UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

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

               FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2008

                                       OR

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

       FOR THE TRANSITION PERIOD FROM _______________ TO _________________


                         COMMISSION FILE NUMBER: 1-13447

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


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


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

                                      10036
                                   (Zip Code)

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

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

                                    Yes   X    No
                                        -----     -----

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


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

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


                      APPLICABLE ONLY TO CORPORATE ISSUERS:

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

                Class                            Outstanding at November 6, 2008
        Common Stock, $.01 par value                      541,260,431



                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES

                                    FORM 10-Q

                                TABLE OF CONTENTS


                                                                                       
Part I.  FINANCIAL INFORMATION

       Item 1.  Financial Statements:

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

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

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

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

       Notes to Consolidated Financial Statements (Unaudited)                                   6

       Item 2. Management's Discussion and Analysis of Financial Condition and
        Results of Operations                                                                  21

       Item 3. Quantitative and Qualitative Disclosures about Market Risk                      38

       Item 4. Controls and Procedures                                                         40

Part II. OTHER INFORMATION

       Item 1. Legal Proceedings                                                               41

       Item 1A. Risk Factors                                                                   41

       Item 6. Exhibits                                                                        42

       SIGNATURES                                                                              43


                                       1

Part I
Item 1.  Financial Statements


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

                                                  September 30, 2008    December 31,
                                                     (Unaudited)          2007(1)
                                                  ------------------------------------
                      ASSETS
                      ------

Cash and cash equivalents                                 $1,083,814          $103,960
Reverse repurchase agreements                                619,657                 -
Mortgage-Backed Securities, at fair value                 54,840,928        52,879,528
Agency debentures, at fair value                             618,352           253,915
Available for sale equity securities, at fair
 value                                                        22,490            64,754
Trading securities, at fair value                              2,199            11,675
Receivable for Mortgage-Backed Securities sold             2,446,342           276,737
Accrued interest and dividends receivable                    295,925           271,996
Receivable for advisory and service fees                       3,581             3,598
Intangible for customer relationships, net                     6,726             9,842
Goodwill                                                      22,966            22,966
Other assets                                                   2,602             4,543
                                                  ------------------------------------
     Total assets                                        $59,965,582       $53,903,514
                                                  ====================================

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

Liabilities:
  Repurchase agreements                                  $51,075,758       $46,046,560
  Payable for Investment Securities purchased                839,235         1,677,131
  Trading securities sold, not yet purchased,
   at fair value                                              30,903            32,835
  Accrued interest payable                                   168,361           257,608
  Dividends payable                                          296,254           136,618
  Accounts payable and other liabilities                      26,385            36,688
  Interest rate swaps, at fair value                         384,258           398,096
                                                  ------------------------------------
     Total liabilities                                    52,821,154        48,585,536
                                                  ------------------------------------

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

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

Commitments and contingencies (Note 12)                            -                 -

Stockholders' Equity:
7.875% Series A Cumulative Redeemable Preferred
 Stock:
  7,412,500 shares authorized, issued and outstanding        177,088           177,088
 Common stock: par value $.01 per share;
  987,987,500 shares authorized, 540,189,101 and
  401,822,703 issued and outstanding, respectively             5,402             4,018
Additional paid-in capital                                 7,616,528         5,297,922
Accumulated other comprehensive loss                        (661,498)         (152,197)
Accumulated deficit                                         (102,049)         (121,893)
                                                  ------------------------------------

     Total stockholders' equity                            7,035,471         5,204,938
                                                  ------------------------------------

Total liabilities, minority interest, Series B
 Cumulative Convertible
Preferred Stock and stockholders' equity                 $59,965,582       $53,903,514
                                                  ====================================

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

See notes to consolidated financial statements.

                                       2



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

                                          For the Quarter     For the Quarter       For the Nine       For the Nine
                                               Ended               Ended            Months Ended        Months Ended
                                         September 30, 2008  September 30, 2007  September 30, 2008  September 30, 2007
                                        --------------------------------------------------------------------------------
Interest income                                     $810,659            $628,696          $2,375,146          $1,634,522
Interest expense                                     458,250             519,118           1,438,107           1,368,030
                                        --------------------------------------------------------------------------------
Net interest income                                  352,409             109,578             937,039             266,492
                                        --------------------------------------------------------------------------------
Other (loss) income:
   Investment advisory and service fees                7,663               5,464              20,667              16,392
   (Loss) gain on sale of Investment
    Securities                                        (1,066)              3,795              11,181              17,233
   Gain on termination of interest rate
    swaps                                                  -               2,029                   -               2,096
   Income from trading securities                      7,671               8,288              11,705              11,960
   Dividend income from available-for-
    sale equity securities                               580                   -               2,101                   -
   Loss on other-than-temporarily
    impaired securities                              (31,834)                  -             (31,834)             (1,189)
                                        --------------------------------------------------------------------------------
     Total other (loss) income                       (16,986)             19,576              13,820              46,492
                                        --------------------------------------------------------------------------------

Expenses:
  Distribution fees                                      299               1,100               1,302               2,865
  General and administrative expenses                 25,455              17,334              76,665              42,492
                                        --------------------------------------------------------------------------------
     Total expenses                                   25,754              18,434              77,967              45,357
                                        --------------------------------------------------------------------------------

 Income before income taxes and
  minority interest                                  309,669             110,720             872,892             267,627

 Income taxes                                          7,538               2,327              19,675               5,770
                                        --------------------------------------------------------------------------------

 Income before minority interest                     302,131             108,393             853,217             261,857

 Minority interest                                         -                 106                  58                 405
                                        --------------------------------------------------------------------------------

 Net income                                          302,131             108,287             853,159             261,452

Dividends on preferred stock                           5,335               5,373              16,042              16,119

                                        --------------------------------------------------------------------------------
Net income available to common
 shareholders                                       $296,796            $102,914            $837,117            $245,333
                                        ================================================================================

Net income available per share to
 common shareholders:
  Basic                                                $0.55               $0.33               $1.69               $0.92
                                        ================================================================================
  Diluted                                              $0.54               $0.32               $1.67               $0.91
                                        ================================================================================

Weighted average number of common
 shares outstanding:
  Basic                                          538,706,131         315,969,814         495,583,506         266,510,879
                                        ================================================================================
  Diluted                                        547,882,488         324,614,534         504,609,331         275,146,595
                                        ================================================================================

Net income                                          $302,131            $108,287            $853,159            $261,452
                                        --------------------------------------------------------------------------------
Other comprehensive loss:
  Unrealized (loss) gain on available-
   for-sale securities                              (200,513)            320,102            (511,958)           (169,363)
  Unrealized gain (loss) on interest
   rate swaps                                         16,740            (232,598)             13,838           (122,345)
  Reclassification adjustment for net
   (gains) loss included in net income                 1,066              (5,824)            (11,181)            (18,140)
                                        --------------------------------------------------------------------------------
  Other comprehensive (loss) income                 (182,707)             81,680            (509,301)           (309,848)
                                        --------------------------------------------------------------------------------
Comprehensive (loss) income                         $119,424            $189,967            $343,858           ($48,396)
                                        ================================================================================

See notes to consolidated financial statements.

                                       3



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

                                                                                         Other
                                                           Common       Additional     Accumulated
                                           Preferred        Stock         Paid-In     Comprehensive  Accumulated
                                             Stock        Par Value       Capital          Loss         Deficit         Total
                                        ------------------------------------------------------------------------------------------

BALANCE JANUARY 1, 2008                        $177,088         $4,018     $5,297,922     ($152,197)     ($121,893)     $5,204,938
  Net income                                          -              -              -              -        243,036        243,036
  Other comprehensive loss                            -              -              -      (183,617)              -      (183,617)
  Exercise of stock options                           -              2          1,633              -              -          1,635
  Stock option expense                                -              -            322              -              -            322
  Net proceeds from direct purchase and
   dividend reinvestment                              -             33         54,524              -              -         54,557
  Net proceeds from follow-on offerings               -            587      1,080,244              -              -      1,080,831
  Net proceeds from ATM programs                      -             44         71,788              -              -         71,832
  Conversion of Series B Cumulative
   Convertible Preferred Stock                        -              -             61              -              -             61
  Series A Cumulative Redeemable
   Preferred Stock dividends declared,
   $0.492188 per share                                -              -              -              -        (3,648)        (3,648)
  Series B Cumulative Convertible
   Preferred Stock dividends declared,
   $0.375 per share                                   -              -              -              -        (1,725)        (1,725)
  Common dividends declared, $0.48 per
   share                                              -              -              -              -      (224,823)      (224,823)
                                        ------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2008                         177,088          4,684      6,506,494      (335,814)      (109,053)      6,243,399
  Net income                                          -              -              -              -        307,992        307,992
  Other comprehensive loss                            -              -              -      (142,977)              -      (142,977)
  Exercise of stock options                           -              -            195              -              -            195
  Stock option expense                                -              -            517              -              -            517
  Net proceeds from direct purchase and
   dividend reinvestment                              -              9         16,481              -              -         16,490
  Net proceeds from follow-on offerings               -            690      1,066,028              -              -      1,066,718
  Conversion of Series B Cumulative
   Convertible Preferred Stock                        -              2          2,446              -              -          2,448
  Series A Cumulative Redeemable
   Preferred Stock dividends declared,
   $0.492188 per share                                -              -              -              -        (3,647)        (3,647)
  Series B Cumulative Convertible
   Preferred Stock dividends declared,
   $0.375 per share                                   -              -              -              -        (1,685)        (1,685)
  Common dividends declared, $0.55 per
   share                                              -              -              -              -      (296,201)      (296,201)
                                        ------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2008                          177,088          5,385      7,592,161      (478,791)      (102,594)      7,193,249
  Net income                                          -              -              -              -        302,131        302,131
  Other comprehensive loss                            -              -              -      (182,707)              -      (182,707)
  Exercise of stock options                           -              1            909              -              -            910
  Stock option expense                                -              -            846              -              -            846
  Net proceeds from direct purchase and
   dividend reinvestment                              -             16         22,612              -              -         22,628
  Series A Cumulative Redeemable
   Preferred Stock dividends declared,
   $0.492188 per share                                -              -              -              -        (3,648)        (3,648)
  Series B Cumulative Convertible
   Preferred Stock dividends declared,
   $0.375 per share                                   -              -              -              -        (1,687)        (1,687)
  Common dividends declared, $0.55 per
   share                                              -              -              -              -      (296,251)      (296,251)
                                        ------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2008                    $177,088         $5,402     $7,616,528     ($661,498)     ($102,049)     $7,035,471
                                        ==========================================================================================


See notes to consolidated financial statements.

