ý ~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~

For the Quarterly Period Ended September 30, ~~2011~~

2012

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

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

For the transition period from to

ARMOUR RESIDENTIAL REIT, INC.

(Exact name of registrant as specified in its charter)


Maryland	~~001-33736~~001-34766	26-1908763
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(I.R.S. Employer Identification No.)

3001 Ocean Drive, Suite 201, Vero Beach, FL 32963

(Address of principal executive offices)(zip code)

(772) 617-4340

(~~Registrant’s~~Registrant's telephone number, including area code)

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 ~~twelve~~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 ý☒ 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 during the preceding ~~twelve~~12 months (or for such shorter period that the registrant was required to submit and post such files). ~~Yes~~YES ý☒ NO ¨☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See ~~definition~~the definitions of ~~"large~~"larger accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐¨ Accelerated filer ☒¨ Non-accelerated filerý☐ Smaller reporting company¨☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨☐ NO☒ NOý

~~Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.~~

The number of outstanding shares of the ~~Registrant’s~~Registrant's common stock as of ~~November 2, 2011~~October 29, 2012 was ~~84,766,397.~~309,004,524.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
3
Item 1. Financial Statements
3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
2822
Item 3. Quantitative and Qualitative Disclosures About Market Risk
4435
Item 4. Controls and Procedures
47
37
PART II. OTHER INFORMATION
47
37
Item 1. Legal Proceedings
4737
Item 1A. Risk Factors
4737
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
4739
Item 3. Defaults Upon Senior Securities
4739
Item 4. ~~Removed and Reserved~~Mine Safety Disclosures
4739
Item 5. Other Information
4740
Item 6. Exhibits
4740

~~ARMOUR Residential REIT, Inc. and Subsidiaries~~

~~CONDENSED CONSOLIDATED BALANCE SHEETS~~

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Assets

(Unaudited)
September 30, 2011

December 31, 2010
Cash
$
250,485,889
$
35,343,907
Restricted cash

129,924,393

4,680,603
Agency securities, available for sale, at fair value (including pledged assets of $5,475,284,566 and $1,023,749,488)

5,975,823,418

1,161,850,680
Principal payments receivable

8,541,768

2,642,149
Accrued interest receivable

18,905,442

3,908,235
Prepaid and other assets

430,100

266,203
Refundable income taxes

-

547,574
Total Assets
$
6,384,111,010
$
1,209,239,351

Liabilities and Stockholders’ Equity

Liabilities:

Repurchase agreements
$
5,221,525,340
$
971,675,658
Payable for unsettled securities

475,109,262

125,418,369
Derivatives, at fair value

94,421,587

2,530,645
Accrued interest payable

17,051,708

295,005
Accounts payable and accrued expenses

1,219,235

174,775
Dividends payable

115,993

436,322
Total Liabilities

5,809,443,125

1,100,530,774

Stockholders’ Equity:

Preferred stock, $0.001 par value, 25,000,000 shares authorized, none outstanding at September 30, 2011 and December 31, 2010

-

-
Common stock, $0.001 par value, 500,000,000 and 250,000,000 shares authorized, 84,758,505 and 16,441,554 shares issued and outstanding at September 30, 2011 and December 31, 2010

84,758

16,442
Additional paid-in capital

606,186,743

116,748,175
Accumulated deficit

(94,910,261)

(3,826,510)
Accumulated other comprehensive income (loss)

63,306,645

(4,229,530)
Total Stockholders’ Equity

574,667,885

108,708,577
Total Liabilities and Stockholders’ Equity
$
6,384,111,010
$
1,209,239,351

ARMOUR Residential REIT, Inc. and Subsidiary

CONDENSED CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share and per share amounts)

(Unaudited)

Assets
September 30, 2012
December 31, 2011
Cash
$ 727,306 $ 252,372
Restricted cash
237,789 147,199
Agency securities, available for sale, at fair value (including pledged assets of $20,846,817 and $5,225,234)
22,114,875 5,393,675
Receivable for unsettled securities
357,218 382,931
Derivatives, at fair value
8,069 -
Principal payments receivable
10,799 12,493
Accrued interest receivable
60,548 18,637
Prepaid and other assets
742 440
Total Assets
$ 23,517,346 $ 6,207,747

Liabilities and Stockholders' Equity

Liabilities:

Repurchase agreements
$ 19,826,988 $ 5,335,962
Payable for unsettled securities
1,036,450 117,885
Derivatives, at fair value
198,398 121,727
Accrued interest payable
9,302 2,154
Accounts payable and accrued expenses
3,157 2,663
Dividends payable
103 750
Total Liabilities
21,074,398 5,581,141

Stockholders' Equity:

Preferred stock, $0.001 par value, 25,000,000 shares authorized, 1,785,000 8.250% Series A Cumulative Preferred Stock issued and outstanding at September 30, 2012 and none issued and outstanding at December 31, 2011
2 -
Common stock, $0.001 par value, 500,000,000 shares authorized, 308,972,403 and 95,436,949 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
309 95
Additional paid-in capital
2,220,417 678,641
Accumulated deficit
(180,430
)
(100,878
)
Accumulated other comprehensive income
402,650 48,748
Total Stockholders' Equity
2,442,948 626,606
Total Liabilities and Stockholders' Equity
$ 23,517,346 $ 6,207,747

See notes to condensed consolidated financial statements.

