SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

      FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF
                      THE SECURITIES EXCHANGE ACT OF 1934

                                   (MARK ONE)

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

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

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

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

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

Title of Each Class                                     Name of Each Exchange on
                                                            Which Registered

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

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

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

         None.

Indicate by check mark whether the Registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.   Yes X   No
                                                   ---    ---

Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes     No X
                                                       ---    ---



Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
                                   Yes X  No
                                      ---   ---

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

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

Large accelerated filer   X     Accelerated filer       Non-accelerated filer
                         ---                      ---                        ---

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

At June 30, 2007, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $3,844,910,385.

The number of shares of the Registrant's Common Stock outstanding on February
25, 2008 was 460,617,126.

                       Documents Incorporated by Reference


The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2007. Portions of such proxy statement are incorporated by reference into Part
III of this Form 10-K.


                         ANNALY CAPITAL MANAGEMENT, INC.
                          2007 FORM 10-K ANNUAL REPORT
                                TABLE OF CONTENTS


                                                                                      
                                     PART I
                                                                                        PAGE

ITEM 1.         BUSINESS                                                                    1

ITEM 1A.        RISK FACTORS                                                               17

ITEM 1B.        UNRESOLVED STAFF COMMENTS                                                  26

ITEM 2.         PROPERTIES                                                                 26

ITEM 3.         LEGAL PROCEEDINGS                                                          26

ITEM 4.         SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                        26

                                     PART II

ITEM 5.         MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
                STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES              27

ITEM 6.         SELECTED FINANCIAL DATA                                                    29

ITEM 7.         MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
                RESULTS OF OPERATIONS                                                      31

ITEM 7A.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                 49

ITEM 8.         FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                                51

ITEM 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
                FINANCIAL DISCLOSURE                                                       51

ITEM 9A.        CONTROLS AND PROCEDURES                                                    51

ITEM 9B.        OTHER INFORMATION                                                          52

                                    PART III

ITEM 10.        DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                     52

ITEM 11.        EXECUTIVE COMPENSATION                                                     52

ITEM 12.        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
                RELATED STOCKHOLDER MATTERS                                                52

ITEM 13.        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
                INDEPENDENCE                                                               52

ITEM 14.        PRINCIPAL ACCOUNTANT FEES AND SERVICES                                     52

                                     PART IV

ITEM 15.        EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                                 53

FINANCIAL STATEMENTS                                                                      F-1

SIGNATURES                                                                               II-1
EXHIBIT INDEX                                                                            II-2




                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Certain statements contained in this annual report, and certain statements
contained in our future filings with the Securities and Exchange Commission (the
"SEC" or the "Commission"), in our press releases or in our other public or
shareholder communications may not be based on historical facts and are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements, which are based on
various assumptions (some of which are beyond our control), may be identified by
reference to a future period or periods or by the use of forward-looking
terminology, such as "may," "will," "believe," "expect," "anticipate,"
"continue," or similar terms or variations on those terms or the negative of
those terms. Actual results could differ materially from those set forth in
forward-looking statements due to a variety of factors, including, but not
limited to:

     o    changes in interest rates,

     o    changes in the yield curve,

     o    changes in prepayment rates,

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

     o    the availability of financing,

     o    changes in the market value of our assets,

     o    changes in business conditions and the general economy,

     o    risks associated with the investment advisory business of our wholly
          owned subsidiary, Fixed Income Discount Advisory Company (which we
          refer to as FIDAC), including:

          o    the removal by FIDAC's clients of assets FIDAC manages,

          o    FIDAC's regulatory requirements, and

          o    competition in the investment advisory business,

     o    changes in government regulations affecting our business, and

     o    our ability to maintain our qualification 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, please see the
information under the caption "Risk Factors" described in this Form 10-K. We do
not undertake, and specifically disclaim any obligation, to publicly release the
result of any revisions which may be made to any forward-looking statements to
reflect the occurrence of anticipated or unanticipated events or circumstances
after the date of such statements.

                                       i


                                     PART I

ITEM 1. BUSINESS

                                   THE COMPANY

     Background

     Annaly Capital Management, Inc. owns, manages, and finances a portfolio of
investment securities, including mortgage pass-through certificates,
collateralized mortgage obligations (or CMOs), agency callable debentures, and
other securities representing interests in or obligations backed by pools of
mortgage loans. Our principal business objective is to generate net income for
distribution to our stockholders from the spread between the interest income on
our investment securities and the cost of borrowings to finance our acquisition
of investment securities. We are a Maryland corporation that commenced
operations on February 18, 1997. We are self-advised and self-managed.

     We acquired Fixed Income Discount Advisory Company (or FIDAC) on June 4,
2004. FIDAC is a registered investment advisor and is our taxable REIT
subsidiary. FIDAC manages a number of investment vehicles and separate accounts
for which it earns fee income.

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

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

     Assets

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

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

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

                                       1


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

     At December 31, 2007, approximately 21% of our investment securities were
adjustable-rate pass-though certificates, approximately 71% of our investment
securities were fixed-rate pass-through certificates or CMOs, and approximately
8% of our investment securities were CMO floaters. Our adjustable-rate
pass-through certificates are backed by adjustable-rate mortgage loans and have
coupon rates which adjust over time, subject to interest rate caps and lag
periods, in conjunction with changes in short-term interest rates. Our
fixed-rate pass-through certificates are backed by fixed-rate mortgage loans and
have coupon rates which do not adjust over time. CMO floaters are tranches of
mortgage-backed securities where the interest rate adjusts in conjunction with
changes in short-term interest rates. CMO floaters may be backed by fixed-rate
mortgage loans or, less often, by adjustable-rate mortgage loans. In this Form
10-K, except where the context indicates otherwise, we use the term
"adjustable-rate securities" or "adjustable-rate investment securities" to refer
to adjustable-rate pass-through certificates, CMO floaters, and Agency
debentures. At December 31, 2007, the weighted average yield on our portfolio of
earning assets was 5.75% and the weighted average term to next rate adjustment
on adjustable rate securities was 39 months.

     We may also invest in Federal Home Loan Bank ("FHLB"), FHLMC, and FNMA
debentures. We refer to the mortgage-backed securities and agency debentures
collectively as "Investment Securities." We intend to continue to invest in
adjustable-rate pass-through certificates, fixed-rate mortgage-backed
securities, CMO floaters, and Agency debentures. We may also invest on a limited
basis in mortgage derivative securities such as interest rate swaps, and other
derivative securities which include securities representing the right to receive
interest only or a disproportionately large amount of interest as well as
inverse floaters, which may have imbedded leverage as part of their structural
characteristics. We have not and will not invest in real estate mortgage
investment conduit ("REMIC") residuals and other CMO residuals.

     Borrowings

     We attempt to structure our borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate basis,
correspond generally to the interest rate adjustment indices and periods of our
adjustable-rate investment securities. However, periodic rate adjustments on our
borrowings are generally more frequent than rate adjustments on our investment
securities. At December 31, 2007, the weighted average cost of funds for all of
our borrowings was 4.76%, with the effect of swaps, the weighted average
original term to maturity was 286 days, and the weighted average term to next
rate adjustment of these borrowings was 234 days.

     We generally expect to maintain a ratio of debt-to-equity of between 8:1
and 12:1, although the ratio may vary from time to time depending upon market
conditions and other factors that our management deems relevant. For purposes of
calculating this ratio, our equity is equal to the value of our investment
portfolio on a mark-to-market basis, less the book value of our obligations
under repurchase agreements and other collateralized borrowings. At December 31,
2007, our ratio of debt-to-equity was 8.7:1.

     Hedging

     To the extent consistent with our election to qualify as a REIT, we enter
into hedging transactions to attempt to protect our investment securities and
related borrowings against the effects of major interest rate changes. This
hedging would be used to mitigate declines in the market value of our investment
securities during periods of increasing or decreasing interest rates and to
limit or cap the interest rates on our borrowings. These transactions would be
entered into solely for the purpose of hedging interest rate or prepayment risk
and not for speculative purposes. In connection with the Company's interest rate
risk management strategy, the Company hedges a portion of its interest rate risk
by entering into derivative financial instrument contracts. As of December 31,
2007, we had $16.2 billion in interest rate swaps, which in effect modify the
cash flows on repurchase agreements.

                                       2


     Compliance with REIT and Investment Company Requirements

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

     Executive Officers of the Company

     The following table sets forth certain information as of February 25, 2008
concerning our executive officers:


                                
        Name                       Age          Position held with the Company

Michael A.J. Farrell               56        Chairman of the Board, Chief Executive Officer and President

Wellington J. Denahan-Norris       44        Vice Chairman of the Board, Chief Investment Officer and Chief
                                             Operating Officer

Kathryn F. Fagan                   41        Chief Financial Officer and Treasurer

R. Nicholas Singh                  48        Executive Vice President, General Counsel, Secretary and Chief
                                             Compliance Officer

James P. Fortescue                 34        Executive Vice President and Head of Liabilities

Kristopher Konrad                  33        Executive Vice President and  Co-Head Portfolio Management

Rose-Marie Lyght                   34        Executive Vice-President and  Co-Head Portfolio Management

Jeremy Diamond                     44        Managing Director

Ronald Kazel                       40        Managing Director


     Mr. Farrell and Ms. Denahan-Norris have an average of 25 years experience
in the investment banking and investment management industries where, in various
capacities, they have each managed portfolios of mortgage-backed securities,
arranged collateralized borrowings and utilized hedging techniques to mitigate
interest rate and other risk within fixed-income portfolios. Ms. Fagan is a
certified public accountant and, prior to becoming our Chief Financial Officer
and Treasurer, served as Chief Financial Officer and Controller of a publicly
owned savings and loan association. Mr. Singh joined Annaly in February 2005.
Prior to that, he was a partner in the law firm of McKee Nelson LLP, and prior
to that, a partner in Sidley Austin Brown & Wood LLP. Mr. Fortescue joined
Annaly in 1997. Mr. Konrad joined Annaly in 1997. Ms. Lyght joined Annaly in
April 1999. Mr. Diamond joined Annaly in March 2002. Mr. Kazel joined Annaly in
December 2001. We had 39 full-time employees at December 31, 2007.

     Distributions

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

                                BUSINESS STRATEGY

General

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

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

                                       3


     o    to acquire mortgage-backed securities that we believe:

          -    we have the necessary expertise to evaluate and manage;

          -    we can readily finance;

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

          -    provide attractive investment returns in a range of scenarios;

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

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

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

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

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

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

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

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

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

                                       4


Mortgage-Backed Securities

     General

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

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

     Under our capital investment policy, the remainder of our assets,
comprising not more than 25% of total assets, may consist of mortgage-backed
securities and other qualified REIT real estate assets which are unrated or
rated less than high quality, but which are at least "investment grade" (rated
"BBB" or better by S&P or the equivalent by another nationally recognized rating
organization) or, if not rated, we determine them to be of comparable credit
quality to an investment which is rated "BBB" or better. In addition, we may
directly or indirectly invest part of this remaining 25% of our assets in other
types of securities, including without limitation, unrated debt, equity or
derivative securities, to the extent consistent with our REIT qualification
requirements. The derivative securities in which we invest may include
securities representing the right to receive interest only or a
disproportionately large amount of interest, as well as inverse floaters, which
may have imbedded leverage as part of their structural characteristics. We
intend to structure our portfolio to maintain a minimum weighted average rating
(including our deemed comparable ratings for unrated mortgage-backed securities)
of our mortgage-backed securities of at least single "A" under the S&P rating
system and at the comparable level under the other rating systems.

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

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

     At December 31, 2007, our mortgage-backed securities consisted of
pass-through certificates and collateralized mortgage obligations issued or
guaranteed by FHLMC, FNMA or GNMA. We have not, and will not, invest in REMIC
residuals and other CMO residuals.

     Description of Mortgage-Backed Securities

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

                                       5


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

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

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

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

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

     FHLMC Certificates

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

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

     FHLMC certificates may pay interest at a fixed rate or an adjustable rate.
The interest rate paid on adjustable-rate FHLMC certificates ("FHLMC ARMs")
adjusts periodically within 60 days prior to the month in which the interest
rates on the underlying mortgage loans adjust. The interest rates paid on
certificates issued under FHLMC's standard ARM programs adjust in relation to
the Treasury index. Other specified indices used in FHLMC ARM programs include
the 11th District Cost of Funds Index published by the Federal Home Loan Bank of
San Francisco, LIBOR and other indices. Interest rates paid on fully-indexed
FHLMC ARM certificates equal the applicable index rate plus a specified number

                                       6


of basis points. The majority of series of FHLMC ARM certificates issued to date
have evidenced pools of mortgage loans with monthly, semi-annual or annual
interest adjustments. Adjustments in the interest rates paid are generally
limited to an annual increase or decrease of either 100 or 200 basis points and
to a lifetime cap of 500 or 600 basis points over the initial interest rate.
Certain FHLMC programs include mortgage loans which allow the borrower to
convert the adjustable mortgage interest rate to a fixed rate. Adjustable-rate
mortgages which are converted into fixed-rate mortgage loans are repurchased by
FHLMC or by the seller of the loan to FHLMC at the unpaid principal balance of
the loan plus accrued interest to the due date of the last adjustable rate
interest payment.

     FNMA Certificates

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

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

     GNMA Certificates

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

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

                                       7


     Single-Family and Multi-Family Privately-Issued Certificates

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

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

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

     Collateralized Mortgage Obligations and Multi-Class Pass-Through Securities

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

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

                                       8


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

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

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

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

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

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

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

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

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

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

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

                                       9


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

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

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

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

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

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

     Other Floating Rate Instruments

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

     Mortgage Loans

     As of December 31, 2007, we have not invested directly in mortgage loans,
but we may from time-to-time invest a small percentage of our assets directly in
single-family, multi-family or commercial mortgage loans. We expect that the
majority of these mortgage loans would be ARM pass-through certificates. The
interest rate on an ARM pass-through certificate is typically tied to an index
(such as LIBOR or the interest rate on Treasury bills), and is adjustable
periodically at specified intervals. These mortgage loans are typically subject
to lifetime interest rate caps and periodic interest rate or payment caps. The
acquisition of mortgage loans generally involves credit risk. We may obtain
credit enhancement to mitigate this risk; however, there can be no assurances
that we will able to obtain credit enhancement or that credit enhancement would
mitigate the credit risk of the underlying mortgage loans.

                                       10


Capital Investment Policy

     Asset Acquisitions

     Our capital investment policy provides that at least 75% of our total
assets will be comprised of high quality mortgage-backed securities and
short-term investments. The remainder of our assets (comprising not more than
25% of total assets), may consist of mortgage-backed securities and other
qualified REIT real estate assets which are unrated or rated less than high
quality but which are at least "investment grade" (rated "BBB" or better) or, if
not rated, are determined by us to be of comparable credit quality to an
investment which is rated "BBB" or better. In addition, we may directly or
indirectly invest part of this remaining 25% of our assets in other types of
securities, including without limitation, unrated debt, equity or derivative
securities, to the extent consistent with our REIT qualification requirements.
The derivative securities in which we invest may include securities representing
the right to receive interest only or a disproportionately large amount of
interest, as well as inverse floaters, which may have imbedded leverage as part
of their structural characteristics.

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

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

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


     o    the amount and nature of anticipated cash flows from the asset;

     o    our ability to pledge the asset to secure collateralized borrowings;

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

     o    the costs of financing, hedging and managing the asset.

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

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

                                       11


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

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

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

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

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

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

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

     Credit Risk Management

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

     Capital and Leverage

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

                                       12


     Our goal is to strike a balance between the under-utilization of leverage,
which reduces potential returns to stockholders, and the over-utilization of
leverage, which could reduce our ability to meet our obligations during adverse
market conditions. Our capital investment policy limits our ability to acquire
additional assets during times when our debt-to-equity ratio exceeds 12:1. At
December 31, 2007, our ratio of debt-to-equity was 8.7:1. Our capital base
represents the approximate liquidation value of our investments and approximates
the market value of assets that we can pledge or sell to meet
over-collateralization requirements for our borrowings. The unpledged portion of
our capital base is available for us to pledge or sell as necessary to maintain
over-collateralization levels for our borrowings.

