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: MARCH 31, 2009

                                       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 incorporation or organization)          (IRS Employer 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  has submitted electronically
and  posted on its  corporate  Web site,  if any,  every  Interactive  Data File
required  to be  submitted  and posted  pursuant to Rule 405 of  Regulation  S-T
(Section  232.405 of this  chapter)  during the preceding 12 months (or for such
shorter  period that the registrant was required to submit and post such files).
Yes __ 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 May 7, 2009
Common Stock, $.01 par value                         544,344,030




                                                                                                               
                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 March 31, 2009
          (Unaudited) and December 31, 2008 (Derived from the audited
          consolidated statement of financial condition at December 31, 2008)                                           1

        Consolidated Statements of Operations and Comprehensive Income
          (Unaudited) for the quarters ended March 31, 2009 and 2008                                                    2

        Consolidated Statement of Stockholders' Equity (Unaudited) for
          the quarter ended March 31, 2009                                                                              3

        Consolidated Statements of Cash Flows (Unaudited) for the
          quarters ended March 31, 2009 and 2008                                                                        4

        Notes to Consolidated Financial Statements (Unaudited)                                                          5

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

        Item 3. Quantitative and Qualitative Disclosures about Market Risk                                             37

        Item 4. Controls and Procedures                                                                                38


Part II.        OTHER INFORMATION

        Item 1. Legal Proceedings                                                                                      39

        Item 1A. Risk Factors                                                                                          39

        Item 6. Exhibits                                                                                               41

        SIGNATURES                                                                                                     43






                                                                                                  
Part I
Item 1. Financial Statements

                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                      MARCH 31, 2009 AND DECEMBER 31, 2008
                  (dollars in thousands, except for share data)


                                                                        March 31, 2009
                                                                          (Unaudited)      December 31, 2008(1)
                                                                       -----------------------------------------
                                     ASSETS
                                     ------
     Cash and cash equivalents                                                $1,035,118                $909,353
     Reverse repurchase agreements with affiliate                                452,480                 562,119
     Mortgage-Backed Securities, at fair value                                58,785,456              55,046,995
     Agency debentures, at fair value                                                  -                 598,945
     Available for sale equity securities, at fair value                          51,418                  52,795
     Receivable for Investment Securities sold                                    33,009                  75,546
     Accrued interest and dividends receivable                                   291,347                 282,532
     Receivable from Prime Broker                                                 16,886                  16,886
     Receivable for advisory and service fees                                      6,507                   6,103
     Intangible for customer relationships, net                                   11,399                  12,380
     Goodwill                                                                     27,917                  27,917
     Other assets                                                                  5,717                   6,044
                                                                       -----------------------------------------

          Total assets                                                       $60,717,254             $57,597,615
                                                                       =========================================

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

     Liabilities:
       Repurchase agreements                                                 $48,951,178             $46,674,885
       Payable for Investment Securities purchased                             2,121,670               2,062,030
       Accrued interest payable                                                  112,457                 199,985
       Dividends payable                                                         272,170                 270,736
       Accounts payable and other liabilities                                     23,970                   8,380
       Interest rate swaps, at fair value                                      1,012,574               1,102,285
                                                                       -----------------------------------------

          Total liabilities                                                   52,494,019              50,318,301
                                                                       -----------------------------------------

     6.00% Series B Cumulative Convertible Preferred Stock:
       4,600,000 shares authorized 2,607,564 and 3,963,525 shares
       issued and outstanding respectively.                                       63,185                  96,042
                                                                       -----------------------------------------

     Commitments and contingencies (Note 13)                                           -                       -

     Stockholders' Equity:
     7.875% Series A Cumulative Redeemable Preferred Stock:
       7,412,500 shares authorized, issued and outstanding                       177,088                 177,088
     Common stock: par value $.01 per share; 987,987,500 shares
       authorized, 544,339,785 and 541,475,366 issued and
       outstanding, respectively                                                   5,443                   5,415
     Additional paid-in capital                                                7,667,769               7,633,438
     Accumulated other comprehensive income                                    1,121,551                 252,230
     Accumulated deficit                                                        (811,801)               (884,899)
                                                                       -----------------------------------------

          Total stockholders' equity                                           8,160,050               7,183,272
                                                                       -----------------------------------------

     Total liabilities, Series B Cumulative Convertible
       Preferred Stock and stockholders' equity                              $60,717,254             $57,597,615
                                                                       =========================================

     (1)  Derived from the audited consolidated statement of financial condition
          at December 31, 2008.

See notes to consolidated financial statements.

                                       1



                                                                                                       
                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
         CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
                     QUARTERS ENDED MARCH 31, 2009 AND 2008
                (dollars in thousands, except per share amounts)
                                   (Unaudited)

                                                                        For the Quarter Ended  For the Quarter Ended
                                                                            March 31, 2009        March 31, 2008
                                                                        --------------------------------------------
Interest income                                                                      $716,015               $791,128
Interest expense                                                                      378,625                537,606
                                                                        --------------------------------------------
     Net interest income                                                              337,390                253,522
                                                                        --------------------------------------------

Other income:
   Investment advisory and service fees                                                 7,761                  6,598
   Gain on sale of Investment Securities                                                5,023                  9,417
   Income from trading securities                                                           -                  1,854
   Dividend income from available-for-sale equity securities                              918                    941
   Unrealized gain on interest rate swaps                                              35,545                      -
                                                                        --------------------------------------------
     Total other income                                                                49,247                 18,810
                                                                        --------------------------------------------

Expenses:

   Distribution fees                                                                      428                    633
   General and administrative expenses                                                 29,882                 23,995
                                                                        --------------------------------------------
     Total expenses                                                                    30,310                 24,628
                                                                        --------------------------------------------

                                                                                      356,327                247,704
 Income before income taxes and noncontrolling interest

 Income taxes                                                                           6,434                  4,610
                                                                        --------------------------------------------

 Net income                                                                           349,893                243,094

 Noncontrolling interest                                                                    -                     58
                                                                        --------------------------------------------

 Net income attributable to controlling interest                                      349,893                243,036

 Dividends on preferred stock                                                           4,626                  5,373
                                                                        --------------------------------------------

 Net income available to common shareholders                                         $345,267               $237,663
                                                                        ============================================

 Net income available per share to common shareholders:
   Basic                                                                                $0.64                  $0.54
                                                                        ============================================
   Diluted                                                                              $0.63                  $0.53
                                                                        ============================================

Weighted average number of common shares outstanding:
   Basic                                                                          542,903,110            443,812,432
                                                                        ============================================
   Diluted                                                                        548,551,328            452,967,457
                                                                        ============================================

Net income attributable to controlling interest                                      $349,893               $243,036
                                                                        --------------------------------------------
Other comprehensive gain (loss):
  Unrealized gain on available-for-sale securities                                    820,178                217,563
  Unrealized gain (loss) on interest rate swaps                                        54,166               (391,763)
  Reclassification adjustment for net gains included in net income                     (5,023)                (9,417)
                                                                        --------------------------------------------
  Other comprehensive income (loss)                                                   869,321               (183,617)
                                                                        --------------------------------------------
Comprehensive income attributable to controlling interest                          $1,219,214                $59,419
                                                                        ============================================


See notes to consolidated financial statements.

                                       2



                                                                                                 
                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                          QUARTER ENDED MARCH 31, 2009
                  (dollars in thousands, except per share data)
                                   (Unaudited)

                                                                                            Accumulated
                                                                       Common   Additional     Other
                                                           Preferred   Stock     Paid-In    Comprehensive  Accumulated
                                                             Stock    Par Value  Capital    Income (Loss)    Deficit       Total
                                                           -------------------------------------------------------------------------
BALANCE, DECEMBER  31, 2008                                 $177,088     $5,415 $7,633,438       $252,230    ($884,899)  $7,183,272

  Net income attributable to controlling interest                  -          -          -              -      349,893      349,893
  Other comprehensive income                                       -          -          -        869,321            -      869,321
  Exercise of stock options and stock grants                       -          -        623              -            -          623
  Stock option expense and long-term compensation expense          -          -        879              -            -          879
  Conversion of Series B cumulative convertible Preferred
   Stock                                                           -         28     32,829              -            -       32,857
  Preferred Series A dividends declared $0.492188 per share        -          -          -              -       (3,648)      (3,648)
  Preferred Series B dividends declared $0.375 per share           -          -          -              -         (978)        (978)
  Common dividends declared, $0.50 per share                       -          -          -              -     (272,169)    (272,169)
                                                           -------------------------------------------------------------------------
BALANCE, MARCH 31, 2009                                     $177,088     $5,443 $7,667,769     $1,121,551    ($811,801)   $8,160,050
                                                           =========================================================================

See notes to consolidated financial statements

                                       3



                                                                                                            
                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                     QUARTERS ENDED MARCH 31, 2009 AND 2008
                             (dollars in thousands)
                                   (Unaudited)
                                                                                  For the Quarter       For the Quarter
                                                                                Ended March 31, 2009  Ended March 31, 2008
                                                                                ------------------------------------------
Cash flows from operating activities:
Net income                                                                                  $349,893              $243,094
Adjustments to reconcile net income to net cash provided by operating
 activities:
     Net income attributable to noncontrolling interest                                            -                   (58)
     Amortization of Mortgage Backed Securities premiums and discounts, net                   41,014                27,513
     Amortization of intangibles                                                               1,088                 1,002
     Amortization of trading securities premiums and discounts                                     -                    (3)
     Gain on sale of Investment Securities                                                    (5,023)               (9,417)
     Stock option and long-term compensation expense                                             879                   322
     Unrealized gain on interest rate swaps                                                  (35,545)                    -
     Net realized gain on trading investments                                                      -                (5,294)
     Unrealized depreciation on trading investments                                                -                 4,427
     Increase in accrued interest receivable                                                  (8,525)              (15,309)
     Decrease in trading sales receivables                                                         -                   157
     Decrease in other assets                                                                    220                   196
     Purchase of trading securities                                                                -                  (746)
     Proceeds from sale of trading securities                                                      -                 9,926
     Purchase of trading securities sold, not yet purchased                                        -                (4,044)
     Proceeds from securities sold, not yet purchased                                              -                 9,848
     Increase in advisory and service fees receivable                                           (404)                 (983)
     Decrease in interest payable                                                            (87,528)              (85,033)
     Increase (decrease) in accrued expenses and other liabilities                            15,590               (16,565)
     Proceeds from repurchase agreements on from broker dealer                             1,086,026                     -
     Payments on repurchase agreements, broker dealer                                       (200,000)                    -
                                                                                ------------------------------------------
          Net cash provided by operating activities                                        1,157,685               159,033
                                                                                ------------------------------------------
Cash flows from investing activities:
   Purchase of Mortgage-Backed Securities                                                 (6,244,648)          (10,453,627)
   Proceeds from sale of Investment Securities                                               882,754             4,160,361
   Principal payments of Mortgage-Backed Securities                                        2,502,807             2,536,577
   Agency debentures called                                                                  602,000                     -
   Purchase of agency debentures                                                                   -              (500,000)
   Purchase of equity securities                                                                   -                     -
   Purchase of reverse repurchase agreements                                                       -              (800,000)
   Payments on reverse repurchase Agreements                                                 109,639                     -
                                                                                ------------------------------------------
        Net cash used in investing activities                                             (2,147,448)           (5,056,689)
                                                                                ------------------------------------------
Cash flows from financing activities:
   Proceeds from repurchase agreements                                                    89,786,336           114,589,490
   Principal payments on repurchase agreements                                           (88,396,069)         (109,312,043)
   Proceeds from exercise of stock options                                                       623                 1,635
   Proceeds from direct purchase and dividend reinvestment                                         -                54,557
   Net proceeds from follow-on offerings                                                           -             1,080,831
   Net proceeds from ATM programs                                                                  -                71,832
   Noncontrolling interest                                                                         -                (1,574)
   Dividends paid                                                                           (275,362)             (141,991)
                                                                                ------------------------------------------
        Net cash provided by financing activities                                          1,115,528             6,342,737
                                                                                ------------------------------------------

Net increase in cash and cash equivalents                                                    125,765             1,445,081
                                                                                ------------------------------------------
Cash and cash equivalents, beginning of period                                               909,353               103,960
                                                                                ------------------------------------------
Cash and cash equivalents, end of period                                                  $1,035,118            $1,549,041
                                                                                ==========================================
Supplemental disclosure of cash flow information:
   Interest paid                                                                            $466,153              $622,639
                                                                                ==========================================
   Taxes paid                                                                                 $8,357                  $254
                                                                                ==========================================
Noncash financing activities:
   Net change in unrealized gain (loss) on available-for-sale securities
       and interest rate swaps, net of reclassification adjustment                          $869,321             ($183,617)
                                                                                ==========================================
   Dividends declared, not yet paid                                                         $272,170              $224,823
                                                                                ==========================================
Noncash investing activities:
   Receivable for Investment Securities Sold                                                 $33,009              $174,413
                                                                                ==========================================
     Payable for Investment Securities Purchased                                          $2,121,670              $828,235
                                                                                ==========================================

See notes to consolidated financial statements.

                                       4

                ANNALY CAPITAL MANAGEMENT, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE QUARTERS ENDED MARCH 31, 2009 AND 2008
--------------------------------------------------------------------------------

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

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

     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,  2008.  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,  Merganser,  RCap and an
affiliated  investment fund (the "Fund") which was a wholly owned  subsidiary of
the Company.  All intercompany  balances and transactions  have been eliminated.
The minority  shareholder's interest in the earnings of the Fund is reflected as
minority interest in the consolidated financial statements.

