UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

               FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2007

                                       OR

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

       FOR THE TRANSITION PERIOD FROM _______________ TO _________________

                         COMMISSION FILE NUMBER: 1-13447

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

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


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

                                      10036
                                   (Zip Code)

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

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

                                 Yes |X|  No |_|

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

   Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|

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


                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

      Class                               Outstanding at November 6, 2007
     Common Stock, $.01 par value                   401,809,203






                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

                                    FORM 10-Q

                                TABLE OF CONTENTS

Part I. FINANCIAL INFORMATION
           Item 1. Financial Statements:
            Consolidated Statements of Financial Condition at September
            30, 2007 (Unaudited) and December 31, 2006 (Derived from the
            audited consolidated statement of financial condition at
            December 31, 2006)                                                 1

            Consolidated Statements of Operations and Comprehensive
             Income (Loss) (Unaudited) for the quarters and nine months
             ended September 30, 2007 and 2006                                 2

            Consolidated Statement of Stockholders' Equity (Unaudited)
             for the quarters ended March 31, 2007, June 30, 2007 and
             September 30, 2007                                                3

            Consolidated Statements of Cash Flows (Unaudited) for the
             quarters and nine months ended September 30, 2007 and 2006        4

            Notes to Consolidated Financial Statements (Unaudited)             5

            Item 2. Management's Discussion and Analysis of Financial
             Condition and Results of Operations                              18

            Item 3. Quantitative and Qualitative Disclosures about Market
             Risk                                                             36

            Item 4. Controls and Procedures                                   37


Part II. OTHER INFORMATION

             Item 1. Legal Proceedings                                        38

             Item 1A. Risk Factors                                            38

             Item 6. Exhibits                                                 39

             SIGNATURES                                                       40

             CERTIFICATIONS                                                   41

                                       i




                                       F-4

PART I.
ITEM 1.     FINANCIAL STATEMENTS
                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                  (dollars in thousands, except for share data)


                                                                  (unaudited)
                                                              September 30, 2007  December 31, 2006((1))
                                                              --------------------------------------------

ASSETS
------
                                                                                   
Cash and cash equivalents                                         $       90,028         $         91,782
Mortgage-Backed Securities, at fair value                             44,641,352               30,167,509
Agency debentures, at fair value                                         249,281                   49,500
Trading securities, at fair value                                         10,987                   18,365
Receivable for Mortgage-Backed Securities sold                           516,140                  200,535
Accrued interest receivable                                              235,787                  146,089
Receivable for advisory and service fees                                   2,933                    3,178
Intangible for customer relationships, net                                10,178                   11,184
Goodwill                                                                  22,966                   22,966
Interest rate swaps, at fair value                                             -                    2,558
Other assets                                                               3,026                    2,314
                                                              --------------------------------------------

     Total assets                                                 $   45,782,678         $     30,715,980
                                                              ============================================

LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------

Liabilities:
  Repurchase agreements                                           $   40,140,113         $     27,514,020
  Payable for Investment Securities purchased                          1,169,324                  338,172
  Trading securities sold, not yet purchased, at fair value               26,823                   41,948
  Accrued interest payable                                               148,462                   83,998
  Dividends payable                                                       85,932                   39,016
  Accounts payable                                                        25,237                   18,816
  Interest rate swaps, at fair value                                     142,061                   20,179
                                                              --------------------------------------------

     Total liabilities                                                41,737,952               28,056,149
                                                              --------------------------------------------

Minority interest in equity of consolidated affiliate                      1,329                    5,324
                                                              --------------------------------------------

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

Stockholders' Equity:
7.875% Series A Cumulative Redeemable Preferred Stock:
 7,637,500 shares authorized, 7,412,500 shares issued and
 outstanding                                                             177,088                  177,088
Common stock: par value $.01 per share; 487,762,500 shares
 authorized, 330,509,203 and 205,345,591 shares issued and
 outstanding, respectively                                                 3,305                    2,053
Additional paid-in capital                                             4,270,330                2,615,016
Accumulated other comprehensive loss                                    (385,960)                 (76,112)
Accumulated deficit                                                     (132,832)                (175,004)
                                                              --------------------------------------------

     Total stockholders' equity                                        3,931,931                2,543,041
                                                              --------------------------------------------

Total liabilities, minority interest, Series B Cumulative
 Convertible Preferred Stock and stockholders' equity             $   45,782,678         $     30,715,980
                                                              ============================================

(1) Derived from the audited consolidated statement of financial condition at December 31, 2006.


See notes to consolidated financial statements.


                                       1



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



                                                           For the Quarter  For the Quarter       For the Nine     For the Nine
                                                                  Ended       Ended               Months Ended     Months Ended
                                                              September 30,  September 30,        September 30,    September 30,
                                                                  2007           2006                 2007             2006
                                                            --------------------------------------------------------------------
                                                                                                      
Interest income                                                $     628,696    $     339,737    $   1,634,522    $     814,790

Interest expense                                                     519,118          295,726        1,368,030          705,711

                                                            --------------------------------------------------------------------
Net interest income                                                  109,578           44,011          266,492          109,079
                                                            --------------------------------------------------------------------

Other income (loss):
   Investment advisory and service fees                                5,464            4,966           16,392           17,173
   Gain (loss) on sale of Investment Securities                        3,795             (446)          17,233           (8,691)
   Gain on termination of interest rate swaps                          2,029            8,414            2,096            8,414
   Income from trading securities                                      8,288              612           11,960              612
   Loss on other-than-temporarily impaired securities                      -                -           (1,189)         (46,844)
                                                            --------------------------------------------------------------------
     Total other income (loss)                                        19,576           13,546           46,492          (29,336)
                                                            --------------------------------------------------------------------

Expenses:
  Distribution fees                                                    1,100              724            2,865            2,649
  General and administrative expenses                                 17,334           11,682           42,492           27,844
                                                            --------------------------------------------------------------------
     Total expenses                                                   18,434           12,406           45,357           30,493
                                                            --------------------------------------------------------------------

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

Income before income taxes and minority interest                     110,720           45,151          267,627           46,757

Income taxes                                                           2,327            2,273            5,770            6,250
                                                            --------------------------------------------------------------------

Income before minority interest                                      108,393           42,878          261,857           40,507

Minority interest                                                        106               28              405               28
                                                            --------------------------------------------------------------------

Net Income                                                     $     108,287    $      42,850    $     261,452    $      40,479

Dividends on preferred stock                                           5,373            5,373           16,119           14,184

                                                            --------------------------------------------------------------------
Net income available to common shareholders                    $     102,914    $      37,477    $     245,333    $      26,295
                                                            ====================================================================

Net income available to common shareholders per average
 common share:
  Basic                                                        $        0.33    $        0.21    $        0.92    $        0.17
                                                            ====================================================================

  Diluted                                                      $        0.32    $        0.20    $        0.91    $        0.16
                                                            ====================================================================

Weighted average number of common shares outstanding:
Basic                                                            315,969,814      181,767,106      266,510,879      155,054,308
                                                            ====================================================================

Diluted                                                          324,614,534      189,952,159      275,146,595      160,211,191
                                                            ====================================================================

Net income                                                     $     108,287    $      42,850    $     261,452    $      40,479
                                                            --------------------------------------------------------------------

Comprehensive income (loss):
  Unrealized gain (loss) on available-for sale securities            320,102          400,261         (169,363)          61,399
  Unrealized loss on interest rate swaps                            (232,598)        (127,354)        (122,345)         (21,376)
  Reclassification adjustment for net (gains) losses
   included in net income or loss                                     (5,824)          (7,968)         (18,140)          47,121
                                                            --------------------------------------------------------------------
  Other comprehensive income (loss)                                   81,680          264,939         (309,848)          87,144
                                                            --------------------------------------------------------------------
Comprehensive income (loss)                                    $     189,967    $     307,789         ($48,396)   $     127,623
                                                            ====================================================================


See notes to consolidated financial statements.


                                       2





                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
        FOR THE QUARTERS ENDED MARCH 31, JUNE 30, AND SEPTEMBER 30, 2007
                  (dollars in thousands, except per share data)
                                   (UNAUDITED)



                                                                                        Accumulated
                                                                Common     Additional     Other
                                                   Preferred     Stock       Paid-In   Comprehensive  Accumulated     Total
                                                     Stock     Par Value     Capital        Loss        Deficit
                                                ------------------------------------------------------------------------------
                                                                                                
BALANCE, JANUARY 1, 2007                          $  177,088    $  2,053 $ 2,615,016       ($76,112)   ($175,004) $ 2,543,041
  Net income                                               -           -           -              -       67,432            -
  Other comprehensive income                               -           -           -         16,072            -            -
  Comprehensive income                                     -           -           -              -            -       83,504
  Exercise of stock options                                -           -         417              -            -          417
  Stock option expense                                     -           -         311              -            -          311
  Net proceeds from common stock follow-on
   offerings                                               -         576     736,673              -            -      737,249
  Preferred Series A Cumulative Redeemable
   Preferred Stock                                         -           -           -              -       (3,648)      (3,648)
    dividends declared, $0.492188 per share
  Preferred Series B Cumulative Convertible
   Preferred Stock dividends                               -           -           -              -       (1,725)      (1,725)
    declared, $0.375 per share
  Common dividends declared, $0.20 per share               -           -           -              -      (52,577)     (52,577)
                                                ------------------------------------------------------------------------------
BALANCE, MARCH 31, 2007                           $  177,088    $  2,629 $ 3,352,417       ($60,040)   ($165,522)   3,306,572
  Net income                                               -           -           -              -       85,733            -
  Other comprehensive income                               -           -           -       (407,600)           -            -
  Comprehensive loss                                       -           -           -              -            -     (321,867)
  Exercise of stock options                                -           -          64              -            -           64
  Stock option expense                                     -           -         362              -            -          362
  Offering cost for common stock follow-on
   offering                                                -           -        (178)             -            -         (178)
     Net proceeds from ATM programs                        -          46      65,862              -            -       65,908
     Proceeds from dividend reinvestment and share
      purchase program                                     -          19      29,437              -            -       29,456
  Preferred Series A Cumulative Redeemable
   Preferred Stock
    dividends declared, $0.492188 per share                -           -           -              -       (3,648)      (3,648)
  Preferred Series B Cumulative Convertible
   Preferred Stock dividends
    declared, $0.375 per share                             -           -           -              -       (1,725)      (1,725)
  Common dividends declared, $0.24 per share               -           -           -              -      (64,652)     (64,652)
                                                ------------------------------------------------------------------------------
 BALANCE, JUNE 30, 2007                           $  177,088    $  2,694 $ 3,447,964      ($467,640)   ($149,814) $ 3,010,292
  Net income                                               -           -           -              -      108,287            -
  Other comprehensive income                               -           -           -         81,680            -
  Comprehensive income                                     -           -           -              -            -      189,967
  Exercise of stock options                                -           -          23              -            -           23
  Stock option expense                                     -           -         339              -            -          339
  Net proceeds common stock follow-on offering             -         540     720,027              -            -      720,567
   Net proceeds from ATM programs                          -          10      15,001              -            -       15,011
   Proceeds from dividend reinvestment and share
    purchase program                                       -          61      86,976              -            -       87,037
   Preferred Series A Cumulative Redeemable
    Preferred Stock
     dividends declared, $0.492188 per share               -           -           -              -       (3,648)      (3,648)
   Preferred Series B Cumulative Convertible
    Preferred Stock dividends
     declared, $0.375 per share                            -           -           -              -       (1,725)      (1,725)
  Common dividends declared, $0.26 per share                                                             (85,932)     (85,932)
                                                ------------------------------------------------------------------------------
  BALANCE, September 30, 2007                     $  177,088    $  3,305 $ 4,270,330      ($385,960)   ($132,832) $ 3,931,931
                                                ==============================================================================

See notes to consolidated financial statements.