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

     The first component of our capital requirements is the current aggregate
over-collateralization amount or "haircut" the lenders require us to hold as
capital. The haircut for each mortgage-backed security is determined by our
lenders based on the risk characteristics and liquidity of the asset. Haircut
levels on individual borrowings generally range from 3% or less for certain
FHLMC, FNMA or GNMA mortgage-backed securities to 20% or more for certain
privately-issued mortgage-backed securities. At December 31, 2007, the weighted
average haircut level on our securities was 3.0%. Should the market value of our
pledged assets decline, we will be required to deliver additional collateral to
our lenders to maintain a constant over-collateralization level on our
borrowings.

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

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

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

     We expect to continue to use repurchase agreements as our principal
financing device to leverage our mortgage-backed securities portfolio. We
anticipate that, upon repayment of each borrowing under a repurchase agreement,
we will use the collateral immediately for borrowing under a new repurchase
agreement. At present, we have entered into uncommitted facilities with 30
lenders for borrowings in the form of repurchase agreements. We have not at the

                                       13


present time entered into any commitment agreements under which the lender would
be required to enter into new repurchase agreements during a specified period of
time, nor do we presently plan to have liquidity facilities with commercial
banks. We may, however, enter into such commitment agreements in the future. We
enter into repurchase agreements primarily with national broker-dealers,
commercial banks and other lenders which typically offer this type of financing.
We enter into collateralized borrowings only with financial institutions meeting
credit standards approved by our board of directors, and we monitor the
financial condition of these institutions on a regular basis.

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

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

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

     Interest Rate Risk Management

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

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

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

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

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

                                       14


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

     We seek to build a balance sheet and undertake an interest rate risk
management program which is likely to generate positive earnings and maintain an
equity liquidation value sufficient to maintain operations given a variety of
potentially adverse circumstances. Accordingly, our interest rate risk
management program addresses both income preservation, as discussed above, and
capital preservation concerns. For capital preservation, we monitor our
"duration." This is the expected percentage change in market value of our assets
that would be caused by a 1% change in short and long-term interest rates. To
monitor weighted average duration and the related risks of fluctuations in the
liquidation value of our equity, we model the impact of various economic
scenarios on the market value of our mortgage-backed securities and liabilities.
At December 31, 2007, we estimate that the duration of our assets was 2.54 years
and giving effect to the swap transactions, our weighted average duration was
1.39 years. We believe that our interest rate risk management program will allow
us to maintain operations throughout a wide variety of potentially adverse
circumstances. Nevertheless, in order to further preserve our capital base (and
lower our duration) during periods when we believe a trend of rapidly rising
interest rates has been established, we may decide to increase hedging
activities or to sell assets. Each of these actions may lower our earnings and
dividends in the short term to further our objective of maintaining attractive
levels of earnings and dividends over the long term.

     We may elect to conduct a portion of our hedging operations through one or
more subsidiary corporations, each of which we would elect to treat as a
"taxable REIT subsidiary." To comply with the asset tests applicable to us as a
REIT, we could own 100% of the voting stock of such subsidiary, provided that
the value of the stock that we own in all such taxable REIT subsidiaries does
not exceed 20% of the value of our total assets at the close of any calendar
quarter. A taxable subsidiary, such as FIDAC, would not elect REIT status and
would distribute any net profit after taxes to us and its other stockholders.
Any dividend income we receive from the taxable subsidiary (combined with all
other income generated from our assets, other than qualified REIT real estate
assets) must not exceed 25% of our gross income.

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

     Prepayment Risk Management

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

                                       15


Future Revisions in Policies and Strategies

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

Potential Acquisitions, Strategic Alliances and Other Investments

     From time-to-time we have explored possible transactions to enhance our
operations and assist FIDAC's growth, including entering into new businesses,
acquisitions of other businesses or assets, investments in other entities, joint
venture arrangements, or strategic alliances. During 2007, we acquired
approximately 3.6 million shares of common stock of Chimera Investment
Corporation, or Chimera, for approximately $54.3 million in connection with
Chimera's initial public offering on November 21, 2007. Chimera is a
newly-formed, publicly traded, specialty finance company that invests in
residential mortgage loans, residential mortgage-backed securities, real estate
related securities and various other asset classes. Chimera is externally
managed by FIDAC and intends to elect and qualify to be taxed as a REIT for
federal income tax purposes. We also own a majority interest in an investment
fund.

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

Dividend Reinvestment and Share Purchase Plan

     We have adopted a dividend reinvestment and share purchase plan. Under the
dividend reinvestment feature of the plan, existing shareholders can reinvest
their dividends in additional shares of our common stock. Under the share
purchase feature of the plan, new and existing shareholders can purchase shares
of our common stock. We have an effective shelf registration statement on Form
S-3 which registered 50,000,000 shares that could be issued under the plan. We
still sell shares covered by this registration statement under the plan.

At the Market Sales Programs

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

Legal Proceedings

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

Employees

     As of December 31, 2007, we had 39 full time employees. None of our
employees are subject to any collective bargaining agreements. We believe we
have good relations with our employees.

Available Information

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

                                       16


                                   COMPETITION

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

ITEM 1A. RISK FACTORS
---------------------

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

Risks Related to Our Business

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

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

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

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

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

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

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

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

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

     These indices generally reflect short-term interest rates. On December 31,
2007, approximately 29% of our investment securities were adjustable-rate
securities.

     The interest rates on our borrowings similarly vary with changes in an
objective index. Nevertheless, the interest rates on our borrowings generally
adjust more frequently than the interest rates on our adjustable-rate investment
securities. For example, on December 31, 2007, our adjustable-rate investment
securities had a weighted average term to next rate adjustment of 39 months,
while our borrowings had a weighted average term to next rate adjustment of 234
days. Accordingly, in a period of rising interest rates, we could experience a
decrease in net income or a net loss because the interest rates on our
borrowings adjust faster than the interest rates on our adjustable-rate
investment securities.

                                       17


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

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

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

     In a period of rising interest rates, our interest payments could increase
while the interest we earn on our fixed-rate mortgage-backed securities would
not change. This would adversely affect our profitability. On December 31, 2007,
approximately 71% of our investment securities were fixed-rate securities.

An increase in prepayment rates may adversely affect our profitability

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

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

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

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

     We also can acquire mortgage-backed securities that are less affected by
prepayments. For example, we can acquire CMOs, a type of mortgage-backed
security. CMOs divide a pool of mortgage loans into multiple tranches that allow
for shifting of prepayment risks from slower-paying tranches to faster-paying
tranches. This is in contrast to pass-through or pay-through mortgage-backed
securities, where all investors share equally in all payments, including all
prepayments. As discussed below, the Investment Company Act of 1940 imposes
restrictions on our purchase of CMOs. As of December 31, 2007, approximately 35%
of our mortgage-backed securities were CMOs and approximately 65% of our
mortgage-backed securities were pass-through or pay-through securities.

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

                                       18


An increase in interest rates may adversely affect our book value

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

Failure to procure funding on favorable terms, or at all, would adversely affect
our results and may, in turn, negatively affect the market price of shares of
our common stock.

     The current situation in the sub-prime mortgage sector, and the current
weakness in the broader mortgage market, could adversely affect one or more of
our lenders and could cause one or more of our lenders to be unwilling or unable
to provide us with additional financing. This could potentially increase our
financing costs and reduce liquidity. If one or more major market participants
fails, it could negatively impact the marketability of all fixed income
securities, including agency mortgage-backed securities, and this could
negatively impact the value of the securities in our portfolio, thus reducing
our net book value. Furthermore, if many of our lenders are unwilling or unable
to provide us with additional financing, we could be forced to sell our assets
at an inopportune time when prices are depressed.


Our strategy involves significant leverage

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

o    Our leverage may cause substantial losses

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

     -    short-term interest rates increase;

     -    the market value of our investment securities decreases;

     -    interest rate volatility increases; or

     -    the availability of financing in the market decreases.

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

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

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

                                       19


o    Liquidation of collateral may jeopardize our REIT status

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

o    We may exceed our target leverage ratios

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

o    We may not be able to achieve our optimal leverage

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

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

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

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

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

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

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

     -    the movement of interest rates;

     -    the availability of financing in the market; or

     -    the value and liquidity of our investment securities.

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

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

Our hedging strategies expose us to risks

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

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

                                       20


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

o    Our use of derivatives may expose us to counterparty risks

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

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

Our investment strategy may involve credit risk

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

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

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

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

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

                                       21


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

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

We have not established a minimum dividend payment level

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

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

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

We are dependent on our key personnel

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

We and our shareholders are subject to certain tax risks

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

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

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

                                       22


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

o    We have certain distribution requirements

     As a REIT, we must distribute at least 90% of our REIT taxable income
(determined without regard to the deduction for dividends paid and by excluding
any net capital gain). The required distribution limits the amount we have
available for other business purposes, including amounts to fund our growth.
Also, it is possible that because of the differences between the time we
actually receive revenue or pay expenses and the period we report those items
for distribution purposes, we may have to borrow funds on a short-term basis to
meet the 90% distribution requirement.

o    We are also subject to other tax liabilities

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

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

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

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

o    A REIT cannot invest more than 20% of its total assets in the stock or
     securities of one or more taxable REIT subsidiaries; therefore, FIDAC
     cannot constitute more than 20% of our total assets

     A taxable REIT subsidiary is a corporation, other than a REIT or a
qualified REIT subsidiary, in which a REIT owns stock and which elects taxable
REIT subsidiary status. The term also includes a corporate subsidiary in which
the taxable REIT subsidiary owns more than a 35% interest. A REIT may own up to
100% of the stock of one or more taxable REIT subsidiaries. A taxable REIT
subsidiary may earn income that would not be qualifying income if earned
directly by the parent REIT. Overall, at the close of any calendar quarter, no
more than 20% of the value of a REIT's assets may consist of stock or securities
of one or more taxable REIT subsidiaries.

     The stock and securities of FIDAC, our only taxable REIT subsidiary, are
expected to represent less than 20% of the value of our total assets.
Furthermore, we intend to monitor the value of our investments in the stock and
securities of FIDAC (and any other taxable REIT subsidiary in which we may
invest) to ensure compliance with the above-described 20% limitation. We cannot
assure you, however, that we will always be able to comply with the 20%
limitation so as to maintain REIT status.

                                       23


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

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

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

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

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

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

Risks of Ownership of Our Common Stock

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

     As of February 25, 2008, 460,617,126 shares of our common stock were
outstanding. If we issue a significant number of shares of common stock or
securities convertible into common stock in a short period of time, there could
be a dilution of the existing common stock and a decrease in the market price of
the common stock.

o    We may change our policies without stockholder approval

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

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

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

                                       24


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

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

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

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

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

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

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

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

          o    A majority or more of all voting power.

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

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

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

          o    the last control share acquisition; or

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

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

                                       25


Regulatory Risks

     o    Loss of Investment Company Act exemption would adversely affect us

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

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

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

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

ITEM 1B. UNRESOLVED STAFF COMMENTS
------------------------------------
None.

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

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

ITEM 3. LEGAL PROCEEDINGS
-------------------------

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

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

     We did not submit any matters to a vote of our stockholders during the
fourth quarter of 2007.


                                       26


                                     PART II

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

     Our common stock began trading publicly on October 8, 1997 and is traded on
the New York Stock Exchange under the trading symbol "NLY". As of February 25,
2008, we had 460,617,126 shares of common stock issued and outstanding which
were held by approximately 273,000 holders.

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


                                                                     
                                                             Stock Prices

                                                 High             Low               Close

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

                                                 High             Low               Close

First Quarter ended March 31, 2006               $12.82           $11.34            $12.14
Second Quarter ended June 30, 2006               $14.04           $11.57            $12.81
Third Quarter ended September 30, 2006           $13.25           $12.17            $13.14
Fourth Quarter ended December 31, 2006           $14.42           $13.01            $13.91

                                                        Common Dividends
                                                        Declared Per Share

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

First Quarter ended March 31, 2006                                $0.11
Second Quarter ended June 30, 2006                                $0.13
Third Quarter ended September 30, 2006                            $0.14
Fourth Quarter ended December 31, 2006                            $0.19


     We intend to pay quarterly dividends and to distribute to our stockholders
all or substantially all of our taxable income in each year (subject to certain
adjustments). This will enable us to qualify for the tax benefits accorded to a
REIT under the Code. We have not established a minimum dividend payment level
and our ability to pay dividends may be adversely affected for the reasons
described under the caption "Risk Factors." All distributions will be made at
the discretion of our board of directors and will depend on our earnings, our
financial condition, maintenance of our REIT status and such other factors as
our board of directors may deem relevant from time to time. No dividends can be
paid on our common stock unless we have paid full cumulative dividends on our
preferred stock. From the date of issuance of our preferred stock through
December 31, 2007, we have paid full cumulative dividends on our preferred
stock.

                                       27


                      EQUITY COMPENSATION PLAN INFORMATION

     We have adopted a long term stock incentive plan for executive officers,
key employees and nonemployee directors (the "Incentive Plan"). The Incentive
Plan authorizes the Compensation Committee of the board of directors to grant
awards, including incentive stock options as defined under Section 422 of the
Code ("ISOs") and options not so qualified ("NQSOs"). The Incentive Plan
authorizes the granting of options or other awards for an aggregate of the
greater of 500,000 shares or 9.5% of the outstanding shares of our common stock
up to a ceiling of 8,932,921 shares. For a description of our Incentive Plan,
see Note 8 to the Financial Statements.

     The following table provides information as of December 31, 2007 concerning
shares of our common stock authorized for issuance under our existing Incentive
Plan.


                                                                                        
                                                                                             Number of securities
                                Number of securities to be    Weighted-average exercise     remaining available for
                                  issued upon exercise of       price of outstanding         future issuance under
        Plan Category              outstanding options,         options, warrants and      Incentive Plan (excluding
                                    warrants and rights                rights                 previously issued)
------------------------------- ---------------------------- ---------------------------- ----------------------------
Equity compensation plans
approved by security holders             3,437,267                     $15.23                    4,724,490(1)

Equity compensation plans not
approved by security holders                 -                            -                            -
                                ---------------------------- ---------------------------- ----------------------------
Total                                    3,437,267                     $15.23                      4,724,490
                                ============================ ============================ ============================

(1)  The Incentive Plan authorizes the granting of options or other awards for
     an aggregate of the greater of 500,000 or 9.5% of the outstanding shares on
     a fully diluted basis of our common stock up to a ceiling of 8,932,921
     shares.

                                       28


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

     The following selected financial data are derived from our audited
financial statements for the years ended December 31, 2007, 2006, 2005, 2004,
and 2003. The selected financial data should be read in conjunction with the
more detailed information contained in the Financial Statements and Notes
thereto and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-K.