                                       4



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

                                                            For the Quarter For the Quarter  For the Nine    For the Nine
                                                                 Ended           Ended        Months Ended    Months Ended
                                                             September 30,   September 30,   September 30,   September 30,
                                                                  2008            2007            2008            2007
                                                            ----------------------------------------------------------------
Cash flows from operating activities:
Net income                                                         $302,131        $108,287        $853,159        $261,452
Adjustments to reconcile net income to net cash provided
  by operating activities:
    Amortization of Mortgage Backed Securities premiums
     and discounts, net                                              18,709          16,895          72,836          49,001
    Amortization of intangibles                                         878             336           3,116           1,041
    Amortization of trading securities premiums and
     discounts                                                            -              (3)             (3)             (6)
    Loss (gain) on sale of Investment Securities                      1,066          (3,795)        (11,181)        (17,233)
    Gain on termination of interest rate swaps                            -          (2,029)              -          (2,096)
    Stock option and long-term compensation expense                     846             339           1,685           1,012
    Net realized gain on trading investments                         (5,448)         (1,596)        (12,579)         (2,612)
    Unrealized (appreciation) depreciation on trading
     investments                                                     (1,784)         (6,071)          2,994          (6,919)
    Loss on other-than-temporarily impaired securities               31,834               -          31,834           1,189
    Decrease (increase) in accrued interest receivable                2,689         (37,982)        (29,661)        (88,444)
    Decrease (increase) in other assets                                 614             120           1,941            (747)
    Purchase of trading securities                                   (1,033)              -         (13,049)        (13,562)
    Proceeds from sale of trading securities                         21,061           1,130          30,986          10,288
    Purchase of trading securities sold, not yet purchased          (16,258)         (4,854)        (22,290)        (16,636)
    Proceeds from securities sold, not yet purchased                  6,927           1,628          21,483          21,701
    Decrease in advisory and service fees receivable                  1,122              21              17             245
    Increase (decrease) in interest payable                          13,746          44,006         (89,247)         64,464
    (Decrease) Increase in accrued expenses and other
     liabilities                                                    (10,240)         10,717         (10,303)          6,421
                                                            ----------------------------------------------------------------
         Net cash provided by operating activities                  366,860         127,149         831,738         268,559
                                                            ----------------------------------------------------------------
Cash flows from investing activities:
  Purchase of Mortgage-Backed Securities                         (4,056,829)     (8,616,269)    (21,312,583)    (23,460,454)
  Proceeds from sale of Investment Securities                     3,160,959       1,190,908       8,819,213       4,059,787
  Principal payments of Mortgage-Backed Securities                1,761,680       1,701,529       7,091,400       5,328,833
  Purchase of agency debentures                                           -        (201,675)       (500,000)       (305,862)
  Proceeds from termination of swaps                                      -           2,029               -           2,096
  Purchase of reverse repurchase agreements                        (569,693)              -        (619,657)              -
                                                            ----------------------------------------------------------------
       Net cash provided by (used in) investing activities          296,117      (5,923,478)     (6,521,627)    (14,375,600)
                                                            ----------------------------------------------------------------
Cash flows from financing activities:
  Proceeds from repurchase agreements                           115,322,213     108,110,752     338,648,447     309,132,679
  Principal payments on repurchase agreements                  (116,086,118)   (103,064,495)   (333,619,249)   (296,506,587)
  Proceeds from exercise of stock options                               910              23           2,740             504
  Proceeds from direct purchase and dividend reinvestment            22,628          87,037          93,675         116,493
  Net proceeds from follow-on offerings                                   -         720,567       2,147,549       1,457,638
  Net proceeds from ATM programs                                          -          15,011          71,832          80,919
  Minority interest                                                       -          (4,294)         (1,573)         (3,995)
  Dividends paid                                                   (301,533)        (70,025)       (673,678)       (172,364)
                                                            ----------------------------------------------------------------
       Net cash (used in) provided by financing activities       (1,041,900)      5,794,576       6,669,743      14,105,287
                                                            ----------------------------------------------------------------
Net (decrease) increase in cash and cash equivalents               (378,923)         (1,753)        979,854          (1,754)

Cash and cash equivalents, beginning of period                    1,462,737          91,781         103,960          91,782
                                                            ----------------------------------------------------------------

Cash and cash equivalents, end of period                         $1,083,814         $90,028      $1,083,814         $90,028
                                                            ================================================================

Supplemental disclosure of cash flow information:
  Interest paid                                                    $444,504        $475,112      $1,527,353      $1,303,566
                                                            ================================================================
  Taxes paid                                                         $8,963          $2,557         $18,303          $7,138
                                                            ================================================================

Noncash financing activities:
  Net change in unrealized loss on available-for-sale
   securities and interest rate swaps, net of
   reclassification adjustment                                    ($182,707)        $81,680       ($509,301)      ($309,848)
                                                            ================================================================
  Dividends declared, not yet paid                                 $296,254         $85,932        $296,254         $85,932
                                                            ================================================================
Noncash investing activities:
  Receivable for Investment Securities Sold                      $2,446,342        $516,140      $2,446,342        $516,140
                                                            ================================================================
  Payable for Investment Securities Purchased                      $839,235      $1,169,324        $839,235      $1,169,324
                                                            ================================================================

See notes to consolidated financial statements.

                                       5


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

1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

     Annaly Capital Management, Inc. ("Annaly" or the "Company") was
incorporated in Maryland on November 25, 1996. The Company commenced its
operations of purchasing and managing an investment portfolio of mortgage-backed
securities on February 18, 1997, upon receipt of the net proceeds from the
private placement of equity capital, and completed its initial public offering
on October 14, 1997. The Company is a real estate investment trust ("REIT")
under the Internal Revenue Code of 1986, as amended. Fixed Income Discount
Advisory Company ("FIDAC") is a registered investment advisor and is a wholly
owned taxable REIT subsidiary of the Company. On June 27, 2006, the Company made
a majority equity investment in an affiliated investment fund (the "Fund"),
which is now wholly owned by the Company. The Company acquired approximately 3.6
million shares of common stock of Chimera Investment Corporation ("Chimera") for
approximately $54.3 million on November 21, 2007. Chimera is a 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 has
elected and intends to qualify to be taxed as a REIT for federal income tax
purposes. During the third quarter of 2008, the Company formed Ranger Capital
Corp. ("Ranger"). Ranger is in the final stages of the application process to
operate as a broker-dealer and is a wholly owned taxable REIT subsidiary.

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

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

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

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

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

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

     Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS 115"), requires the
Company to classify its Investment Securities as either trading investments,

                                       6


available-for-sale investments or held-to-maturity investments. Although the
Company generally intends to hold most of its Investment Securities until
maturity, it may, from time to time, sell any of its Investment Securities as
part of its overall management of its portfolio. Accordingly, the Company
classifies all of its Investment Securities as available-for-sale. All assets
classified as available-for-sale are reported at estimated fair value, based on
market prices from independent sources, with unrealized gains and losses
excluded from earnings and reported as a separate component of stockholders'
equity. The Company's investment in Chimera is accounted for as
available-for-sale equity securities under the provisions of SFAS 115.

     Management evaluates securities for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or market concerns
warrant such evaluation. Based on the guidance provided by EITF 03-1 and
Financial Accounting Standards Board ("FASB") Staff Position Nos. FAS 115-1 and
FAS 124-1 The Meaning of Other-Than-Temporary-Impairment and its Application to
Certain Investments, consideration is given to (1) the length of time and the
extent to which the fair value has been lower than carrying value, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent
and ability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value.
Unrealized losses on Investment Securities that are considered other than
temporary, as measured by the amount of decline in fair value attributable to
other-than-temporary factors, are recognized in income and the cost basis of the
Investment Securities is adjusted. For the quarter and nine months ended
September 30, 2008, there was a $31.8 million loss on other-than-temporarily
impaired securities. For the quarter ended September 30, 2007, there were no
losses on other-than-temporarily impaired securities. For the nine months ended
September 30, 2007, there was a $1.2 million loss on other-than-temporarily
impaired securities.

     SFAS No. 107, Disclosure About Fair Value of Financial Instruments,
requires disclosure of the fair value of financial instruments for which it is
practicable to estimate that value. The estimated fair value of Investment
Securities, available-for-sale equity securities, trading securities, trading
securities sold, not yet purchased, and interest rate swaps is equal to their
carrying value presented in the consolidated statements of financial condition.
The estimated fair value of cash and cash equivalents, reverse repurchase
agreements, accrued interest and dividends receivable, receivable for securities
sold, receivable for advisory and service fees, repurchase agreements with
maturities shorter than one year, payable for Investment Securities purchased,
dividends payable, accounts payable and other liabilities, and accrued interest
payable, generally approximates cost as of September 30, 2008 due to the short
term nature of these financial instruments. The estimated fair value of long
term structured repurchase agreements is reflected in the Footnote 6 to the
financial statements.

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

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

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

                                       7


     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.

     If it becomes probable that the forecasted transaction, which in this case
refers to interest payments to be made under the Company's short-term borrowing
agreements, will not occur by the end of the originally specified time period,
as documented at the inception of the hedging relationship, the related gain or
loss in accumulated other comprehensive income or loss would be reclassified to
income or loss.

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

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

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

                                       8


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

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

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

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

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

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

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

     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
5.8 year weighted average time period. During the quarters and nine months ended
September 30, 2008 and 2007, there were no impairment losses on goodwill and
intangible assets.

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

                                       9


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

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

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

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

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

     In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value and requires enhanced disclosures about fair value measurements. SFAS
157 requires companies to disclose the fair value of their financial instruments
according to a fair value hierarchy (i.e., levels 1, 2, and 3, as defined).

                                       10


Additionally, companies are required to provide enhanced disclosure regarding
instruments in the level 3 category (the valuation of which require significant
management judgment), including a reconciliation of the beginning and ending
balances separately for each major category of assets and liabilities. SFAS 157
was adopted by the Company on January 1, 2008. SFAS 157 did not have an impact
on the manner in which the Company estimates fair value, but it requires
additional disclosure, which is included in Note 5.