                                       3




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


                                                                  For the Quarter For the Quarter   For the Nine     For the Nine
                                                                       Ended           Ended        Months Ended     Months Ended
                                                                   September 30,   September 30,    September 30,    September 30,
                                                                        2007            2006            2007             2006
                                                                  -----------------------------------------------------------------
Cash flows from operating activities:
                                                                                                        
Net income                                                         $      108,287   $      42,850  $      261,452   $       40,479
Adjustments to reconcile net income to net cash provided
  by operating activities:
    Amortization of Mortgage Backed Securities premiums and
      discounts, net                                                       16,895          14,941          49,001           48,677
    Amortization of intangibles                                               336             564           1,041            1,090
    Amortization of trading securities premiums and discounts, net             (3)             (4)             (6)              (4)
    (Gain) loss on sale of Investment Securities                           (3,795)            446         (17,233)           8,691
    Gain on termination of interest rate swaps                             (2,029)         (8,414)         (2,096)          (8,414)
    Stock option expense                                                      339             324           1,012              961
    Net realized (gain) loss on trading investments                        (1,596)             19          (2,612)              19
    Unrealized appreciation on trading investments                         (6,071)           (187)         (6,919)            (187)
    Market value adjustment on long-term repurchase agreements                  -               -               -             (149)
    Loss on other-than-temporarily impaired securities                          -               -           1,189           46,843
    Impairment of intangible for customer relationships                         -               -               -            2,493
    Increase in accrued interest receivable                               (37,982)        (20,236)        (88,444)         (59,857)
    Decrease (increase) in other assets                                       120          (1,133)           (747)            (583)
    Purchase of trading investments                                             -         (36,995)        (13,562)         (36,995)
    Proceeds from sale of trading securities                                1,130          43,448          10,288           43,448
    Purchase of trading securities sold, not yet purchased                 (4,854)              -         (16,636)               -
    Proceeds from securities sold, not yet purchased                        1,628               -          21,701                -
    Decrease (increase) in advisory and service fees receivable                21             (10)            245              374
    Increase in interest payable                                           44,006          24,447          64,464           38,553
    Increase in accounts payable                                           10,717           6,388           6,421            4,530
    Principal payments on trading securities                                    -              51               -               51
                                                                  -----------------------------------------------------------------
         Net cash provided by operating activities                        127,149          66,499         268,559          130,020
                                                                  -----------------------------------------------------------------
Cash flows from investing activities:
  Purchase of Mortgage-Backed Securities                               (8,616,269)     (5,944,272)    (23,460,454)     (18,536,593)
  Proceeds from termination of interest rate swaps                          2,029           8,414           2,096            8,414
  Proceeds from sale of Investment Securities                           1,190,908         482,108       4,059,787        2,534,044
  Principal receipts on Mortgage-Backed Securities                      1,701,529       1,303,756       5,328,833        3,615,902
  Purchase of agency debentures                                          (201,675)              -        (305,862)
                                                                  -----------------------------------------------------------------
        Net cash used in investing activities                          (5,923,478)     (4,149,994)    (14,375,600)     (12,378,233)
                                                                  -----------------------------------------------------------------
Cash flows from financing activities:
  Proceeds from repurchase agreements                                 108,110,752      76,940,538     309,132,679      205,009,542
  Principal payments on repurchase agreements                        (103,064,495)    (73,295,822)   (296,506,587)    (193,684,423)
  Proceeds from exercise of stock options                                      23              46             504              183
  Net proceeds from follow-on common stock offerings                      720,567         476,675       1,457,638          914,023
  Net proceeds from dividend reinvestment and share
    purchase program                                                       87,037               -         116,493                -
  Net proceeds from ATM programs                                           15,011               -          80,919           14,187
  Net proceeds from Series B preferred stock offering                           -              (5)              -          111,466
  Minority interest                                                        (4,294)             28          (3,995)           5,028
  Dividends paid                                                          (70,025)        (24,970)       (172,364)         (59,757)
                                                                  -----------------------------------------------------------------
       Net cash provided by financing activities                        5,794,576       4,096,490      14,105,287       12,310,249
                                                                  -----------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents                       (1,753)         12,995          (1,754)          62,036

Cash and cash equivalents, beginning of the period                         91,781          53,849          91,782            4,808
                                                                  -----------------------------------------------------------------

Cash and cash equivalents, end of period                           $       90,028   $      66,844  $       90,028   $       66,844
                                                                  =================================================================
Supplemental disclosure of cash flow information:
  Interest paid                                                    $      475,112   $     271,279  $    1,303,566   $      667,158
                                                                  =================================================================
  Taxes paid                                                       $        2,557   $       2,320  $        7,138   $        5,917
                                                                  =================================================================
Noncash financing and investing activities:
  Net change in unrealized loss on available-for-sale securities
    and interest rate swaps, net of reclassification adjustment    $       81,680   $     264,939       ($309,848)  $       87,144
                                                                  =================================================================
  Dividends declared, not yet paid                                 $       85,932   $      30,403  $       85,932   $       30,403
                                                                  =================================================================
See notes to consolidated financial statements.



                                       4




                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                FOR THE QUARTER ENDED SEPTEMBER 30, 2007 AND 2006
                                  (UNAUDITED)
--------------------------------------------------------------------------------

1.  ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

     Annaly Capital Management, Inc. (the "Company") was incorporated in
Maryland on November 25, 1996. The Company changed its name from Annaly Mortgage
Management, Inc. to Annaly Capital Management, Inc. effective August 2, 2006.
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. An initial public
offering was completed on October 14, 1997. The Company is a real estate
investment trust (REIT) under the Internal Revenue Code of 1986, as amended. The
Company acquired Fixed Income Discount Advisory Company ("FIDAC") on June 4,
2004. FIDAC is a registered investment advisor and is a taxable REIT subsidiary
of the Company. At September 30, 2007, the Company had a majority equity
investment of 99% in an affiliated investment fund (the "Fund").

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

     Basis of Presentation - The accompanying unaudited consolidated financial
statements have been prepared in conformity with the instructions to Form 10-Q
and Article 10, Rule 10-01 of Regulation S-X for interim financial statements.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America
("GAAP"). The consolidated interim financial statements are unaudited; however,
in the opinion of the Company's management, all adjustments, consisting only of
normal recurring accruals, necessary for a fair statement of the financial
positions, results of operations, and cash flows have been included. These
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2006. The nature of the
Company's business is such that the results of any interim period are not
necessarily indicative of results for a full year.

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

     Cash and Cash Equivalents - Cash and cash equivalents include cash on
deposit and money market funds.

     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 (collectively, "Mortgage-Backed
Securities"). The Company also invests in agency debentures issued by Federal
Home Loan Bank ("FHLB"), Federal Home Loan Mortgage Corporation ("FHLMC"), and
Federal National Mortgage Association ("FNMA"). The Mortgage-Backed Securities
and agency debentures are collectively referred to herein as "Investment
Securities."

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

     Management evaluates securities for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or market concerns
warrant such evaluation. Consideration is given to (1) the length of time and
the extent to which the fair value has been lower than carrying value, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent
and ability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value.
Unrealized losses on Investment Securities that are considered other than
temporary, as measured by the amount of decline in fair value attributable to
other-than-temporary factors, are recognized in income and the carrying value of
the Investment Securities is adjusted.


                                       5




     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.

     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 sale of
Investment Securities are determined based on the specific identification
method.

     Derivative Financial Instruments/Hedging Activity - The Company hedges
interest rate risk through the use of derivative financial instruments such as
interest rate caps and interest rate swaps ("Hedging Instruments"). The Company
accounts for Hedging Instruments in accordance with SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities ("SFAS 133"), as amended and
interpreted. The Company carries all Hedging Instruments at their fair value, as
assets, if their fair value is positive, or as liabilities, if their fair value
is negative. As the Company's interest rate swaps are designated as cash flow
hedges under SFAS 133, the change in the fair value of any such derivative is
recorded in other comprehensive income or loss for hedges that qualify as
effective. At September 30, 2007, the Company did not have any interest rate
caps. The ineffective amount of all Hedging Instruments, if any, is recognized
in earnings each quarter. To date, the Company has not recognized any change in
the value of its interest rate swaps in earnings as a result of the hedge or a
portion thereof being ineffective.


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

     When the Company enters into an interest rate swap, it agrees to pay a
fixed rate of interest and to receive a variable interest rate, generally based
on the London Interbank Offered Rate ("LIBOR"). The Company's interest rate
swaps are designated as cash flow hedges against the benchmark interest rate
risk associated with the Company's borrowings.

     All changes in the unrealized gains and losses on any interest rate swap
are recorded in accumulated other comprehensive income or loss and are
reclassified to earnings as interest expense is recognized on the Company's
hedged borrowings. If it becomes probable that the forecasted transaction, which
in this case refers to interest payments to be made under the Company's
short-term borrowing agreements, will not occur by the end of the originally
specified time period, as documented at the inception of the hedging
relationship, then the related gain or loss in accumulated other comprehensive
income or loss would be reclassified to income or loss.

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


                                       6




     Credit Risk - The Company has limited its exposure to credit losses on its
portfolio of Mortgage-Backed Securities by only purchasing securities issued by
FHLMC, FNMA, or GNMA. 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. All of the Company's
Investment Securities have an actual or implied "AAA" rating.

     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 condition 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.

     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 and interest rate swaps is equal to their carrying value presented in
the consolidated statements of financial condition. The estimated fair value of
trading securities and trading securities sold, not yet purchased, is equal to
their carrying value. The estimated fair value of cash and cash equivalents,
accrued interest receivable, receivable for securities sold, receivable for
advisory and service fees, repurchase agreements with maturities shorter than
one year, and payable for Mortgage-Backed Securities purchased, dividends
payable, accounts payable, and accrued interest payable, generally approximates
cost, due to the short term nature of these financial instruments.

     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 in 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 Cumulative Convertible Preferred Stock
contains fundamental change provisions that allow the holder to redeem the
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 Cumulative Convertible Preferred Stock as temporary
equity in the accompanying consolidated statements of financial condition.

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

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

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


                                       7




     Intangible assets - The Company's acquisition of FIDAC was accounted for
using the purchase method. Under the purchase method, net assets and results of
operations of acquired companies are included in the consolidated financial
statements from the date of acquisition. In addition, the cost of FIDAC was
allocated to the assets acquired, including identifiable intangible assets, and
the liabilities assumed based on their estimated fair values at the date of
acquisition. The excess of purchase price over the fair value of the net assets
acquired was recognized as goodwill. Intangible assets are periodically (but not
less frequently than annually) reviewed for potential impairment. Intangible
assets with an estimated useful life are expected to amortize over an 8.0 year
weighted average time period.

     Stock Based Compensation - On December 16, 2004, the Financial Accounting
Standards Board (FASB) issued SFAS No. 123 (Revised 2004) - Share-Based Payment
("SFAS 123R"). SFAS 123R, which replaced SFAS 123, 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 adopted SFAS 123R effective January 1, 2006 under the modified
prospective transition method. Accordingly, prior period amounts have not been
restated. Under this application, the Company is required to record compensation
expense for all awards granted or modified on or after January 1, 2006 and for
the unvested portion of all outstanding awards that remain outstanding at the
date of adoption.

