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

Indicate by check mark 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 (§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, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): Yes ¨ No x

Number of shares outstanding of each of the registrant’s classes of common stock, as of ~~July 31,~~October 30, 2009:


	June 30, 2009			December 31, 2008			September 30, 2009			December 31, 2008
ASSETS
Cash and cash equivalents	$	36,831		$	254,653		$	13,299		$	254,653
Receivables:
Interest		802			1,378			1,111			1,378
Other		199			32,571			60			32,571
Investments:
Mortgage-backed securities, at fair value		149,298			594,294			173,895			594,294
U.S. Treasury bonds, at fair value		—			550,000			—			550,000
Equity investments, at fair value		71,280			—			87,497			—
Trading securities, at fair value		—			17,954			—			17,954
Long-term and other investments		4,148			54,976			2,563			54,976
Derivative assets, at fair value		—			264			—			264
Intangible assets, net		—			8,943			—			8,943
Furniture, equipment, software and leasehold improvements, net of accumulated depreciation and amortization of $319 and $40,265, respectively		34			24,442
Furniture, equipment, software and leasehold improvements, net of accumulated depreciation and amortization of $160 and $40,265, respectively								114			24,442
Prepaid expenses and other assets		6,995			20,816			4,786			20,816

Total assets	$	269,587		$	1,560,291		$	283,325		$	1,560,291

LIABILITIES AND EQUITY
Liabilities:
Repurchase agreements	$	94,738		$	1,063,040		$	100,000		$	1,063,040
Trading account securities sold, but not yet purchased, at fair value		—			8,325			—			8,325
Derivative liabilities, at fair value		—			56			—			56
Interest payable		483			2,064			129			2,064
Accrued compensation and benefits		7,175			47,259			7,360			47,259
Due to clearing broker		—			3,009			—			3,009
Accounts payable, accrued expenses and other liabilities		23,740			38,925			22,041			38,925
Long-term debt		51,775			254,357			16,816			254,357

Total liabilities		177,911			1,417,035			146,346			1,417,035

Commitments and Contingencies (Note 7)
Equity:
Preferred stock, $0.01 par value, 25,000,000 shares authorized, none issued and outstanding		—			—			—			—
Class A common stock, $0.01 par value, 450,000,000 shares authorized, 147,661,632 and 147,645,301 shares issued and outstanding, respectively		1,477			1,476
Class B common stock, $0.01 par value, 100,000,000 shares authorized, 11,322,293 and 11,571,670 shares issued and outstanding, respectively		113			116
Class A common stock, $0.01 par value, 450,000,000 shares authorized, 7,354,075 and 7,382,265 shares issued and outstanding, respectively⁽¹⁾								74			74
Class B common stock, $0.01 par value, 100,000,000 shares authorized, 566,115 and 578,584 shares issued and outstanding, respectively⁽¹⁾								6			6
Additional paid-in capital(1)		1,502,911			1,493,130			1,505,787			1,494,642
Accumulated other comprehensive loss, net of taxes		(1,211	)		(118	)
Accumulated other comprehensive income (loss), net of taxes								289			(118	)
Accumulated deficit		(1,411,614	)		(1,481,021	)		(1,369,177	)		(1,481,021	)

Total Arlington Asset shareholders’ equity		91,676			13,583			136,979			13,583
Noncontrolling interest		—			129,673			—			129,673

Total equity		91,676			143,256			136,979			143,256

Total liabilities and equity	$	269,587		$	1,560,291		$	283,325		$	1,560,291


	Three Months Ended June 30,						Three Months Ended September 30,
	2009			2008			2009			2008
Revenues:
Capital markets	$	31,171		$	52,993		$	—		$	50,694
Principal investment:
Interest		1,282			22,842			3,719			23,173
Net investment loss		(3,989	)		(5,542	)
Net investment income (loss)								19,737			(153,110	)
Dividends		108			133			—			158
Other		—			902			—			739

Total revenues		28,572			71,328
Total revenues (loss)								23,456			(78,346	)
Interest expense		582			21,858			310			25,387

Revenues, net of interest expense		27,990			49,470
Revenues (loss), net of interest expense								23,146			(103,733	)

Non-Interest Expenses:
Compensation and benefits		25,594			53,970			2,735			61,111
Professional services		7,224			10,492			878			10,442
Business development		7,142			6,812			16			5,262
Clearing and brokerage fees		2,653			3,393			—			3,834
Occupancy and equipment		5,374			8,580			94			8,282
Communications		3,637			6,255			100			5,773
Other operating expenses		3,611			7,055			1,163			6,668

Total non-interest expenses		55,235			96,557			4,986			101,372

Operating loss		(27,245	)		(47,087	)
Operating income (loss)								18,160			(205,105	)

Other Income (Loss):
Loss on subsidiary share transactions		(9,776	)		(189	)		(116	)		—
Gain on extinguishment of long-term debt								27,982			4,078
Other loss		(4	)		(3	)		(4	)		(4	)

Loss before income taxes		(37,025	)		(47,279	)
Income tax benefit		(310	)		(9,974	)
Income (loss) before income taxes								46,022			(201,031	)
Income tax provision (benefit)								3,585			(18,123	)

Net loss		(36,715	)		(37,305	)
Net income (loss)								42,437			(182,908	)
Less: Net loss attributable to the noncontrolling interest of consolidated subsidiary		(4,558	)		(12,254	)		—			(13,886	)

Net loss attributable to Arlington Asset shareholders	$	(32,157	)	$	(25,051	)
Net income (loss) attributable to Arlington Asset shareholders							$	42,437		$	(169,022	)

Basic loss per share attributable to Arlington Asset	$	(0.21	)	$	(0.17	)
Basic earnings (loss) per share attributable to Arlington Asset⁽¹⁾							$	5.51		$	(22.34	)

Diluted loss per share attributable to Arlington Asset	$	(0.21	)	$	(0.17	)
Diluted earnings (loss) per share attributable to Arlington Asset⁽¹⁾							$	5.38		$	(22.34	)

Weighted average shares outstanding:
Basic (in thousands)		153,912			150,948
Weighted average shares outstanding(in thousands):
Basic⁽¹⁾								7,705			7,565

Diluted (in thousands)		153,912			150,948
Diluted⁽¹⁾								7,895			7,565


	Six Months Ended June 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Revenues:
Capital markets	$	81,075		$	157,072		$	81,075		$	207,766
Principal investment:
Interest		3,881			47,694			7,600			70,867
Net investment loss		(3,983	)		(20,201	)
Net investment income (loss)								15,754			(173,311	)
Dividends		108			339			108			497
Other		—			2,356			—			3,095

Total revenues		81,081			187,260			104,537			108,914
Interest expense		3,346			45,508			3,656			70,895

Revenues, net of interest expense		77,735			141,752			100,881			38,019

Non-Interest Expenses:
Compensation and benefits		70,731			130,924			73,466			192,035
Professional services		11,993			22,959			12,871			33,401
Business development		13,123			19,106			13,139			24,368
Clearing and brokerage fees		5,950			7,023			5,950			10,857
Occupancy and equipment		13,479			17,769			13,573			26,051
Communications		8,864			12,273			8,964			18,046
Other operating expenses		8,936			12,439			10,099			19,107

Total non-interest expenses		133,076			222,493			138,062			323,865

Operating loss		(55,341	)		(80,741	)		(37,181	)		(285,846	)

Other Income (Loss):
Loss on subsidiary share transactions		(9,912	)		(189	)		(10,028	)		(189	)
Gain on extinguishment of long-term debt		132,453			—			160,435			4,078
Other (loss) income		(7	)		73,034			(11	)		73,030

Income (loss) before income taxes		67,193			(7,896	)		113,215			(208,927	)
Income tax provision (benefit)		9,245			(10,780	)		12,830			(28,903	)

Net income		57,948			2,884
Net income (loss)								100,385			(180,024	)
Less: Net loss attributable to the noncontrolling interest of consolidated subsidiary		(11,459	)		(17,167	)		(11,459	)		(31,053	)

Net income attributable to Arlington Asset shareholders	$	69,407		$	20,051
Net income (loss) attributable to Arlington Asset shareholders							$	111,844		$	(148,971	)

Basic earnings per share attributable to Arlington Asset	$	0.45		$	0.13
Basic earnings (loss) per share attributable to Arlington Asset⁽¹⁾							$	14.58		$	(19.71	)

Diluted earnings per share attributable to Arlington Asset	$	0.45		$	0.13
Diluted earnings (loss) per share attributable to Arlington Asset⁽¹⁾							$	14.28		$	(19.71	)

Weighted average shares outstanding:
Basic (in thousands)		153,135			150,869
Weighted average shares outstanding (in thousands):
Basic⁽¹⁾								7,673			7,557

Diluted (in thousands)		153,551			151,345
Diluted⁽¹⁾								7,830			7,557


	Class A Common Stock (#)		Class A Amount ($)			Class B Common Stock (#)		Class B Amount ($)			Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Noncontrolling Interest			Total			Comprehensive Income (Loss)			Class A Common Stock (#)⁽¹⁾		Class A Amount ($)⁽¹⁾		Class B Common Stock (#)⁽¹⁾		Class B Amount ($)⁽¹⁾		Additional Paid-In Capital⁽¹⁾			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Noncontrolling Interest			Total			Comprehensive Income (Loss)
Balances, December 31, 2007	139,266,465		$	1,393		12,616,249		$	126		$	1,468,801		$	(13,071	)	$	(1,063,558	)	$	243,061		$	636,752					6,963,323		$	70	630,812		$	6	$	1,470,244		$	(13,071	)	$	(1,063,558	)	$	243,061		$	636,752

Net loss	—			—		—			—			—			—			(417,463	)		(86,867	)		(504,330	)	$	(504,330	)	—			—	—			—		—			—			(417,463	)		(86,867	)		(504,330	)	$	(504,330	)
Conversion of Class B shares to Class A shares	1,044,579			10		(1,044,579	)		(10	)		—			—			—			—			—			—		52,229			—	(52,228	)		—		—			—			—			—			—			—
Issuance of Class A common stock	7,867,619			78		—			—			432			—			—			—			510			—		393,381			4	—			—		506			—			—			—			510			—
Forfeitures of Class A common stock	(414,042	)		(3	)	—			—			(1,736	)		—			—			—			(1,739	)		—		(20,702	)		—	—			—		(1,739	)		—			—			—			(1,739	)		—
Repurchase of Class A common stock	(119,320	)		(2	)	—			—			(46	)		—			—			—			(48	)		—		(5,966	)		—	—			—		(48	)		—			—			—			(48	)		—
Stock compensation expense for stock options	—			—		—			—			108			—			—			—			108			—		—			—	—			—		108			—			—			—			108			—
Amortization of Class A common shares issued as stock-based awards	—			—		—			—			14,408			—			—			—			14,408			—		—			—	—			—		14,408			—			—			—			14,408			—
Equity in issuance of subsidiary common shares to employees	—			—		—			—			11,163			—			—			—			11,163			—		—			—	—			—		11,163			—			—			—			11,163			—
Net decrease in equity related to subsidiary stock compensation transactions	—			—		—			—			—			—			—			(26,430	)		(26,430	)		—		—			—	—			—		—			—			—			(26,430	)		(26,430	)		—
Other comprehensive income:
Net change in unrealized loss on available-for-sale investment securities, (net of taxes of -0-)	—			—		—			—			—			(227	)		—			(91	)		(318	)		(318	)	—			—	—			—		—			(227	)		—			(91	)		(318	)		(318	)
Net change in unrealized gain on cash flow hedges (net of taxes of $-0-)	—			—		—			—			—			13,180			—			—			13,180			13,180		—			—	—			—		—			13,180			—			—			13,180			13,180

Comprehensive loss																										$	(491,468	)																								$	(491,468	)

Balances, December 31, 2008	147,645,301		$	1,476		11,571,670		$	116		$	1,493,130		$	(118	)	$	(1,481,021	)	$	129,673		$	143,256					7,382,265		$	74	578,584		$	6	$	1,494,642		$	(118	)	$	(1,481,021	)	$	129,673		$	143,256
Net income (loss)	—			—		—			—			—			—			69,407			(11,459	)		57,948		$	57,948		—			—	—			—		—			—			111,844			(11,459	)		100,385		$	100,385
Conversion of Class B shares to Class A shares	249,377			3		(249,377	)		(3	)		—			—			—			—			—			—		12,469			—	(12,469	)		—		—			—			—			—			—			—
Issuance of Class A common stock	36,318			—		—			—			364			—			—			—			364			—		1,816			—	—			—		364			—			—			—			364			—
Retirement of Class A common stock																													(27,500	)		—	—			—		(275	)		—			—			—			(275	)		—
Forfeitures of Class A common stock	(269,364	)		(2	)	—			—			(178	)		—			—			—			(180	)		—		(14,975	)		—	—			—		(194	)		—			—			—			(194	)		—
Stock compensation expense for stock options	—			—		—			—			23			—			—			—			23			—		—			—	—			—		23			—			—			—			23			—
Amortization of Class A common shares issued as stock-based awards	—			—		—			—			4,514			—			—			—			4,514			—		—			—	—			—		6,169			—			—			—			6,169			—
Equity in issuance of subsidiary common shares to employees	—			—		—			—			5,058			—			—			—			5,058			—		—			—	—			—		5,058			—			—			—			5,058			—
Elimination of noncontrolling interest resulting from sale of majority stake in subsidiary	—			—		—			—			—			—			—			(118,269	)		(118,269	)		—		—			—	—			—		—			—			—			(118,269	)		(118,269	)		—
Other comprehensive income:
Net change in unrealized (loss) gain on available-for-sale investment securities, (net of taxes of $-0-)	—			—		—			—			—			(1,093	)		—			55			(1,038	)		(1,038	)	—			—	—			—		—			407			—			55			462			462

Comprehensive income																										$	56,910																									$	100,847

Balances, June 30, 2009	147,661,632		$	1,477		11,322,293		$	113		$	1,502,911		$	(1,211	)	$	(1,411,614	)	$	—		$	91,676
Balances, September 30, 2009																													7,354,075		$	74	566,115		$	6	$	1,505,787		$	289		$	(1,369,177	)	$	—		$	136,979


	Six Months Ended June 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Cash flows from operating activities:
Net income	$	57,948		$	2,884
Non-cash items included in net income:
Net income (loss)							$	100,385		$	(180,024	)
Non-cash items included in net income (loss):
Gain on extinguishment of long-term debt		(132,453	)		—			(160,435	)		—
Net investment loss from investments, mortgage-backed securities, incentive allocations and fees		4,872			23,542
Net investment (income) loss from investments, mortgage-backed securities, incentive allocations and fees								(14,749	)		178,055
Depreciation and amortization		4,718			5,033			4,718			7,710
Gain on disposition of subsidiary		—			(73,040	)		—			(73,040	)
Other		22,781			10,933			23,792			32,569
Changes in operating assets:
Receivables:
Interest		139			(12	)		(51	)		1,139
Other		(1,037	)		(1,242	)		(898	)		(364,309	)
Due from/to clearing broker		(7,132	)		(19,580	)		(7,132	)		(24,227	)
Trading securities, at fair value		(26,517	)		2,079			(26,517	)		(6,035	)
Prepaid expenses and other assets		4,104			8,474			6,313			4,023
Changes in operating liabilities:
Trading account securities sold but not yet purchased, at fair value		12,339			53			12,339			4,395
Accounts payable, accrued expenses and other liabilities		5,138			(21,052	)		2,988			(23,565	)
Accrued compensation and benefits		(15,350	)		(5,172	)		(15,165	)		(10,740	)

Net cash used in operating activities		(70,450	)		(67,100	)		(74,412	)		(454,049	)

Cash flows from investing activities:
Purchases of mortgage-backed securities		(140,118	)		(1,891,573	)		(397,767	)		(2,266,616	)
Receipt of principal payments on mortgage-backed securities		10,398			137,063			15,105			210,827
Proceeds from sales of mortgage-backed securities		574,343			403,459			806,408			1,107,155
Proceeds from U.S. treasury bond maturities		550,000			—			550,000			—
Purchases of long-term investments		—			(6,899	)		—			(7,287	)
Proceeds from sales of and distributions from long-term investments		12,575			21,413			14,166			31,618
Deconsolidation of FBR Capital Markets cash balance		(122,752	)		—			(122,752	)		—
Other		(864	)		(2,335	)		(937	)		(3,758	)

Net cash provided by (used in) investing activities		883,582			(1,338,872	)		864,223			(928,061	)

Cash flows from financing activities:
Repayments of long-term debt		(68,769	)		(970	)		(75,769	)		(3,630	)
(Repayments of) proceeds from repurchase agreements, net		(968,302	)		1,131,946			(963,040	)		920,084
Repurchase of subsidiary stock		(73,011	)		—			(73,300	)		—
Proceeds from subsidiary stock transactions		79,128			576			80,944			458

Net cash (used in) provided by financing activities		(1,030,954	)		1,131,552			(1,031,165	)		916,912

Net decrease in cash and cash equivalents		(217,822	)		(274,420	)		(241,354	)		(465,198	)
Cash and cash equivalents, beginning of period		254,653			692,360			254,653			692,360

Cash and cash equivalents, end of period	$	36,831		$	417,940		$	13,299		$	227,162

Supplemental Cash Flow Information:
Cash payments for interest	$	3,432		$	42,309		$	3,592		$	66,957
Cash payments for taxes		1,223			646		$	1,623		$	667

The consolidated financial statements of Arlington Asset Investment Corp. (Arlington Asset), formerly known as Friedman, Billings, Ramsey Group, Inc. (FBR Group), and its subsidiaries (unless the context otherwise provides, collectively, the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q. Therefore, they do not include all information required by GAAP for complete financial statements. The interim financial statements reflect all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair statement of the results for the periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation. The results of operations for the ~~three-~~three and ~~six-months~~nine months ended ~~June~~September 30, 2009 are not necessarily indicative of the operating results for the entire year or any other subsequent interim period. The Company’s unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with (i) the Company’s audited consolidated financial statements and notes thereto included in Annual Report on Form 10-K for the year ended December 31, ~~2008;~~2008 and (ii) FBR Capital Markets Corporation’s unaudited condensed consolidated financial statements and notes thereto included in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2009; and (iii) FBR Capital Markets Corporation’s audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2008.

