a margin. The margins on these borrowings over or under
     short-term interest rates may vary depending upon:

              o   the movement of interest rates;

              o   the availability of financing in the market; or

              o   the value and liquidity of our investment securities.

If we are unable to renew our borrowings at favorable rates, our profitability
may be adversely affected

         Since we rely primarily on short-term borrowings, our ability to
achieve our investment objectives depends not only on our ability to borrow
money in sufficient amounts and on favorable terms, but also on our ability to
renew or replace on a continuous basis our maturing short-term borrowings. If we
are not able to renew or replace maturing borrowings, we would have to sell our
assets under possibly adverse market conditions.

Our hedging strategies expose us to risks

         Our policies permit us to enter into interest rate swaps, caps and
floors and other derivative transactions to help us mitigate our interest rate
and prepayment risks described above. We have used interest rate swaps and
interest rate caps to provide a level of protection against interest rate risks,
but no hedging strategy can protect us completely.

     o   Our hedging strategies may not be successful in mitigating the risks
         associated with interest rates

         We cannot assure you that our use of derivatives will offset the risks
related to changes in interest rates. It is likely that there will be periods in
the future during which we will incur losses on our derivative financial
instruments that will not be fully offset by gains on our portfolio. The
derivative financial instruments we select may not have the effect of reducing
our interest rate risk. In addition, the nature and timing of hedging
transactions may influence the effectiveness of these strategies. Poorly
designed strategies or improperly executed transactions could significantly
increase our risk and lead to material losses. In addition, hedging strategies
involve transaction and other costs. Our hedging strategy and the derivatives
that we use may not adequately offset the risk of interest rate volatility or
that our hedging transactions may not result in losses.

     o   Our use of derivatives may expose us to counterparty risks

         We enter into interest rate swap and cap agreements to hedge risks
associated with movements in interest rates. If a swap counterparty cannot
perform under the terms of an interest rate swap, we would not receive payments
due under that agreement, we may lose any unrealized gain associated with the
interest rate swap, and the hedged liability would cease to be hedged by the
interest rate swap. We may also be at risk for any collateral we have pledged to
secure our obligations under the interest rate swap if the counterparty becomes
insolvent or files for bankruptcy. Similarly, if a cap counterparty fails to
perform under the terms of the cap agreement, in addition to not receiving
payments due under that agreement that would off-sets our interest expense, we
would also incur a loss for all remaining unamortized premium paid for that
agreement.

                                       21


We may face risks of investing in inverse floating rate securities

         We may invest in inverse floaters. The returns on inverse floaters are
inversely related to changes in an interest rate. Generally, income on inverse
floaters will decrease when interest rates increase and increase when interest
rates decrease. Investments in inverse floaters may subject us to the risks of
reduced or eliminated interest payments and losses of principal. In addition,
certain indexed securities and inverse floaters may increase or decrease in
value at a greater rate than the underlying interest rate, which effectively
leverages our investment in such securities. As a result, the market value of
such securities will generally be more volatile than that of fixed rate
securities.

Our investment strategy may involve credit risk

         We may incur losses if there are payment defaults under our investment
securities.

         To date, all of our mortgage-backed securities have been agency
certificates and agency debentures which, although not rated, carry an implied
"AAA" rating. Agency certificates are mortgage pass-through certificates where
Freddie Mac, Fannie Mae or Ginnie Mae guarantees payments of principal or
interest on the certificates. Agency debentures are debt instruments issued by
Freddie Mac, Fannie Mae, or the FHLB.

         Even though we have only acquired "AAA" securities so far, pursuant to
our capital investment policy, we have the ability to acquire securities of
lower credit quality. Under our policy:

          o    75% of our investments  must have a "AA" or higher rating by S&P,
               an equivalent  rating by a similar  nationally  recognized rating
               organization   or  our   management   must   determine  that  the
               investments are of comparable  credit quality to investments with
               these ratings;

          o    the  remaining  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 derivate
               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; and

          o    we  seek  to  have a  minimum  weighted  average  rating  for our
               portfolio of at least "A" by S&P.

         If we acquire securities of lower credit quality, we may incur losses
if there are defaults under those securities or if the rating agencies downgrade
the credit quality of those securities.

There can be no assurance that the actions of the U.S. government, Federal
Reserve and other governmental and regulatory bodies for the purpose of
stabilizing the financial markets, or market response to those actions, will
achieve the intended effect, our business may not benefit from these actions and
further government or market developments could adversely impact us.

         In response to the financial issues affecting the banking system and
financial markets and going concern threats to investment banks and other
financial institutions, the Emergency Economic Stabilization Act of 2008, or
EESA, was recently enacted. The EESA provides the U.S. Secretary of the Treasury
with the authority to establish a Troubled Asset Relief Program, or TARP, to
purchase from financial institutions up to $700 billion of equity or preferred
securities, residential or commercial mortgages and any securities, obligations,
or other instruments that are based on or related to such mortgages, that in
each case was originated or issued on or before March 14, 2008, as well as any
other financial instrument that the U.S. Secretary of the Treasury, after
consultation with the Chairman of the Board of Governors of the Federal Reserve
System, determines the purchase of which is necessary to promote financial
market stability, upon transmittal of such determination, in writing, to the
appropriate committees of the U.S. Congress. The EESA also provides for a
program that would allow companies to insure their troubled assets.

                                       22


         In addition, the U.S. Government, Federal Reserve and other
governmental and regulatory bodies have taken or are considering taking other
actions to address the financial crisis. There can be no assurance that the EESA
or other policy initiatives will have a beneficial impact on the financial
markets, including current extreme levels of volatility. We cannot predict
whether or when such actions may occur or what impact, if any, such actions
could have on our business, results of operations and financial condition.


We have not established a minimum dividend payment level

         We intend to pay quarterly dividends and to make distributions to our
stockholders in amounts such that all or substantially all of our taxable income
in each year (subject to certain adjustments) is distributed. This enables us to
qualify for the tax benefits accorded to a REIT under the Code. We have not
established a minimum dividend payment level and our ability to pay dividends
may be adversely affected for the reasons described in this section. All
distributions will be made at the discretion of our board of directors and will
depend on our earnings, our financial condition, maintenance of our REIT status
and such other factors as our board of directors may deem relevant from time to
time.

Because of competition, we may not be able to acquire mortgage-backed securities
at favorable yields

         Our net income depends, in large part, on our ability to acquire
mortgage-backed securities at favorable spreads over our borrowing costs. In
acquiring mortgage-backed securities, we compete with other REITs, investment
banking firms, savings and loan associations, banks, insurance companies, mutual
funds, other lenders and other entities that purchase mortgage-backed
securities, many of which have greater financial resources than us. As a result,
in the future, we may not be able to acquire sufficient mortgage-backed
securities at favorable spreads over our borrowing costs.

We are dependent on our key personnel

         We are dependent on the efforts of our key officers and employees,
including Michael A. J. Farrell, our Chairman of the board of directors, Chief
Executive Officer and President, Wellington J. Denahan-Norris, our Vice
Chairman, Chief Operating Officer and Chief Investment Officer, and Kathryn F.
Fagan, our Chief Financial Officer and Treasurer. The loss of any of their
services could have an adverse effect on our operations. Although we have
employment agreements with each of them, we cannot assure you they will remain
employed with us.

We and our shareholders are subject to certain tax risks

         o    Our failure to qualify as a REIT would have adverse tax
              consequences

              We believe that since 1997 we have qualified for taxation as a
         REIT for federal income tax purposes. We plan to continue to meet the
         requirements for taxation as a REIT. The determination that we are a
         REIT requires an analysis of various factual matters and circumstances
         that may not be totally within our control. For example, to qualify as
         a REIT, at least 75% of our gross income must come from real estate
         sources and 95% of our gross income must come from real estate sources
         and certain other sources that are itemized in the REIT tax laws. We
         are also required to distribute to stockholders at least 90% of our
         REIT taxable income (determined without regard to the deduction for
         dividends paid and by excluding any net capital gain). Even a technical
         or inadvertent mistake could jeopardize our REIT status. Furthermore,
         Congress and the Internal Revenue Service (or IRS) might make changes
         to the tax laws and regulations, and the courts might issue new rulings
         that make it more difficult or impossible for us to remain qualified as
         a REIT.

                                       23


                  If we fail to qualify as a REIT, we would be subject to
         federal income tax at regular corporate rates. Also, unless the IRS
         granted us relief under certain statutory provisions, we would remain
         disqualified as a REIT for four years following the year we first fail
         to qualify. If we fail to qualify as a REIT, we would have to pay
         significant income taxes and would therefore have less money available
         for investments or for distributions to our stockholders. This would
         likely have a significant adverse effect on the value of our
         securities. In addition, the tax law would no longer require us to make
         distributions to our stockholders.

                  A REIT that fails the quarterly asset tests for one or more
         quarters will not lose its REIT status as a result of such failure if
         either (i) the failure is regarded as a de minimis failure under
         standards set out in the Internal Revenue Code, or (ii) the failure is
         greater than a de minimis failure but is attributable to reasonable
         cause and not willful neglect. In the case of a greater than de minimis
         failure, however, the REIT must pay a tax and must remedy the failure
         within 6 months of the close of the quarter in which the failure was
         identified. In addition, the Internal Revenue Code provides relief for
         failures of other tests imposed as a condition of REIT qualification,
         as long as the failures are attributable to reasonable cause and not
         willful neglect. A REIT would be required to pay a penalty of $50,000,
         however, in the case of each failure.

          o    We have certain distribution requirements

              As a REIT, 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). The required distribution
         limits the amount we have available for other business purposes,
         including amounts to fund our growth. Also, it is possible that because
         of the differences between the time we actually receive revenue or pay
         expenses and the period we report those items for distribution
         purposes, we may have to borrow funds on a short-term basis to meet the
         90% distribution requirement.

          o    We are also subject to other tax liabilities

              Even if we qualify as a REIT, we may be subject to certain
         federal, state and local taxes on our income and property. Any of these
         taxes would reduce our operating cash flow.

          o    Limits on  ownership  of our  common  stock  could  have  adverse
               consequences to you and could limit your opportunity to receive a
               premium on our stock

              To maintain our qualification as a REIT for federal income tax
         purposes, not more than 50% in value of the outstanding shares of our
         capital stock may be owned, directly or indirectly, by five or fewer
         individuals (as defined in the federal tax laws to include certain
         entities). Primarily to facilitate maintenance of our qualification as
         a REIT for federal income tax purposes, our charter will prohibit
         ownership, directly or by the attribution provisions of the federal tax
         laws, by any person of more than 9.8% of the lesser of the number or
         value of the issued and outstanding shares of our common stock and will
         prohibit ownership, directly or by the attribution provisions of the
         federal tax laws, by any person of more than 9.8% of the lesser of the
         number or value of the issued and outstanding shares of any class or
         series of our preferred stock. Our board of directors, in its sole and
         absolute discretion, may waive or modify the ownership limit with
         respect to one or more persons who would not be treated as
         "individuals" for purposes of the federal tax laws if it is satisfied,
         based upon information required to be provided by the party seeking the
         waiver and upon an opinion of counsel satisfactory to the board of
         directors, that ownership in excess of this limit will not otherwise
         jeopardize our status as a REIT for federal income tax purposes.

              The ownership limit may have the effect of delaying, deferring or
         preventing a change in control and, therefore, could adversely affect
         our shareholders' ability to realize a premium over the then-prevailing
         market price for our common stock in connection with a change in
         control.

          o    A REIT  cannot  invest  more than 25% of its total  assets in the
               stock or  securities  of one or more taxable  REIT  subsidiaries;
               therefore,  our taxable  subsidiaries cannot constitute more than
               25% of our total assets

                                       24


              A taxable REIT subsidiary is a corporation, other than a REIT or a
         qualified REIT subsidiary, in which a REIT owns stock and which elects
         taxable REIT subsidiary status. The term also includes a corporate
         subsidiary in which the taxable REIT subsidiary owns more than a 35%
         interest. A REIT may own up to 100% of the stock of one or more taxable
         REIT subsidiaries. A taxable REIT subsidiary may earn income that would
         not be qualifying income if earned directly by the parent REIT.
         Overall, at the close of any calendar quarter, no more than 25% of the
         value of a REIT's assets may consist of stock or securities of one or
         more taxable REIT subsidiaries.

              The stock and securities of our taxable REIT subsidiaries are
         expected to represent less than 25% of the value of our total assets.
         Furthermore, we intend to monitor the value of our investments in the
         stock and securities of our taxable REIT subsidiaries to ensure
         compliance with the above-described 25% limitation. We cannot assure
         you, however, that we will always be able to comply with the 25%
         limitation so as to maintain REIT status.

          o    Taxable  REIT  subsidiaries  are  subject  to tax at the  regular
               corporate  rates, are not required to distribute  dividends,  and
               the amount of dividends a taxable REIT  subsidiary can pay to its
               parent REIT may be limited by REIT gross income tests

              A taxable REIT subsidiary must pay income tax at regular corporate
         rates on any income that it earns. Our taxable REIT subsidiaries will
         pay corporate income tax on their taxable income, and their after-tax
         net income will be available for distribution to us. Such income,
         however, is not required to be distributed.

              Moreover, the annual gross income tests that must be satisfied to
         ensure REIT qualification may limit the amount of dividends that we can
         receive from our taxable REIT subsidiaries and still maintain our REIT
         status. Generally, not more than 25% of our gross income can be derived
         from non-real estate related sources, such as dividends from a taxable
         REIT subsidiary. If, for any taxable year, the dividends we received
         from our taxable REIT subsidiaries, when added to our other items of
         non-real estate related income, represented more than 25% of our total
         gross income for the year, we could be denied REIT status, unless we
         were able to demonstrate, among other things, that our failure of the
         gross income test was due to reasonable cause and not willful neglect.

              The limitations imposed by the REIT gross income tests may impede
         our ability to distribute assets from our taxable REIT subsidiaries to
         us in the form of dividends. Certain asset transfers may, therefore,
         have to be structured as purchase and sale transactions upon which our
         taxable REIT subsidiaries recognize taxable gain.

          o    If  interest  accrues  on  indebtedness  owed by a  taxable  REIT
               subsidiary  to  its  parent  REIT  at  a  rate  in  excess  of  a
               commercially  reasonable rate, or if transactions  between a REIT
               and a taxable  REIT  subsidiary  are  entered  into on other than
               arm's-length terms, the REIT may be subject to a penalty tax

              If interest accrues on an indebtedness owed by a taxable REIT
         subsidiary to its parent REIT at a rate in excess of a commercially
         reasonable rate, the REIT is subject to tax at a rate of 100% on the
         excess of (i) interest payments made by a taxable REIT subsidiary to
         its parent REIT over (ii) the amount of interest that would have been
         payable had interest accrued on the indebtedness at a commercially
         reasonable rate. A tax at a rate of 100% is also imposed on any
         transaction between a taxable REIT subsidiary and its parent REIT to
         the extent the transaction gives rise to deductions to the taxable REIT
         subsidiary that are in excess of the deductions that would have been
         allowable had the transaction been entered into on arm's-length terms.
         We will scrutinize all of our transactions with our taxable REIT
         subsidiaries in an effort to ensure that we do not become subject to
         these taxes. We may not be able to avoid application of these taxes.

Risks of Ownership of Our Common Stock

     o   Issuances  of large  amounts of our stock could cause the market price
         of our common stock to decline

         As of February 25, 2009, 544,290,086 shares of our common stock were
outstanding. If we issue a significant number of shares of common stock or
securities convertible into common stock in a short period of time, there could
be a dilution of the existing common stock and a decrease in the market price of
the common stock.

                                       25


     o   We may change our policies without stockholder approval

         Our board of directors and management determine all of our policies,
including our investment, financing and distribution policies. They may amend or
revise these policies at any time without a vote of our stockholders. Policy
changes could adversely affect our financial condition, results of operations,
the market price of our common stock or our ability to pay dividends or
distributions.

     o   Our  governing  documents and Maryland law impose  limitations  on the
         acquisition of our common stock and changes in control that could make
         it more difficult for a third party to acquire us

         Maryland Business Combination Act
         ---------------------------------

         The Maryland General Corporation Law establishes special requirements
for "business combinations" between a Maryland corporation and "interested
stockholders" unless exemptions are applicable. An interested stockholder is any
person who beneficially owns 10% or more of the voting power of our
then-outstanding voting stock. Among other things, the law prohibits for a
period of five years a merger and other similar transactions between us and an
interested stockholder unless the board of directors approved the transaction
prior to the party's becoming an interested stockholder. The five-year period
runs from the most recent date on which the interested stockholder became an
interested stockholder. The law also requires a super majority stockholder vote
for such transactions after the end of the five-year period. This means that the
transaction must be approved by at least:

              o   80% of the votes entitled to be cast by holders of outstanding
                  voting shares; and

              o   two-thirds of the votes entitled to be cast by holders of
                  outstanding voting shares other than shares held by the
                  interested stockholder or an affiliate of the interested
                  stockholder with whom the business combination is to be
                  effected.