     The Company elected to recognize 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. The
Company granted 687,250 options during the nine months ended September 30, 2007.

     Recent Accounting Pronouncements- In February 2006, the FASB issued SFAS
No. 155, Accounting for Certain Hybrid Instruments ("SFAS 155"), an amendment of
FASB Statements No. 133 and 140. Among other things, SFAS 155: (i) permits fair
value re-measurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation; (ii) clarifies
which interest-only strips and principal-only strips are not subject to the
requirements of SFAS 133; (iii) establishes a requirement to evaluate interests
in securitized financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain an embedded
derivative requiring bifurcation; (iv) clarifies that concentrations of credit
risk in the form of subordination are not embedded derivatives; and (v) amends
SFAS 140 to eliminate the prohibition on a qualifying special-purpose entity
from holding a derivative financial instrument that pertains to a beneficial
interest other than another derivative financial instrument. SFAS 155 was
effective for all financial instruments acquired or issued by the Company after
January 1, 2007. Securitized interests which only contain an embedded derivative
that is tied to the prepayment risk of the underlying prepayable financial
assets and for which the investor does not control the right to accelerate the
settlement of such financial assets are excluded under a scope exception adopted
by the FASB. None of the Company's assets were subject to SFAS 155 as a result
of this scope exception. Therefore, the Company has continued to record changes
in the market value of its investment securities through Other Comprehensive
Income, a component of stockholders' equity. Therefore, the adoption of SFAS 155
did not have any impact on the Company's consolidated financial statements.

     In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109 ("FIN
48"), and related implementation issues. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an entity's financial statements in
accordance with FASB Statement No. 109, Accounting for Income Taxes. FIN 48
prescribes a threshold and measurement attributes for recognition in the
financial statements of an asset or liability resulting from a tax position
taken or expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. FIN 48 was effective for the Company on
January 1, 2007. There was no impact to the Company's financial statements from
implementing this new standard.

     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 its 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 (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 is
effective for the Company on January 1, 2008. The Company is currently
evaluating the impact that the adoption of SFAS 157 may have on its consolidated
financial statements.


                                       8


     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 FAS 159 is effective
for the Company commencing January 1, 2008. The Company is currently evaluating
the impact that the adoption of SFAS 159 will have on its consolidated financial
statements.

     In June, 2007, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 07-1, Clarification of the Scope of
the Audit and Accounting Guide Investment Companies and Accounting for Parent
Companies and Equity Method Investors for Investments in Investment Companies.
This SOP provides guidance for determining whether an entity is within the scope
of the AICPA Audit and Accounting Guide Investment Companies (the Guide).
Entities that are within the scope of the Guide are required, among other
things, to carry their investments at fair value, with changes in fair value
included in earnings. In October 2007, the FASB decided to indefinitely defer
the effective date of SOP 07-1.

     Proposed FASB Staff Position - The FASB issued a proposed FSP FAS 140-d
relating to FASB Statement No. 140, Accounting for Transfers of Financial Assets
and Repurchase Financing Transactions to address questions 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. Currently, the Company records such assets and the
related financing on a gross basis in the consolidated statement of financial
condition, and the corresponding interest income and interest expense in the
Company's consolidated statement of operations and comprehensive income (loss).
For assets representing available-for-sale investment securities, as in the
Company's case, any change in fair value is reported through other comprehensive
income under SFAS 115, with the exception of impairment losses, which are
recorded in the consolidated statement of operations and comprehensive (loss)
income as realized losses.

     FASB's staff position requires that all of the following criteria be met in
order to continue the application of SFAS 140 as described above: (1) the
initial transfer of and repurchase financing cannot be contractually contingent;
(2) the repurchase financing entered into between the parties provides full
recourse to the transferee and the repurchase price is fixed; (3) the financial
asset has an active market and the transfer is executed at market rates; (4) the
borrower maintains the right to the collateral and the lender cannot re-pledge
the asset prior to settlement of the repurchase agreement; and (4) the
repurchase agreement and financial asset do not mature simultaneously.

     At this time, the Company believes that its purchases and subsequent
financing through repurchase agreements with the same counterparty meet the
criteria enumerated in the proposed FSP FAS 140 for treatment as a non-linked
transfer and repurchase under SFAS No. 140 and the Company believes that if the
FSP is ultimately issued in substantially its current form, there will be no
effect on the manner in which the Company records such assets, their financings,
and the corresponding interest income and interest expense. FSP FAS 140 may be
subject to significant changes prior to finalization, which may impact the
Company's current assessment of its impact upon adoption.


                                       9




2.  MORTGAGE-BACKED SECURITIES

      The following tables present the Company's available-for-sale
Mortgage-Backed Securities portfolio as of September 30, 2007 and December 31,
2006, which are carried at their fair value:



                                         Federal Home     Federal         Government        Total
                                             Loan        National          National        Mortgage-
September 30, 2007                         Mortgage      Mortgage          Mortgage         Backed
                                         Corporation    Association       Association      Securities
                                      ---------------------------------------------------------------
                                                          (dollars in thousands)
                                                                           
Mortgage-Backed Securities, gross       $ 16,455,757   $  27,823,348   $     368,715   $  44,647,820
Unamortized discount                         (31,150)        (45,024)           (539)        (76,713)
Unamortized premium                          103,321         201,464           2,399         307,184
                                      ---------------------------------------------------------------
Amortized cost                            16,527,928      27,979,788         370,575      44,878,291

Gross unrealized gains                        32,837          34,963             214          68,014
Gross unrealized losses                     (112,814)       (189,709)         (2,430)       (304,953)
                                      ---------------------------------------------------------------

Estimated fair value                    $ 16,447,951   $  27,825,042   $     368,359   $  44,641,352
                                      ===============================================================
                                      Amortized Cost Gross UnrealizedGross UnrealizedEstimated Fair
                                                           Gains          Losses           Value
                                      ---------------------------------------------------------------
Adjustable rate                         $ 13,001,149   $      28,276        ($73,364)  $  12,956,061

Fixed rate                                31,877,142          39,738        (231,589)     31,685,291
                                      ---------------------------------------------------------------

Total                                   $ 44,878,291   $      68,014       ($304,953)  $  44,641,352
                                      ===============================================================

                                         Federal Home     Federal         Government        Total
                                             Loan        National          National        Mortgage-
December 31, 2006                          Mortgage      Mortgage          Mortgage         Backed
                                         Corporation    Association       Association      Securities
                                      ---------------------------------------------------------------
                                                          (dollars in thousands)
Mortgage-Backed Securities, gross       $ 10,675,235   $  19,085,218   $     324,338   $  30,084,791
Unamortized discount                         (21,332)        (56,517)           (204)        (78,053)
Unamortized premium                           82,707         133,164           3,271         219,142
                                      ---------------------------------------------------------------
Amortized cost                            10,736,610      19,161,865         327,405      30,225,880

Gross unrealized gains                        35,174          74,498             366         110,038
Gross unrealized losses                      (73,125)        (92,548)         (2,736)       (168,409)
                                      ---------------------------------------------------------------

Estimated fair value                    $ 10,698,659   $  19,143,815   $     325,035   $  30,167,509
                                      ===============================================================
                                                             Gross            Gross
                                          Amortized        Unrealized       Unrealized      Estimated
                                            Cost             Gains            Losses       Fair Value
                                      ---------------------------------------------------------------
Adjustable rate                         $  8,546,363   $      12,764        ($61,483)  $   8,497,644

Fixed rate                                21,679,517          97,274        (106,926)     21,669,865
                                      ---------------------------------------------------------------

Total                                   $ 30,225,880   $     110,038       ($168,409)  $  30,167,509
                                      ===============================================================



                                       10




     Actual maturities of Mortgage-Backed Securities are generally shorter than
stated contractual maturities. Actual maturities of the Company's
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 September 30, 2007 and December 31, 2006 according to their
estimated weighted-average life classifications:



                                        September 30, 2007           December 31, 2006
                                                      Amortized                  Amortized
        Weighted-Average Life          Fair Value        Cost     Fair Value        Cost
------------------------------------------------------------------------------------------
                                                    (dollars in thousands)
                                                                   
Less than one year                     $   259,129  $    261,424  $   379,967  $   382,268
Greater than one year and less than
 five years                             23,350,639    23,480,096   21,788,975   21,851,659
Greater than or equal to five years     21,031,584    21,136,771    7,998,567    7,991,953
                                     -----------------------------------------------------

Total                                  $44,641,352  $ 44,878,291  $30,167,509  $30,225,880
                                     =====================================================


     The weighted-average lives of the Mortgage-Backed Securities at September
30, 2007 and December 31, 2006 in the table above are based upon data provided
through subscription-based financial information services, assuming constant
principal prepayment rates to the reset date of each security. The prepayment
model considers current yield, forward yield, steepness of the yield curve,
current mortgage rates, mortgage rate of the outstanding loans, loan age, margin
and volatility.

     The following table presents the gross unrealized losses, and estimated
fair value of the Company's Mortgage-Backed Securities by length of time that
such securities have been in a continuous unrealized loss position at September
30, 2007 and December 31, 2006.



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

September 30, 2007           $21,713,362     ($165,689)    $6,949,847    ($139,264)   $28,663,209     ($304,953)

December 31, 2006             $6,324,266      ($30,244)    $6,817,677    ($138,165)   $13,141,933     ($168,409)


     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 since 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.

     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 10.02% at
September 30, 2007 and 9.8% at December 31, 2006.

     During the quarter and nine months ended September 30, 2007 the Company
realized $3.8 million and $17.2 million in net gains, respectively, from sales
of Investment Securities. During the quarter and nine months ended September 30,
2006, the Company realized $446,000 and $8.7 million, respectively, in net
losses from sales of Mortgage-Backed Securities, respectively.


                                       11




3.  REPURCHASE AGREEMENTS

     The Company had outstanding $40.1 billion and $27.5 billion of repurchase
agreements with weighted average borrowing rates of 4.99% and 5.14%, with the
effect of interest rate swaps and weighted average remaining maturities of 250
days and 125 days as of September 30, 2007 and December 31, 2006, respectively.
Investment Securities pledged as collateral under these repurchase agreements
had an estimated fair value of $41.2 billion at September 30, 2007 and $28.6
billion at December 31, 2006.

      At September 30, 2007 and December 31, 2006, the repurchase agreements had
the following remaining maturities:

                   September 30, 2007   December 31, 2006
                           (dollars in thousands)
                ------------------------------------------
Within 30 days            $31,141,427         $22,778,703
30 to 59 days               3,214,590           2,285,317
60 to 89 days                 784,096             200,000
90 to 119 days                      -                   -
Over 120 days               5,000,000           2,250,000
                ------------------------------------------
     Total                $40,140,113         $27,514,020
                ==========================================

     The Company did not have an amount at risk greater than 10% of the equity
of the Company with any individual counterparty as of September 30, 2007.

     The Company had an amount at risk greater than 10% of the equity of the
Company with the following counterparty at December 31, 2006.

                      Amount at risk(1)     Weighted average days
                    (dollars in thousands)       to maturity
                    ---------------------------------------------
UBS Securities LLC        $179,959                  121

(1)   Equal to the sum of fair value of securities sold plus accrued interest
      income minus the sum of repurchase agreements plus accrued interest
      expense.