Prior to May 20, 2009, the Company consolidated the results of its former subsidiary, FBR Capital Markets Corporation (FBR Capital Markets) because the Company’s wholly-owned subsidiary, FBR TRS Holdings, Inc. (FBR TRS Holdings), owned approximately 56% of the outstanding shares of FBR Capital Markets’ common stock. The Company liquidated 16,667,000 and 1,500,000 shares of FBR Capital Markets common stock on May 20, and June 19, 2009, respectively, resulting in remaining holdings representing an approximately 39% and 24% interest in FBR Capital Markets, respectively. The sale of 16,667,000 shares on May 20, 2009 was to FBR Capital Markets. As a result, effective May 20, 2009, the Company no longer had majority control of FBR Capital Markets and therefore, deconsolidated the results of FBR Capital Markets’ activities in preparing the Company’s unaudited condensed consolidated financial statements. In addition, on July 15, 2009, the Company liquidated an additional 411,032 shares of FBR Capital Markets stock at a price of $4.42 per share in connection with the over-allotment option that was granted to the underwriters under the underwriting agreement entered into on June 15, 2009.

Historically, the Company has conducted its business within four reportable segments: capital markets, asset management, principal investing and mortgage banking operations. In January 2008, as a result of the filing of a voluntary petition for bankruptcy protection by First NLC Financial Services, LLC (First NLC), the Company deconsolidated First NLC, which included the origination and sale of non-conforming residential mortgage loans and was previously reported as the mortgage banking segment. Due to organizational changes effective January 1, 2009, the Company’s chief operating decision maker ~~reviews~~reviewed financial information within two reportable segments: capital markets and principal investing. The capital markets segment ~~includes~~included the operations of FBR Capital Markets and its subsidiaries, and ~~includes~~included the asset management and principal investing operations by FBR Capital Markets, which were previously reported separately. Accordingly, as of January 1, 2009, the Company ~~has~~had reflected the change in segment reporting in accordance with the criteria for segment reporting as set forth in ~~Statement of Financial Standards (SFAS) No. 131, “Disclosures~~amended accounting principles related to disclosures about ~~Segments~~segments of an ~~Enterprise~~enterprise and ~~Related Information.”~~related information. As a result of the Company’s sale of its majority ownership interest in and resulting deconsolidation of FBR Capital Markets on May 20, 2009, the capital markets segment ~~will~~is no longer be a reportable segment in subsequent ~~periods.~~to May 20, 2009.

~~financial~~ statements. Accordingly, the Company reclassified its noncontrolling interest in its former subsidiary, FBR Capital Markets, as a component of equity in the consolidated financial statements for the applicable periods.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions affecting 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. Although the Company bases its estimates and assumptions on historical experience, when available, market information and on various other factors that it believes to be reasonable under the circumstances, management exercises significant judgment in the final determination of its estimates. Actual results may differ materially from those estimates.

Certain amounts in the consolidated financial statements and notes for prior periods have been reclassified to conform to the current period presentation. These reclassifications had no effect on the results of operations of the Company.

The Company adopted ~~SFAS No. 157, “Fair Value Measurements,” (SFAS 157)~~amended accounting principles related to fair value measurements as of January 1, 2008. ~~SFAS 157~~This amendment defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, not adjusted for transaction costs. ~~SFAS 157~~This amendment also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels giving the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3) as described below:

The Company determines fair values for the following assets and liabilities discussed below in accordance with ~~SFAS 157:~~amended accounting principles related to fair value measurements:

Mortgage-backed securities, at fair value—The Company’s agency mortgage-backed securities (MBS), which are generally guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae, and AAA-rated private label MBS are generally classified within Level 2 of the fair value hierarchy as they are valued using quoted market prices provided by a broker or dealer, or alternative pricing sources with reasonable levels of price transparency. The independent brokers and dealers providing market prices are those who make markets in these financial instruments.

The Company classifies certain other non-agency MBS within Level 3 of the fair value hierarchy because they trade infrequently and, therefore, have little or no price transparency. These Level 3 MBS include private label MBS, residual interests in securitizations of non-prime mortgage loans, and collateralized mortgage obligations (CMOs). The Company utilizes present value techniques based on estimated cash flows of the instrument taking into consideration various assumptions derived by management and used by other market participants. These assumptions are corroborated by evidence such as historical data, risk characteristics, transactions in similar instruments, and completed or pending transactions, when available.

Long-term investments, at fair value—The Company’s long-term investments, at fair value, consist of marketable equity securities and a residual interest in a securitization. The Company’s marketable equity securities are classified within Level 1 of the fair value hierarchy as they are valued using quoted market prices. The residual interest in a securitization is classified within Level 3 of the fair value hierarchy and valued as discussed above.

Trading securities and trading account securities sold but not yet purchased, at fair value—Historically, the Company’s trading securities and trading account securities sold but not yet purchased, at fair value, were securities owned or sold by FBR Capital Markets’ broker-dealer subsidiaries and consisted of marketable and non-public equity and convertible debt securities. The Company classified marketable equity securities within Level 1 of the fair value hierarchy if quoted market prices were used to value the securities. Convertible debt securities were generally classified within Level 2 of the fair value hierarchy as they were valued using quoted market prices provided by a broker or dealer, or alternative pricing services that provided a reasonable level of price transparency. Non-public equity and debt securities were classified within Level 3 of the fair value hierarchy if enterprise values were used to value the securities. In determining the enterprise value, the Company relied on FBR Capital Markets’ management and its analysis of various financial, performance and market factors to estimate the value, including where applicable market trading activity, which were sometimes reported by The PORTAL Market^SM, a subsidiary of The NASDAQ Stock Market, Inc.

Derivative instruments—In the normal course of the Company’s operations, the Company is a party to various financial instruments that are accounted for as derivatives in accordance with ~~SFAS No. 133, “Accounting~~amended accounting principles related to accounting for ~~Derivative Instruments~~derivative instruments and ~~Hedging Activities,” as amended (SFAS 133).~~hedging activities. These derivatives are generally classified within Level 2 of the fair value hierarchy because they are valued using broker or dealer quotations which are model based calculations based on market-based inputs, including, but not limited to, contractual terms, market prices, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs.

Equity investments, at fair value—The Company’s equity investments, at fair value, consist of its investment in FBR Capital Markets which is classified within Level 1 of the fair value hierarchy as it is valued using quoted market prices. With the sale of FBR Capital Markets stock on May 20, 2009 and resulting deconsolidation, the Company elected to adopt the provisions of ~~SFAS No. 159, “The Fair Value Option~~amended accounting principles related to the fair value option for ~~Financial Assets~~financial assets and ~~Financial Liabilities, Including an amendment of FASB Statement No. 115” (SFAS 159)~~financial liabilities to its remaining investment in FBR Capital Markets stock. In accordance with the provisions of ~~SFAS 159,~~this amendment, the Company records unrealized gains and losses resulting from the change in the fair value of FBR Capital Markets stock in earnings, as a component of investment income or loss, in the respective reporting period.

Other—Cash and cash equivalents, restricted cash, interest receivable, reverse repurchase agreements, repurchase agreements, accounts payable, accrued expenses and other liabilities are reflected in the consolidated balance sheets at their amortized cost, which approximates fair value because of the short-term nature of these instruments.

The estimated fair values of the Company’s financial instruments are as follows:


	June 30, 2009				December 31, 2008				September 30, 2009				December 31, 2008
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial assets:
Cash and cash equivalents	$	36,831	$	36,831	$	254,653	$	254,653	$	13,299	$	13,299	$	254,653	$	254,653
Non-interest bearing receivables		199		199		32,571		32,571		60		60		32,571		32,571
MBS		149,298		149,298		594,294		594,294		173,895		173,895		594,294		594,294
U.S. Treasury bonds		—		—		550,000		550,000		—		—		550,000		550,000
Trading securities		—		—		9,629		9,629		—		—		9,629		9,629
Equity, long-term and other investments		75,428		75,428		54,976		54,976		90,060		90,060		54,976		54,976
Derivative assets		—		—		264		264		—		—		264		264

Financial liabilities:
Repurchase agreements		94,738		94,738		1,063,040		1,063,040		100,000		100,000		1,063,040		1,063,040
Long-term debt		51,775		31,775		254,357		254,357		16,816		16,816		254,357		254,357
Derivative liabilities		—		—		56		56		—		—		56		56

The following tables set forth by level within the fair value hierarchy financial instruments accounted for under ~~SFAS 157~~amended accounting principles related to fair value measurements as of ~~June~~September 30, 2009 and December 31, 2008. As required by ~~SFAS 157,~~this amendment, assets and liabilities that are measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.


	June 30, 2009								September 30, 2009
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Mortgage-backed securities, at fair value:
Agency	$	119,354	$	—	$	119,354	$	—	$	118,149	$	—	$	118,149	$	—
Other private label		29,944		—		—		29,944		55,746		—		—		55,746

Total		149,298		—		119,354		29,944		173,895		—		118,149		55,746
Equity investments, at fair value:
FBR Capital Markets		71,280		71,280		—		—		87,497		87,497		—		—

Long-term investments, at fair value:
Marketable equity securities		189		189		—		—

Total	$	220,767	$	71,469	$	119,354	$	29,944	$	261,392	$	87,497	$	118,149	$	55,746

The total financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were ~~$29,944,~~$55,746, or ~~11.11%~~19.68% of the Company’s total assets as of ~~June~~September 30, 2009.

The total financial assets measured and reported at fair value on a recurring basis and classified within Level 3 were $69,093, or 4.43% of the Company’s total assets as of December 31, 2008.

The tables below set forth a summary of changes in the fair value and gains and losses of the Company’s Level 3 financial assets and liabilities that are measured at fair value on a recurring basis, for the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008.


	Three Months Ended September 30, 2009
	MBS		Long-Term Investments		Other		Total
Beginning balance, July 1, 2009	$	29,944	$	—	$	—	$	29,944
Total net gains (losses) (realized/unrealized)
Included in earnings		3,151		—		—		3,151
Included in other comprehensive income		685		—		—		685
Net transfers in		—		—		—		—
Net purchases, issuances, settlements, principal payoffs, and amortization/accretion of premium/discount		21,966		—		—		21,966

Ending balance, September 30, 2009	$	55,746	$	—	$	—	$	55,746

The amount of net gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting date	$	244	$	—	$	—	$	244

Gains and losses included in earnings for the three and ~~six~~nine months ended ~~June~~September 30, 2009 and 2008 are reported in the following income statement line descriptions as follows:


											Principal investment-Net investment income (loss)					Capital markets					Principal investment-Net investment income (loss)					Capital markets
	Three Months Ended June 30, 2009					Six Months Ended June 30, 2009					Three Months Ended September 30,										Nine Months Ended September 30,
	Principal investment—Net investment income (loss)		Capital markets			Principal investment—Net investment income (loss)		Capital markets			2009		2008			2009		2008			2009		2008			2009			2008
Total gains (losses) included in earnings for the period	$	177	$	(3	)	$	1,829	$	(117	)	$	3,151	$	(1,233	)	$	—	$	(1,325	)	$	4,981	$	(15,642	)	$	(117	)	$	(4,259	)

Change in unrealized gains relating to assets still held at reporting date	$	177	$	—		$	620	$	—		$	244	$	(10,119	)	$	—	$	(564	)	$	561	$	(96,075	)	$	—		$	(2,447	)

In addition, the Company also measures certain financial assets at fair value on a non-recurring basis. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets. Due to the nature of these financial assets, enterprise values are primarily used to value these financial assets. In determining the enterprise value, the Company analyzes various financial, performance and market factors to estimate fair value, including where applicable, market trading activity. As a result, these financial assets are classified within Level 3 of the fair value hierarchy.

For the three months ended ~~June~~September 30, ~~2009 and 2008, there were no changes to the carrying value of these financial assets. For the three months ended March 31,~~ 2009 and 2008, the Company recognized the following change in carrying value of those assets measured at fair value on a non-recurring basis:


	Fair Value Measurements at March 31, 2009									Three months ended March 31, 2009			Fair Value Measurements at September 30, 2009								Three months ended September 30, 2009
	Total		��	Level 1		Level 2		Level 3		Gains (Losses)			Total		Level 1		Level 2		Level 3		Gains (Losses)
Non-public equity securities	$	—		$	—	$	—	$	—	$	(1,000	)	$	452	$	—	$	—	$	452	$ (86)


		Fair Value Measurements at March 31, 2008									Three months ended March 31, 2008			Fair Value Measurements at September 30, 2008							Three months ended September 30, 2008
	Total			Level 1		Level 2		Level 3		Gains (Losses)			Total		Level 1		Level 2		Level 3		Gains (Losses)
Non-public equity securities	$	12,984		$	—	$	—	$	12,984	$	(6,431	)	$	23,283	$	—	$	—	$	23,283	$(14,205)

For the nine months ended September 30, 2009 and 2008, the Company recognized the following change in carrying value of those assets measured at fair value on a non-recurring basis:

Mortgage-backed securities, at fair value⁽^{1)(1) (2)}, consisted of the following as of the dates indicated:


					September 30, 2009									December 31, 2008
	June 30, 2009		December 31, 2008		Balance		Net Unamortized Premium (Discount)			Percent		WAL	Weighted Average Rating	Balance		Net Unamortized Premium (Discount)		Percent		WAL	Weighted Average Rating
Fannie Mae	$	116,039	$	528,408	$	117,738	$	3,765		67.70	%	3.94	AAA	$	528,408	$	—	88.90	%	2.24	AAA
Freddie Mac		3,315		65,886		411		—		0.20	%	0.08	AAA		—		—	—		—	—
Private-label		29,944		—		55,746		(70,100	)	32.10	%	4.63	CCC		65,886		—	11.10	%	4.34	BB

	$	149,298	$	594,294	$	173,895	$	(66,335	)	100.00	%			$	594,294	$	—	100.00	%

Equity investments, at fair value, consisted of the following as of the dates indicated:

The Company’s long-term and other investments consist of marketable equity investments, which are valued at fair value on a recurring basis and other long-term investments, which are fair valued on a non-recurring basis. The Company’s long-term and other investments consisted of the following as of the dates indicated:


	June 30, 2009		December 31, 2008		September 30, 2009		December 31, 2008
Long-term marketable equity investments	$	189	$	1,043	$	—	$	1,043
Non-public equity securities		2,409		38,203		1,479		38,203
Preferred equity investment		—		1,000		—		1,000
Investments funds		1,550		14,730		1,084		14,730

	$	4,148	$	54,976	$	2,563	$	54,976

The Company’s available-for-sale securities consist primarily of MBS and equity investments in publicly traded companies. In accordance with ~~SFAS No. 115, “Accounting~~amended accounting principles related to accounting for ~~Certain Investments~~certain investments in ~~Debt~~debt and ~~Equity Securities” (SFAS 115),~~equity securities, the securities are carried at fair value with resulting unrealized gains and losses reflected as other comprehensive income or loss. Gross unrealized gains and losses on these securities were the following as of the dates indicated:

The following table provides further information regarding the duration of unrealized losses as of ~~June~~September 30, 2009:

The Company recorded no other-than-temporary impairments on MBS investments during the three and ~~six~~nine months ended ~~June~~September 30, 2009. For the three and ~~six~~nine months ended ~~June~~September 30, 2008, the Company recorded other-than-temporary impairment losses of ~~$3,304~~$110,433 and ~~$6,184,~~$116,617, respectively, related to continued deterioration in credit quality on certain MBS investments with an original cost basis of ~~$67,345.~~$2,194,066 and $2,199,983, respectively.