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

     Reverse Repurchase  Agreements - The Company may invest its daily available
cash balances via reverse  repurchase  agreements to provide additional yield on
its  assets.  These  investments  will  typically  be  recorded  as  short  term
investments and will generally mature daily.  Reverse repurchase  agreements are
recorded at cost and are collateralized by mortgage-backed securities pledged by
the counterparty to the agreement. Reverse repurchase agreements entered into by
RCap are part of the  subsidiary's  daily matched book trading  activity.  These
reverse repurchase agreements are recorded on trade date at the contract amount,
are  collateralized by mortgage backed securities and generally mature within 30
days.  Margin calls are made by RCap as appropriate based on the daily valuation
of the underlying  collateral  versus the contract price.  RCap generates income
from the spread between what is earned on the reverse repurchase  agreements and
what is paid on the matched repurchase agreements.  Cash flows related to RCap's
matchbook activity are included in cash flows from operating activity.

     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  ("Ginnie Mae"), the Federal Home
Loan Mortgage  Corporation  ("Freddie Mac"),  and the Federal National  Mortgage
Association ("Fannie Mae")  (collectively,  "Mortgage-Backed  Securities").  The

                                       5


Company  also  invests in agency  debentures  issued by  Federal  Home Loan Bank
("FHLB"),  Freddie Mac and Fannie Mae. The Mortgage-Backed Securities and agency
debentures are collectively referred to herein as "Investment Securities."

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

     Management  evaluates  securities  for  other-than-temporary  impairment at
least on a quarterly basis, and more frequently when economic or market concerns
warrant such evaluation.  Based on the guidance provided by Financial Accounting
Standards  Board  ("FASB"),  the FASB  issued  FSP FAS 115-2 and FSP FAS  124-2,
Recognition and Presentation of Other Than Temporary Impairments.  FSP FAS 115-2
and FSP FAS 124-2 are effective for interim and annual periods ending after June
15, 2009, with early adoption  permitted for periods ending after March 15, 2009
and the Company  decided to early adopt  these two FSPs.  Under these FSPs,  the
Company  determines if it has (1) the intent to sell the Investment  Securities,
(2) it is more likely  than not that it will be required to sell the  securities
before recovery,  or (3) it does not expect to recover the entire amortized cost
basis of the Investment Securities. Further, the security is analyzed for credit
loss (the  difference  between  the present  value of cash flows  expected to be
collected and the amortized  cost basis).  The credit loss, if any, will then be
recognized in the statement of earnings, while the balance of impairment related
to other factors will be recognized in other comprehensive  income ("OCI").  For
the quarters ended March 31, 2009 and 2008, the Company did not have  unrealized
losses on Investment Securities that were deemed other than temporary.

     SFAS  No.  107,  Disclosure  About  Fair  Value of  Financial  Instruments,
requires  disclosure of the fair value of financial  instruments for which it is
practicable  to estimate  that value.  The  estimated  fair value of  Investment
Securities,  available-for-sale equity securities,  trading securities,  trading
securities  sold, not yet purchased,  receivable  from prime broker and interest
rate  swaps is  equal to their  carrying  value  presented  in the  consolidated
statements of financial condition. 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 fair value as of March 31, 2009 due to the short
term nature of these  financial  instruments.  The estimated  fair value of long
term  structured  repurchase  agreements  is  reflected in the Footnote 7 to the
financial statements.

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

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

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

                                       6


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

     Credit Risk - The Company has limited its exposure to credit  losses on its
portfolio of  Investment  Securities  by only  purchasing  securities  issued by
Freddie Mac, Fannie Mae, or Ginnie Mae and agency debentures issued by the FHLB,
Freddie Mac and Fannie Mae. The payment of principal and interest on the Freddie
Mac,  and  Fannie  Mae  Mortgage-Backed   Securities  are  guaranteed  by  those
respective agencies, and the payment of principal and interest on the Ginnie Mae
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 agency 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 Freddie Mac, Fannie
Mae, or Ginnie Mae.

     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.

     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.  Repurchase  agreements entered into by RCap are matched
with specific reverse repurchase  agreements and are recorded on trade date with
the  duration  of such  repurchase  agreements  mirroring  those of the  matched
reverse  repurchase  agreements.  The repurchase  agreements are recorded at the
contract  amount and margin  calls are filled by RCap as  required  based on any
deficiencies in collateral versus the contract price. RCap generates income from
the spread between what is earned on the reverse repurchase  agreements and what
is paid on the repurchase agreements.  Intercompany  transactions are eliminated
in the statement of financial condition,  statement of operations, and statement
of cash flows. Cash flows related to RCap's  repurchase  agreements are included
in cash flows from operating activity.

     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

                                       7


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 No.  133 and  EITF  Issue  No.  00-19,
Accounting  for Derivative  Financial  Instruments  Indexed to, and  Potentially
Settled in, a Company's Own Stock,  and has determined  that  bifurcation is not
necessary.

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

     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  acquisitions  of FIDAC and
Merganser  were  accounted  for using the  purchase  method.  Under the purchase
method,  net assets and results of operations of acquired companies are included
in the  consolidated  financial  statements  from  the date of  acquisition.  In
addition,  the  costs  of FIDAC  and  Merganser  were  allocated  to the  assets
acquired,  including identifiable intangible assets, and the liabilities assumed
based on their estimated fair values at the date of  acquisition.  The excess of
purchase price over the fair value of the net assets  acquired was recognized as
goodwill.  Intangible  assets are  periodically  (but not less  frequently  than
annually) reviewed for potential impairment. Intangible assets with an estimated
useful life are  expected to amortize  over a 10.8 year  weighted  average  time
period.  During  the  quarters  ended  March 31,  2009 and 2008,  there  were no
impairment losses.

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

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

     Fair Value  Measurement - In September  2006, the FASB issued SFAS No. 157,
Fair Value Measurements ("SFAS 157"). SFAS 157 defines fair value, establishes a
framework for measuring fair value and requires enhanced  disclosures about fair
value  measurements.  SFAS 157 requires  companies to disclose the fair value of
their financial instruments according to a fair value hierarchy (i.e., levels 1,
2, and 3, as defined). Additionally,  companies are required to provide enhanced
disclosure regarding instruments in the level 3 category (the valuation of which
require  significant  management  judgment),  including a reconciliation  of the
beginning and ending  balances  separately for each major category of assets and
liabilities.  SFAS 157 was adopted by the  Company on January 1, 2008.  SFAS 157
did not have an impact on the manner in which the Company  estimates fair value,
but it requires additional disclosure, which is included in Note 6.

     Recent Accounting Pronouncements - 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

                                       8


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 was
effective for the Company on January 1, 2009. The implementation of this FSP did
not have a material effect on the financial statements of the Company.

     On January 1, 2009, the Company adopted SFAS 160, Noncontrolling  Interests
in Consolidated Financial Statements, an Amendment of ARB No. 51, which requires
the  Company  to make  certain  changes  to the  presentation  of its  financial
statements.  This  standard  requires  us to classify  noncontrolling  interests
(previously  referred to as "minority  interest")  as part of  consolidated  net
income and to include the accumulated amount of noncontrolling interests as part
of stockholders' equity. Similarly, in its presentation of stockholders' equity,
the Company  distinguishes  between equity amounts  attributable  to controlling
interest and amounts  attributable to the noncontrolling  interests - previously
classified as minority interest outside of stockholders' equity. For the quarter
ended March 31, 2009 and  year-ended  December  31, 2008 the Company do not have
any noncontrolling  interest.  In addition to these financial reporting changes,
SFAS  160   provides  for   significant   changes  in   accounting   related  to
noncontrolling   interests;   specifically,   increases  and  decreases  in  its
controlling financial interests in consolidated subsidiaries will be reported in
equity  similar to treasury  stock  transactions.  If a change in ownership of a
consolidated  subsidiary  results in loss of control  and  deconsolidation,  any
retained  ownership  interests are remeasured  with the gain or loss reported in
net  earnings.  Since the first  quarter of 2008, the Company  did  not have any
noncontrolling  interest in any of its subsidiaries.  However, the retrospective
effect of the  presentation  and disclosure  requirement  under SFAS 160 will be
applied.

     In December  2007,  the FASB issued SFAS No. 141 (revised  2007),  Business
Combinations,  ("SFAS 141R") which replaces SFAS No. 141, Business Combinations.
SFAS 141R establishes  principles and requirements for recognizing and measuring
identifiable   assets  and  goodwill  acquired,   liabilities  assumed  and  any
noncontrolling  interest  in a  business  combination  at  their  fair  value at
acquisition date. SFAS 141R alters the treatment of  acquisition-related  costs,
business  combinations  achieved in stages (referred to as a step  acquisition),
the treatment of gains from a bargain purchase, the recognition of contingencies
in business  combinations,  the treatment of in-process research and development
in a business combination as well as the treatment of recognizable  deferred tax
benefits.  SFAS 141R is  effective  for business  combinations  closed in fiscal
years  beginning after December 15, 2008. As SFAS 141R is applicable to business
acquisitions  completed  after  January 1, 2009 and the Company did not make any
business  acquisitions  during the quarter ended March 31, 2009 the  adoption of
SFAS 141R did not have a material impact on the Company's consolidated financial
statements.

     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  mandating  the  provision  of  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 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  mandates,  SFAS  161  requires
qualitative  disclosures about objectives and strategies for using  derivatives,
quantitative   disclosures  about  fair  value  amounts,  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 was effective for the Company as of January 1,
2009 and was adopted prospectively. The Company discontinued hedge accounting as
of September 30, 2008, and therefore the effect of the adoption of SFAS 161 will
be a minimal  increase  in  footnote  disclosures.  A table of the effect of the
de-designated  swap  transactions will be included to indicate the effect on OCI
and Other Income (Expense) in footnote 8.

     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,

                                       9


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 was
effective upon issuance  including prior periods for which financial  statements
have not been issued. FSP 157-3 did not have a material effect on the fair value
of its assets as the  Company  intends to  continue  to hold  assets that can be
valued via level 1 and level 2 criteria, as defined under SFAS 157.

     On October 3, 2008 the Emergency  Economic  Stabilization  Act of 2008 (the
EESA) was signed into law.  Section 133 of the EESA mandated that the Securities
and  Exchange  Commission  (SEC)  conduct a study on  mark-to-market  accounting
standards.  The SEC  provided its study to the US Congress on December 30, 2008.
Part  of the  recommendations  within  the  study  indicated  that  "fair  value
requirements  should be improved  through  development of  application  and best
practices  guidance for determining fair value in illiquid or inactive markets."
As a result of this study and the recommendations therein, the FASB issued Staff
Position  (FSP) FAS 157-4,  Determining  Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions  That Are Not  Orderly.  This FSP provides  additional  guidance on
determining  fair value when the volume and level of  activity  for the asset or
liability have significantly decreased when compared with normal market activity
for the asset or liability  (or similar  assets or  liabilities).  The FSP gives
specific  factors  to  evaluate  if there has been a decrease  in normal  market
activity and if so,  provides a methodology  to analyze  transactions  or quoted
prices and make necessary adjustments to fair value in accordance with Statement
157.  The  objective  is to  determine  the point  within a range of fair  value
estimates  that is  most  representative  of fair  value  under  current  market
conditions.  FSP FAS157-4 is effective for interim and annual reporting  periods
ending  after June 15, 2009 with early  adoption  permitted  for periods  ending
after March 15, 2009 and the Company  decided to early adopt FSP FAS 157-4.  The
implementation  of FSP  FAS157-4  has no major impact on the manner in which the
Company estimates fair value, nor does it have any impact on current disclosure.

     Additionally,  in conjunction with FSP 157-4, the FASB issued FAS 115-2 and
FAS 124-2, Recognition and Presentation of Other Than Temporary Impairments. The
objective of the new guidance is to make  impairment  guidance more  operational
and  to  improve  the  presentation   and  disclosure  of   other-than-temporary
impairments (OTTI) on debt and equity securities in financial  statements.  This
guidance was also the result of the SEC mark-to-market  study mandated under the
EESA. The SEC's  recommendation  was to "evaluate the need for modifications (or
the  elimination)  of current OTTI guidance to provide for a more uniform system
of impairment testing standards for financial instruments". The guidance revises
the OTTI evaluation methodology.  Previously the analytical focus was on whether
the company had the  "intent  and ability to retain its  investment  in the debt
security for a period of time sufficient to allow for any  anticipated  recovery
in fair  value".  Now the focus is on whether the Company has the (1) the intent
to sell the Investment  Securities,  (2) it is more likely than not that it will
be required to sell the Investment  Securities  before recovery,  or (3) it does
not  expect  to  recover  the  entire  amortized  cost  basis of the  Investment
Securities.  Further,  the security is analyzed for credit loss, (the difference
between  the  present  value of cash  flows  expected  to be  collected  and the
amortized  cost basis).  The credit loss, if any, will then be recognized in the
statement of earnings,  while the balance of impairment related to other factors
will be recognized in OCI. FAS 115-2 and FAS 124-2 are effective for all interim
and annual periods ending after June 15, 2009 with early adoption  permitted for
periods  ending after March 15, 2009 and the Company  decided to early adopt FSP
FAS 115-2 and FSP FAS 124-2.  For the quarter ended March 31, 2009,  the Company
did not have  unrealized  losses  in  Investment  Securities  that  were  deemed
other-than-temporary.