         As permitted by the Maryland General Corporation Law, we have elected
not to be governed by the Maryland business combination statute. We made this
election by opting out of this statute in our articles of incorporation. If,
however, we amend our articles of incorporation to opt back in to the statute,
the business combination statute could have the effect of discouraging offers to
acquire us and of increasing the difficulty of consummating any such offers,
even if our acquisition would be in our stockholders' best interests.

         Maryland Control Share Acquisition Act
         --------------------------------------

         Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of the stockholders. Two-thirds of the shares eligible
to vote must vote in favor of granting the "control shares" voting rights.
"Control shares" are shares of stock that, taken together with all other shares
of stock the acquirer previously acquired, would entitle the acquirer to
exercise voting power in electing directors within one of the following ranges
of voting power:

              o   One-tenth or more but less than one third of all voting power;

              o   One-third or more but less than a majority of all voting
                  power; or

              o   A majority or more of all voting power.

         Control shares do not include shares of stock the acquiring person is
entitled to vote as a result of having previously obtained stockholder approval.
A "control share acquisition" means the acquisition of control shares, subject
to certain exceptions.

         If a person who has made (or proposes to make) a control share
acquisition satisfies certain conditions (including agreeing to pay expenses),
he may compel our board of directors to call a special meeting of stockholders
to consider the voting rights of the shares. If such a person makes no request
for a meeting, we have the option to present the question at any stockholders'
meeting.

                                       26


         If voting rights are not approved at a meeting of stockholders then,
subject to certain conditions and limitations, we may redeem any or all of the
control shares (except those for which voting rights have previously been
approved) for fair value. We will determine the fair value of the shares,
without regard to voting rights, as of the date of either:

              o   the last control share acquisition; or

              o   the meeting where stockholders considered and did not approve
                  voting rights of the control shares.

         If voting rights for control shares are approved at a stockholders'
meeting and the acquirer becomes entitled to vote a majority of the shares of
stock entitled to vote, all other stockholders may obtain rights as objecting
stockholders and, thereunder, exercise appraisal rights. This means that you
would be able to force us to redeem your stock for fair value. Under Maryland
law, the fair value may not be less than the highest price per share paid in the
control share acquisition. Furthermore, certain limitations otherwise applicable
to the exercise of dissenters' rights would not apply in the context of a
control share acquisition. The control share acquisition statute would not apply
to shares acquired in a merger, consolidation or share exchange if we were a
party to the transaction. The control share acquisition statute could have the
effect of discouraging offers to acquire us and of increasing the difficulty of
consummating any such offers, even if our acquisition would be in our
stockholders' best interests.

Regulatory Risks

     o   Loss of Investment Company Act exemption would adversely affect us

         We intend to conduct our business so as not to become regulated as an
investment company under the Investment Company Act. If we fail to qualify for
this exemption, our ability to use leverage would be substantially reduced, and
we would be unable to conduct our business as described in this Form 10-K.

         We rely on the exclusion provided by Section 3(c)(5)(C) of the
Investment Company Act. Section 3(c)(5)(C) as interpreted by the staff of the
SEC, requires us to invest at least 55% of our assets in "mortgages and other
liens on and interest in real estate" (or Qualifying Real Estate Assets) and at
least 80% of our assets in Qualifying Real Estate Assets plus real estate
related assets. The assets that we acquire, therefore, are limited by the
provisions of the Investment Company Act and the rules and regulations
promulgated under the Investment Company Act. If the SEC determines that any of
these securities are not qualifying interests in real estate or real estate
related assets, adopts a contrary interpretation with respect to these
securities or otherwise believes we do not satisfy the above exceptions, we
could be required to restructure our activities or sell certain of our assets.
We may be required at times to adopt less efficient methods of financing certain
of our mortgage assets and we may be precluded from acquiring certain types of
higher yielding mortgage assets. The net effect of these factors will be to
lower our net interest income. If we fail to qualify for exemption from
registration as an investment company, our ability to use leverage would be
substantially reduced, and we would not be able to conduct our business as
described. Our business will be materially and adversely affected if we fail to
qualify for this exemption.

     o   Compliance with proposed and recently enacted changes in securities
         laws and regulations increase our costs

         The Sarbanes-Oxley Act of 2002 and rules and regulations promulgated by
the SEC and the New York Stock Exchange have increased the scope, complexity and
cost of corporate governance, reporting and disclosure practices. We believe
that these rules and regulations will make it more costly for us to obtain
director and officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain coverage. These
rules and regulations could also make it more difficult for us to attract and
retain qualified members of management and our board of directors, particularly
to serve on our audit committee.

                                       27


ITEM 1B.   UNRESOLVED STAFF COMMENTS
------------------------------------

None.

ITEM 2.      PROPERTIES
-----------------------

         Our executive and administrative office is located at 1211 Avenue of
the Americas, Suite 2902 New York, New York 10036, telephone 212-696-0100. This
office is leased under a non-cancelable lease expiring December 31, 2009.

ITEM 3.       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 effect on our
consolidated financial statements.

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------------

         We did not submit any matters to a vote of our stockholders during the
fourth quarter of 2008.



                                       28


                                     PART II
                                     -------

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------
              AND ISSUER PURCHASES OF EQUITY SECURITIES
              -----------------------------------------

     Our common stock began trading publicly on October 8, 1997 and is traded on
the New York Stock Exchange under the trading symbol "NLY". As of February 25,
2009, we had 544,290,086 shares of common stock issued and outstanding which
were held by approximately 290,409 beneficial holders.

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


                                                                                    

                                                                    Stock Prices

                                                          High             Low               Close

First Quarter ended March 31, 2008                        $21.00           $14.16            $15.32
Second Quarter ended June 30, 2008                        $17.95           $15.51            $15.51
Third Quarter ended September 30, 2008                    $17.00           $12.92            $13.45
Fourth Quarter ended December 31, 2008                    $16.12           $11.21            $15.87

                                                          High             Low               Close

First Quarter ended March 31, 2007                        $15.48           $13.54            $15.48
Second Quarter ended June 30, 2007                        $16.20           $13.83            $14.42
Third Quarter ended September 30, 2007                    $16.42           $13.03            $15.93
Fourth Quarter ended December 31, 2007                    $18.18           $15.25            $18.18



                                                                        

                                                                  Common Dividends
                                                                  Declared Per Share

First Quarter ended March 31, 2008                                         $0.48
Second Quarter ended June 30, 2008                                         $0.55
Third Quarter ended September 30, 2008                                     $0.55
Fourth Quarter ended December 31, 2008                                     $0.50
First Quarter ended March 31, 2007                                         $0.20
Second Quarter ended June 30, 2007                                         $0.24
Third Quarter ended September 30, 2007                                     $0.26
Fourth Quarter ended December 31, 2007                                     $0.34


         We intend to pay quarterly dividends and to distribute to our
stockholders all or substantially all of our taxable income in each year
(subject to certain adjustments). This will enable us to qualify for the tax
benefits accorded to a REIT under the Code. We have not established a minimum
dividend payment level and our ability to pay dividends may be adversely
affected for the reasons described under the caption "Risk Factors." All
distributions will be made at the discretion of our board of directors and will
depend on our earnings, our financial condition, maintenance of our REIT status
and such other factors as our board of directors may deem relevant from time to
time. No dividends can be paid on our common stock unless we have paid full
cumulative dividends on our preferred stock. From the date of issuance of our
preferred stock through December 31, 2008, we have paid full cumulative
dividends on our preferred stock.

                                       29


                      EQUITY COMPENSATION PLAN INFORMATION

         We have adopted a long term stock incentive plan for executive
officers, key employees and nonemployee directors (the "Incentive Plan"). The
Incentive Plan authorizes the Compensation Committee of the board of directors
to grant awards, including incentive stock options as defined under Section 422
of the Code ("ISOs") and options not so qualified ("NQSOs"). 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 outstanding shares of our common stock
up to a ceiling of 8,932,921 shares. For a description of our Incentive Plan,
see Note 11 to the Financial Statements.

         The  following  table  provides  information  as of  December  31, 2008
concerning shares of our common stock authorized for issuance under our existing
Incentive Plan.


                                                                                         
                                                                                     Number of securities
                                Number of securities to  Weighted-average exercise  remaining available for
                                 be issued upon exercise   price of outstanding      future issuance under
                                 of outstanding options,   options, warrants and   Incentive Plan (excluding
         Plan Category             warrants and rights             rights              previously issued)
--------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders                    5,180,164                   $15.87                2,688,350(1)
Equity compensation plans not
approved by security holders                            -                        -                          -
                                ------------------------------------------------------------------------------
Total                                           5,180,164                   $15.87                  2,688,350
                                ==============================================================================
(1) The Incentive Plan authorizes the granting of options or other awards for an aggregate of the greater of
 500,000 or 9.5% of the outstanding shares on a fully diluted basis of our common stock up to a ceiling of
 8,932,921 shares.


                                       30


ITEM 6.           SELECTED FINANCIAL DATA
-----------------------------------------

         The following selected financial data are derived from our audited
financial statements for the years ended December 31, 2008, 2007, 2006, 2005,
and 2004. The selected financial data should be read in conjunction with the
more detailed information contained in the Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-K.

                             SELECTED FINANCIAL DATA
               (dollars in thousands, except for per share data)



                                                                                                            
                                                             For the Year      For the Year   For the Year For the Year For the Year
                                                                 Ended            Ended          Ended         Ended       Ended
                                                             December 31,     December 31,    December 31, December 31, December 31,
                                                                 2008              2007           2006          2005        2004
                                                           -------------------------------------------------------------------------
Statement of Operations Data
     Interest income                                             $3,115,428       $2,355,447     $1,221,882    $705,046    $532,328
     Interest expense                                             1,888,912        1,926,465      1,055,013     568,560     270,116
                                                           -------------------------------------------------------------------------
       Net interest income                                        1,226,516          428,982        166,869     136,486     262,212
                                                           -------------------------------------------------------------------------

Other (loss) income:
     Investment advisory and service fees                            27,891           22,028         22,351      35,625      12,512
     Gain (loss) on sale of investment securities                    10,713           19,062         (3,862)    (53,238)      5,215
     Gain on termination of interest rate swaps                           -            2,096         10,674           -           -
     Income from trading securities                                   9,695           19,147          3,994           -           -
     Dividend income from available-for-sale equity
      securities                                                      2,713               91              -           -           -
     Loss on other-than-temporarily impaired securities             (31,834)          (1,189)       (52,348)    (83,098)          -
     Unrealized loss on interest rate swaps                        (768,268)               -              -           -           -
                                                           -------------------------------------------------------------------------
       Total other (loss) income                                   (749,090)          61,235        (19,191)   (100,711)     17,727
                                                           -------------------------------------------------------------------------

Expenses:
     Distribution fees                                                1,589            3,647          3,444       8,000       2,860
     General and administrative expenses                            103,622           62,666         40,063      26,278      24,029
                                                           -------------------------------------------------------------------------
      Total Expenses                                                105,211           66,313         43,507      34,278      26,889
                                                           -------------------------------------------------------------------------

     Impairment of intangible for customer relationships                  -                -          2,493           -           -
                                                           -------------------------------------------------------------------------

Income before income taxes                                          372,215          423,904        101,678       1,497     253,050

Income taxes                                                         25,977            8,870          7,538      10,744       4,458
                                                           -------------------------------------------------------------------------

Income (loss) before minority interest                              346,238          415,034         94,140      (9,247)    248,592

Minority interest                                                        58              650            324           -           -
                                                           -------------------------------------------------------------------------

Net income (loss)                                                   346,180          414,384         93,816      (9,247)    248,592

Dividends on preferred stock                                         21,177           21,493         19,557      14,593       7,745
                                                           -------------------------------------------------------------------------

Net income available (loss related) to common shareholders         $325,003         $392,891        $74,259    ($23,840)   $240,847
                                                           =========================================================================

Basic net income (loss) per average common share                      $0.64            $1.32          $0.44      ($0.19)      $2.04
Diluted net income (loss) per average common share                    $0.64            $1.31          $0.44      ($0.19)      $2.03
Dividends declared per common share                                   $2.08            $1.04          $0.57       $1.04       $1.98
Dividends declared per preferred Series A share                       $1.97            $1.97          $1.97       $1.97       $1.45
Dividends declared per preferred Series B share                       $1.50            $1.50          $1.08           -           -


                                       31



                                                                                                        

Balance Sheet Data                                           December 31,    December 31,   December 31,  December 31, December 31,
                                                                 2008             2007         2006            2005        2004
                                                           -------------------------------------------------------------------------
     Mortgage-Backed Securities, at fair value                  $55,046,995     $52,879,528  $30,167,509  $15,929,864  $19,038,386
     Agency Debentures, at fair value                               598,945         253,915       49,500            -      390,509
     Total assets                                                57,597,615      53,903,514   30,715,980   16,063,422   19,560,299
     Repurchase agreements                                       46,674,885      46,046,560   27,514,020   13,576,301   16,707,879
     Total liabilities                                           50,318,301      48,585,536   28,056,149   14,559,399   17,859,829
     Stockholders' equity                                         7,183,272       5,204,938    2,543,041    1,504,023    1,700,470
     Number of common shares outstanding                        541,475,366     401,822,703  205,345,591  123,684,931  121,263,000

                                                             For the Year     For the Year  For the Year  For the Year For the Year
                                                                 Ended           Ended          Ended        Ended        Ended
Other Data                                                   December 31,     December 31,   December 31, December 31, December 31,
                                                                 2008             2007          2006         2005         2004
                                                           ----------------- -------------------------------------------------------
     Average total assets                                       $58,540,508     $41,834,831  $23,130,057 $18,724,075    $17,293,174
     Average investment securities                               55,962,519      40,800,148   23,029,195  18,543,749     16,399,184
     Average borrowings                                          50,270,226      37,967,215   21,399,130  17,408,828     15,483,118
     Average equity                                               6,679,431       3,710,821    2,006,206   1,614,743      1,550,076
     Yield on average interest earning assets                          5.57%           5.77%        5.31%       3.80%          3.25%
     Cost of funds on average interest bearing liabilities             3.76%           5.07%        4.93%       3.27%          1.74%
     Interest rate spread                                              1.81%           0.70%        0.38%       0.53%          1.51%

Financial Ratios
     Net interest margin (net interest income/average total
      assets)                                                          2.10%           1.03%        0.72%       0.73%          1.52%
     G&A expense as a percentage of average total assets               0.18%           0.15%        0.17%       0.14%          0.14%
     G&A expense as a percentage of average equity                     1.55%           1.69%        2.00%       1.63%          1.55%
     Return on average total assets                                    0.59%           0.99%        0.41%      (0.05%)         1.44%
     Return on average equity                                          5.18%          11.17%        4.68%      (0.57%)        16.04%


                                       32


ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
-----------------------------------------------------------------------------
              RESULTS OF OPERATIONS
              ---------------------

Overview

         We are a REIT that owns and manages a portfolio of principally
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 our
taxable REIT subsidiaries. FIDAC and Merganser are our wholly-owned taxable REIT
subsidiaries that are registered investment advisors that generate advisory and
service fee income. RCap is our wholly- owned broker dealer taxable REIT
subsidiary which we expect to generate fee income.

         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.

         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, the behavior of which involves 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 13% ,15% and 17% for the
years ended December 31, 2008, 2007 and 2006,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.

                                       33


         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.


                                                                                   

                           Average                  Yield on      Average                                        Net
                          Investment     Total       Average     Balance of              Average      Net     Interest
                          Securities    Interest   Investment    Repurchase   Interest   Cost of     Interest   Rate
                           Held (1)      Income    Securities    Agreements   Expense     Funds      Income    Spread
                       -----------------------------------------------------------------------------------------------
Quarter Ended
 December 31, 2008      $53,838,665     $740,282        5.50%    $47,581,332  $450,805     3.79%     $289,477    1.71%
Quarter Ended
 September 30, 2008     $57,694,277     $810,659        5.62%    $51,740,645  $458,250     3.54%     $352,409    2.08%
Quarter Ended
 June 30, 2008          $56,197,550     $773,359        5.50%    $50,359,825  $442,251     3.51%     $331,108    1.99%
Quarter Ended
 March 31, 2008         $56,119,584     $791,128        5.64%    $51,399,101  $537,606      4.18%    $253,522    1.46%


(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
-------------                                              ---
December 31, 2008                                          10%
September 30, 2008                                         11%
June 30, 2008                                              16%
March 31, 2008                                             15%

         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 accounting principles generally accepted in the United States, or
GAAP,, as temporary equity.