For the three and ~~six~~nine months ended ~~June~~September 30, 2009, ~~and 2008,~~ the Company recorded no other-than-temporary impairment losses on marketable equity securities. ~~The Company does not consider the remaining~~There are no marketable equity securities in unrealized loss positions as of ~~June~~September 30, 2009 to be other-than-temporarily impaired considering the limited severity and duration of these unrealized losses and/or the Company’s ability and intent to hold these investments for a reasonable period of time sufficient for forecasted recovery of the cost basis. During2009. For the three and ~~six~~nine months ended ~~June~~September 30, 2008, the Company recorded other-than-temporary impairment losses of $2,072 on marketable equity securities with an original cost basis of $4,863. During the nine months ended September 30, 2008, the Company also recognized other-than-temporary impairment losses of ~~$1,611 and~~ $8,640 ~~respectively,~~ in a residual interest in a securitization of non-prime mortgage loans. No such losses were recognized for the three months ended September 30, 2008.

For investments carried at cost, at each reporting date, the Company evaluates its portfolio of such investments for impairment, including consideration of the severity and duration of factors affecting the fair value of these investments. ~~The Company recorded no other-than-temporary impairment losses during the three months ended June 30, 2009 and 2008.~~ During the three months ended ~~March 31,~~September 30, 2009 and 2008, the Company recorded other-than-temporary impairment losses of ~~$1,000~~$86 and ~~$6,431,~~$14,205, respectively, in the consolidated statements of operations, reflecting the Company’s evaluation of the estimated fair value of private equity investments with a remaining cost basis of ~~$1,000~~$452 and ~~$19,415,~~$23,283, respectively. During the nine months ended September 30, 2009 and 2008, the Company recorded other-than-temporary impairment losses of $1,086 and $20,918, respectively, in the consolidated statements of operations, reflecting the Company’s evaluation of the estimated fair value of private equity investments with a remaining cost basis of $452 and $28,533, respectively.

During the three months ended ~~June~~September 30, 2009, the Company received ~~$26,295~~$232,065 from sales of MBS, resulting in gross gains and losses of $2,907 and $1,471, respectively, and received $407 from sales of marketable equity securities, resulting in gross gains of $114 and no losses. During the three months ended September 30, 2008, the Company received $703,697 from sales of MBS, resulting in no gains and gross losses of ~~$83,~~$24,474, respectively. There were no sales of the Company’s marketable equity securities during the three months ended September 30, 2008.

During the nine months ended September 30, 2009, the Company received $806,408 from sales of MBS, resulting in gross gains and losses of $4,253 and $3,055, respectively, and received ~~$731~~$1,138 from sales of marketable equity securities, resulting in gross gains of ~~$56~~$170 and no ~~losses.~~losses, respectively. During the ~~three~~nine months

ended ~~June~~September 30, 2008, the Company received $331,218 from sales of MBS, resulting in gross gains and losses of $285 and $84, respectively, and received $10,709 from sales of marketable equity securities, resulting in gross gains of $1,082 and no losses.

During the six months ended June 30, 2009, the Company received $574,343 from sales of MBS, resulting in gross gains and losses of $1,347 and $1,583, respectively, and received $731 from sales of marketable equity securities, resulting in gross gains of $56 and no gross losses, respectively. During the six months ended June 30, 2008, the Company received $403,459$1,107,155 from sales of MBS, resulting in gross gains and losses of $357 and ~~$84,~~$24,557, respectively, and received $19,065 from sales of marketable equity securities, resulting in gross gains of $1,483 and no ~~gross~~ losses, respectively.

The following table provides information regarding the Company’s outstanding repurchase agreement borrowings as of the dates indicated:


	June 30, 2009			December 31, 2008			September 30, 2009			December 31, 2008
Outstanding balance	$	94,738		$	1,063,040		$	100,000		$	1,063,040
Value of assets pledged as collateral:
Agency mortgage-backed securities		99,771			528,111			106,501			528,111
Non-agency mortgage-backed securities		—			40,381			—			40,381
U.S. Treasury bonds		—			550,000			—			550,000
Weighted-average rate		0.54	%		0.44	%		0.33	%		0.44	%
Weighted-average term to maturity		44.0 days			14.3 days			14.0 days			14.3 days

	June 30, 2009			June 30, 2008			September 30, 2009			September 30, 2008
Weighted-average outstanding balance during the three months ended	$	55,513		$	2,337,360		$	100,575		$	2,993,800
Weighted-average rate during the three months ended		0.56	%		2.68	%		0.44	%		2.53	%
Weighted-average outstanding balance during the six months ended	$	155,742		$	2,051,122
Weighted-average rate during the six months ended		0.70	%		3.11	%
Weighted-average outstanding balance during the nine months ended							$	78,863		$	2,367,642
Weighted-average rate during the nine months ended								0.69	%		2.87	%

As of ~~June~~September 30, 2009, the Company had no amount at risk greater than 10% of equity. As of December 31, 2008, the amount at risk related to $334,908 of repurchase agreements with Barclays Capital Inc. was $28,069, or 19.59% of the Company’s equity with a weighted average maturity of 26 days.

As of ~~June~~September 30, 2009 and December 31, 2008, the Company had ~~$50,000~~$15,000 and $251,689, respectively, of outstanding long-term debt (Trust Preferred securities) issued by FBR TRS Holdings. The ~~long-term debentures~~Trust Preferred securities accrue and require payments of interest quarterly at an annual rate of three-month London Interbank Offer Rate (LIBOR) plus 2.25% to 3.00%. The weighted average interest rate on these long-term debentures was ~~3.82%~~3.26% and 5.65% as of ~~June~~September 30, 2009 and December 31, 2008, respectively. These borrowings mature between 2033 and 2035, and are redeemable, in whole or in part, without penalty, currently or in 2010. During the three and nine months ended ~~June~~September 30, 2009, the Company did not issue additional long-term debentures.

During the three and nine months ended September 30, 2009, the Company extinguished $35,000 and $236,689 of Trust Preferred securities, respectively, at a gain of $27,982 and $160,435, respectively. During the three and nine months ended September 30, 2008, the Company extinguished $6,750 of Trust Preferred securities at a gain of $4,078.

Prior to January 1, 2009, FBR Group was organized and operated in a manner that allowed it to qualify as a real estate investment trust (REIT) for tax purposes. As a REIT, FBR Group was not subjected to federal income tax on earnings distributed to its shareholders. The Company filed a notification with the Internal Revenue Service to revoke its REIT status as of January 1, 2009. As a result, income generated at the parent company

level, along with all of its consolidated subsidiaries, will be subject to federal, state and local income taxes for 2009 and future tax years at regular corporate tax rates, to the extent that it is not offset by net operating loss carry-forwards (NOLs) and net capital loss carry-forwards (NCLs).

The total income tax provision ~~(benefit)~~ recorded for the three and ~~six~~nine months ended ~~June~~September 30, 2009 was ~~($310)~~$3,585 and ~~$9,245,~~$12,830, respectively. The total income tax benefit recorded for the three and ~~six~~nine months ended ~~June~~September 30, 2008 was ~~$9,974~~$18,123 and ~~$10,780,~~$28,903, respectively. The Company generated pre-tax book ~~loss~~income (loss) of ~~$45,405~~$46,022 and ~~$36,999~~($44,207) in the three months ended ~~June~~September 30, 2009 and 2008, respectively. In the ~~six~~nine months ending ~~June~~September 30, 2009 and 2008, ~~respectively,~~ the Company generated pre-tax book income (loss) of ~~$58,813~~$113,215 and ~~$21,456. Note that the~~($22,751), respectively. The 2008 ~~figures reported~~balances include only the former taxable REIT subsidiaries, including FBR TRS Holdings and FBR Capital Markets.

The Company’s effective tax rate for the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008 was ~~15.7%~~11.4% and ~~(50.2%)~~127.0%, respectively. The effective tax rate for the ~~six~~nine months ended ~~June~~September 30, 2008 represents tax only on the former taxable REIT subsidiaries. The effective tax rate during these periods differed from statutory tax rates primarily due to the full valuation allowance on the tax benefit of the book losses incurred in the current period, recognition of ~~FIN 48~~a liability for unrecognized tax benefits, and the expected tax liability related to domestic operations due to projected taxable income for 2009 that will be subject to alternative minimum tax. The effective tax rate for the ~~six~~nine months ended ~~June~~September 30, 2008 differed from statutory tax rates due to the effects of ~~SFAS No. 123(R), “Share-Based Payment” (SFAS 123R),~~amended accounting principles related to share-based payment, as restricted stock awards vested at share prices lower than original grant date prices. The Company expects to realize a portion of the tax benefits of the federal and state net NOLs in 2009, which are reflected in the Company’s projected effective tax rate for the year. The Company will continue to provide a valuation allowance against the other deferred tax assets since the Company believes that it is more likely than not that the benefits will not be realized in the future. The Company will continue to assess the need for a valuation allowance at each reporting date.

The Company adopted ~~Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting~~amended accounting principles related to accounting for ~~Uncertainty~~uncertainty in ~~Income Taxes—an interpretation of FASB Statement No. 109” (FIN 48),~~income taxes effective January 1, 2007. ~~Adoption of FIN 48 did not have a material effect on the consolidated financial statements.~~ The total unrecognized tax benefit as of January 1, 2007, that, if recognized, would affect the Company’s effective tax rate was immaterial. The Company ~~has recorded a liability for~~estimates that, as of September 30, 2009, the range within which unrecognized tax benefits related to the recognition of income between members of the consolidated ~~group. The~~group is $-0- to approximately $14,500, of which the Company has ~~reclassified $1,898 of payable related to prior tax years as a FIN 48 reserve. As of June 30, 2009, the total amount of FIN 48 reserve was $9,158.~~reserved $11,306. The Company continues to record interest and penalties in other ~~expenses/other income~~operating expenses in the statements of operations. The total amount of accrued interest refund and penalties as of the date of adoption was immaterial.

Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share include the impact of dilutive securities such as stock options and unvested shares of restricted stock. The following table presents the computations of basic and diluted earnings per share, adjusted for the 1-for-20 reverse stock split effective October 6, 2009, for the periods indicated:


	Three Months Ended September 30,
	2009				2008
	Basic		Diluted		Basic			Diluted
Weighted average shares outstanding (in thousands):
Common stock		7,705		7,705		7,565			7,565
Stock options and unvested restricted stock		—		190		—			—

Weighted average common and common equivalent shares outstanding		7,705		7,895		7,565			7,565

Net income (loss) applicable to common stock	$	42,437	$	42,437	$	(169,022	)	$	(169,022	)

Earnings (loss) per common share	$	5.51	$	5.38	$	(22.34	)	$	(22.34	)

As of ~~June~~September 30, 2009 and 2008, there were ~~206,239~~10,312 and ~~756,779~~35,812, as adjusted for 1-for-20 reverse stock split, of options to purchase shares of common stock outstanding, respectively. See Note 8 for additional information regarding outstanding restricted ~~stock.~~stock and Note 11 for additional information regarding the reverse stock split.

As discussed above, the Company historically consolidated the results of operations of its former subsidiary, FBR Capital Markets, because the Company’s wholly-owned subsidiary, FBR TRS Holdings, owned approximately 56% of the outstanding shares of FBR Capital Markets’ common stock. The Company liquidated 16,667,000 and 1,500,000 shares of FBR Capital Markets common stock on May 20, and June 19, 2009, respectively, resulting in remaining holdings representing an approximately 39% and 24% interest in FBR Capital Markets, respectively. As a result, effective May 20, 2009, the Company no longer had majority control of FBR Capital Markets and therefore, deconsolidated the results of FBR Capital Markets’ activities in preparing the Company’s consolidated financial statements. The Company recorded $9,776 of losses related to the sales of FBR Capital Markets stock and $4,026 of losses related to the fair value measurement of the remaining shares during the quarter ended June 30, 2009. As previously discussed, with

With the sale of FBR Capital Markets stock on May 20, 2009 and resulting deconsolidation, the Company elected to adopt the provisions of ~~SFAS 159~~amended accounting principles related to the fair value option for financial assets and financial liabilities to apply fair value accounting for the remaining shares of its FBR Capital Markets stock. In accordance with ~~the provisions of SFAS 159,~~this amendment, the Company records unrealized gains and losses resulting from the change in the fair value of FBR Capital Markets stock in earnings, as a component of investment income or loss, in the respective reporting period. The provisions of ~~SFAS 159, paragraph 18f~~this amendment require a disclosure of summarized financial information of FBR Capital Markets in the Company’s consolidated financial ~~statements in accordance with paragraph 20d of APB Opinion No. 18.~~statements. The table below presents summarized financial information of FBR Capital Markets for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008			2009			2008			2009			2008
FBR Capital Markets’ statement of operations data:
Total revenues	$	47,328		$	52,993		$	97,231		$	157,072		$	71,440		$	50,694		$	168,671		$	207,766
Revenues, net of interest expense		47,328			50,488			96,979			154,534			71,440			45,555			168,419			200,089
Loss before income taxes		(21,640	)		(35,223	)		(37,198	)		(46,204	)		(6,958	)		(46,682	)		(44,156	)		(92,886	)
Net loss		(21,744	)		(25,249	)		(37,911	)		(35,423	)		(6,970	)		(28,560	)		(44,881	)		(63,983	)

~~The sale of 16,667,000~~On July 15, 2009, the Company liquidated an additional 411,032 shares ~~on May 20, 2009 was to~~of FBR Capital Markets ~~in accordance with the terms~~stock at a price of ~~a Stock Repurchase Agreement entered into~~$4.42 per share in ~~May 2009. In~~ connection with the ~~Stock Repurchase Agreement,~~over-allotment option that was granted to the underwriters under the underwriting agreement entered into on June 15, 2009. On October 20, 2009, the Company ~~and~~also entered into an underwriting agreement to sell the remaining interest in FBR Capital Markets. See Note 11, Subsequent Events, for additional information regarding subsequent sales of FBR Capital Markets have also agreed that FBR Capital Markets has no additional payment obligations with respect to the FBR Open Golf Tournament (FBR Open). Accordingly, the Company recorded $5,515 related to the remaining obligations on the FBR Open during the three months ended June 30, 2009.stock.

On January 1, 2009, the Company adopted ~~SFAS 160, “Noncontrolling Interests~~amended accounting principles related to noncontrolling interests in ~~Consolidated Financial Statements—an Amendment of ARB No. 51.”~~consolidated financial statements. This ~~statement~~amendment clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Noncontrolling interest (formerly reported as minority interest) represents shares of common stock of FBR Capital Markets held by third-party investors. Accordingly, the Company reclassified its noncontrolling interest in its former subsidiary, FBR Capital Markets, as a component of equity in the consolidated financial statements for the applicable periods.

Except as described below, as of ~~June~~September 30, 2009, the Company was not a defendant or a plaintiff in any lawsuits or arbitrations or involved in any governmental or self-regulatory organization (SRO) matters that are

expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity. The Company is a defendant in a small number of civil lawsuits and arbitrations (together, litigation) relating to its businesses. There can be no assurance that these matters individually or in aggregate will not have a material adverse effect on the Company’s financial condition or results of operations in a future period. However, based on management’s review with counsel, resolution of these matters is not expected to have a material adverse effect on the Company’s financial condition, results of operations or liquidity.

On September 16, 2008, a shareholder derivative action captionedKornfeld, et al. v. Billings, et al., No. 08-1144, was filed in the Circuit Court of Arlington County, Virginia, by Bill Kornfeld and Edward Lapinski. The Company was named as a nominal defendant along with certain current and former officers and directors as individual defendants. The complaint asserts claims under Virginia law against the individual defendants for breach of fiduciary duty and against certain of the individual defendants for unjust enrichment in connection with certain decisions concerning executive compensation. The Company’s Board of Directors established a special committee to conduct a review and evaluation of the plaintiffs’ allegations and make a final decision concerning whether maintenance of the litigation was in the Company’s best interests. The special committee concluded that the litigation was not in the Company’s best interest. On December 8, 2008, the Company moved to dismiss the shareholder derivative action based on the special committee’s recommendation and the individual defendants filed demurrers. On March 5, 2009, the court denied the individual defendants’ demurrers, granted the plaintiffs’ motion for certain discovery and denied the Company’s motion to dismiss with leave to renew the motion following discovery. On July 24, 2009, the plaintiffs filed an amended complaint. The amended complaint contains allegations similar to those in the original complaint and adds a cause of action against certain of the individual defendants for waste. On August 14, 2009, the Company filed an answer to the amended complaint and the individual defendants filed a demurrer to the amended complaint. The likely outcome of this action or its likely impact on the Company’s results of operations at this time cannot be predicted.

On July 20, 2009, counsel to Bill Kornfeld and Edward Lapinski, two purported shareholders of the Company sent a letter to the Company, demanding that the Board of Directors remedy alleged breaches of fiduciary duty by the directors in connection with the sale of a portion of the Company’s FBR Capital Markets stock to FBR Capital Markets on May 20, 2009. The letter alleges that this sale was completed pursuant to an inappropriate process and resulted in an inadequate price. The letter states that the shareholders will file a lawsuit bringing derivative claims if the Company’s Board does not take the demanded action within a reasonable period of time. The Board of Directors has established a special committee of independent directors to investigate the claims made in the demand letter.