     As of September 30, 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 $5.0 billion and the
redemption value of the option to call was estimated at a loss of $44.4 million.
Management has determined that the call option is not required to be bifurcated
under the provisions of SFAS 133 as it is deemed clearly and closely related to
the debt instrument, therefore the option value is not recorded in the
consolidated financial statements.

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


                                       12




4.  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 September 30, 2007, such
instruments are comprised of interest rate swaps, which in effect modify the
cash flows on repurchase agreements. The use of interest rate swaps creates
exposure to credit risk relating to potential losses that could be recognized if
the counterparties to these instruments fail to perform their obligations under
the contracts. In the event of a default by the counterparty, the Company could
have difficulty obtaining its Mortgage-Backed Securities pledged as collateral
for swaps. The Company does not anticipate any defaults by its counterparties.

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

     The table below provides information about the Company's swaps outstanding
at September 30, 2007.

  Notional Amount       Weighted       Weighted         Net Estimated Fair
    (dollars in       Average Pay      Average         Value/Carrying Value
     thousands)           Rate       Receive Rate     (dollars in thousands)
--------------------------------------------------------------------------------
    $14,660,850          5.15%          5.59%              ($142,061)

5.  PREFERRED STOCK AND COMMON STOCK

(A) Common Stock Issuances

     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 net
of underwriting fees of approximately $720.8 million. This transaction settled
on July 17, 2007.

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

     On August 3, 2006, the Company entered into an ATM Equity Offering(sm)
Sales Agreement with Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, relating to the sale of shares of its common stock from time
to time through Merrill Lynch. Sales of the shares, if any, will be made by
means of ordinary brokers' transaction on the New York Stock Exchange. During
the quarter and nine months ended September 30, 2007, 994,800 and 4,524,100
shares of the Company's common stock were issued pursuant to this program,
totaling $15.0 million and $66.2 million in net proceeds, respectively.

     On August 3, 2006, the Company entered into an ATM Equity Sales Agreement
with UBS Securities LLC, relating to the sale of shares of its common stock from
time to time through UBS Securities. Sales of the shares, if any, will be made
by means of ordinary brokers' transaction on the New York Stock Exchange. During
nine months ended September 30, 2007, 1,051,900 shares of the Company's common
stock were issued pursuant to this program, totaling $14.7 million in net
proceeds. During the quarter ended September 30, 2007, the company did not issue
common stock pursuant to this program.

     During the quarter ended and nine months ended September 30, 2007, the
Company raised $87.0 million and $116.5 million by issuing 6,077,055 and
7,988,374 shares, respectively, through the Direct Purchase and Dividend
Reinvestment Program. There were no such transactions during the quarter and
nine months ended September 30, 2006.

     During the quarter ended September 30, 2007, 2,000 options were exercised
under the Long-Term Stock Incentive Plan, or Incentive Plan, for an aggregate
exercise price of $23,000 and there were no options exercised during the quarter
ended September 30, 2006. During the nine months ended September 30, 2007 and
September 30, 2006, 49,238 options were exercised for an aggregate exercise
price of $504,000, and 22,160 shares for an aggregate exercise price of
$205,000, respectively.


                                       13




(B) Preferred Stock

     At September 30, 2007, the Company had issued and outstanding 7,412,500
shares of Series A Cumulative Redeemable 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 stockholders
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 September 30,
2007, the Company had declared and paid all required quarterly dividends on the
Series A preferred stock.

     At September 30, 2007, the Company also had issued and outstanding
4,600,000 shares of Series B Cumulative Convertible 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
stockholders must be paid a dividend at a rate of 6% per year on the $25.00
liquidation preference before the common stock is entitled to receive any
dividends.

     The Series B preferred stock is not redeemable. The Series B preferred
stock is convertible into shares of common stock at a conversion rate that
adjusts from time to time upon the occurrence of certain events, including if
the Company distributes to its common shareholders in any calendar quarter cash
dividends in excess of $0.11 per share. Initially, the conversion rate was
1.7730 shares of common shares per $25 liquidation preference. Commencing April
5, 2011, the Company has a 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 any time 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 September 30,
2007, the Company had declared and paid all required quarterly dividends on the
Series B preferred stock.

(C) Distributions to Shareholders

     During the quarter ended September 30, 2007, the Company declared dividends
to common shareholders totaling $85.9 million or $0.26 per share, which were
paid to shareholders on October 29, 2007. During the quarter ended September 30,
2007, the Company declared dividends to Series A Preferred shareholders totaling
approximately $3.6 million or $0.492188 per share, and Series B shareholders
totaling approximately $1.7 million or $0.375 per share, which were paid by the
Company on September 28, 2007 and distributed to shareholders on October 1,
2007.

6.  NET INCOME PER COMMON SHARE

     The following table presents a reconciliation of the net income and shares
used in calculating basic and diluted earnings per share for the quarters and
nine months ended September 30, 2007 and 2006.


                                       14






                                        For the Quarters Ended        For the Nine Months Ended
                                      September 30,   September 30,  September 30,    September 30,
                                          2007           2006             2007            2006
                                                        (dollars in thousands)
                                    --------------------------------------------------------------

                                                                          
Net income                             $    108,287   $      42,850   $    261,452    $     40,479
Less: Preferred stock dividends               5,373           5,373         16,119          14,184
                                    --------------------------------------------------------------
Net income available to common
shareholders, prior to adjustment
for Series B dividends, if
necessary                              $    102,914   $      37,477   $    245,333    $     26,295

Add: Preferred Series B dividends,
if Series B shares are dilutive               1,725           1,725          5,175           3,240
                                    --------------------------------------------------------------

Net income available to common
shareholders                           $    104,639   $      39,202   $    250,508    $     29,535
                                    ==============================================================

Weighted average shares of common
stock outstanding-basic                     315,970         181,767        266,511         155,054

Add: Effect of dilutive stock                 8,645           8,185          8,636           5,157
     options Series B Cumulative
     Convertible Preferred Stock
                                    --------------------------------------------------------------

Weighted average shares of common
stock outstanding-diluted                   324,615         189,952        275,147         160,211
                                    ==============================================================


     Options to purchase 2,471,375 shares of common stock were outstanding and
considered anti-dilutive as their exercise price exceeded the average stock
price for the quarter and nine months ended September 30, 2007. Options to
purchase 1,942,275 shares of common stock were outstanding and considered
anti-dilutive as their exercise price exceeded the average stock price for the
quarter and nine months ended September 30, 2006.

7.  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.

     The following table sets forth activity relating to the Company's stock
options awards:



                                                              For the nine months ended September 30,
                                                               2007                           2006
                                                     Number of   Weighted Average   Number of   Weighted Average
                                                       Shares      Exercise Price     Shares      Exercise Price
                                                   --------------------------------------------------------------
                                                                                         
Options outstanding at the beginning of period         2,984,995      $      15.10    2,333,593      $      16.10
Granted                                                  687,250             15.69      737,250             11.72
Exercised                                                (49,238)            10.25      (22,160)             8.25
Forfeited                                               (174,240)            16.64      (60,000)            15.39
Expired                                                   (5,000)            20.35       (3,688)            13.69
                                                   --------------------------------------------------------------
Options outstanding at end of period                   3,443,767      $      15.23    2,984,995      $      15.10
                                                   ==============================================================
Options exercisable at end of period                   1,292,504      $      14.98    1,298,496      $      15.28
                                                   ==============================================================



                                       15




     The weighted average remaining contractual term was approximately 7.2 years
for all outstanding stock options and approximately 5.6 years for stock options
exercisable as of September 30, 2007. As of September 30, 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.

     The following table summarizes information about stock options outstanding
at September 30, 2007:



                                            Weighted
                               Weighted       Average                                 Weighted
                                Average      Remaining                 Weighted        Average
                                Exercise    Contractual                 Average       Remaining
   Range of        Total        Price on    Life (Years)    Total       Exercise     Contractual
   Exercise       Options        Total        on Total     Options      Price on    Life (Years)
     Prices      Outstanding   Outstanding   Outstanding  Exercisable  Exercisable  on Exercisable
--------------------------------------------------------------------------------------------------

                                                                             
  $ 7.94-$19.99     3,438,767     $   15.22           7.2   1,287,504      $  14.96            5.6
  $20.00-$29.99         5,000         20.70           0.7       5,000         20.70            0.7
               -----------------------------------------------------------------------------------
                    3,443,767     $   15.23           7.2   1,292,504      $  14.98            5.6
               ===================================================================================


8.  INCOME TAXES

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

     During the quarter and nine months ended September 30, 2007, the Company
recorded a reduction in the expense of $628,000 and an expense of $297,000,
respectively, of income tax expense for income attributable to FIDAC, its
taxable REIT subsidiary, and the portion of earnings retained based on Section
162(m) limitations. During the quarter and nine months ended September 30, 2007,
the Company recorded approximately $3.0 million and $5.5 million, respectively,
of income tax expense for a portion of earnings retained based on Section 162(m)
limitations. 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.

     During the quarter and nine months ended September 30, 2006, the Company
recorded $517,000 and $2.9 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 quarter and nine months ended September 30, 2006, the
Company recorded $1.8 million and $3.3 million of income tax expense for a
portion of earnings retained based on Section 162(m) limitations, respectively.

9. LEASE COMMITMENTS

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

                                             Total per Year
                                              (dollars in
                                               thousands)
            2007 (remainder)                         $   133
            2008                                         532
            2009                                         532
                                            -----------------
            Total remaining lease payments           $ 1,197
                                            =================


                                       16




10. 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.

     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 September 30, 2007,
the Company entered into interest rate swaps to pay a fixed rate and receive a
floating rate of interest, with total notional amount of $14.7 billion.

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

11. CONTINGENCIES

     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.

     Chimera Investment Corporation, or Chimera, has filed a registration
statement on Form S-11 with the Securities and Exchange Commission for an
initial public offering of the common stock of Chimera. Chimera is a
newly-formed specialty finance company that will invest in residential mortgage
loans, residential mortgage-backed securities, real estate-related securities
and various other asset classes. Chimera will be externally managed by FIDAC.
Concurrent with the public offering pursuant to Chimera's registration
statement, the Company expects to acquire 9.8% of Chimera's outstanding shares
of common stock at the initial public offering price after giving effect to the
shares issued in the offering, excluding shares sold pursuant to the
underwriters' exercise of their overallotment option. There can be no assurance
that the Chimera transaction will take place or if it will take place in the
manner described.

12. SUBSEQUENT EVENTS

     On October 12, 2007, the Company entered into an underwriting agreement
pursuant to which it sold 71,300,000 shares of its common stock for proceeds net
of underwriting fees of approximately $1.0 billion. This transaction settled on
October 17, 2007.


                                       17




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

Special Note Regarding Forward-Looking Statements

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

Overview

     We are a REIT that owns and manages a portfolio of mortgage-backed
securities. Our principal business objective is to generate net income for
distribution to our stockholders from the spread between the interest income on
our investment securities and the costs of borrowing to finance our acquisition
of investment securities and from dividends we receive from FIDAC. FIDAC is our
wholly-owned taxable REIT subsidiary, and is a registered investment advisor
that generates advisory and service fee income. We also have a majority interest
in an investment fund.

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

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

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


                                       18




     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 14% and 16% for the
quarters ended September 30, 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.