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

                                              For the Year   For the Year   For the Year   For the Year   For the Year
                                                  Ended          Ended          Ended          Ended          Ended
                                              December 31,   December 31,   December 31,   December 31,   December 31,
                                                   2007           2006          2005           2004           2003
                                             ---------------------------------------------------------------------------
Statement of Operations Data
  Interest income                            $    2,355,447   $  1,221,882   $    705,046   $     532,328  $     337,433
  Interest expense                                1,926,465      1,055,013        568,560         270,116        182,004
                                             ---------------------------------------------------------------------------
    Net interest income                             428,982        166,869        136,486         262,212        155,429
                                             ---------------------------------------------------------------------------
Other income (loss):
  Investment advisory and service fees               22,028         22,351         35,625          12,512              -
  Gain (loss) on sale of investment
   securities                                        19,062         (3,862)       (53,238)          5,215         40,907
  Gain on termination of interest rate swaps          2,096         10,674              -               -              -
  Income from trading securities                     19,147          3,994              -               -              -
  Dividend income from available-for-sale
   equity
securities                                               91              -              -               -              -
  Loss on other-than-temporarily impaired
   securities                                        (1,189)       (52,348)       (83,098)              -              -
                                             ---------------------------------------------------------------------------
    Total other income (loss)                        61,235        (19,191)      (100,711)         17,727         40,907
                                             ---------------------------------------------------------------------------
Expenses:
  Distribution fees                                   3,647          3,444          8,000           2,860              -
  General and administrative expenses                62,666         40,063         26,278          24,029         16,233
                                             ---------------------------------------------------------------------------
   Total Expenses                                    66,313         43,507         34,278          26,889         16,233
                                             ---------------------------------------------------------------------------
  Impairment of intangible for customer
   relationships                                          -          2,493              -               -              -
                                             ---------------------------------------------------------------------------
Income before income taxes                          423,904        101,678          1,497         253,050        180,103
Income taxes                                          8,870          7,538         10,744           4,458              -
                                             ---------------------------------------------------------------------------
Income (loss) before minority interest              415,034         94,140         (9,247)        248,592        180,103
Minority interest                                       650            324              -               -              -
                                             ---------------------------------------------------------------------------
Net income (loss)                                   414,384         93,816         (9,247)        248,592        180,103
Dividends on preferred stock                         21,493         19,557         14,593           7,745              -
                                             ---------------------------------------------------------------------------
Net income available (loss related) to common
 shareholders                                $      392,891   $     74,259   $    (23,840)  $     240,847        180,103
                                             ===========================================================================

Basic net (loss) income per average common
 share                                       $         1.32   $       0.44   $      (0.19)  $        2.04  $        1.95
Diluted net (loss) income per average common
 share                                       $         1.31   $       0.44   $      (0.19)  $        2.03  $        1.94
Dividends declared per common share          $         1.04   $       0.57   $       1.04   $        1.98  $        1.95
Dividends declared per preferred Series A
 share                                       $         1.97   $       1.97   $       1.97   $        1.45              -
Dividends declared per preferred Series B
 share                                       $         1.50   $       1.08              -               -              -


Balance Sheet Data                            December 31,   December 31,   December 31,   December 31,   December 31,
                                                   2007           2006           2005          2004           2003
                                             ---------------------------------------------------------------------------
  Mortgage-Backed Securities, at fair value  $   52,879,528   $ 30,167,509   $ 15,929,864   $   19,038,386 $   11,956,512
  Agency Debentures, at fair value                  253,915         49,500              -         390,509        978,167
  Total assets                                   53,903,514     30,715,980     16,063,422      19,560,299     12,990,286
  Repurchase agreements                          46,046,560     27,514,020     13,576,301      16,707,879     11,012,903
  Total liabilities                              48,585,536     28,056,149     14,559,399      17,859,829     11,841,066
  Stockholders' equity                            5,204,938      2,543,041      1,504,023       1,700,470      1,149,220
  Number of common shares outstanding           401,822,703    205,345,591    123,684,931     121,263,000     96,074,096


                                       29



                                                                                          
                                              For the Year   For the Year   For the Year   For the Year   For the Year
                                                  Ended          Ended          Ended          Ended          Ended
Other Data                                    December 31,   December 31,   December 31,   December 31,   December 31,
                                                   2007           2006          2005           2004           2003
                                             ---------------------------------------------------------------------------
  Average total assets                       $   41,834,831   $ 23,130,057   $18,724,075    $ 17,293,174   $ 12,975,039
  Average investment securities                  40,800,148     23,029,195    18,543,749      16,399,184     12,007,333
  Average borrowings                             37,967,215     21,399,130    17,408,828      15,483,118     11,549,368
  Average equity                                  3,710,821      2,006,206     1,614,743       1,550,076      1,122,633
  Yield on average interest earning assets             5.77%          5.31%         3.80%           3.25%          2.81%
  Cost of funds on average interest
    bearing liabilities                                5.07%          4.93%         3.27%           1.74%          1.58%
  Interest rate spread                                 0.70%          0.38%         0.53%           1.51%          1.23%

Financial Ratios
  Net interest margin (net interest
    income/average total assets)                       1.03%          0.72%         0.73%           1.52%          1.20%
  G&A expense as a percentage of average
    total assets                                       0.15%          0.17%         0.14%           0.14%          0.13%
  G&A expense as a percentage of average
    equity                                             1.69%          2.00%         1.63%           1.55%          1.45%
  Return on average total assets                       0.99%          0.41%        (0.05%)          1.44%          1.39%
  Return on average equity                            11.17%          4.68%        (0.57%)         16.04%         16.04%


                                       30


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

Overview

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

     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,

                                       31


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 15% and 17% for the years
ended December 31, 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
our lenders and could cause one or more of our lenders to be unwilling or unable
to provide us with additional financing. This could potentially increase our
financing costs and reduce liquidity. If one or more major market participants
fails, it could negatively impact the marketability of all fixed income
securities, including government mortgage securities, and this could negatively
impact the value of the securities in our portfolio, thus reducing its net book
value. Furthermore, if many of our lenders are unwilling or unable to provide us
with additional financing, we could be forced to sell our Investment Securities
at an inopportune time when prices are depressed. Even with the current
situation in the sub-prime mortgage sector we do not anticipate having
difficulty converting our assets to cash or extending financing term, due to the
fact that our investment securities have an actual or implied "AAA" rating and
principal payment is guaranteed.

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


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

Quarter Ended
December 31, 2007  $     49,619,857  $   720,925      5.81%  $     45,272,782  $   558,435      4.93%      162,490      0.88%
Quarter Ended
September 30, 2007 $     43,075,489  $   628,696      5.84%  $     40,201,513  $   519,118      5.17%  $   109,578      0.67%
Quarter Ended
June 30, 2007      $     38,822,274  $   556,262      5.73%  $     36,560,359  $   468,748      5.13%  $    87,514      0.60%
Quarter Ended
March 31, 2007     $     31,682,974  $   449,564      5.68%  $     29,834,208  $   380,164      5.10%  $    69,400      0.58%

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


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

Quarter Ended                                              CPR
-------------                                              ---
December 31, 2007                                          12%
September 30, 2007                                         14%
June 30, 2007                                              15%
March 31, 2007                                             17%
December 31, 2006                                          15%
September 30, 2006                                         16%
June 30, 2006                                              19%
March 31, 2006                                             18%

     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.

                                       32


     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.

     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.

                                       33


     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 Goodwill and 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. Goodwill and finite-lived intangible assets are
periodically reviewed for potential impairment. This evaluation requires
significant judgment.

     Recent Accounting Pronouncements- In February 2006, the FASB issued FAS 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. Consequently, 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 the Company's financial statements in
accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a
threshold and measurement attribute 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 (the valuation of which require significant
management judgment), including a reconciliation of the beginning and ending
balances separately for each major category of assets and liabilities. SFAS 157
is effective for the Company on January 1, 2008. The Company does not believe
that the adoption of SFAS 157 will have a significant impact on its financial
position or results of operations, the manner in which it estimates fair value,
but expects that adoption will increase footnote disclosure to comply with SFAS
157 disclosure requirements for financials statements issued after January 1,
2008.

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

                                       34


     Proposed FASB Staff Position - The FASB issued a proposed FASB Staff
Position ("FSP") FAS No. 140-d relating to FASB Statement No. 140, Accounting
for Transfers of Financial Assets and Repurchase Financing Transactions to
address situations 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 proposed 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 is "readily obtainable" in the marketplace 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 No. 140-d for treatment as a
non-linked transfer and repurchase under SFAS 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-d may be subject to significant changes prior to finalization, which may
impact the Company's current assessment of its impact.

Results of Operations:

     Net Income Summary

     For the year ended December 31, 2007, our net income was $414.4 million or
$1.32 basic income per average share related to common shareholders, as compared
to $93.8 million net income or $0.44 basic net income per average share for the
year ended December 31, 2006. For the year ended December 31, 2005, our net loss
was $9.2 million or $0.19 basic loss per average share related to common
shareholders. Net income per average share increased by $0.88 per average share
available to common shareholders and total net income increased $320.6 million
for the year ended December 31, 2007, when compared to the year ended December
31, 2006. We attribute the increase in total net income for the year ended
December 31, 2007 from the year ended December 31, 2006 to an increase in net
interest income, gains on the sale of securities, a reduction in losses on
other-than temporarily impaired securities, the increased asset base, and the
increase in interest rate spread. Net interest income increased by $262.1
million for the year ended December 31, 2007, as compared to the year ended
December 31, 2006, due to the increase in interest earning assets from the
deployment of additional capital we raised in 2007 and the improved interest
rate spread. For the year ended December 31, 2007, net gain on sale of
Mortgage-Backed Securities was $19.1 million, as compared to a net loss of $3.9
million for the year ended December 31, 2006. The loss on other-than-temporarily
impaired securities totaled $1.2 million for the year ended December 31, 2007,
as compared to $52.3 million for the year ended December 31, 2006. During the
year ended December 31, 2007, the Company realized a gain on the termination of
interest rate swaps of $2.1 million, as compared to a $10.7 million gain for the
year ended December 31, 2006.

     We attribute the increase in total net income for the year ended December
31, 2006 compared to the year ended December 31, 2005 to the increase in net
interest income, reduction in losses on sales of securities and losses on
other-than-temporarily impaired securities, and gains on termination of interest
rate swaps. The interest rate spread decreased from 0.53% for the year ended
December 31, 2005 to 0.38% for the year ended December 31, 2006. The total
amortization for the year ended December 31, 2006 was $63.6 million and for the
year ended December 31, 2005 was $154.3 million. This decline in amortization
increased the yield on interest earning assets. The increased yield was more
than offset by the increase funding cost, resulting in a net decline in interest
rate spread. For the year ended December 31, 2006, net loss on sale of
Mortgage-Backed Securities was $3.9 million, as compared to a net loss of $53.2
million in 2005. The table below presents the net income (loss) summary for the
years ended December 31, 2007, 2006, and 2005.

                                       35



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

                                                      Year Ended        Year Ended         Year Ended
                                                    December 31, 2007 December 31, 2006 December 31, 2005
                                                   ------------------------------------------------------
Interest income                                    $      2,355,447    $    1,221,882    $      705,046
Interest expense                                          1,926,465         1,055,013           568,560
                                                   ------------------------------------------------------
Net interest income                                         428,982           166,869           136,486
                                                   ------------------------------------------------------
Other income (loss):
  Investment advisory and service fees                       22,028            22,351            35,625
  Gain (loss) on sale of investment securities               19,062            (3,862)          (53,238)
  Gain on termination of interest rate swaps                  2,096            10,674                 -
  Income from trading securities                             19,147             3,994                 -
  Dividend income from available-for-sale equity
   securities                                                    91
  Loss on other-than-temporarily impaired
   securities                                                (1,189)          (52,348)          (83,098)
                                                   ------------------------------------------------------
     Total other income (loss)                               61,235           (19,191)         (100,711)
                                                   ------------------------------------------------------
Expenses:
  Distribution fees                                           3,647             3,444             8,000
  General and administrative expenses                        62,666            40,063            26,278
                                                   ------------------------------------------------------
     Total expenses                                          66,313            43,507            34,278
                                                   ------------------------------------------------------
Impairment of intangible for customer relationships               -             2,493                 -
                                                   ------------------------------------------------------
Income before income taxes and minority interest            423,904           101,678             1,497
Income taxes                                                  8,870             7,538            10,744
                                                   ------------------------------------------------------
Income (loss) before minority interest                      415,034            94,140            (9,247)
Minority interest                                               650               324                 -
                                                   ------------------------------------------------------
Net Income (loss)                                           414,384            93,816            (9,247)
Dividends on preferred stock                                 21,493            19,557            14,593
                                                   ------------------------------------------------------
Net income available (loss related) to common
 shareholders                                      $        392,891    $       74,259   $       (23,840)
                                                   ======================================================

Weighted average number of basic common shares
 outstanding                                            297,488,394       167,666,631       122,475,032
Weighted average number of diluted common shares
 outstanding                                            306,263,766       167,746,387       122,475,032

Basic net income (loss) per average common share   $           1.32    $         0.44   $         (0.19)
Diluted net income (loss) per average common share $           1.31    $         0.44   $         (0.19)

Average total assets                                     41,834,831    $   23,130,057   $    18,724,075
Average equity                                            3,710,821         2,006,206         1,614,743

Return on average total assets                                 0.99%             0.41%            (0.05%)
Return on average equity                                      11.17%             4.68%            (0.57%)

                                       36


     Interest Income and Average Earning Asset Yield

     We had average earning assets of $40.8 billion for the year ended December
31, 2007. We had average earning assets of $23.0 billion for the year ended
December 31, 2006. We had average earning assets of $18.5 billion for the year
ended December 31, 2005. Our primary source of income is interest income. Our
interest income was $2.4 billion for the year ended December 31, 2007, $1.2
billion for the year ended December 31, 2006, and $705.0 million for the year
ended December 31, 2005. The yield on average investment securities was 5.77%,
5.31%, and 3.80% for the respective periods. The prepayment speeds decreased to
an average of 15% CPR for the year ended December 31, 2007 from an average of
17% CPR for the year ended December 31, 2006. The increase in coupon rates and
reduction in prepayment speeds resulted in an increase in yield.

     Interest Expense and the Cost of Funds

     Our largest expense is the cost of borrowed funds. We had average borrowed
funds of $38.0 billion and total interest expense of $1.9 billion for the year
ended December 31, 2007. We had average borrowed funds of $21.4 billion and
total interest expense of $1.1 billion for the year ended December 31, 2006. We
had average borrowed funds of $17.4 billion and total interest expense of $568.6
million for the year ended December 31, 2005. Our average cost of funds was
5.07% for the year ended December 31, 2007 and 4.93% for the year ended December
31, 2006 and 3.27 % for the year ended December 31, 2005. The cost of funds rate
increased by 14 basis points and the average borrowed funds increased by $16.6
billion for the year ended December 31, 2007 when compared to the year ended
December 31, 2006. Interest expense for the year 2007 increased by $871.5
million over the prior year due to the substantial increase in the average
borrowed funds and the increase in the average cost of funds rate. The cost of
funds rate increased by 166 basis points and the average borrowed funds
increased by $4.0 billion for the year ended December 31, 2006 when compared to
the year ended December 31, 2005. Interest expense for the year ended December
31, 2006 increased by $486.5 million over the previous year due to the increase
in the average borrowed funds. 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 0.12% below average one-month
LIBOR and 0.12% below average six-month LIBOR for the year ended December 31,
2007. Our average cost of funds was 0.10% below average one-month LIBOR and
0.28% below average six-month LIBOR for the year ended December 31, 2006. Our
average cost of funds was 0.06% below average one-month LIBOR and 0.45% below
average six-month LIBOR for the year ended December 31, 2005.

         The table below shows our average borrowed funds and average cost of
funds as compared to average one-month and average six-month LIBOR for the years
ended December 31, 2007, 2006, 2005, 2004, and 2003 and the four quarters in
2007.

                                       37



                                                                                      
                              Average Cost of Funds
(Ratios for the four quarters in 2007 have been annualized, dollars in thousands)
                                     Average

                                                                                                             Average
                                                                               Average                       Cost of
                                                                           One-Month LIBOR Average Cost of     Funds
                         Average              Average   Average   Average    Relative to   Funds Relative  Relative to
                         Borrowed   Interest   Cost of   One-Month Six-Month  Average Six-    to Average      Average
                           Funds      Expense    Funds     LIBOR     LIBOR    Month LIBOR  One-Month LIBOR Six-Month LIBOR
                        ------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 2007       $37,967,215  $1,926,465    5.07%     5.19%     5.19%      (0.00%)        (0.12%)        (0.12%)
For the Year Ended
December 31,2006        $21,399,130  $1,055,013    4.93%     5.03%     5.21%      (0.18%)        (0.10%)        (0.28%)
For the Year Ended
December 31,2005        $17,408,828  $  568,560    3.27%     3.33%     3.72%      (0.39%)        (0.06%)        (0.45%)
For the Year Ended
December 31 2004        $15,483,118  $  270,116    1.74%     1.50%     1.80%      (0.30%)         0.24%         (0.06%)
For the Year Ended
December 31, 2003       $11,549,368  $  182,004    1.58%     1.21%     1.23%      (0.02%)         0.37%          0.35%
---------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
December 31, 2007       $45,272,782  $  558,435    4.93%     4.86%     4.85%       0.01%          0.07%          0.08%
For the Quarter Ended
September 30, 2007      $40,201,513  $  519,118    5.17%     5.37%     5.31%       0.07%         (0.20%)        (0.14%)
For the Quarter Ended
June 30, 2007           $36,560,359  $  468,748    5.13%     5.32%     5.37%      (0.05%)        (0.19%)        (0.24%)
For the Quarter Ended
March 31, 2007          $29,834,208  $  380,164    5.10%     5.26%     5.30%      (0.04%)        (0.16%)        (0.20%)


     Net Interest Income

     Our net interest income, which equals interest income less interest
expense, totaled $429.0 million for the year ended December 31, 2007, $166.9
million for the year ended December 31, 2006 and $136.5 million for the year
ended December 31, 2005. Our net interest income increased for the year ended
December 31, 2007, as compared to the year ended December 31, 2006, because of
the increased average asset base in 2007 and the increased interest rate spread.
In 2007 average assets increased because of the deployment of additional
capital. Our net interest spread, which equals the yield on our average assets
for the period less the average cost of funds for the period, was 0.70% for the
year ended December 31, 2007 as compared to 0.38% for the year ended December
31, 2006 and 0.53% for the year ended December 31, 2005. This 32 basis point
increase in interest rate spread for 2007 over the spread for 2006 was the
result in the increased yield of 46 basis points, partially offset by an
increase of in the average cost of funds of 14 basis points.