Recent Developments

         The liquidity crisis which commenced in August 2007 escalated
throughout 2008. During this period of market dislocation, fiscal and monetary
policymakers have established new liquidity facilities for primary dealers and
commercial banks, reduced short-term interest rates, and passed legislation that
is intended to address the challenges of mortgage borrowers and lenders. This
legislation, the Housing and Economic Recovery Act of 2008, seeks to forestall
home foreclosures for distressed borrowers and assist communities with
foreclosure problems. Although these aggressive steps are intended to protect
and support the US housing and mortgage market, we continue to operate under
very difficult market conditions.

         Subsequent to June 30, 2008, there were increased market concerns about
Freddie Mac and Fannie Mae's ability to withstand future credit losses
associated with securities held in their investment portfolios, and on which
they provide guarantees, without the direct support of the federal government.
In September 2008 Fannie Mae and Freddie Mac were placed into the
conservatorship of the Federal Housing Finance Agency, or FHFA, their federal
regulator, pursuant to its powers under The Federal Housing Finance Regulatory
Reform Act of 2008, a part of the Housing and Economic Recovery Act of 2008. As
the conservator of Fannie Mae and Freddie Mac, the FHFA controls and directs the
operations of Fannie Mae and Freddie Mac and may (1) take over the assets of and
operate Fannie Mae and Freddie Mac with all the powers of the shareholders, the
directors, and the officers of Fannie Mae and Freddie Mac and conduct all
business of Fannie Mae and Freddie Mac; (2) collect all obligations and money
due to Fannie Mae and Freddie Mac; (3) perform all functions of Fannie Mae and
Freddie Mac which are consistent with the conservator's appointment; (4)
preserve and conserve the assets and property of Fannie Mae and Freddie Mac; and
(5) contract for assistance in fulfilling any function, activity, action or duty
of the conservator.

                                       34


         In addition to FHFA becoming the conservator of Fannie Mae and Freddie
Mac, (i) the U.S. Department of Treasury and FHFA have entered into preferred
stock purchase agreements between the U.S. Department of Treasury and Fannie Mae
and Freddie Mac pursuant to which the U.S. Department of Treasury will ensure
that each of Fannie Mae and Freddie Mac maintains a positive net worth; (ii) the
U.S. Department of Treasury has established a new secured lending credit
facility which will be available to Fannie Mae, Freddie Mac, and the Federal
Home Loan Banks, which is intended to serve as a liquidity backstop, which will
be available until December 2009; and (iii) the U.S. Department of Treasury has
initiated a temporary program to purchase RMBS issued by Fannie Mae and Freddie
Mac. Given the highly fluid and evolving nature of these events, it is unclear
how our business will be impacted. Based upon the further activity of the U.S.
government or market response to developments at Fannie Mae or Freddie Mac, our
business could be adversely impacted.

         The Emergency Economic Stabilization Act of 2008, or EESA, was recently
enacted. The EESA provides the U.S. Secretary of the Treasury with the authority
to establish a Troubled Asset Relief Program, or TARP, to purchase from
financial institutions up to $700 billion of equity or preferred securities,
residential or commercial mortgages and any securities, obligations, or other
instruments that are based on or related to such mortgages, that in each case
was originated or issued on or before March 14, 2008, as well as any other
financial instrument that the U.S. Secretary of the Treasury, after consultation
with the Chairman of the Board of Governors of the Federal Reserve System,
determines the purchase of which is necessary to promote financial market
stability, upon transmittal of such determination, in writing, to the
appropriate committees of the U.S. Congress. The EESA also provides for a
program that would allow companies to insure their troubled assets.

         In addition, the U.S. Government, Federal Reserve and other
governmental and regulatory bodies have taken or are considering taking other
actions to address the financial crisis. There can be no assurance that the EESA
or other policy initiatives will have a beneficial impact on the financial
markets, including current extreme levels of volatility. We cannot predict
whether or when such actions may occur or what impact, if any, such actions
could have on our business, results of operations and financial condition.

         The liquidity crisis 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 terms, due to the fact that our
investment securities have an actual or implied "AAA" rating and principal
payment is guaranteed.


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 GAAP. 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.

                                       35


         Fair Value 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
fair 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.

         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.

      Derivative Financial Instruments/Hedging Activity : Prior to the fourth
quarter of 2008, we designated interest rate swaps as cash flow hedges, whereby
the swaps were recorded at fair value on the balance sheet as assets and
liabilities with any changes in fair value recorded in accumulated other
comprehensive income. In a cash flow hedge, a swap would exactly match the
pricing date of the relevant repurchase agreement. Through the end of the third
quarter 2008, we continued to be able to match the swaps with the repurchase
agreements therefore entering into effective hedge transactions. However, due to
the volatility of the credit markets, it is no longer practical to match the
pricing dates of both the swaps and the repurchase agreements.

      As a result, we voluntarily discontinued hedge accounting in the fourth
quarter of 2008 through a combination of de-designating previously defined hedge
relationships and not designating new contracts as cash flow hedges. The
de-designation of cash flow hedges was done in accordance with Derivatives
Implementation Group (DIG) Issue Nos. G3, G17, G18 & G20, which generally
require that the net derivative gain or loss related to the discontinued cash
flow hedge should continue to be reported in accumulated other comprehensive
income, unless it is probable that the forecasted transaction will not occur by
the end of the originally specified time period or within an additional
two-month period of time thereafter. As such we continue to hold repurchase
agreements in excess of swap contracts and have no indication that interest
payments on the hedged repurchase agreements are in jeopardy of discontinuing.
Therefore, the deferred losses related to these derivatives that have been
de-designated were not recognized immediately and are expected to be
reclassified into earnings during the contractual terms of the swap agreements
starting as of October 1, 2008. Changes in the unrealized gains or losses on the
interest rate swaps subsequent to September 30, 2008 will be reflected in our
income statement.

         Repurchase Agreements: We finance the acquisition of our 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.

                                       36


         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 our distributions to shareholders and as
long as certain asset, income and stock ownership tests are met. We, FIDAC,
Merganser, and RCap have made a joint election to treat FIDAC, Merganser, and
RCap as taxable REIT subsidiaries. As such, FIDAC, Merganser, and RCap are
taxable as a domestic C corporations and subject to federal and state and local
income taxes based upon their taxable income.

         Impairment of Goodwill and Intangibles: The Company's acquisitions of
FIDAC and Merganser were accounted for using the purchase method. The cost of
FIDAC and Merganser were 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 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.

      In April 2007, the FASB issued 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 us on January
1, 2008. The implementation did not have an effect on our financial statements.

      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 Accounting for Derivative Instruments and
Hedging Activities. 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 us on January 1, 2009. We are currently evaluating FSP 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, 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 us on January 1, 2009. We expect that adoption of SFAS
161 will increase footnote disclosure to comply with the disclosure requirements
for financial statements issued after January 1, 2009.

                                       37


      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 required additional disclosure,
which is included in Note 6.

      On October 10, 2008, FASB issued FASB Staff Position (FSP) 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active ("FSP 157-3"), in response to the deterioration of the credit
markets. This FSP provides guidance clarifying how SFAS 157 should be applied
when valuing securities in markets that are not active. The guidance provides an
illustrative example that applies the objectives and framework of SFAS 157,
utilizing management's internal cash flow and discount rate assumptions when
relevant observable data does not exist. It further clarifies how observable
market information and market quotes should be considered when measuring fair
value in an inactive market. It reaffirms the notion of fair value as an exit
price as of the measurement date and that fair value analysis is a transactional
process and should not be broadly applied to a group of assets. FSP 157-3 is
effective upon issuance including prior periods for which financial statements
have not been issued. FSP 157-3 does not have a material effect on the fair
value of our assets as we intend to continue to hold assets that can be valued
via level 1 and level 2 criteria, as defined under SFAS No. 157.

Results of Operations:

         Net Income Summary

         For the year ended December 31, 2008, our net income was $346.2 million
or $0.64 basic income per average share related to common shareholders, as
compared to $414.4 million net income or $1.32 basic net income per average
share for the year ended December 31, 2007. For the year ended December 31,
2006, our net income was $93.8 million or $0.44 basic net income per average
share related to common shareholders. Net income per average share decreased by
$0.68 per average share available to common shareholders and total net income
decreased $68.2 million for the year ended December 31, 2008, when compared to
the year ended December 31, 2007. We attribute the decrease in total net income
for the year ended December 31, 2008 from the year ended December 31, 2007
primarily to recording of unrealized losses related to interest rate swaps in
the fourth quarter of 2008. An unrealized loss of $768.3 million was recorded in
the income statement for the year ended December 31, 2008, as the result of
de-designation of cash flow hedges. Prior to the fourth quarter of 2008, we
recorded changes in the fair values in our interest rate swaps in the
Accumulated Other Comprehensive Income in our Statement of Financial Condition.
Net interest income increased by $797.5 million for the year ended December 31,
2008, as compared to the year ended December 31, 2007, due to the increase in
interest earning assets from the deployment of additional capital we raised in
2008 and the improved interest rate spread. For the year ended December 31,
2008, net gain on sale of Mortgage-Backed Securities was $10.7 million, as
compared to a net gain of $19.1 million for the year ended December 31, 2007.
The loss on other-than-temporarily impaired securities totaled $31.8 million for
the year ended December 31, 2008, as compared to $1.2 million for the year ended
December 31, 2007. During the year ended December 31, 2008, our general and
administrative expenses increased to $103.6 million, as compared to $62.7
million for the year ended December 31, 2007.

         We attribute the increase in total net income for the year ended
December 31, 2007 compared to the year ended December 31, 2006 primarily to the
increase in net interest income, gains on the sale of securities, a reduction in
losses on other-than temporarily impaired securities, the increased asset base,
and the increase in interest rate spread. The interest rate spread increased
from 0.38% for the year ended December 31, 2006 to 0.70% for the year ended
December 31, 2007. For the year ended December 31, 2007, net gain on sale of
Mortgage-Backed Securities was $19.1 million, as compared to a net loss of $3.9
million in 2006. The table below presents the net income (loss) summary for the
years ended December 31, 2008, 2007, and 2006.

                                       38


                            Net Income (Loss) Summary
                (dollars in thousands, except for per share data)
                -------------------------------------------------


                                                                                                                
                                                                                              Year Ended   Year Ended   Year Ended
                                                                                              December 31, December 31, December 31,
                                                                                                  2008         2007         2006
                                                                                             ---------------------------------------
Interest income                                                                                $3,115,428   $2,355,447   $1,221,882
Interest expense                                                                                1,888,912    1,926,465    1,055,013
                                                                                             ---------------------------------------
     Net interest income                                                                        1,226,516      428,982      166,869
                                                                                             ---------------------------------------

Other (loss) income:
  Investment advisory and service fees                                                             27,891       22,028       22,351
  Gain (loss) on sale of investment securities                                                     10,713       19,062       (3,862)
  Gain on termination of interest rate swaps                                                            -        2,096       10,674
  Income from trading securities                                                                    9,695       19,147        3,994
  Dividend income from available-for-sale equity securities                                         2,713           91            -
  Loss on other-than-temporarily impaired securities                                              (31,834)      (1,189)     (52,348)
  Unrealized loss on interest rate swaps                                                         (768,268)           -            -
                                                                                             ---------------------------------------
     Total other (loss) income                                                                   (749,090)      61,235      (19,191)
                                                                                             ---------------------------------------

Expenses:
  Distribution fees                                                                                 1,589        3,647        3,444
  General and administrative expenses                                                             103,622       62,666       40,063
                                                                                             ---------------------------------------
     Total expenses                                                                               105,211       66,313       43,507
                                                                                             ---------------------------------------

Impairment of intangible for customer relationships                                                     -            -        2,493
                                                                                             ---------------------------------------

Income before income taxes and minority interest                                                  372,215      423,904      101,678

Income taxes                                                                                       25,977        8,870        7,538
                                                                                             ---------------------------------------

Income before minority interest                                                                   346,238      415,034       94,140

Minority interest                                                                                      58          650          324
                                                                                             ---------------------------------------

Net Income                                                                                        346,180      414,384       93,816

Dividends on preferred stock                                                                       21,177       21,493       19,557
                                                                                             ---------------------------------------

Net income available to common shareholders                                                      $325,003     $392,891      $74,259
                                                                                             =======================================

Weighted average number of basic common shares outstanding                                    507,024,596  297,488,394  167,666,631
Weighted average number of diluted common shares outstanding                                  507,024,596  306,263,766  167,746,387

Basic net income per average common share                                                           $0.64        $1.32        $0.44
Diluted net income per average common share                                                         $0.64        $1.31        $0.44

Average total assets                                                                           58,540,508   41,834,831  $23,130,057
Average equity                                                                                  6,679,431    3,710,821    2,006,206

Return on average total assets                                                                       0.59%        0.99%        0.41%
Return on average equity                                                                             5.18%       11.17%        4.68%


Interest Income and Average Earning Asset Yield

         We had average earning assets of $56.0 billion for the year ended
December 31, 2008. We had average earning assets of $40.8 billion for the year
ended December 31, 2007. We had average earning assets of $23.0 billion for the
year ended December 31, 2006. Our primary source of income is interest income.
Our interest income was $3.1 billion for the year ended December 31, 2008, $2.4
billion for the year ended December 31, 2007, and $1.2 billion for the year
ended December 31, 2006. The yield on average investment securities was 5.57%,
5.77%, and 5.31% for the respective years. The prepayment speeds decreased to an
average of 10% CPR for the year ended December 31, 2008 from an average of 15%
CPR for the year ended December 31, 2007.

                                       39


         Interest Expense and the Cost of Funds

         Our largest expense is the cost of borrowed funds. We had average
borrowed funds of $50.3 billion and total interest expense of $1.9 billion for
the year ended December 31, 2008. We had average borrowed funds of $38.0 billion
and total interest expense of $1.9 billion for the year ended December 31, 2007.
We had average borrowed funds of $21.4 billion and total interest expense of
$1.1 million for the year ended December 31, 2006. Our average cost of funds was
3.76% for the year ended December 31, 2008 and 5.07% for the year ended December
31, 2007 and 4.93 % for the year ended December 31, 2006. The cost of funds rate
decreased by 131 basis points and the average borrowed funds increased by $12.3
billion for the year ended December 31, 2008 when compared to the year ended
December 31, 2007. Interest expense for the year ended December 31, 2008
decreased by $37.6 million over the prior year due to the substantial decrease
in the average cost of funds rate. The cost of funds rate increased by 14 basis
points and the average borrowed funds increased by $16.6 billion for the year
ended December 31, 2007 when compared to the year ended December 31, 2006.
Interest expense for the year ended December 31, 2007 increased by $871.5
million over the previous year due to the substantial increase in the average
borrowed funds and the increase in the average cost of funds rate. Since a
substantial portion of our repurchase agreements are short term, changes in
market rates are directly reflected in our interest expense. Our average cost of
funds was 1.08% above average one-month LIBOR and 0.70% above average six-month
LIBOR for the year ended December 31, 2008. Our average cost of funds was 0.12%
below average one-month LIBOR and 0.12% below average six-month LIBOR for the
year ended December 31, 2007. Our average cost of funds was 0.10% below average
one-month LIBOR and 0.28% below average six-month LIBOR for the year ended
December 31, 2006.