     On April 9,  2009,  the FASB also  issued  FAS 107-1 and APB 28-1,  Interim
Disclosures  about  Fair  Value of  Financial  Instruments.  The  rule/guideline
requires  disclosures  about fair value of  financial  instruments  for  interim
reporting periods as well as in annual financial statements.  The effective date
of this  rule/guideline  is for interim  reporting periods ending after June 15,
2009 with early adoption  permitted for periods ending after March 15, 2009. The
Company's  early  adoption did not impact  financial  reporting as all financial
instruments  are  currently  reported  at fair value in both  interim and annual
periods.

                                       10

2.   MORTGAGE-BACKED SECURITIES

     The   following    tables   present   the   Company's    available-for-sale
Mortgage-Backed  Securities portfolio as of March 31, 2009 and December 31, 2008
which were carried at their fair value:


                                                                                                  
                                                                                                            Total
                                  Federal Home Loan        Federal National     Government National     Mortgage-Backed
March 31, 2009                    Mortgage Corporation   Mortgage Association   Mortgage Association      Securities
                                 ----------------------------------------------------------------------------------------
                                                                    (dollars in thousands)
Mortgage-Backed
 Securities, gross                         $19,993,488            $34,891,680             $1,833,236          $56,718,404
Unamortized discount                           (25,874)               (33,931)                  (236)             (60,041)
Unamortized premium                            226,636                451,497                 50,203              728,336
                                 ----------------------------------------------------------------------------------------
Amortized cost                             $20,194,250            $35,309,246             $1,883,203          $57,386,699

Gross unrealized gains                         544,835                921,016                 33,823            1,499,674
Gross unrealized losses                        (36,893)               (63,515)                  (509)            (100,917)
                                 ----------------------------------------------------------------------------------------

Estimated fair value                       $20,702,192            $36,166,747             $1,916,517          $58,785,456
                                 ========================================================================================


                                     Amortized Cost     Gross Unrealized Gain  Gross Unrealized Loss  Estimated Fair Value
                                 ----------------------------------------------------------------------------------------
                                                                    (dollars in thousands)

Adjustable rate                            $19,734,089               $336,690              ($100,523)         $19,970,256

Fixed rate                                  37,652,610              1,162,984                   (394)          38,815,200
                                 ----------------------------------------------------------------------------------------

Total                                      $57,386,699             $1,499,674              ($100,917)         $58,785,456
                                 ========================================================================================


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

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

Estimated fair value                       $20,310,222            $33,439,290             $1,297,483          $55,046,995
                                 ========================================================================================


                                     Amortized Cost     Gross Unrealized Gain  Gross Unrealized Loss  Estimated Fair Value
                                 ----------------------------------------------------------------------------------------
                                                                    (dollars in thousands)

Adjustable rate                            $19,509,017               $287,249              ($178,599)         $19,617,667

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

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


                                       11


     Actual maturities of Mortgage-Backed  Securities are generally shorter than
stated  contractual  maturities  because  actual  maturities of  Mortgage-Backed
Securities are affected by the  contractual  lives of the underlying  mortgages,
periodic  payments of principal,  and  prepayments  of principal.  The following
table summarizes the Company's Mortgage-Backed  Securities on March 31, 2009 and
December  31,  2008,   according  to  their  estimated   weighted-average   life
classifications:


                                                                                              
                                                           March 31, 2009                   December 31, 2008
              Weighted-Average Life                    Fair Value     Amortized Cost      Fair Value    Amortized Cost
                                                                         (dollars in thousands)
----------------------------------------------------------------------------------------------------------------------

Less than one year                                    $ 3,949,455      $ 3,915,546       $ 4,147,646      $ 4,181,282

Greater than one year and less than five years         41,960,853       40,859,762        37,494,312       37,102,706

Greater than or equal to five years                    12,875,148       12,611,391        13,405,037       13,177,997
                                                   -------------------------------------------------------------------

Total                                                 $58,785,456      $57,386,699       $55,046,995      $54,461,985
                                                   ===================================================================


     The weighted-average  lives of the Mortgage-Backed  Securities at March 31,
2009 and  December  31,  2008 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 March 31,
2009 and December 31, 2008.


                                                                                    
                                                          Unrealized Loss Position For:
                                                              (dollars in thousands)
                            -------------------------------------------------------------------------------------------
                                 Less than 12 Months             12 Months or More                   Total
                            -------------------------------------------------------------------------------------------
                              Estimated       Unrealized      Estimated     Unrealized   Estimated Fair    Unrealized
                              Fair Value        Losses        Fair Value      Losses          Value          Losses
                            -------------------------------------------------------------------------------------------
March 31, 2009                  $925,368        ($8,691)      $4,559,464      ($92,226)       $5,484,832    ($100,917)

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



     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 does not have the
intent to sell the  Investment  Securities and more likely than not, the Company
will not be required to sell the Investment  Securities before recovery of their
amortized cost basis, which may be maturity. The Company does not consider these
investments to be  other-than-temporarily  impaired at March 31, 2009. 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 10.1% at March
31, 2009 and 10.0% at December 31, 2008.

     During the quarter ended March 31, 2009, the Company sold $835.7 million of
Mortgage-Backed Securities, resulting in a realized gain of $5.0 million. During
the  quarter   ended  March  31,   2008,   the  Company  sold  $4.1  billion  of
Mortgage-Backed Securities, resulting in a realized gain of $9.4 million.

                                       12

3.   AVAILABLE FOR SALE EQUITY SECURITIES

     All of the  available-for-sale  equity securities are shares of Chimera and
are reported at fair value. The Company owns  approximately  15.3 million shares
of Chimera at a fair value of $51.4  million at March 31, 2009 and $52.8 million
at December 31, 2008. . At March 31, 2009 and December 31, 2008,  the investment
in  Chimera  had  an   unrealized   gain  of  $2.6  million  and  $4.0  million,
respectively.

4.   REVERSE REPURCHASE AGREEMENT

     At March 31,  2009 and  December  31,  2008,  the  Company  had lent $452.5
million and $562.1  million,  respectively,  to Chimera in an overnight  reverse
repurchase  agreement.  This amount is included at the  principal  amount  which
approximates fair value in the Company's Statement of Financial  Condition.  The
interest  rate at March 31, 2009 and December 31, 2008 was at the market rate of
2.01% and 1.43%,  respectively.  The collateral for this loan is mortgage-backed
securities  with a fair value of $532.1  million and $680.8 million at March 31,
2009 and December 31, 2008, respectively.

5.   RECEIVABLE FROM PRIME BROKER

     These net assets of the investment fund owned by the Company are subject to
English  bankruptcy  law, which governs the  administration  of Lehman  Brothers
International  (Europe) ("LBIE"),  as well as the law of New York, which governs
the contractual  documents.  Until the Company's contractual documents with LBIE
are terminated, the value of the assets and liabilities in its account with LBIE
will  continue to  fluctuate  based on market  movements.  The Company  does not
intend to terminate these contractual documents until LBIE's administrators have
clarified the consequences of doing so. The Company has not received notice from
LBIE's   administrators   that  LBIE  has  terminated   the  documents.   LBIE's
administrators  have  advised  the Company  that they can provide no  additional
information  about the  account  at this  time.  As a result,  the  Company  has
recorded a receivable from LBIE based on the fair value of its account with LBIE
as of  September  15,  2008 of  $16.9  million,  which  is the  date of the last
statement it received from LBIE on the  account's  assets and  liabilities.  The
Company  can  provide no  assurance,  however,  that it will  recover all or any
portion of these assets following  completion of LBIE's  administration (and any
subsequent  liquidation).  Based on the  information  known at March 31, 2009, a
loss was not  determined  to be probable.  If additional  information  indicates
otherwise and it is  determined  that the loss is probable,  the estimated  loss
will be reflected in the statement of operations.

6.   FAIR VALUE MEASUREMENTS

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

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

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

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

     Available  for sale equity  securities  are valued  based on quoted  prices
(unadjusted) in an active market.  Mortgage-Backed  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:

                                       13



                                                                                 
                                                                 Level 1             Level 2            Level 3
                                                                             (dollars in thousands)
-----------------------------------------------------------------------------------------------------------------
Assets:
  Mortgage-Backed Securities                                             -          $58,785,456                 -
  Available for sale equity securities                             $51,418                    -                 -

Liabilities:
  Interest rate swaps                                                    -           $1,012,574                 -


     The  classification of assets and liabilities by level remains unchanged at
March 31, 2009, when compared to the previous quarter.

7.   REPURCHASE AGREEMENTS

     The Company had  outstanding  $49.0 billion and $46.7 billion of repurchase
agreements  with  weighted  average  borrowing  rates of 2.78% and 4.08%,  after
giving  effect to the  Company's  interest  rate  swaps,  and  weighted  average
remaining  maturities of 219 days and 238 days as of March 31, 2009 and December
31, 2008, respectively.  Investment Securities pledged as collateral under these
repurchase  agreements  and interest  rate swaps had an estimated  fair value of
$55.1 billion at March 31, 2009 and $51.8 billion at December 31, 2008.

     At March 31, 2009 and December 31, 2008, the repurchase  agreements had the
following remaining maturities:

                         March 31, 2009            December 31, 2008
                                      (dollars in thousands)
                       ----------------------------------------------
Within 30 days               $36,955,906                 $32,025,186
30 to 59 days                  2,815,272                   5,205,352
60 to 89 days                          -                     209,673
90 to 119 days                         -                     254,674
Over 120 days                  9,180,000                   8,980,000
                       ----------------------------------------------
Total                        $48,951,178                 $46,674,885
                       ==============================================

     The Company did not have an amount at risk  greater  than 10% of the equity
of the Company with any counterparty as of March 31, 2009 or December 31, 2008.

     The Company has entered into long- term repurchase agreements which provide
the  counterparty  with the right to call the balance  prior to  maturity  date.
These  repurchase  agreements  totaled  $8.8  billion  and the fair value of the
option  to call  was  ($489.1  million)  at March  31,  2009.  These  repurchase
agreements  totaled  $8.1  billion  and the fair value of the option to call was
($574.3  million) at December 31, 2008.  Management has determined that the call
option is not required to be bifurcated  under the  provisions of SFAS 133 as it
is deemed clearly and closely related to the debt instrument, therefore the fair
value of the option is not recorded in the consolidated financial statements.

8.       INTEREST RATE SWAPS

     In connection with the Company's  interest rate risk  management  strategy,
the  Company  hedges a  portion  of its  interest  rate  risk by  entering  into
derivative  financial  instrument   contracts.   As  of  March  31,  2009,  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.

                                       14


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

     The  location  and fair value of  derivative  instruments  reported  in the
Consolidated  Statement  of  Financial  Position  as of  March  31,  2009 are as
follows:


                                                                                      
                          Location on                                                            Net Estimated Fair
                          Statement of      Notional Amount       Weighted        Weighted      Value/Carrying Value
                           Financial          (dollars in       Average Pay        Average          (dollars in
                           Condition          thousands)            Rate        Receive Rate         thousands)
                        ---------------------------------------------------------------------------------------------
March 31, 2009             Liabilities         $17,339,850           4.55%           0.55%            ($1,012,574)


     The effect of derivatives on the Statement of Operations and  Comprehensive
Income is as follows:


                                                                                               
                                                   Location on Statement of Operations and Comprehensive Income
                                              ---------------------------------------------------------------------
                                                                                      Unrealized Gain on Interest
                                                        Interest Expense                       Rate Swaps
                                                                      (dollars in thousands)
                                              ---------------------------------------------------------------------
For the Quarter Ended March 31, 2009                         $200,738                                      $35,545


9.   PREFERRED STOCK AND COMMON STOCK

     (A) Common Stock Issuances

     During the quarter ended March 31, 2009, 55,887 options were exercised, for
an aggregate  exercise  price of $623,000 and 7,550 shares of  restricted  stock
were issued under the Long-Term Stock Incentive Plan, or Incentive Plan.  During
the quarter ended March 31, 2009,  1,355,961  shares of Series B Preferred Stock
were converted into 2,801,000 shares of common stock.

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

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

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

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

     On August 3, 2006,  the  Company  entered  into an ATM Equity  Offering(sm)
Sales  Agreement  with Merrill Lynch & Co. and Merrill Lynch,  Pierce,  Fenner &
Smith Incorporated, relating to the sale of shares of the Company's common stock
from time to time through Merrill Lynch.  Sales of the shares,  if any, are made
by means of ordinary brokers' transaction on the New York Stock Exchange. During
the year ended December 31, 2008,  588,000 shares of the Company's  common stock
were issued pursuant to this program, totaling $11.5 million in net proceeds.

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

                                       15


     (B) Preferred Stock

     At March 31,  2009 and  December  31,  2008,  the  Company  had  issued and
outstanding  7,412,500 shares of Series A Cumulative  Redeemable Preferred Stock
("Series A Preferred Stock"), with a par value $0.01 per share and a liquidation
preference of $25.00 per share plus accrued and unpaid dividends (whether or not
declared).  The Series A  Preferred  Stock must be paid a dividend  at a rate of
7.875% per year on the $25.00 liquidation  preference before the common stock is
entitled to receive any dividends. The Series A Preferred Stock is redeemable at
$25.00 per share plus  accrued and unpaid  dividends  (whether or not  declared)
exclusively at the Company's option  commencing on April 5, 2009 (subject to the
Company's  right under  limited  circumstances  to redeem the Series A Preferred
Stock earlier in order to preserve its  qualification  as a REIT).  The Series A
Preferred  Stock is senior to the  Company's  common stock and is on parity with
the Series B  Preferred  Stock  with  respect to  dividends  and  distributions,
including distributions upon liquidation,  dissolution or winding up. The Series
A  Preferred  Stock  generally  does not have any voting  rights,  except if the
Company fails to pay  dividends on the Series A Preferred  Stock for six or more
quarterly periods (whether or not consecutive).  Under such  circumstances,  the
Series A Preferred Stock,  together with the Series B Preferred  Stock,  will be
entitled  to vote to elect two  additional  directors  to the  Board,  until all
unpaid  dividends  have been paid or  declared  and set  apart for  payment.  In
addition,  certain  material  and  adverse  changes to the terms of the Series A
Preferred  Stock  cannot be made without the  affirmative  vote of holders of at
least  two-thirds  of the  outstanding  shares of Series A  Preferred  Stock and
Series B Preferred  Stock.  Through March 31, 2009, the Company had declared and
paid all required quarterly dividends on the Series A Preferred Stock.