     Our net interest income increased for the year ended December 31, 2006 as
compared to the year ended December 31, 2005 by $30.4 million because of the
increased average asset base for 2006.

     The table below shows our interest income by average Investment Securities
held, total interest income, yield on average interest earning assets, average
balance of repurchase agreements, interest expense, average cost of funds, net
interest income, and net interest rate spread for the years ended December 31,
2007, 2006, 2005, 2004, and 2003 and the four quarters in 2007.

                                       38



                                                                                      
                               Net Interest Income
 (Ratios for the four quarters in 2007 have been annualized, dollars in thousands)

                                                 Yield on                                                        Net
                            Average               Average   Average                                            Interest
                          Investment    Total     Interest  Balance of                Average                    Rate
                           Securities  Interest   Earning   Repurchase   Interest     Cost of   Net Interest    Spread
                              Held       Income    Assets   Agreements    Expense       Funds       Income
                          ----------------------------------------------------------------------------------------------
For the Year Ended
December 31, 2007         $ 40,800,148  $ 2,355,447   5.77%  $37,967,215  $ 1,926,465     5.07%  $     428,982     0.70%
For the Year Ended
December 31, 2006         $ 23,029,195  $ 1,221,882   5.31%  $21,399,130  $ 1,055,013     4.93%  $     166,869     0.38%
For the Year Ended
December 31, 2005         $ 18,543,749  $   705,046   3.80%  $17,408,827  $   568,560     3.27%  $     136,486     0.53%
For the Year Ended
December 31, 2004         $ 16,399,184  $   532,328   3.25%  $15,483,118  $   270,116     1.74%  $     262,212     1.51%
For the Year Ended
December 31, 2003         $ 12,007,333  $   337,433   2.81%  $11,549,368  $   182,004     1.58%  $     155,429     1.23%
------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
December 31, 2007         $ 49,619,857  $   720,925   5.81%  $45,272,782  $   558,435     4.93%  $     162,490     0.88%
 For the Quarter Ended
September 30, 2007        $ 43,075,489  $   628,696   5.84%  $40,201,513  $   519,118     5.17%  $     109,578     0.67%
For the Quarter Ended
June 30, 2007             $ 38,822,274  $   556,262   5.73%  $36,560,359  $   468,748     5.13%  $      87,514     0.60%
For the Quarter Ended
March 31, 2007            $ 31,682,974  $   449,564   5.68%  $29,834,208  $   380,164     5.10%  $      69,400     0.58%


     Investment Advisory and Service Fees

     FIDAC is a registered investment advisor which specializes in managing
fixed income securities. FIDAC expanded its line of business in 2007 to manage
Chimera Investment Corporation, a newly-formed specialty finance company that
invests in residential mortgage loans, residential mortgage-backed securities,
real estate related securities and various other asset classes. In 2006 FIDAC
expanded its business to include the management of equity securities, initially
for us and an affiliated person and collateralized debt obligations. FIDAC
generally receives annual net investment advisory fees on the gross assets it
manages, assists in managing or supervises. At December 31, 2007, FIDAC had
under management approximately $3.1 billion in net assets and $15.4 billion in
gross assets, compared to $2.6 billion in net assets and $15.1 billion in gross
assets at December 31, 2006. Net investment advisory and service fees for the
years ended December 31, 2007, 2006, and 2005 totaled $18.4 million, $18.9
million, and $27.6 million, respectively, net of fees paid to third parties
pursuant to distribution service agreements for facilitating and promoting
distribution of shares or units to FIDAC's clients. Gross assets under
management will vary from time to time because of changes in the amount of net
assets FIDAC manages as well as changes in the amount of leverage used by the
various funds and accounts FIDAC manages.

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

     For the year ended December 31, 2007, we sold Investment Securities with a
carrying value of $4.9 billion for an aggregate gain of $19.1 million. In
addition, we had a $2.1 million gain on the termination of interest rate swaps
with a notional value of $900 million. For the year ended December 31, 2006, we
sold investment securities with a aggregate historical amortized value of $3.2
billion for an aggregate loss of $3.9 million. In addition, the Company had a
$10.7 million gain on the termination of interest rate swaps with a notional
value of $1.2 billion. For the year ended December 31, 2005, we sold investment
securities with an aggregate historical amortized value of $3.4 billion for an
aggregate loss of $53.2 million. The loss on sale of assets for the year ended
December 31, 2005 was due to portfolio rebalancing that was initiated in the
fourth quarter of 2005. We determined that certain assets purchased in a much
lower interest rate environment of 2003 and 2004 were unlikely to receive their
amortized cost basis, and commenced selling these assets. The rebalancing was
done with the objective of improving future financial performance. A positive
difference between the sale price and the historical amortized cost of our
Mortgage-Backed Securities is a realized gain and increases income accordingly.
We do not expect to sell assets on a frequent basis, but may from time to time
sell existing assets to move into new assets, which our management believes
might have higher risk-adjusted returns, or to manage our balance sheet as part
of our asset/liability management strategy.

                                       39


     Income from Trading Securities

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

     Dividend Income from Available-For-Sale Equity Securities

     Dividend income from available-for-sale equity securities total $91,000 for
the year ended December 31, 2007. For the years ended December 31, 2006 and
2005, we did not have an investment in available-for-sale equity securities.

     Loss on Other-Than-Temporarily Impaired Securities

     At each quarter end, we review each of our securities to determine if an
other-than-temporary impairment charge would be necessary. We will take these
charges if we determine that we do not intend to hold securities that were in an
unrealized loss position for a period of time, to maturity if necessary,
sufficient for a forecasted market price recovery up to or beyond the cost of
the investments. For the year ended December 31, 2007 the loss on
other-than-temporarily impaired securities totaled $1.2 million. For the years
ended December 31, 2006 and 2005, the loss on other-than-temporarily impaired
securities totaled $52.3 million and $83.1 million, respectively.

     Impairment of Goodwill and Intangibles

     During the year ended December 31, 2007, it was determined that there was
no impairment of intangibles. The total impairment of intangible assets relating
to customer relationships was $2.5 million for the year ended December 31, 2006.
There was no impairment charges during the year ended December 31, 2005. There
were no impairment charges related to goodwill during the years ended 2007,
2006, and 2005.

     General and Administrative Expenses

     General and administrative (or G&A) expenses were $62.7 million for the
year ended December 31, 2007, $40.1 million for the year ended December 31,
2006, and $26.3 million for the year ended December 31, 2005. G&A expenses as a
percentage of average total assets was 0.15%, 0.17%, and 0.14% for the years
ended December 31, 2007, 2006, and 2005, respectively. The increase in G&A
expenses of $22.6 million for the year December 31, 2007 was primarily the
result of increased salaries, directors and officers insurance and additional
costs related to FIDAC. Staff increased from 31 at the end of 2005 to 34 at the
end of 2006 and 39 at the end of 2007. Salaries and bonuses for the years ended
December 31, 2007, 2006, and 2005 were $48.1 million, $28.7 million and $18.8
million, respectively.

     The table below shows our total G&A expenses as compared to average total
assets and average equity for the years ended December 31, 2007, 2006, 2005,
2004, and 2003 and the four quarters in 2007.


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

                                                                    Total G&A           Total G&A
                                                                 Expenses/Average   Expenses/Average
                                            Total G&A Expenses        Assets             Equity
                                            ------------------   ----------------   -----------------
For the Year Ended December 31, 2007             $62,666              0.15%               1.69%
For the Year Ended December 31, 2006             $40,063              0.17%               2.00%
For the Year Ended December 31, 2005             $26,278              0.14%               1.63%
For the Year Ended December 31, 2004             $24,029              0.14%               1.55%
For the Year Ended December 31, 2003             $16,233              0.13%               1.45%
-----------------------------------------------------------------------------------------------
For  the Quarter Ended December 31, 2007         $20,174              0.16%               1.72%
For the Quarter Ended September 30, 2007         $17,334              0.16%               1.94%
For the Quarter Ended June 30, 2007              $12,272              0.12%               1.50%
For the Quarter Ended March 31, 2007             $12,886              0.15%               1.70%


                                       40


Net Income and Return on Average Equity

     Our net income was $414.4 million for the year ended December 31, 2007, net
income was $93.8 million for the year ended December 31, 2006, and our net loss
was $9.2 million for the year ended December 31, 2005. Our return on average
equity was 11.17% for the year ended December 31, 2007, was 4.68% for the year
ended December 31, 2006, and (0.57%) for the year ended December 31, 2005. Even
with the increase in G&A expenses, net income for the year increased by $320.6
million. We attribute the increase in total net income for the year ended
December 31, 2007 over the year ended December 31, 2006 to the increase in net
interest income, the gains realized on sale of assets and the decrease in loss
on other-than-temporarily impaired securities, income realized from trading
securities, and the gains realized on the termination of interest rate swaps.

     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 years ended December
31, 2007, 2006, 2005, 2004, and 2003, and the four quarters in 2007.


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

                               Gain/(Loss)
                                on Sale of
                                Mortgage-     Loss
                                 Backed        on
                       Net      Securities   other-                Dividend
                    Investment     and        than-      Income     income
            Net     Advisory    Interest   temporarily    from       from                      Impairment of
          Interest     and        Rate      impaired     equity    available-   G&A     Income  intangible     Minority  Return
          Income/    Service     Swaps/    securities/ investment/ for-sale   Expenses/ Taxes/  for customer   interest/   on
          Average  Fees/Average  Average    Average     Average     equity    Average   Average relationships/ Average   Average
           Equity     Equity      Equity     Equity      Equity    securities  Equity   Equity Average Equity   Equity   Equity
         -----------------------------------------------------------------------------------------------------------------------
For
 the
 Year
 Ended
 December
 31, 2007   11.56%        0.50%      0.57%     (0.03%)       0.52%      0.00%   (1.69%) (0.24%)              -   (0.02%)  11.17%
For the
 Year
 Ended
 December
 31, 2006    8.32%        0.94%      0.34%     (2.61%)       0.20%          -   (2.00%) (0.38%)        (0.12%)   (0.01%)   4.68%
For the
 Year
 Ended
 December
 31, 2005    8.45%        1.71%    (3.30%)     (5.15%)           -          -     1.63%   0.67%              -         - (0.57%)
For the
 Year
 Ended
 December
 31, 2004   16.92%        0.62%      0.34%           -           -          -     1.55%   0.29%              -         -  16.04%
For the
 Year
 Ended
 December
 31, 2003   13.85%            -      3.64%           -           -          -     1.45%       -              -         -  16.04%
--------------------------------------------------------------------------------------------------------------------------------
For the
 Quarter
 Ended
 December
 31, 2007   13.89%        0.41%      0.16%           -       0.61%      0.00%   (1.72%) (0.26%)              -   (0.02%)  13.07%
For the
 Quarter
 Ended
September
 30, 2007   12.23%        0.49%      0.65%           -       0.93%          -   (1.94%) (0.26%)              -   (0.01%)  12.09%
For the
 Quarter
 Ended
June 30,
 2007       10.71%        0.55%      0.89%     (0.09%)       0.03%          -   (1.50%) (0.10%)              -         -  10.49%
For the
 Quarter
 Ended
March 31,
 2007        9.14%        0.61%      0.82%     (0.06%)       0.45%          -   (1.70%) (0.34%)              -   (0.04%)   8.88%


Financial Condition

     Investment Securities, Available for Sale

     All of our Mortgage-Backed Securities at December 31, 2007, 2006, and 2005
were adjustable-rate or fixed-rate mortgage-backed securities backed by
single-family mortgage loans. All of the mortgage assets underlying these
mortgage-backed securities were secured with a first lien position on the
underlying single-family properties. All of our mortgage-backed securities were
FHLMC, FNMA or GNMA mortgage pass-through certificates or CMOs, which carry an
implied "AAA" rating. All of our agency debentures are callable and carry an
implied "AAA" rating. We carry all of our earning assets at fair value.

                                       41


     We accrete discount balances as an increase in interest income over the
life of discount investment securities and we amortize premium balances as a
decrease in interest income over the life of premium investment securities. At
December 31, 2007, 2006, and 2005 we had on our balance sheet a total of $77.4
million, $78.4 million and $21.5 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 $405.8 million, $219.1 million and $242.1
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 $6.8 billion for the year
ended December 31, 2007, $5.1 billion for the year ended December 31, 2006, and
$7.1 billion for the year ended December 31, 2005. The average prepayment speed
for the year ended December 31, 2007, 2006 and 2005 was 15%, 17%, and 27%,
respectively. During the year ended December 31, 2007, the average CPR declined
to 15% from 17% during the year ended December 31, 2006, due to a decline in
refinancing activity. Given our current portfolio composition, if mortgage
principal prepayment rates were to increase over the life of our mortgage-backed
securities, all other factors being equal, our net interest income would
decrease during the life of these mortgage-backed securities as we would be
required to amortize our net premium balance into income over a shorter time
period. Similarly, if mortgage principal prepayment rates were to decrease over
the life of our mortgage-backed securities, all other factors being equal, our
net interest income would increase during the life of these mortgage-backed
securities as we would amortize our net premium balance over a longer time
period.

     The table below summarizes certain characteristics of our Investment
Securities at December 31, 2007, 2006, 2005, 2004, and 2003 and September 30,
2007, June 30, 2007, and March 31, 2007.


                                                                                        
                              Investment Securities
                             (dollars in thousands)

                                                                    Amortized
                                                                       Cost/                 Fair Value/
                          Principal                                 Principal                Principal      Weighted
                             Amount    Net Premium  Amortized Cost    Amount    Fair Value      Amount    Average Yield
                        ------------------------------------------------------------------------------------------------
At December 31, 2007    $    52,569,598 $   328,376 $    52,897,974   100.62%  $  53,133,443     101.07%           5.75%
At December 31, 2006    $    30,134,791 $   140,709 $    30,275,500   100.47%  $  30,217,009     100.27%           5.63%
At December 31, 2005    $    15,915,801 $   220,637 $    16,136,438   101.39%  $  15,929,864     100.09%           4.68%
At December 31, 2004    $    19,123,902 $   425,792 $    19,549,694   102.23%  $  19,428,895     101.59%           3.43%
At December 31, 2003    $    12,682,130 $   299,810 $    12,981,940   102.36%  $  12,934,679     101.99%           2.96%
------------------------------------------------------------------------------------------------------------------------
At September 30, 2007   $    44,904,820 $   229,713 $    45,134,533   100.51%  $  44,890,633      99.97%           5.74%
At June 30, 2007        $    39,102,277 $   211,438 $    39,313,715   100.54%  $  38,753,509      99.11%           5.71%
At March 31, 2007       $    39,053,196 $   195,649 $    39,248,845   100.50%  $  39,230,648     100.45%           5.67%


     The table below summarizes certain characteristics of our Investment
Securities at December 31, 2007, 2006, 2005, 2004, and 2003 and September 30,
2007, June 30, 2007, and March 31, 2007. The index level for adjustable-rate
Investment Securities is the weighted average rate of the various short-term
interest rate indices, which determine the coupon rate.