         The table below shows our average borrowed funds and average cost of
funds as compared to average one-month and average six-month LIBOR for the years
ended December 31, 2008, 2007, 2006, 2005, and 2004 and the four quarters in
2008.
                             Average Cost of Funds
                             ---------------------
     (Ratios for the four quarters in 2008 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 Year Ended
  December 31, 2008                                      $50,270,226 $1,888,912   3.76%   2.68%   3.06%   (0.38%)    1.08%    0.70%
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 Year Ended
  December 31, 2006                                      $21,399,130 $1,055,013   4.93%   5.03%   5.21%   (0.18%)   (0.10%)  (0.28%)
For the Year Ended
  December 31, 2005                                      $17,408,828   $568,560   3.27%   3.33%   3.72%   (0.39%)   (0.06%)  (0.45%)
For the Year Ended
  December 31, 2004                                      $15,483,118   $270,116   1.74%   1.50%   1.80%   (0.30%)    0.24%   (0.06%)
------------------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
  December 31, 2008                                      $47,581,332   $450,805   3.79%   2.23%   2.94%   (0.71%)    1.56%    0.85%
For the Quarter Ended
  September 30, 2008                                     $51,740,645   $458,250   3.54%   2.62%   3.19%   (0.57%)    0.92%    0.35%
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%


                                       40


Net Interest Income

         Our net interest income, which equals interest income less interest
expense, totaled $1.2 billion for the year ended December 31, 2008 and $429.0
million for the year ended December 31, 2007 and $166.9 million for the year
ended December 31, 2006. Our net interest income increased for the year ended
December 31, 2008, as compared to the year ended December 31, 2007, because of
the increased average asset base in 2008 and the increased interest rate spread.
Our net interest income increased for the year ended December 31, 2007 as
compared to the year ended December 31, 2006 by $262.1 million because of the
increased average asset base for 2007. In 2008 average assets increased because
of the deployment of additional capital. Our net interest spread, which equals
the yield on our average assets for the period less the average cost of funds
for the period, was 1.81% for the year ended December 31, 2008 as compared to
0.70% for the year ended December 31, 2007 and 0.38% for the year ended December
31, 2006. This 111 basis point increase in interest rate spread for 2008 over
the spread for 2007 was the result in the decrease in the average cost of funds
of 131 basis points, which was only partially offset by a decrease in average
yield on average interest earning assets of 20 basis points.

                  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
years ended December 31, 2008, 2007, 2006, 2005, and 2004 and the four quarters
in 2008.
                               Net Interest Income
 (Ratios for the four quarters in 2008 have been annualized, dollars in
                                   thousands)



                                                                              
                                               Yield on
                         Average               Average   Average                                         Net
                       Investment    Total     Interest  Balance of              Average     Net       Interest
                        Securities  Interest   Earning   Repurchase  Interest    Cost of   Interest      Rate
                          Held       Income     Assets   Agreements   Expense     Funds     Income      Spread
                       ----------- ---------- --------- ----------- ----------- --------- ---------- ------------
For the Year Ended
  December 31, 2008    $55,962,519 $3,115,428     5.57% $50,270,226  $1,888,912     3.76% $1,226,516        1.81%
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 Year Ended
  December 31, 2006    $23,029,195 $1,221,882     5.31% $21,399,130  $1,055,013     4.93%   $166,869        0.38%
For the Year Ended
  December 31, 2005    $18,543,749   $705,046     3.80% $17,408,827    $568,560     3.27%   $136,486        0.53%
For the Year Ended
  December 31, 2004    $16,399,184   $532,328     3.25% $15,483,118    $270,116     1.74%   $262,212        1.51%
-----------------------------------------------------------------------------------------------------------------
For the Quarter Ended
  December 31, 2008    $53,838,665   $740,282     5.50% $47,581,332    $450,805     3.79%   $289,477        1.71%
 For the Quarter Ended
  September 30, 2008   $57,694,277   $810,659     5.62% $51,740,645    $458,250     3.54%   $352,409        2.08%
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%


         Investment Advisory and Service Fees

         FIDAC and Merganser are registered investment advisors specializing in
managing fixed income securities. At December 31, 2008, FIDAC and Merganser had
under management approximately $7.0 billion in net assets and $15.3 billion in
gross assets, compared to $3.1 billion in net assets and $15.4 billion in gross
assets at December 31, 2007. Net investment advisory and service fees for the
years ended December 31, 2008, 2007, and 2006 totaled $26.3 million, $18.4
million, and $18.9 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 and Merganser manage as well as changes in the amount of leverage
used by the various funds and accounts FIDAC manages.

                                       41


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

         For the year ended December 31, 2008, we sold Investment Securities
with a carrying value of $15.2 billion for aggregate net gain of $10.7 million.
For the year ended December 31, 2007, we sold investment securities with a
aggregate historical amortized value of $4.9 billion for a net gain of $19.1
million. In addition, for the year ended December 31, 2007, we had a $2.1
million gain on the termination of interest rate swaps with a notional amount of
$900 million. For the year ended December 31, 2006, we sold investment
securities with an aggregate historical amortized value of $3.2 billion for an
aggregate loss of $3.9 million. In addition, for the year ended December 31,
2006, we had a $10.7 million gain on the termination of interest rate swaps with
a notional amount of $1.2 billion. 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.

         Income from Trading Securities

         Gross income from trading securities totaled $9.7 million, $19.1
million, and $4.0 million for the year ended December 31, 2008, 2007 and 2006.

         Dividend Income from Available-For-Sale Equity Securities

         Dividend income from our investment in Chimera totaled $2.7 million for
the year ended December 31, 2008 and $91,000 for the year ended December 31,
2007. For the year 2006 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 year ended December 31, 2008 the loss on
other-than-temporarily impaired securities totaled $31.8 million related to our
equity investment in Chimera. For the years ended December 31, 2007 and 2006 the
loss on other-than-temporarily impaired securities totaled $1.2 million and
$52.3 million, respectively.

         Impairment of Goodwill and Intangibles

         During the years ended December 31, 2008 and 2007, it was determined
that there was no impairment of intangibles. The total impairment of intangible
assets relating to customer relationships was $2.5 million for the year ended
December 31, 2006. There were no impairment charges related to goodwill during
the years ended 2008, 2007, and 2006.

         General and Administrative Expenses

         General and administrative (or G&A) expenses were $103.6 million for
the year ended December 31, 2008, $62.7 million for the year ended December 31,
2007, and $40.1 million for the year ended December 31, 2006. G&A expenses as a
percentage of average total assets was 0.18%, 0.15%, and 0.17% for the years
ended December 31, 2008, 2007, and 2006, respectively. The increase in G&A
expenses of $40.9 million for the year December 31, 2008 was primarily the
result of increased compensation, directors and officers insurance and
additional costs related to our subsidiaries. Staff increased from 34 at the end
of 2006 to 39 at the end of 2007 and 65 at the end of 2008.

         The table below shows our total G&A expenses as compared to average
total assets and average equity for the years ended December 31, 2008, 2007,
2006, 2005, and 2004 and the four quarters in 2008.


                                       42




                                                                        

                    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 Year Ended December 31, 2008            $103,622            0.18%              1.55%
For the Year Ended December 31, 2007             $62,666            0.15%              1.69%
For the Year Ended December 31, 2006             $40,063            0.17%              2.00%
For the Year Ended December 31, 2005             $26,278            0.14%              1.63%
For the Year Ended December 31, 2004             $24,029            0.14%              1.55%
--------------------------------------------------------------------------------------------
For the Quarter Ended December 31, 2008          $26,957            0.18%              1.50%
For the Quarter Ended September 30, 2008         $25,455            0.17%              1.40%
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%


Net Income and Return on Average Equity

         Our net income was $346.2 million for the year ended December 31, 2008,
net income was $414.4 million for the year ended December 31, 2007, and net
income was $93.8 million for the year ended December 31, 2006. Our return on
average equity was 5.18% for the year ended December 31, 2008, was 11.17% for
the year ended December 31, 2007, and 4.68% for the year ended December 31,
2006. Net interest income increased by $797.5 million for the year ended
December 31, 2008, as compared to the year ended December 31, 2007, due to the
increase in interest earning assets from the deployment of additional capital we
raised in 2008 and the improved interest rate spread. Even with the increase in
net interest income of $797.5 million, net income for the year decreased by
$68.2 million. We attribute the decrease in total net income for the year ended
December 31, 2008 from the year ended December 31, 2007 primarily to the
de-designation of interest rate swaps as cash flow hedges in the fourth quarter
of 2008, which resulted in an unrealized loss of $768.3 million being recorded
in the income statement for the year ended December 31, 2008. Prior to the
fourth quarter of 2008 and the de-designation of cash flow hedges, we recorded
these changes in the market values of interest rate swaps in the Statement of
Financial Condition.

         We attribute the increase in total net income for the year ended
December 31, 2007 compared to the year ended December 31, 2006 primarily to the
increase in net interest income, gains on the sale of securities, a reduction in
losses on other-than temporarily impaired securities, the increased asset base,
and the increase in interest rate spread.

         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 trading securities, G&A expenses, income taxes,
impairment of intangibles for customer relationships, minority interest, each as
a percentage of average equity, and the return on average equity for the years
ended December 31, 2008, 2007, 2006, 2005, and 2004, and the four quarters in
2008.

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


                                                                                                 

                               Gain/(Loss)
                                on Sale of
                                Mortgage-
                                 Backed
                                Securities
                                   and
                                Realized
                      Net          and                                                               Impairment
                    Investment  Unrealized   Loss on                 Dividend                             of
                     Advisory      Gain     other-than-               income                          intangible
           Net         and      /(Loss)     temporarily Income from    from                               for
          Interest  Service     Interest     impaired     trading    available-    G&A      Income    customer     Minority  Return
           Income      Fees     Rate Swaps  securities/  securities  for-sale    Expenses/ Taxes/    relationships  interest/  on
         /Average   /Average    /Average     Average     /Average     equity     Average    Average   /Average      Average  Average
           Equity    Equity       Equity      Equity       Equity    securities   Equity    Equity      Equity       Equity   Equity
         --------- ----------- ----------- ------------ ----------- ----------- ---------- -------- -------------- -----------------
For the
 Year
 Ended
December
 31, 2008   18.36%      0.39%     (11.34%)      (0.48%)      0.15%        0.04%    (1.55%)  (0.39%)            -          -    5.18%
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
 Year
 Ended
December
 31, 2006    8.32%      0.94%       0.34%       (2.61%)      0.20%           -     (2.00%)  (0.38%)        (0.12%)    (0.01%)  4.68%
For the
 Year
 Ended
December
 31, 2005    8.45%      1.71%      (3.30%)      (5.15%)         -            -      1.63%    0.67%             -          -  (0.57%)
For the
 Year
 Ended
December
 31, 2004   16.92%      0.62%       0.34%           -           -            -      1.55%    0.29%             -          -   16.04%
------------------------------------------------------------------------------------------------------------------------------------
For the
 Quarter
 Ended
December
 31, 2008   16.06%      0.38%     (42.63%)          -       (0.11%)       0.03%    (1.50%)  (0.35%)            -          - (28.12%)
For the
 Quarter
 Ended
September
 30, 2008   19.52%      0.41%      (0.07%)      (1.76%)      0.42%        0.03%    (1.40%)  (0.42%)            -          -   16.73%
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%


                                       43


Financial Condition

         Investment Securities, Available for Sale

        All of our Mortgage-Backed Securities at December 31, 2008, 2007, and
2006 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
implied "AAA" rating. All of our agency debentures are callable and carry an
implied "AAA" rating. We carry all of our earning assets at fair value.

         We accrete discount balances as an increase in interest income over the
life of discount investment securities and we amortize premium balances as a
decrease in interest income over the life of premium investment securities. At
December 31, 2008, 2007, and 2006 we had on our balance sheet a total of $64.4
million, $77.4 million and $78.4 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 value) and a total of $619.5 million, $405.8 million and $219.1
million, respectively, of unamortized premium (which is the difference between
the remaining principal value and the current historical amortized cost of our
investment securities acquired at a price above principal value).

         We received mortgage principal repayments of $8.6 billion for the year
ended December 31, 2008, $6.8 billion for the year ended December 31, 2007, and
$5.1 billion for the year ended December 31, 2006. The average prepayment speed
for the year ended December 31, 2008, 2007 and 2006 was 13%, 15%, and 17%,
respectively. During the year ended December 31, 2008, the average CPR declined
to 13% from 15% during the year ended December 31, 2007, due to a decline in
refinancing activity. 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.

         The table below summarizes certain characteristics of our Investment
Securities at December 31, 2008, 2007, 2006, 2005, and 2004 and September 30,
2008, June 30, 2008, and March 31, 2008.

                              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 December 31, 2008    $54,508,672 $555,043 $55,063,715         101.02% $55,645,940          102.09%    5.15%
At December 31, 2007    $52,569,598 $328,376 $52,897,974         100.62% $53,133,443          101.07%    5.75%
At December 31, 2006    $30,134,791 $140,709 $30,275,500         100.47% $30,217,009          100.27%    5.63%
At December 31, 2005    $15,915,801 $220,637 $16,136,438         101.39% $15,929,864          100.09%    4.68%
At December 31, 2004    $19,123,902 $425,792 $19,549,694         102.23% $19,428,895          101.59%    3.43%
--------------------------------------------------------------------------------------------------------------
At September 30, 2008   $55,211,123 $525,394 $55,736,517         100.95% $55,459,280          100.45%    5.41%
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%


                                       44


         The table below summarizes certain characteristics of our Investment
Securities at December 31, 2008, 2007, 2006, 2005, and 2004 and September 30,
2008, June 30, 2008, and March 31, 2008. 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)



                                                                    
                                             Weighted                           Principal Amount
                                    Weighted  Average                 Weighted   at Period End as
                                     Average  Term to     Weighted     Average      % of Total
                         Principal   Coupon     Next       Average      Asset       Investment
                           Amount     Rate   Adjustment  Lifetime Cap    Yield      Securities
                        --------------------------------------------------------------------------
At December 31, 2008     $19,540,152   4.75%   36 months        10.00%     3.93%            35.85%
At December 31, 2007     $15,331,447   5.90%   39 months         9.89%     5.63%            29.16%
At December 31, 2006      $8,493,242   5.72%   19 months         9.76%     5.57%            28.18%
At December 31, 2005      $9,699,133   4.76%   22 months        10.26%     4.74%            60.94%
At December 31, 2004     $13,544,872   4.23%   24 months        10.12%     3.24%            70.83%
--------------------------------------------------------------------------------------------------
At September 30, 2008    $19,310,012   5.27%   37 months         9.98%     4.65%            34.97%
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%




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



                                                                 
                                                                    Principal Amount at
                                                                     Period End as % of
                       Principal  Weighted Average Weighted Average   Total Investment
                         Amount      Coupon Rate      Asset Yield        Securities
                      ------------ ---------------- --------------- ----------------------
At December 31, 2008   $34,968,520            6.13%           5.84%                64.15%
At December 31, 2007   $37,238,151            6.00%           5.80%                70.84%
At December 31, 2006   $21,641,549            5.83%           5.65%                71.82%
At December 31, 2005    $6,216,668            5.37%           4.60%                39.06%
At December 31, 2004    $5,579,030            5.24%           3.89%                29.17%
At December 31, 2003    $3,387,196            5.77%           4.29%                26.71%
-----------------------------------------------------------------------------------------
At September 30, 2008  $35,901,111            6.06%           5.82%                65.03%
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, 2008 and 2007,  we held  Investment  Securities  with
coupons  linked to various  indices.  The following  tables detail the portfolio
characteristics by index.

                 Adjustable-Rate Investment Securities by Index
                 ----------------------------------------------
                               December 31, 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. 25 mo. 55 mo.    1 mo.     1 mo.    37 mo.    1 mo.     14 mo.
Weighted Average
  Annual Period Cap                                             6.28%  1.95%  1.98%    0.00%     1.26%     1.93%    0.00%      1.94%
Weighted Average
  Lifetime Cap at
  December 31, 2008                                             7.07% 10.87% 10.92%    8.86%    11.35%    10.86%   13.44%     11.98%
Investment Principal
  Value as Percentage of
  Investment Securities at
  December 31, 2008                                             8.11%  2.53% 19.32%    0.99%     0.60%     4.12%    0.11%      0.07%

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

                                       45


                 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.


     Reverse Repurchase Agreements

         At December 31, 2008, we lent $562.1 million to Chimera in an overnight
reverse repurchase agreement. This amount is included at fair value in our
Statement of Financial Condition. The interest rate at December 31, 2008 was an
at the market rate of 1.43%. The average rate on all reverse repurchase
agreements for the year was 2.99%. The collateral for this loan is
mortgage-backed 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. There
were no trading securities and trading securities sold, not yet purchased at
December 31, 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.

     Receivable from Prime Broker on Equity Investment

         The net assets of the investment fund are subject to English bankruptcy
law, which governs the administration of Lehman Brothers International (Europe)
(LBIE), as well as the law of New York, which governs the contractual documents.
Until our contractual documents with LBIE are terminated, the value of the
assets and liabilities in our account with LBIE will continue to fluctuate based
on market movements. We do not intend to terminate these contractual documents
until LBIE's administrators have clarified the consequences of us doing so. We
have not received notice from LBIE's administrators that LBIE has terminated the
documents. LBIE's administrators have advised us that they can provide us with
no additional information about our account at this time. As a result, we have
presented the market value of our account with LBIE as of September 15, 2008,
which is the date of the last statement we received from LBIE on the account's
assets and liabilities. We can provide no assurance, however, that we will
recover all or any portion of these assets following completion of LBIE's
administration (and any subsequent liquidation).