     At March 31,  2009 and  December  31,  2008,  the  Company  had  issued and
outstanding 2,607,564 and 3,963,525 shares, respectively, of Series B Cumulative
Convertible Preferred Stock ("Series B Preferred Stock"), with a par value $0.01
per share and a  liquidation  preference  of $25.00 per share plus  accrued  and
unpaid dividends (whether or not declared). The Series B Preferred Stock must be
paid a dividend  at a rate of 6% per year on the $25.00  liquidation  preference
before the common  stock is  entitled  to receive  any  dividends.  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 March 31, 2009 and December 31, 2008,
the conversion ratio was 2.1228 and 2.0650 shares of common stock, respectively,
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  March 31,  2009,  the Company had
declared  and paid all  required  quarterly  dividends on the Series B Preferred
Stock.  During the quarter  ended March 31, 2009,  1,355,961  shares of Series B
Preferred Stock were converted into 2,801,000 shares of common stock.

     (C) Distributions to Shareholders

     During the quarter ended March 31, 2009, the Company declared  dividends to
common shareholders  totaling $272.2 million or $0.50 per share, which were paid
to shareholders on April 29, 2009.  During the quarter ended March 31, 2009, 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  $978,000  or  $0.375  per  share,  which  were  paid to
shareholders on March 31, 2009.

10.  NET INCOME PER COMMON SHARE

                                       16



     The following table presents a reconciliation  of the net income and shares
used in calculating  basic and diluted earnings per share for the quarters ended
March 31, 2009 and 2008.


                                                                                                      
                                                                                     For the Quarters Ended
                                                                          -------------------------------------------
                                                                             March 31, 2009         March 31,2008
                                                                          -------------------------------------------
Net income attributable to controlling interest                                     $349,893                $243,036
Less: Preferred stock dividends                                                        4,626                   5,373
                                                                          ------------------------------------------
Net income available to common shareholders, prior to adjustment for                $345,267                $237,663
  Series B dividends, if necessary

Add: Preferred Series B dividends, if Series B shares are dilutive                       978                   1,725
                                                                          ------------------------------------------
Net income available to common shareholders, as adjusted                            $346,245                $239,388
                                                                          ==========================================
Weighted average shares of common stock outstanding-basic                            542,903                 443,812
Add:  Effect of dilutive stock options and                                               113                     409
Series B Cumulative Convertible Preferred                                              5,535                   8,746
Stock
                                                                          ------------------------------------------
Weighted average shares of common stock outstanding-diluted                          548,551                 452,967
                                                                          ===========================================


     Options to  purchase  4.5  million  and 5,000  shares of common  stock were
outstanding  and  considered  anti-dilutive  as their  exercise price and option
expense  exceeded the average stock price for the quarters  ended March 31, 2009
and 2008, respectively.

11.  LONG-TERM STOCK INCENTIVE PLAN

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


                                                                                                 
                                                                           For the Quarters Ended
                                                      --------------------------------------------------------------
                                                             March 31, 2009                  March 31, 2008
                                                      --------------------------------------------------------------
                                                                        Weighted
                                                                        Average                          Weighted
                                                        Number of       Exercise       Number of         Average
                                                          Shares         Price          Shares        Exercise Price
                                                      --------------------------------------------------------------
Options outstanding at the beginning of quarter          5,180,164        $15.87        3,437,267            $15.23
Granted                                                          -             -                -                 -
Exercised                                                  (55,887)        11.17         (170,617)             9.58
Forfeited                                                        -             -                -                 -
Expired                                                          -             -                -                 -
                                                      --------------------------------------------------------------
Options outstanding at the end of the quarter            5,124,277        $15.92        3,266,650            $15.53
                                                      ==============================================================
Options exercisable at the end of the quarter            2,241,702        $16.12        1,738,900            $15.78
                                                      ==============================================================


     The weighted average remaining contractual term was approximately 7.3 years
for stock  options  outstanding  and  approximately  5.5 years for stock options
exercisable as of March 31, 2009. As of March 31, 2009, there was  approximately
$8.5  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 3.1 years.

                                       17


     The weighted average remaining contractual term was approximately 6.9 years
for stock  options  outstanding  and  approximately  5.8 years for stock options
exercisable as of March 31, 2008. As of March 31, 2008, there was  approximately
$2.3  million of total  unrecognized  compensation  cost  related  to  nonvested
share-based  compensation  awards. That cost is expected to be recognized over a
weighted average period of 2.5 years.

     During the quarter ended March 31, 2009,  the Company  granted 7,550 shares
of restricted  common stock to certain of its  employees.  As of March 31, 2009,
5,663 of these restricted shares were unvested and subject to forfeiture. During
the year ended December 31. 2007, the Company granted 7,000 shares of restricted
common stock to certain of its employees.  As of March 31, 2009,  3,360 of these
restricted shares were unvested and subject to forfeiture.

12.  INCOME TAXES

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

     During the  quarter  ended  March 31,  2009,  the  Company's  taxable  REIT
subsidiaries  recorded $533,000 of income tax expense for income attributable to
those  subsidiaries,  and the portion of earnings retained based on Code Section
162(m)  limitations.  During the  quarter  ended  March 31,  2009,  the  Company
recorded  $5.9 million of income tax expense for a portion of earnings  retained
based on Section  162(m)  limitations.  The  effective  tax rate was 54% for the
quarter ended March 31, 2009

     During the quarter ended March 31, 2008,  FIDAC, a taxable REIT subsidiary,
recorded  $734,000  of income tax  expense  for  income  and for the  portion of
earnings retained based on Code Section 162(m)  limitations.  During the quarter
ended March 31, 2008,  the Company  recorded  $3.9 million of income tax expense
for a portion of earnings  retained  based on Section  162(m)  limitations.  The
effective tax rate was 51% for the quarter ended March 31, 2008.

     The Company's  effective  tax rate was 54%, and 51% for the quarters  ended
March 31, 2009 and 2008,  respectively.  These rates  differed  from the federal
statutory  rate as a result of state and local  taxes and  permanent  difference
pertaining to employee remuneration as discussed above.

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

13.  LEASE COMMITMENTS AND CONTINGENCIES

     The Company has a non-cancelable lease for office space, which commenced in
May 2002 and expires in December  2009. The Company's  aggregate  future minimum
lease payments total $399,000.  Merganser has a non-cancelable  lease for office
space,  which commenced on May 2003 and expires in May 2014. The following table
details the lease payments, net of sub-lease receipts


                                                                                       
     Year Ending December              Lease Commitment         Sublease Income           Net Amount
                                     ----------------------------------------------------------------
                                                          (dollars in thousands)
                                     ----------------------------------------------------------------
2009 (remaining)                                  $450                   $101                   $349
2010                                               608                     56                    552
2011                                               632                      -                    632
2012                                               642                      -                    642
2013                                               682                      -                    682
Thereafter                                         189                      -                    189
                                     ----------------------------------------------------------------
                                                $3,203                   $157                 $3,046
                                     ================================================================


     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 March 31, 2009 and December 31, 2008.

                                       18


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

14.  INTEREST RATE RISK

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

     The  Company  seeks to manage the  extent to which net income  changes as a
function of changes in interest  rates by matching  adjustable-rate  assets with
variable-rate borrowings.  The Company may seek to mitigate the potential impact
on net income of periodic and lifetime  coupon  adjustment  restrictions  in the
portfolio of Investment  Securities  by entering  into interest rate  agreements
such as interest  rate caps and interest rate swaps.  As of March 31, 2009,  the
Company  entered  into  interest  rate swaps to pay a fixed  rate and  receive a
floating rate of interest, with a total notional amount of $17.3 billion.

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

15.  RELATED PARTY TRANSACTIONS

     At March 31,  2009 and  December  31,  2008,  the  Company  had lent $452.5
million and $562.1  million,  respectively,  to Chimera in an overnight  reverse
repurchase  agreement.  This amount is included at the  principal  amount  which
approximates fair value in the Company's Statement of Financial  Condition.  The
interest  rate at March 31, 2009 and December 31, 2008 was at the market rate of
2.01% and 1.43%,  respectively.  The collateral for this loan is mortgage-backed
securities  with a fair value of $532.1  million and $680.8 million at March 31,
2009 and December 31, 2008, respectively.

     At March 31, 2009 the Company had $885.7  million of repurchase  agreements
outstanding with RCap. The weighted average interest rate is 0.80% and the terms
are one day to one month. These agreements are collateralized by agency mortgage
backed securities, with an estimated market value of $965.2 million.

17.  SUBSEQUENT EVENTS

     On April 21, 2009, the Company purchased  approximately 25.0 million shares
of Chimera  common stock for  approximately  $74.9  million in  connection  with
Chimera's secondary offering.  Chimera is managed by FIDAC, and the Company owns
approximately 8.5% of Chimera's common stock.

                                       19


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

Special Note Regarding Forward-Looking Statements

     Certain  statements   contained  in  this  quarterly  report,  and  certain
statements  contained  in our future  filings with the  Securities  and Exchange
Commission  (the "SEC" or the  "Commission"),  in our press  releases  or in our
other public or shareholder  communications may not be based on historical facts
and are  "forward-looking  statements"  within the meaning of Section 27A of the
Securities Act of 1933, as amended,  and Section 21E of the Securities  Exchange
Act of 1934, as amended.  Forward-looking statements, which are based on various
assumptions,  (some of which  are  beyond  our  control)  may be  identified  by
reference  to a  future  period  or  periods,  or by the use of  forward-looking
terminology,   such  as  "may,"  "will,"  "believe,"   "expect,"   "anticipate,"
"continue,"  or similar terms or  variations on those terms,  or the negative of
those terms.  Actual  results  could differ  materially  from those set forth in
forward-looking  statements  due to a variety  of  factors,  including,  but not
limited to, changes in interest  rates,  changes in the yield curve,  changes in
prepayment  rates,  the  availability  of  mortgage-backed  securities and other
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, changes in governmental regulations
affecting our business, and our ability to maintain our classification as a REIT
for  federal  income tax  purposes,  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,  and risks  associated  with the  broker  dealer
business of our  subsidiary.  For a  discussion  of the risks and  uncertainties
which  could  cause  actual  results  to  differ  from  those  contained  in the
forward-looking  statements,  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   principally
mortgage-backed  securities. Our principal business objective is to generate net
income for distribution to our stockholders from the spread between the interest
income on our  investment  securities  and the costs of borrowing to finance our
acquisition  of  investment  securities  and from  dividends we receive from our
taxable REIT subsidiaries. FIDAC and Merganser are our wholly-owned taxable REIT
subsidiaries that are registered  investment advisors that generate advisory and
service fee  income.  RCap is our  wholly-  owned  broker  dealer  taxable  REIT
subsidiary which generates fee income.

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

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

     The  remainder  of our  assets,  comprising  not more than 25% of our total
assets, may consist of other qualified REIT real estate assets which are unrated
or rated  less than high  quality,  but  which are at least  "investment  grade"
(rated  "BBB"  or  better  by  Standard  &  Poor's  Corporation  ("S&P")  or the
equivalent by another nationally  recognized rating agency) or, if not rated, we
determine  them to be of comparable  credit  quality to an  investment  which is
rated "BBB" or better. In addition, we may directly or indirectly invest part of

                                       20


this remaining 25% of our assets in other types of securities, including without
limitation,  unrated  debt,  equity  or  derivative  securities,  to the  extent
consistent with our REIT qualification  requirements.  The derivative securities
in which we invest  may  include  securities  representing  the right to receive
interest  only or a  disproportionately  large  amount of  interest,  as well as
inverse  floaters,  which may have imbedded leverage as part of their structural
characteristics.

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

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

     The results of our  operations  are  affected by various  factors,  many of
which are beyond our control.  Our results of  operations  primarily  depend on,
among other things,  our net interest income, the market value of our assets and
the  supply of and  demand  for such  assets.  Our net  interest  income,  which
reflects  the  amortization  of purchase  premiums and  accretion of  discounts,
varies  primarily as a result of changes in interest rates,  borrowing costs and
prepayment   speeds,   the  behavior  of  which   involves   various  risks  and
uncertainties.  Prepayment speeds, as reflected by the Constant Prepayment Rate,
or CPR, and interest rates vary according to the type of investment,  conditions
in  financial  markets,  competition  and  other  factors,  none of which can be
predicted  with  any  certainty.   In  general,  as  prepayment  speeds  on  our
Mortgage-Backed   Securities   portfolio  increase,   related  purchase  premium
amortization  increases,  thereby reducing the net yield on such assets. The CPR
on our  Investment  Securities  portfolio  averaged 16% and 15% for the quarters
ended March 31, 2009 and 2008, 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 table  below  provides  quarterly  information  regarding  our  average
balances,  interest  income,  yield  on  assets,  average  repurchase  agreement
balances,  interest expense, cost of funds, net interest income and net interest
rate spreads for the quarterly periods presented.