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


                                       11


2.   MORTGAGE-BACKED SECURITIES

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


                                                              
                                           Federal       Government
                          Federal Home     National       National    Total Mortgage-
                          Loan Mortgage    Mortgage       Mortgage        Backed
September 30, 2008         Corporation    Association    Association     Securities
                         ------------------------------------------------------------
                                            (dollars in thousands)
Mortgage-Backed
 Securities, gross           $21,310,660    $32,935,526       $307,940    $54,554,126
Unamortized discount            (26,964)       (32,373)        (1,099)       (60,436)
Unamortized premium              217,247        367,440          1,831        586,518
                         ------------------------------------------------------------
Amortized cost                21,500,943     33,270,593        308,672     55,080,208

Gross unrealized gains            88,058        129,198            454        217,710
Gross unrealized losses        (183,336)      (270,332)        (3,322)      (456,990)
                         ------------------------------------------------------------

Estimated fair value         $21,405,665    $33,129,459       $305,804    $54,840,928
                         ============================================================
                                            Gross          Gross
                                          Unrealized     Unrealized   Estimated Fair
                         Amortized Cost       Gain           Loss          Value
                         ------------------------------------------------------------
                                            (dollars in thousands)
Adjustable rate              $19,241,776       $106,312     ($242,346)    $19,105,742

Fixed rate                    35,838,432        111,398      (214,644)     35,735,186
                         ------------------------------------------------------------

Total                        $55,080,208       $217,710     ($456,990)    $54,840,928
                         ============================================================


                                           Federal       Government
                          Federal Home     National       National    Total Mortgage-
                          Loan Mortgage    Mortgage       Mortgage        Backed
December 31, 2007          Corporation    Association    Association     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          Gross
                                          Unrealized     Unrealized   Estimated Fair
                         Amortized Cost       Gain           Loss          Value
                         ------------------------------------------------------------
                                            (dollars in thousands)
Adjustable rate              $15,361,031        $96,310      ($76,853)    $15,380,488

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

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


                                       12


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


                                                                           
                                         September 30, 2008            December 31, 2007
       Weighted-Average Life         Fair Value   Amortized Cost   Fair Value   Amortized Cost
                                                      (dollars in thousands)
-----------------------------------------------------------------------------------------------
Less than one year                        $594,435       $602,139       $324,495       $326,754
Greater than one year and less than
 five years                             40,894,131     41,088,306     35,772,813     35,586,721
Greater than or equal to five years     13,352,362     13,389,763     16,782,220     16,728,257
                                   ------------------------------------------------------------

Total                                  $54,840,928    $55,080,208    $52,879,528    $52,641,732
                                   ============================================================


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

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


                                                                            
                                                  Unrealized Loss Position For:
                    ------------------------------------------------------------------------------------------
                         Less than 12 Months            12 Months or More                   Total
                    ------------------------------------------------------------------------------------------
                    Estimated Fair   Unrealized   Estimated Fair   Unrealized   Estimated Fair   Unrealized
                         Value          Losses         Value          Losses         Value          Losses
                    ------------------------------------------------------------------------------------------
                                                      (dollars in thousands)
September 30, 2008      $24,704,441     ($301,270)     $4,191,554     ($155,720)    $28,895,995     ($456,990)

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


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

     The adjustable rate Mortgage-Backed Securities are limited by periodic caps
(generally interest rate adjustments are limited to no more than 1% every nine
months) and lifetime caps. The weighted average lifetime cap was 10.0% at
September 30, 2008 and 9.9% at December 31, 2007.

     During the quarter and nine months ended September 30, 2008, the Company
realized $1.1 million in net losses from sales of Investment Securities and
$11.2 million in net gains from sales of Investment Securities, respectively.
During the quarter and nine months ended September 30, 2007, the Company
realized $3.8 million and $17.2 million in net gains from sales of Investment
Securities, respectively. For the quarter and nine months ended September 30,
2008 there were no losses on other-than-temporarily impaired Mortgage-Backed
Securities. For the nine months ended September 30, 2007 there was a $1.2
million loss on other-than-temporarily impaired Investment securities.

                                       13


3.   AVAILABLE FOR SALE EQUITY SECURITIES

     All of the available-for-sale equity securities are shares of Chimera and
are reported at fair value. The Company purchased 3.6 million shares of Chimera
for $54.3 million in November 2007. Consistent with the decline of the stock
market and the market for non-Agency Mortgage-Backed Securities, the fair value
of the Company's investment in Chimera decreased significantly to $22.5 million
at September 30, 2008.

     Although the Company has the intent and ability to retain the investment in
Chimera indefinitely, allowing time for the shares of Chimera to recoup their
value, the Company determined based on the FSP FAS-115 that an
other-than-temporarily impaired charge of $31.8 million was appropriate and is
reflected in the income statement for the quarter ended of September 30, 2008.
This determination is based on the extent of the decline in value of the Chimera
shares combined with the current state of the mortgage and credit markets.

4.   REVERSE REPURCHASE AGREEMENT

     At September 30, 2008, the Company had lent $619.7 million to Chimera in an
overnight reverse repurchase agreement. This amount is included at fair value in
the Company's Statement of Financial Condition. The interest rate at September
30, 2008 was 8.375%. The average rate for the quarter was 3.48%. The collateral
for this loan is non-Agency mortgage-backed securities. The estimated fair
market value of the collateral pledged for the reverse repurchase agreement was
$727.7 million.

5.   FAIR VALUE MEASUREMENTS

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

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

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

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

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

                                       14


                                       Level 1        Level 2        Level 3
                                              (dollars in thousands)
--------------------------------------------------------------------------------
Assets:
  Mortgage-Backed Securities                     -    $54,840,928              -
  Agency debentures                              -        618,352              -
  Available for sale equity
   securities                              $22,490              -              -
  Trading securities                         2,199              -              -

Liabilities:
  Trading securities sold, not yet
   purchased                                30,903              -              -
  Interest rate swaps                            -        384,258              -


     The classification of assets and liabilities by level remains unchanged at
September 30, 2008, when compared to the previous quarter.

6.   REPURCHASE AGREEMENTS

     The Company had outstanding $51.1 billion and $46.0 billion of repurchase
agreements with weighted average borrowing rates of 3.59% and 4.76%, after
giving effect to the Company's interest rate swaps, and weighted average
remaining maturities of 222 days and 234 days as of September 30, 2008 and
December 31, 2007, respectively. Investment Securities pledged as collateral
under these repurchase agreements and interest rate swaps had an estimated fair
value of $54.6 billion at September 30, 2008 and $48.3 billion at December 31,
2007.

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

                    September 30,   December 31,
                          2008           2007
                        (dollars in thousands)
                    ------------------------------
Within 30 days          $40,824,303    $34,940,600
30 to 59 days             1,501,455      4,005,960
60 to 89 days                     -        300,000
90 to 119 days              400,000              -
Over 120 days             8,350,000      6,800,000
                    ------------------------------
Total                   $51,075,758    $46,046,560
                    ==============================

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

     The Company has entered into repurchase agreements which provide the
counterparty with the right to call the balance prior to maturity date. These
repurchase agreements totaled $7.9 billion and the fair value of the option to
call was ($169.4 million) at September 30, 2008. The repurchase agreements
totaled $6.4 billion and the market value of the option to call was ($176.7
million) at December 31, 2007. Management has determined that the call option is
not required to be bifurcated under the provisions of SFAS 133 as it is deemed
clearly and closely related to the debt instrument, therefore the option value
is not recorded in the consolidated financial statements.

7.   INTEREST RATE SWAPS

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

                                       15


     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 September 30, 2008 and December 31, 2007.

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

September 30, 2008      $18,361,200          4.70%          2.69%     ($384,258)

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

8.   PREFERRED STOCK AND COMMON STOCK

     (A) Common Stock Issuances

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

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

     During the quarter and nine months ended September 30, 2008, the Company
raised $22.6 million and $93.7 million by issuing 1.5 and 5.8 million shares,
respectively, through the Direct Purchase and Dividend Reinvestment Program.

     During the quarter and nine months ended September 30, 2008, 102,625 and
289,842 options were exercised under the Long-Term Stock Incentive Plan, or
Incentive Plan, for an aggregate exercise price of $910,000 and $2.7 million,
respectively.

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

     (B) Preferred Stock

     At September 30, 2008, the Company had issued and outstanding 7,412,500
shares of Series A Cumulative Redeemable Preferred Stock ("Series A Preferred
Stock"), with a par value $0.01 per share and a liquidation preference of $25.00
per share plus accrued and unpaid dividends (whether or not declared). The
Series A Preferred Stock must be paid a dividend at a rate of 7.875% per year on
the $25.00 liquidation preference before the common stock is entitled to receive
any dividends. The Series A Preferred Stock is redeemable at $25.00 per share
plus accrued and unpaid dividends (whether or not declared) exclusively at the
Company's option commencing on April 5, 2009 (subject to the Company's right
under limited circumstances to redeem the Series A Preferred Stock earlier in
order to preserve its qualification as a REIT). The Series A Preferred Stock is
senior to the Company's common stock and is on parity with the Series B

                                       16


Preferred Stock with respect to dividends and distributions, including
distributions upon liquidation, dissolution or winding up. The Series A
Preferred Stock generally does not have any voting rights, except if the Company
fails to pay dividends on the Series A Preferred Stock for six or more quarterly
periods (whether or not consecutive). Under such circumstances, the Series A
Preferred Stock, together with the Series B Preferred Stock, will be entitled to
vote to elect two additional directors to the Board, until all unpaid dividends
have been paid or declared and set apart for payment. In addition, certain
material and adverse changes to the terms of the Series A Preferred Stock cannot
be made without the affirmative vote of holders of at least two-thirds of the
outstanding shares of Series A Preferred Stock and Series B Preferred Stock.
Through September 30, 2008, the Company had declared and paid all required
quarterly dividends on the Series A Preferred Stock.

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

     The Series B Preferred Stock is not redeemable. The Series B Preferred
Stock is convertible into shares of common stock at a conversion rate that
adjusts from time to time upon the occurrence of certain events, including if
the Company distributes to its common shareholders in any calendar quarter cash
dividends in excess of $0.11 per share. Initially, the conversion rate was
1.7730 shares of common shares per $25 liquidation preference. At September 30,
2008, the conversion ratio was 2.0125 shares of common stock per $25 liquidation
preference. Commencing April 5, 2011, the Company has the right in certain
circumstances to convert each Series B Preferred Stock into a number of common
shares based upon the then prevailing conversion rate. The Series B Preferred
Stock is also convertible into common shares at the option of the Series B
preferred shareholder at anytime at the then prevailing conversion rate. The
Series B Preferred Stock is senior to the Company's common stock and is on
parity with the Series A Preferred Stock with respect to dividends and
distributions, including distributions upon liquidation, dissolution or winding
up. The Series B Preferred Stock generally does not have any voting rights,
except if the Company fails to pay dividends on the Series B Preferred Stock for
six or more quarterly periods (whether or not consecutive). Under such
circumstances, the Series B Preferred Stock, together with the Series A
Preferred Stock, will be entitled to vote to elect two additional directors to
the Board, until all unpaid dividends have been paid or declared and set apart
for payment. In addition, certain material and adverse changes to the terms of
the Series B Preferred Stock cannot be made without the affirmative vote of
holders of at least two-thirds of the outstanding shares of Series B Preferred
Stock and Series A Preferred Stock. Through September 30, 2008, the Company had
declared and paid all required quarterly dividends on the Series B Preferred
Stock. During the quarter ended September 30, 2008, no Series B Preferred Stock
were converted. During the nine months ended September 30, 2008, 103,475 shares
of Series B Preferred Stock were converted into 196,751 shares of common stock.

     (C) Distributions to Shareholders

     During the quarter ended September 30, 2008, the Company declared dividends
to common shareholders totaling $296.3 million or $0.55 per share, which were
paid to shareholders on October 29, 2008. During the quarter ended September 30,
2008, the Company declared dividends to Series A Preferred shareholders totaling
approximately $3.6 million or $0.492188 per share, and Series B shareholders
totaling approximately $1.7 million or $0.375 per share, which were paid to
shareholders on September 30, 2008.