On April 7, 2009, the United States Bankruptcy Court for the Southern District of Florida, West Palm Beach Division (Bankruptcy Court) entered a final order (Final Order) approving the Company’s completed settlement agreement with the Trustee of the First NLC bankruptcy estate. The settlement agreement with the Trustee releases all claims that the Trustee or the bankruptcy estate of First NLC may have against the Company and its officers, directors, employees and affiliates in exchange for the payment by the Company of approximately $4,000, which the Company accrued for as of December 31, 2008. Under the settlement agreement, the Company and each of the officers, directors, employees and affiliates released all claims against the Trustee and the First NLC bankruptcy estate. The Company remitted the settlement payment on April 20, 2009 following the Final Order.

There were no dividends declared for the three and ~~six~~nine month period ended ~~June~~September 30, 2009. Pursuant to the Company’s variable dividend policy, the Board of Directors, in its sole discretion, may reinstate the payment of cash dividends when appropriate in the future. No dividends were declared or paid during 2008.

From time to time, the Company grants shares of the its restricted Class A common stock to employees under the Company’s Long-Term Incentive Plan that vest ratably over a three-year period or cliff-vest after two to three years for various purposes based on continued employment over these specified periods. During the three and ~~six~~nine months ended ~~June~~September 30, 2009, the Company did not grant any shares of such restricted Class A common stock. ~~The Company issued no restricted Class A common stock to employees during~~During the three and nine months ended ~~June 30, 2008. During the six months ended June~~September 30, 2008 the Company granted ~~7,753,822~~122 and 387,816 shares, adjusted for 1-for-20 reverse stock split effective October 6, 2009, respectively, of such restricted Class A common stock at weighted average share price of ~~$2.91~~$35.60 and $58.20, adjusted for 1-for-20 reverse stock split effective October 6, 2009, per ~~share.~~share, respectively.

As of ~~June~~September 30, 2009 and December 31, 2008, a total of ~~5,343,692~~264,501 and ~~8,236,384~~411,819 shares, adjusted for 1-for-20 reverse stock split effective October 6, 2009, respectively, of such restricted Class A common stock were outstanding with total unrecognized compensation cost related to unvested shares of ~~$6,847~~$5,192 and $11,382, respectively. The total unrecognized cost is expected to be recognized over a weighted average period of ~~1.61~~1.4 years.

For the three months ended ~~June~~September 30, 2009 and 2008, the Company recognized ~~$1,608~~$1,516 and ~~$3,473~~$3,870 of compensation expense related to its restricted stock, respectively. For the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, the Company recognized ~~$4,331~~$5,848 and ~~$5,641~~$9,511 of compensation expense related to its restricted stock, respectively.

In April 2003, the Company’s Board of Directors authorized a share repurchase program in which the Company may repurchase up to ~~14,000,000~~700,000 shares of the Company’s Class A common stock from time to time. In 2007, the Company’s Board of Directors authorized an additional share repurchase program in which the Company may repurchase up to ~~100,000,000~~5,000,000 shares of the Company’s Class A common stock. During the three and ~~six~~nine months ended ~~June~~September 30, 2009, the Company had no share repurchases and had the authority to repurchase ~~76,237,252~~3,811,863 shares.

On June 1, 2009, the Company’s Board of Directors adopted a shareholder rights plan (Rights Plan) and declared a dividend of one preferred share purchase right (each, a Right) for each outstanding share of the Company’s Class A common stock and Class B common stock. No shareholder approval was required for adoption of the Rights Plan, however, the Company plans to submit the Rights Plan to its shareholders for approval on or before June 4, 2010.

The Board adopted the Rights Plan in an effort to protect against a possible limitation on the Company’s ability to use its NOLs, NCLs and built-in losses under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the Code). The Company’s ability to use its NOLs, NCLs and built-in losses would be limited if there was an “ownership change” under Section 382 of the Code. The Rights Plan was adopted to dissuade any person or group from acquiring 4.9% or more of the Company’s outstanding Class A common stock (each, an Acquiring Person) without the approval of the Board and triggering an “ownership change” as defined by Section 382.

Initially, the Rights will generally not be exercisable and will be attached to and automatically trade with the Class A common stock and Class B common stock. The Rights will separate from the Class A common stock and Class B common stock and a “distribution date” will occur, with certain exceptions and upon a determination of the Company’s Board of Directors, upon the earlier of (i) 10 business days after a public announcement by the Company that a person or group has become an Acquiring Person and (ii) 10 business days after the commencement of a tender or exchange offer by a person or group for 4.9% or more of the Class A common stock. Shareholders who owned 4.9% or more of the Company’s outstanding Class A common stock at the time of adoption of the Rights Plan will not trigger the Rights Plan so long as they do not (i) acquire any additional shares of Class A common stock or (ii) fall under 4.9% ownership of Class A common stock and then re-acquire additional shares so that they own 4.9% or more of the Class A common stock.

Subject to the terms, provisions and conditions of the Rights Plan, and taking into account our 1-for-20 reverse stock split that was effected on October 6, 2009 (see Note 11, Subsequent Events), if the Rights become exercisable, each Right would ~~initially~~ represent the right to purchase from the Company one ten-thousandth of a share of Series A Junior Preferred Stock for a purchase price of $3.00 each, subject to adjustment in accordance with the terms of the Rights Plan. Each post-split share of Class A and Class B common stock is now associated with, and now trades with, 20 Rights. If issued, each 20 fractional ~~share~~shares of preferred stock would give the shareholder approximately the same dividend, voting and liquidation rights as does one share of the Company’s Class A common stock. However, prior to exercise, a Right does not give its holder any rights as a shareholder of the Company, including without limitation any dividend, voting or liquidation rights.

The Rights and the Rights Plan will expire on the earliest of (i) June 4, 2019, (ii) the time at which the Rights are redeemed pursuant to the Rights Plan, (iii) the time at which the Rights are exchanged pursuant to the Rights Plan, (iv) the repeal of Sections 382 and 383 of the Code or any successor statute if the Board determines that the Rights Plan is no longer necessary for the preservation of the applicable tax benefits, (v) the beginning of a taxable year of the Company to which the Board determines that no applicable tax benefits may be carried forward and (vi) the close of business on June 4, 2010 if approval of the Rights Plan by the Company’s shareholders has not been obtained.

~~There was no impact on the Company’s financial results as a result of the adoption of the Rights Plan as of June 30, 2009.~~

subsidiaries, and ~~includes~~included the asset management and principal investing operations by FBR Capital Markets, which were previously reported separately. Accordingly, as of January 1, 2009, the Company ~~has~~had reflected the change in segment reporting in accordance with the criteria for segment reporting as set forth in ~~SFAS No. 131, “Disclosures~~amended accounting principle related to disclosures about ~~Segments~~segments of an ~~Enterprise~~enterprise and ~~Related Information.”~~related information. As a result of the Company’s sale of its majority ownership interest in and resulting deconsolidation of FBR Capital Markets on May 20, 2009, the capital markets segment ~~will~~is no longer be a reportable segment in subsequent ~~periods.~~to May 20, 2009.

The Company has developed systems and methodologies to allocate overhead costs to its business units and, accordingly, presents segment information consistent with internal management reporting. Revenue generating transactions between the individual segments have been included in the net revenue and pre-tax income of each segment. The following table illustrates the financial information for the Company’s segments for the periods indicated. The column labeled “Other” includes financial information for the Company’s historical mortgage banking segment, which the Company no longer separately reports.


	Principal Investing			Capital Markets			Other			Consolidated Totals			Principal Investing			Capital Markets			Other			Consolidated Totals
Three months ended June 30, 2009
Three months ended September 30, 2009
Net revenues													$	23,146		$	—		$	—		$	23,146
Operating income														18,160			—			—			18,160
Three months ended September 30, 2008
Net revenues														(149,978	)		45,555			690			(103,733	)
Operating loss														(157,728	)		(46,682	)		(695	)		(205,105	)
Nine months ended September 30, 2009
Net revenues⁽¹⁾	$	(3,181	)	$	31,171		$	—		$	27,990			20,057			80,824			—			100,881
Operating loss⁽¹⁾		(17,220	)		(10,025	)		—			(27,245	)		(11,598	)		(25,583	)		—			(37,181	)
Three months ended June 30, 2008
Nine months ended September 30, 2008
Net revenues		(1,836	)		50,488			818			49,470			(164,505	)		200,089			2,435			38,019
Operating loss		(11,272	)		(35,223	)		(592	)		(47,087	)		(189,150	)		(92,886	)		(3,810	)		(285,846	)
Six months ended June 30, 2009
Net revenues⁽¹⁾		(3,088	)		80,823			—			77,735
Operating loss⁽¹⁾		(29,757	)		(25,584	)		—			(55,341	)
Six months ended June 30, 2008
Net revenues		(14,527	)		154,534			1,745			141,752
Operating loss		(31,422	)		(46,204	)		(3,115	)		(80,741	)

In December 2007, the FASB issued SFAS No. 160 which re-characterizes minority interests in consolidated subsidiaries as noncontrolling interests and requires the classification of minority interests as a component of equity. Under SFAS 160, a change in control is measured at fair value, with any gain or loss recognized in earnings. The effective date for SFAS 160 is for annual periods beginning on or after December 15, 2008. Early adoption and retroactive application of SFAS 160 to fiscal years preceding the effective date are not permitted. The Company adopted the provisions of SFAS 160 effective January 1, 2009. As a result, the Company reclassified the noncontrolling interest (formerly reported as minority interest) component of the Company’s balance sheet as a component of equity for the applicable periods.

In April 2009, the FASB issued three FASB Staff Positions (FSPs) to provide additional application guidance and enhance disclosures regarding fair value measurements and impairment of securities as follows:

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,” provides guidelines for making fair value measurement more consistent with the principles presented in FASB statement No. 157, “Fair Value Measurements” (SFAS 157). FSP FAS 157-4 relates to determining fair values when there is no active market or where the price inputs being used represent distressed sales. It reaffirms what SFAS 157 states is the objective of fair value measurement—to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive.

FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments,” enhances consistency in financial reporting by increasing the frequency of fair value disclosures. FSP FAS 107-1 and APB 28-1 relate to fair value disclosures for any financial instruments that are not currently reflected on the balance sheet of companies at fair value. Prior to issuing this FSP, fair values for these assets and liabilities were only

disclosed once a year. The FSP now requires these disclosures on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value.

FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments,” provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. FSP FAS 115-2 and FAS 124-2 on other-than-temporary impairments is intended to bring greater consistency to the timing of impairment recognition, and provide greater clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. The measure of impairment in comprehensive income remains fair value. The FSP also requires increased and more timely disclosures sought by investors regarding expected cash flows, credit losses, and an aging of securities with unrealized losses.

~~The Company adopted the provisions of these three FSPs during the quarter-ended June 30, 2009. The adoption of these FSPs did not have a material impact on the Company’s financial position.~~

In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” This FSP applies to all assets acquired and liabilities assumed in a business combination that arise from contingencies that would be within the scope of FAS No. 5, “Accounting for Contingencies,” if not acquired or assumed in a business combination, except for assets or liabilities arising from contingencies that are subject to specific guidance in Statement 141(R). FSP FAS 141(R)-1 states that the acquirer will recognize such an asset or liability if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If it cannot be determined during the measurement period, then the asset or liability should be recognized at the acquisition date if certain criteria are met. This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company had no transactions applicable to FSP FAS 141(R)-1 as of June 30, 2009.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued and sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosure that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009. The Company’s adoption of SFAS 165 did not have a significant impact on the Company’s financial position or disclosure.

In June 2009, the FASB issued ~~SFAS No. 166, “Accounting~~amended accounting principles related to accounting for ~~Transfers~~transfers of ~~Financial Assets, an Amendment of FASB Statement No. 140” SFAS 166. SFAS 166~~financial assets. This amendment improves financial reporting by eliminating the exceptions for qualified special-purpose entities from the consolidation guidance and the exception that permitted sale accounting for certain mortgage securitizations when a transferor has not surrendered control over the transferred financial assets. In addition, comparability and consistency in accounting for transferred financial assets will be improved through clarifications of the requirements for isolation and limitations on portions of financial assets that are eligible for sale accounting. ~~SFAS 166~~This guidance is effective January 1, 2010 for the Company. Earlier application is prohibited and ~~the SFAS 166~~it must be applied to transfers occurring on or after the effective date. The Company is evaluating the impact of adoption of ~~SFAS 166~~the amendment on its consolidated financial statements.

In June 2009, the FASB issued ~~SFAS No. 167, “Amendments~~amended accounting principles related to ~~FASB Interpretation No. 46(R)” (SFAS 167). SFAS 167 amends Interpretation 46(R) to replace~~the consolidation of variable-interest entities. This amendment replaces the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity

that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity or the right to receive benefits from the entity. An approach that is expected to be primarily qualitative will be more effective for identifying which enterprise has a controlling financial interest in a variable interest entity. ~~SFAS 167~~The amendment is effective as of January 1, 2010 for the Company. The Company is evaluating the impact of adoption of ~~SFAS 167~~the amendment on its consolidated financial statements.

In June 2009, the FASB has issued guidance related to the FASB Accounting Standards Codification and the hierarchy of generally accepted accounting principles. This guidance establishes the FASB Accounting Standards Codification™ (Codification or ASC) as the single source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.

Following the Codification, the Board will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.

GAAP is not intended to be changed as a result of the FASB’s Codification project, but it will change the way the guidance is organized and presented. As a result, these changes will have a significant impact on how companies reference GAAP in their financial statements and in their accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009. The Company implemented the Codification in this quarterly report.

The Company evaluated subsequent events through ~~August 10,~~November 9, 2009, the date the financial statements were issued.

~~Subsequent to June 30,~~On October 1, 2009, the Company ~~extinguished $25,000~~announced a 1-for-20 reverse split of ~~trust-preferred long-term debt at~~its Class A and Class B common stock in accordance with the previously approved shareholder authorization. The reverse stock split was effective October 6, 2009. Upon the effectiveness of the reverse stock split, each twenty shares of issued and outstanding common stock were converted into one share of common stock. The Company did not issue fractional shares and shareholders received a ~~gain~~cash payment for fractional shares based on the split-adjusted average price of the Class A common stock before the effective time. The reverse split reduced the number of shares of the Company’s common stock outstanding from approximately ~~$20,000.~~160 million to approximately 8 million. Proportional adjustments were made to outstanding stock options and other equity incentive awards and equity compensation plans. The number of authorized shares of common stock did not change.

On ~~July 15,~~October 28, 2009, the Company ~~liquidated an additional 411,032~~announced the closing on the sale of 14,755,017 shares of FBR Capital Markets common stock at ~~a price of $4.42~~$6.00 per share in ~~connection with the over-allotment option that was granted~~an underwritten public offering. Proceeds to the ~~underwriters under~~Company, after the underwriting ~~agreement entered into on June 15,~~discount but before expenses, were $84,104. The net price per share after the underwriting discount to the Company of $5.70, is less than the carrying value of the FBR Capital Markets stock of $5.93 at September 30, 2009, and will result in the Company recording a pre-tax book loss of $3,394 during the quarter ending December 31, 2009.

25 These shares represented the Company’s remaining interest in FBR Capital Markets.

The following analysis of the unaudited condensed consolidated financial condition and results of operations of Arlington Asset Investment Corp. (Arlington Asset), formerly known as Friedman Billings Ramsey Group, Inc. (FBR Group) and its subsidiaries, including FBR Capital Markets Corporation (FBR Capital Markets) (unless the context otherwise provides, collectively, “we”, “us”, “our” or the “Company”), should be read in conjunction with (i) the Company’s audited consolidated financial statements and notes thereto included in Annual Report on Form 10-K for the year ended December 31, ~~2008;~~2008 and (ii) ~~FBR Capital Markets’ unaudited condensed consolidated financial statements and notes thereto included in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2009; and (iii)~~ FBR Capital Markets’ audited consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the year ended December 31, 2008.

The Company’s unaudited condensed consolidated financial statements include the results of its former subsidiary, FBR Capital Markets through May 20, 2009. Prior to May 20, 2009, the Company’s wholly-owned subsidiary, FBR TRS Holdings, Inc. (FBR TRS Holdings), owned approximately 56% of the outstanding shares of FBR Capital Markets. The Company liquidated 16,667,000 and 1,500,000 shares of FBR Capital Markets common stock on May 20 and June 19, 2009, respectively, resulting in remaining holdings representing an approximately 39% and 24% interest in FBR Capital Markets, respectively. The sale of 16,667,000 shares on May 20, 2009 was to FBR Capital Markets. As a result, effective May 20, 2009, the Company no longer had majority control of FBR Capital Markets and therefore, deconsolidated the results of FBR Capital Markets’ activities in preparing the Company’s consolidated financial statements. In addition, on July 15, 2009, the Company liquidated an additional 411,032 shares of FBR Capital Markets stock at a price of $4.42 per share in connection with the over-allotment option that was granted to the underwriters under the underwriting agreement entered into on June 15, 2009.