                                                                                       
                          Average                  Yield on      Average
                         Investment     Total      Average      Balance of              Average     Net      Interest
                         Securities    Interest   Investment    Repurchase   Insert     Cost of    Interest    Rate
                          Held (1)      Income    Securities    Agreements   Expense     Funds      Income    Spread
  --------------------------------------------------------------------------------------------------------------------
                                 (ratios for the quarters have been annualized, dollars in thousands)
----------------------------------------------------------------------------------------------------------------------
Quarter Ended            $54,763,268    $716,015     5.23%     $48,497,444    $378,625    3.12%     $337,390   2.11%
     March 31, 2009
Quarter Ended
     December 31, 2008   $53,838,665    $740,282     5.50%     $47,581,332    $450,805    3.79%     $289,477   1.71%
Quarter Ended
     September 30, 2008  $57,694,277    $810,659     5.62%     $51,740,645    $458,250    3.54%     $352,409   2.08%
Quarter Ended
     June 30, 2008       $56,197,550    $773,359     5.50%     $50,359,825    $442,251    3.51%     $331,108   1.99%
Quarter Ended
     March 31, 2008      $56,119,584    $791,128     5.64%     $51,399,101    $537,606    4.18%     $253,522   1.46%

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

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

Quarter Ended                      CPR
-------------                      ---
March 31, 2009                     16%
December 31, 2008                  10%
September 30, 2008                 11%
June 30, 2008                      16%
March 31, 2008                     15%

                                       21


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

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

     For  the  purposes  of  computing   ratios  relating  to  equity  measures,
throughout this report, equity includes Series B preferred stock, which has been
treated under accounting  principles generally accepted in the United States, or
GAAP,  as  temporary  equity.  For the  discussion  purposes  in the  Management
Discussion and Analysis of Financial  Condition and Results of  Operations,  net
income attributable to controlling interest is referred to as net income.

Recent Developments

     The liquidity  crisis which  commenced in August 2007 escalated  throughout
2008 and  during  the  first  quarter  of 2009.  During  this  period  of market
dislocation,  fiscal and monetary  policymakers  have  established new liquidity
facilities for primary dealers and commercial banks, reduced short-term interest
rates,  and passed  legislation  that is intended to address the  challenges  of
mortgage  borrowers  and  lenders.  This  legislation,  the Housing and Economic
Recovery  Act of 2008,  seeks to  forestall  home  foreclosures  for  distressed
borrowers and assist  communities  with  foreclosure  problems.  Although  these
aggressive steps are intended to protect and support the US housing and mortgage
market, we continue to operate under very difficult market conditions.

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

     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  mortgage-backed  securities issued by
Fannie Mae and Freddie Mac. Given the highly fluid and evolving  nature of these
events, it is unclear how our business will be impacted.  Based upon the further
activity of the U.S. government or market response to developments at Fannie Mae
or Freddie Mac, our business could be adversely impacted.

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

                                       22


In addition,  the U.S.  Government,  Federal Reserve and other  governmental and
regulatory bodies have taken or are considering  taking other actions to address
the financial crisis. The Term Asset-Backed  Securities Loan Facility,  or TALF,
was first  announced by the U.S.  Department of Treasury,  or the  Treasury,  on
November  25,  2008,  and has been  expanded in size and scope since its initial
announcement.  Under  the  TALF,  the  Federal  Reserve  Bank of New York  makes
non-recourse  loans to  borrowers  to fund their  purchase of  eligible  assets,
currently certain  asset-backed  securities but not residential  mortgage-backed
securities.  In addition,  on March 23, 2009 the  government  announced that the
Treasury in conjunction with the Federal Deposit Insurance Corporation, or FDIC,
and the Federal Reserve, would create the Public-Private  Investment Program, or
PPIP. The PPIP aims to recreate a market for specific  illiquid  residential and
commercial  loans and  securities  through a number of joint  public and private
investment  funds.  The PPIP is designed to draw new  private  capital  into the
market  for  these   securities  and  loans  by  providing   government   equity
co-investment and attractive  public  financing.  As these programs are still in
early  stages of  development,  it is not  possible  for us to predict how these
programs will impact our business.

     There  can be no  assurance  that the  EESA,  TALF,  PPIP or  other  policy
initiatives will have a beneficial  impact on the financial  markets,  including
current  extreme  levels of volatility.  We cannot predict  whether or when such
actions  may  occur or what  impact,  if any,  such  actions  could  have on our
business, results of operations and financial condition.

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

Critical Accounting Policies

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

     Fair   Value  of   Investment   Securities:   All  assets   classified   as
available-for-sale are reported at fair value, based on market prices.  Although
we generally intend to hold most of our Investment Securities until maturity, we
may,  from  time to time,  sell  any of our  Investment  Securities  as part our
overall  management of our portfolio.  Accordingly,  we are required to classify
all of our Investment Securities as available-for-sale.  Our policy is to obtain
fair values from independent  sources.  Fair values from independent sources are
compared to internal prices for reasonableness.  Management evaluates securities
for  other-than-temporary  impairment  at least on a quarterly  basis,  and more
frequently  when  economic  or market  concerns  warrant  such  evaluation.  The
determination of whether a security is other-than-temporarily  impaired involves
judgments  and   assumptions   based  on  subjective   and  objective   factors.
Consideration is given to (1) the intent to sell the Investment Securities,  (2)
it is more  likely  than not  that it will be  required  to sell the  Investment
Securities  before  recovery,  or (3) it does not expect to  recover  the entire
amortized  cost basis of the  Investment  Securities.  Further,  the security is
analyzed  for credit loss,  (the  difference  between the present  value of cash
flows expected to be collected and the amortized  cost basis).  The credit loss,
if any, will then be recognized in the statement of earnings,  while the balance
of impairment related to other factors will be recognized in other comprehensive
income ("OCI").

     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.

                                       23


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

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

     Repurchase  Agreements:  We  finance  the  acquisition  of  our  Investment
Securities through the use of repurchase  agreements.  Repurchase agreements are
treated  as  collateralized  financing  transactions  and are  carried  at their
contractual amounts,  including accrued interest, as specified in the respective
agreements. Repurchase agreements entered into by RCap are matched with specific
reverse  repurchase  agreements and are recorded on trade date with the duration
of such repurchase  agreements mirroring those of the matched reverse repurchase
agreements.  These repurchase agreements are recorded at the contract amount and
margin  calls  are  filled  by RCap as  required  based on any  deficiencies  in
collateral  versus the contract  price.  RCap  generates  income from the spread
between what is earned on the reverse repurchase  agreements and what is paid on
the  repurchase  agreements.  Cash flows related to RCap's matched book activity
are included in cash flows from operating activity.

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

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

Recent Accounting Pronouncements:

     On January  1,  2009,  we adopted  SFAS 160,  Noncontrolling  Interests  in
Consolidated Financial Statements, an amendment of ARB No. 51, which requires us
to make certain changes to the  presentation of our financial  statements.  This
standard requires us to classify  noncontrolling  interests (previously referred
to as "minority interest") as part of consolidated net income and to include the
accumulated amount of noncontrolling  interests as part of stockholders' equity.
The net income  amounts we have  previously  reported are now  presented as "Net
income attributable to controlling interest".  Similarly, in our presentation of
stockholders'  equity,  we distinguish  between equity amounts  attributable  to
controlling interest and amounts attributable to the noncontrolling  interests -
previously  classified as minority interest outside of stockholders' equity. For

                                       24


the quarter ended March 31, 2009 and year-ended December 31, 2008 we do not have
any non controlling  interest. In addition to these financial reporting changes,
SFAS  160   provides  for   significant   changes  in   accounting   related  to
noncontrolling   interests;   specifically,   increases  and  decreases  in  our
controlling financial interests in consolidated subsidiaries will be reported in
equity  similar to treasury  stock  transactions.  If a change in ownership of a
consolidated  subsidiary  results in loss of control  and  deconsolidation,  any
retained  ownership  interests are remeasured  with the gain or loss reported in
net  earnings.  Since  December  31, 2008,  we did not have any non  controlling
interest in any of its subsidiaries.  However,  the retrospective  effect of the
presentation and disclosure requirement under SFAS 160 will be applied.

     In December  2007,  the FASB issued SFAS No. 141 (revised  2007),  Business
Combinations,  ("SFAS 141R") which replaces SFAS No. 141, Business Combinations.
SFAS 141R establishes  principles and requirements for recognizing and measuring
identifiable   assets  and  goodwill  acquired,   liabilities  assumed  and  any
noncontrolling  interest  in a  business  combination  at  their  fair  value at
acquisition date. SFAS 141R alters the treatment of  acquisition-related  costs,
business  combinations  achieved in stages (referred to as a step  acquisition),
the treatment of gains from a bargain purchase, the recognition of contingencies
in business  combinations,  the treatment of in-process research and development
in a business combination as well as the treatment of recognizable  deferred tax
benefits.  SFAS 141R is  effective  for business  combinations  closed in fiscal
years  beginning after December 15, 2008. As SFAS 141R is applicable to business
acquisitions  completed  after  January 1, 2009 and we did not make any business
acquisitions  during the quarter ended March 31, 2009, the adoption of SFAS 141R
did not have a material impact on our consolidated financial statements.

     In February 2008, FASB issued FASB Staff Position No. FAS 140-3  Accounting
for Transfers of Financial Assets and Repurchase  Financing  Transactions  ("FSP
FAS 140-3"). FSP FAS 140-3 addresses whether transactions where assets purchased
from a particular  counterparty and financed through a repurchase agreement with
the  same   counterparty  can  be  considered  and  accounted  for  as  separate
transactions,  or are required to be considered "linked" transactions and may be
considered  derivatives  under SFAS 133. 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  was  effective  for us on  January  1,  2009.  The
implementation  of this  FSP did not have a  material  effect  on our  financial
statements.

     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  mandating  the  provision  of  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 mandates, SFAS 161 requires
qualitative  disclosures about objectives and strategies for using  derivatives,
quantitative   disclosures  about  fair  value  amounts,  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 was effective for us as of January 1, 2009 and
was adopted prospectively.  We discontinued hedge accounting as of September 30,
2008 and  therefore  the  effect of the  adoption  of SFAS 161 will be a minimal
increase in  footnote  disclosures.  A table of the effect of the  de-designated
swap  transactions  will be  included  to  indicate  the effect on OCI and Other
Income (Expense).

     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 was
effective upon issuance  including prior periods for which financial  statements
have not been  issued.  FSP 157-3  does not have a  material  effect on the fair
value of our assets as we intend to  continue  to hold assets that can be valued
via level 1 and level 2 criteria, as defined under SFAS 157.

                                       25


     On October 3, 2008 the Emergency  Economic  Stabilization  Act of 2008 (the
EESA) was signed into law.  Section 133 of the EESA mandated that the Securities
and Exchange  Commission (the SEC) conduct a study on mark-to-market  accounting
standards.  The SEC  provided its study to the US Congress on December 30, 2008.
Part  of the  recommendations  within  the  study  indicated  that  "fair  value
requirements  should be improved  through  development of  application  and best
practices  guidance for determining fair value in illiquid or inactive markets."
As a result of this study and the recommendations therein, the FASB issued Staff
Position  (FSP)  FAS157-4,  Determining  Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions  That Are Not  Orderly.  This FSP provides  additional  guidance on
determining  fair value when the volume and level of  activity  for the asset or
liability have significantly decreased when compared with normal market activity
for the asset or liability  (or similar  assets or  liabilities).  The FSP gives
specific  factors  to  evaluate  if there has been a decrease  in normal  market
activity and if so,  provides a methodology  to analyze  transactions  or quoted
prices and make necessary adjustments to fair value in accordance with Statement
157.  The  objective  is to  determine  the point  within a range of fair  value
estimates  that is  most  representative  of fair  value  under  current  market
conditions.  FSP FAS157-4 is effective for interim and annual reporting  periods
ending  after June 15, 2009 with early  adoption  permitted  for periods  ending
after  March  15,  2009  and we  decided  to  early  adopt  FSP FAS  157-4.  The
implementation  of FSP  FAS157-4  has no major  impact on the manner in which we
estimate fair value, nor does it have any impact on current disclosure.

     Additionally,  in conjunction with FSP 157-4, the FASB issued FAS 115-2 and
FAS 124-2, Recognition and Presentation of Other Than Temporary Impairments. The
objective of the new guidance is to make  impairment  guidance more  operational
and  to  improve  the  presentation   and  disclosure  of   other-than-temporary
impairments (OTTI) on debt and equity securities in financial  statements.  This
EESA guidance was also the result of the SEC mark-to-market study mandated under
the EESA. The SEC's  recommendation  was to "evaluate the need for modifications
(or the  elimination)  of current  OTTI  guidance to provide for a more  uniform
system of impairment testing standards for financial instruments".  The guidance
revises the OTTI evaluation methodology.  Previously the analytical focus was on
whether the company had the "intent and ability to retain its  investment in the
debt  security  for a period of time  sufficient  to allow  for any  anticipated
recovery in fair  value".  Now the focus is on whether we have (1) the intent to
sell the Investment  Securities,  (2) it is more likely than not that it will be
required to sell the Investment  Securities before recovery,  or (3) it does not
expect to recover the entire amortized cost basis of the Investment  Securities.
Further,  the security is analyzed for credit loss, (the difference  between the
present  value of cash flows  expected to be collected  and the  amortized  cost
basis).  The credit loss,  if any,  will then be  recognized in the statement of
earnings,  while the  balance of  impairment  related to other  factors  will be
recognized  in OCI.  FAS 115-2 and FAS 124-2 are  effective  for all interim and
annual  periods  ending after June 15, 2009 with early  adoption  permitted  for
periods  ending after March 15, 2009 and we decided to early adopt FSP FAS 115-2
and  FSP FAS  124-2.  For the  quarter  ended  March  31,  2009 we did not  have
unrealized    losses    on    Investment    Securities    that    were    deemed
other-than-temporary.