                                       46


         Borrowings

         To date, our debt has consisted entirely of borrowings collateralized
by a pledge of our Investment Securities. These borrowings appear on our balance
sheet as repurchase agreements. At December 31, 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.

         For the year ended December 31, 2008, the term to maturity of our
borrowings ranged from one day to three years. Additionally, 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 287 days at December 31, 2008. For the year ended December 31,
2007, the term to maturity of our borrowings ranged from one day to three years,
with a weighted average original term to maturity of 286 days at December 31,
2007. For the year ended December 31, 2006, the term to maturity of our
borrowings ranged from one day to three years, with a weighted average original
term to maturity of 194 days at December 31, 2006.

         At December 31, 2008, the weighted average cost of funds for all of our
borrowings was 4.08%, with the effect of the interest rate swaps, and the
weighted average term to next rate adjustment was 238 days. At December 31,
2007, the weighted average cost of funds for all of our borrowings 4.76% and the
weighted average term to next rate adjustment was 234 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. 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 $700 million to
$46.7 billion at December 31, 2008, from $46.0 billion at December 31, 2007.
Even though borrowing increased over the year, leverage declined from 8.7:1 to
6.4:1.

         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 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 December 31, 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.

                                       47


         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 December 31, 2008. The table does not include the effect of net
interest rate payments under our interest rate swap agreements. The net swap
payments will fluctuate based on monthly changes in the receive rate, At
December 31, 2008, the interest rate swaps had a negative fair value of $1.1
billion.


                                                                                          

                                                                    (dollars in thousands)
                                                                     --------------------
                                             Within One    One to Three     Three to      More than
Contractual Obligations                         Year           Years       Five Years    Five Years        Total
---------------------------------------------------------------------------------------------------------------------
Repurchase agreements                         $40,195,726     $2,930,000    $2,049,159     $1,500,000    $46,674,885
Interest expense on repurchase
agreements, based on rates at 12-31-08            367,979        395,150       183,269        196,838      1,143,236
Long-term operating lease obligations
                                                      532                            -              -            532
Employment contracts                               36,645              -             -              -         36,645
                                           --------------------------------------------------------------------------
Total                                         $40,600,882     $3,325,150    $2,232,428     $1,696,838    $47,855,298
                                           ==========================================================================


         Stockholders' Equity

         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
May 19, 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 year ended December 31, 2008, we raised $93.7 million by
issuing 5.8 million shares through our Direct Purchase and Dividend Reinvestment
Program.

         On August 3, 2006, we 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 our 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 year
ended December 31, 2008, 588,000 shares of our common stock were issued pursuant
to this program, totaling $11.5 million in net proceeds.

         On August 3, 2006, we entered into an ATM Equity Sales Agreement with
UBS Securities LLC, relating to the sale of shares of our common stock from time
to time through UBS Securities. Sales of the shares, if any, are made by means
of ordinary brokers' transaction on the New York Stock Exchange. During the year
ended December 31, 2008, 3.8 million shares of our common stock were issued
pursuant to this program, totaling $60.3 million in net proceeds.

         During the year ended December 31, 2008, 300,000 options were exercised
under the Long-Term Stock Incentive Plan, or Incentive Plan, for an aggregate
exercise price of $2.8 million.

         On October 11, 2007, we entered into an underwriting agreement pursuant
to which we sold 71,300,000 shares of our common stock for net proceeds
following underwriting expenses of approximately $1.0 billion. This transaction
settled on October 17, 2007.

         On July 12, 2007, we entered into an underwriting agreement pursuant to
which we sold 54,050,000 shares of our common stock for proceeds of $720.8
million net of underwriting fees. This transaction settled on July 18, 2007.

                                       48


         On March 7, 2007, we entered into an underwriting agreement pursuant to
which we sold 57,500,000 shares of our common stock for net proceeds following
underwriting expenses of approximately $737.4 million. This transaction settled
on March 13, 2007.

         During the year ended December 31, 2007 we sold 4.5 million shares of
our common stock, for net proceeds of $66.2 million, under the ATM Equity Sales
Agreement with Merrill. During the year ended December 31, 2007, we sold 1.1
million shares of our common stock for net proceeds of $14.7 million under our
Equity Shelf Program with UBS Securities, pursuant to which sales are made by
means of ordinary brokers' transaction on the New York Stock Exchange.

         During the year ended December 31, 2007, we raised $116.5 million by
issuing 8.0 million shares through the Direct Purchase and Dividend Reinvestment
Program.

         During the year ended December 31, 2007, 55,738 options were exercised
under the Incentive Plan for an aggregate exercise price of $576,000.

         On August 16, 2006, we entered into an underwriting agreement pursuant
to which we sold 40,825,000 shares of our common stock for net proceeds
following underwriting expenses of approximately $476.7 million. This
transaction settled on August 22, 2006.

         On April 6, 2006, we entered into an underwriting agreement pursuant to
which we sold 39,215,000 shares of our common stock for net proceeds following
underwriting expenses of approximately $437.7 million. On April 6, 2006, we
entered into a second underwriting agreement pursuant to which we sold 4,600,000
shares of our 6% Series B Cumulative Convertible Preferred Stock for net
proceeds following underwriting expenses of approximately $111.5 million. Each
of these transactions settled on April 12, 2006. The 6% Series B Cumulative
Preferred Stock has been treated under GAAP as temporary equity. For the purpose
of computing ratios relating to equity measures, the Series B Preferred Stock
has been included in equity.

         During the year ended December 31, 2006, 1,598,500 shares of the
Company's common stock were issued through the ATM Programs and Equity Shelf
Program with UBS Securities, totaling net proceeds of $20.9 million. During the
year ended December 31, 2006, 22,160 options were exercised under the long-term
compensation plan for an aggregate exercise price of $183,000.

         Unrealized Gains and Losses

         With our "available-for-sale" accounting treatment, unrealized
fluctuations in market values of assets do not impact our GAAP or taxable income
but rather are reflected on our balance sheet by changing the carrying value of
the asset and stockholders' equity under "Accumulated Other Comprehensive Income
(Loss)." As a result of the de-designation of interest rate swaps as cash flow
hedges during the quarter ended December 31, 2008, unrealized gains and losses
in our interest rate swaps impact our GAAP income.
         As a result of this mark-to-market 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 balance sheet 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 prior to de-designation.

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


                                                                                
                                                             At December 31,
                                 -------------------------------------------------------------------------
                                       2008            2007           2006          2005         2004
                                 -------------------------------------------------------------------------
Unrealized gain                          $785,087       $379,348       $112,596  $     5,027   $   23,021
Unrealized loss                          (532,857)      (531,545)      (188,708)    (211,601)    (143,821)
                                 -------------------------------------------------------------------------
Net Unrealized (loss) gain               $252,230      ($152,197)      ($76,112)   ($206,574)   ($120,800)
                                 =========================================================================


                                       49


         Unrealized changes in the estimated net fair value of investment
securities have one direct effect on our potential earnings and dividends:
positive 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 December 31, 2008, 2007 and 2006 was 6.4:1,
8.7:1 and 10.4:1, 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
would 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 December 31, 2008, we had entered into swap agreements with a
total notional amount of $17.6 billion. We agreed to pay a weighted average pay
rate of 4.66% 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.

         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 December 31, 2008, we had no material commitments for capital
expenditures.

                                       50


         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 years ended December 31, 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 years ended December 31,
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, for the years ended of December 31,
2008, 2007, and 2006, 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 December 31, 2008 and December 31,
2007, we were in compliance with this requirement.

                                       51


ITEM 7A  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 December 31, 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                                         8.82%                                  1.64%

-50 Basis Points                                         5.19%                                  1.58%
-25 Basis Points                                         1.85%                                  1.41%
Base Interest Rate                                         -                                      -
+25 Basis Points                                        (3.68%)                                 0.74%
+50 Basis Points                                        (7.62%)                                 0.25%
+75 Basis Points                                       (11.57%)                                (0.34%)


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 December 31,
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.

                                       52



                                                                                              


                                        Within 3                              More than 1
                                         Months              4-12 Months       Year to 3    3 Years and
                                                                                Years           Over            Total
                                                                   (dollars in thousands)
                                     ------------------------------------------------------------------------------------
Rate Sensitive Assets:
 Investment Securities (Principal)       $ 5,722,108       $ 2,294,550      $ 3,196,475     $43,295,539      $54,508,672
 Cash Equivalents                            909,353                 -                -               -          909,353
 Reverse Repurchase Agreements               562,119                                                             562,119
                                     ------------------------------------------------------------------------------------
  Total Rate Sensitive Assets              7,193,580         2,294,550        3,196,475      43,295,539       55,980,144

Rate Sensitive Liabilities:
  Repurchase Agreements,
    with the effect of swaps              21,369,035         5,880,891       12,243,050       7,181,909       46,674,885
                                     ------------------------------------------------------------------------------------

Interest rate sensitivity gap           ($14,175,455)      ($3,586,341)     ($9,046,575)    $36,113,630       $9,305,259
                                     ====================================================================================

Cumulative rate sensitivity gap         ($14,175,455)     ($17,761,796)    ($26,808,371)    $ 9,305,259
                                     ===================================================================

Cumulative interest rate
sensitivity gap as a percentage of
total rate-sensitive assets                     (26%)             (33%)            (49%)            17%
                                     ===================================================================


        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."

                                       53


ITEM 8        FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------------

         Our financial statements and the related notes, together with the
Report of Independent Registered Public Accounting Firm thereon, are set forth
on pages F-1 through F-22 of this Form 10-K.

ITEM 9        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------------
              FINANCIAL DISCLOSURE
              --------------------

         None.

ITEM 9A       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 annual 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.


Management Report On Internal Control Over Financial Reporting


Dated:  February 25, 2009


         Management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rules 13a-15(f) under the Securities
Exchange Act as a process designed by, or under the supervision of, the
Company's principal executive and principal financial officers and effected by
the Company's Board of Directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:


   o    pertain to the maintenance of records that in reasonable detail
        accurately and fairly reflect the transactions and dispositions of the
        assets of the Company;

   o    provide reasonable assurance that transactions are recorded as necessary
        to permit preparation of financial statements in accordance with
        generally accepted accounting principles, and that receipts and
        expenditures of the Company are being made only in accordance with
        authorizations of management and directors of the Company; and

   o    provide reasonable assurance regarding prevention or timely detection of
        unauthorized acquisition, use or disposition of the Company's assets
        that could have a material effect on the financial statements.

         Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. As a result, even systems
determined to be effective can provide only reasonable assurance regarding the
preparation and presentation of financial statements. Moreover, projections of
any evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may deteriorate.

         The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2008. In making
this assessment, the Company's management used criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.

                                       54


         Based on management's assessment, the Company's management believes
that, as of December 31, 2008, the Company's internal control over financial
reporting was effective based on those criteria. There have been no changes in
the Company's internal controls over financial reporting that occurred during
the quarter ended December 31, 2008 that have materially affected, or are
reasonably likely to affect its internal control over financial reporting.

         The Company's independent registered public accounting firm, Deloitte &
Touche LLP, has issued an attestation report on the Company's internal control
over financial reporting. This report appears on page F-1 of this annual report
on Form 10-K.

ITEM 9B.     OTHER INFORMATION
------------------------------

         None.
                                    PART III
                                    --------

ITEM 10       DIRECTORS , EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
---------------------------------------------------------------------

         The information required by Item 10 as to our directors is incorporated
herein by reference to the proxy statement to be filed with the SEC within 120
days after December 31, 2008. The information regarding our executive officers
required by Item 10 appears in Part I of this Form 10-K. The information
required by Item 10 as to our compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated by reference to the proxy statement to be
filed with the SEC within 120 days after December 31, 2008.

         We have adopted a Code of Business Conduct and Ethics within the
meaning of Item 406(b) of Regulation S-K. This Code of Business Conduct and
Ethics applies to our principal executive officer, principal financial officer
and principal accounting officer. This Code of Business Conduct and Ethics is
publicly available on our website at www.annaly.com. If we make substantive
amendments to this Code of Business Conduct and Ethics or grant any waiver,
including any implicit waiver, we intend to disclose these events on our
website.

ITEM 11       EXECUTIVE COMPENSATION
------------------------------------

         The information required by Item 11 is incorporated herein by reference
to the proxy statement to be filed with the SEC within 120 days after December
31, 2008.

ITEM 12       SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
--------------------------------------------------------------------------------
              RELATED STOCKHOLDER MATTERS
              ---------------------------

         The information required by Item 12 is incorporated herein by reference
to the proxy statement to be filed with the SEC within 120 days after December
31, 2008.

ITEM 13       CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
--------------------------------------------------------------------------
              INDEPENDENCE
              ------------

         The information required by Item 13 is incorporated herein by reference
to the proxy statement to be filed with the SEC within 120 days after December
31, 2008.

ITEM 14       PRINCIPAL ACCOUNTANT FEES AND SERVICES
----------------------------------------------------

         The information required by Item 14 is incorporated herein by reference
to the proxy statement to be filed with the SEC within 120 days after December
31, 2008.

                                       55


                                     PART IV
                                     -------

ITEM 15       EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
------------------------------------------------------

(a) Documents filed as part of this report:

1. Financial Statements.

2. Schedules to Financial Statements:

         All financial statement schedules not included have been omitted
because they are either inapplicable or the information required is provided in
our Financial Statements and Notes thereto, included in Part II, Item 8, of this
Annual Report on Form 10-K.

3. Exhibits:
                                  EXHIBIT INDEX


           
Exhibit       Exhibit Description
Number

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           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).
3.5           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).
3.6           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).
3.7           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 8K filed with
              the Securities and Exchange Commission on April 10, 2006).
10.1          Long-Term Stock Incentive Plan (incorporated by reference to
              Exhibit 10.3 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).*



                                       56




                                                                                      
10.2          Form of Master Repurchase Agreement  (incorporated by reference to Exhibit 10.7 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).
10.3          Amended and Restated Employment Agreement, effective as of June 4, 2004, between the
              Registrant and Michael A.J. Farrell (incorporated by reference to Exhibit 10.3 of the
              Registrant's Form 10-K filed with the Securities and Exchange Commission on March 10, 2005).*
10.4          Amended and Restated Employment Agreement, dated as of February 25, 2008, between the
              Registrant and Wellington J. Denahan.*
10.5          Amended and Restated Employment Agreement, effective as of June 4, 2004,between the
              Registrant and Kathryn F. Fagan (incorporated by reference to Exhibit 10.5 of the
              Registrant's Form 10-K filed with the Securities and Exchange Commission on March 10, 2005).*
10.6          Amended and Restated Employment Agreement, effective as of June 4, 2004, between the
              Registrant and James P. Fortescue (incorporated by reference to Exhibit 10.7 of the
              Registrant's Form 10-K filed with the Securities and Exchange Commission on March 10, 2005).*
10.7          Amended and Restated Employment Agreement, dated as of January 23, 2006, between the
              Registrant and Jeremy Diamond (incorporated by reference to Exhibit 10.7 for Diamond of the
              Registrant's Form 10-K filed with the Securities and Exchange Commission on March 13, 2006).*
10.8          Amended and Restated Employment Agreement, dated as of January 23, 2006, between the
              Registrant and Ronald D. Kazel. Diamond (incorporated by reference to Exhibit 10.7 for Kazel
              of the Registrant's Form 10-K filed with the Securities and Exchange Commission on March 13,
              2006).*
10.9          Amended and Restated Employment Agreement, dated as of April 21, 2006, between the Registrant
              and Rose-Marie Lyght (incorporated by reference to Exhibit 10.9 of the Registrant's Form 10-Q
              filed with the Securities and Exchange Commission on May 9, 2006).*
10.10         Amended and Restated Employment Agreement, effective as of June 4,
              2004, between the Registrant and Kristopher R. Konrad
              (incorporated by reference to Exhibit 10.11 of the Registrant's
              Form 10-K filed with the Securities and Exchange Commission on
              March 10, 2005).*
10.11         Amended and Restated Employment Agreement, dated January 23, 2006,
              between the Registrant and R. Nicholas Singh. Diamond
              (incorporated by reference to Exhibit 10.7 for Singh of the
              Registrant's Form 10-K filed with the Securities and Exchange
              Commission on March 13, 2006).*
12.1          Computation of ratio of earnings to combined fixed charges and preferred stock dividends.
23.1          Consent of Independent Registered Public Accounting Firm.
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.