9.   NET INCOME PER COMMON SHARE

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


                                                                                
                                            For the Quarters Ended      For the Nine Months Ended
                                                September 30,                  September 30,
                                        ------------------------------------------------------------
                                             2008           2007           2008           2007
                                                           (dollars in thousands)
                                        ------------------------------------------------------------
Net income                                     $302,131       $108,287       $853,159       $261,452
Less: Preferred stock dividends                   5,335          5,373         16,042         16,119
                                        ------------------------------------------------------------
Net income available to common
 shareholders, prior to adjustment for
 Series B dividends, if necessary              $296,796       $102,914       $837,117       $245,333
Add: Preferred Series B dividends, if
 Series B shares are dilutive                     1,686          1,725          5,097          5,175
                                        ------------------------------------------------------------
Net income, as adjusted                        $298,482       $104,639       $842,214       $250,508
                                        ============================================================

Weighted average shares of common stock
outstanding-basic                               538,706        315,970        495,584        266,511

Add: Effect of dilutive stock options
 and Series B Cumulative Convertible
 Preferred Stock                                  9,176          8,645          9,025          8,636
                                        ------------------------------------------------------------
Weighted average shares of common
stock outstanding-diluted                       547,882        324,615       $504,609        275,147
                                        ============================================================


                                       17


     Options to purchase 4.5 million and 1.8 million shares of common stock,
respectively, were outstanding and considered anti-dilutive as their exercise
price exceeded the average stock price for the quarter and nine months ended
September 30, 2008. Options to purchase 2.5 million shares of common stock were
outstanding and considered anti-dilutive as their exercise price exceeded the
average stock price for the quarter and nine months ended September 30, 2007.

10.  LONG-TERM STOCK INCENTIVE PLAN

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


                                                                                     
                                                   For the nine months ended September 30,
                                                     2008                           2007
                                        --------------------------------------------------------------
                                                           Weighted                       Weighted
                                                            Average       Number of        Average
                                        Number of Shares Exercise Price     Shares     Exercise Price
                                        --------------------------------------------------------------
Options outstanding at the beginning of
 period                                       3,437,267          $15.23      2,984,995          $15.10
Granted                                       2,043,700           16.02        687,250           15.69
Exercised                                      (289,842)           9.45        (49,238)          10.25
Forfeited                                        (2,550)          15.84       (174,240)          16.64
Expired                                          (5,010)          20.70         (5,000)          20.35
                                        --------------------------------------------------------------
Options outstanding at the end of period      5,183,565          $15.86      3,443,767          $15.23
                                        ==============================================================
Options exercisable at the end of the
 period                                       2,123,365          $16.35      1,292,504          $14.98
                                        ==============================================================


     The weighted average remaining contractual term was approximately 7.8 years
for stock options outstanding and approximately 5.9 years for stock options
exercisable as of September 30, 2008. The weighted average remaining contractual
term was approximately 7.2 years for stock options outstanding and approximately
5.6 years for stock options exercisable as of September 30, 2007. As of
September 30, 2008, there was approximately $10.1 million of total unrecognized
compensation cost related to nonvested share-based compensation awards. That
cost is expected to be recognized over a weighted average period of 3.8 years.

                                       18


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

11.  INCOME TAXES

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

     During the quarter and nine months ended September 30, 2008, FIDAC recorded
$1.7 million and $3.3 million, respectively, of income tax expense for income
attributable to FIDAC, and the portion of earnings retained based on Code
Section 162(m) limitations. During the quarter and nine months ended September
30, 2008, Annaly recorded $5.8 million and $16.4 million, respectively, of
income tax expense for a portion of earnings retained based on Section 162(m)
limitations. The effective tax rate was 53% for the quarter ended September 30,
2008.

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

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

12.  LEASE COMMITMENTS AND CONTINGENCIES

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

                                                    Total per Year
                                                  (dollars in thousands)
                2008 (remainder)                                $133
                2009                                             532
                                                 ------------------------
                Total remaining lease payments                  $665
                                                 ========================

     From time to time, the Company is involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
effect on the Company's consolidated financial statements and therefore no
accrual is required as of September 30, 2008.

13.  INTEREST RATE RISK

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

                                       19


     The Company seeks to manage the extent to which net income changes as a
function of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. The Company may seek to mitigate the potential impact
on net income of periodic and lifetime coupon adjustment restrictions in the
portfolio of Investment Securities by entering into interest rate agreements
such as interest rate caps and interest rate swaps. As of September 30, 2008,
the Company entered into interest rate swaps to pay a fixed rate and receive a
floating rate of interest, with a total notional amount of $18.4 billion.

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

14.  RELATED PARTY TRANSACTIONS

     In March 2008, the Company entered into a master repurchase agreement with
Chimera. This agreement contains customary representations, warranties and
covenants contained in such agreements. As of September 30, 2008, Chimera owed
the Company $619.7 million under this master repurchase agreement, with a term
of one day, which is reflected in the Company's balance sheet as an asset. The
interest rate at September 30, 2008 was 8.375%. The average rate for the quarter
was 3.48%. The loan to Chimera is collateralized by s non-Agency mortgage-backed
securities.

15.  SUBSEQUENT EVENTS

     The Company consummated the acquisition of Merganser Capital Management LP
("Merganser") on October 31, 2008. Merganser is a Boston-based institutional
fixed-income manager which, at September 30, 2008, had $4.6 billion in assets
under management. Merganser is a wholly-owned taxable REIT subsidiary of the
Company.

     The Company acquired approximately 11.7 million shares of common stock of
Chimera for approximately $26.3 million in connection with Chimera's secondary
offering on October 29, 2008.

     As discussed in Notes 7 and 13, until the fourth quarter of 2008, the
Company designated interest rate swaps as cash flow hedges, whereby the swaps
were recorded at fair value on the balance sheet as assets and liabilities with
any changes in fair value recorded in other comprehensive income (OCI). In a
cash flow hedge, a swap would exactly match the pricing date of relevant
repurchase agreement. However, due to the volatility of the credit markets, it
is not always practical to match the pricing dates of both the swaps and the
repurchase agreements.

     As a result, the Company discontinued hedge accounting in the fourth
quarter of 2008 through a combination of de-designating previously defined hedge
relationships and not designating new contracts as cash flow hedges. The
de-designation of cash flow hedges was done in accordance with Derivatives
Implementation Group (DIG) Issue No. G3, which generally requires that the net
gain or loss related to the discontinued cash flow hedge continue to be reported
in OCI. Therefore, the deferred losses related to these derivatives that have
been de-designated remain in OCI at September 30, 2008 and are expected to be
reclassified into earnings during the contractual terms of the swap agreements.
Changes in unrealized gains or losses on interest rate swaps subsequent to
September 30, 2008 will be reflected in the Company's income statement.

     The Company still considers the use of interest rate swaps beneficial and
therefore it continues to use interest rate swaps to lock in funding cost of its
assets. The Company uses interest rate swaps primarily as an economic hedge
against increased funding cost risk, but without the application of hedge
accounting for financial reporting purposes. For income tax purposes, the
Company will continue to hedge liabilities with interest rate swaps.

                                       20


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

Special Note Regarding Forward-Looking Statements

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

Overview

     We are a REIT that owns and manages a portfolio of mortgage-backed
securities. Our principal business objective is to generate net income for
distribution to our stockholders from the spread between the interest income on
our investment securities and the costs of borrowing to finance our acquisition
of investment securities and from dividends we receive from FIDAC. FIDAC is our
wholly-owned taxable REIT subsidiary, and is a registered investment advisor
that generates advisory and service fee income. We acquired approximately 3.6
million shares of common stock of Chimera, 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 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 has elected and
intends to qualify to be taxed as a REIT for federal income tax purposes. We
also own 100% of an investment fund. During the third quarter of 2008, the
Company formed Ranger. Ranger is in the final stages of the application process
to operate as a broker-dealer and is a wholly owned taxable REIT subsidiary.

     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.

                                       21


     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, all of which involve various risks and uncertainties.
Prepayment speeds, as reflected by the Constant Prepayment Rate ("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 Investment Securities
portfolio averaged 11% and 14% for the quarters ended September 30, 2008 and
2007, respectively. Since changes in interest rates may significantly affect our
activities, our operating results depend, in large part, upon our ability to
effectively manage interest rate risks and prepayment risks while maintaining
our status as a REIT.

     The current situation in the 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 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 by FHLMC, FNMA, or GNMA.

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


                                       22



                                                                                     
                                                       Yield on
                                  Average               Average      Average                                     Net
                                 Interest      Total    Interest   Balance of              Average     Net     Interest
                               Earning Assets Interest  Earning    Repurchase   Interest   Cost of   Interest    Rate
                                 Held (1)      Income    Assets     Agreements    Expense    Funds    Income    Spread
------------------------------------------------------------------------------------------------------------------------
Quarter Ended
September 30, 2008                $57,694,277  $810,659     5.62%    $51,740,645  $458,250     3.54%  $352,409     2.08%
Quarter Ended
June 30, 2008                     $56,197,550  $773,359     5.50%    $50,359,825  $442,251     3.51%  $331,108     1.99%
Quarter Ended
March 31, 2008                    $56,119,584  $791,128     5.64%    $51,399,101  $537,606     4.18%  $253,522     1.46%
------------------------------------------------------------------------------------------------------------------------
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
-------------                          ---
September 30, 2008                     11%
June 30, 2008                          16%
March 31, 2008                         15%
December 31, 2007                      12%
September 30, 2007                     14%


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

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

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

Critical Accounting Policies

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

     Valuation of Investment Securities: All assets classified as
available-for-sale are reported at fair value, based on market prices. Although
we generally intend to hold most of our Investment Securities until maturity, we
may, from time to time, sell any of our Investment Securities as part our
overall management of our portfolio. Accordingly, we are required to classify
all of our Investment Securities as available-for-sale. Our policy is to obtain
market values from independent sources. Management evaluates securities for

                                       23


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.

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

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

Recent Accounting Pronouncements

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

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

                                       24


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

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

     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
was adopted by us on January 1, 2008. SFAS 157 did not have an impact on the
manner in which we estimate fair value, but it requires additional disclosures.

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

     Pursuant to Section 133 of the recently enacted Emergency Economic
Stabilization Act of 2008 ("the Act"), the Securities and Exchange Commission
(SEC) has commenced a study of the impact of the fair value or "mark-to-market"
accounting standards, including, but not limited to: (1) the effects of such
accounting standards on a financial institution's balance sheet; (2) the impacts
of such accounting on bank failures in 2008; (3) the impact of such standards on
the quality of financial information available to investors; (4) the process

                                       25


used by the Financial Accounting Standards Board in developing accounting
standards; (5) the advisability and feasibility of modification to such
standards; and (6) alternative accounting standards to those provided in SFAS
157. The study, which is being conducted in consultation with the Secretary of
the Treasury and the Board of Governors of the Federal Reserve System, is
expected to be completed before the end of the 90-day period beginning on the
date of the enactment of this Act, which is October 3, 2008..