The discussion of the Company’s consolidated financial condition and results of operations below may contain forward-looking statements. These statements, which reflect management’s beliefs and expectations, are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of the risks and uncertainties that may affect the Company’s future results, please see “Forward-Looking Statements” immediately following Item 4 of this report on Form 10-Q.

The sale of FBR Capital Markets stock is in furtherance of the strategic shift the Company has initiated to focus on a principal investing strategy by monetizing our investment in FBR Capital Markets. Given ~~current~~recent dislocations in the capital markets, the Company seeks to benefit from potential high current cash returns available on mortgage investments. The Company plans to deploy the net cash proceeds for investments that offer current income as well as capital appreciation potential, and which may utilize the Company’s net operating loss carry-forwards (NOLs) and net capital loss carry-forwards (NCLs). The Company expects future investments to include non-agency residential ~~MBS~~mortgage-backed securities (MBS) and residential MBS guaranteed by a U.S. Government agency or U.S. Government-sponsored entity, among others. The Company may also consider opportunities for financial service operating businesses potentially in the form of a bank charter, and will seek to continue strengthening its balance sheet by converting long-term debt to equity through the extinguishment of the remaining $15.0 million Trust Preferred securities at a discount to face value.

As discussed above, ~~on May 20 and June 19, 2009,~~ we liquidated ~~16,667,000 and 1,500,000~~an additional 411,032 shares of FBR Capital Markets stock at a price of $4.42 per share on July 15, 2009 in connection with the over-allotment option that was granted to the underwriters under the underwriting agreement entered into on June 15, 2009. We have continued our efforts to divest our holdings in FBR Capital Markets to further fund the principal investing strategy. Accordingly, on October 28, 2009, the Company announced the closing on the sale of 14,755,017 shares of FBR Capital Markets common stock ~~respectively, resulting~~at $6.00 per share in ~~remaining holdings representing~~ an ~~approximately 39%~~underwritten public offering. Proceeds to the Company, after the

underwriting discount but before expenses, were $84.1 million. The net price per share after the underwriting discount to the Company of $5.70, is less than the carrying value of the FBR Capital Markets stock of $5.93 at September 30, 2009, and ~~24%~~will result in the Company recording a pre-tax book loss of $3.4 million during the quarter ending December 31, 2009. These shares represented the Company’s remaining interest in FBR Capital Markets, respectively. As a result, effective May 20, 2009, we deconsolidated the results of FBR Capital Markets’ activities in preparing the Company’s consolidated financial statements. The Company recorded $9.8 million of losses related to the sales of FBR Capital Markets stock and $4.0 million of losses related to the fair value measurement of the remaining shares duringMarkets.

During the quarter ended ~~June~~September 30, ~~2009. With the sale of FBR Capital Markets stock on May 20,~~ 2009, ~~and resulting deconsolidation, the Company elected to adopt the provisions of SFAS 159 to apply fair value accounting for the remaining shares of its FBR Capital~~

~~Markets stock. In accordance with the provisions of SFAS 159, the Company records~~we recorded $18.1 million in unrealized gains ~~and losses~~ resulting from the change in the fair value of FBR Capital Markets stock ~~in earnings,~~ as a component of investment income ~~or loss, in~~on the ~~respective reporting periods.~~income statement.

~~The sale~~Our efforts to continue the extinguishment of 16,667,000 shares on May 20, 2009 was to FBR Capital Markets in accordance with the terms of a Stock Repurchase Agreement entered into in May 2009. In connection with the Stock Repurchase Agreement, the Company and FBR Capital Markets have also agreed that FBR Capital Markets has no additional payment obligations with respect to the FBR Open Golf Tournament (FBR Open). Accordingly, the Company recorded $5.5 million related to the remaining ~~obligations on the FBR Open during~~Trust Preferred securities resulted in an additional extinguishment of $35.0 million of Trust Preferred securities at a gain of $28.0 million for the three months ended ~~June~~September 30, 2009. As of September 30, 2009, we have $15.0 million in remaining Trust Preferred securities.

The results of the Company’s operations, without the results of FBR Capital Markets’ operations, as compared to the results of consolidated operations as reported, for the three and ~~six~~nine months ended ~~June~~September 30, 2009 are as follows (dollars in thousands):

~~Pro-Forma~~Pro Forma Results of Operations, Excluding FBR Capital Markets’ Operations


	Three Months Ended June 30, 2009						Six Months Ended June 30, 2009						Three Months Ended September 30, 2009						Nine Months Ended September 30, 2009
	Pro-forma			As Reported			Pro-forma			As Reported			Pro forma			As Reported			Pro forma			As Reported
Revenues:
Capital markets	$	—		$	31,171		$	—		$	81,075		$	—		$	—		$	—		$	81,075
Principal investment:
Interest		1,282			1,282			3,881			3,881			3,719			3,719			7,600			7,600
Net investment loss		(3,989	)		(3,989	)		(3,983	)		(3,983	)
Net investment income														19,737			19,737			15,754			15,754
Dividends		108			108			108			108			—			—			108			108

Total revenues		(2,599	)		28,572			6			81,081			23,456			23,456			23,462			104,537
Interest expense		582			582			3,095			3,346			310			310			3,405			3,656

Revenues, net of interest expense		(3,181	)		27,990			(3,089	)		77,735			23,146			23,146			20,057			100,881

Non-Interest Expenses:
Compensation and benefits		2,363			25,594			10,502			70,731			2,735			2,735			13,238			73,466
Professional services		4,892			7,224			5,120			11,993			878			878			5,997			12,871
Business development		5,534			7,142			7,884			13,123			16			16			7,900			13,139
Clearing and brokerage fees		—			2,653			—			5,950			—			—			—			5,950
Occupancy and equipment		175			5,374			322			13,479			94			94			416			13,573
Communications		82			3,637			148			8,864			100			100			247			8,964
Other operating expenses		994			3,611			2,694			8,936			1,163			1,163			3,857			10,099

Total non-interest expenses		14,040			55,235			26,670			133,076			4,986			4,986			31,655			138,062

Operating loss		(17,221	)		(27,245	)		(29,759	)		(55,341	)
Operating income (loss)														18,160			18,160			(11,598	)		(37,181	)

Other Income (Loss):
Loss on subsidiary share transactions		(9,776	)		(9,776	)		(9,912	)		(9,912	)		(116	)		(116	)		(10,028	)		(10,028	)
Gain on extinguishment of long-term debt		—			—			132,453			132,453			27,982			27,982			160,435			160,435
Other loss		(4	)		(4	)		(7	)		(7	)		(4	)		(4	)		(11	)		(11	)

(Loss) income before income taxes and noncontrolling interest		(27,001	)		(37,025	)		92,775			67,193
Income tax (benefit) provision		(501	)		(310	)		8,445			9,245
Income before income taxes and noncontrolling interest														46,022			46,022			138,798			113,215
Income tax provision														3,585			3,585			12,029			12,830

Net (loss) income	$	(26,500	)	$	(36,715	)	$	84,330		$	57,948
Net income													$	42,437		$	42,437		$	126,769		$	100,385

With the Company’s sale of its majority ownership interest in and resulting deconsolidation of FBR Capital Markets activities effective May 20, 2009, the Company’s consolidated financial statements ~~will~~for the periods subsequent to May 20, 2009 no longer include the results of operations of FBR Capital ~~Markets and will cease to report a capital markets segment~~Markets.

~~During~~second quarter and continuing in the third quarter ~~ended June 30,~~of 2009, we ~~began~~have continued our efforts to re-build our mortgage-backed securities (MBS) portfolio. Our strategy is to be selective in identifying non-agency senior MBSs that could provide attractive loss-adjusted yield on an unlevered basis. As of ~~June~~September 30, 2009, the Company had ~~$29.9~~$55.7 million in unlevered non-agency MBS. We are also continuing to invest in agency MBS on a leveraged ~~basis as we believe that these investments will provide attractive risk-adjusted returns given the current environment.~~basis. As of ~~June~~September 30, 2009, the Company had ~~$119.4~~$118.1 million in its agency MBS portfolio. We will continue to evaluate investment opportunities against the returns available in each of our investment alternatives and endeavor to allocate our assets and capital with an emphasis toward the highest risk-adjusted return available. This strategy may cause us to have different allocations of capital in different environments.

The Company recorded net interest income of ~~$1.2~~$3.6 million and ~~$8.5~~$7.7 million from MBS held in its principal investment portfolio for the three months ended ~~June~~September 30, 2009 and 2008, respectively. The Company recorded net interest income of ~~$3.6~~$7.2 million and ~~$14.9~~$22.6 million from MBS held in its principal investment portfolio for the ~~six~~nine months ended ~~June~~September 30, 2009 and 2008, respectively. The decrease in net interest income during the three and ~~six~~nine months ended ~~June~~September 30, 2009 is due mainly to the decrease in the average balance of MBS investments held in our portfolio offset by the increase in the average yield.

The total value of our merchant banking portfolio and other investments was ~~$75.4~~$90.1 million as of ~~June~~September 30, 2009. Of this total, ~~$71.3~~$87.5 million represents an investment in FBR Capital Markets, ~~$2.6~~$1.5 million was held in the merchant banking portfolio and ~~$1.5~~$1.1 million was held in alternative asset funds. ~~Net~~There were no unrealized losses in the merchant banking portfolio included in accumulated other comprehensive income (AOCI) ~~totaled $0.1 million~~ as of ~~June~~September 30, 2009.

During the three and ~~six~~nine months ended ~~June~~September 30, 2009, we recorded $0.5 million and ~~$1.5~~$2.0 million, respectively, in other-than-temporary impairment write-downs as part of the Company’s quarterly assessments of unrealized losses in its merchant banking and other investment portfolio.

Three months ended ~~June~~September 30, 2009 compared to three months ended ~~June~~September 30, 2008

The Company had a net ~~loss~~income of ~~$32.2~~$42.4 million in the ~~second~~third quarter of 2009 versus a net loss of ~~$25.1~~$169.0 million in the ~~second~~third quarter of 2008. Net ~~loss~~income (loss) included the following results of operations by segment (dollars in thousands):

~~The increase in net loss attributable to Arlington Asset shareholders~~Net income for the third quarter of 2009 is primarily due to ~~losses recorded~~the gain on extinguishment of long-term debt and investment income from ~~the sales of~~fair value changes in our investment in FBR Capital Markets common ~~stock during~~stock. Net loss for the ~~second~~third quarter of ~~2009~~2008 was primarily the result of other-than-temporary impairment losses recorded on our MBS investments and ~~the valuation loss on the remaining shares of~~losses generated by FBR Capital ~~Markets stock.~~Markets.

The Company’s revenues, net of interest expense, ~~decreased~~increased to ~~$28.0~~$23.1 million in the ~~second~~third quarter of 2009 from ~~$49.5~~$(103.7) million in the ~~second~~third quarter of 2008 due to the changes in revenues and interest expense described below.

Revenues from our principal investment activities, net of related interest expense, totaled ~~$(2.7)~~$23.3 million in the ~~second~~third quarter of 2009 as compared to ~~$3.4~~a loss of $145.0 million in the ~~second~~third quarter of 2008. The ~~decrease~~change in net revenues is primarily the result of the recognition of other-than-temporary impairment losses related to the Company’s MBS portfolio during the third quarter of 2008. No other-than-temporary impairments were recognized in the third quarter of 2009 related to the MBS portfolio. In addition, the Company recognized net investment income on the fair value change of our investment in FBR Capital Markets common stock for the third quarter of 2009. These investment gains were partially offset by a decrease in MBS interest income resulting from lower average MBS ~~balances and a decrease in investment losses offset by the losses incurred as a result of fair value changes in our investment in FBR Capital Markets stock.~~balances. Revenues from our principal investment activities included the following (dollars in thousands):


	For the quarter ended June 30,						For the quarter ended September 30,
	2009			2008			2009		2008
Net interest income	$	1,203		$	8,854		$	3,605	$	7,949
Net investment loss—principal investing		(3,989	)		(5,542	)
Net investment income (loss)—principal investing								19,737		(153,110	)
Dividend income		108			133			—		158

Principal investment income (loss)							$	23,342	$	(145,003	)
	$	(2,678	)	$	3,445

The components of net interest income from principal investing segment are summarized in the following table (dollars in thousands):


	Three months ended June 30, 2009							Three months ended June 30, 2008							Three months ended September 30, 2009							Three months ended September 30, 2008
	Average Balance		Income / (Expense)			Yield / (Cost)		Average Balance		Income / (Expense)			Yield / (Cost)		Average Balance		Income (Expense)			Yield (Cost)		Average Balance		Income (Expense)			Yield (Cost)
Mortgage-backed securities⁽¹⁾	$	75,101	$	1,280		6.82	%	$	2,274,713	$	22,532		3.96	%	$	166,271	$	3,717		8.94	%	$	2,525,719	$	22,923		3.63	%
Other⁽²⁾				2							310							2							250

																		3,719							23,173
				1,282							22,842
Repurchase agreements	$	55,514		(79	)	(0.57	)%	$	1,961,642		(13,358	)	(2.69	)%	$	100,575		(114	)	(0.45	)%	$	2,189,574		(14,259	)	(2.55	)%
Derivative contracts⁽³⁾		—		—					—		(630	)						—							(965	)

	$	55,514		(79	)	(0.57	)%	$	1,961,642		(13,988	)	(2.85	)%	$	100,575		(114	)	(0.45	)%	$	2,189,574		(15,224	)	(2.78	)%

Net interest income/spread			$	1,203		6.25	%			$	8,854		1.11	%			$	3,605		8.49	%			$	7,949		0.85	%

As shown in the table above, net interest income decreased by ~~$7.7~~$4.3 million to ~~$1.2~~$3.6 million during the three months ended ~~June~~September 30, 2009 compared to ~~$8.9~~$7.9 million during the three months ended ~~June~~September 30, 2008. This decrease in interest income was primarily due to a lower average balance on the MBS portfolio.

The Company recognized net investment ~~loss~~income of ~~$4.0~~$19.7 million during the ~~second~~third quarter 2009 compared to a net investment loss of ~~$5.5~~$153.1 million in the ~~second~~third quarter 2008. The following table summarizes the components of net investment ~~loss~~income (loss) (dollars in thousands):


	Three months ended June 30,						Three months ended September 30,
	2009			2008			2009			2008
Available for sale and cost method securities—other-than-temporary impairments	$	—		$	(3,304	)	$	(86	)	$	(118,720	)
Fair value change in investment in FBR Capital Markets stock		(4,026	)		—			18,149			—
Losses from investments funds		(547	)		(326	)		(399	)		(1,448	)
Realized (losses) gains on sale of available for sale investments, net		(83	)		737
Residual interest in a securitization—other-than-temporary impairments		—			(1,611	)
Realized gains (losses) on sale of available for sale investments, net								1,822			(24,474	)
Other net investment income (loss)		667			(1,038	)		251			(8,468	)

Net investment income (loss)							$	19,737		$	(153,110	)
	$	(3,989	)	$	(5,542	)

Fair value change in investment in FBR Capital Markets stock reflects the change in fair value of FBR Capital Markets stock ~~subsequent to~~during the ~~May 20, 2009 deconsolidation.~~quarter ended September 30, 2009.

Loss from investment funds reflects the earnings from and valuation adjustment of investments in proprietary investment partnerships and other managed investments.

Other net investment income (loss) primarily includes net gains and losses from the changes in the fair value of investments in our MBS portfolio and derivative transactions.

Capital markets’ revenues, generated through FBR Capital Markets and its subsidiaries and consolidated through May 20, 2009, decreased 41.1% to $31.2 million in the quarter ended June 30, 2009 from $53.0 million

~~in the quarter ended June 30, 2008. This decrease was mainly attributable to the deconsolidation of FBR Capital Markets’ activities during the second quarter of 2009.~~

Principal investing interest revenue decreased ~~94.3%~~84.1% to ~~$1.3~~$3.7 million in the ~~second~~third quarter of 2009 from ~~$22.8~~$23.2 million in the ~~second~~third quarter of 2008. Net investment ~~loss decreased~~income increased to ~~$4.0~~$19.7 million in the ~~second~~third quarter of 2009 from ~~$5.5~~a loss of $153.1 million in the ~~second~~third quarter of 2008. The decrease in interest income year over year was a result of the lower average balance in the MBS portfolio as a result of the downsizing effort to reduce exposure to deteriorating market conditions while at the same time generating additional cash to fund the extinguishment of long-term debt in the first quarter of 2009. The ~~decrease~~change in net investment ~~loss was a~~income (loss) is primarily the result of ~~other-than-temporary impairment losses on MBS and a residual interest~~increase in ~~securitizations recorded in the second quarter of 2008 with no comparable losses recorded in the second quarter of 2009 offset by~~ fair value ~~losses recorded on~~of our investment in FBR Capital ~~Markets~~Markets’ common stock and ~~change in derivative activities.~~no recognition of other-than-temporary impairment losses related to the Company’s MBS portfolio during the third quarter of 2009.