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



                                       19




     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                                                      Net
                        Investment        Total       Average      Average                               Net     Interest
                         Securities     Interest     Investment   Repurchase   Interest   Average Cost Interest    Rate
                         Held (1)        Income      Securities    Agreements    Expense    of Funds    Income     Spread
---------------------------------------------------------------------------------------------------------------------------
                                  (ratios for the quarters have been annualized, dollars in thousands)
                                                                                              
Quarter Ended
 September 30, 2007     $   43,075,489   $  628,696         5.84%  $40,201,513  $  519,118       5.17%  $109,578      0.67%
Quarter Ended
 June 30, 2007          $   38,822,274   $  556,262         5.73%  $36,560,359  $  468,748       5.13%  $ 87,514      0.60%
Quarter Ended
 March 31, 2007         $   31,682,974   $  449,564         5.68%  $29,834,208  $  380,164       5.10%  $ 69,400      0.58%
Quarter Ended
 December 31, 2006      $   28,888,956   $  407,092         5.64%  $27,118,402  $  349,302       5.15%  $ 57,790      0.49%
Quarter Ended
 September 30, 2006     $   24,976,876   $  339,737         5.44%  $23,120,247  $  295,726       5.12%  $ 44,011      0.32%

(1) Does not reflect unrealized gains/(losses).


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

Quarter Ended                CPR
-------------                ---
September 30, 2007           14%
June 30, 2007                15%
March 31, 2007               17%
December 31, 2006            15%
September 30, 2006           16%

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

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

     For the purposes of computing ratios relating to equity measures,
throughout this report, equity includes Series B preferred stock, which has been
treated under GAAP as temporary equity.

Critical Accounting Policies

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

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


                                       20




     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.

     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.

     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, the Company will not be subjected to
federal income tax to the extent of its distributions to shareholders and as
long as certain asset, income and stock ownership tests are met. The Company and
FIDAC have made a joint election to treat FIDAC as a taxable REIT subsidiary. As
such, FIDAC is taxable as a domestic C corporation and subject to federal and
state and local income taxes based upon its taxable income.

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

Results of Operations: For the Quarters and Nine Months Ended  September 30,
                       2007 and 2006

     Net Income Summary

     For the quarter ended September 30, 2007, our net income was $108.3
million, or $0.33 basic net income per average share available to common
shareholders, as compared to net income of $42.9 million, or $0.21 net income
per average share available to common shareholders, for the quarter ended
September 30, 2006. We attribute the increase in total net income for the
quarter ended September 30, 2007 from the quarter ended September 30, 2006 to
the increased asset base, and the increase in interest rate spread. Average
Investment Securities for the quarter ended September 30, 2007 totaled $43.1
billion, as compared to $25.0 billion for the quarter ended September 30, 2006.
The interest rate spread increased to 0.67% for the quarter ended September 30,
2007 from 0.32% for the quarter ended September 30, 2006. The increase in yield
on Investment Securities to 5.84% for the quarter ended September 30, 2007 from
5.44% for the quarter ended September 30, 2006 was only partially offset by the
increase in cost of funding to 5.17% for the quarter ended September 30, 2007
from 5.12% for the quarter ended September 30, 2006. For the quarter ended
September 30, 2007, net investment advisory and service fees totaled $4.4
million, as compared to $4.3 million for the quarter ended September 30, 2006.
For the quarter ended September 30, 2007, the net gain on sale of Investment
Securities and termination of interest rate swaps was $5.8 million as compared
to an $8.0 million net gain on sale of Mortgage-Backed Securities for the
quarter ended September 30, 2006. Gross income from trading securities totaled
$8.3 million for the quarter ended September 30, 2007 and $612,000 for the
quarter ended September 30, 2006. There was no loss on other-than-temporarily
impaired securities for the quarters ended September 30, 2007 and 2006. For the
quarter ended September 30, 2007, general and administrative expenses totaled
$17.3 million, as compared to $11.7 million for the quarter ended September 30,
2006.


                                       21




     Dividends for the quarter ended September 30, 2007 were $0.26 per share of
common stock, or $85.9 million in total, $0.492188 per share of Series A
preferred stock, or $3.6 million in total, and $0.375 per share of Series B
preferred stock or $1.7 million in total. Dividends per share for the quarter
ended September 30, 2006 were $0.14 per share of common stock, or $28.7 million
in total, $0.492188 per share of Series A preferred stock, or $3.6 million in
total, and $0.375 per share of Series B preferred stock, or $1.7 million in
total. The 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. Our return
on average equity was 12.09% for the quarter ended September 30, 2007 compared
to 7.72% for the quarter ended September 30, 2006.

     For the nine months ended September 30, 2007, our net income was $261.5
million, or $0.92 basic net income per average share related to common
shareholders, as compared to net income of $40.5 million, or $0.17 net income
per average share available to common shareholders for the nine months ended
September 30, 2006. We attribute the increase in net income of $221.0 million
for the nine months ended September 30, 2007 when compared to the nine months
ended September 30, 2006 to the increased interest earning assets, increased
interest rate spread, and the net gains on sales of Investment Securities.
Average Investment Securities for the nine months ended September 30, 2007
totaled $37.9 billion, as compared to $21.1 billion for the nine months ended
September 30, 2006. Net interest spread for the nine months ended September 30,
2007 increased to 0.62%, from 0.32% for the nine months ended September 30,
2006. For the nine months ended September 30, 2007, net interest income was
$266.5 million, as compared to $109.1 million for the nine months ended
September 30, 2006. For the nine months ended September 30, 2007, gain on sale
of Mortgage-Backed Securities was $17.2 million, as compared to a $8.7 million
loss for the quarter ended September 30, 2006. Losses on other-than-temporarily
impaired securities totaled $1.2 million and there were no losses of impairment
of intangibles for the nine months ended September 30, 2007. Losses on
other-than-temporarily impaired securities totaled $46.8 million and impairment
of intangibles totaled $2.5 million for the nine months ended September 30,
2006. Dividends per share for the nine months ended September 30, 2007, were
$0.70 per share of common stock, or $203.2 million in total, $1.476564 per share
of Series A preferred stock or $10.9 million in total, and $1.125 per share of
Series B preferred stock, or $5.2 million in total. Dividends per share for the
nine months ended September 30, 2006 were $0.38 per share of common stock, or
$63.6 million in total and $1.476564 per share of Series A preferred stock, or
$10.9 million in total, and $0.704167 per shares of Series B preferred stock, or
$3.2 million in total. Our return on average equity was 10.53% for the nine
months ended September 30, 2007 and 2.93% for the nine months ended September
30, 2006.


                                       22




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



                                                    Quarter         Quarter        Nine Months      Nine Months
                                                     Ended           Ended            Ended            Ended
                                                 September 30,   September 30,   September 30,    September 30,
                                                      2007            2006             2007             2006
                                                ------------------------------------------------------------------
                                                                                         
Interest income                                    $    628,696    $    339,737     $  1,634,522     $    814,790
Interest expense                                        519,118         295,726        1,368,030          705,711
                                                ------------------------------------------------------------------
    Net interest income                                 109,578          44,011          266,492          109,079
                                                ------------------------------------------------------------------

Other income (loss):
  Investment advisory and service fees                    5,464           4,966           16,392           17,173
  Gain (loss) on sale of Investment Securities            3,795            (446)          17,233           (8,691)
  Gain on termination of interest rate swaps              2,029           8,414            2,096            8,414
  Income from trading securities                          8,288             612           11,960              612
  Loss on other-than-temporarily impaired
   securities                                                 -               -           (1,189)         (46,844)
                                                ------------------------------------------------------------------
     Total other income (loss)                           19,576          13,546           46,492          (29,336)
                                                ------------------------------------------------------------------

Expenses:
  Distribution fees                                       1,100             724            2,865            2,649
  General and administrative expenses                    17,334          11,682           42,492           27,844
                                                ------------------------------------------------------------------
     Total expenses                                      18,434          12,406           45,357           30,493
                                                ------------------------------------------------------------------

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

Income before income taxes and minority
 interest                                               110,720          45,151          267,627           46,757

Income taxes                                              2,327           2,273            5,770            6,250
                                                ------------------------------------------------------------------

Income before minority interest                         108,393          42,878          261,857           40,507

Minority interest                                           106              28              405               28
                                                ------------------------------------------------------------------

Net Income                                              108,287          42,850          261,452           40,479

Dividends on preferred stock                              5,373           5,373           16,119           14,184
                                                ------------------------------------------------------------------

Net income available to common shareholders        $    102,914    $     37,477     $    245,333     $     26,295
                                                ==================================================================

Weighted average number of basic common
 shares outstanding                                 315,969,814     181,767,106      266,510,879      155,054,308
Weighted average number of diluted
 common shares outstanding                          324,614,534     189,952,159      275,146,595      160,211,191

Basic net income per average common share          $       0.33    $       0.21     $       0.92     $       0.17

Diluted net income per average common share        $       0.32    $       0.20     $       0.91     $       0.16

Average total assets                               $ 42,485,071    $ 26,199,087     $ 38,817,661     $ 21,226,016
Average equity                                     $  3,582,578    $  2,219,286     $  3,309,425     $  1,844,131

Return on average total assets                             1.02%           0.65%            0.90%            0.25%
Return on average equity                                  12.09%           7.72%           10.53%            2.93%



                                       23




     Interest Income and Average Earning Asset Yield

     We had average earning assets of $43.1 billion and $25.0 billion for the
quarters ended September 30, 2007 and 2006, respectively. Our primary source of
income for the quarters ended September 30, 2007 and 2006 was interest income.
Our interest income was $628.7 million for the quarter ended September 30, 2007
and $339.7 million for the quarter ended September 30, 2006. The yield on
average Investment Securities increased by 40 basis points, from 5.44% for the
quarter ended September 30, 2006 to 5.84%, for the quarter ended September 30,
2007. Our average Investment Securities increased by $18.1 billion and interest
income increased by $289.0 million for the quarter ended September 30, 2007 as
compared to the quarter ended September 30, 2006. The average coupon rate at
September 30, 2007 was 5.94% as compared to 5.74% at September 30, 2006. The
prepayment speeds decreased to 14% CPR for the quarter ended September 30, 2007
from 16% CPR for the quarter ended September 30, 2006. The increase in coupon
rates and reduction in prepayment speeds resulted in an increase in yield.

     We had average earning assets of $37.9 billion and $21.1 billion for the
nine months ended September 30, 2007 and 2006, respectively. Average earning
assets is the average of the current par of the portfolio during the measurement
period. Our interest income was $1.6 billion for the nine months ended September
30, 2007 and $814.8 million for the nine months ended September 30, 2006. The
yield on average Investment Securities increased from 5.15% for the nine months
ended September 30, 2006, to 5.76% for the nine months ended September 30, 2007.
Our average earning asset balance increased by $16.8 billion and interest income
increased by $819.7 million for the nine months ended September 30, 2007 as
compared to the nine months ended September 30, 2006. The average prepayment
speeds decreased to 15% CPR for the nine months ended September 30, 2007 from
18% CPR for the nine months ended September 30, 2006. The increase in interest
income for the nine months ended September 30, 2007, when compared to the nine
months ended September 30, 2006, resulted from the increased asset base and the
increase in weighted average yield.