Results of Operations: For the Quarters and Nine Months Ended September 30, 2008
and 2007

     Net Income Summary

     For the quarter ended September 30, 2008, our net income was $302.1 million
or $0.55 basic income per share related to common shareholders, as compared to
$108.3 million or $0.33 basic net income per share for the quarter ended
September 30, 2007. Net income per share increased by $0.22 per share available
to common shareholders and net income increased $193.8 million for the quarter
ended September 30, 2008, when compared to the quarter ended September 30, 2007.
We attribute the increase in total net income for the quarter ended September
30, 2008 from the quarter ended September 30, 2007 to an increase in net
interest income, resulting from the increased asset base, and the increase in
interest rate spread. Net interest income increased by $242.8 million for the
quarter ended September 30, 2008, as compared to the quarter ended September 30,
2007.

     For the nine months ended September 30, 2008, our net income was $853.2
million, or $1.69 net income per share available to common shareholders, as
compared to net income of $261.5 million, or $0.92 net income per share
available to common shareholders, for the nine months ended September 30, 2007.
We attribute the majority of the increase in net income for the nine months
ended September 30, 2008 from the nine months ended September 30, 2007 to the
increase in our asset base and the increase in net interest spread. For the nine
months ended September 30, 2008, net interest income was $937.0 million, as
compared to $266.5 million for the nine months ended September 30, 2007.


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


                                                                                                     
                                                                Quarter         Quarter       Nine Months     Nine Months
                                                                 Ended           Ended            Ended           Ended
                                                             September 30,   September 30,   September 30,   September 30,
                                                                  2008            2007            2008            2007
                                                            ----------------------------------------------------------------
Interest income                                                    $810,659        $628,696      $2,375,146      $1,634,522
Interest expense                                                    458,250         519,118       1,438,107       1,368,030
                                                            ----------------------------------------------------------------
Net interest income                                                 352,409         109,578         937,039         266,492
                                                            ----------------------------------------------------------------
Other (loss) income:
  Investment advisory and service fees                                7,663           5,464          20,667          16,392
  (Loss) Gain on sale of investment securities                       (1,066)          3,795          11,181          17,233
  Gain on termination of interest rate swaps                              -           2,029               -           2,096
  Income from trading securities                                      7,671           8,288          11,705          11,960
  Dividend income from available-for-sale
equity securities                                                       580               -           2,101               -
  Loss on other-than-temporarily impaired
securities                                                          (31,834)              -         (31,834)         (1,189)
                                                            ----------------------------------------------------------------
     Total other (loss) income                                      (16,986)         19,576          13,820          46,492
                                                            ----------------------------------------------------------------
Expenses:
  Distribution fees                                                     299           1,100           1,302           2,865
  General and administrative expenses                                25,455          17,334          76,665          42,492
                                                            ----------------------------------------------------------------
     Total expenses                                                  25,754          18,434          77,967          45,357
                                                            ----------------------------------------------------------------
Income before income taxes and minority
interest                                                            309,669         110,720         872,892         267,627
Income taxes                                                          7,538           2,327          19,675           5,770
                                                            ----------------------------------------------------------------
Income before minority interest                                     302,131         108,393         853,217         261,857
Minority interest                                                         -             106              58             405
                                                            ----------------------------------------------------------------
Net Income                                                          302,131         108,287         853,159         261,452
Dividends on preferred stock                                          5,335           5,373          16,042          16,119
                                                            ----------------------------------------------------------------
Net income available to common
shareholders                                                       $296,796        $102,914        $837,117        $245,333
                                                            ================================================================

Weighted average number of basic common
shares outstanding                                              538,706,131     315,969,814     495,583,506     266,510,879
Weighted average number of diluted common
shares outstanding                                              547,882,488     324,614,534     504,609,331     275,146,595

Basic net income per common share                                     $0.55           $0.33           $1.69           $0.92
Diluted net income per common share                                   $0.54           $0.32           $1.67           $0.91

Average total assets                                            $60,724,859     $42,485,071     $58,776,231     $38,817,661
Average equity                                                   $7,223,317      $3,582,578      $6,529,460      $3,309,425

Return on average total assets                                         1.99%           1.02%           1.90%           0.90%
Return on average equity                                              16.73%          12.09%          17.42%          10.53%


                                       26


     Interest Income and Average Earning Asset Yield

     We had average earning assets of $57.7 billion for the quarter ended
September 30, 2008 and $43.1 billion for the quarter ended September 30, 2007.
Our interest income was $810.7 million for the quarter ended September 30, 2008,
and $628.7 million for the quarter ended September 30, 2007. The yield on
average Investment Securities was 5.62% and 5.84% for the quarters ended
September 30, 2008 and 2007, respectively. The prepayment speeds decreased to an
average of 11% CPR for the quarter ended September 30, 2008 from an average of
14% CPR for the quarter ended September 30, 2007. Even though the yield on
assets declined by 0.22%, the total interest income increased by $182.0 million,
primarily due to the increase in average earning assets.

     We had average earning assets of $56.7 billion and $37.9 billion for the
nine months ended September 30, 2008 and 2007, respectively. Our interest income
was $2.4 billion for the nine months ended September 30, 2008 and $1.6 billion
for the nine months ended September 30, 2007. The yield on average Investment
Securities decreased from 5.76% for the nine months ended September 30, 2007 to
5.59% for the nine months ended September 30, 2008. Our average earning asset
balance increased by $18.8 billion and interest income increased by $740.6
million for the nine months ended September 30, 2008 as compared to the nine
months ended September 30, 2007. Even though yield on assets declined by 0.17%,
the increase in interest income for the nine months ended September 30, 2008,
when compared to the nine months ended September 30, 2007, resulted from the
increased asset base.

     Interest Expense and the Cost of Funds

     Our largest expense is the cost of borrowed funds. We had average borrowed
funds of $51.7 billion and total interest expense of $458.3 million for the
quarter ended September 30, 2008. We had average borrowed funds of $40.2 billion
and total interest expense of $519.1 million for the quarter ended September 30,
2007. Our average cost of funds was 3.54% for the quarter ended September 30,
2008 and 5.17% for the quarter ended September 30, 2007. The cost of funds rate
decreased by 163 basis points and the average borrowed funds increased by $11.5
billion for the quarter ended September 30, 2008 when compared to the quarter
ended September 30, 2007. Interest expense for the quarter ended September 30,
2008 decreased by $60.8 million due to the decline in the cost of funding. We
had average borrowed funds of $51.2 billion and interest expense of $1.4 billion
for the nine months ended September 30, 2008. We had average borrowed funds of
$35.5 billion and interest expense of $1.4 billion for the nine months ended
September 30, 2007. Our average cost of funds was 3.75% for the nine months
ended September 30, 2008 and 5.17% for the nine months ended September 30, 2007.
Even though the average cost of funds decreased by 1.42%, interest expense
increased by $70.1 million because the average borrowed funds increased by $15.7
billion.

                                       27


     Since the majority of our repurchase agreements are short term, changes in
market rates are directly reflected in our interest expense. In addition to
short term financing, we have entered into longer term repurchase agreements
which provide the counterparty with the right to call the balance prior to
maturity date. Our average cost of funds was 0.92% above average one-month LIBOR
and 0.35% above average six-month LIBOR for the quarter ended September 30,
2008. Our average cost of funds was 0.20% below average one-month LIBOR and
0.14% below average six-month LIBOR for the quarter ended September 30, 2007.
Our cost of funds, when compared to six-month LIBOR and one-month LIBOR,
increased in the third quarter of 2008 because, in addition to short term
financing, we have entered into longer term repurchase agreements which
typically have a higher cost of funds.

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


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

                                                                                                                       Average
                                                                                         Average                       Cost of
                                                                                     One-Month LIBORAverage Cost of     Funds
                                                        Average   Average   Average    Relative to   Funds Relative Relative to
                            Average        Interest       Cost    One-Month Six-Month  Average Six-    to Average      Average
                          Borrowed Funds    Expense     of Funds    LIBOR     LIBOR    Month LIBOR  One-Month LIBORSix-Month LIBOR
                         ---------------------------------------------------------------------------------------------------------
For the Quarter Ended
September 30, 2008           $51,740,645       $458,250     3.54%     2.62%     3.19%        (0.57%)          0.92%         0.35%
For the Quarter Ended
June 30, 2008                $50,359,825       $442,251     3.51%     2.59%     2.93%        (0.34%)          0.92%         0.58%
For the Quarter Ended
March 31, 2008               $51,399,101       $537,606     4.18%     3.31%     3.18%         0.13%           0.87%         1.00%
----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 2007            $37,967,215     $1,926,465     5.07%     5.19%     5.19%        (0.00%)        (0.12%)        (0.12%)
For the Quarter Ended
December 31, 2007            $45,272,782       $558,435     4.93%     4.86%     4.85%         0.01%          0.07%          0.08%
For the Quarter Ended
September 30, 2007           $40,201,513       $519,118     5.17%     5.37%     5.31%         0.07%         (0.20%)        (0.14%)
For the Quarter Ended
June 30, 2007                $36,560,359       $468,748     5.13%     5.32%     5.37%        (0.05%)        (0.19%)        (0.24%)
For the Quarter Ended
March 31, 2007               $29,834,208       $380,164     5.10%     5.26%     5.30%        (0.04%)        (0.16%)        (0.20%)


     Net Interest Income

     Our net interest income, which equals interest income less interest
expense, totaled $352.4 million for the quarter ended September 30, 2008, and
$109.6 million for the quarter ended September 30, 2007. Our net interest income
increased for the quarter ended September 30, 2008, as compared to the quarter
ended September 30, 2007, because of the increased average earning assets and
the increased interest rate spread. Our net interest rate spread, which equals
the average yield for the period less the average cost of funds for the period,
was 2.08% for the quarter ended September 30, 2008 as compared to 0.67% for the
quarter ended September 30, 2007. This 141 basis point increase in interest rate
spread was the result in the decrease cost of funds of 163 basis points,
partially offset by a decrease in the average yield of 22 basis points.

     Our net interest income totaled $937.0 million for the nine months ended
September 30, 2008 and $266.5 million for the nine months ended September 30,
2007. Our net interest income increased because of the increase in interest rate
spread. Our net interest rate spread, which equals the average for the period
less the average cost of funds for the period, was 1.84% for the nine months
ended September 30, 2008 as compared to 0.62% for the nine months ended
September 30, 2007.