               Adjustable-Rate Investment Security Characteristics
                             (dollars in thousands)

                                                                                              Principal Amount
                                          Weighted     Weighted                    Weighted   at Period End as
                                          Average    Average Term     Weighted     Average       % of Total
                             Principal    Coupon       to Next         Average     Asset         Investment
                              Amount        Rate      Adjustment    Lifetime Cap     Yield       Securities
                            ------------------------------------------------------------------------------------
At December 31, 2007        $15,331,447     5.90%        39 months           9.89%      5.63%            29.16%
At December 31, 2006        $ 8,493,242     5.72%        19 months           9.76%      5.57%            28.18%
At December 31, 2005        $ 9,699,133     4.76%        22 months          10.26%      4.74%            60.94%
At December 31, 2004        $13,544,872     4.23%        24 months          10.12%      3.24%            70.83%
At December 31, 2003        $ 9,294,934     3.85%        23 months           9.86%      2.47%            73.29%
----------------------------------------------------------------------------------------------------------------
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%


                                       42



                                                                                
                 Fixed-Rate Investment Security Characteristics
                             (dollars in thousands)
                                                                                           Principal Amount at
                                                Weighted Average     Weighted Average    Period End as % of Total
                            Principal Amount      Coupon Rate          Asset Yield        Investment Securities
                            -----------------------------------------------------------------------------------
At December 31, 2007          $37,238,151            6.00%                5.80%                   70.84%
At December 31, 2006          $21,641,549            5.83%                5.65%                   71.82%
At December 31, 2005           $6,216,668            5.37%                4.60%                   39.06%
At December 31, 2004           $5,579,030            5.24%                3.89%                   29.17%
At December 31, 2003           $3,387,196            5.77%                4.29%                   26.71%
At December 31, 2002           $4,195,322            6.76%                4.78%                   37.45%
---------------------------------------------------------------------------------------------------------
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, 2007 and 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
                                December 31, 2007

                                                              11th                         Monthly             Twelve
                                         Twelve   12-Month   District  1-Year    3-Year    Federal              Month
                     One-Month Six-Month  Month     Moving   Cost of   Treasury  Treasury  Cost of  One-Month   Libor-   Other
                       Libor     Libor     Libor    Average    Funds     Index     Index     Funds   Libor-USD   USD    Indexes(1)
                     -------------------------------------------------------------------------------------------------------------
Weighted Average Term
to Next Adjustment       1 mo.    38 mo.    72 mo.     1 mo.     1 mo.    36 mo.    18 mo.     1 mo.     1 mo.   60 mo.     10 mo.
Weighted Average
Annual Period Cap        6.48%     1.72%     2.00%      .42%     0.00%     1.88%     2.07%     0.00%     2.00%    2.00%      1.84%
Weighted Average
Lifetime Cap at
December 31, 2007        7.13%    11.25%    11.08%     9.15%    12.08%    10.73%    13.18%    13.43%     12.8%   10.94%    10.73 %
Investment Principal
Value as Percentage
 of Investment
 Securities at
December 31, 2007        8.24%     1.89%     7.23%     0.67%     0.19%     3.39%     0.05%     0.13%     0.19%    7.14%      0.04%

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

                 Adjustable-Rate Investment Securities by Index
                                December 31, 2006

                                                                        11th                                   Monthly
                                           Six-    Twelve   12-Month   District            1-Year    3-Year    Federal
                              One-Month   Month     Month     Moving   Cost of  Six-Month  Treasury  Treasury  Cost of    Other
                                 Libor     Libor    Libor     Average   Funds    CD Rate    Index     Index     Funds    Indexes(1)
                              ----------------------------------------------------------------------------------------------------
Weighted Average Term to           1 mo.    35 mo.    36 mo.     1 mo.     1 mo.     3 mo.    13 mo.    17 mo.    1 mo.     24 mo.
Next Adjustment
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.


                                       43

     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 $11.7 million and the trading
securities sold, not yet purchased, was $32.8 million at December 31, 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 December 31, 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 year ended December 31, 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 286 days at December 31, 2007. For the year ended December 31,
2006, the term to maturity of our borrowings ranged from one day to three years,
with a weighted average original term to maturity of 194 days at December 31,
2006. For the year ended December 31, 2005, the term to maturity of our
borrowings ranged from one day to three years, with a weighted average original
term to maturity of 163 days at December 31, 2005.

     At December 31, 2007, the weighted average cost of funds for all of our
borrowings was 4.76%, with the effect of the interest rate swaps, and the
weighted average term to next rate adjustment was 234 days. At December 31,
2006, the weighted average cost of funds for all of our borrowings 5.14% and the
weighted average term to next rate adjustment was 125 days. At December 31,
2005, the weighted average cost of funds for all of our borrowings was 4.16% and
the weighted average term to next rate adjustment was 79 days.

     Liquidity

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

     Borrowings under our repurchase agreements increased by $18.5 billion to
$46.0 billion at December 31, 2007, from $27.5 billion at December 31, 2006. The
increase in borrowings was the result of our deployment of additional capital
raised during 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.
                                       44


     Under our repurchase agreements, we may be required to pledge additional
assets to our repurchase agreement counterparties (i.e., lenders) in the event
the estimated fair value of the existing pledged collateral under such
agreements declines and such lenders demand additional collateral (a "margin
call"), which may take the form of additional securities or cash. Similarly, if
the estimated fair value of investment securities increases due to changes in
market interest rates of market factors, lenders may release collateral back to
us. Specifically, margin calls result from a decline in the value of the our
Mortgage-Backed Securities securing our repurchase agreements, prepayments on
the mortgages securing such Mortgage-Backed Securities and to changes in the
estimated fair value of such Mortgage-Backed Securities generally due to
principal reduction of such Mortgage-Backed Securities from scheduled
amortization and resulting from changes in market interest rates and other
market factors. Through December 31, 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 December 31, 2007.


                                                                                          
                                                   (dollars in thousands)
                         ---------------------------------------------------------------------------
                                         One to Three  Three to Five  More than Five
Contractual Obligations  Within One Year     Years          Years          Years          Total
----------------------------------------------------------------------------------------------------
Repurchase agreements        $39,646,560     $3,100,000     $1,800,000     $1,500,000    $46,046,560
Interest expense on
 repurchase agreements           384,255        427,089        215,223        262,993      1,289,560
Long-term operating lease
 obligations                         532            532              -              -          1,064
Employment contracts              23,157              -              -              -         23,157
                         ---------------------------------------------------------------------------
Total                        $40,054,504     $3,527,621     $2,015,223     $1,762,993    $47,360,341
                         ===========================================================================


     Stockholders' Equity

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

     During the year ended December 31, 2007, we declared dividends to common
shareholders totaling $339.8 million or $1.04 per share, of which $136.6 million
was paid on January 28, 2008. During the year ended December 31, 2007, we
declared and paid dividends to Series A Preferred shareholders totaling $14.6
million or $1.97 per share, and Series B Preferred shareholders totaling $6.9
million or $1.50. During the year ended December 31, 2006, we declared dividends
to common shareholders totaling $102.6 million or $0.57 per share, of which
$39.0 million was paid on January 26, 2007. During the year ended December 31,
2006, we declared and paid dividends to Series A Preferred shareholders totaling
$14.6 million or $1.97 per share, and Series B Preferred shareholders totaling
$5.0 million or $1.08 per share.

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

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

     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.

                                       45


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

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

     On August 3, 2006, we entered into an ATM Equity Offering(sm) Sales
Agreement with Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, relating to the sale of shares of our common stock from time to
time through Merrill Lynch. Sales of the shares, if any, are made by means of
ordinary brokers' transaction on the New York Stock Exchange. During the year
ended December 31, 2007, 4.5 million shares of our common stock were issued
pursuant to this program, totaling $66.2 million in net proceeds.

     On August 3, 2006, we entered into an ATM Equity Sales Agreement with UBS
Securities LLC, relating to the sale of shares of our common stock from time to
time through UBS Securities. Sales of the shares, if any, will be made by means
of ordinary brokers' transaction on the New York Stock Exchange. During the year
ended December 31, 2007, 1.1 million shares of our common stock were issued
pursuant to this program, totaling $14.7 million in net proceeds.

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

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

     During the year ended December 31, 2006, 22,160 options were exercised
under the Incentive Plan for an aggregate exercise price of $183,000.

     During the year ended December 31, 2006 we sold 500,000 shares of our
common stock, for net proceeds of $6.7 million, under the ATM Equity Sales
Agreement with Merrill Lynch and we did not sell any shares under the ATM Equity
Sales Agreement with UBS Securities. During the year ended December 31, 2006, we
sold 1.1 million shares of our common stock for net proceeds of $14.2 million
under our Equity Shelf Program with UBS Securities, pursuant to which sales are
made by means of ordinary brokers' transaction on the New York Stock Exchange.

     Unrealized Gains and Losses

     With our "available-for-sale" accounting treatment, unrealized fluctuations
in market values of assets do not impact our GAAP or taxable income but rather
are reflected on our balance sheet by changing the carrying value of the asset
and stockholders' equity under "Accumulated Other Comprehensive Income (Loss)."
By accounting for our assets in this manner, we hope to provide useful
information to stockholders and creditors and to preserve flexibility to sell
assets in the future without having to change accounting methods.

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

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

                                       46



                                                                             
                           Unrealized Gains and Losses
                             (dollars in thousands)

                                                          At December 31,
                              -------------------------------------------------------------------------
                                  2007           2006            2005          2004          2003
                              -------------- -------------- --------------- ------------ --------------
Unrealized gain               $    379,348    $   112,596    $      5,027   $   23,021    $    24,886
Unrealized loss                   (531,545)      (188,708)       (211,601)    (143,821)       (72,147)
                              -------------- -------------- --------------- ------------ --------------
Net Unrealized (loss) gain    $   (152,197)   $   (76,112)   $   (206,574)  $ (120,800)   $   (47,261)
                              ============== ============== =============== ============ ==============


     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.

     Leverage

     Our debt-to-equity ratio at December 31, 2007, 2006 and 2005 was 8.7:1,
10.4:1 and 9.0:1, 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 December 31, 2007, we had entered into swap agreements with a
total notional amount of $16.2 billion. We agreed to pay a weighted average pay
rate of 5.03% and receive a floating rate based on one month LIBOR. At December
31, 2006, we entered into swap agreements with a total notional amount of $9.3
billion. We agreed to pay a weighted average pay rate of 5.17% 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.

                                       47


     Capital Resources

     At December 31, 2007, we had no material commitments for capital
expenditures.

     Inflation

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

     Other Matters

     We calculate that at least 75% of our assets were qualified REIT assets, as
defined in the Code for the years ended December 31, 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 years ended December 31, 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, for the years ended of December 31, 2007, 2006, and
2005, we believe that we qualified as a REIT under the Code.

     We at all times intend to conduct our business so as not to become
regulated as an investment company under the Investment Company Act of 1940, or
the Investment Company Act. If we were to become regulated as an investment
company, then our use of leverage would be substantially reduced. The Investment
Company Act exempts entities that are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate" (qualifying interests). Under current interpretation of the staff
of the SEC, in order to qualify for this exemption, we must maintain at least
55% of our assets directly in qualifying interests and at least 80% of our
assets in qualifying interests plus other real estate related assets. In
addition, unless certain mortgage securities represent all the certificates
issued with respect to an underlying pool of mortgages, the Mortgage-Backed
Securities may be treated as securities separate from the underlying mortgage
loans and, thus, may not be considered qualifying interests for purposes of the
55% requirement. We calculate that as of December 31, 2007 and December 31,
2006, we were in compliance with this requirement.

                                       48


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

MARKET RISK

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

     Our profitability and the value of our portfolio (including interest rate
swaps) may be adversely affected during any period as a result of changing
interest rates. The following table quantifies the potential changes in net
interest income, portfolio value should interest rates go up or down 25, 50, and
75 basis points, assuming the yield curves of the rate shocks will be parallel
to each other and the current yield curve. All changes in income and value are
measured as percentage changes from the projected net interest income and
portfolio value at the base interest rate scenario. The base interest rate
scenario assumes interest rates at December 31, 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 Change in
                                Projected Percentage Change in  Portfolio Value, with Effect of
Change in Interest Rate             Net Interest Income                 Interest Rate Swaps
-----------------------         ------------------------------  --------------------------------

-75 Basis Points                          15.27%                         1.65%
-50 Basis Points                           9.42%                         1.41%
-25 Basis Points                           4.18%                         1.06%
Base Interest Rate                           -                             -
+25 Basis Points                          (5.02%)                        0.03%
+50 Basis Points                         (10.16%)                       (0.66%)
+75 Basis Points                         (15.30%)                       (1.47%)


ASSET AND LIABILITY MANAGEMENT

     Asset and liability management is concerned with the timing and magnitude
of the repricing of assets and liabilities. We attempt to control risks
associated with interest rate movements. Methods for evaluating interest rate
risk include an analysis of our interest rate sensitivity "gap", which is the
difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest income positively
or negatively even if an institution were perfectly matched in each maturity
category. The following table sets forth the estimated maturity or repricing of
our interest-earning assets and interest-bearing liabilities at December 31,
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 based on actual prepayment experience.

                                       49



                                                                                              
                                                                         More than 1
                                                                          Year to
                                     Within 3 Months       4-12 Months     3 Years      3 Years and Over        Total
                                     ------------------------------------------------------------------------------------
                                                                   (dollars in thousands)
Rate Sensitive Assets:
  Investment Securities (Principal)
                                     $     5,652,903    $    1,148,382   $   11,202,093   $  34,566,220   $   52,569,598

Rate Sensitive Liabilities:
  Repurchase Agreements,
    with the effect of swaps              25,244,710         2,420,950        9,894,250       8,486,650       46,046,560
                                     ---------------- ----------------- ---------------- --------------- ----------------

Interest rate sensitivity gap        $  (19,591,807)    $  (1,272,568)   $    1,307,843   $  26,079,570   $    6,523,038
                                     ================ ================= ================ =============== ================

Cumulative rate sensitivity gap      $  (19,591,807)    $ (20,864,375)   $ (19,556,532)   $   6,523,038
                                     ================ ================= ================ ===============

Cumulative interest rate
sensitivity gap as a percentage of
total rate-sensitive assets                    (37%)             (40%)            (37%)             12%
                                     ================ ================= ================ ===============


     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."

                                       50


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

     Our financial statements and the related notes, together with the Report of
Independent Registered Public Accounting Firm thereon, are set forth on pages
F-1 through F-21 of this Form 10-K.

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

     None.

ITEM 9A. CONTROLS AND PROCEDURES
--------------------------------

     Our management, including our Chief Executive Officer (the "CEO") and Chief
Financial Officer (the "CFO"), reviewed and evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act) as of the end of
the period covered by this annual report. Based on that review and evaluation,
the CEO and CFO have concluded that our current disclosure controls and
procedures, as designed and implemented, (1) were effective in ensuring that
information regarding the Company and its subsidiaries is made known to our
management, including our CEO and CFO, by our employees, as appropriate to allow
timely decisions regarding required disclosure and (2) were effective in
providing reasonable assurance that information the Company must disclose in its
periodic reports under the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods prescribed by the SEC's rules
and forms.


Management Report On Internal Control Over Financial Reporting

Dated:  February 23, 2007

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

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

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

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

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

                                       51


     The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2007. In making
this assessment, the Company's management used criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework

     Based on management's assessment, the Company's management believes that,
as of December 31, 2007, the Company's internal control over financial reporting
was effective based on those criteria. There have been no changes in the
Company's internal controls over financial reporting that occurred during the
quarter ended December 31, 2007 that have materially affected, or are reasonably
likely to affect its internal control over financial reporting.

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

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

     None.

                                    PART III

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

     The information required by Item 10 as to our directors is incorporated
herein by reference to the proxy statement to be filed with the SEC within 120
days after December 31, 2007. The information regarding our executive officers
required by Item 10 appears in Part I of this Form 10-K. The information
required by Item 10 as to our compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated by reference to the proxy statement to be
filed with the SEC within 120 days after December 31, 2007.

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

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

     The information required by Item 11 is incorporated herein by reference to
the proxy statement to be filed with the SEC within 120 days after December 31,
2007.

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

     The information required by Item 12 is incorporated herein by reference to
the proxy statement to be filed with the SEC within 120 days after December 31,
2007.

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

     The information required by Item 13 is incorporated herein by reference to
the proxy statement to be filed with the SEC within 120 days after December 31,
2007.

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

     The information required by Item 14 is incorporated herein by reference to
the proxy statement to be filed with the SEC within 120 days after December 31,
2007.