Interest expense, related primarily to long-term debt issued through FBR TRS Holdings, decreased ~~97.3%~~98.8% to ~~$0.6~~$0.3 million in the ~~second~~third quarter of 2009 from ~~$21.9~~$25.4 million in the ~~second~~third quarter of 2008 as a result of a decrease in outstanding principal balances due to the extinguishment during the first ~~quarter~~and third quarters of 2009 and lower LIBOR based interest rates associated with these floating rate borrowings.

Total non-interest expenses decreased ~~42.9%~~95.1% to ~~$55.2~~$5.0 million in the ~~second~~third quarter of 2009 from ~~$96.6~~$101.4 million in the ~~second~~third quarter ~~2008. This decrease was caused by the fluctuations in non-interest expenses discussed below.~~

~~Compensation and benefits expense decreased 52.6% to $25.6 million in the second quarter 2009 from $54.0 million in the second quarter~~of 2008. The decrease was primarily attributable to the deconsolidation of FBR Capital Markets’ activities during the second quarter of 2009 and the results of the cost reduction efforts taken during the last year.

~~Professional services expense decreased 31.4% to $7.2 million in the second quarter 2009 from $10.5 million in the second quarter 2008 primarily due to the deconsolidation~~The Company had an income tax provision of ~~FBR Capital Markets’ activities during the second quarter of 2009.~~

Business development expenses increased 4.4% to $7.1 million in the second quarter 2009 from $6.8 million in the second quarter 2008. The increase was primarily due to an increase in expenses associated with costs for the PGA Tour’s FBR Open.

Clearing and brokerage fees decreased 20.6% to $2.7 million in the second quarter 2009 from $3.4 million in the second quarter 2008. The decrease reflects the effects of the deconsolidation of FBR Capital Markets’ activities during the second quarter of 2009.

Occupancy and equipment expense decreased 37.2% to $5.4 million in the second quarter 2009 from $8.6 million in the second quarter 2008. The decrease in expenses is attributable to the effects of cost reduction initiatives over the past year including decreased costs associated with technology upgrades and the deconsolidation of FBR Capital Markets’ activities during the second quarter of 2009.

~~Communications expense decreased 42.9% to~~ $3.6 million in the ~~second~~third quarter of 2009 ~~from $6.3~~as compared to an income tax benefit of $18.1 million in the ~~second~~third quarter ~~2008. The decrease in expenses is primarily due to the effects~~ of cost reduction initiatives over the past year including decreased costs related to market data and customer trading services and the deconsolidation of FBR Capital Markets’ activities during the second quarter of 2009.

~~The total income tax benefit decreased 97.0% to $0.3 million in the second quarter 2009 from $10.0 million in the second quarter~~ 2008. The decrease is due primarily to the recording of the tax provision due to the discrete period reporting of the tax effects of the gain recognized from the extinguishment of debt during the first ~~quarter~~and third quarters of 2009. Our effective tax rate was ~~0.7%~~6.7% in the ~~second~~third quarter of 2009 as compared to ~~27.0%~~41.0% in the ~~second~~third quarter

of 2008. For the ~~second~~third quarter of 2009, our deferred tax assets continue to reflect a full valuation allowance as the Company believes it is more likely than not that the benefits will not be realized in the future.

~~Net~~Subsequent to the deconsolidation of FBR Capital Markets effective May 20, 2009, the Company no longer records activities related to the noncontrolling interest of consolidated subsidiary. $13.9 million of net loss attributable to the noncontrolling interest of consolidated subsidiary for the third quarter of ~~$4.6 million~~2008 represents minority interest holders’ share of losses of FBR Capital Markets ~~for the second quarter 2009 as compared to $12.3 million for the second quarter 2008.~~during that period.

~~Six~~Nine months ended ~~June~~September 30, 2009 compared to ~~six~~nine months ended ~~June~~September 30, 2008

Net income increased to ~~$69.4~~$111.8 million in the ~~six~~nine months ended ~~June~~September 30, 2009 from ~~$20.1~~a loss of $149.0 million in the ~~six~~nine months ended ~~June~~September 30, 2008. Net income included the following results of operations by segment (dollars in thousands):


	Six Months Ended June 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Capital Markets	$	(25,584	)	$	(46,204	)	$	(25,583	)	$	(92,886	)
Principal Investment		(29,757	)		(31,422	)		(11,598	)		(189,150	)
Other		—			(3,115	)		—			(3,810	)

Operating loss		(55,341	)		(80,741	)		(37,181	)		(285,846	)
Net income from extinguishment of debt, subsidiary share transactions and other		122,534			72,845			150,396			76,919

Income (loss) before taxes and noncontrolling interest		67,193			(7,896	)		113,215			(208,927	)
Income tax provision (benefit)		9,245			(10,780	)		12,830			(28,903	)
Noncontrolling interest in losses of consolidated subsidiary		(11,459	)		(17,167	)		(11,459	)		(31,053	)

Net income attributable to Arlington Asset shareholders	$	69,407		$	20,051
Net income (loss) attributable to Arlington Asset shareholders							$	111,844		$	(148,971	)

~~The increase in net~~Net income for the first nine months of 2009 is primarily ~~attributable~~due to the ~~$132.5 million~~ gain on extinguishment of long-term debt and investment income from fair value changes in our investment in FBR Capital Markets common stock. Net loss for the first ~~quarter~~nine months of ~~2009.~~2008 was primarily the result of other-than-temporary impairment losses recorded on our MBS investments and losses generated by FBR Capital Markets.

The Company’s revenues, net of interest expense, ~~decreased~~increased to ~~$77.7~~$100.9 million in the first ~~six~~nine months of 2009 from ~~$141.8~~$38.0 million in the first ~~six~~nine months of 2008 due to the changes in revenues and interest expense described below.

Revenues from our principal investment activities, net of related interest expense, totaled ~~$(0.3)~~$23.0 million in the first ~~six~~nine months of 2009 as compared to ~~$(2.9)~~a loss of $147.9 million in the first ~~six~~nine months of 2008. The change in net revenues is primarily the result of the recognition of other-than-temporary impairment losses related to the Company’s MBS portfolio and a residual interest in a securitization of non-prime mortgage loans during the first ~~half~~nine months of 2008. No other-than-temporary impairments were recognized in the first ~~half~~nine months of 2009 related to ~~MBS. This decrease~~MBS or a residual interest in ~~other-than-temporary impairment losses were offset by losses incurred from~~a securitization. In addition, the Company recognized net investment income on the fair value change of our ~~equity~~ investment in FBR Capital ~~Markets.~~Markets common stock subsequent to May 20, 2009. These investment gains were partially offset by a decrease in MBS interest income resulting from lower average MBS balances. Revenues from our principal investment activities included the following (dollars in thousands):


	Six Months Ended June 30,						Nine Months Ended September 30,
	2009			2008			2009		2008
Net interest income	$	3,581		$	16,976		$	7,186	$	24,924
Net investment loss—principal investing		(3,983	)		(20,201	)
Net investment income (loss)—principal investing								15,754		(173,311	)
Dividend income		108			339			108		497

Principal investment income (loss)							$	23,048	$	(147,890	)
	$	(294	)	$	(2,886	)

The components of net interest income from mortgage investments are summarized in the following table (dollars in thousands):


	Six Months Ended June 30,														Nine Months Ended September 30,
	2009							2008							2009							2008
	Average Balance		Income / (Expense)			Yield / (Cost)		Average Balance		Income / (Expense)			Yield / (Cost)		Average Balance		Income (Expense)			Yield (Cost)		Average Balance		Income (Expense)			Yield (Cost)
Mortgage-backed securities⁽¹⁾	$	91,830	$	3,861		8.41	%	$	2,107,574	$	45,629		4.33	%
Mortgage-backed securities⁽¹⁾															$	116,639	$	7,579		8.66	%	$	2,246,956	$	68,551		4.07	%
Other⁽²⁾				20							2,065							21							2,316

				3,881							47,694							7,600							70,867

Repurchase agreements	$	67,663		(300	)	(0.89	)%	$	1,861,188		(29,764	)	(3.16	)%	$	78,863		(414	)	(0.70	)%	$	1,971,449		(44,023	)	(2.93	)%
Derivative contracts⁽³⁾		—		—					—		(954	)						—							(1,920	)

	$	67,663		(300	)	(0.89	)%	$	1,861,188		(30,718	)	(3.30	)%	$	78,863		(414	)	(0.70	)%	$	1,971,449		(45,943	)	(3.11	)%

Net interest income/spread			$	3,581		7.52	%			$	16,976		1.03	%			$	7,186		7.96	%			$	24,924		0.96	%

As shown in the table above, net interest income decreased by ~~$13.4~~$17.7 million to ~~$3.6~~$7.2 million during the ~~six~~nine months ended ~~June~~September 30, 2009 from ~~$17.0~~$24.9 million during the ~~six~~nine months ended ~~June~~September 30, 2008. This decrease was primarily due to a lower average balance on the MBS portfolio.

The Company recognized net investment income of $15.8 million during the first nine months of 2009 compared to a net investment loss of ~~$4.0 million during the first six months of 2009 compared to net investment loss of $20.2~~$173.3 million in the first ~~six~~nine months of 2008. The following table summarizes the components of net investment ~~loss~~income (loss) (dollars in thousands):


	Six Months Ended June 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Available for sale and cost method securities—other-than-temporary impairments	$	(1,000	)	$	(12,614	)	$	(1,086	)	$	(131,334	)
Fair value change in investment in FBR Capital Markets stock		(4,026	)		—			14,123			—
Loss from investment funds		(547	)		(1,289	)		(946	)		(2,736	)
Realized (losses) gains on sale of available for sale investments, net		(236	)		3,788
Realized gains (losses) on sale of available for sale investments, net								1,586			(20,686	)
Residual interest in securitization—other-than-temporary impairments		—			(8,640	)		—			(8,640	)
Other net investment income (loss)		1,826			(1,446	)		2,077			(9,915	)

Net investment income (loss)							$	15,754		$	(173,311	)
	$	(3,983	)	$	(20,201	)

As part of the Company’s quarterly assessments of unrealized losses in its portfolio of marketable equity securities for potential other-than-temporary impairments and its assessment of cost method investments, the Company recorded ~~$1.0~~$1.1 million of other-than-temporary impairment losses during the ~~six~~nine months ended ~~June~~September 30, 2009 as compared to ~~$6.4~~$23.0 million for the same period in 2008. In addition, the Company recorded $8.6 million in other-than-temporary impairment losses on a residual interest in a securitizations during the ~~six~~nine months ended ~~June~~September 30, 2008.

Fair value change in investment in FBR Capital Markets stock reflects the change in fair value of FBR Capital Markets stock subsequent to the May 20, 2009 deconsolidation.

Loss from investment funds reflects the Company’s earnings from and valuation adjustment of investments in proprietary investment partnerships and other managed investments.

Other net investment income (loss) primarily includes net gains and losses from the changes in the fair value of investments in our MBS portfolio and derivative transactions.

~~In addition~~Principal investing interest revenue decreased 89.3% to ~~net interest income, the Company recorded $0.1 million during the first six months of 2009 in dividend income from its merchant banking equity investment portfolio as compared to $0.3~~$7.6 million in the first ~~six~~nine months of 2009 from $70.9 million in the first nine months of 2008. The decrease in ~~dividend~~interest income year over year was a result of the lower average balance in the MBS portfolio as a result of the downsizing effort to reduce exposure to deteriorating market conditions while at the same time generating additional cash to fund the extinguishment of long-term debt in the first quarter of 2009. Net investment income increased to $15.8 million in the first nine months of 2009 from a loss of $173.3 million in the first nine months of 2008. The change in net investment income is primarily ~~due~~the result of a gain recognized on the fair value change of FBR Capital Markets’ common stock subsequent to the ~~decrease~~deconsolidation on May 20, 2009 and no recognition of other-than-temporary impairment losses related to the Company’s MBS portfolio and a residual interest in a securitization of non-prime loans during the ~~number~~first nine months of ~~and amount of capital invested in, dividend-paying companies in the merchant banking portfolio as well as reduced dividend rates.~~2009.

Interest expense, related primarily to long-term debt issued through FBR TRS Holdings decreased ~~92.7%~~94.8% to ~~$3.3~~$3.7 million in the first ~~six~~nine months of 2009 from ~~$45.5~~$70.9 million in the first ~~six~~nine months of 2008 as a result of a decrease in the outstanding principal ~~balance on the FBR TRS Holdings debt~~balances due to the extinguishment during the first ~~quarter~~and third quarters of 2009 and also due to the decrease in interest rates associated with these floating rate borrowings.

Total non-interest expenses decreased ~~40.2%~~57.4% to ~~$133.1~~$138.1 million in the first ~~six~~nine months of 2009 from ~~$222.5~~$323.9 million in the first ~~six~~nine months ~~2008. This decrease was caused by the fluctuations in non-interest expenses discussed below.~~

~~Compensation and benefits expense decreased 46.0% to $70.7 million in the first six months of 2009 from $130.9 million in the first six months of~~ 2008. The decrease was primarily attributable to ~~a decrease in variable compensation as a result of decreased investment banking revenues as well as reductions in employees undertaken by FBR Capital Markets and~~ the deconsolidation of FBR Capital Markets’ activities during the second quarter of ~~2009.~~

~~Professional services expense decreased 47.8% to $12.0 million in~~2009 and results of the first six months of 2009 from $23.0 million in the first six months of 2008 primarily due to decreased costs associated with the lower volume of investment banking transactions, a reduction in consultants associated with cost reduction ~~initiatives, a reduction in sub-advisory fees as a result of the decrease in average mutual funds under management and the deconsolidation of FBR Capital Markets’ activities~~efforts taken during the ~~second quarter of 2009.~~last year.

Business development expenses decreased 31.4% to $13.1 million in the first six months of 2009 from $19.1 million in the first six months of 2008. This change is primarily due to a decrease in expenses associated with investment banking transactions as well as the deconsolidation of FBR Capital Markets’ activities during the second quarter of 2009.

Occupancy and equipment expense decreased 24.2% to $13.5 million in the first six months 2009 from $17.8 million in the first six months of 2008. This decrease in expenses is attributable to the effects of cost reduction initiatives over the past year including decreased costs associated with technology upgrades and the deconsolidation of FBR Capital Markets activities during the second quarter of 2009.

Communications expense decreased 27.6% to $8.9 million in the first six months of 2009 from $12.3 million in the first six months of 2008. The decrease in expenses is primarily due to the effects of cost reduction initiatives over the past year including decreased costs related to market data and customer trading services and the deconsolidation of FBR Capital Markets activities during the second quarter of 2009.

Other operating expenses decreased 28.2% to $8.9 million in the first six months of 2009 from $12.4 million in the first six months of 2008. This change was due mainly to the deconsolidation of FBR Capital Markets’ activities.

The Company had an income tax provision of ~~$9.2~~$12.8 million in the first ~~six~~nine months of 2009 as compared to an income tax benefit of ~~$10.8~~$28.9 million in the first ~~six~~nine months of 2008. Our tax provision in 2009 related to the gain on extinguishment of debt as compared to the tax benefits ~~relate~~related to taxable losses generated by our former taxable REIT subsidiaries in 2008. Our effective tax rate relating to this activity was ~~15.7%~~11.4% in the first ~~six~~nine months of 2009 as compared to ~~(50.2)%~~127.0% in the first ~~six~~nine months of 2008. For the ~~six~~nine months ended ~~June~~September 30, 2008, our tax benefit reflects a full valuation allowance on tax benefits related to operating losses at FBR TRS Holdings and related release of valuation allowance related to the disposition of First ~~NLC (see Note 9).~~NLC.

Net loss attributable to the noncontrolling interest of consolidated subsidiary of $11.5 million represents minority interest holders’ share of losses of FBR Capital Markets ~~for the first half of~~through May 20, 2009 as compared to ~~$17.2~~$31.1 million for the first ~~half~~nine months of 2008.

Liquidity is a measurement of our ability to meet potential cash requirements including ongoing commitments to repay borrowings, fund investments, ~~and lending activities,~~ and for other general business purposes. Our primary sources of funds for liquidity consist of short-term borrowings (e.g., repurchase agreements), principal and interest payments on MBS, dividends on equity securities, proceeds from sales of MBS, ~~securitization financing~~ and credit provided by banks. Potential future sources of liquidity for us also include existing cash balances, ~~shares of our subsidiary companies,~~ borrowing capacity through margin accounts and repurchase agreements and future issuances of common stock, preferred stock or debt securities. ~~Our continued effort to monetize the remaining shares of FBR Capital Markets stock will also provide additional liquidity.~~

Liquidity, or ready access to funds, is essential to our business. Failures of similar businesses have often been attributable in large part to insufficient liquidity. Liquidity is of particular importance to our business and perceived liquidity issues may affect our clients’ and counterparties’ willingness to engage in transactions with

us. Our liquidity could be impaired due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects us or third parties. Further, our ability to sell assets may be impaired if other market participants are seeking to sell similar assets at the same time.