     Interest Expense and the Cost of Funds

     Our largest expense is the cost of borrowed funds. We had average borrowed
funds of $40.2 billion and total interest expense of $519.1 million for the
quarter ended September 30, 2007. We had average borrowed funds of $23.1 billion
and total interest expense of $295.7 million for the quarter ended September 30,
2006. Our average cost of funds was 5.17% for the quarter ended September 30,
2007 and 5.12% for the quarter ended September 30, 2006. The cost of funds rate
increased by 5 basis points and the average borrowed funds increased by $17.1
billion for the quarter ended September 30, 2007 when compared to the quarter
ended September 30, 2006. Interest expense for the quarter increased over the
quarter ended September 30, 2006 by $223.4 million due to the substantial
increase in the average repurchase balance and the increase in the 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 0.20% below average one-month LIBOR and 0.14% below
average six-month LIBOR for the quarter ended September 30, 2007. Our average
cost of funds was 0.17% below average one-month LIBOR and 0.31% below average
six-month LIBOR for the quarter ended September 30, 2006.


                                       24




     The table below shows our average borrowed funds, interest expense, and
average cost of funds as compared to average one-month and average six-month
LIBOR for the quarters ended September 30, 2007, June 30, 2007, March 31, 2007,
the year ended December 31, 2006 and the four quarters in 2006.

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



                                                                                   Average                  Average
                                                                                  One-Month  Average Cost   Cost of
                                                                                    LIBOR      of Funds      Funds
                                                                                  Relative to Relative to Relative to
                         Average                            Average    Average     Average      Average      Average
                        Repurchase  Interest  Average Cost  One-Month  Six-Month  Six-Month   One-Month    Six-Month
                        Agreements   Expense     of Funds     LIBOR      LIBOR       LIBOR       LIBOR        LIBOR
                       -----------------------------------------------------------------------------------------------
                                                                                       
For the Quarter Ended
 September 30, 2007     $40,201,513 $  519,118        5.17%      5.37%      5.31%      0.07%       (0.20%)     (0.14%)
For the Quarter Ended
 June 30, 2007          $36,560,359 $  468,748        5.13%      5.32%      5.37%     (0.05%)      (0.19%)     (0.24%)
For the Quarter Ended
 March 31, 2007         $29,834,208 $  380,164        5.10%      5.26%      5.30%     (0.04%)      (0.16%)     (0.20%)
----------------------------------------------------------------------------------------------------------------------
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 Quarter Ended
 December 31, 2006      $27,118,402 $  349,302        5.15%      5.27%      5.31%     (0.04%)      (0.12%)     (0.16%)
For the Quarter Ended
 September 30, 2006     $23,120,247 $  295,726        5.12%      5.29%      5.43%     (0.14%)      (0.17%)     (0.31%)
For the Quarter Ended
 June 30, 2006          $20,060,978 $  242,473        4.83%      5.03%      5.27%     (0.24%)      (0.20%)     (0.44%)
For the Quarter Ended
 March 31, 2006         $15,296,893 $  167,512        4.38%      4.55%      4.84%     (0.29%)      (0.17%)     (0.46%)


     Net Interest Income

     Our net interest income, which equals interest income less interest
expense, totaled $109.6 million for the quarter ended September 30, 2007 and
$44.0 million for the quarter ended September 30, 2006. Our net interest income
increased because of the increase in average Investment Securities we owned and
because of an increase in interest rate spread. Our net interest rate spread,
which equals the yield on our average assets for the period less the average
cost of funds for the period, was 0.67% for the quarter ended September 30, 2007
as compared to 0.32% for the quarter ended September 30, 2006. This 35 basis
point increase was a result of the yield increasing for the quarter ended
September 30, 2007 to 5.84% from 5.44% for the quarter ended September 30, 2006.
The increase in yield was only partially offset by the increase in cost of
funds, which increased to 5.17% for the quarter ended September 30, 2007, as
compared to 5.12% for the quarter ended September 30, 2006.

     Our net interest income totaled $266.5 million for the nine months ended
September 30, 2007 and $109.1 million for the nine months ended September 30,
2006. Our net interest income increased because of the increase in interest rate
spread. 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 0.62% for the
nine months ended September 30, 2007 as compared to 0.32% for the nine months
ended September 30, 2006.


                                       25



     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 quarter ended September
30, 2007, June 30, 2007, March 31, 2007, the year ended December 31, 2006 and
the four quarters in 2006.

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



                            Average                 Yield Average   Average                                          Net
                          Investment      Total       Interest     Balance of                   Average    Net     Interest
                           Securities    Interest      Earning     Repurchase     Interest      Cost of   Interest   Rate
                           Held((1))      Income       Assets      Agreements      Expense      Funds     Income    Spread
                         -------------------------------------------------------------------------------------------------
                                                                                             
For the Quarter Ended
 September 30, 2007       $ 43,075,489   $  628,696        5.84%   $40,201,513   $   519,118     5.17% $ 109,578     0.67%
For the Quarter Ended
 June 30, 2007            $ 38,822,274   $  556,262        5.73%   $36,560,359   $   468,748     5.13% $  87,514     0.60%
For the Quarter Ended
 March 31, 2007           $ 31,682,974   $  449,564        5.68%   $29,834,208   $   380,164     5.10% $  69,400     0.58%
--------------------------------------------------------------------------------------------------------------------------
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 Quarter Ended
 December 31, 2006        $ 28,888,956   $  407,092        5.64%   $27,118,402   $   349,302     5.15% $  57,790     0.49%
For the Quarter Ended
 September 30, 2006       $ 24,976,876   $  339,737        5.44%   $23,120,247   $   295,726     5.12% $  44,011     0.32%
For the Quarter Ended
 June 30, 2006            $ 21,660,089   $  280,171        5.17%   $20,060,978   $   242,473     4.83% $  37,698     0.34%
For the Quarter Ended
 March 31, 2006           $ 16,590,859   $  194,882        4.70%   $15,296,893   $   167,512     4.38% $  27,370     0.32%


     Investment Advisory and Service Fees

     FIDAC is a registered investment advisor which specializes in managing
fixed income securities. FIDAC expanded its line of business in 2006 to include
the management of equity securities, initially for us and an affiliated person,
and collaterized debt obligations. FIDAC generally receives annual net
investment advisory fees of approximately 10 to 20 basis points of the gross
assets it manages, assists in managing or supervises. At September 30, 2007,
FIDAC had under management approximately $2.5 billion in net assets and $13.9
billion in gross assets, compared to $2.6 billion in net assets and $14.6
billion in gross assets at September 30, 2006. Investment advisory and service
fees for the quarters ended September 30, 2007 and 2006 totaled $4.4 million and
$4.3 million respectively, net of fees paid to third parties pursuant to
distribution agreements for facilitating and promoting distribution of shares of
FIDAC's clients. Gross assets under management will vary from time to time
because of changes in the amount of net assets FIDAC manages as well as changes
in the amount of leverage used by the various funds and accounts FIDAC manages.

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

     For the quarter ended September 30, 2007, we sold Mortgage-Backed
Securities with a carrying value of $1.7 billion for an aggregate gain of $3.8
million and terminated interest rates swap agreements with a notional amount of
$600 million for a gain of $2.0 million. For the quarter ended September 30,
2006, we sold Mortgage-Backed Securities with a carrying value of $483.5 for an
aggregate loss of $446,000 and terminated interest rates swap agreements with a
notional amount of $895 million for a gain of $8.4 million. For the nine months
ended September 30, 2007, we sold Mortgage-Backed Securities with an aggregate
historical amortized cost of $4.4 billion for an aggregate gain of $17.2 million
and terminated interest rates swap agreements with a notional amount of $900
million for a gain of $2.1 million. For the nine months ended September 30,
2006, we sold Mortgage-Backed Securities with an aggregate historical amortized
cost of $2.5 billion for an aggregate loss of $8.7 million and terminated
interest rates swap agreements with a notional amount of $895 million for a gain
of $8.4 million. The difference between the sale price and the carrying value of
our Mortgage-Backed Securities will be a realized gain or a realized loss, and
will increase or decrease income accordingly. We do not expect to sell assets on
a frequent basis, but may from time to time sell existing assets to acquire new
assets which our management believes might have higher risk-adjusted returns as
part of our asset/liability management strategy.


                                       26




     Income from Trading Securities

     Gross income from trading securities totaled $8.3 million for the quarter
ended September 30, 2007 and $12.0 million for the nine months ended September
30, 2007. During the quarter and nine months ended September 30, 2006, we earned
$612,000 in gross income from trading securities.

     Impairment of Intangible for Customer Relationships

     During the quarter and nine months ended September 30, 2007, it was
determined that there was no impairment of intangibles for customer
relationships. The total impairment of intangible assets relating to customer
relationships was $2.5 million for the nine months ended September 30, 2006.
There was no impairment of intangibles for customer relationships for the
quarter ended September 30, 2006.

     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 quarters ended September 30, 2007 and 2006 there were
no losses on other-than temporarily impaired securities. For the nine months
ended September 30, 2007 and September 30, 2006 the loss on other-than
temporarily impaired securities totaled $1.2 million and $46.8 million,
respectively.

     General and Administrative Expenses

     General and administrative (or G&A) expenses were $17.3 million for the
quarter ended September 30, 2007, and $11.7 million for the quarter ended
September 30, 2006. G&A expenses as a percentage of average total assets was
0.16% and 0.18% for the quarters ended September 30, 2007 and 2006,
respectively. The increase in G&A expenses of $5.7 million for the quarter ended
September 30, 2007 was primarily the result of increased compensation expense.

     G&A expenses were $42.5 million for the nine months ended September 30,
2007 and $27.8 million for the six months ended September 30, 2006. G&A expenses
as a percentage of average assets was 0.15% and 0.17% on an annualized basis for
the nine months ended September 30, 2007 and 2006, respectively. G&A expenses as
a percentage of average equity were 1.71% and 2.0% on an annualized basis for
the nine months ended September 30, 2007 and 2006, respectively.

     The table below shows our total G&A expenses as compared to average total
assets and average equity for the quarter ended September 30, 2007, June 30,
2007, March 31, 2007, the year ended December 31, 2006 and the four quarters in
2006.

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



                                                          Total G&A          Total G&A
                                         Total G&A     Expenses/Average   Expenses/Average
                                           Expenses         Assets             Equity
                                        ------------- ------------------ ------------------
                                                                       
For the Quarter Ended September 30, 2007   $   17,334              0.16%              1.94%
For the Quarter Ended June 30, 2007        $   12,272              0.12%              1.50%
For the Quarter Ended March 31, 2007       $   12,886              0.15%              1.70%
-------------------------------------------------------------------------------------------
For the Year Ended December 31, 2006       $   40,063              0.17%              2.00%
For the Quarter Ended December 31, 2006    $   12,219              0.16%              1.86%
For the Quarter Ended September 30, 2006   $   11,682              0.18%              2.08%
For the Quarter Ended June 30, 2006        $    8,985              0.18%              2.19%
For the Quarter Ended March 31, 2006       $    7,177              0.18%              1.95%



                                       27




Net Income and Return on Average Equity

     Our net income was $108.3 million for the quarter ended September 30, 2007,
and $42.9 million for the quarter ended September 30, 2006. Our return on
average equity was 12.09% for the quarter ended September 30, 2007, and 7.72%
for the quarter ended September 30, 2006. We attribute the majority of the
increase in net income of $65.4 million to the increase in Investment Securities
and interest rate spread for the quarter ended September 30, 2007 compared to
the quarter ended September 30, 2006.

     Our net income was $261.5 million for the nine months ended September 30,
2007 and $40.5 million for the nine months ended September 30, 2006. We
attribute the increase in total net income for nine months ended September 30,
2007 from the nine months ended September 30, 2006 to the increase in net
interest income, the decline in realized losses and the decline in loss on
other-than-temporarily impaired securities. The net interest income for the nine
months ended September 30, 2007 was $266.5 million as compared to $109.1 million
for the nine months ended September 30, 2006. The gain on sale of investment
securities was $17.2 million for the nine months ended September 30, 2007 and
the loss on sale of investment securities was $8.7 million for the nine months
ended September 30, 2006. Loss on other-than-temporarily impaired securities was
$1.2 million for the nine months ended September 30, 2007 and $46.8 million for
the nine months ended September 30, 2006.