                                       52


                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
-------------------------------------------------
(a) Documents filed as part of this report:

1. Financial Statements.

2. Schedules to Financial Statements:

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

3. Exhibits:

                                  EXHIBIT INDEX

Exhibit
Number         Exhibit Description
-------        -------------------

3.1            Articles of Amendment and Restatement of the Articles of
               Incorporation of the Registrant (incorporated by reference to
               Exhibit 3.2 to the Registrant's Registration Statement on Form
               S-11 (Registration No. 333-32913) filed with the Securities and
               Exchange Commission on August 5, 1997).
3.2            Articles of Amendment of the Articles of Incorporation of the
               Registrant (incorporated by reference to Exhibit 3.1 of the
               Registrant's Registration Statement on Form S-3 (Registration
               Statement 333-74618) filed with the Securities and Exchange
               Commission on June 12, 2002).
3.3            Articles of Amendment of the Articles of Incorporation of the
               Registrant (incorporated by reference to Exhibit 3.1 of the
               Registrant's Form 8-K (filed with the Securities and Exchange
               Commission on August 3, 2006).
3.4            Form of Articles Supplementary designating the Registrant's
               7.875% Series A Cumulative Redeemable Preferred Stock,
               liquidation preference $25.00 per share (incorporated by
               reference to Exhibit 3.3 to the Registrant's 8-A filed April 1,
               2004).
3.5            Articles Supplementary of the Registrant's designating an
               additional 2,750,000 shares of the Company's 7.875% Series A
               Cumulative Redeemable Preferred Stock, as filed with the State
               Department of Assessments and Taxation of Maryland on October 15,
               2004 (incorporated by reference to Exhibit 3.2 to the
               Registrant's 8-K filed October 4, 2004).
3.6            Articles Supplementary designating the Registrant's 6% Series B
               Cumulative Convertible Preferred Stock, liquidation preference
               $25.00 per share (incorporated by reference to Exhibit 3.1 to the
               Registrant's 8-K filed April 10, 2006).

3.7            Bylaws of the Registrant, as amended (incorporated by reference
               to Exhibit 3.3 to the Registrant's Registration Statement on Form
               S-11 (Registration No. 333-32913) filed with the Securities and
               Exchange Commission on August 5, 1997).
4.1            Specimen Common Stock Certificate (incorporated by reference to
               Exhibit 4.1 to Amendment No. 1 to the Registrant's Registration
               Statement on Form S-11 (Registration No. 333-32913) filed with
               the Securities and Exchange Commission on September 17, 1997).

4.2            Specimen Preferred Stock Certificate (incorporated by reference
               to Exhibit 4.2 to the Registrant's Registration Statement on Form
               S-3 (Registration No. 333-74618) filed with the Securities and
               Exchange Commission on December 5, 2001).
4.3            Specimen Series A Preferred Stock Certificate (incorporated by
               reference to Exhibit 4.1 of the Registrant's Registration
               Statement on Form 8-A filed with the SEC on April 1, 2004).
4.4            Specimen Series B Preferred Stock Certificate (incorporated by
               reference to Exhibit 4.1 to the Registrant's Form 8K filed with
               the Securities and Exchange Commission on April 10, 2006).
10.1           Long-Term Stock Incentive Plan (incorporated by reference to
               Exhibit 10.3 to the Registrant's Registration Statement on Form
               S-11 (Registration No. 333-32913) filed with the Securities and
               Exchange Commission on August 5, 1997).*

                                       53


10.2           Form of Master Repurchase Agreement (incorporated by reference to
               Exhibit 10.7 to the Registrant's Registration Statement on Form
               S-11 (Registration No. 333-32913) filed with the Securities and
               Exchange Commission on August 5, 1997).
10.3           Amended and Restated Employment Agreement, effective as of June
               4, 2004, between the Registrant and Michael A.J. Farrell
               (incorporated by reference to Exhibit 10.3 of the Registrant's
               Form 10-K filed with the Securities and Exchange Commission on
               March 10, 2005).*
10.4           Amended and Restated Employment Agreement, dated as of February
               25, 2008, between the Registrant and Wellington J. Denahan.*
10.5           Amended and Restated Employment Agreement, effective as of June
               4, 2004,between the Registrant and Kathryn F. Fagan (incorporated
               by reference to Exhibit 10.5 of the Registrant's Form 10-K filed
               with the Securities and Exchange Commission on March 10, 2005).*
10.6           Amended and Restated Employment Agreement, effective as of June
               4, 2004, between the Registrant and James P. Fortescue
               (incorporated by reference to Exhibit 10.7 of the Registrant's
               Form 10-K filed with the Securities and Exchange Commission on
               March 10, 2005).*
10.7           Amended and Restated Employment Agreement, dated as of January
               23, 2006, between the Registrant and Jeremy Diamond (incorporated
               by reference to Exhibit 10.7 of the Registrant's Form 10-K filed
               with the Securities and Exchange Commission on March 13, 2006).*
10.8           Amended and Restated Employment Agreement, dated as of January
               23, 2006, between the Registrant and Ronald D. Kazel
               (incorporated by reference to Exhibit 10.8 of the Registrant's
               Form 10-K filed with the Securities and Exchange Commission on
               March 13, 2006).*
10.9           Amended and Restated Employment Agreement, dated as of April 21,
               2006, between the Registrant and Rose-Marie Lyght (incorporated
               by reference to Exhibit 10.9 of the Registrant's Form 10-Q filed
               with the Securities and Exchange Commission on May 9, 2006).*
10.10          Amended and Restated Employment Agreement, effective as of June
               4, 2004, between the Registrant and Kristopher R. Konrad
               (incorporated by reference to Exhibit 10.11 of the Registrant's
               Form 10-K filed with the Securities and Exchange Commission on
               March 10, 2005).*
10.11          Amended and Restated Employment Agreement, dated January 23,
               2006, between the Registrant and R. Nicholas Singh (incorporated
               by reference to Exhibit 10.11 of the Registrant's Form 10-K filed
               with the Securities and Exchange Commission on March 13, 2006).*
12.1           Computation of ratio of earnings to combined fixed charges and
               preferred stock dividends.
23.1           Consent of Independent Registered Public Accounting Firm.
31.1           Certification of Michael A.J. Farrell, Chairman, Chief Executive
               Officer, and President of the Registrant, pursuant to 18 U.S.C.
               Section 1350 as adopted pursuant to Section 302 of the
               Sarbanes-Oxley Act of 2002.
31.2           Certification of Kathryn F. Fagan, Chief Financial Officer and
               Treasurer of the Registrant, pursuant to 18 U.S.C. Section 1350
               as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
               2002.
32.1           Certification of Michael A.J. Farrell, Chairman, Chief Executive
               Officer, and President of the Registrant, pursuant to 18 U.S.C.
               Section 1350 as adopted pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002.
32.2           Certification of Kathryn F. Fagan, Chief Financial Officer and
               Treasurer of the Registrant, pursuant to 18 U.S.C. Section 1350
               as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
               2002.

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

                                       54


ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

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

                                                                        Page

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                  F-1

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
        DECEMBER 31, 2007 and 2006:

   Consolidated Statements of Financial Condition                        F-2

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

   Consolidated Statements of Stockholders' Equity                       F-4

   Consolidated Statements of Cash Flows                                 F-5

   Notes to Consolidated Financial Statements                            F-6

                                       55

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


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

We have audited the accompanying consolidated statements of financial condition
of Annaly Capital Management, Inc. and subsidiaries (the "Company") as of
December 31, 2007 and 2006, and the related consolidated statements of
operations and comprehensive income (loss), stockholders' equity, and cash flows
for each of the three years in the period ended December 31, 2007. We also have
audited the Company's internal control over financial reporting as of December
31, 2007, based on criteria established in Internal Control -- Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management Report On Internal Control
Over Financial Reporting at Item 9A. Our responsibility is to express an opinion
on these financial statements and an opinion on the Company's internal control
over financial reporting based on our audits.

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

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

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Annaly Capital
Management, Inc. and subsidiaries as of December 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on the criteria established
in Internal Control -- Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.

/s/ Deloitte & Touche LLP

New York, New York
February 26, 2008

                                      F-1



                                                                              
                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           DECEMBER 31, 2007 AND 2006
                  (dollars in thousands, except for share data)

                                                             DECEMBER 31, 2007   DECEMBER 31, 2006
                                                            ----------------------------------------

                           ASSETS
------------------------------------------------------------

Cash and cash equivalents                                       $       103,960     $        91,782
Mortgage-Backed Securities, at fair value                            52,879,528          30,167,509
Agency debentures, at fair value                                        253,915              49,500
Available for sale equity securities, at fair value                      64,754                   -
Trading securities, at fair value                                        11,675              18,365
Receivable for Mortgage-Backed Securities sold                          276,737             200,535
Accrued interest receivable                                             271,996             146,089
Receivable for advisory and service fees                                  3,598               3,178
Intangible for customer relationships, net                                9,842              11,184
Goodwill                                                                 22,966              22,966
Interest rate swaps, at fair value                                            -               2,558
Other assets                                                              4,543               2,314
                                                            ----------------------------------------

     Total assets                                               $    53,903,514     $    30,715,980
                                                            ========================================

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

Liabilities:
Repurchase agreements                                           $    46,046,560     $    27,514,020
Payable for Investment Securities purchased                           1,677,131             338,172
Trading securities sold, not yet purchased, at fair value                32,835              41,948
Accrued interest payable                                                257,608              83,998
Dividends payable                                                       136,618              39,016
Accounts payable                                                         36,688              18,816
Interest rate swaps, at fair value                                      398,096              20,179
                                                            ----------------------------------------

     Total liabilities                                               48,585,536          28,056,149
                                                            ----------------------------------------

Minority interest in equity of consolidated affiliate                     1,574               5,324
                                                            ----------------------------------------

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

Commitments and contingencies (Note 11)

Stockholders' Equity:
7.875% Series A Cumulative Redeemable Preferred Stock:
7,637,500 shares authorized 7,412,500 issued and outstanding            177,088             177,088
 Common stock: par value $.01 per share; 487,762,500 shares
  authorized, 401,822,703 and 205,345,591 issued and
 outstanding, respectively                                                4,018               2,053
Additional paid-in capital                                            5,297,922           2,615,016
Accumulated other comprehensive loss                                   (152,197)            (76,112)
Accumulated deficit                                                    (121,893)           (175,004)
                                                            ----------------------------------------

     Total stockholders' equity                                       5,204,938           2,543,041
                                                            ----------------------------------------

Total liabilities, minority interest, Series B Preferred
 Stock and stockholders' equity                                 $    53,903,514     $    30,715,980
                                                            ========================================


See notes to consolidated financial statements.

                                      F-2



                                                                           
                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
      CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
                  YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
                (dollars in thousands, except per share amounts)

                                                       For the Year   For the Year   For the Year
                                                           Ended      Ended December Ended December
                                                        December 31,     31, 2006       31, 2005
                                                            2007
                                                       ---------------------------------------------
Interest income                                         $  2,355,447   $  1,221,882    $    705,046
Interest expense                                           1,926,465      1,055,013         568,560
                                                       ---------------------------------------------
Net interest income                                          428,982        166,869         136,486
                                                       ---------------------------------------------
Other income (loss):
   Investment advisory and service fees                       22,028         22,351          35,625
   Gain (loss) on sale of Investment Securities               19,062         (3,862)        (53,238)
   Gain on termination of interest rate swaps                  2,096         10,674               -
   Income from trading securities                             19,147          3,994               -
   Dividend income from available-for-sale equity
        securities                                                91              -               -
   Loss on other-than-temporarily impaired
    securities                                                (1,189)       (52,348)        (83,098)
                                                       ---------------------------------------------
     Total other income (loss)                                61,235        (19,191)       (100,711)
                                                       ---------------------------------------------
Expenses:
  Distribution fees                                            3,647          3,444           8,000
  General and administrative expenses                         62,666         40,063          26,278
                                                       ---------------------------------------------
     Total expenses                                           66,313         43,507          34,278
                                                       ---------------------------------------------
  Impairment of intangible for customer
   relationships                                                   -          2,493               -
                                                       ---------------------------------------------
  Income before income taxes and minority interest           423,904        101,678           1,497
  Income taxes                                                 8,870          7,538          10,744
                                                       ---------------------------------------------
  Income (loss) before minority interest                     415,034         94,140          (9,247)
  Minority interest                                              650            324               -
                                                       ---------------------------------------------
  Net income (loss)                                          414,384         93,816          (9,247)
Dividends on preferred stock                                  21,493         19,557          14,593
                                                       ---------------------------------------------
Net income available (loss related) to common
 shareholders                                           $    392,891   $     74,259    $    (23,840)
                                                       =============================================
Net income available (loss related) to common
 shareholders per average common share:
  Basic                                                 $       1.32   $       0.44    $      (0.19)
                                                       =============================================
  Diluted                                               $       1.31   $       0.44    $      (0.19)
                                                       =============================================
Weighted average number of common shares
 outstanding:
  Basic                                                  297,488,394    167,666,631     122,475,032
                                                       =============================================
  Diluted                                                306,263,766    167,746,387     122,475,032
                                                       =============================================
Net income (loss)                                       $    414,384   $     93,816    $     (9,247)
                                                       ---------------------------------------------
Comprehensive income (loss):
  Unrealized gain (loss) on available-for-sale
   securities                                                322,264         91,873        (222,110)
  Unrealized loss on interest rate swaps                    (378,380)        (6,404)           (543)
  Reclassification adjustment for net gains
   (losses) included in net income or loss                   (19,969)        45,536         136,336
                                                       ---------------------------------------------
  Other comprehensive income (loss)                          (76,085)       131,005         (86,317)
                                                       ---------------------------------------------
Comprehensive income (loss)                             $    338,299   $    224,821    $    (95,564)
                                                       =============================================
See notes to consolidated financial statements.


                                      F-3



                                                                                     
                 ANNALY CAPITAL MANAGEMENT, INC.AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
                  (dollars in thousands, except per share data)

                                                                               Other
                                                 Common       Additional     Accumulated     Retained
                                 Preferred        Stock         Paid-In     Comprehensive    (Deficit)
                                   Stock        Par Value       Capital     Income (Loss)    Earnings         Total
                              -------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2004        $   177,077    $     1,213    $ 1,638,635     ($120,800)    $    4,345     $ 1,700,470
  Net loss                                  -              -              -             -         (9,247)              -
  Other comprehensive loss                  -              -              -       (86,317)             -               -
  Comprehensive loss                        -              -              -             -              -         (95,564)
  Reduction in estimated legal
   cost of preferred offering              11              -                            -              -              11
  Exercise of stock options                 -              -            253             -              -             253
  Net proceeds from direct
   purchase and dividend
   reinvestment                             -              -            440             -              -             440
  Net proceeds from equity
   shelf program                            -             24         40,124             -              -          40,148
  Preferred dividends
   declared, $1.97 per share                -              -              -             -        (14,593)        (14,593)
  Common dividends declared,
   $1.04 per share                          -              -              -             -       (127,142)       (127,142)
                              -------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2005            177,088          1,237      1,679,452      (207,117)      (146,637)    $ 1,504,023
  Net income                                -              -              -             -         93,816               -
  Other comprehensive income                -              -              -       131,005              -               -
  Comprehensive income                      -              -              -             -              -         224,821
  Exercise of stock options                 -              -            183             -              -             183
  Option expense                            -              -          1,285             -              -           1,285
  Net proceeds from follow-on
   offerings                                -            800        913,200             -              -         914,000
  Net proceeds from equity
   shelf program                            -             16         20,896             -              -          20,912
  Preferred Series A dividends
   declared $1.97 per share                 -              -              -             -        (14,594)        (14,594)
  Preferred Series B dividends
   declared $1.08 per share                 -              -              -             -         (4,966)         (4,966)
  Common dividends declared,
   $0.57 per share                          -              -              -             -       (102,623)       (102,623)
                              -------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2006            177,088          2,053      2,615,016       (76,112)      (175,004)      2,543,041
  Net income                                -              -              -             -        414,384               -
  Other comprehensive loss                                 -              -       (76,085)             -               -
  Comprehensive income                      -              -              -             -              -         338,299
  Exercise of stock options                 -              -            576             -              -             576
  Option and long-term
   compensation expense                     -              -          1,355             -              -           1,355
  Net proceeds from follow-on
   offerings                                -          1,829      2,483,700             -              -       2,485,529
  Net proceeds from ATM
   program                                  -             56         80,862             -              -          80,918
  Net proceeds from direct
   purchase and dividend
   reinvestment                             -             80        116,413             -              -         116,493
  Preferred Series A dividends
   declared $1.97 per share                 -              -              -             -        (14,593)        (14,593)
  Preferred Series B dividends
   declared $1.50 per share                 -              -              -             -         (6,900)         (6,900)
  Common dividends declared,
   $1.04 per share                          -              -              -             -       (339,780)       (339,780)
                              -------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2007        $   177,088    $     4,018    $ 5,297,922     ($152,197)     ($121,893)    $ 5,204,938
                              ===========================================================================================

See notes to consolidated financial statements.