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

                                       28

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


                                                                                               
                                                       Yield on
                                                        Average                                                          Net
                             Average                    Interest Average Balance           Average                    Interest
                            Interest    Total Interest  Earning   of Repurchase  Interest   Cost of   Net Interest       Rate
                          Earning Assets     Income      Assets     Agreements     Expense    Funds       Income        Spread
                         ----------------------------------------------------------------------------------------------------------
For the Quarter Ended
September 30, 2008           $57,694,277       $810,659     5.62%    $51,740,645   $458,250     3.54%       $352,409          2.08%
For the Quarter Ended
June 30, 2008                $56,197,550       $773,359     5.50%    $50,359,825   $442,251     3.51%       $331,108          1.99%
For the Quarter Ended
March 31, 2008               $56,119,584       $791,128     5.64%    $51,399,101   $537,606     4.18%       $253,522          1.46%
----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 2007            $40,800,148     $2,355,447     5.77%    $37,967,215 $1,926,465     5.07%       $428,982          0.70%
For the Quarter Ended
December 31, 2007            $49,619,857       $720,925     5.81%    $45,272,782   $558,435     4.93%       $162,490          0.88%
 For the Quarter Ended
September 30, 2007           $43,075,489       $628,696     5.84%    $40,201,513   $519,118     5.17%       $109,578          0.67%
For the Quarter Ended
June 30, 2007                $38,822,274       $556,262     5.73%    $36,560,359   $468,748     5.13%        $87,514          0.60%
For the Quarter Ended
March 31, 2007               $31,682,974       $449,564     5.68%    $29,834,208   $380,164     5.10%        $69,400          0.58%


     Investment Advisory and Service Fees

     FIDAC is a registered investment advisor which specializes in managing
fixed income securities. FIDAC generally receives annual net investment advisory
fees on the gross assets it manages, assists in managing or supervises. FIDAC
expanded its line of business in 2007 to manage Chimera. At September 30, 2008,
FIDAC had under management approximately $2.4 billion in net assets and $10.5
billion in gross assets, compared to $2.5 billion in net assets and $13.9
billion in gross assets at September 30, 2007. Net investment advisory and
service fees for the quarters ended September 30, 2008 and 2007 totaled $7.4
million and $4.4 million, respectively, net of fees paid to third parties
pursuant to distribution service agreements for facilitating and promoting
distribution of shares or units to FIDAC's clients. Gross assets under
management will vary from time to time because of changes in the amount of net
assets FIDAC manages as well as changes in the amount of leverage used by the
various funds and accounts FIDAC manages.

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

     For the quarter ended September 30, 2008, we sold Investment Securities
with a carrying value of $4.8 billion for an aggregate loss of $1.1 million. For
the quarter ended September 30, 2007, we sold Investment Securities with a
carrying value of $1.7 billion for an aggregate gain of $3.8 million. We do not
expect to sell assets on a frequent basis, but may from time to time sell
existing assets to move into new assets, which our management believes might
have higher risk-adjusted returns, or to manage our balance sheet as part of our
asset/liability management strategy.

     For the nine months ended September 30, 2008, we sold Investment Securities
with a carrying value of $11.0 billion for an aggregate gain of $11.2 million.
For the nine months ended September 30, 2007, we sold Investment Securities with
an aggregate historical amortized cost of $4.4 billion for an aggregate gain of
$17.2 million and terminated interest rates swap agreements with a notional
amount of $900 million for a gain of $2.1 million. The difference between the
sale price and the carrying value of our Mortgage-Backed Securities will be a
realized gain or a realized loss, and will increase or decrease income
accordingly.

     Income from Trading Securities

     Gross income from trading securities held by our investment fund, which is
a combination of interest, dividends, and realized and unrealized gains and
losses, totaled $7.7 million for the quarter ended September 30, 2008 and $11.7
million for the nine months ended September 30, 2008. Gross income from trading
securities totaled $8.3 million for the quarter ended September 30, 2007 and
$12.0 million for the nine months ended September 30, 2007.

                                       29


     Dividend Income from Available-For-Sale Equity Securities

     We owned approximately 3.6 million shares of common stock of Chimera at
September 30, 2008. The investment in Chimera is accounted for as
available-for-sale equity securities.

     Dividend income from available-for-sale equity securities totaled $580,000
for the quarter ended September 30, 2008, and $2.1 million for the nine months
ended September 30, 2008. For the quarter and nine months ended September 30,
2007 we did not have an investment in available-for-sale equity securities.

     Loss on Other-Than-Temporarily Impaired Securities

     At each quarter end, we review each of our securities to determine if an
other-than-temporary impairment charge would be necessary. We will take these
charges if we determine that we do not intend to hold securities that were in an
unrealized loss position for a period of time, to maturity if necessary,
sufficient for a forecasted market price recovery up to or beyond the cost of
the investments. For the quarter and nine months ended September 30, 2008 there
was a loss of approximately $31.8 million on other-than-temporarily impaired
securities. For the quarter ended September 30, 2007 there were no losses on
other-than-temporarily impaired securities and for the nine months ended
September 30, 2007 the loss on other-than temporarily impaired securities
totaled $1.2 million.

     General and Administrative Expenses

     General and administrative (or G&A) expenses were $25.5 million for the
quarter ended September 30, 2008, and $17.3 million for the quarter ended
September 30, 2007. G&A expenses as a percentage of average total assets was
0.17% and 0.16% for the quarters ended September 30, 2008 and 2007,
respectively. G&A expenses were $76.7 million for the nine months ended
September 30, 2008, and $42.5 million for the nine months ended September 30,
2007. The increase in G&A expenses of $8.1 million and $34.2 million for the
quarter and nine months ended September 30, 2008, respectively, was primarily
the result of increased compensation.

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


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

                                                                 Total G&A           Total G&A
                                                              Expenses/Average    Expenses/Average
                                         Total G&A Expenses        Assets              Equity
                                        ------------------------------------------------------------
For the Quarter Ended September 30, 2008      $25,455              0.17%               1.40%
For the Quarter Ended June 30, 2008           $27,215              0.18%               1.59%
For the Quarter Ended March 31, 2008          $23,995              0.17%               1.64%
----------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2007          $62,666              0.15%               1.69%
For the Quarter Ended December 31, 2007       $20,174              0.16%               1.72%
For the Quarter Ended September 30, 2007      $17,334              0.16%               1.94%
For the Quarter Ended June 30, 2007           $12,272              0.12%               1.50%
For the Quarter Ended March 31, 2007          $12,886              0.15%               1.70%


Net Income and Return on Average Equity

     Our net income was $302.1 million for the quarter ended September 30, 2008,
and net income was $108.3 million for the quarter ended September 30, 2007. Our
return on average equity was 16.73% for the quarter ended September 30, 2008 and
12.09% for the quarter ended September 30, 2007. Net income for the quarter
increased by $193.8 million. We attribute the increase in total net income for
the quarter ended September 30, 2008 over the quarter ended September 30, 2007
to the increase in net interest rate spread and increase in interest-earning
assets.

                                       30


     Our net income was $853.2 million for the nine months ended September 30,
2008, and $261.5 million for the nine months ended September 30, 2007. Our
return on average equity was 17.42% for the nine months ended September 30, 2008
and 10.53% for the nine months ended September 30, 2007. We attribute the
increase in total net income for the nine months ended September 30, 2008 over
the nine months ended September 30, 2007 to the increase in net interest rate
spread and increase in interest-earning assets, resulting in an increase of net
interest income of $670.5 million, which was only partially offset by an
increase in G&A expenses of $34.2 million.

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


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

                                                (Loss) gain
                                                 on Sale of
                                                 Mortgage-
                                                  Backed
                                       Net       Securities  Loss on                Dividend
                                     Investment     and     other-than-              income
                            Net      Advisory    Interest   temporarilyIncome from    from
                          Interest      and        Rate      impaired     equity    available-   G&A     Income Minority  Return
                          Income/     Service     Swaps/    securities/ investment/ for-sale   Expenses/Taxes/   interest/   on
                          Average   Fees/Average  Average    Average     Average     equity    Average   Average Average   Average
                           Equity      Equity      Equity     Equity      Equity    securities  Equity   Equity   Equity   Equity
                         ---------------------------------------------------------------------------------------------------------
For the Quarter Ended
September 30, 2008           19.52%        0.41%     (0.07%)    (1.76%)       0.42%      0.03%   (1.40%) (0.42%)        -   16.73%
For the Quarter Ended
June 30, 2008                19.40%        0.35%      0.16%           -       0.13%      0.03%   (1.59%) (0.44%)        -   18.04%
For the Quarter Ended
March 31, 2008               17.38%        0.41%      0.64%           -       0.13%      0.06%   (1.64%) (0.32%)    0.00%   16.66%
----------------------------------------------------------------------------------------------------------------------------------
For the Year Ended
December 31, 2007            11.56%        0.50%      0.57%     (0.03%)       0.52%      0.00%   (1.69%) (0.24%)   (0.02%)  11.17%
For the Quarter Ended
December 31, 2007            13.89%        0.41%      0.16%           -       0.61%      0.00%   (1.72%) (0.26%)   (0.02%)  13.07%
For the Quarter Ended
September 30, 2007           12.23%        0.49%      0.65%           -       0.93%          -   (1.94%) (0.26%)   (0.01%)  12.09%
For the Quarter Ended
June 30, 2007                10.71%        0.55%      0.89%     (0.09%)       0.03%          -   (1.50%) (0.10%)        -   10.49%
For the Quarter Ended
March 31, 2007                9.14%        0.61%      0.82%     (0.06%)       0.45%          -   (1.70%) (0.34%)   (0.04%)   8.88%


Financial Condition

     Investment Securities, Available for Sale

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

     We accrete discount balances as an increase in interest income over the
life of Investment Securities acquired at a discount and we amortize premium
balances as a decrease in interest income over the life of Investment Securities
acquired at a premium. At September 30, 2008 and December 31, 2007, we had on
our balance sheet a total of $61.1 million and $77.4 million, respectively, of
unamortized discount (which is the difference between the remaining principal
value and current historical amortized cost of our investment securities
acquired at a price below principal amount) and a total of $586.5 million and
$405.8 million, respectively, of unamortized premium (which is the difference
between the remaining principal amount and the current historical amortized cost
of our investment securities acquired at a price above principal amount).

                                       31


     We received mortgage principal repayments of $1.8 billion for the quarter
ended September 30, 2008, and $1.7 billion for the quarter ended September 30,
2007. The average prepayment speed for the quarter ended September 30, 2008 and
2007 was 11%, and 14%, respectively. Given our current portfolio composition, if
mortgage principal prepayment rates were to increase over the life of our
Mortgage-Backed Securities, all other factors being equal, our net interest
income would decrease during the life of these Mortgage-Backed Securities as we
would be required to amortize our net premium balance into income over a shorter
time period. Similarly, if mortgage principal prepayment rates were to decrease
over the life of our Mortgage-Backed Securities, all other factors being equal,
our net interest income would increase during the life of these Mortgage-Backed
Securities as we would amortize our net premium balance over a longer time
period.