     The table below shows our net interest income, net investment advisory and
service fees, gain (loss) on sale of Mortgage-Backed Securities and termination
of interest rate swaps, loss on other-than-temporarily impaired securities,
income from equity investment, G&A expenses, income taxes, impairment of
intangibles for customer relationships, minority interest, each as a percentage
of average equity, and the return on average equity for the quarter ended
September 30, 2007 June 30, 2007, March 31, 2007, the year ended December 31,
2006, and the four quarters in 2006.

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


                                                                    
                                                 Gain/Loss on
                                                   Sale of
                                                   Mortgage-
                                                    Backed      Loss on
                                       Net        Securities   other-than-
                          Net       Investment       and       temporarily  Income from
                        Interest    Advisory and   Interest     impaired       equity
                         Income/      Service     Rate Swaps/  securities/   investment/
                         Average    Fees/Average   Average      Average       Average
                          Equity       Equity       Equity        Equity       Equity
                       ----------- ------------- ------------ ------------- ------------
For the Quarter Ended
 September 30, 2007         12.23%         0.49%        0.65%             -        0.93%
For the Quarter Ended
 June 30, 2007              10.71%         0.55%        0.89%       (0.09%)        0.03%
For the Quarter Ended
 March 31, 2007              9.14%         0.61%        0.82%       (0.06%)        0.45%
---------------------------------- ------------- ------------ ------------- ------------
For the Year Ended
 December 31, 2006           8.32%         0.94%        0.34%       (2.61%)        0.20%
For the Quarter Ended
 December 31, 2006           8.81%         0.67%        1.08%       (0.84%)        0.52%
For the Quarter Ended
 September 30, 2006          7.93%         0.76%        1.44%             -        0.08%
For the Quarter Ended
 June 30, 2006               9.20%         1.08%      (0.30%)       (4.91%)            -
For the Quarter Ended
 March 31, 2006              7.45%         1.59%      (1.91%)       (7.28%)            -


                                                   Impairment of
                                                    intangible
                           G&A                      for customer   Minority
                         Expenses/     Income      relationships/   interest/  Return on
                         Average   Taxes/ Average     Average       Average      Average
                          Equity       Equity         Equity         Equity       Equity
                        ---------- -------------- --------------- ------------ -----------
For the Quarter Ended
 September 30, 2007        (1.94%)        (0.26%)               -      (0.01%)      12.09%
For the Quarter Ended
 June 30, 2007             (1.50%)        (0.10%)               -            -      10.49%
For the Quarter Ended
 March 31, 2007            (1.70%)        (0.34%)               -      (0.04%)       8.88%
----------------------- ---------- -------------- --------------- ------------ -----------
For the Year Ended
 December 31, 2006         (2.00%)        (0.38%)         (0.12%)      (0.01%)       4.68%
For the Quarter Ended
 December 31, 2006         (1.86%)        (0.20%)               -      (0.05%)       8.13%
For the Quarter Ended
 September 30, 2006        (2.08%)        (0.41%)               -            -       7.72%
For the Quarter Ended
 June 30, 2006             (2.19%)        (0.33%)         (0.46%)            -       2.09%
For the Quarter Ended
 March 31, 2006            (1.95%)        (0.57%)         (0.31%)            -     (2.98%)



                                       28




Financial Condition

     Investment Securities, Available for Sale

     All of our Mortgage-Backed Securities at September 30, 2007 were
adjustable-rate or fixed-rate mortgage-backed securities backed by single-family
mortgage loans. All of the mortgage assets underlying these Mortgage-Backed
Securities were secured with a first lien position on the underlying
single-family properties. All of our mortgage-backed securities were FHLMC, FNMA
or GNMA mortgage pass-through certificates or CMOs, which carry an actual or
implied "AAA" rating. All of our agency debentures are callable and carry an
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 Investment Securities purchased at a discount, and we amortize premium
balances as a decrease in interest income over the life of investment securities
purchased at a premium. At September 30, 2007, and December 31, 2006 we had on
our balance sheet a total of $77.5 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 $307.2 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 $1.7 billion for the quarter
ended September 30, 2007 and $1.3 billion for the quarter ended September 30,
2006. The overall prepayment speed for the quarter ended September 30, 2007
decreased to 14%, as compared to 16% for the quarter ended September 30, 2006.
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 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 our Investment Securities at September 30, 2007,
June 30, 2007, March 31, 2007, December 31, 2006, September 30, 2006, June 30,
2006 and March 31, 2006.

                              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 September 30, 2007         $44,904,820   $229,713   $45,134,533         100.51% $44,890,633           99.97%    5.74%
At June 30, 2007              $39,102,277   $211,438   $39,313,715         100.54% $38,753,509           99.11%    5.71%
At March 31, 2007             $39,053,196   $195,649   $39,248,845         100.50% $39,230,648          100.45%    5.67%
----------------------------------------- ---------- ------------- --------------- ----------- ---------------- --------
At December 31, 2006          $30,134,791   $140,709   $30,275,500         100.47% $30,217,009          100.27%    5.63%
At September 30, 2006         $28,297,950   $139,717   $28,437,667         100.49% $28,348,027          100.18%    5.58%
At June 30, 2006              $23,822,683   $141,671   $23,964,354         100.59% $23,474,006           98.54%    5.42%
At March 31, 2006             $16,288,848   $173,428   $16,462,276         101.06% $16,176,348           99.31%    5.03%


     The tables below set forth certain characteristics of our Investment
Securities at September 30, 2007, June 30, 2007, March 31, 2007, December 31,
2006, September 30, 2006, June 30, 2006 and March 31, 2006. 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.


                                       29




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


                                                                                         
                                                                                                    Principal
                                                                                                     Amount at
                                                         Weighted                                  Period End as
                                         Weighted      Average Term     Weighted      Weighted      % of Total
                         Principal     Average Coupon     to Next        Average       Average      Investment
                           Amount           Rate         Adjustment    Lifetime Cap  Asset Yield     Securities
                       -------------- --------------- --------------- ------------- ------------- ---------------
At September 30, 2007     $13,148,355           5.99%    41 months           10.02%         5.68%          29.28%
At June 30, 2007           $9,553,827           5.85%    32 months           10.11%         5.77%          24.43%
At March 31, 2007          $9,657,221           5.79%    30 months           10.05%         5.66%          24.73%
------------------------------------- --------------- --------------- ------------- ------------- ---------------
At December 31, 2006       $8,493,242           5.72%    19 months            9.76%         5.57%          28.18%
At September 30, 2006      $8,291,239           5.57%    17 months            9.64%         5.47%          29.30%
At June 30, 2006           $7,964,221           5.36%    16 months            9.75%         5.26%          33.43%
At March 31, 2006          $7,785,082           4.99%    20 months           10.27%         5.07%          47.79%


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


                                                                          Principal Amount
                                                                           at Period End as
                                                Weighted      Weighted       % of Total
                                Principal        Average       Average       Investment
                                   Amount       Coupon Rate   Asset Yield     Securities
                              --------------- -------------- ------------ -----------------
At September 30, 2007             $31,756,465          5.93%        5.76%            70.72%
At June 30, 2007                  $29,548,450          5.87%        5.69%            75.57%
At March 31, 2007                 $29,395,975          5.85%        5.67%            75.27%
--------------------------------------------- -------------- ------------ -----------------
At December 31, 2006              $21,641,549          5.83%        5.65%            71.82%
At September 30, 2006             $20,006,711          5.82%        5.62%            70.70%
At June 30, 2006                  $15,858,461          5.73%        5.50%            66.57%
At March 31, 2006                  $8,503,766          5.43%        4.99%            52.21%


     At September 30, 2007 and December 31, 2006, 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
              ----------------------------------------------
                               September 30, 2007
                               ------------------

                                                                         11th                           Monthly
                                                   Twelve    12-Month   District  1-Year     3-Year     Federal
                           One-Month   Six-Month    Month     Moving    Cost of   Treasury   Treasury   Cost of     Other
                              Libor       Libor      Libor    Average    Funds      Index      Index     Funds    Indexes((1))
                           ----------- ---------- ---------- --------- --------- ---------- ---------- --------- -------------
Weighted Average Term
 to Next Adjustment              1 mo.     34 mo.     67 mo.     1 mo.     1 mo.     30 mo.     16 mo.     1 mo.        11 mo.
Weighted Average
 Annual Period Cap               6.40%      3.15%      2.00%     0.02%     0.00%      1.91%      2.07%     0.00%         1.84%
Weighted Average
 Lifetime Cap at
 September 30, 2007              7.33%     10.65%     10.99%     9.31%    12.08%     10.85%     13.17%    13.42%        10.66%
Investment Principal
 Value as Percentage of
 Investment Securities at
 September 30, 2007              7.46%      2.36%     14.60%     0.20%     0.23%      4.16%      0.06%     0.16%         0.05%

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


                                       30




                 Adjustable-Rate Investment Securities by Index
                 ----------------------------------------------
                                December 31, 2006
                                -----------------



                                                                                             
                                                                        11th     Six-                       Monthly
                                         One-   Six-  Twelve 12-Month  District  Month  1-Year    3-Year    Federal
                                         Month Month   Month  Moving   Cost of    CD    Treasury  Treasury  Cost of    Other
                                         Libor  Libor  Libor  Average   Funds    Rate    Index     Index     Funds   Indexes((1))
                                        ------ ------ ------ -------- --------- ------ --------- --------- -------- -------------
Weighted Average Term to Next Adjustment 1 mo. 35 mo. 36 mo.    1 mo.     1 mo.  3 mo.    13 mo.    17 mo.    1 mo.        24 mo.
Weighted Average Annual
 Period Cap                              6.70%  1.88%  2.00%    0.16%     0.00%  1.75%     1.00%     2.03%    0.00%         1.89%
Weighted Average Lifetime Cap at
 December 31, 2006                       7.32% 10.39% 10.70%   10.53%    12.07%  9.75%    10.81%    13.17%   13.41%        12.39%
Investment Principal Value as Percentage
 of Investment Securities at December
 31, 2006                                8.29%  2.71%  9.89%    0.07%     0.41%  0.06%     6.34%     0.10%    0.28%         0.03%

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

     Trading Securities and Trading Securities Sold, Not Yet Purchased

     Trading securities and trading securities sold, not yet purchased, are
included in the balance sheet as a result of consolidating the financial
statements of an affiliated investment fund. The resulting realized and
unrealized gains and losses are reflected in the statements of operations. The
fair value of the trading securities was $11.0 million and the trading
securities sold, not yet purchased, was $26.8 million at September 30, 2007. The
fair value of the trading securities was $18.4 million and the trading
securities sold, not yet purchased, was $41.9 million at December 31, 2006.

     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 September 30, 2007, 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 quarter ended September 30, 2007, 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 296 days at September 30, 2007. For the quarter ended September
30, 2006, the term to maturity of our borrowings ranged from one day to three
years, with a weighted average original term to maturity of 108 days at
September 30, 2006. At September 30, 2007, the weighted average cost of funds
for all of our borrowings, after giving effect to interest rate swaps, was
4.99%, and the weighted average term to next rate adjustment was 250 days. At
September 30, 2006, the weighted average cost of funds for all of our
borrowings, after giving effect to interest rate swaps, was 5.12%, and the
weighted average term to next rate adjustment was 35 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, 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.