The Company manages its short-term liquidity with its MBS portfolio and related repurchase agreements. ~~Excess cash is used to pay down short-term borrowings, and cash is provided by increasing short-term borrowings within the Company’s leverage policies. Additionally, we believe, in~~In the current environment, MBS may be liquidated within relatively short time periods to provide additional liquidity, although there is no assurance we would get favorable pricing in connection with any such sales. We also intend to manage our liquidity risk by managing our investment strategy, determining the appropriate allocation of investment portfolio between levered and unlevered positions.

As of ~~June~~September 30, 2009, the Company’s cash and cash equivalents totaled ~~$36.8~~$13.3 million, representing a net decrease in the balance of ~~$217.8~~$241.4 million for the ~~six~~nine months ended ~~June~~September 30, 2009. The cash used in operating activities of ~~$70.5~~$74.4 million was attributable primarily to a reduction in cash related to operating activities of FBR Capital Markets. The cash provided by investing activities of ~~$883.6~~$864.2 million relates primarily to proceeds from sales and principal receipts of MBS and proceeds from the maturity of U.S. Treasury bonds ~~during the first quarter of 2009~~ offset by ~~the~~ cash used in the purchase of MBS and deconsolidation of FBR Capital Markets during the second quarter of 2009. The cash used in financing activities of $1.0 billion relates primarily to repayments of repurchase agreements used to finance a portion of the MBS sold and U.S. Treasury bonds that matured.

~~Our~~On September 30, 2009, our principal liquid assets consist of MBS, investment in FBR Capital Markets, and cash and cash equivalents. ~~As of June 30, 2009, liquid assets consisted primarily of cash and cash equivalents of $36.8 million, and net investments in MBS of $54.6 million.~~ The Company’s total assets decreased from $1.6 billion at December 31, 2008 to ~~$269.6~~$283.3 million as of ~~June~~September 30, 2009. The decrease in total assets reflects the decrease of MBS and U.S. Treasury bonds and the effects of the deconsolidation of FBR Capital Markets during the second quarter of 2009.

~~As of June 30, 2009, our MBS portfolio, which was comprised primarily of agency MBS, had a fair value of $149.3 million. As of June 30, 2009, the weighted-average coupon of the portfolio was 5.59%.~~

The following table provides additional detail regarding the Company’s merchant banking and other investments as of ~~June~~September 30, 2009 (dollars in thousands):


	June 30, 2009					September 30, 2009
	Number of Shares/Units	Cost/Adjusted Basis		Fair Value/ Carrying Value		Number of Shares/Units	Cost/Adjusted Basis		Fair Value/ Carrying Value
Long-term investments, at fair value:
Merchant banking—marketable equity securities
Grubb & Ellis Company⁽¹⁾	236,558	$	293	$	189

Total long-term investments, at fair value		$	293	$	189

Other investments:
Merchant banking—non-marketable securities⁽²⁾
Merchant banking—non-marketable securities
Cypress Sharpridge Investments, Inc.⁽¹⁾	89,600	$	896	$	896	5,176	$	52	$	52
Thunderbird Resorts, Inc.⁽¹⁾	358,423		538		538	358,423		452		452
Other			975		975			975		975

Total merchant banking investments		$	2,409	$	2,409		$	1,479		1,479

Investment in FBR Capital Markets, at fair value					71,280					87,497
Investment funds					1,550					1,084

Total other investments				$	75,239				$	90,060

We believe that our existing cash balances, ~~investment in FBR Capital Markets,~~ net investments, ~~in MBS,~~ cash flows from operations, borrowing capacity, other sources of liquidity and execution of our financing strategies should be sufficient to meet our cash requirements. We have obtained, and believe we will be able to continue to obtain, short-term financing in amounts and at interest rates consistent with our financing objectives. We ~~will, however, continue to monetize the remaining shares of FBR Capital Markets stock. In addition, we~~ may seek debt or equity financings, in public or private transactions, to provide capital for corporate purposes and/or strategic business opportunities, including possible acquisitions, joint ventures, alliances or other business arrangements which could require substantial capital outlays. Our policy is to evaluate strategic business opportunities, including acquisitions and divestitures, as they arise. There can be no assurance that we will be able to generate sufficient funds from future operations, or raise sufficient debt or equity on acceptable terms, to take advantage of investment opportunities that become available. Should our needs ever exceed these sources of liquidity, we believe that most of our investments could be sold, in most circumstances, to provide cash, although such sales may not be on terms we consider to be favorable.

As of ~~June~~September 30, 2009, the Company’s liabilities totaled ~~$177.9~~$146.3 million. Our indebtedness consisted of repurchase agreements and long-term debentures ~~issued through our wholly-owned subsidiary, FBR TRS Holdings.~~(Trust Preferred securities). These ~~long-term debt~~Trust Preferred securities accrue and require payments of interest quarterly at annual rates of three-month LIBOR plus 2.25% to 3.00%, mature in 24 to 26 years, and are redeemable, in whole or in part, without penalty, currently or within two years. As of ~~June~~September 30, 2009, we had ~~$50.0~~$15.0 million of ~~long-term corporate debt,~~Trust Preferred securities, and the weighted average interest rate on these securities was ~~3.82%~~3.26%.

Our repurchase agreements for our MBS include provisions contained in the standard master repurchase agreement as published by the Bond Market Association and may be amended and supplemented in accordance with industry standards for repurchase facilities. As provided in the standard master repurchase agreement, upon the occurrence of an event of default or a termination event the applicable counterparty has the option to terminate all repurchase transactions under such counterparty’s repurchase agreement and to demand immediate payment of any amount due from us to the counterparty.

Under our repurchase agreements, we may be required to pledge additional assets to our repurchase agreement counterparties in the event the estimated fair value of the existing pledged collateral under such agreements declines and such lenders demand additional collateral (i.e., a margin call), which may take the form of additional securities or cash. Margin calls on repurchase agreements collateralized by our MBS investments primarily result from events such as declines in the value of the underlying mortgage collateral caused by factors such as rising interest rates or prepayments.

To date, we have not had any margin calls on our repurchase agreements that we were not able to satisfy with either cash or additional pledged collateral. However, should we encounter increases in interest rates, prepayments or delinquency levels, margin calls on our repurchase agreements could lead to a material adverse change in our liquidity position.

In the event that market conditions are such that we are unable to obtain financing for our investments in MBS in amounts and at interest rates consistent with our financing objectives, to the extent deemed appropriate, we may use cash to finance our investments or we may liquidate such investments. Accordingly, depending on market conditions, the Company may incur significant losses on any such sales of MBS.

The following table provides information regarding the Company’s outstanding repurchase agreement borrowings (dollars in thousands):


	June 30, 2009			December 31, 2008			September 30, 2009			December 31, 2008
Outstanding balance	$	94,738		$	1,063,040		$	100,000		$	1,063,040
Weighted-average rate		0.54	%		0.44	%		0.33	%		0.44	%
Weighted-average term to maturity		44.0 days			14.3 days			14.0 days			14.3 days

During the three and ~~six~~nine month period ended ~~June~~September 30, 2009, no dividends were declared or paid. Pursuant to our variable dividend policy, our Board of Directors, in its sole discretion, may reinstate the payment of cash dividends when appropriate in the future. No dividends were declared or paid during 2008.

Subject to the terms, provisions and conditions of the Rights Plan, and taking into account our 1-for-20 reverse stock split that was effected on October 6, 2009, if the Rights become exercisable, each Right would ~~initially~~ represent the right to purchase from the Company one ten-thousandth of a share of Series A Junior Preferred Stock for a purchase price of $3.00 each, subject to adjustment in accordance with the terms of the Rights Plan. Each post-split share of Class A and Class B common stock is now associated with, and now trades with, 20 Rights. If issued, each 20 fractional ~~share~~shares of preferred stock would give the shareholder approximately the same dividend, voting and liquidation rights as does one share of the Company’s Class A common stock. However, prior to exercise, a Right does not give its holder any rights as a shareholder of the Company, including without limitation, any dividend, voting or liquidation rights.

~~There was no impact on the Company’s financial results as a result of the adoption of the Rights Plan as of June 30, 2009.~~

~~Subsequent to June 30,~~On October 1, 2009, the Company ~~extinguished $25.0~~announced a 1-for-20 reverse split of its Class A and Class B common stock in accordance with the previously approved shareholder authorization. The reverse stock split is effective October 6, 2009. Upon the effectiveness of the reverse stock split, each twenty shares of issued and outstanding common stock were converted into one share of common stock. The Company did not issue fractional shares and shareholders received a cash payment for fractional shares based on the split-adjusted average price of the Class A common stock before the effective time. The reverse split reduced the number of shares of the Company’s common stock outstanding from approximately 160 million to approximately 8 million. Proportional adjustments were made to outstanding stock options and other equity incentive awards and equity compensation plans. The number of ~~trust-preferred long-term debt at a gain~~authorized shares of ~~approximately $20.0 million.~~common stock did not change.

On ~~July 15,~~October 28, 2009, the Company ~~liquidated an additional 411,032~~announced the closing on the sale of 14,755,017 shares of FBR Capital Markets common stock at ~~a price of $4.42~~$6.00 per share in ~~connection with the over-allotment option that was granted~~an underwritten public offering. Proceeds to the ~~underwriters under~~Company, after the underwriting ~~agreement entered into on June 15,~~discount but before expenses, were $84.1 million. The net price per share after the underwriting discount to the Company of $5.70, is less than the carrying value of the FBR Capital Markets stock of $5.93 at September 30, 2009, and will result in the Company recording a pre-tax book loss of $3.4 million during the quarter ending December 31, 2009.

38 These shares represented the Company’s remaining interest in FBR Capital Markets.

Market risk generally represents the risk of loss through a change in realizable value that can result from a change in the prices of equity securities, a change in the value of financial instruments as a result of changes in interest rates, a change in the volatility of interest rates or a change in the credit rating of an issuer. We are exposed to the following market risks as a result of our investments in MBS and equity investments. The Company may utilize forward sales to mitigate market risk related to our agency MBS portfolio. As of ~~June~~September 30, 2009, none of the investments mentioned in this Item 3 is held for trading purposes.

We are also exposed to mortgage credit risk related to our MBS portfolio. Mortgage credit risk is the risk that a borrower will fail to make timely payments on a mortgage or an issuer will fail to make timely payments on a security we own, exposing us to the risk of credit losses and credit-related expenses. While the agency MBS has less credit risk due to the guarantee by U.S. government, we have increased credit risk related to our private-label MBS. To mitigate the credit risk in private-label MBS, we invest in private-label MBS with credit enhancements which reduce the exposure. However, the continued deterioration in the housing market, coupled with the increasing mortgage loan delinquencies and credit ~~loses~~losses in the U.S. mortgage market may not prevent us from incurring losses and negatively affecting our financial position.

The Company is primarily subject to interest-rate risk as a result of its principal investment activities. Through its principal investment activities, the Company primarily invests in MBS and finances those investments with repurchase agreements which are interest rate sensitive financial instruments. The Company is exposed to interest rate risk that fluctuates based on changes in the level or volatility of interest rates and mortgage prepayments and in the shape and slope of the yield curve. The Company historically hedged a portion of its exposure to interest rate fluctuations primarily through the use of interest rate swaps, interest rate caps, and Eurodollar futures and put option contracts. The Company held no such hedging instruments as of ~~June~~September 30, 2009.

The Company’s primary risk is related to changes in both short and long-term interest rates, which affect the Company in several ways. As interest rates increase, the market value of the MBS may be expected to decline, prepayment rates may be expected to go down, and duration may be expected to extend. If interest rates decline, the reverse is true for MBS.

The table that follows shows the expected change in fair value for the Company’s current MBS under several hypothetical interest-rate scenarios. Interest rates are defined by the U.S. Treasury yield curve. The changes in rates are assumed to occur instantaneously. It is further assumed that the changes in rates occur uniformly across the yield curve and that the level of LIBOR changes by the same amount as the yield curve. Actual changes in market conditions are likely to be different from these assumptions.

Changes in value are measured as percentage changes from their respective values presented in the column labeled “Value at ~~June~~September 30, 2009.” Management’s estimate of change in value for MBS is based on the same assumptions it uses to manage the impact of interest rates on the portfolio. Actual results could differ significantly from these estimates. For MBS, the estimated change in value of the MBS reflects an effective duration of ~~2.46~~3.42 in a rising interest rate environment and ~~0.87~~2.16 in a declining interest rate environment.

The effective durations are based on observed market value changes, as well as management’s own estimate of the effect of interest rate changes on the fair value of the investments including assumptions regarding prepayments based, in part, on age of and interest rate on the mortgages and the mortgages underlying the MBS,

embedded derivates in the MBS, prior exposure to refinancing opportunities and an overall analysis of historical prepayment patterns under a variety of past interest rate conditions (dollars in thousands, except per share amounts).


	Value at June 30, 2009										Value at September 30, 2009
			100 Basis Point Increase in Interest Rates		Percent Change		100 Basis Point Decrease in Interest Rates		Percent Change				100 Basis Point Increase in Interest Rates		Percent Change		100 Basis Point Decrease in Interest Rates		Percent Change
Assets
Mortgage-backed securities	$	149,298	$	145,630	(2.46	)%	$	150,602	0.87	%	$	173,895	$	167,950	(3.42	)%	$	177,648	2.16	%
Other		120,289		120,289	—			120,289	—			109,430		109,430	—			109,430	—

Total assets	$	269,587	$	265,919	(1.36	)%	$	270,891	0.48	%	$	283,325	$	277,380	(2.10	)%	$	287,078	1.32	%

Liabilities
Repurchase agreements	$	94,738	$	94,738	—		$	94,738	—		$	100,000	$	100,000	—		$	100,000	—
Other		83,173		83,173	—			83,173	—			46,346		46,346	—			46,346	—

Total liabilities		177,911		177,911	—			177,911	—			146,346		146,346	—			146,346	—
Equity		91,676		88,008	(4.00	)%		92,980	1.42	%		136,979		131,034	(4.34	)%		140,732	2.74	%

Total liabilities and equity	$	269,587	$	265,919	(1.36	)%	$	270,891	0.48	%	$	283,325	$	277,380	(2.10	)%	$	287,078	1.32	%

Book value per share—total equity(1)	$	0.59	$	0.57	(4.00	)%	$	0.60	1.42	%	$	17.84	$	17.06	(4.34	)%	$	18.33	2.74	%

As shown above, the Company’s MBS portfolio generally will benefit less from a decline in interest rates than it will be adversely affected by a same-scale increase in interest rates.

The Company is exposed to equity price risk as a result of its investments in marketable equity securities and equity method investments. Equity price risk changes as the volatility of equity prices changes or the values of corresponding equity indices change.

While it is impossible to project exactly what factors may affect the prices of equity sectors and how much the effect might be, the table below illustrates the impact a ten percent increase and a ten percent decrease in the price of the equities held by the Company would have on the value of the total assets and the book value of the Company as of ~~June~~September 30, 2009 (dollars in thousands, except per share amounts).


	Value at June 30, 2009													Value at September 30, 2009
				10% Increase in Price			Percent Change		10% Decrease in Price			Percent Change					10% Increase in Price			Percent Change		10% Decrease in Price			Percent Change
Assets
Marketable equity securities	$	189		$	208		10.00	%	$	170		(10.00	)%
Investment in FBR Capital Markets		71,280			78,408		10.00	%		64,152		(10.00	)%	$	87,497		$	96,247		10.00	%	$	78,747		(10.00	)%
Equity method investments		3,959			4,355		10.00	%		3,563		(10.00	)%		2,563			2,819		10.00	%		2,307		(10.00	)%
Other		194,159			194,159		—			194,159		—			193,265			193,265		—			193,265		—

Total assets	$	269,587		$	277,130		2.80	%	$	262,044		(2.80	)%	$	283,325		$	292,331		3.18	%	$	274,319		(3.18	)%

Liabilities	$	177,911		$	177,911		—		$	177,911		—		$	146,346		$	146,346		—		$	146,346		—

Equity
Common stock		1,590			1,590		—			1,590		—			1,584			1,584		—			1,584		—
Paid-in-capital		1,502,911			1,502,911		—			1,502,911		—			1,504,283			1,504,283		—			1,504,283		—
Accumulated other comprehensive loss		(1,211	)		(1,192	)	(1.57	)%		(1,230	)	1.57	%
Accumulated other comprehensive income															289			289		—			289		—
Accumulated deficit		(1,411,614	)		(1,404,090	)	(0.53	)%		(1,419,138	)	0.53	%		(1,369,177	)		(1,360,171	)	(0.66	)%		(1,378,183	)	0.66	%

Total equity		91,676			99,219		8.23	%		84,133		(8.23	)%		136,979			145,985		6.58	%		127,973		(6.58	)%

Total liabilities and equity	$	269,587		$	277,130		2.80	%	$	262,044		(2.80	)%	$	283,325		$	292,331		3.18	%	$	274,319		(3.18	)%

Book value per share	$	0.59		$	0.64		8.23	%	$	0.55		(8.23	)%
Book value per share⁽¹⁾														$	17.84		$	19.01		6.58	%	$	16.67		(6.58	)%

Except to the extent that the Company sells its marketable equity securities, excluding its shares of FBR Capital Markets stock, or other long-term investments, or a decrease in their fair value is deemed to be other-than-temporary, an increase or decrease in the fair value of those assets will not directly affect the Company’s earnings. However, an increase or decrease in the value of equity method investments and our investment in FBR Capital Markets stock will directly affect the Company’s earnings.