     On April 9,  2009,  the FASB also  issued  FAS 107-1 and APB 28-1,  Interim
Disclosures  about  Fair  Value of  Financial  Instruments.  The  rule/guideline
requires  disclosures  about fair value of  financial  instruments  for  interim
reporting periods as well as in annual financial statements.  The effective date
of this  rule/guideline  is for interim  reporting periods ending after June 15,
2009.  Our early  adoption did not impact  financial  reporting as all financial
instruments are currently  reported at fair value in both the interim and annual
reports.

Results of Operations: For the Quarters Ended March 31, 2008 and 2009

     Net Income Summary

     For the quarter ended March 31, 2009,  our net income was $349.9 million or
$0.64 basic income per average share related to common shareholders, as compared
to $243.0 million net income or $0.54 basic net income per average share for the
quarter ended March 31, 2008.  Net income per average  share  increased by $0.10
per  average  share  available  to common  shareholders  and  total  net  income
increased  $106.9 million for the quarter ended March 31, 2009, when compared to
the quarter  ended March 31, 2008. We attribute the increase in total net income
for the  quarter  ended  March 31,  2009 from the  quarter  ended March 31, 2008
primarily to increase in net interest  income of $83.9  million and recording of
unrealized  gain related to interest rate swaps in the first quarter of 2009. An
unrealized  gain of $35.5  million was recorded in the income  statement for the

                                       26


quarter  ended  March  31,  2009 as the  result of  de-designation  of cash flow
hedges.  Prior to the fourth  quarter of 2008,  we recorded  changes in the fair
values in our interest rate swaps in the Accumulated Other Comprehensive  Income
in our Statement of Financial Condition.


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

                                                                      Quarter Ended        Quarter Ended
                                                                     March 31, 2009       March 31, 2008
                                                                     -----------------------------------
Interest income                                                            $716,015             $791,128
Interest expense                                                            378,625              537,606
                                                                     -----------------------------------
     Net interest income                                                    337,390              253,522
                                                                     -----------------------------------

Other income:
  Investment advisory and service fees                                        7,761                6,598
  Gain on sale of investment securities                                       5,023                9,417
  Income from trading securities                                                  -                1,854
  Dividend income from available-for-sale equity securities                     918                  941
  Unrealized gain on interest rate swaps                                     35,545                    -
                                                                     -----------------------------------
     Total other income                                                      49,247               18,810
                                                                     -----------------------------------

Expenses:
  Distribution fees                                                             428                  633

  General and administrative expenses                                        29,882               23,995
                                                                     -----------------------------------
     Total expenses                                                          30,310               24,628
                                                                     -----------------------------------

Income before income taxes and noncontrolling interest                      356,327              247,704

Income taxes                                                                  6,434                4,610
                                                                     -----------------------------------

Net income                                                                  349,893              243,094

Noncontrolling interest                                                           -                   58
                                                                     -----------------------------------

Net Income attributable to controlling interest                             349,893              243,036

Dividends on preferred stock                                                  4,626                5,373
                                                                     -----------------------------------

Net income available to common shareholders                                $345,267             $237,663
                                                                    ====================================

Weighted average number of basic common shares outstanding              542,903,110          443,812,432
Weighted average number of diluted common shares outstanding            548,551,328          452,967,457

Basic net income per average common share                                     $0.64                $0.54
Diluted net income per average common share                                   $0.63                $0.53

Average total assets                                                    $59,157,435          $56,827,604
Average equity                                                           $7,751,275           $5,835,604

Return on average total assets                                                 2.37%                1.71%
Return on average equity                                                      18.06%               16.66%


     Interest Income and Average Earning Asset Yield

     We had average  earning assets of $54.8 billion for the quarter ended March
31, 2009. We had average  earning  assets of $56.1 billion for the quarter ended
March 31, 2008.  Our primary source of income is interest  income.  Our interest
income  was $716.0  million  for the  quarter  ended  March 31,  2009 and $791.1
million for the quarter  ended March 31, 2008.  The yield on average  Investment
Securities was 5.23% and 5.64%, for the quarters ending March 31, 2009 and 2008,

                                       27


respectively.  The prepayment  speeds increased to an average of 16% CPR for the
quarter  ended March 31,  2009 from an average of 15% CPR for the quarter  ended
March 31,  2008.  Interest  income for the quarter  ended March 31,  2009,  when
compared to interest  income for the quarter  ended March 31, 2008,  declined by
$75.1 million due to the decline in the average  earning  assets of $1.3 billion
and the decline in the yield on earning assets of 41 basis points.

         Interest Expense and the Cost of Funds

     Our largest expense is the cost of borrowed funds. We had average  borrowed
funds of $48.5  billion  and total  interest  expense of $378.6  million for the
quarter ended March 31, 2009. We had average borrowed funds of $51.4 billion and
total  interest  expense of $537.6 million for the quarter ended March 31, 2008.
Our  average  cost of funds was 3.12% for the  quarter  ended March 31, 2009 and
4.18% for the quarter ended March 31, 2008.  The cost of funds rate decreased by
106 basis points and the average  borrowed  funds  decreased by $2.9 billion for
the quarter  ended March 31, 2009 when  compared to the quarter  ended March 31,
2008.  Interest expense for the quarter ended March 31, 2009 decreased by $159.0
million,  when compared to the quarter ended March 31, 2008, due to the decrease
in the  average  borrowed  funds and the  average  cost of funds  rate.  Since a
substantial  portion of our  repurchase  agreements  are short term,  changes in
market rates are directly reflected in our interest expense. Our average cost of
funds was 2.66% above average  one-month LIBOR and 1.38% above average six-month
LIBOR for the quarter ended March 31, 2009.

     The table below shows our average  borrowed funds and average cost of funds
as compared to average  one-month  and average  six-month  LIBOR for the quarter
ended March 31,  2009,  the year ended  December  31, 2008 and four  quarters in
2008.


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

                                                                                 Average
                                                                                One-Month   Average Cost   Average
                                                                                 LIBOR       of Funds      Cost of
                                                  Average                       Relative   Relative to      Funds
                           Average                Cost    Average    Average    to Average   Average     Relative to
                           Borrowed    Interest    of     One-Month  Six-Month  Six-Month   One-Month      Average
                            Funds       Expense   Funds   LIBOR      LIBOR       LIBOR       LIBOR      Six-Month LIBOR
                         -----------------------------------------------------------------------------------------------
For the Quarter Ended
  March 31, 20099         $48,497,444    $378,625  3.12%   0.46%     1.74%      (1.28%)        2.66%         1.38%
------------------------------------------------------------------------------------------------------------------------
For the Year Ended        $50,270,226  $1,888,912  3.76%   2.68%     3.06%      (0.38%)        1.08%         0.70%
  December 31, 2008
For the Quarter Ended
  December 31, 2008       $47,581,332    $450,805  3.79%   2.23%     2.94%      (0.71%)        1.56%         0.85%
For the Quarter Ended
  September 30, 2008      $51,740,645    $458,250  3.54%   2.62%     3.19%      (0.57%)        0.92%         0.35%
For the Quarter Ended
  June 30, 2008           $50,359,825    $442,251  3.51%   2.59%     2.93%      (0.34%)        0.92%         0.58%
For the Quarter Ended
  March 31, 2008          $51,399,101    $537,606  4.18%   3.31%     3.18%       0.13%         0.87%         1.00%


     Net Interest Income

     Our net  interest  income,  which  equals  interest  income  less  interest
expense,  totaled $337.4 million for the quarter ended March 31, 2009 and $253.5
million for the quarter ended March 31, 2008. Our net interest income  increased
for the quarter ended March 31, 2009, as compared to the quarter ended March 31,
2008, because of increased interest rate spread. Our net interest spread,  which
equals the yield on our average  assets for the period less the average  cost of
funds for the period, was 1.46% for the quarter ended March 31, 2008 as compared
2.11% for the quarter  ended  March 31,  2009.  This 65 basis point  increase in
interest rate spread for first quarter of 2009 over the spread for first quarter
of 2008 was the result in the decrease in the average cost of funds of 106 basis
points,  which was only  partially  offset by a  decrease  in  average  yield on
average interest earning assets of 41 basis points.

     The table below shows our interest income by average Investment  Securities
held, total interest income,  yield on average interest earning assets,  average
balance of repurchase agreements,  interest expense,  average cost of funds, net
interest  income,  and net interest  rate spread for the quarter ended March 31,
2009, the year ended December 31, 2008 and four quarters in 2008.

                                       28



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

                          Average                 Average      Average                                       Net
                         Investment     Total     Interest    Balance of             Average     Net       Interest
                         Securities    Interest   Earning     Repurchase  Interest   Cost of   Interest     Rate
                            Held        Income     Assets     Agreements   Expense     Funds    Income     Spread
                       ---------------------------------------------------------------------------------------------
For the Quarter Ended
   March 31, 2009       $54,763,268    $716,015     5.23%    $48,497,444   $378,625   3.12%     $337,390    2.11%
--------------------------------------------------------------------------------------------------------------------
For the Year Ended
   December 31, 2008    $55,962,519  $3,115,428     5.57%    $50,270,226 $1,888,912   3.76%   $1,226,516    1.81%
 For the Quarter Ended
   December 31, 2008    $53,838,665    $740,282     5.50%    $47,581,332   $450,805   3.79%     $289,477    1.71%
 For the Quarter Ended
   September 30, 2008   $57,694,277    $810,659     5.62%    $51,740,645   $458,250   3.54%     $352,409    2.08%
For the Quarter Ended
   June 30, 2008        $56,197,550    $773,359     5.50%    $50,359,825   $442,251   3.51%     $331,108    1.99%
For the Quarter Ended
   March 31, 2008       $56,119,584    $791,128     5.64%    $51,399,101   $537,606   4.18%     $253,522    1.46%


     Investment Advisory and Service Fees

     FIDAC and Merganser are  registered  investment  advisors  specializing  in
managing  fixed income  securities.  At March 31, 2009,  FIDAC and Merganser had
under management  approximately  $8.5 billion in net assets and $16.3 billion in
gross assets,  compared to $3.2 billion in net assets and $12.7 billion in gross
assets at March 31,  2008.  Net  investment  advisory  and  service  fees net of
distribution  fees for the  quarters  ended March 31, 2009 and 2008 totaled $7.3
million and $6.0 million, respectively.  Gross assets under management will vary
from time to time  because of  changes  in the  amount of net  assets  FIDAC and
Merganser  manage  as well as  changes  in the  amount of  leverage  used by the
various funds and accounts FIDAC manages.

     Gains and Losses on Sales of Investment Securities

     For the quarter ended March 31, 2009, we sold Investment  Securities with a
carrying value of $835.7 million for aggregate net gain of $5.0 million. For the
quarter  ended March 31, 2008,  we sold  Investment  Securities  with a carrying
value of $4.1 billion for a net gain of $9.4  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.

     Income from Trading Securities

     For the quarter  ended March 31, 2009,  we did not have income from trading
securities.  Gross income from trading  securities  totaled $1.9 million for the
quarter ended March 31, 2008.

     Dividend Income from Available-For-Sale Equity Securities

     Dividend  income  from our  investment  in  Chimera  totaled  $918,000  and
$941,000 for the quarter ended March 31, 2009 and 2008, respectively.

     General and Administrative Expenses

     General and  administrative  (or G&A)  expenses  were $29.9 million for the
quarter  ended March 31, 2009 and $24.0  million for the quarter ended March 31,
2008.  G&A expenses as a percentage of average total assets was 0.20% and 0.17%,
for the quarters  ended March 31, 2009 and 2008,  respectively.  The increase in
G&A expenses of $5.9 million for the quarter  ended March 31, 2009 was primarily
the result of  increased  compensation,  directors  and officers  insurance  and
additional costs related to our subsidiaries. Our employees increased from 41 at
March 31, 2008 to 69 at March 31, 2009.

                                       29


     The table below shows our total G&A  expenses as compared to average  total
assets and average  equity for the quarter ended March 31, 2009,  the year ended
December 31, 2008 and four quarters in 2008.


                                                                           
                    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 March 31, 2009             $29,882              0.20%               1.54%
------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 2008            $103,622              0.18%               1.55%
For the Quarter Ended December 31, 2008          $26,957              0.18%               1.50%
For the Quarter Ended September 30, 2008         $25,455              0.17%               1.40%
For the Quarter Ended June 30, 2008              $27,215              0.18%               1.59%
For the Quarter Ended March 31, 2008             $23,995              0.17%               1.64%


     Net Income and Return on Average Equity

     Our net income was $349.9  million for the quarter ended March 31, 2009 and
net income  was  $243.0  million  for the  quarter  ended  March 31,  2008.  Our
annualized  return on average  equity was 18.06% for the quarter ended March 31,
2009 and 16.66% for the  quarter  ended  March 31,  2008.  Net  interest  income
increased by $83.9  million for the quarter ended March 31, 2009, as compared to
the quarter  ended March 31, 2008,  due to the increase in interest rate spread.
In addition to the  increase in interest  rate  spread,  an  unrealized  gain on
interest  rate swaps of $35.5  million was recorded in the income  statement for
the quarter ended March 31, 2009, as the result of  de-designation  of cash flow
hedges.  Prior to the fourth  quarter of 2008,  we recorded  changes in the fair
values in our interest rate swaps in Accumulated Other  Comprehensive  Income in
our Statement of Financial Condition.