*       Exhibit Numbers 10.1 and 10.3-10.11 are management contracts or
compensatory plans required to be filed as Exhibits to this Form 10-K.


                                       57



                                                                                                                 

ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

FINANCIAL STATEMENTS
----------------------------------------------------------------------------------------------------------------------


                                                                                                                 Page

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                                                           F-1

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2008 and
   2007:

   Consolidated Statements of Financial Condition                                                                 F-2

   Consolidated Statements of Operations and Comprehensive Income (Loss)                                          F-3

   Consolidated Statements of Stockholders' Equity                                                                F-4

   Consolidated Statements of Cash Flows                                                                          F-5

   Notes to Consolidated Financial Statements                                                                     F-6


                                       58


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Annaly Capital Management, Inc.
New York, New York

We have audited the accompanying consolidated statements of financial condition
of Annaly Capital Management, Inc. and subsidiaries (the "Company") as of
December 31, 2008 and 2007, and the related consolidated statements of
operations and comprehensive income (loss), stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2008. We also have
audited the Company's internal control over financial reporting as of December
31, 2008, based on criteria established in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management Report On Internal Control
Over Financial Reporting at Item 9A. Our responsibility is to express an opinion
on these financial statements and an opinion on the Company's internal control
over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal
control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Annaly Capital
Management, Inc. and subsidiaries as of December 31, 2008 and 2007, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, based on the criteria established
in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.

/s/ Deloitte & Touche LLP
New York, New York
February 25, 2009

                                      F-1

Part I
Item1.  Financial Statements

                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           DECEMBER 31, 2008 AND 2007
                  (dollars in thousands, except for share data)


                                                                                                                  
                                                                                                December 31, 2008  December 31, 2007
                                                                                               -------------------------------------
                                            ASSETS
                                            ------
Cash and cash equivalents                                                                                 $909,353      $   103,960
Reverse repurchase agreements with affiliate                                                               562,119                -
Mortgage-Backed Securities, at fair value                                                               55,046,995       52,879,528
Agency debentures, at fair value                                                                           598,945          253,915
Available for sale equity securities, at fair value                                                         52,795           64,754
Trading securities, at fair value                                                                                -           11,675
Receivable for Mortgage-Backed Securities sold                                                              75,546          276,737
Accrued interest and dividends receivable                                                                  282,532          271,996
Receivable from Prime Broker                                                                                16,886                -
Receivable for advisory and service fees                                                                     6,103            3,598
Intangible for customer relationships, net                                                                  12,380            9,842
Goodwill                                                                                                    27,917           22,966
Other assets                                                                                                 6,044            4,543
                                                                                               -------------------------------------

     Total assets                                                                                      $57,597,615      $53,903,514
                                                                                               =====================================

                             LIABILITIES AND STOCKHOLDERS' EQUITY
                             ------------------------------------
Liabilities:
  Repurchase agreements                                                                                $46,674,885      $46,046,560
  Payable for Investment Securities purchased                                                            2,062,030        1,677,131
  Trading securities sold, not yet purchased, at fair value                                                      -           32,835
  Accrued interest payable                                                                                 199,985          257,608
  Dividends payable                                                                                        270,736          136,618
  Accounts payable and other liabilities                                                                     8,380           36,688
  Interest rate swaps, at fair value                                                                     1,102,285          398,096
                                                                                               -------------------------------------

     Total liabilities                                                                                  50,318,301       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 3,963,525 and 4,600,000 shares issued
and outstanding respectively.                                                                               96,042          111,466
                                                                                               -------------------------------------

Commitments and contingencies (Note 13)                                                                          -                -

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, 541,475,366 and 401,822,703 issued and outstanding,
  respectively                                                                                               5,415            4,018
Additional paid-in capital                                                                               7,633,438        5,297,922
Accumulated other comprehensive income (loss)                                                              252,230         (152,197)
Accumulated deficit                                                                                       (884,899)        (121,893)
                                                                                               -------------------------------------

     Total stockholders' equity                                                                          7,183,272        5,204,938
                                                                                               -------------------------------------

Total liabilities, minority interest, Series B Cumulative Convertible
Preferred Stock and stockholders' equity                                                               $57,597,615      $53,903,514
                                                                                               =====================================


See notes to consolidated financial statements.



                                      F-2

                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                  YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
                (dollars in thousands, except per share amounts)


                                                                                                                
                                                                                             For the Year For the Year For the Year
                                                                                                 Ended        Ended       Ended
                                                                                              December 31, December 31, December 31,
                                                                                                  2008         2007        2006
                                                                                             ---------------------------------------
Interest income                                                                                $3,115,428   $2,355,447   $1,221,882
Interest expense                                                                                1,888,912    1,926,465    1,055,013
                                                                                             ---------------------------------------
     Net interest income                                                                        1,226,516      428,982      166,869
                                                                                             ---------------------------------------

Other (loss) income:
   Investment advisory and service fees                                                            27,891       22,028       22,351
   Gain (loss) on sale of Investment Securities                                                    10,713       19,062       (3,862)
   Gain on termination of interest rate swaps                                                           -        2,096       10,674
   Income from trading securities                                                                   9,695       19,147        3,994
   Dividend income from available-for-sale equity securities                                        2,713           91            -
   Loss on other-than-temporarily impaired securities                                             (31,834)      (1,189)     (52,348)
   Unrealized loss on interest rate swaps                                                        (768,268)           -            -
                                                                                             ---------------------------------------
     Total other (loss) income                                                                   (749,090)      61,235      (19,191)
                                                                                             ---------------------------------------

Expenses:
  Distribution fees                                                                                 1,589        3,647        3,444
  General and administrative expenses                                                             103,622       62,666       40,063
                                                                                             ---------------------------------------
     Total expenses                                                                               105,211       66,313       43,507
                                                                                             ---------------------------------------

 Impairment of intangible for customer relationships                                                    -            -        2,493
                                                                                             ---------------------------------------

 Income before income taxes and minority interest                                                 372,215      423,904      101,678

 Income taxes                                                                                      25,977        8,870        7,538
                                                                                             ---------------------------------------

 Income before minority interest                                                                  346,238      415,034       94,140

 Minority interest                                                                                     58          650          324
                                                                                             ---------------------------------------

 Net income                                                                                       346,180      414,384       93,816

Dividends on preferred stock                                                                       21,177       21,493       19,557
                                                                                             ---------------------------------------
Net income available to common shareholders                                                      $325,003     $392,891      $74,259
                                                                                             =======================================

Net income available per share to common shareholders:
  Basic                                                                                             $0.64        $1.32        $0.44
                                                                                             =======================================
  Diluted                                                                                           $0.64        $1.31        $0.44
                                                                                             =======================================

Weighted average number of common shares outstanding:
  Basic                                                                                       507,024,596  297,488,394  167,666,631
                                                                                             =======================================
  Diluted                                                                                     507,024,596  306,263,766  167,746,387
                                                                                             =======================================

Net income                                                                                       $346,180     $414,384      $93,816
                                                                                             ---------------------------------------
Other comprehensive gain (loss):
  Unrealized gain on available-for-sale securities                                                319,226      322,264       91,873
  Unrealized gain (loss) on interest rate swaps                                                    64,080     (378,380)      (6,404)
  Reclassification adjustment for net loss (gains)included in net income                           21,121      (19,969)      45,536
                                                                                             ---------------------------------------
  Other comprehensive income (loss)                                                               404,427      (76,085)     131,005
                                                                                             ---------------------------------------
Comprehensive income                                                                             $750,607     $338,299     $224,821
                                                                                             =======================================
See notes to consolidated financial statements.


                                      F-3

                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
                  (dollars in thousands, except per share data)


                                                                                                 
                                                                                               Accumulated
                                                                           Common  Additional     Other
                                                                 Preferred  Stock    Paid-In   Comprehensive Accumulated
                                                                   Stock  Par Value  Capital   Income (Loss)   Deficit     Total
                                                                 -------------------------------------------------------------------
BALANCE, DECEMBER 31, 2005                                       $ 177,088  $ 1,237 $1,679,452    ($207,117)  ($146,637) $1,504,023
  Net income                                                             -        -          -            -      93,816           -
  Other comprehensive income                                             -        -          -      131,005           -           -
  Comprehensive income                                                   -        -          -            -           -     224,821
  Exercise of stock options                                              -        -        183            -           -         183
  Option expense                                                         -        -      1,285            -           -       1,285
  Net proceeds from follow-on offerings                                  -      800    913,200            -           -     914,000
  Net proceeds from equity shelf program                                 -       16     20,896            -           -      20,912
  Preferred Series A dividends declared $1.97 per share                  -        -          -            -     (14,594)    (14,594)
  Preferred Series B dividends declared $1.08 per share                  -        -          -            -      (4,966)     (4,966)
  Common dividends declared, $0.57 per share                             -        -          -            -    (102,623)   (102,623)
                                                                 -------------------------------------------------------------------
BALANCE, DECEMBER 31, 2006                                         177,088    2,053  2,615,016      (76,112)   (175,004)  2,543,041
  Net income                                                             -        -          -            -     414,384           -
  Other comprehensive loss                                                        -          -      (76,085)          -           -
  Comprehensive income                                                   -        -          -            -           -     338,299
  Exercise of stock options                                              -        -        576            -           -         576
  Option and long-term compensation expense                              -        -      1,355            -           -       1,355
  Net proceeds from follow-on offerings                                  -    1,829  2,483,700            -           -   2,485,529
  Net proceeds from ATM program                                          -       56     80,862            -           -      80,918
  Net proceeds from direct purchase and dividend reinvestment            -       80    116,413            -           -     116,493
  Preferred Series A dividends declared $1.97 per share                  -        -          -            -     (14,593)    (14,593)
  Preferred Series B dividends declared $1.50 per share                  -        -          -            -      (6,900)     (6,900)
  Common dividends declared, $1.04 per share                             -        -          -            -    (339,780)   (339,780)
                                                                 -------------------------------------------------------------------
BALANCE, DECEMBER 31, 2007                                         177,088    4,018  5,297,922     (152,197)   (121,893)  5,204,938
  Net income                                                             -        -          -            -     346,180           -
  Other comprehensive income                                             -        -          -      404,427           -           -
  Comprehensive income                                                   -        -          -            -           -     750,607
  Exercise of stock options                                              -        3      2,777            -           -       2,780
  Option and long-term compensation expense                              -        -      2,534            -           -       2,534
  Conversion of Series B cumulative convertible Preferred Stock          -       13     15,411            -           -      15,424
  Stock granted in acquisition                                           -        2      3,123            -           -       3,125
  Net proceeds from follow-on offerings                                  -    1,277  2,146,266            -           -   2,147,543
  Net proceeds from ATM program                                          -       44     71,788            -           -      71,832
  Net proceeds from direct purchase and dividend reinvestment            -       58     93,617            -           -      93,675
  Preferred Series A dividends declared $1.97 per share                  -        -          -            -     (14,594)    (14,594)
  Preferred Series B dividends declared $1.50 per share                  -        -          -            -      (6,583)     (6,583)
  Common dividends declared, $2.08 per share                             -        -          -            -  (1,088,009) (1,088,009)
                                                                 -------------------------------------------------------------------
BALANCE, DECEMBER 31, 2008                                       $ 177,088  $ 5,415 $7,633,438     $252,230   ($884,899) $7,183,272
                                                                 ===================================================================

See notes to consolidated financial statements


                                      F-4

                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006
                             (dollars in thousands)


                                                                                                                   
                                                                                            For the Year  For the Year  For the Year
                                                                                                Ended       Ended         Ended
                                                                                            December 31,  December 31,  December 31,
                                                                                                2008         2007          2006
                                                                                          ------------------------------------------
Cash flows from operating activities:
Net income                                                                                     $346,180      $414,384       $93,816
Adjustments to reconcile net income to net cash provided
  by operating activities:
    Amortization of Mortgage Backed Securities premiums and discounts, net                       99,603        65,185        63,625
    Amortization of intangibles                                                                   4,133         1,377         1,589
    Amortization of trading securities premiums and discounts                                        (3)          (11)            -
    (Gain) loss on sale of Investment Securities                                                (10,713)      (19,062)        3,862
    Gain on termination of interest rate swaps                                                        -        (2,096)      (10,674)
    Stock option and long-term compensation expense                                               2,534         1,355         1,285
    Unrealized loss on interest rate swaps                                                      768,268             -             -
    Net realized gain on trading investments                                                    (12,578)       (4,430)       (1,200)
    Unrealized depreciation (appreciation) on trading investments                                 2,994       (11,013)        1,180
    Market value adjustment on long-term repurchase agreements                                        -             -          (149)
    Loss on other-than-temporarily impaired securities                                           31,834         1,189        52,348
    Impairment of intangibles                                                                         -             -         2,493
    Increase in accrued interest receivable                                                      (8,405)     (123,322)      (76,224)
    Decrease (increase) in other assets                                                             340        (2,264)         (238)
    Purchase of trading securities                                                              (13,048)      (18,479)      (44,200)
    Proceeds from sale of trading securities                                                     30,986        23,640        28,838
    Purchase of trading securities sold, not yet purchased                                      (22,290)      (13,620)      (16,096)
    Proceeds from securities sold, not yet purchased                                             21,483        21,489        55,073
    Decrease (increase) in advisory and service fees receivable                                     345          (420)          319
    (Decrease) Increase in interest payable                                                     (57,623)      173,610        56,004
    (Decrease) Increase in accrued expenses and other liabilities                               (28,867)       17,872         9,978
    Receivable from Prime Broker                                                                (16,886)            -             -
    Reduction of net assets in the fund                                                         (28,704)            -             -
                                                                                          ------------------------------------------
         Net cash provided by operating activities                                            1,109,583       525,384       221,629
                                                                                          ------------------------------------------
Cash flows from investing activities:
  Purchase of Mortgage-Backed Securities                                                    (25,281,183)  (32,832,687)  (23,196,076)
  Proceeds from sale of Investment Securities                                                15,491,408     4,847,909     3,040,984
  Principal payments of Mortgage-Backed Securities                                            8,619,102     6,831,406     5,115,693
  Purchase of agency debentures                                                                (500,000)     (256,241)            -
  Purchase of equity securities                                                                 (26,283)      (54,324)            -
  Purchase of reverse repurchase agreements                                                    (562,119)            -             -
  Investment to purchase subsidiary                                                             (12,628)            -             -
                                                                                          ------------------------------------------
       Net cash used in investing activities                                                 (2,271,703)  (21,463,937)  (15,039,399)
                                                                                          ------------------------------------------
Cash flows from financing activities:
  Proceeds from repurchase agreements                                                       434,042,799   393,750,907   292,418,807
  Principal payments on repurchase agreements                                              (433,414,474) (375,218,367) (278,481,088)
  Proceeds from exercise of stock options                                                         2,780           576           183
  Proceeds from termination of interest rate swaps                                                    -         2,096        10,674
  Proceeds from direct purchase and dividend reinvestment                                        93,675       116,493             -
  Net proceeds from follow-on offerings                                                       2,147,543     2,485,529       914,000
  Net proceeds from preferred stock offering                                                          -             -       111,466
  Net proceeds from ATM programs                                                                 71,832        80,918        20,912
  Minority interest                                                                              (1,574)       (3,750)        5,324
  Dividends paid                                                                               (975,068)     (263,671)      (95,534)
                                                                                          ------------------------------------------
       Net cash provided by financing activities                                              1,967,513    20,950,731    14,904,744
                                                                                          ------------------------------------------

Net increase in cash and cash equivalents                                                       805,393        12,178        86,974

Cash and cash equivalents, beginning of period                                                  103,960        91,782         4,808
                                                                                          ------------------------------------------

Cash and cash equivalents, end of period                                                        909,353      $103,960       $91,782
                                                                                          ==========================================

Supplemental disclosure of cash flow information:
  Interest paid                                                                              $1,946,535    $1,752,855      $999,009
                                                                                          ==========================================
  Taxes paid                                                                                    $18,866       $10,272        $7,242
                                                                                          ==========================================

Noncash financing activities:
  Net change in unrealized loss on available-for-sale securities and interest rate swaps,
   net of reclassification adjustment                                                          $404,427      ($76,085)     $131,005
                                                                                          ==========================================
  Dividends declared, not yet paid                                                             $270,736      $136,618       $39,016
                                                                                          ==========================================
Noncash investing activities:
  Receivable for Investment Securities Sold                                                     $75,546      $276,737      $200,535
                                                                                          ==========================================
  Payable for Investment Securities Purchased                                                $2,062,030    $1,677,131      $338,172
                                                                                          ==========================================
See notes to consolidated financial statements.