As of the end of the period covered by this report on Form 10-Q, our management, with the participation of our Chief Executive Officer, Eric F. Billings, and our Chief Financial Officer, Kurt R. Harrington, carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined under Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) pursuant to Rule 13a-15(b) of the Exchange Act. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures, as of ~~June~~September 30, 2009, are effective.

With the deconsolidation and the sale of its interest in FBR Capital Markets, the Company is no longer sharing financial and administrative services with FBR Capital Markets. The Company has ~~been no change in our internal control over financial reporting~~established an independent information technology infrastructure and implemented a new accounting system during the quarter ended ~~June~~September 30, 2009. Although certain procedures and processes have been changed during the quarter ended September 30, 2009, ~~that has~~these changes have not materially affected, or isare not reasonably likely to materially affect, our internal control over financial reporting.

This report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Some of the forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates” or the negative of those words or other comparable terminology. Such statements include, but are not limited to, those relating to the effects of growth, our principal investment activities, levels of assets under management and our current equity capital levels. Forward-looking statements involve risks and uncertainties. You should be aware that a number of important factors could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to:

We will not necessarily update the information presented in this Form 10-Q if any of these forward-looking statements turn out to be inaccurate. For a more detailed discussion of the risks affecting our business, any of which could cause our actual results to differ materially from those in the forward-looking statements, see our Annual Report on Form 10-K for the year ended December 31, 2008, including the section entitled “Risk Factors” in that report, and any other reports or documents we file with the SEC from time to time.

On September 16, 2008, a shareholder derivative action captionedKornfeld, et al. v. Billings, et al., No. 08-1144, was filed in the Circuit Court of Arlington County, Virginia, by Bill Kornfeld and Edward Lapinski. The Company was named as a nominal defendant along with certain current and former officers and directors as individual defendants. The complaint asserts claims under Virginia law against the individual defendants for breach of fiduciary duty and against certain of the individual defendants for unjust enrichment in connection with certain decisions concerning executive compensation. Our Board of Directors established a special committee to conduct a review and evaluation of the plaintiffs’ allegations and make a final decision concerning whether maintenance of the litigation was in the Company’s best interests. The special committee concluded that the litigation was not in the Company’s best interest. On December 8, 2008, the Company moved to dismiss the shareholder derivative action based on the special committee’s recommendation and the individual defendants filed demurrers. On March 5, 2009, the court denied the individual defendants’ demurrers, granted the plaintiffs’ motion for certain discovery and denied the Company’s motion to dismiss with leave to renew the motion following discovery. On July 24, 2009, the plaintiffs filed an amended complaint. The amended complaint contains allegations similar to those in the original complaint and adds a cause of action against certain of the individual defendants for waste. ~~The~~On August 14, 2009, the Company ~~believes~~filed an answer to the ~~claims are without merit~~amended complaint and ~~intends~~the individual defendants filed a demurrer to ~~defend vigorously. However,~~ the amended complaint. The likely outcome of this action or its likely impact on the Company’s results of operations at this time cannot be predicted.

On April 7, 2009, the United States Bankruptcy Court for the Southern District of Florida, West Palm Beach Division (Bankruptcy Court) entered a final order (Final Order) approving the Company’s completed settlement agreement with the Trustee of the First NLC bankruptcy estate. The settlement agreement with the Trustee releases all claims that the Trustee or the bankruptcy estate of First NLC may have against the Company and its officers, directors, employees and affiliates in exchange for the payment by the Company of approximately $4.0 million, which the Company accrued for as of December 31, 2008. Under the settlement agreement, the Company and each of the officers, directors, employees and affiliates released all claims against the Trustee and the First NLC bankruptcy estate. The Company remitted the settlement payment on April 20, 2009 following the Final Order.

In addition to the risk factors disclosed in “Part I—Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2008, set forth in this section is an additional risk factor we believe applicable to our business.

On June 1, 2009, our Board implemented a Rights Plan in an effort to protect against a possible limitation on our ability to use our NOLs, NCLs and built-in losses by dissuading investors from aggregating ownership of our Class A common stock and triggering an “ownership change” for purposes of Sections 382 and 383 of the Code. The Rights Plan may not be successful in preventing an “ownership change” within the meaning of

Sections 382 and 383 of the Code, and we may lose all or most of the anticipated tax benefits associated with our prior losses. Under the terms of the Rights Plan, in general, if a person or group acquires or commences a tender or exchange offer for beneficial ownership of 4.9% or more of the outstanding shares of our Class A common stock upon a determination by our Board of Directors, all of our other Class A and Class B common shareholders will have the right to purchase securities from us at a discount to such securities’ fair market value, thus causing substantial dilution to the acquiring person. The Rights Plan may have the effect of inhibiting or impeding a change in control not approved by our Board and, notwithstanding its purpose, could adversely affect our shareholders’ ability to realize a premium over the then-prevailing market price for our common stock in connection with such a transaction. In addition, since our Board can prevent the Rights Plan from operating, in the event our Board approves of an acquiring person, the Rights Plan gives our Board significant discretion over whether a potential acquirer’s efforts to acquire a large interest in us will be successful. Consequently, the Rights Plan may not succeed in protecting anticipated tax benefits and could impede transactions that would otherwise benefit our shareholders.

The Company held its annual meeting of shareholders on June 1, 2009. At the annual meeting, the shareholders voted on the election of seven directors to the Company’s Board of Directors for one-year terms to expire at the annual meeting of shareholders in 2010. Our shareholders also approved a proposal to approve an amendment to our Amended and Restated Articles of Incorporation (Amended and Restated Articles) to change our corporate name from “Friedman, Billings, Ramsey Group, Inc.” to “Arlington Asset Investment Corp.,” and a proposal to approve an amendment to our Amended and Restated Articles to effect a reverse stock split of the issued and outstanding shares of our Class A and Class B common stock at one of three reverse split ratios, 1-for-20, 1-for-25 or 1-for-30, as will be selected by the Board of Directors within 12 months of the date of the annual meeting. In addition, the shareholders ratified the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2009.

~~In the election of directors, each nominee was elected by a vote of the shareholders as follows:~~

~~No broker non-votes arose in connection with the matters voted upon at the annual meeting due to the fact that all such matters were considered “routine.”~~

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.

~~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.~~


Virginia		54-1873198
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1001 Nineteenth Street North Arlington, VA		22209
(Address of Principal Executive Offices)		(Zip Code)


Large accelerated filer ¨		Accelerated filer x		Non-accelerated filer ¨		Smaller reporting company ¨


		Page
PART I—FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements and Notes—(unaudited)	3

	Consolidated Balance Sheets—~~June~~September 30, 2009 and December 31, 2008	3

	Consolidated Statements of Operations—Three Months Ended ~~June~~September 30, 2009 and 2008	4

	Consolidated Statements of Operations—~~Six~~Nine Months Ended ~~June~~September 30, 2009 and 2008	5

	Consolidated Statements of Changes in Equity—~~Six~~Nine Months Ended ~~June~~September 30, 2009 and Year Ended December 31, 2008	6

	Consolidated Statements of Cash Flows—~~Six~~Nine Months Ended ~~June~~September 30, 2009 and 2008	7

	Notes to Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2625

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3938

Item 4.	Controls and Procedures	4140

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings	4443

Item 1A.	Risk Factors	44

~~Item 4.~~	~~Submission of Matters to a Vote of Security Holders~~	4543

Item 6.	Exhibits	4744

	Signatures	4845


Level 1 Inputs	—	Unadjusted quoted prices in active markets for identical assets or liabilities that is accessible by the Company;

Level 2 Inputs	—	Quoted prices in markets that are not active or financial instruments for which all significant inputs are observable, either directly or indirectly; and

Level 3 Inputs	—	Unobservable inputs for the asset or liability including significant assumptions of the Company and other market participants.


	Three Months Ended June 30, 2008
	MBS			Long-Term Investments			Other			Total
Beginning balance, April 1, 2008	$	7,660		$	11,076		$	42,640		$	61,376
Total net losses (realized/unrealized)
Included in earnings		(3,004	)		(1,924	)		(1,480	)		(6,408	)
Included in other comprehensive income		—			—			—			—
Purchases, issuances, settlements, and principal payoffs, net		(22	)		(1,321	)		(24,698	)		(26,041	)

Ending balance, June 30, 2008	$	4,634		$	7,831		$	16,462		$	28,927

The amount of total losses for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date	$	(3,004	)	$	(1,912	)	$	(1,157	)	$	(6,073	)


	Six Months Ended June 30, 2009
	MBS			Long-Term Investments			Other			Total
Beginning balance, January 1, 2009	$	65,886		$	—		$	3,207		$	69,093
Total net gains (losses) (realized/unrealized)
Included in earnings		1,829			—			(117	)		1,712
Included in other comprehensive income		42			—			—			42
Net Transfers In		—			—			—			—
Purchases, issuances, settlements, and principal payoffs, net		(37,813	)		—			(192	)		(38,005	)
Deconsolidation of FBR Capital Markets		—			—			(2,898	)		(2,898	)

Ending balance, June 30, 2009	$	29,944		$	—		$	—		$	29,944

The amount of total gains for the period included in earnings attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting date	$	620		$	—		$	—		$	620


	Six Months Ended June 30, 2008
	MBS			Long-Term Investments			Other			Total
Beginning balance, January 1, 2008	$	10,638		$	19,049		$	18,567		$	48,254
Total net losses (realized/unrealized)
Included in earnings		(5,769	)		(9,457	)		(2,117	)		(17,343	)
Included in other comprehensive income		—			—			—			—
Purchases, issuances, settlements, and principal payoffs, net		(235	)		(1,761	)		12			(1,984	)

Ending balance, June 30, 2008	$	4,634		$	7,831		$	16,462		$	28,927

The amount of total losses for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at the reporting date	$	(5,769	)	$	(9,319	)	$	(1,908	)	$	(16,996	)


Title		Outstanding
Class A Common Stock		~~147,658,885~~7,353,972 shares
Class B Common Stock		~~11,322,293~~566,112 shares


	June 30, 2009
	Amortized Cost/ Cost Basis		Unrealized					Fair Value
	Amortized Cost/ Cost Basis		Gains		Losses			Fair Value
Mortgage-backed securities⁽¹⁾	$	150,405	$	50	$	(1,157	)	$	149,298
Marketable equity securities		293		—		(104	)		189

	$	150,698	$	50	$	(1,261	)	$	149,487


	Continuous Unrealized Loss Position for
	Less Than 12 Months							12 Months or More
	Amortized Cost		Unrealized Losses			Fair Value		Amortized Cost		Unrealized Losses		Fair Value
Mortgage-backed securities	$	120,249	$	(1,157	)	$	119,092	$	—	$	—	$	—
Marketable equity securities		293		(104	)		189		—		—		—

	$	120,542	$	(1,261	)	$	119,281	$	—	$	—	$	—


	Three Months Ended June 30,
	2009						2008
	Basic			Diluted			Basic			Diluted
Weighted average shares outstanding:
Common stock (in thousands)		153,912			153,912			150,948			150,948
Stock options and unvested restricted stock (in thousands)		—			—			—			—

Weighted average common and common equivalent shares outstanding (in thousands)		153,912			153,912			150,948			150,948

Net loss applicable to common stock	$	(32,157	)	$	(32,157	)	$	(25,051	)	$	(25,051	)

Loss per common share	$	(0.21	)	$	(0.21	)	$	(0.17	)	$	(0.17	)


Nominee for Director	Votes For	Votes Withheld
Eric F. Billings	132,804,898	33,765,535
Daniel J. Altobello	106,833,549	59,736,884
Peter A. Gallagher	100,551,483	66,018,950
Ralph S. Michael III	138,337,353	28,233,080
Wallace L. Timmeny	124,951,116	41,619,317
J. Rock Tonkel, Jr.	137,940,433	28,630,000
John T. Wall	105,456,185	61,114,248


	Votes For	Votes Against	Votes Abstaining
Approval of an amendment to the Company’s Amended and Restated Articles to change the Company’s corporate name from “Friedman, Billings, Ramsey Group, Inc.” to “Arlington Asset Investment Corp.”	142,055,673	6,478,212	18,036,548

Approval of an amendment to the Company’s Amended and Restated Articles to effect a reverse stock split of the issued and outstanding shares of Class A and Class B common stock at one of three reverse split ratios, 1-for-20, 1-for-25 or 1-for-30, as will be selected by the Board within 12 months of the date of the annual meeting	137,135,413	11,625,508	17,809,512

Ratification of the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2009	161,806,800	4,289,118	474,515


Exhibit Number		Exhibit Title
3.1		Amended and Restated Articles of Incorporation of the Company, as amended.

3.2		Bylaws of ~~the~~ Company, as ~~amended.~~

~~4.1~~		Rights Agreement, dated as of June 5, 2009, between the Company and American Stock Transfer & Trust Company LLC (which includes the form of Articles of Amendment as Exhibit A, the form of Rights Certificate as Exhibit B and the form of Summary of Rights to Purchase Preferred Stock as Exhibit C)amended (incorporated by reference to Exhibit ~~4.1~~3.2 to the Company’s ~~Current~~Quarterly Report on Form ~~8-K~~10-Q filed on ~~June 5,~~August 10, 2009).

10.1		~~Stock Repurchase~~Underwriting Agreement, dated ~~May 18,~~October 22, 2009, ~~by and~~ among the ~~Registrant,~~Company, FBR ~~TRS Holdings, Inc.~~Capital Markets Corporation and FBR Capital Markets ~~Corporation~~& Co. and Barclays Capital Inc. as representatives of the several underwriters named in Schedule I thereto (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on ~~May 20,~~October 29, 2009).

~~10.2~~31.01		~~Transition Services Agreement, dated May 20, 2009,~~Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.02		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.01		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.02		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Arlington Asset Investment Corp.

By:		/S/ KURT R. HARRINGTON
		Kurt R. Harrington
		*Executive Vice President, Chief Financial Officer, and ~~between~~Chief Accounting Officer*
		*(Principal Financial Officer)*


~~Arlington Asset Investment Corp.~~

~~By:~~		~~/s/ KURT~~ ~~R. HARRINGTON~~
		~~Kurt R. Harrington~~
		*~~Executive Vice President, Chief Financial Officer, and Chief Accounting Officer~~*
		*~~(Principal Financial Officer)~~*


~~Exhibit~~ ~~Number~~		~~Exhibit Title~~
~~3.1~~		~~Amended and Restated Articles of Incorporation of the Company, as amended.~~

~~3.2~~		~~Bylaws of the Company, as amended.~~

~~4.1~~		Rights Agreement, dated as of June 5, 2009, between the Company and American Stock Transfer & Trust Company LLC (which includes the form of Articles of Amendment as Exhibit A, the form of Rights Certificate as Exhibit B and the form of Summary of Rights to Purchase Preferred Stock as Exhibit C) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on June 5, 2009).

~~10.1~~		Stock Repurchase Agreement, dated May 18, 2009, by and among the Registrant, FBR TRS Holdings, Inc. and FBR Capital Markets Corporation (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 20, 2009).

~~10.2~~		Transition Services Agreement, dated May 20, 2009, by and between the Registrant and FBR Capital Markets Corporation (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 20, 2009).

~~10.3~~		Assignment and Assumption Agreement, dated May 20, 2009, by and between the Registrant and FBR Capital Markets Corporation (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on May 20, 2009).

~~10.4~~		Trademark and Copyright Assignment, dated May 20, 2009, by and between the Registrant and FBR Capital Markets Corporation (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on May 20, 2009).

~~10.5~~		Domain Name Assignment, dated May 20, 2009, by and between the Registrant and FBR Capital Markets Corporation (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K filed on May 20, 2009).

~~10.6~~		Trademark License Agreement, dated May 20, 2009, by and between the Registrant and FBR Capital Markets Corporation (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K filed on May 20, 2009).

~~10.7~~		Amended and Restated Voting Agreement, dated May 20, 2009, by and among the Registrant, FBR TRS Holdings, Inc., FBR Capital Markets Corporation, Forest Holdings (ERISA) LLC, and Forest Holdings LLC (incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K filed on May 20, 2009).

~~31.01~~		~~Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~

~~31.02~~		~~Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended, adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.~~

~~32.01~~		~~Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~

~~32.02~~		~~Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~

June 30,
2009

December 31,
2008

FBR Capital Markets⁽¹⁾