     The table below shows our net interest income, net investment  advisory and
service fees, gain (loss) on sale of Mortgage-Backed  Securities and termination
of interest  rate swaps,  loss on  other-than-temporarily  impaired  securities,
income from trading securities, G&A expenses, income taxes, each as a percentage
of average equity,  and the return on average equity for the quarter ended March
31, 2009, the year ended December 31, 2008 and four quarters in 2008.


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

                                              Gain/(Loss)
                                               on Sale of
                                               Mortgage-
                                                Backed
                                               Securities
                                                 and
                                     Net      Realized and  Loss on      Income    Dividend
                                  Investment   Unrealized  other-than-   (loss)     income
                         Net      Advisory     Gain/(Loss) temporarily    from      from
                       Interest     and         Interest    impaired     trading   available-    G&A     Income    Return
                        Income/    Service     Rate Swaps/  securities/ securities  for-sale   Expenses/ Taxes/    (loss) on
                        Average  Fees/Average   Average      Average    /Average    equity     Average   Average   Average
                        Equity      Equity      Equity       Equity      Equity    securities  Equity    Equity     Equity
                       -----------------------------------------------------------------------------------------------------
For the Quarter Ended
  March 31, 2009         17.41%       0.38%      2.09%           -           -        0.05%     (1.54%)   (0.33%)    18.06%
----------------------------------------------------------------------------------------------------------------------------
For the Year Ended
  December 31, 2008      18.36%       0.39%    (11.34%)      (0.48%)      0.15%       0.04%     (1.55%)   (0.39%)     5.18%
For the Quarter Ended
  December 31, 2008      16.06%       0.38%    (42.63%)         -        (0.11%)      0.03%     (1.50%)   (0.35%)   (28.12%)
For the Quarter Ended
  September 30, 2008     19.52%       0.41%     (0.07%)      (1.76%)      0.42%       0.03%     (1.40%)   (0.42%)    16.73%
For the Quarter Ended
  June 30, 2008          19.40%       0.35%      0.16%          -         0.13%       0.03%     (1.59%)   (0.44%)    18.04%
For the Quarter Ended
   March 31, 2008        17.38%       0.41%      0.64%          -         0.13%       0.06%     (1.64%)   (0.32%)    16.66%


                                       30


Financial Condition

     Investment Securities, Available for Sale

     All of our  Mortgage-Backed  Securities  at March 31, 2009 and December 31,
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
Freddie Mac,  Fannie Mae or Ginnie Mae  mortgage  pass-through  certificates  or
CMOs,  which carry an implied "AAA"  rating.  All of our agency  debentures  are
callable and carry an implied "AAA" rating.  We carry all of our earning  assets
at fair value.  We accrete  discount  balances as an increase in interest income
over the life of discount Investment Securities and we amortize premium balances
as a decrease in interest income over the life of premium Investment Securities.
At March 31, 2009 and December  31, 2008 we had on our balance  sheet a total of
$60.0 Million and, $64.4 million,  respectively,  of unamortized discount (which
is the difference  between the remaining  principal value and current historical
amortized cost of our Investment  Securities acquired at a price below principal
value)  and a total of $728.3  million  and  $619.5  million,  respectively,  of
unamortized  premium  (which is the difference  between the remaining  principal
value and the current  historical  amortized cost of our  Investment  Securities
acquired at a price above principal value).

     We received mortgage principal  repayments of $2.5 billion and $2.5 billion
for the  quarters  ended March 31, 2009 and March 31,  2008,  respectively.  The
average prepayment speed for the quarters ended March 31, 2009 and 2008 was 16%,
and 15%, respectively.  During the quarter ended March 31, 2009, the average CPR
increased  to 16% from 15% during the quarter  ended March 31,  2008,  due to an
increase in foreclosure and refinancing  activity.  Given our current  portfolio
composition,  if mortgage  principal  prepayment rates were to increase over the
life of our mortgage-backed  securities,  all other factors being equal, our net
interest  income  would  decrease  during  the  life  of  these  mortgage-backed
securities  as we would be  required to amortize  our net premium  balance  into
income over a shorter time period.  Similarly,  if mortgage principal prepayment
rates were to  decrease  over the life of our  mortgage-backed  securities,  all
other factors being equal,  our net interest  income would  increase  during the
life of these  mortgage-backed  securities as we would  amortize our net premium
balance over a longer time period.

     The  table  below  summarizes  certain  characteristics  of our  Investment
Securities at March 31, 2009,  December 31, 2008,  September 30, 2008,  June 30,
2008, and March 31, 2008.


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

                                                                                                Fair
                                                                    Amortized                  Value/      Weighted
                              Principal      Net      Amortized   Cost/Principal              Principal    Average
                                Amount     Premium      Cost         Amount      Fair Value     Amount      Yield
                             ----------------------------------------------------------------------------------------
At March 31, 2009            $56,718,404   $668,295   $57,386,699     101.18%   $58,785,456     103.64%       4.98%
---------------------------------------------------------------------------------------------------------------------
At December 31, 2008         $54,508,672   $555,043   $55,063,715     101.02%   $55,645,940     102.09%       5.15%
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%


     The  table  below  summarizes  certain  characteristics  of our  Investment
Securities at March 31, 2009,  December 31, 2008,  September 30, 2008,  June 30,
2008,  and  March 31,  2008.  The index  level  for  adjustable-rate  Investment
Securities is the weighted average rate of the various short-term  interest rate
indices, which determine the coupon rate.

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

                                                                                               Principal Amount
                                         Weighted     Weighted                     Weighted    at Period End as
                                         Average    Average Term     Weighted       Average      % of Total
                            Principal    Coupon       to Next         Average       Asset        Investment
                             Amount       Rate       Adjustment     Lifetime Cap    Yield        Securities
                           -------------------------------------------------------------------------------------
At March 31, 2009          $19,558,480     4.66%      34 months          10.06%      3.74%            34.48%
----------------------------------------------------------------------------------------------------------------
At December 31, 2008       $19,540,152     4.75%      36 months          10.00%      3.93%            35.85%
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%


                                       31



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

                                                                                           Principal Amount at
                                                Weighted Average     Weighted Average    Period End as % of Total
                            Principal Amount      Coupon Rate          Asset Yield        Investment Securities
                            --------------------------------------------------------------------------------------
At March 31, 2009             $37,159,924            6.08%                5.64%                   65.52%
------------------------------------------------------------------------------------------------------------------
At December 31, 2008          $34,968,520            6.13%                5.84%                   64.15%
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 March 31, 2009 and December 31, 2008, 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
                 ----------------------------------------------
                                 March 31, 2009

                                                                               11th               Monthly
                                         One-     Six-     Twelve   12-Month  District  1-Year    Federal
                                        Month     Month     Month    Moving   Cost of   Treasury  Cost of   Other
                                        Libor     Libor     Libor   Average    Funds     Index     Funds   Indexes(1)
                                       ---------------------------------------------------------------------------
Weighted Average Term to Next           1 mo.     23 mo.   51 mo.      1 mo.    1 mo.    38 mo.    1 mo.    14 mo.
  Adjustment
Weighted Average Annual Period Cap      6.39%     1.61%     2.01%      0.02%    1.05%    1.94%     0.00%     1.84%
Weighted Average Lifetime Cap at
  March 31, 2009                        7.04%    11.20%    10.89%      9.19%   10.78%   10.83%    13.43%    11.95%
Investment Principal Value as
Percentage of Investment Securities     7.10%     1.98%    19.48%      1.14%    0.66%    3.94%     0.11%     0.07%
  at March 31, 2009

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


                 Adjustable-Rate Investment Securities by Index
                 ----------------------------------------------
                                December 31, 2008

                                                                               11th               Monthly
                                         One-     Six-     Twelve   12-Month  District  1-Year    Federal
                                        Month     Month     Month    Moving   Cost of   Treasury  Cost of   Other
                                        Libor     Libor     Libor   Average    Funds     Index     Funds   Indexes(1)
                                       ---------------------------------------------------------------------------
Weighted Average Term to Next           1 mo.    25 mo.    55 mo.     1 mo.    1 mo.    37 mo.     1 mo.   14 mo.
  Adjustment
Weighted Average Annual Period Cap      6.28%     1.95%     1.98%     0.00%    1.26%     1.93%     0.00%    1.94%
Weighted Average Lifetime Cap at
  December 31, 2008                     7.07%    10.87%    10.92%     8.86%   11.35%    10.86%    13.44%   11.98%
Investment  Principal Value as
Percentage of Investment Securities     8.11%     2.53%    19.32%     0.99%    0.60%     4.12%     0.11%    0.07%
  at December 31, 2008

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

     Reverse Repurchase Agreements

     At March 31, 2009 and December 31, 2008, we lent $452.5  million and $562.1
million,  respectively, to Chimera in an overnight reverse repurchase agreement.
This amount is included at fair value in our  Statement of Financial  Condition.
The interest rate at March 31, 2009 and December 31, 2008 was at the market rate
of  2.01%  and   1.43%,   respectively.   The   collateral   for  this  loan  is
mortgage-backed securities.

     Receivable from Prime Broker on Equity Investment

     The net assets of the  investment  fund are  subject to English  bankruptcy
law, which governs the administration of Lehman Brothers  International (Europe)
(LBIE), as well as the law of New York, which governs the contractual documents.
Until  our  contractual  documents  with LBIE are  terminated,  the value of the
assets and liabilities in our account with LBIE will continue to fluctuate based
on market movements.  We do not intend to terminate these contractual  documents
until LBIE's  administrators  have clarified the consequences of us doing so. We
have not received notice from LBIE's administrators that LBIE has terminated the
documents.  LBIE's  administrators have advised us that they can provide us with
no additional  information  about our account at this time. As a result, we have
presented  the market value of our account with LBIE as of September 15, 2008 of
$16.9 million,  which is the date of the last statement we received from LBIE on
the account's assets and liabilities. We can provide no assurance, however, that
we will  recover  all or any portion of these  assets  following  completion  of
LBIE's administration (and any subsequent liquidation). Based on the information
known  at  March  31,  2009,  a loss  was not  determined  to be  probable.  If
additional information indicates otherwise and it is determined that the loss is
probable, the estimated loss will be reflected in the statement of operations

                                       32


     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  March  31,  2009,  we had
established  uncommitted  borrowing facilities in this market with 30 lenders in
amounts  which we  believe  are in excess of our  needs.  All of our  Investment
Securities are currently  accepted as collateral for these borrowings.  However,
we limit  our  borrowings,  and thus our  potential  asset  growth,  in order to
maintain unused borrowing  capacity and thus increase the liquidity and strength
of our financial condition.

     At March 31, 2009, the term to maturity of our  borrowings  ranged from one
day to ten years.  Additionally,  we have  entered  into  structured  borrowings
giving the  counterparty  the right to call the balance  prior to maturity.  The
weighted  average  original term to maturity of our  borrowings  was 263 days at
March 31, 2009. At March 31, 2008, the term to maturity of our borrowings ranged
from one day to ten years,  with a weighted average original term to maturity of
266 days.

     At March  31,  2009,  the  weighted  average  cost of funds  for all of our
borrowings was 2.78%,  including the effect of the interest rate swaps,  and the
weighted  average term to next rate  adjustment was 219 days. At March 31, 2008,
the  weighted  average  cost of funds  for all of our  borrowings  3.85% and the
weighted average term to next rate adjustment was 229 days.

     Liquidity

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

     Borrowings  under our  repurchase  agreements  increased by $2.3 billion to
$49.0 billion at March 31, 2009, from $46.7 billion at December 31, 2008.

     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 pledged  collateral  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 March 31, 2009, 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.

                                       33


     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 March 31, 2009.  The table does not include the effect of net  interest  rate
payments  under our interest  rate swap  agreements.  The net swap payments will
fluctuate  based on monthly  changes in the receive rate, At March 31, 2009, the
interest rate swaps had a negative fair value of $1.0 billion.


                                                                                          
                                                                (dollars in thousands)

                                             Within One    One to Three     Three to      More than
Contractual Obligations                         Year           Years       Five Years    Five Years        Total
---------------------------------------------------------------------------------------------------------------------
Repurchase agreements                         $41,771,178     $4,630,000      $950,000     $1,600,000    $48,951,178
Interest expense on repurchase
agreements, based on rates at March 31,           292,698        366,702       157,761        196,229      1,013,390
2009
Long-term operating lease obligations                 886          1,207         1,352              -          3,445
Employment contracts                               79,421         16,765             -              -         96,186
                                           --------------------------------------------------------------------------
Total                                         $42,144,183     $5,014,674    $1,109,113     $1,796,229    $50,064,199
                                           ==========================================================================


     Stockholders' Equity

     During the quarter  ended March 31, 2009,  we declared  dividends to common
shareholders  totaling  $272.2  million or $0.50 per  share,  which were paid on
April 29, 2009.  During the quarter  ended March 31, 2009,  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 $978,000 or $0.375 per
share.

     During the quarter  ended March 31, 2009,  55,887  options for an aggregate
exercise  price of $623,000  were  exercised  and 7,550  restricted  shares were
issued under the Long-Term Stock  Incentive Plan, or Incentive Plan.  During the
quarter ended March 31, 2009,  1,355,961 shares of Series B Preferred Stock were
converted into 2,801,000 shares of common stock.

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

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

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

     On August  3,  2006,  we  entered  into an ATM  Equity  Offering(sm)  Sales
Agreement  with Merrill Lynch & Co. and Merrill  Lynch,  Pierce,  Fenner & Smith
Incorporated,  relating  to the sale of shares of our common  stock from time to
time through  Merrill Lynch.  Sales of the shares,  if any, are made by means of
ordinary  brokers'  transaction on the New York Stock Exchange.  During the year
ended December 31, 2008, 588,000 shares of our common stock were issued pursuant
to this program, totaling $11.5 million in net proceeds.