                                      F-5


                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2008, 2007 AND 2006
--------------------------------------------------------------------------------

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. During the third quarter of 2008, the
Company formed RCap Securities Inc. ("RCap"). RCap was granted membership in the
Financial Industry Regulatory Authority ("FINRA") on January 26, 2009, and will
operate as broker-dealer. RCap is a wholly owned taxable REIT subsidiary of the
Company. On October 31, 2008, the Company acquired Merganser Capital Management,
Inc. ("Merganser"). Merganser is a registered investment advisor and is a wholly
owned taxable REIT subsidiary of the Company.

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

       The consolidated financial statements include the accounts of the
Company, FIDAC, Merganser, RCap and the Fund. All intercompany balances and
transactions have been eliminated. The minority shareholder's interest in the
earnings of 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 on an overnight basis.

       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 generally 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 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, the Company
classifies 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 Investment Corporation ("Chimera")
is accounted for as available-for-sale equity securities under the provisions of
SFAS 115.

       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. Based on the guidance provided by Financial Accounting
Standards Board ("FASB") Staff Position Nos. FAS 115-1 and FAS 124-1, The
Meaning of Other-Than-Temporary-Impairment and its Application to Certain
Investments, 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. The loss on other-than-temporarily impaired
securities was $31.8 million, $1.2 million and $52.3 million during the years
ended December 31, 2008, 2007 and 2006, respectively.

                                      F-6


       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, trading securities, trading
securities sold, not yet purchased, receivable from prime broker and interest
rate swaps is equal to their carrying value presented in the consolidated
statements of financial condition. The estimated fair value of cash and cash
equivalents, reverse repurchase agreements, accrued interest and dividends
receivable, receivable for securities sold, receivable for advisory and service
fees, repurchase agreements with maturities shorter than one year, payable for
Investment Securities purchased, dividends payable, accounts payable and other
liabilities, and accrued interest payable, generally approximates cost as of
December 31, 2008 due to the short term nature of these financial instruments.
The estimated fair value of long term structured repurchase agreements is
reflected in the Footnote 7 to the financial statements.

       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 - Prior to the fourth
quarter of 2008, the Company designated interest rate swaps as cash flow hedges,
whereby the swaps were recorded at fair value on the balance sheet as assets and
liabilities with any changes in fair value recorded in accumulated other
comprehensive income ("OCI"). In a cash flow hedge, a swap would exactly match
the pricing date of the relevant repurchase agreement. Through the end of the
third quarter the Company continued to be able to effectively match the swaps
with the repurchase agreements therefore entering into effective hedge
transactions. However, due to the volatility of the credit markets, it is no
longer practical to match the pricing dates of both the swaps and the repurchase
agreements.

       As a result, the Company voluntarily discontinued hedge accounting in the
fourth quarter of 2008 through a combination of de-designating previously
defined hedge relationships and not designating new contracts as cash flow
hedges. The de-designation of cash flow hedges was done in accordance with SFAS
133, Accounting for Derivative Instruments and Hedging Activities, and
Derivatives Implementation Group "DIG" Issue Nos. G3, G17, G18 & G20, which
generally requires that the net derivative gain or loss related to the
discontinued cash flow hedge should continue to be reported in accumulated OCI,
unless it is probable that the forecasted transaction will not occur by the end
of the originally specified time period or within an additional two-month period
of time thereafter. The Company continues to hold repurchase agreements in
excess of swap contracts and has no indication that interest payments on the
hedged repurchase agreements are in jeopardy of discontinuing. Therefore, the
deferred losses related to these derivatives that have been de-designated will
not be recognized immediately and will remain in OCI. These losses are expected
to be reclassified into earnings during the contractual terms of the swap
agreements starting as of October 1, 2008. Changes in the unrealized gains or
losses on the interest rate swaps subsequent to September 30, 2008 were
reflected in the Company's statement of operations and comprehensive income.

       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.

                                      F-7


       Market Risk - The current situation in the 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. 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 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.

       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 each of its subsidiaries, FIDAC, Merganser, and RCap have
made separate joint election to treat the subsidiaries as a taxable REIT
subsidiary. As such, each of the taxable REIT subsidiaries are taxable as a
domestic C corporation and subject to federal, state, and local income taxes
based upon its taxable income. The affiliated investment fund is a partnership
and the income and expense flow through to the Company.

       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.

                                      F-8


       Goodwill and Intangible assets - The Company's acquisitions of FIDAC and
Merganser were 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 costs of FIDAC and Merganser were 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 10.5 year weighted average time
period. During the years ended December 31, 2008 and 2007, there were no
impairment losses. During the year ended December 31, 2006 the Company
recognized $2.5 million in impairment losses on intangible assets relating to
customer relationships.

       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 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.

       In April 2007, the FASB issued 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.

                                      F-9


       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.

       On October 10, 2008, FASB issued FASB Staff Position (FSP) 157-3,
Determining the Fair Value of a Financial Asset When the Market for That Asset
Is Not Active ("FSP 157-3"), in response to the deterioration of the credit
markets. This FSP provides guidance clarifying how SFAS 157 should be applied
when valuing securities in markets that are not active. The guidance provides an
illustrative example that applies the objectives and framework of SFAS 157,
utilizing management's internal cash flow and discount rate assumptions when
relevant observable data does not exist. It further clarifies how observable
market information and market quotes should be considered when measuring fair
value in an inactive market. It reaffirms the notion of fair value as an exit
price as of the measurement date and that fair value analysis is a transactional
process and should not be broadly applied to a group of assets. FSP 157-3 is
effective upon issuance including prior periods for which financial statements
have not been issued. FSP 157-3 does not have a material effect on the fair
value of its assets as the Company intends to continue to hold assets that can
be valued via level 1 and level 2 criteria, as defined under SFAS 157.

                                      F-10


2.     MORTGAGE-BACKED SECURITIES

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



                                                                            
                         Federal Home Loan  Federal National Government National
December 31, 2008             Mortgage          Mortgage          Mortgage         Total Mortgage-
                             Corporation       Association       Association      Backed Securities
                        ----------------------------------------------------------------------------
                                                   (dollars in thousands)
Mortgage-Backed
 Securities, gross             $19,898,430       $32,749,123         $1,259,118         $53,906,671
Unamortized discount               (26,733)          (36,647)              (787)            (64,167)
Unamortized premium                212,354           381,433             25,694             619,481
                        ----------------------------------------------------------------------------
Amortized cost                  20,084,051        33,093,909          1,284,025          54,461,985

Gross unrealized gains             297,366           468,824             14,606             780,796
Gross unrealized losses            (71,195)         (123,443)            (1,148)           (195,786)
                        ----------------------------------------------------------------------------

Estimated fair value           $20,310,222       $33,439,290         $1,297,483         $55,046,995
                        ============================================================================
                                            Gross Unrealized  Gross Unrealized
                          Amortized Cost           Gain              Loss       Estimated Fair Value
                        ----------------------------------------------------------------------------
                                                   (dollars in thousands)
Adjustable rate                $19,509,017          $287,249          ($178,599)        $19,617,667

Fixed rate                      34,952,968           493,547            (17,187)         35,429,328
                        ----------------------------------------------------------------------------

Total                          $54,461,985          $780,796          ($195,786)        $55,046,995
                        ============================================================================



                                                                            

                         Federal Home Loan  Federal National Government National
December 31, 2007             Mortgage          Mortgage          Mortgage         Total Mortgage-
                             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
                          Amortized Cost          Gain               Loss       Estimated Fair 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
                        ============================================================================


                                      F-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 December 31, 2008
and 2007, according to their estimated weighted-average life classifications:


                                                                                                
                                                          December 31, 2008                 December 31, 2007
              Weighted-Average Life                  Fair Value    Amortized Cost      Fair Value     Amortized Cost
                                                                         (dollars in thousands)
----------------------------------------------------------------------------------------------------------------------

Less than one year                                    $ 4,147,646      $ 4,181,282         $ 324,495        $ 326,754

Greater than one year and less than five years         37,494,312       37,102,706        35,772,813       35,586,721

Greater than or equal to five years                    13,405,037       13,177,997        16,782,220       16,728,257
                                                   -------------------------------------------------------------------
Total                                                 $55,046,995      $54,461,985       $52,879,528      $52,641,732
                                                   ===================================================================


       The weighted-average lives of the Mortgage-Backed Securities at December
31, 2008 and 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 actual weighted average lives of the Mortgage-Backed Securities
could be longer or shorter than estimated.

       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 December
31, 2008 and December 31, 2007.


                                                                                 
                                                     Unrealized Loss Position For:
                                                         (dollars in thousands)
                     -----------------------------------------------------------------------------------------------
                           Less than 12 Months               12 Months or More                    Total
                     -----------------------------------------------------------------------------------------------
                         Estimated       Unrealized    Estimated Fair    Unrealized     Estimated      Unrealized
                        Fair Value         Losses           Value          Losses       Fair Value       Losses
                     -----------------------------------------------------------------------------------------------

December 31, 2008          $4,631,897     ($65,790)       $4,267,448     ($129,996)      $8,899,345      ($195,786)

December 31, 2007          $7,593,443     ($62,594)       $5,340,667      ($67,882)     $12,934,110      ($130,476)


       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 10.0% at
December 31, 2008 and 9.9% at December 31, 2007.

       During the year ended December 31, 2008, the Company sold $15.1 billion
of Mortgage-Backed Securities, resulting in a realized gain of $10.7 million.
During the year ended December 31, 2007, the Company sold $4.9 billion of
Mortgage-Backed Securities, resulting in a realized gain of $19.1 million.


                                      F-12


3.     AVAILABLE FOR SALE EQUITY SECURITIES

       All of the available-for-sale equity securities are shares of Chimera and
are reported at fair value. The Company owns approximately 15.3 million shares
of Chimera at a carrying value of $52.8 million. Although the Company has the
intent and ability to retain the investment in Chimera indefinitely, the Company
determined based on the FSP FAS-115 that an other-than-temporarily impaired
charge of $31.8 million was appropriate in the third quarter of 2008 and is
reflected in the income statement for the year ended of December 31, 2008. This
determination is based on the extent of the decline in value of the Chimera
shares combined with the current state of the mortgage and credit markets. At
December 31, 2008, the investment in Chimera had an unrealized gain of $4.0
million.


4.     REVERSE REPURCHASE AGREEMENT

       During the first quarter of 2008, the Company began using excess cash to
do reverse repurchase agreements. At December 31, 2008, the Company had lent
$562.1 million to Chimera in an overnight reverse repurchase agreement. This
amount is included at the principal amount which approximates fair value in the
Company's Statement of Financial Condition. The interest rate at December 31,
2008 was an at the market rate of 1.43%. The average rate on all reverse
repurchase agreements for the year was 2.99%. The collateral for this loan is
mortgage-backed securities with a fair value of $680.8 million.

5.     RECEIVABLE FROM PRIME BROKER

       These net assets of the investment fund owned by the Company are subject
to English bankruptcy law, which governs the administration of Lehman Brothers
International (Europe) ("LBIE"), as well as the law of New York, which governs
the contractual documents. Until the Company's contractual documents with LBIE
are terminated, the value of the assets and liabilities in its account with LBIE
will continue to fluctuate based on market movements. The Company does not
intend to terminate these contractual documents until LBIE's administrators have
clarified the consequences of doing so. The Company has not received notice from
LBIE's administrators that LBIE has terminated the documents. LBIE's
administrators have advised the Company that they can provide no additional
information about the account at this time. As a result, the Company has
recorded a receivable from LBIE based on the fair value of its account with LBIE
as of September 15, 2008 of $16.9 million, which is the date of the last
statement it received from LBIE on the account's assets and liabilities. The
Company can provide no assurance, however, that it will recover all or any
portion of these assets following completion of LBIE's administration (and any
subsequent liquidation).

6.     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 overall 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:

                                      F-13



                                                                                    
                                                                 Level 1             Level 2            Level 3
                                                                             (dollars in thousands)
---------------------------------------------------------------------------------------------------------------------
Assets:
  Mortgage-Backed Securities                                                -          $55,046,995                 -
  Agency debentures                                                         -              598,945                 -
  Available for sale equity securities                                $52,795                    -                 -

Liabilities:
  Interest rate swaps                                                       -            1,102,285                 -


       The classification of assets and liabilities by level remains unchanged
at December 31, 2008, when compared to the previous quarter.

7.       REPURCHASE AGREEMENTS

       The Company had outstanding $46.7 billion and $46.0 billion of repurchase
agreements with weighted average borrowing rates of 4.08% and 4.76%, after
giving effect to the Company's interest rate swaps, and weighted average
remaining maturities of 238 days and 234 days as of December 31, 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 $51.8 billion at December 31, 2008 and $48.3 billion at December 31,
2007.

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



                                                                                    
                                                      December 31, 2008           December 31, 2007
                                                                     (dollars in thousands)
                                                      ---------------------------------------------------
Within 30 days                                                 $32,025,186                   $34,940,600
30 to 59 days                                                    5,205,352                     4,005,960
60 to 89 days                                                      209,673                       300,000
90 to 119 days                                                     254,674                             -
Over 120 days                                                    8,980,000                     6,800,000
                                                      ---------------------------------------------------
Total                                                          $46,674,885                   $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 December 31, 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 $8.1 billion and the fair value of the option to
call was ($574.3 million) at December 31, 2008. The repurchase agreements
totaled $6.4 billion and the fair 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 fair value of
the option is not recorded in the consolidated financial statements.

8.     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 December 31, 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.

                                      F-14


       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 December 31, 2008 December 31, 2007.


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

December 31, 2008                           $17,615,750                    4.66%             1.18%              ($1,102,285)

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


9.     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.

       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 year ended December 31, 2008, the Company raised $93.7 million
by issuing 5.8 million shares, through the Direct Purchase and Dividend
Reinvestment Program.

       During the year ended December 31, 2008, 300,000 options were exercised
under the Long-Term Stock Incentive Plan, or Incentive Plan, for an aggregate
exercise price of $2.8 million.

       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 the Company's 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 year ended December 31, 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 the Company's 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 year ended December 31, 2008, 3.8 million shares of the
Company's common stock were issued pursuant to this program, totaling $60.3
million in net proceeds.

       On October 11, 2007, the Company entered into an underwriting agreement
pursuant to which it sold 71,300,000 shares of its common stock for net proceeds
following underwriting expenses of approximately $1.0 billion. This transaction
settled on October 17, 2007.

       On July 12, 2007, the Company entered into an underwriting agreement
pursuant to which it sold 54,050,000 shares of its common stock for proceeds of
$720.8 million net of underwriting fees. This transaction settled on July 18,
2007.

       On March 7, 2007, the Company entered into an underwriting agreement
pursuant to which it sold 57,500,000 shares of its common stock for net proceeds
following underwriting expenses of approximately $737.4 million. This
transaction settled on March 13, 2007.

                                      F-15


       During the year ended December 31, 2007, the Company raised $116.5
million by issuing 8.0 million shares through the Direct Purchase and Dividend
Reinvestment Program.

       During the year ended December 31, 2007, 56,000 options were exercised
under the Long-Term Stock Incentive Plan, or Incentive Plan, for an aggregate
exercise price of $576,000.

       During the year ended December 31, 2007, 4.5 million shares of the
Company's common stock were issued pursuant to the Company's ATM Equity
Offering(sm) Sales Agreement with Merrill Lynch, totaling $66.2 million in net
proceeds. During the year ended December 31, 2007, 1.1 million shares of its
common stock were issued pursuant to the Company's ATM Equity Sales Agreement
with UBS Securities, totaling $14.7 million in net proceeds.

       On August 16, 2006, the Company entered into an underwriting agreement
pursuant to which it sold 40,825,000 shares of its common stock for net proceeds
following underwriting expenses of approximately $476.7 million. This
transaction settled on August 22, 2006.

       On April 6, 2006, the Company entered into an underwriting agreement
pursuant to which it sold 39,215,000 shares of its common stock for net proceeds
following underwriting expenses of approximately $437.7 million. On April 6,
2006, the Company entered into a second underwriting agreement pursuant to which
if sold 4,600,000 shares of its 6% Series B Cumulative Convertible Preferred
Stock for net proceeds following underwriting expenses of approximately $111.5
million. Both of these transactions settled on April 12, 2006.