                                      F-4



                                                                                        
                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                  YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005
                             (dollars in thousands)

                                                For the Year Ended For the Year Ended For the Year Ended
                                                December 31, 2007  December 31, 2006   December 31, 2005
                                                ---------------------------------------------------------
Cash flows from operating activities:
Net income (loss)                               $         414,384 $       93,816                 ($9,247)
Adjustments to reconcile net income (loss) to
 net cash provided by operating activities:
    Amortization of Mortgage Backed Securities
     premiums and discounts, net                           65,185         63,625                 154,309
    Amortization of intangibles                             1,377          1,589                     571
    Amortization of trading securities premiums
     and discounts                                            (11)             -                       -
    Loss (gain) on sale of Investment Securities          (19,062)         3,862                  53,238
    Gain on termination of interest rate swaps             (2,096)       (10,674)                      -
    Stock option and long-term compensation
     expense                                                1,355          1,285                      56
    Net realized gain on trading investments               (4,430)        (1,200)                      -
    Unrealized (appreciation) depreciation on
     trading investments                                  (11,013)         1,180                       -
    Market value adjustment on long-term
     repurchase agreements                                      -           (149)                 (2,514)
    Loss on other-than-temporarily impaired
     securities                                             1,189         52,348                  83,098
    Impairment of intangibles                                   -          2,493                       -
    (Increase) decrease in accrued interest
     receivable                                          (123,322)       (76,224)                 10,555
    Increase in other assets                               (2,264)          (238)                   (425)
    Purchase of trading investments                       (18,479)       (44,200)                      -
    Proceeds from sale of trading securities               23,640         28,838                       -
    Purchase of trading securities sold, not yet
     purchased                                            (13,620)       (16,096)                      -
    Proceeds for securities sold, not yet
     purchased                                             21,489         55,073                       -
    (Decrease) increase in advisory and service
     fees receivable                                         (420)           319                  (1,138)
    Increase (decrease) in interest payable               173,610         56,004                  (7,727)
    Increase in accrued expenses and other
     liabilities                                           17,872          9,978                     753
                                                ---------------------------------------------------------
      Net cash provided by operating activities           525,384        221,629                 281,529
                                                ---------------------------------------------------------
Cash flows from investing activities:
  Purchase of Mortgage-Backed Securities              (32,832,687)   (23,196,076)             (7,416,869)
  Proceeds from sale of Investment Securities           4,847,909      3,040,984               3,231,219
  Principal payments of Mortgage-Backed
   Securities                                           6,831,406      5,115,693               7,053,867
  Purchase of agency debentures                          (256,241)             -                       -
  Proceeds from called agency debentures                        -              -                 130,000
  Purchase of equity investment                           (54,324)             -                       -
                                                ---------------------------------------------------------
      Net cash (used in) provided by investing
       activities                                     (21,463,937)   (15,039,399)              2,998,217
                                                ---------------------------------------------------------
Cash flows from financing activities:
  Proceeds from repurchase agreements                 393,750,907    292,418,807             245,514,548
  Principal payments on repurchase agreements        (375,218,367)  (278,481,088)           (248,646,126)
  Proceeds from exercise of stock options                     576            183                     197
  Proceeds from termination of interest rate
   swaps                                                    2,096         10,674                       -
  Proceeds from direct purchase and dividend
   reinvestment                                           116,493              -                     440
  Net proceeds from follow-on offerings                 2,485,529        914,000                       -
  Net proceeds from preferred stock offering                    -        111,466                       -
  Net proceeds from equity shelf program and ATM
   Equity Sales Agreement                                  80,918         20,912                  40,148
  Minority interest                                        (3,750)         5,324
  Dividends paid                                         (263,671)       (95,534)               (189,998)
                                                ---------------------------------------------------------
      Net cash provided by (used in) financing
       activities                                      20,950,731     14,904,744              (3,280,791)
                                                ---------------------------------------------------------
Net increase (decrease) in cash and cash
 equivalents                                               12,178         86,974                  (1,045)
Cash and cash equivalents, beginning of year               91,782          4,808                   5,853
                                                ---------------------------------------------------------
Cash and cash equivalents, end of year          $         103,960 $       91,782      $            4,808
                                                =========================================================
Supplemental disclosure of cash flow
 information:
  Interest paid                                 $       1,752,855 $      999,009      $          576,287
                                                =========================================================
  Taxes paid                                    $          10,272 $        7,242      $           11,740
                                                =========================================================
Noncash financing activities:
  Net change in unrealized loss on available-
   for-sale securities and interest rate swaps,
   net of reclassification adjustment                    ($76,085)$      131,005                ($86,317)
                                                =========================================================
  Dividends declared, not yet paid              $         136,618 $       39,016      $           12,368
                                                =========================================================

See notes to consolidated financial statements.


                                      F-5


                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005
--------------------------------------------------------------------------------

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. On June 27, 2006, the Company made a majority equity investment
in an affiliated investment fund (the "Fund"). The Company acquired
approximately 3.6 million shares of common stock of Chimera Investment
Corporation ("Chimera") for approximately $54.3 million on November 21, 2007.
Chimera is a newly-formed, publicly traded, specialty finance company that
invests in residential mortgage loans, residential mortgage-backed securities,
real estate related securities and various other asset classes. Chimera is
externally managed by FIDAC and intends to elect and qualify to be taxed as a
REIT for federal income tax purposes.

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

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

     Cash and Cash Equivalents - Cash and cash equivalents include cash on hand
and 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, 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 No. 115
requires the Company to classify all of its Investment Securities as
available-for-sale. All assets classified as available-for-sale are reported at
estimated fair value, based on market prices from independent sources, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity. The investment in Chimera is accounted for as
available-for-sale under the provisions of SFAS 115.

     Management evaluates securities for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or market concerns
warrant such evaluation. Consideration is given to (1) the length of time and
the extent to which the fair value has been lower than carrying value, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent
and ability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value.
Unrealized losses on Investment Securities that are considered other than
temporary, as measured by the amount of decline in fair value attributable to
other-than-temporary factors, are recognized in income and the cost basis of the
Investment Securities is adjusted. The loss on other-than-temporarily impaired
securities was $1.2 million, $52.3 million and $83.1 million during the years
ended December 31, 2007, 2006 and 2005, respectively.

                                       F-6


     SFAS No. 107, Disclosure About Fair Value of Financial Instruments,
requires disclosure of the fair value of financial instruments for which it is
practicable to estimate that value. The estimated fair value of Investment
Securities and interest rate swaps is equal to their carrying value presented in
the consolidated statements of financial condition. The estimated fair value of
trading securities and trading securities sold, not yet purchased, is equal to
their carrying value presented in the consolidated statements of financial
condition. The estimated fair value of cash and cash equivalents, accrued
interest receivable, receivable for securities sold, receivable for advisory and
service fees, repurchase agreements with maturities shorter than one year, and
payable for mortgage-backed securities purchased, dividends payable, accounts
payable, and accrued interest payable, generally approximates cost as of
December 31, 2007 due to the short term nature of these financial instruments.

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

     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 gain and losses on sale of
Investment Securities are determined on the specific identification method.

     Derivative Financial Instruments/Hedging Activity - The Company hedges
interest rate risk through the use of derivative financial instruments,
comprised of interest rate caps and interest rate swaps (collectively, "Hedging
Instruments"). The Company accounts for Hedging Instruments in accordance with
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
("SFAS 133") as amended and interpreted. The Company carries all Hedging
Instruments at their fair value, as assets, if their fair value is positive, or
as liabilities, if their fair value is negative. As the Company's interest rate
swaps are designated as cash flow hedges under SFAS No. 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 December 31, 2007, the Company did
not have any interest rate caps. The ineffective amount of all Hedging
Instruments, if any, is recognized in earnings each year. 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/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.

                                      F-7


     Credit Risk - The Company has limited its exposure to credit losses on its
portfolio of Investment Securities by only purchasing securities issued by
FHLMC, FNMA, or GNMA. 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 conditions as a result of consolidating the
financial statements of the Fund, and are carried at fair value at December 31,
2007. The realized and unrealized gains and losses, as well as other income or
loss from trading securities, are recorded in the income from trading securities
balance in the accompanying consolidated statements of operations.

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

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

     Cumulative Convertible Preferred Stock- The Company classifies its Series B
Cumulative Convertible Preferred Stock on the consolidated statements of
financial condition using the guidance in SEC Accounting Series Release No. 268,
Presentation in Financial Statements of "Redeemable Preferred Stocks," and
Emerging Issues Task Force ("EITF") Topic D-98, Classification and Measurement
of Redeemable Securities. The Series B 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 statement of financial condition.

     The Company has analyzed whether the embedded conversion option should be
bifurcated under the guidance in SFAS No. 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 Generally Accepted Accounting Principles or ("GAAP"),
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

     Goodwill and Intangible assets - The Company's acquisition of FIDAC was
accounted for using the purchase method. Under the purchase method, net assets
and results of operations of acquired companies are included in the consolidated
financial statements from the date of acquisition. In addition, the cost of
FIDAC was allocated to the assets acquired, including identifiable intangible
assets, and the liabilities assumed based on their estimated fair values at the
date of acquisition. The excess of purchase price over the fair value of the net
assets acquired was recognized as goodwill. Intangible assets are periodically
(but not less frequently than annually) reviewed for potential impairment.
Intangible assets with an estimated useful life are expected to amortize over a
7.8 year weighted average time period. During the year ended December 31, 2007,
there were no impairment losses. During the year ended December 31, 2006 the
Company recognized $2.5 million in impairment losses on intangible assets
relating to customer relationships. During the year ended December 31, 2005, the
Company did not have impairment losses.

                                      F-8


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

     Recent Accounting Pronouncements- In February 2006, the FASB issued FAS No.
155, Accounting for Certain Hybrid Instruments, an amendment of FASB Statements
No. 133 and 140 ("SFAS 155").. 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. Consequently, 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 the Company's financial statements in
accordance with SFAS No. 109, Accounting for Income Taxes. FIN 48 prescribes a
threshold and measurement attribute 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 (the valuation of which require significant
management judgment), including a reconciliation of the beginning and ending
balances separately for each major category of assets and liabilities. SFAS 157
is effective for the Company on January 1, 2008. The Company does not believe
that the adoption of SFAS 157 will have a significant impact on its financial
position or results of operations the manner in which it estimates fair value,
but expects that adoption will increase footnote disclosure to comply with SFAS
157 disclosure requirements for financial statements issued after January 1,
2008.

                                      F-9


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

     Proposed FASB Staff Position - The FASB issued a proposed FASB Staff
Position ("FSP") FAS No. 140-d relating to FASB Statement No. 140, Accounting
for Transfers of Financial Assets and Repurchase Financing Transactions to
address situations 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 proposed 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 is "readily obtainable" in the marketplace 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 No. 140-d 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
No. 140-d may be subject to significant changes prior to finalization, which may
impact the Company's current assessment of its impact.

                                      F-10


     2. MORTGAGE-BACKED SECURITIES

     The following tables present the Company's available-for-sale
Mortgage-Backed Securities portfolio as of December 31, 2007 and 2006:


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

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

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

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

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

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


                        Federal Home Loan  Federal National  Government National
                             Mortgage           Mortgage          Mortgage        Total Mortgage-
December 31, 2006           Corporation        Association       Association      Backed 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 Unrealized   Gross Unrealized
                          Amortized Cost          Gain               Loss       Estimated Fair Value
                        ----------------------------------------------------------------------------
                                                   (dollars in thousands)
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
                        ============================================================================

                                      F-11


     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 December 31, 2007 and 2006, according to their estimated
weighted-average life classifications:


                                                                                                  
                                  December 31, 2007                    December 31, 2006
  Weighted-Average Life    Fair Value      Amortized Cost        Fair Value        Amortized Cost
----------------------------------------------------------------------------------------------------
                                                   (dollars in thousands)
----------------------------------------------------------------------------------------------------
Less than one year       $       324,495    $        326,754    $        379,967    $        382,268
Greater than one year and
 less than five years         35,772,813          35,586,721          21,788,975          21,851,659
Greater than or equal to
 five years                   16,782,220          16,728,257           7,998,567           7,991,953

                         ---------------------------------------------------------------------------
Total                    $    52,879,528    $     52,641,732    $     30,167,509    $     30,225,880
                         ===========================================================================


     The weighted-average lives of the mortgage-backed securities at December
31, 2007 and 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 December
31, 2007 and December 31, 2006.


                                                                                    
                                                         Unrealized Loss Position For:
------------------------- ---------------------------------------------------------------------------------------------
                              Less than 12 Months             12 Months or More                     Total
------------------------- ----------------------------- ------------------------------ --------------------------------
                            Estimated     Unrealized      Estimated      Unrealized      Estimated       Unrealized
                           Fair Value       Losses        Fair Value       Losses        Fair Value        Losses
------------------------- -------------- -------------- --------------- -------------- --------------- ----------------
                                                             (dollars in thousands)
December 31, 2007            $7,593,443      ($62,594)      $5,340,667      ($67,882)     $12,934,110       ($130,476)

December 31, 2006            $6,324,266      ($30,244)      $6,817,667     ($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 because the Company currently has the ability
and intent to hold the investments to maturity or for a period of time
sufficient for a forecasted market price recovery up to or beyond the cost of
the investments. Also, the Company is guaranteed payment of the principal amount
of the securities.

     The adjustable rate Mortgage-Backed Securities are limited by periodic caps
(generally interest rate adjustments are limited to no more than 1% every nine
months) and lifetime caps. The weighted average lifetime cap was 9.9% at
December 31, 2007 and 9.8% at December 31, 2006.

     During the year ended December 31, 2007, the Company realized $19.1 million
in net gains from sales of Investment Securities. During the year ended December
31, 2006, the Company realized $3.9 million in net losses from sales of
Investment Securities.

3. REPURCHASE AGREEMENTS

     The Company had outstanding $46.0 billion and $27.5 billion of repurchase
agreements with weighted average borrowing rates of 4.76% and 5.14%, with the
effect of interest rate swaps, and weighted average remaining maturities of 234
days and 125 days as of December 31, 2007 and December 31, 2006, respectively.
Investment Securities pledged as collateral under these repurchase agreements
had an estimated fair value of $48.3 billion at December 31, 2007 and $28.6
billion at December 31, 2006.

                                      F-12


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

                December 31, 2007   December 31, 2006
                        (dollars in thousands)
               ----------------------------------------
Within 30 days     $     34,940,600    $     22,778,703
30 to 59 days             4,005,960           2,285,317
60 to 89 days               300,000             200,000
90 to 119 days                    0                   -
Over 120 days             6,800,000           2,250,000
               ----------------------------------------
Total              $     46,046,560    $     27,514,020
               ========================================

     The Company did not have an amount at risk greater than 10% of the equity
of the Company with any counterparties as of December 31, 2007 or December 31,
2006.

     The Company has entered into repurchase agreements which provide the
counterparty with the right to call the balance prior to maturity date. The
repurchase agreements totaled $6.4 billion and the market value of the option to
call is $176.7 million. Management has determined that the call option is not
required to be bifurcated under the provisions of FASB No. 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.

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 December 31, 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 presents information about the Company's swaps outstanding at
December 31, 2007.


                                                                 
              Notional Amount                      Weighted        Net Estimated Fair
               (dollars in     Weighted Average     Average        Value/Carrying Value
December 31,     thousands)         Pay Rate      Receive Rate   (dollars in thousands)
------------------------------------------------------------------------------------------
        2007        $16,243,500            5.03%          5.06%        $     (398,096)

        2006        $ 9,328,400            5.17%          5.35%        $      (17,621)


                                       F-13


     During the year ended December 31, 2007, the Company had a $2.1 million
realized gain on the termination of interest rate swaps with a notional value of
$900 million. During the year ended December 31, 2006, the Company had a $10.7
million gain on the termination of interest rate swaps with a notional value of
$1.2 billion.