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

                                       34


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

     Unrealized Gains and Losses

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

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

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


                                                                                       
                           Unrealized Gains and Losses
                             (dollars in thousands)

                                       March 31,    December 31,    September 30,     June 30,     March 31,
                                         2009           2008            2008            2008          2008
                                      -------------------------------------------------------------------------
Unrealized gain                        $1,502,319        $785,087         $217,710      $324,612      $654,506
Unrealized loss                          (380,768)       (532,857)        (879,208)     (803,403)     (990,320)
                                      -------------------------------------------------------------------------
Net Unrealized gain (loss)             $1,121,551        $252,230        ($661,498)    ($478,791)    ($335,814)
                                      =========================================================================


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

     Leverage

     Our debt-to-equity  ratio at March 31, 2009 and December 31, 2008 was 6.0:1
and  6.4:1,   respectively.   We  generally   expect  to  maintain  a  ratio  of
debt-to-equity  of between 8:1 and 12:1,  although  the ratio may vary from this
range from time to time based upon various  factors,  including our management's
opinion  of the  level of risk of our  assets  and  liabilities,  our  liquidity
position,  our level of unused  borrowing  capacity  and  over-collateralization
levels required by lenders when we pledge assets to secure borrowings.

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

Asset/Liability Management and Effect of Changes in Interest Rates

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

     We seek to manage the extent to which our net income  changes as a function
of  changes  in  interest   rates  by  matching   adjustable-rate   assets  with
variable-rate  borrowings.  In  addition,  we have  attempted  to  mitigate  the
potential  impact on net  income of  periodic  and  lifetime  coupon  adjustment
restrictions in our portfolio of investment securities by entering into interest

                                       35


rate swaps.  At March 31, 2009, we had entered into swap agreements with a total
notional amount of $17.3 billion.  We agreed to pay a weighted  average pay rate
of 4.55% and receive a floating  rate based on one month LIBOR.  At December 31,
2008,  we entered into swap  agreements  with a total  notional  amount of $17.6
billion.  We agreed to pay a weighted  average  pay rate of 4.66% and  receive a
floating  rate based on one month LIBOR.  We may enter into  similar  derivative
transactions  in the future by entering  into  interest  rate  collars,  caps or
floors or purchasing interest only securities.

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

     Off-Balance Sheet Arrangements

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

     Capital Resources

     At March 31, 2009, 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  March 31,  2009 and 2008.  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 March 31, 2009 and
2008. 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 March 31, 2009 and  December  31,  2008,  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 March 31, 2009 and December 31, 2008,
we were in compliance with this requirement.

                                       36




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

MARKET RISK

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

     Our profitability and the value of our portfolio  (including  interest rate
swaps) may be  adversely  affected  during  any  period as a result of  changing
interest  rates.  The following  table  quantifies the potential  changes in net
interest income,  portfolio value should interest rates go up or down 25, 50 and
75 basis  points,  assuming the yield curves of the rate shocks will be parallel
to each other and the current  yield curve.  All changes in income and value are
measured as  percentage  changes  from the  projected  net  interest  income and
portfolio  value at the base  interest  rate  scenario.  The base  interest rate
scenario  assumes  interest  rates  at March  31,  2009  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                              2.33%                             1.75%
-50 Basis Points                              1.15%                             1.68%
-25 Basis Points                              0.01%                             1.51%
Base Interest Rate                              -                                 -
+25 Basis Points                             (1.58%)                            0.86%
+50 Basis Points                             (3.39%)                            0.39%
+75 Basis Points                             (5.20%)                           (0.19%)


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.

                                       37


     The following  table sets forth the estimated  maturity or repricing of our
interest-earning assets and interest-bearing  liabilities at March 31, 2009. 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.


                                                                                              
                                                                           More than 1
                                         Within 3 Months   4-12 Months    Year to 3 Years   3 Years and Over     Total
                                                                     (dollars in thousands)
                                         --------------------------------------------------------------------------------
Rate Sensitive Assets:
  Investment Securities (Principal)           $5,385,767      $2,607,636        $3,486,223     $45,238,778    $56,718,404
  Cash Equivalents                             1,035,118               -                 -               -      1,035,118
  Reverse Repurchase Agreements                  452,480               -                 -               -        452,480
                                         --------------------------------------------------------------------------------
  Total Rate Sensitive Assets                  6,873,365       2,607,636         3,486,223      45,238,778     58,206,002

Rate Sensitive Liabilities:
  Repurchase Agreements, with the
    effect of swaps                           23,262,528       6,160,650        13,052,350       6,475,650     48,951,178
                                         --------------------------------------------------------------------------------

Interest rate sensitivity gap
                                            ($16,389,163)    ($3,553,014)      ($9,566,127)    $38,763,128     $9,254,824
                                         ================================================================================

Cumulative rate sensitivity gap             ($16,389,163)   ($19,942,177)     ($29,508,304)     $9,254,824
                                         =================================================================

Cumulative interest rate sensitivity
gap as a percentage of total
rate-sensitive assets                                (29%)           (35%)             (52%)            16%
                                         =================================================================


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

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

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

                                       38


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  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, 2008, 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.

The  conservatorship  of Fannie Mae and Freddie Mac and related  efforts,  along
with any changes in laws and  regulations  affecting  the  relationship  between
Fannie Mae and Freddie Mac and the federal government,  may adversely affect our
business.

     Due to increased market concerns about Fannie Mae and Freddie Mac'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,  on July 30, 2008, the government passed the
Housing and Economic Recovery Act of 2008, or the HERA. Among other things,  the
HERA  established the Federal Housing Finance Agency,  or FHFA,  which has broad
regulatory  powers over Fannie Mae and Freddie Mac. On  September  7, 2008,  the
FHFA placed Fannie Mae and Freddie Mac into  conservatorship  and, together with
the Treasury,  established a program  designed to boost  investor  confidence in
Fannie  Mae's and  Freddie  Mac's debt and  mortgage-backed  securities.  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.  A primary focus of this new legislation is to increase the
availability  of mortgage  financing  by allowing  Fannie Mae and Freddie Mac to
continue to grow their  guarantee  business  without  limit,  while limiting net
purchases of agency  mortgage-backed  securities to a modest amount  through the
end of 2009.  It is  currently  planned for Fannie Mae and Freddie Mac to reduce
gradually their agency mortgage-backed securities portfolios beginning in 2010.

     In addition to FHFA becoming the conservator of Fannie Mae and Freddie Mac,
the Treasury has taken three additional actions:  (i) the Treasury and FHFA have
entered into preferred stock purchase agreements between the Treasury and Fannie
Mae and Freddie  Mac  pursuant  to which the  Treasury  will ensure that each of
Fannie Mae and Freddie Mac maintains a positive net worth; (ii) the 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  Treasury  has  initiated  a  temporary  program  to  purchase  agency
mortgage-backed securities issued by Fannie Mae and Freddie Mac.

     Although the Treasury has committed  capital to Fannie Mae and Freddie Mac,
there can be no assurance  that these  actions will be adequate for their needs.
If these actions are  inadequate,  Fannie Mae and Freddie Mac could  continue to
suffer losses and could fail to honor their  guarantees  and other  obligations.
The future  roles of Fannie Mae and Freddie Mac could be  significantly  reduced
and the nature of their  guarantees  could be considerably  limited  relative to
historical measurements. Any changes to the nature of the guarantees provided by
Fannie  Mae  and   Freddie   Mac  could   redefine   what   constitutes   agency
mortgage-backed securities and could have broad adverse market implications.

                                       39


     On November 25, 2008, the Federal Reserve announced that it will initiate a
program to purchase $100 billion in direct  obligations  of Fannie Mae,  Freddie
Mac and the Federal Home Loan Banks and $500  billion in agency  mortgage-backed
securities backed by Fannie Mae, Freddie Mac and Ginnie Mae. The Federal Reserve
stated  that its  actions  are  intended  to reduce  the cost and  increase  the
availability  of credit for the  purchase  of  houses,  and are meant to support
housing  markets  and foster  improved  conditions  in  financial  markets  more
generally.  The purchases of direct  obligations  began during the first week of
December 2008, and the purchases of agency  mortgage-backed  securities began in
early  January  2009.  The Federal  Reserve has  announced  an expansion of this
program to purchase  another $750 million in agency  mortgage-backed  securities
through  the end of 2009.  The  Federal  Reserve's  program to  purchase  agency
mortgage-backed  securities  could  cause an  increase  in the  price of  agency
mortgage-backed  securities,  which  could  help the value of the  assets in our
portfolio but may negatively  impact the net interest margin with respect to new
agency mortgage-backed securities we may purchase.

     The size and  timing of the  federal  government's  agency  mortgage-backed
securities purchase program is subject to the discretion of the Treasury and the
Federal Reserve. Purchases under these programs have already begun, but there is
no  certainty  that  they will  continue.  It is  possible  that a change in the
Treasury's   and  the  Federal   Reserve's   commitment   to   purchase   agency
mortgage-backed  securities in the future could negatively affect the pricing of
agency  mortgage-backed  securities  that we seek to  acquire.  Given the highly
fluid and  evolving  nature of events,  it is unclear  how our  business  may be
impacted.  Further  activity  of the  U.S.  Government  or  market  response  to
developments at Fannie Mae and Freddie Mac could adversely impact our business.


Mortgage loan modification  programs,  future  legislative action and changes in
the  requirements  necessary to qualify for  refinancing  a mortgage with Fannie
Mae,  Freddie  Mac or Ginnie  Mae may  adversely  affect  the value of,  and the
returns on, the assets in which we invest.

     During  the second  half of 2008 and in early  2009,  the U.S.  government,
through the Federal  Housing  Administration,  or FHA,  and the FDIC,  commenced
implementation  of programs  designed to provide  homeowners  with assistance in
avoiding  residential   mortgage  loan  foreclosures   including  the  Hope  for
Homeowners Act of 2008, which allows certain  distressed  borrowers to refinance
their mortgages into  FHA-insured  loans.  The programs may also involve,  among
other things,  the modification of mortgage loans to reduce the principal amount
of the loans or the rate of  interest  payable  on the  loans,  or to extend the
payment terms of the loans.  Members of the U.S. Congress have indicated support
for additional legislative relief for homeowners,  including an amendment of the
bankruptcy  laws to permit the  modification  of  mortgage  loans in  bankruptcy
proceedings.  These loan modification programs, future legislative or regulatory
actions,  including  amendments  to the  bankruptcy  laws,  that  result  in the
modification  of  outstanding   mortgage  loans,  as  well  as  changes  in  the
requirements  necessary to qualify for  refinancing  a mortgage with Fannie Mae,
Freddie Mac or Ginnie Mae may adversely affect the value of, and the returns on,
our  Investment  Securities.  Depending  on  whether  or  not  we  purchased  an
instrument  at a premium or discount,  the yield we receive may be positively or
negatively impacted by any modification.

The actions of the U.S. government,  Federal Reserve and Treasury, including the
establishment of the TALF and the PPIP, may adversely affect our business.

     The TALF was first  announced by the Treasury on November 25, 2008, and has
been expanded in size and scope since its initial announcement.  Under the TALF,
the Federal  Reserve Bank of New York makes  non-recourse  loans to borrowers to
fund  their  purchase  of  eligible  assets,   currently  certain  asset  backed
securities but not mortgage-backed securities. The nature of the eligible assets
has been  expanded  several  times.  The  Treasury  has stated that  through its
expansion of the TALF, non-recourse loans will be made available to investors to
certain fund purchases of legacy  securitization  assets. On March 23, 2009, the
Treasury in conjunction  with the FDIC, and the Federal  Reserve,  announced the
PPIP. The PPIP aims to recreate a market for specific  illiquid  residential and
commercial  loans and  securities  through a number of joint  public and private
investment  funds.  The PPIP is designed to draw new  private  capital  into the
market  for  these   securities  and  loans  by  providing   government   equity
co-investment and attractive public financing.

                                       40


     These  programs  are still in early  stages of  development,  and it is not
possible  to predict how the TALF,  the PPIP,  or other  recent U.S.  government
actions will impact the financial markets,  including current significant levels
of volatility,  or our current or future  investments.  To the extent the market
does not  respond  favorably  to these  initiatives  or they do not  function as
intended,  our business may not receive any benefits from this  legislation.  In
addition, the U.S. government,  Federal Reserve, Treasury and other governmental
and  regulatory  bodies have taken or are  considering  taking other  actions to
address the financial crisis. We cannot predict whether or when such actions may
occur, and such actions could have a dramatic impact on our business, results of
operations and financial condition.


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       Articles  of  Amendment  of  the  Articles  of  Incorporation  of  the
          Registrant   (incorporated   by   reference  to  Exhibit  3.4  of  the
          Registrant's  Form  10-Q  (filed  with  the  Securities  and  Exchange
          Commission on May 7, 2008).

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

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

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

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

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

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

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

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

                                       41


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: May 7, 2009                      By: /s/ Michael A.J. Farrell
                                            ------------------------
                                        Michael A.J. Farrell
                                        (Chairman of the Board, Chief Executive
                                        Officer, President and authorized
                                        officer of registrant)

Dated: May 7, 2009                      By: /s/ Kathryn F. Fagan
                                            --------------------
                                        Kathryn F. Fagan
                                        (Chief Financial Officer and Treasurer
                                        and principal financial and chief
                                        accounting officer)








                                       43