                                       31




     Borrowings under our repurchase agreements increased by $15.2 billion to
$40.1 billion at September 30, 2007, from $24.9 billion at September 30, 2006.
The increase in borrowings was the result of our deployment of additional
capital raised during the first and third quarters of 2007, which permitted us
to increase our borrowings.

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

     Under our repurchase agreements, we may be required to pledge additional
assets to our repurchase agreement counterparties (i.e., lenders) in the event
the estimated fair value of the existing pledged collateral under such
agreements declines and such lenders demand additional collateral (a "margin
call"), which may take the form of additional securities or cash. Similarly, if
the estimated fair value of investment securities increase 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 September 30, 2007, we did not have any margin calls on
our repurchase agreements that we were not able to satisfy with either cash or
additional pledged collateral. However, should prepayment speeds on the
mortgages underlying our Mortgage-Backed Securities and/or market interest rates
suddenly increase, margin calls on our repurchase agreements could result,
causing an adverse change in our liquidity position.

     The following table summarizes the effect on our liquidity and cash flows
from contractual obligations for repurchase agreements, interest expense on
repurchase agreements, the non-cancelable office lease and employment agreements
at September 30, 2007.



                          Within One      One to     Three to    More than
Contractual Obligations       Year     Three Years  Five Years   Five Years      Total
                                              (dollars in thousands)
-------------------------------------- ------------ ----------- ------------ -------------
                                                               
Repurchase agreements     $ 35,140,113  $ 1,700,000  $1,700,000  $ 1,600,000  $ 40,140,113
Interest expense on
 repurchase agreements         313,505      375,720     238,626      297,964     1,225,815
Long-term operating lease
 obligations                       532          665           -            -         1,197
Employment agreements           30,658        1,626           -            -        32,284
                         ------------- ------------ ----------- ------------ -------------
Total                     $ 35,484,808  $ 2,078,011  $1,938,626  $ 1,897,964  $ 41,399,409
                         ============= ============ =========== ============ =============


     Stockholders' Equity

     During the quarter ended September 30, 2007, we declared dividends to
common shareholders totaling $85.9 million, or $0.26 per share, which were paid
on October 29, 2007. During the quarter ended September 30, 2007, we declared
and paid dividends to Series A preferred shareholders totaling $3.6 million, or
$0.492188 per share, and Series B preferred shareholders totaling $1.7 million,
or $0.375 per share. During the quarter ended September 30, 2006, we declared
and paid dividends to common shareholders totaling $28.7 million, or $0.14 per
share, which were paid October 27, 2006. During the quarter ended September 30,
2006, we declared and paid dividends to Series A preferred shareholders totaling
$3.6 million, or $0.492188 per share, and Series B preferred shareholders
totaling $1.7 million, or $0.375 per share which were paid September 30, 2006.

     On July 12, 2007 we 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.


                                       32




     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.

     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, will be made by means
of ordinary brokers' transaction on the New York Stock Exchange. During the
quarter and nine months ended September 30, 2007, 994,800 and 4,524,100 shares
of our common stock were issued pursuant to this program, totaling $15.0 million
and $66.2 million in net proceeds, respectively.

     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, will be made by means
of ordinary brokers' transaction on the New York Stock Exchange. During nine
months ended September 30, 2007, 1,051,900 shares of our common stock were
issued pursuant to this program, totaling $14.7 million in net proceeds. During
the quarter ended September 30, 2007, we did not issue common stock pursuant to
this program.

     During the quarter ended and nine months ended September 30, 2007, we
raised $87.0 million and $116.5 million by issuing 6,077,055 and 7,988,374
shares, respectively, through the Direct Purchase and Dividend Reinvestment
Program and there were no such transactions during the quarter and nine months
ended September 30, 2006.

     During the quarter ended September 30, 2007, 2,000 options were exercised
under the Long-Term Stock Incentive Plan, or Incentive Plan, for an aggregate
exercise price of $23,000 and there were no options exercised during the quarter
ended September 30, 2006. During the nine months ended September 30, 2007 and
September 30, 2006, 49,238 options were exercised for an aggregate exercise
price of $504,000, and 22,160 shares for an aggregate exercise price of
$205,000, respectively.

     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)."

     The table below shows unrealized gains and losses on the Investment
Securities and interest rate swaps in our portfolio.

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



                             At September 30, At June 30,   At March 31, At December 31, At September 30, At June 30,
                                   2007            2007         2007           2006            2006           2006
                             ---------------- ------------- ------------ --------------- ---------------- ------------
                                                                                          
Unrealized gain                      $68,014      $102,641     $138,211        $112,596         $100,229     $110,755
Unrealized loss                     (453,974)     (570,281)    (198,251)       (188,708)        (220,202)    (495,667)
                             ---------------- ------------- ------------ --------------- ---------------- ------------
Net Unrealized (loss) gain         ($385,960)    ($467,640)    ($60,040)       ($76,112)       ($119,973)   ($384,912)
                             ================ ============= ============ =============== ================ ============

Net unrealized losses as
percentage of investment
securities principal amount           (0.86%)       (1.20%)      (0.15%)         (0.25%)          (0.42%)      (1.62%)
Net unrealized losses as
percentage of investment
securities amortized cost             (0.86%)       (1.19%)      (0.15%)         (0.25%)          (0.42%)      (1.61%)



     Unrealized changes in the estimated net market value of investment
securities have one direct effect on our potential earnings and dividends:
positive mark-to-market 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 market value of our investment securities might impair our liquidity
position, requiring us to sell assets with the likely result of realized losses
upon sale. The net unrealized loss on available for sale securities and interest
rate swaps was $386.0 million, or 0.86% of the amortized cost of our investment
securities as of September 30, 2007, and $76.1 million, or 0.25% of the
amortized cost of our investment securities as of December 31, 2006.


                                       33




     Leverage

     Our debt-to-equity ratio at September 30, 2007 and December 31, 2006 was
9.9:1 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 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 September 30, 2007, we entered into swap agreements with a total
notional amount of $14.7 billion, pursuant to which we agreed to pay a weighted
average pay rate of 5.15% and receive a floating rate based on one month LIBOR.
At September 30, 2006, we entered into swap agreements with a total notional
amount of $9.2 billion, pursuant to which we agreed to pay a weighted average
pay rate of 5.19% 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 September 30, 2007, we had no material commitments for capital
expenditures.


                                       34


     Inflation

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

     Other Matters

     We calculate that at least 75% of our assets were qualified REIT assets, as
defined in the Code for the quarters ended September 30, 2007 and 2006. We also
calculate that our revenue qualifies for the 75% source of income test and for
the 95% source of income test rules for the quarters ended September 30, 2007
and 2006. Consequently, we met the REIT income and asset test. We also met all
REIT requirements regarding the ownership of our common stock and the
distribution of our net income. Therefore, as of September 30, 2007 and December
31, 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 September 30, 2007 and December 31,
2006 we were in compliance with this requirement.


                                       35




ITEM 3      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

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

     Our profitability and the value of our portfolio (including interest rate
swaps) may be adversely affected during any period as a result of changing
interest rates. The following table quantifies the potential changes in net
interest income, portfolio value should interest rates go up or down 25, 50, and
75 basis points, assuming the yield curves of the rate shocks will be parallel
to each other and the current yield curve. All changes in income and value are
measured as percentage changes from the projected net interest income and
portfolio value at the base interest rate scenario. The base interest rate
scenario assumes interest rates at September 30, 2007 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      Projected Percentage
  Change in Interest Rate           Change in                  Change in
                               Net Interest Income          Portfolio Value
--------------------------------------------------------------------------------

-75 Basis Points                      35.66%                     1.60%
-50 Basis Points                      25.86%                     1.34%
-25 Basis Points                      19.49%                     0.98%
Base Interest Rate                      -                          -
+25 Basis Points                      4.46%                     (0.08%)
+50 Basis Points                     (3.13%)                    (0.77%)
+75 Basis Points                     (10.73%)                   (1.57%)

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.


                                       36




     The following table sets forth the estimated maturity or repricing of our
interest-earning assets and interest-bearing liabilities at September 30, 2007.
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 if based on actual prepayment experience.



                                                                           
                                                             More than 1
                                Within 3                      Year to 3    3 Years and
                                  Months      4-12 Months        Years         Over         Total
                                                      (dollars in thousands)
                              -------------- -------------- -------------- ------------ -------------
Rate Sensitive Assets:
  Investment Securities
   (Principal)                    $4,138,639     $1,178,746     $2,589,175  $36,998,260   $44,904,820

Rate Sensitive Liabilities:
  Repurchase Agreements,
    with the effect of swaps      20,576,613      1,685,150      8,831,400    9,046,950    40,140,113
                              -------------- -------------- -------------- ------------ -------------

Interest rate sensitivity gap  ($16,437,974)     ($506,404)   ($6,242,225)  $27,951,310    $4,764,707
                              ============== ============== ============== ============ =============

Cumulative interest rate
 sensitivity gap               ($16,437,974)  ($16,944,378)  ($23,186,603)   $4,764,707
                              ============== ============== ============== ============

Cumulative interest rate
 sensitivity gap as a
 percentage of total rate-
 sensitive assets                      (37%)          (38%)          (52%)          11%
                              ============== ============== ============== ============


     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."

ITEM 4.     CONTROLS AND PROCEDURES


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


                                       37




PART II.    OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

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

Item 1A. RISK FACTORS

     There have been no material changes to the risk factors disclosed in Item
1A -- Risk Factors of our annual report on Form 10-K for the year ended December
31, 2006 (the "Form 10-K"). The materialization of any risks and uncertainties
identified in our forward looking statements contained in this report together
with those previously disclosed in the Form 10-K or those that are presently
unforeseen could result in significant adverse effects on our financial
condition, results of operations and cash flows. See Item 2. "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Special Note Regarding Forward Looking Statements" in this quarterly report on
Form 10-Q.


                                       38




Item 6.     EXHIBITS

Exhibits:

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

                                  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 8-K filed with the
         Securities and Exchange Commission on April 10, 2006).
31.1     Certification of Michael A.J. Farrell, Chairman, Chief Executive
         Officer, and President of the Registrant, pursuant to 18 U.S.C. Section
         1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
         2002.
31.2     Certification of Kathryn F. Fagan, Chief Financial Officer and
         Treasurer of the Registrant, pursuant to 18 U.S.C. Section 1350 as
         adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1     Certification of Michael A.J. Farrell, Chairman, Chief Executive
         Officer, and President of the Registrant, pursuant to 18 U.S.C. Section
         1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
         2002.
32.2     Certification of Kathryn F. Fagan, Chief Financial Officer and
         Treasurer of the Registrant, pursuant to 18 U.S.C. Section 1350 as
         adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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SIGNATURES

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

                              ANNALY CAPITAL MANAGEMENT, INC.

Dated: November 6, 2007       By: /s/ Michael A.J. Farrell
                                  ----------------------------------------------
                                  Michael A.J. Farrell
                                  (Chairman of the Board, Chief Executive
                                  Officer, President and authorized
                                  officer of registrant)

Dated: November 6, 2007       By: /s/ Kathryn F. Fagan
                                  ----------------------------------------------
                                  Kathryn F. Fagan
                                  (Chief Financial Officer and Treasurer and
                                  principal financial and chief accounting
                                  officer)


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