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


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

                                                                   Amortized                        Fair
                           Principal       Net                    Cost/Principal                Value/Principal  Weighted
                              Amount      Premium Amortized Cost      Amount      Fair Value        Amount      Average Yield
                         ----------------------------------------------------------------------------------------------------
At September 30, 2008        $55,211,123  $525,394    $55,736,517        100.95%    $55,459,280         100.45%         5.41%
At June 30, 2008             $58,304,678  $500,721    $58,805,399        100.86%    $58,749,300         100.76%         5.33%
At March 31, 2008            $56,006,707  $383,334    $56,390,041        100.68%    $56,853,862         101.51%         5.36%
-----------------------------------------------------------------------------------------------------------------------------
At December 31, 2007         $52,569,598  $328,376    $52,897,974        100.62%    $53,133,443         101.07%         5.75%
At September 30, 2007        $44,904,820  $229,713    $45,134,533        100.51%    $44,890,633          99.97%         5.74%
At June 30, 2007             $39,102,277  $211,438    $39,313,715        100.54%    $38,753,509          99.11%         5.71%
At March 31, 2007            $39,053,196  $195,649    $39,248,845        100.50%    $39,230,648         100.45%         5.67%

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

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

                                                                                            Principal
                                                                                             Amount at
                                        Weighted     Weighted    Weighted                  Period End as
                                         Average   Average Term   Average     Weighted      % of Total
                           Principal      Coupon      to Next     Lifetime  Average Asset   Investment
                              Amount       Rate      Adjustment      Cap        Yield        Securities
                         --------------------------------------------------------------------------------
At September 30, 2008        $19,310,012     5.27%      37 months     9.98%          4.65%         34.97%
At June 30, 2008             $18,418,637     5.16%      36 months     9.89%          4.54%         31.59%
At March 31, 2008            $17,487,518     5.19%      35 months     9.73%          4.40%         31.22%
---------------------------------------------------------------------------------------------------------
At December 31, 2007         $15,331,447     5.90%      39 months     9.89%          5.63%         29.16%
At September 30, 2007        $13,148,355     5.99%      41 months    10.02%          5.68%         29.28%
At June 30, 2007              $9,553,827     5.85%      32 months    10.11%          5.77%         24.43%
At March 31, 2007             $9,657,221     5.79%      30 months    10.05%          5.66%         24.73%


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

                                                                        Principal
                                                                         Amount at
                                                                       Period End as
                                           Weighted       Weighted      % of Total
                           Principal     Average Coupon Average Asset   Investment
                              Amount          Rate          Yield        Securities
                         ------------------------------------------------------------
At September 30, 2008        $35,901,111          6.06%          5.82%         65.03%
At June 30, 2008             $39,886,041          6.00%          5.70%         68.41%
At March 31, 2008            $38,519,189          5.98%          5.80%         68.78%
-------------------------------------------------------------------------------------
At December 31, 2007         $37,238,151          6.00%          5.80%         70.84%
At September 30, 2007        $31,756,465          5.93%          5.76%         70.72%
At June 30, 2007             $29,548,450          5.87%          5.69%         75.57%
At March 31, 2007            $29,395,975          5.85%          5.67%         75.27%


                                       32


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


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

                                                                                       11th               Monthly
                                                                  Twelve   12-Month   District  1-Year    Federal
                                             One-Month Six-Month   Month     Moving   Cost of   Treasury  Cost of      Other
                                                Libor     Libor     Libor    Average    Funds     Index     Funds     Indexes(1)
                                             -------------------------------------------------------------------------------------
Weighted Average Term to Next Adjustment          1 mo.    27 mo.    57 mo.     1 mo.     1 mo.    35 mo.     1 mo.         14 mo.
Weighted Average Annual Period Cap                6.27%     2.13%     1.98%     0.01%     1.74%     1.91%     0.00%          1.94%
Weighted Average Lifetime Cap at September
 30, 2008                                         7.07%    10.70%    10.92%     9.21%    10.85%    10.87%    13.43%         12.00%
Investment Principal Value as Percentage of
 Investment Securities at September 30, 2008      8.16%     2.57%    19.05%     0.69%     0.44%     3.87%     0.12%          0.07%


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


                                                              11th                         Monthly
                                         Twelve   12-Month   District  1-Year    3-Year    Federal             Twelve
                    One-Month Six-Month   Month     Moving   Cost of   Treasury  Treasury  Cost of  One-Month   Month     Other
                       Libor     Libor     Libor    Average    Funds     Index     Index     Funds   Libor-USD Libor-USD Indexes(1)
                    ---------------------------------------------------------------------------------------------------------------
Weighted Average
 Term to
Next Adjustment       1 mo.     38 mo.    72 mo.    1 mo.     1 mo.     36 mo.    18 mo.    1 mo.     1 mo.     60 mo.    10 mo.
Weighted Average
 Annual
Period Cap            6.48%     1.72%     2.00%     0.42%     0.00%     1.88%     2.07%     0.00%     2.00%     2.00%      1.84%
Weighted Average
 Lifetime
Cap at December 31,
 2007                 7.13%     11.25%    11.08%    9.15%     12.08%    10.73%    13.18%    13.43%    12.8%     10.94%    10.73 %
Investment Principal
 Value as
Percentage of
 Investment
Securities at
 December 31, 2007    8.24%     1.89%     7.23%     0.67%     0.19%     3.39%     0.05%     0.13%     0.19%     7.14%      0.04%


     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 $2.2 million and the trading securities
sold, not yet purchased, was $30.9 million at September 30, 2008. The fair value
of the trading securities was $11.7 million and the trading securities sold, not
yet purchased, was $32.8 million at December 31, 2007.

     Borrowings

     To date, our debt has consisted entirely of borrowings collateralized by a
pledge of our Investment Securities. These borrowings appear on our statement of
financial condition as repurchase agreements. At September 30, 2008, we had
established uncommitted borrowing facilities in this market with 27 lenders in
amounts which we believe are in excess of our needs. All of our Investment
Securities are currently accepted as collateral for these borrowings. However,
we limit our borrowings, and thus our potential asset growth, in order to
maintain unused borrowing capacity and thus increase the liquidity and strength
of our balance sheet.

     For the quarter ended September 30, 2008, the term to maturity of our
borrowings ranged from one day to ten years. We have entered into structured
borrowings giving the counterparty the right to call the balance prior to
maturity. The weighted average original term to maturity of our borrowings was
261 days at September 30, 2008. The term to maturity of our borrowings ranged
from one day to three years, with a weighted average original term to maturity
of 296 days at September 30, 2007.

                                       33


     At September 30, 2008, the weighted average cost of funds for all of our
borrowings was 3.59% with the effect of the interest rate swaps, and the
weighted average term to next rate adjustment was 222 days. At September 30,
2007, the weighted average cost of funds for all of our borrowings 4.99% and the
weighted average term to next rate adjustment was 250 days.

     Liquidity

     Liquidity, which is our ability to turn non-cash assets into cash, allows
us to purchase additional investment securities and to pledge additional assets
to secure existing borrowings should the value of our pledged assets decline. We
may need to pledge additional assets to collateralize interest rate swaps, if
the value of the swaps decline. Potential immediate sources of liquidity for us
include cash balances and unused borrowing capacity. At September 30, 2008 and
December 31, 2007 we had total cash and cash equivalents of $1.1 billion and
$104.0 million, respectively. Unused borrowing capacity will vary over time as
the market value of our investment securities varies. Our non-cash assets are
largely actual or implied AAA assets, and accordingly, we have not had, nor do
we anticipate having, difficulty in converting our assets to cash. Our balance
sheet also generates liquidity on an on-going basis through mortgage principal
repayments and net earnings held prior to payment as dividends. Should our needs
ever exceed these on-going sources of liquidity plus the immediate sources of
liquidity discussed above, we believe that in most circumstances our Investment
Securities could be sold to raise cash. The maintenance of liquidity is one of
the goals of our capital investment policy. Under this policy, we limit asset
growth in order to preserve unused borrowing capacity for liquidity management
purposes.

     Borrowings under our repurchase agreements increased by $5.1 billion to
$51.1 billion at September 30, 2008, from $46.0 billion at December 31, 2007.
The increase in borrowings was the result of our deployment of additional
capital raised the first and second quarters of 2008, which permitted us to
increase our borrowings. Even though total borrowings increase from December 31,
2007 to September 30, 2008, leverage decreased from 8.7:1 to 7.2:1.

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

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

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

                                       34



                                                                               
                                                        (dollars in thousands)
                              ---------------------------------------------------------------------------
                                              One to Three  Three to Five  More than Five
Contractual Obligations       Within One Year     Years          Years          Years          Total
---------------------------------------------------------------------------------------------------------
Repurchase agreements             $44,525,758     $2,000,000     $3,050,000     $1,500,000    $51,075,758
Interest expense on repurchase
 agreements                           368,003        392,877        199,530        213,448      1,173,858
Long-term operating lease
 obligations                              532            133              -              -            665
Employment contracts                   50,342          4,168              -              -         54,510
                              ---------------------------------------------------------------------------
Total                             $44,944,635     $2,397,178     $3,249,530     $1,713,448    $52,304,791
                              ===========================================================================


     Stockholders' Equity

     During the quarter ended September 30, 2008, we declared dividends to
common shareholders totaling $296.3 million or $0.55 per share, which were paid
to shareholders on October 29, 2008. During the quarter ended September 30,
2008, we declared and paid dividends to Series A Preferred shareholders totaling
$3.6 million or $0.492188 per share, and Series B Preferred shareholders
totaling $1.7 million or $0.375 per share. During the quarter ended September
30, 2007, we declared dividends to common shareholders totaling $85.9 million or
$0.26 per share, which were paid on October 29, 2007. During the quarter ended
September 30, 2007, we declared and paid dividends to Series A Preferred
shareholders totaling $3.6 million or $0.492188 per share, and Series B
Preferred shareholders totaling $1.7 million or $0.375 per share.

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

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

     During the quarter and nine months ended September 30, 2008, we raised
$22.6 million and $93.7 million by issuing approximately 1.5 million and 5.8
million shares, respectively, through the Direct Purchase and Dividend
Reinvestment Program.

     During the quarter and nine months ended September 30, 2008, 102,625 and
289,842 options were exercised under the Long-Term Stock Incentive Plan, or
Incentive Plan, for an aggregate exercise price of $909,168 and $2.7 million,
respectively.

     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 nine
months ended September 30, 2008, 588,000 shares of the our common stock were
issued pursuant to this program, totaling $11.5 million in net proceeds. On
August 3, 2006, we entered into an ATM Equity Sales Agreement with UBS
Securities LLC, relating to the sale of shares of our common stock from time to
time through UBS Securities. Sales of the shares, if any, will be made by means
of ordinary brokers' transaction on the New York Stock Exchange. During the nine
months ended September 30, 2008, 3.8 million shares of our common stock were
issued pursuant to this program, totaling $60.3 million in net proceeds. During
the quarter ended September 30, 2008, we did not issue stock under either of
these ATM programs.