5. PREFERRED STOCK AND COMMON STOCK

     (A) Stock Issuances

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

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

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

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

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

     On August 3, 2006, the Company entered into an ATM Equity Offering(sm)
Sales Agreement with Merrill Lynch & Co. and Merrill Lynch, Pierce, Fenner &
Smith Incorporated, relating to the sale of shares of its common stock from time
to time through Merrill Lynch. Sales of the shares, if any, are made by means of
ordinary brokers' transaction on the New York Stock Exchange. During the year
ended December 31, 2007, 4.5 million shares of our common stock were issued
pursuant to this program, totaling $66.2 million in net proceeds.

     On August 3, 2006, the Company entered into an ATM Equity Sales Agreement
with UBS Securities LLC, relating to the sale of shares of 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
the year ended December 31, 2007, 1.1 million shares of its common stock were
issued pursuant to this program, totaling $14.7 million in net proceeds.

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

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

     During the year ended December 31, 2006, 22,160 options were exercised
under the long-term compensation plan for an aggregate exercise price of
$183,000.

     During the year ended December 31, 2006, 500,000 shares of the Company's
common stock, with net proceeds of $6.7 million, were issued pursuant to the
Merrill ATM Program. During the year ended December 31, 2006, 1.1 million shares
of the Company's common stock were issued through the Equity Shelf Program with
UBS Securities, totaling net proceeds of $14.2 million.

                                       F-14


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

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

     During the year ended December 31, 2005, the Company declared dividends to
common shareholders totaling $127.1 million, or $1.04 per share, and the Company
declared and paid dividends to preferred shareholders totaling $14.6 million or
$1.97 per share. During the year ended December 31, 2005, 2,381,550 shares of
the Company's common stock were issued through the Equity Shelf Program,
totaling net proceeds of $40.1 million. During the year ended December 31, 2005,
16,128 options were exercised under the long-term compensation plan for an
aggregate exercise price of $253,000. In addition, 24,253 common shares were
sold through the dividend reinvestment and direct purchase program for $440,000
during the year ended December 31, 2005.

     (B) Preferred Stock

     At December 31, 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 stock must be
paid a dividend at a rate of 7.875% per year on the $25.00 liquidation
preference before the common stock is entitled to receive any dividends. The
Series A preferred stock is redeemable at $25.00 per share plus accrued and
unpaid dividends (whether or not declared) exclusively at the Company's option
commencing on April 5, 2009 (subject to the Company's right under limited
circumstances to redeem the Series A preferred stock earlier in order to
preserve its qualification as a REIT). The Series A preferred stock is senior to
the Company's common stock and is on parity with the Series B preferred stock
with respect to dividends and distributions, including distributions upon
liquidation, dissolution or winding up. The Series A preferred stock generally
does not have any voting rights, except if the Company fails to pay dividends on
the Series A preferred stock for six or more quarterly periods (whether or not
consecutive). Under such circumstances, the Series A preferred stock, together
with the Series B preferred stock, will be entitled to vote to elect two
additional directors to the Board, until all unpaid dividends have been paid or
declared and set apart for payment. In addition, certain material and adverse
changes to the terms of the Series A preferred stock cannot be made without the
affirmative vote of holders of at least two-thirds of the outstanding shares of
Series A preferred stock and Series B preferred stock. Through December 31,
2007, the Company had declared and paid all required quarterly dividends on the
Series A preferred stock.

     At December 31, 2007, the Company 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 stock
must be paid a dividend at a rate of 6% per year on the $25.00 liquidation
preference before the common stock is entitled to receive any dividends.

     The Series B preferred stock is not redeemable. The Series B preferred
stock is convertible into shares of common stock at a conversion rate that
adjusts from time to time upon the occurrence of certain events, including if
the Company distributes to its common shareholders in any calendar quarter cash
dividends in excess of $0.11 per share. Initially, the conversion rate was
1.7730 shares of common shares per $25 liquidation preference. Commencing April
5, 2011, the Company has the right in certain circumstances to convert each
Series B preferred stock into a number of common shares based upon the then
prevailing conversion rate. The Series B preferred stock is also convertible
into common shares at the option of the Series B preferred shareholder at 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 December 31, 2007, the Company had declared and paid all required
quarterly dividends on the Series B preferred stock.

                                      F-15


6. NET INCOME (LOSS) PER COMMON SHARE

     The following table presents a reconciliation of the net income (loss) and
shares used in calculating basic and diluted earnings per share for the years
ended December 31, 2007, 2006 and 2005.


                                                                               
                                                               For the years ended
                                                  ----------------------------------------------
                                                  December 31,   December 31,    December 31,
                                                       2007          2006            2005
                                                  ----------------------------------------------

Net income (loss)                                 $      414,384  $      93,816         ($9,247)
Less: Preferred stock dividends                           21,493         19,557          14,593
                                                  ----------------------------------------------
Net income available to common shareholders, prior
 to adjustment for Series B dividends, if
 necessary                                               392,891         74,259         (23,840)

Add: Preferred Series B dividends, if Series B
 shares are dilutive                                       6,900              -               -
                                                  ----------------------------------------------

Net income, as adjusted                                  399,791         74,259         (23,840)
                                                  ----------------------------------------------

Weighted average shares of common stock
outstanding-basic                                        297,488        167,667         122,475

Add: Effect of dilutive stock options and Series B
Cumulative Convertible Preferred Stock                     8,775             79               -

                                                  ----------------------------------------------
Weighted average shares of common
stock outstanding-diluted                                306,263        167,746         122,475
                                                  ==============================================


     The Series B Cumulative Convertible Preferred Stock was anti-dilutive for
the years ended December 31, 2006 and 2005. Because the Company had a net loss
related to common shareholders for the year ended December 31, 2005, options to
purchase 2,333,593 shares of common stock were considered anti-dilutive for the
year ended December 31, 2005.

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.

                                      F-16



                                                                                                   
                                                                            For the years ended
                                              ------------------------------------------------------------------------------
                                                  December 31, 2007         December 31, 2006          December 31, 2005
                                              ------------------------- ------------------------- --------------------------
                                                            Weighted                  Weighted                   Weighted
                                                             Average                   Average                   Average
                                               Number of    Exercise     Number of    Exercise     Number of     Exercise
                                                Shares        Price       Shares        Price       Shares        Price
                                              ------------ ------------ ------------ ------------ ------------ -------------
Options outstanding at the beginning of year
                                                2,984,995       $15.10    2,333,593       $16.10    1,645,721        $15.66
Granted                                           687,250        15.69      737,250        11.72      737,750         17.08
Exercised                                         (55,738)       10.34      (22,160)        8.25      (16,128)        12.21
Forfeited                                        (174,240)       16.06      (60,000)       15.39            -             -
Expired                                            (5,000)       20.35       (3,688)       13.69      (33,750)        17.87
                                              ------------ ------------ ------------ ------------ ------------ -------------
Options outstanding at the end of year          3,437,267       $15.23    2,984,995       $15.10    2,333,593        $16.10
                                              ============ ============ ============ ============ ============ =============
Options exercisable at the end of the year      1,286,004       $14.98    1,298,496       $15.28      831,906        $13.84
                                              ============ ============ ============ ============ ============ =============


     The weighted average remaining contractual term was approximately 7.0 years
for stock options outstanding and approximately 5.3 years for stock options
exercisable as of December 31, 2007. As of December 31, 2007, there was
approximately $2.9 million of total unrecognized compensation cost related to
nonvested share-based compensation awards. That cost is expected to be
recognized over a weighted average period of 2.7 years.

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

The following table summarizes information about stock options outstanding at
December 31, 2007:


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

 $7.94-$19.99               3,432,267           $15.23         7.0            1,286,004     $14.98             5.3
$20.00-$29.99                   5,000            20.70         0.5                5,000      20.70             0.5
                     ----------------- ---------------- ------------------- ------------ ------------- ---------------------
                            3,437,267           $15.23         7.0            1,291,004     $15.00             5.3
                     ================= ================ =================== ============ ============= =====================


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

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

     During the year ended December 31, 2005, the Company recorded $8.7 million
of income tax expense for income attributable to FIDAC and the portion of
earnings retained based on Code Section 162(m) limitations. The Company's
effective tax rate was 47% for the year ended December 31, 2005.

                                      F-17


         The Company's effective tax rate was 51%, 45%, and 47% for the year
ended December 31, 2007, 2006, and 2005, respectively. These rates differed from
the federal statutory rate as a result of state and local taxes and permanent
difference pertaining to employee remuneration as discussed above.

9. LEASE COMMITMENTS

     The Company has a noncancelable lease for office space, which commenced in
May 2002 and expires in December 2009. Total office rent expense was $725,000,
$618,000, and $573,000 for the years ended December 31, 2007, 2006 and 2005,
respectively. The net expense was offset by sub-lease payments received of
$96,000, $91,000, and $84,000 for the years ended December 31, 2007, 2006 and
2005, respectively.

     The Company's aggregate future minimum lease payments are $532,000 in 2008
and in 2009.

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, as discussed in Note 3.

     The Company seeks to manage the extent to which net income changes as a
function of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. The Company may seek to mitigate the potential impact
on net income of periodic and lifetime coupon adjustment restrictions in the
portfolio of Investment Securities by entering into interest rate agreements
such as interest rate caps and interest rate swaps. As of December 31, 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 $16.2 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. COMMITMENTS AND 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.

12. SUBSEQUENT EVENTS

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

13. SUMMARIZED QUARTERLY RESULTS (UNAUDITED)

                                      F-18


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


                                                                                
                                                March 31,      June 30,    September 30,  December 31,
                                                   2007          2007            2007           2007
                                                    (dollars in thousands, except per share data)
                                             -----------------------------------------------------------
Interest income                                $    449,564  $    556,262    $    628,696   $    720,925
Interest expense                                    380,164       468,748         519,118        558,435
                                             -----------------------------------------------------------
Net interest income                                  69,400        87,514         109,578        162,490
                                             -----------------------------------------------------------
Other income:
 Investment advisory and service fees                 5,562         5,366           5,464          5,636
 Gain on sale of Investment Securities                6,145         7,293           3,795          1,829
 Gain on termination of interest rate swaps              67             -           2,029              -
  Income from trading securities                      3,429           243           8,288          7,187
  Dividend income from available-for-sale
   equity securities                                                                                  91
  Loss on other-than-temporarily impaired
   securities                                          (491)         (698)              -              -
                                             -----------------------------------------------------------
      Total other income                             14,712        12,204          19,576         14,743
                                             -----------------------------------------------------------
Expenses:
  Distribution fees                                     904           861           1,100            782
  General and administrative expenses                12,886        12,272          17,334         20,174
                                             -----------------------------------------------------------
      Total expenses                                 13,790        13,133          18,434         20,956
                                             -----------------------------------------------------------
Income before income taxes and minority
interest                                             70,322        86,585         110,720        156,277
Income taxes                                          2,604           839           2,327          3,100
                                             -----------------------------------------------------------
Income before minority interest                      67,718        85,746         108,393        153,177
Minority interest                                       286            13             106            245
                                             -----------------------------------------------------------
Net Income                                           67,432        85,733         108,287        152,932
Dividends on preferred stock                          5,373         5,373           5,373          5,374
                                             -----------------------------------------------------------
Net income available to common
shareholders                                   $     62,059  $     80,360    $    102,914   $    147,558
                                             ===========================================================
Weighted average number of basic common
 shares outstanding                             217,490,205   264,990,422     315,969,814    389,410,812
                                             ===========================================================
Weighted average number of diluted common
 shares outstanding                             225,928,127   273,578,836     324,614,534    398,247,632
                                             ===========================================================
Net income available to common
shareholders per average common share:
Basic                                          $       0.29  $       0.30    $       0.33   $       0.38
                                             ===========================================================
Diluted                                        $       0.28  $       0.30    $       0.32   $       0.37
                                             ===========================================================


                                      F-19

The following is a presentation of the quarterly results of operations for the
year ended December 31, 2006.


                                                                                 
                                                March 31,      June 30,    September 30,    December 31,
                                                   2006          2006            2006            2006
                                                     (dollars in thousands, except per share data)
                                             -------------------------------------------------------------
Interest income                                $    194,882  $    280,171    $    339,737    $    407,092
Interest expense                                    167,512       242,473         295,726         349,302
                                             -------------------------------------------------------------
Net interest income                                  27,370        37,698          44,011          57,790
                                             -------------------------------------------------------------
Other (loss) income:
  Investment advisory and service fees                6,997         5,210           4,966           5,178
  (Loss) gain on sale of Investment
   Securities                                        (7,006)       (1,239)           (446)          4,829
  Gain on termination of interest rate swaps              -             -           8,414           2,260
  Income from trading securities                          -             -             612           3,382
  Loss on other-than-temporarily impaired
   securities                                       (26,730)      (20,114)              -          (5,504)
                                             -------------------------------------------------------------
      Total other (loss) income                     (26,739)      (16,143)         13,546          10,145
                                             -------------------------------------------------------------

Expenses:
  Distribution fees                                   1,170           755             724             795
  General and administrative expenses                 7,177         8,985          11,682          12,219
                                             -------------------------------------------------------------
      Total expenses                                  8,347         9,740          12,406          13,014
                                             -------------------------------------------------------------
Impairment of intangible for customer
 relationships                                        1,148         1,345               -               -
                                             -------------------------------------------------------------
(Loss) income before income taxes and
 minority interest                                   (8,864)       10,470          45,151          54,921
Income taxes                                          2,085         1,892           2,273           1,288
                                             -------------------------------------------------------------
(Loss) income before minority interest              (10,949)        8,578          42,878          53,633
Minority interest                                         -             -              28             296
                                             -------------------------------------------------------------
Net (loss) income                                   (10,949)        8,578          42,850          53,337
Dividends on preferred stock                          3,648         5,163           5,373           5,373
                                             -------------------------------------------------------------
Net (loss related) income available to common
shareholders                                       ($14,597) $      3,415    $     37,477    $     47,964
                                             =============================================================
Weighted average number of basic common
 shares outstanding                             123,693,851   158,632,865     181,767,106     205,092,330
                                             =============================================================
Weighted average number of diluted common
 shares outstanding                             123,693,851   158,703,614     189,952,159     213,455,555
                                             =============================================================
Net (loss related) income available to
common shareholders per average common share:
Basic                                           $     (0.12) $       0.02    $       0.21    $       0.23
                                             =============================================================
Diluted                                         $     (0.12) $       0.02    $       0.20    $       0.23
                                             =============================================================

                                      F-20


                                   SIGNATURES

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

                         ANNALY CAPITAL MANAGEMENT, INC.

Date: February 25, 2008     By: /s/ Michael A. J. Farrell
                                -------------------------
                                Michael A. J. Farrell
                                Chairman, Chief Executive Officer, and President

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


                                                                                     
              Signature              Title                                          Date

         /s/ KEVIN P. BRADY
------------------------------------ Director                                February 25, 2008
           Kevin P. Brady


        /s/ KATHRYN F. FAGAN
------------------------------------ Chief Financial Officer and Treasurer   February 25, 2008
          Kathryn F. Fagan           (principal financial and accounting
                                      officer)


      /s/ MICHAEL A.J. FARRELL
------------------------------------ Chairman of the Board, Chief Executive  February 25, 2008
        Michael A. J. Farrell        Officer, President and Director
                                     (principal executive officer)


       /s/ JONATHAN D. GREEN
------------------------------------ Director                                February 25, 2008
          Jonathan D. Green


        /s/ JOHN A. LAMBIASE
------------------------------------ Director                                February 25, 2008
          John A. Lambiase


        /s/ E. WAYNE NORDBERG
------------------------------------ Director                                February 25, 2008
          E. Wayne Nordberg


       /s/ DONNELL A. SEGALAS
------------------------------------ Director                                February 25, 2008
         Donnell A. Segalas


    /s/ WELLINGTON DENAHAN-NORRIS
------------------------------------ Vice Chairman of the Board, Chief       February 25, 2008
      Wellington Denahan-Norris      Investment Officer, Chief Operating
                                     Officer and Director