       During the year ended December 31, 2006, 500,000 shares of the Company's
common stock were issued pursuant to the Company's ATM Equity Offering(sm) Sales
Agreement with Merrill Lynch, totaling $6.7 million in net proceeds. During the
year ended December 31, 2006, no shares of the Company's common stock were
issued pursuant to the Company's ATM Equity Sales Agreement with UBS Securities.

       During the year ended December 31, 2006, 1.1 million shares of the
Company's common stock were issued through the Equity Shelf Program, totaling
net proceeds of $14.2 million. During the year ended December 31, 2006, 22,160
options were exercised under the Incentive Plan for an aggregate exercise price
of $183,000.

       (B) Preferred Stock

       At December 31, 2008 and 2007, 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 December 31, 2008, the Company had declared and paid all required
quarterly dividends on the Series A Preferred Stock.

       At December 31, 2008, the Company had issued and outstanding 3,963,525
shares of Series B Cumulative Convertible Preferred Stock ("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.

                                      F-16


       At December 31, 2007, the Company had issued and outstanding 4,600,000
shares of Series B Preferred Stock.

       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 December 31,
2008, the conversion ratio was 2.0650 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 December 31, 2008, the Company had
declared and paid all required quarterly dividends on the Series B Preferred
Stock. During the year ended December 31, 2008, 636,475 shares of Series B
Preferred Stock were converted into 1,268,081 shares of common stock. During the
year ended December 31, 2007, no shares of Series B Preferred Stock were
converted.

       (C) Distributions to Shareholders

       During the year ended December 31, 2008, the Company declared dividends
to common shareholders totaling $1.1 billion or $2.08 per share, of which $270.7
million were paid to shareholders on January 29, 2009. During the year ended
December 31, 2008, the Company declared dividends to Series A Preferred
shareholders totaling approximately $14.6 million or $1.97 per share, and Series
B shareholders totaling approximately $6.6 million or $1.50 per share, which
were paid to shareholders on December 31, 2008.

       During the year ended December 31, 2007, the Company declared dividends
to common shareholders totaling $339.8 million or $1.04 per share, of which
$136.6 million were paid on January 28, 2008. During the year ended December 31,
2007, the Company declared and paid dividends to Series A preferred shareholders
totaling $14.6 million or $1.97 per share and Series B Preferred shareholders
totaling $6.9 million or $1.50 per share.

       During the year ended December 31, 2006, the Company declared dividends
to common shareholders totaling $102.6 million or $.57 per share, of which $39.0
million were paid on January 26, 2007. During the year ended December 31, 2006,
the Company declared and paid dividends to Series A preferred shareholders
totaling $14.6 million or $1.97 per share and Series B Preferred shareholders
totaling $5.0 million or $1.08 per share.

10.    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 years
ended December 31, 2008, 2007, and 2006.


                                                                                                  
                                                                              For the years ended
                                                                            (amounts in thousands)
                                                             ------------------------------------------------------
                                                              December 31,         December 31,     December 31,
                                                                  2008              2007                   2006
                                                             ------------------------------------------------------
Net income                                                          $346,180           $414,384            $93,816
Less: Preferred stock dividends                                       21,177             21,493             19,557
                                                             ------------------------------------------------------
Net income available to common shareholders,                         325,003            392,891             74,259
  prior to adjustment for Series B dividends, if
  necessary
Add: Preferred Series B dividends, if Series B
  shares are dilutive                                                      -              6,900                    -
                                                             ------------------------------------------------------
Net income, as adjusted                                             $325,003           $399,791            $74,259
                                                             ======================================================

Weighted average shares of common stock
  outstanding-basic                                                  507,025            297,488            167,667

Add:  Effect of dilutive stock options and Series
  B Cumulative Convertible Preferred Stock                                 -              8,775                 79
                                                             ------------------------------------------------------
Weighted average shares of common
  stock outstanding-diluted                                          507,025            306,263            167,746
                                                             ======================================================


       Options to purchase 5.2 million shares of common stock, were outstanding
and considered anti-dilutive as their exercise price and option expense exceeded
the average stock price for the year ended December 31, 2008. The Series B
Cumulative Convertible Preferred Stock was anti-dilutive for the years ended
December 31, 2008 and 2006.

                                      F-17


11.    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 year ended
                                                 ----------------------------------------------------------------
                                                       December 31, 2008               December 31, 2007
                                                 ----------------------------------------------------------------
                                                                   Weighted
                                                                    Average                          Weighted
                                                   Number of       Exercise        Number of          Average
                                                     Shares          Price          Shares         Exercise Price
                                                 ----------------------------------------------------------------
Options outstanding at the beginning of
 year                                                 3,437,267         $15.23        2,984,995           $15.10
Granted                                               2,043,700          16.02          687,250            15.69
Exercised                                              (293,243)          9.59          (55,738)           10.34
Forfeited                                                (2,550)         15.84         (174,240)           16.06
Expired                                                  (5,010)         20.67           (5,000)           20.35
                                                 ----------------------------------------------------------------
Options outstanding at the end of period              5,180,164         $15.87        3,437,267           $15.23
                                                 ================================================================
Options exercisable at the end of the period          2,119,964         $16.36        1,286,004           $14.98
                                                 ================================================================


       The weighted average remaining contractual term was approximately 7.6
years for stock options outstanding and approximately 5.6 years for stock
options exercisable as of December 31, 2008. As of December 31, 2008, there was
approximately $9.3 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 3.3 years.

       The weighted average remaining contractual term was approximately 7.0
years for stock options outstanding and approximately 5.3 years for stock
options exercisable as of December 31, 2007. As of December 31, 2007, there was
approximately $2.9 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 2.7 years.

                                      F-18


       During the year ended December 31, 2007, the Company granted 7,000 shares
of restricted common stock to certain of its employees. As of December 31, 2008,
3,360 of these restricted shares were unvested and subject to forfeiture.

12.    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 year ended December 31, 2008, FIDAC recorded $4.0 million of
income tax expense for income attributable to FIDAC, and the portion of earnings
retained based on Code Section 162(m) limitations. During the year ended
December 31, 2008, Merganser recorded $94,000 of income tax expense for income
attributable to Merganser. During the year ended December 31, 2008, the Company
recorded $21.9 million of income tax expense for a portion of earnings retained
based on Section 162(m) limitations. The effective tax rate was 53% for the year
ended December 31, 2008.

       During the year ended December 31, 2007, the Company did not record
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 year ended December 31, 2007, the Company recorded $9.0
million of income tax expense for a portion of earnings retained based on
Section 162(m) limitations. The effective tax rate was 51% for the year ended
December 31, 2007.

       During the year ended December 31, 2006, the Company recorded $3.1
million 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 year ended December 31, 2006, the Company recorded $4.5
million of income tax expense for a portion of earnings retained based on
Section 162(m) limitations. The effective tax rate was 45% for the year ended
December 31, 2006.

       The Company's effective tax rate was 53%, 51%, and 45% for the years
ended December 31, 2008, 2007, and 2006, respectively. These rates differed from
the federal statutory rate as a result of state and local taxes and permanent
difference pertaining to employee remuneration as discussed above.

       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.

13.    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 total $532,000.

       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 and therefore no
accrual is required as of December 31, 2008.

       Merganser's prior owner may receive additional consideration as an
earn-out during 2010, 2011 and 2012 if Merganser meets specific performance
goals under the merger agreement. The Company cannot currently calculate how
much consideration will be paid under the earn-out provisions because the
payment amount will vary depending upon whether and the extent to which
Merganser achieves specific performance goals. Any amounts paid under this
provision will be recorded as additional goodwill.

                                      F-19


14.    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 December 31, 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 $17.6 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.

15.    RELATED PARTY TRANSACTIONS

       At December 31, 2008, the Company had lent $562.1 million to Chimera in
an overnight reverse repurchase agreement. This amount is included at the
principal amount which approximates fair value in the Company's Statement of
Financial Condition. The interest rate at December 31, 2008 was an at the market
rate of 1.43%. The average rate for the year was 2.96%. The collateral for this
loan is mortgage-backed securities with a fair value of $680.8 million.

       On October 29, 2008, the Company purchased approximately 11.7 million
shares of Chimera common stock at a price of $2.25 per share for aggregate
proceeds of approximately $26.3 million. Chimera is managed by FIDAC, and the
Company owns approximately 8.6% of Chimera's common stock.

16.    MERGANSER CAPITAL MANAGEMENT, INC.

       The Company acquired Merganser pursuant to a merger which was consummated
before the opening of business on October 31, 2008. The merger was accounted for
using the purchase method of accounting in accordance with SFAS No. 141, and the
purchase price was allocated to the acquired assets and liabilities based on
their fair values, with the excess allocated to goodwill. The purchase price was
paid in cash and Company's stock. Accordingly, the consolidated balance sheet as
of December 31, 2008 includes the effects of the merger and the Company's
application of the purchase method of accounting. Additionally, the consolidated
statements of operations and of cash flows for the year ended December 31, 2008
include the results of the Merganser for the period from October 31, 2008 to
December 31, 2008.

 A summary of the fair values of the net assets acquired is as follows:


                                                                                 
                                                                 (dollars in thousands)
Receivable for advisory fees and services                                           $2,849
Other assets                                                                           654
Customer relationships                                                               6,600
Trade name                                                                             330
Goodwill                                                                             4,488
Favorable leasehold interest                                                         1,310
Payables                                                                            (1,169)
                                                               ----------------------------
  Total purchase price                                                             $15,062
                                                               ============================


17.    SUBSEQUENT EVENTS

       Pursuant to NASD Rule 1014, the application of RCap was granted
membership in FINRA on January 26, 2009. RCap is expected to commence operations
as a broker dealer during the first quarter of 2009.

                                      F-20


18.    SUMMARIZED QUARTERLY (UNAUDITED)

       The following is a presentation of the quarterly results of operations
for the year ended December 31, 2008.


                                                                                                       
                                                              March 31,    June 30, 2008   September 30,     December 31,
                                                                2008                            2008             2008
                                                                     (dollars in thousands, except per share data)
                                                            ----------------------------------------------------------------
Interest income                                                  $791,128       $773,359          $810,659         $740,282

Interest expense                                                  537,606        442,251           458,250          450,805
                                                            ----------------------------------------------------------------

Net interest income                                               253,522        331,108           352,409          289,477
                                                            ----------------------------------------------------------------

Other income:
  Investment advisory and service fees                              6,598          6,406             7,663            7,224
  Gain (loss) on sale of Investment Securities                      9,417          2,830            (1,066)            (468)
  Income (loss) from trading securities                             1,854          2,180             7,671           (2,010)
  Dividend income from available-for-sale equity
     securities                                                       941            580               580              612
  Loss on other-than-temporarily impaired securities                    -              -           (31,834)               -
  Unrealized loss on interest rate swaps                                -              -                 -         (768,268)
                                                            ----------------------------------------------------------------

      Total other income                                           18,810         11,996           (16,986)        (762,910)
                                                            ----------------------------------------------------------------

Expenses:
  Distribution fees                                                   633            370               299              287
  General and administrative expenses                              23,995         27,215            25,455           26,957
                                                            ----------------------------------------------------------------
      Total expenses                                               24,628         27,585            25,754           27,244
                                                            ----------------------------------------------------------------

Income (loss) before income taxes and minority
  interest                                                        247,704        315,519           309,669         (500,677)

Income taxes                                                        4,610          7,527             7,538            6,302
                                                            ----------------------------------------------------------------
Income (loss) before minority interest                            243,094        307,992           302,131         (506,979)

Minority interest                                                      58              -                 -                -
                                                            ----------------------------------------------------------------
                                                                  243,036        307,992           302,131         (506,979)
Net Income

Dividends on preferred stock                                        5,373          5,334             5,335            5,135
                                                            ----------------------------------------------------------------

Net income (loss) available (related) to common
  shareholders                                                   $237,663       $302,658          $296,796        ($512,114)
                                                            ================================================================

Weighted average number of basic common shares
outstanding                                                   443,812,432    503,758,079       538,706,131      541,099,147
                                                            ================================================================
Weighted average number of diluted common shares
outstanding                                                   452,967,457    512,678,975       547,882,488      541,099,147
                                                            ================================================================

Net income available to common
  shareholders per average common  share:
Basic                                                               $0.54          $0.60             $0.55           ($0.95)
                                                            ================================================================
Diluted                                                             $0.53          $0.59             $0.54           ($0.95)
                                                            ================================================================


                                      F-21


The following is a presentation of the quarterly results of operations for the
year ended December 31, 2007.


                                                                                                       

                                                              March 31,      June 30,      September 30,     December 31,
                                                                2007           2007             2007             2007
                                                                     (dollars in thousands, except per share data)
                                                            ----------------------------------------------------------------

Interest income                                                  $449,564       $556,262          $628,696         $720,925

Interest expense                                                  380,164        468,748           519,118          558,435
                                                            ----------------------------------------------------------------
Net interest income                                                69,400         87,514           109,578          162,490
                                                            ----------------------------------------------------------------

Other income:
  Investment advisory and service fees                              5,562          5,366             5,464            5,636
  Gain on sale of Investment Securities                             6,145          7,293             3,795            1,829
  Gain on termination of interest rate swaps                           67              -             2,029                -
  Income from trading securities                                    3,429            243             8,288            7,187
  Dividend income from available-for-sale equity
    securities                                                          -              -                 -               91
  Loss on other-than-temporarily impaired securities                 (491)          (698)                -                -
                                                            ----------------------------------------------------------------
      Total other income                                           14,712         12,204            19,576           14,743
                                                            ----------------------------------------------------------------

Expenses:
  Distribution fees                                                   904            861             1,100              782
  General and administrative expenses                              12,886         12,272            17,334           20,174
                                                            ----------------------------------------------------------------
      Total expenses                                               13,790         13,133            18,434           20,956
                                                            ----------------------------------------------------------------
Income before income taxes and minority
  interest                                                         70,322         86,585           110,720          156,277

Income taxes                                                        2,604            839             2,327            3,100
                                                            ----------------------------------------------------------------
Income before minority interest                                    67,718         85,746           108,393          153,177

Minority interest                                                     286             13               106              245
                                                            ----------------------------------------------------------------
Net income                                                         67,432         85,733           108,287          152,932

Dividends on preferred stock                                        5,373          5,373             5,373            5,374
                                                            ----------------------------------------------------------------

Net income available to common
  shareholders                                                    $62,059        $80,360          $102,914         $147,558
                                                            ================================================================

Weighted average number of basic common shares
outstanding                                                   217,490,205    264,990,422       315,969,814      389,410,812
                                                            ================================================================
Weighted average number of diluted common shares
outstanding                                                   225,928,127    273,578,836       324,614,534      398,247,632
                                                            ================================================================

Net income available to common
  shareholders per average common  share:
Basic                                                               $0.29          $0.30             $0.33            $0.38
                                                            ================================================================
Diluted                                                             $0.28          $0.30             $0.32            $0.37
                                                            ================================================================


                                      F-22


                                   SIGNATURES


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

                                      ANNALY CAPITAL MANAGEMENT, INC.

Date: February 25, 2009          By:  /s/ Michael A. J. Farrell
                                      -------------------------
                                      Michael A. J. Farrell
                                      Chairman, Chief Executive Officer, and
                                      President

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


                                                                                                    

             Signature                          Title                                               Date
  /s/ KEVIN P. BRADY                            Director                                    February 25 , 2009
  ------------------
      Kevin P. Brady

  /s/ KATHRYN F. FAGAN                          Chief Financial Officer and Treasurer       February 25, 2009
  ---------------------                         (principal financial and accounting
      Kathryn F. Fagan                          officer)

  /s/ MICHAEL A.J. FARRELL                      Chairman of the Board, Chief Executive      February 25, 2009
  ------------------------                      Officer, President and Director
      Michael A. J. Farrell                     (principal executive officer)

  /s/ JONATHAN D. GREEN                         Director                                    February 25, 2009
  ----------------------
      Jonathan D. Green

  /s/ MICHAEL E. HAYLON                         Director                                    February 25, 2009
   --------------------
      Michael E. Haylon

  /s/ JOHN A. LAMBIASE                          Director                                    February 25, 2009
   -------------------
      John A. Lambiase

  /s/ E. WAYNE NORDBERG                         Director                                    February 25, 2009
  ---------------------
      E. Wayne Nordberg

  /s/ DONNELL A. SEGALAS                        Director                                    February 25, 2009
  ----------------------
      Donnell A. Segalas

  /s/ WELLINGTON DENAHAN-NORRIS                 Vice Chairman of the Board, Chief           February 25, 2009
  -----------------------------                 Investment Officer, Chief Operating
      Wellington Denahan-Norris                 Officer and Director



                                      II-1