     Unrealized Gains and Losses

     With our "available-for-sale" accounting treatment, unrealized fluctuations
in fair values of assets do not impact our GAAP or taxable income but rather are
reflected on our statement of financial condition by changing the carrying value
of the asset with the change included in stockholders' equity under "Accumulated
Other Comprehensive Income (Loss)." As a result of us using fair value
accounting treatment, our book value and book value per share are likely to
fluctuate far more than if we used historical amortized cost accounting. As a
result, comparisons with companies that use historical cost accounting for some
or all of their investments may not be meaningful.

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

                                       35



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

                     September 30,    June 30,       March 31,    December 31,  September 30,     June 30,
                         2008           2008           2008            2007           2007          2007
                    ------------------------------------------------------------------------------------------
Unrealized gain           $217,710       $324,612       $654,506       $379,348        $68,015       $102,641
Unrealized loss           (879,208)      (803,403)      (990,320)      (531,545)      (453,974)      (570,281)
                    ------------------------------------------------------------------------------------------
Net Unrealized loss      ($661,498)     ($478,791)     ($335,814)     ($152,197)     ($385,959)     ($467,640)
                    ==========================================================================================


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

     Leverage

     Our debt-to-equity ratio at September 30, 2008 and December 31, 2007 was
7.2:1 and 8.7:1, respectively. We generally expect to maintain a ratio of
debt-to-equity of between 8:1 and 12:1, although the ratio may vary from this
range from time to time based upon various factors, including our management's
opinion of the level of risk of our assets and liabilities, our liquidity
position, our level of unused borrowing capacity and over-collateralization
levels required by lenders when we pledge assets to secure borrowings.

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

     Asset/Liability Management and Effect of Changes in Interest Rates

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

     We seek to manage the extent to which our net income changes as a function
of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. In addition, we have attempted to mitigate the
potential impact on net income of periodic and lifetime coupon adjustment
restrictions in our portfolio of investment securities by entering into interest
rate swaps. At September 30, 2008, we had entered into swap agreements with a
total notional amount of $18.4 billion. We agreed to pay a weighted average pay
rate of 4.70% and receive a floating rate based on one month LIBOR. At December
31, 2007, we entered into swap agreements with a total notional amount of $16.2
billion. We agreed to pay a weighted average pay rate of 5.03% and receive a
floating rate based on one month LIBOR. We may enter into similar derivative
transactions in the future by entering into interest rate collars, caps or
floors or purchasing interest-only securities.

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

                                       36


     Off-Balance Sheet Arrangements

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

     Capital Resources

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

     Inflation

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

     Other Matters

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

     We at all times intend to conduct our business so as not to become
regulated as an investment company under the Investment Company Act of 1940, or
the Investment Company Act. If we were to become regulated as an investment
company, then our use of leverage would be substantially reduced. The Investment
Company Act exempts entities that are "primarily engaged in the business of
purchasing or otherwise acquiring mortgages and other liens on and interests in
real estate" (qualifying interests). Under current interpretation of the staff
of the SEC, in order to qualify for this exemption, we must maintain at least
55% of our assets directly in qualifying interests and at least 80% of our
assets in qualifying interests plus other real estate related assets. In
addition, unless certain mortgage securities represent all the certificates
issued with respect to an underlying pool of mortgages, the Mortgage-Backed
Securities may be treated as securities separate from the underlying mortgage
loans and, thus, may not be considered qualifying interests for purposes of the
55% requirement. We calculate that as of September 30, 2008 and December 31,
2007, we were in compliance with this requirement.


                                       37


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

MARKET RISK

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

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


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

-75 Basis Points                                 10.97%                            1.43%
-50 Basis Points                                  6.75%                            1.36%
-25 Basis Points                                  2.87%                            1.18%
Base Interest Rate                                  -                                -
+25 Basis Points                                 (3.92%)                           0.53%
+50 Basis Points                                 (8.00%)                           0.04%
+75 Basis Points                                (12.07%)                          (0.55%)


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 September 30, 2008.
The amounts of assets and liabilities shown within a particular period were
determined in accordance with the contractual terms of the assets and
liabilities, except adjustable-rate loans, and securities are included in the
period in which their interest rates are first scheduled to adjust and not in
the period in which they mature and does include the effect of the interest rate
swaps. The interest rate sensitivity of our assets and liabilities in the table
could vary substantially based on actual prepayment experience.


                                       38



                                                                               
                                                             More than 1
                                                               Year to 3    3 Years and
                              Within 3 Months  4-12 Months       Years           Over          Total
                                                        (dollars in thousands)
                              ---------------------------------------------------------------------------
Rate Sensitive Assets:
 Investment Securities
  (Principal)                      $5,617,099     $2,134,040     $2,822,489    $44,637,498    $55,211,126
 Cash Equivalents                   1,083,814              -              -              -      1,083,814
 Reverse Repurchase Agreements        619,657              -              -              -        619,657
                              ---------------------------------------------------------------------------
  Total Rate Sensitive Assets       7,320,570      2,134,040      2,822,489     44,637,498     56,914,597

Rate Sensitive Liabilities:
  Repurchase Agreements,
    with the effect of swaps       25,385,008      5,346,500     11,638,150      8,706,100     51,075,758
                              ---------------------------------------------------------------------------

Interest rate sensitivity gap   ($18,064,438)   ($3,212,460)   ($8,815,661)    $35,931,398     $5,838,839
                              ===========================================================================

Cumulative rate sensitivity
 gap                            ($18,064,438)  ($21,276,898)  ($30,092,559)     $5,838,839
                              ============================================================

Cumulative interest rate
 sensitivity gap as a
 percentage of total rate-
 sensitive assets                       (33%)          (39%)          (55%)            11%
                              ============================================================


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


                                       39


ITEM 4. CONTROLS AND PROCEDURES
        -----------------------

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

                                       40


PART II. OTHER INFORMATION

Item 1.  LEGAL PROCEEDINGS

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

Item 1A. RISK FACTORS

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

FANNIE MAE AND FREDDIE MAC, WHICH GUARANTEE THE MORTGAGE-BACKED SECURITIES IN
WHICH WE INVEST, WERE RECENTLY PLACED INTO THE CONSERVATORSHIP OF THE FEDERAL
HOUSING FINANCE AGENCY.

     The interest and principal payments we receive on the agency
mortgage-backed securities in which we invest is guaranteed by Fannie Mae,
Freddie Mac, or Ginnie Mae. The recent economic challenges in the residential
mortgage market have affected the financial results and stock values of Fannie
Mae and Freddie Mac. In the second quarter of 2008, both Fannie Mae and Freddie
Mac reported substantial losses. Fannie Mae reported a net loss of $2.3 billion
in the second quarter 2008, compared with a first quarter 2008 net loss of $2.2
billion. Fannie Mae recently stated that it expects the downturn in the housing
market and the disruption in the mortgage and credit markets to continue to
adversely affect their financial results in 2008 and 2009. Freddie Mac has also
reported a net loss of $821 million in the second quarter 2008, compared with a
first quarter 2008 net loss of $151 million.

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

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

                                       41


Item 6.  EXHIBITS

Exhibits:

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

                                  EXHIBIT INDEX

Exhibit        Exhibit Description
Number

3.1            Articles of Amendment and Restatement of the Articles of
               Incorporation of the Registrant (incorporated by reference to
               Exhibit 3.2 to the Registrant's Registration Statement on Form
               S-11 (Registration No. 333-32913) filed with the Securities and
               Exchange Commission on August 5, 1997).

3.2            Articles of Amendment of the Articles of Incorporation of the
               Registrant (incorporated by reference to Exhibit 3.1 of the
               Registrant's Registration Statement on Form S-3 (Registration
               Statement 333-74618) filed with the Securities and Exchange
               Commission on June 12, 2002).

3.3            Articles of Amendment of the Articles of Incorporation of the
               Registrant (incorporated by reference to Exhibit 3.1 of the
               Registrant's Form 8-K (filed with the Securities and Exchange
               Commission on August 3, 2006).

3.4            Form of Articles Supplementary designating the Registrant's
               7.875% Series A Cumulative Redeemable Preferred Stock,
               liquidation preference $25.00 per share (incorporated by
               reference to Exhibit 3.3 to the Registrant's 8-A filed April 1,
               2004).

3.5            Articles Supplementary of the Registrant's designating an
               additional 2,750,000 shares of the Company's 7.875% Series A
               Cumulative Redeemable Preferred Stock, as filed with the State
               Department of Assessments and Taxation of Maryland on October 15,
               2004 (incorporated by reference to Exhibit 3.2 to the
               Registrant's 8-K filed October 4, 2004).

3.6            Articles Supplementary designating the Registrant's 6% Series B
               Cumulative Convertible Preferred Stock, liquidation preference
               $25.00 per share (incorporated by reference to Exhibit 3.1 to the
               Registrant's 8-K filed April 10, 2006).

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

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

4.2            Specimen Preferred Stock Certificate (incorporated by reference
               to Exhibit 4.2 to the Registrant's Registration Statement on Form
               S-3 (Registration No. 333-74618) filed with the Securities and
               Exchange Commission on December 5, 2001).

4.3            Specimen Series A Preferred Stock Certificate (incorporated by
               reference to Exhibit 4.1 of the Registrant's Registration
               Statement on Form 8-A filed with the SEC on April 1, 2004).

4.4            Specimen Series B Preferred Stock Certificate (incorporated by
               reference to Exhibit 4.1 to the Registrant's Form 8-K filed with
               the Securities and Exchange Commission on April 10, 2006).

31.1           Certification of Michael A.J. Farrell, Chairman, Chief Executive
               Officer, and President of the Registrant, pursuant to 18 U.S.C.
               Section 1350 as adopted pursuant to Section 302 of the
               Sarbanes-Oxley Act of 2002.

31.2           Certification of Kathryn F. Fagan, Chief Financial Officer and
               Treasurer of the Registrant, pursuant to 18 U.S.C. Section 1350
               as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
               2002.

32.1           Certification of Michael A.J. Farrell, Chairman, Chief Executive
               Officer, and President of the Registrant, pursuant to 18 U.S.C.
               Section 1350 as adopted pursuant to Section 906 of the
               Sarbanes-Oxley Act of 2002.

32.2           Certification of Kathryn F. Fagan, Chief Financial Officer and
               Treasurer of the Registrant, pursuant to 18 U.S.C. Section 1350
               as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
               2002.

                                       42


SIGNATURES

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


                                      ANNALY CAPITAL MANAGEMENT, INC.

Dated: November 6, 2008               By: /s/ Michael A.J. Farrell
                                          -------------------------
                                          Michael A.J. Farrell
                                         (Chairman of the Board, Chief Executive
                                          Officer, President and authorized
                                          officer of registrant)


Dated: November 6, 2008               By: /s/ Kathryn F. Fagan
                                          --------------------
                                          Kathryn F. Fagan
                                          (Chief Financial Officer and Treasurer
                                           and principal financial and chief
                                           accounting officer)


                                       43