ARMOUR Residential REIT, Inc. and ~~Subsidiaries~~Subsidiary

CONDENSED CONSOLIDATED STATEMENTS ofOF OPERATIONS

(dollars in thousands, except per share amounts)

(Unaudited)

For the Quarters Ended
For the Nine Months Ended

September 30,
2012
September 30,
2011
September 30,
2012
September 30,
2011
Interest Income:

Interest income, net of amortization of premium
$ 116,693 $ 39,665 $ 265,660 $ 82,293
Interest expense:

Repurchase agreements
(19,222
)
(3,451
)
(37,258
)
(7,158
)
Net interest income
97,471 36,214 228,402 75,135
Other (Loss) Income:

Realized gain on sale of agency securities
15,062 6,444 20,110 6,444
Other income
- - 1,043 -
Subtotal
15,062 6,444 21,153 6,444
Realized loss on derivatives(1)
(18,914
)
(8,421
)
(41,055
)
(16,425
)
Unrealized loss on derivatives
(31,486
)
(65,808
)
(84,265
)
(91,891
)
Subtotal
(50,400
)
(74,229
)
(125,320
)
(108,316
)
Total other (loss)
(35,338
)
(67,785
)
(104,167
)
(101,872
)
Expenses:

Management fee
5,545 2,191 13,356 4,441
Professional fees
472 270 1,408 883
Insurance
85 60 189 164
Compensation
426 135 1,417 406
Other
660 243 1,331 504
Total expenses
7,188 2,899 17,701 6,398
Net income (loss) before taxes
54,945 (34,470
)
106,534 (33,135
)
Income tax (expense) benefit
(3
)
(2
)
27 (14
)
Net Income (Loss)
$ 54,942 $ (34,472
)
$ 106,561 $ (33,149
)
Dividends declared on preferred stock
(804
)
- (964
)
-
Net Income (Loss) available (related) to common stockholders
$ 54,138 $ (34,472
)
$ 105,597 $ (33,149
)
Net income (loss) available (related) per share
to common stockholders:

Basic
$ 0.20 $ (0.44
)
$ 0.54 $ (0.63
)
Diluted
$ 0.20 $ (0.44
)
$ 0.54 $ (0.63
)
Dividends per common share
$ 0.30 $ 0.36 $ 0.92 $ 1.06
Weighted average common shares outstanding:

Basic
269,325 78,360 195,272 52,863
Diluted
270,010 78,360 196,287 52,863

Three months
Ended
September 30, 2011

Three months
Ended
September 30, 2010

Nine months
Ended
September 30, 2011

Nine months
Ended
September 30, 2010
Interest Income:

   Interest income, net of amortization of premium
$
39,665,171
$
3,891,240
$
82,293,745
$
6,415,001
Interest expense:

   Repurchase agreements

(3,450,885)

(376,728)

(7,157,796)

(650,021)
      Total interest expense

(3,450,885)

(376,728)

(7,157,796)

(650,021)
Net interest income

36,214,286

3,514,512

75,135,949

5,764,980
Other Income (Loss):

   Realized gain on sale of agency securities

6,443,902

-

6,443,902

208,094
      Subtotal

6,443,902

-

6,443,902

208,094
   Realized loss on derivatives (1)

(8,420,990)

(197,657)

(16,424,950)

(218,134)
   Unrealized loss on derivatives

(65,808,206)

(3,391,588)

(91,890,940)

(5,445,038)
      Subtotal

(74,229,196)

(3,589,245)

(108,315,890)

(5,663,172)
      Total other loss

(67,785,294)

(3,589,245)

(101,871,988)

(5,455,078)
Expenses:

   Professional fees

270,392

84,497

883,411

311,509
   Insurance

60,488

37,241

163,425

140,261
   Management fee

2,190,502

225,000

4,441,302

367,996
   Other

377,480

36,541

910,221

340,801
      Total expenses

2,898,862

383,279

6,398,359

1,160,567
Loss before income taxes

(34,469,870)

(458,012)

(33,134,398)

(850,665)
Income tax expense

(2,050)

(82)

(14,263)

(2,482)
Net Loss
$
(34,471,920)
$
(458,094)
$
(33,148,661)
$
(853,147)
   Weighted average shares outstanding:

   Basic and diluted

78,360,049

7,414,054

52,862,872

4,306,875
   Net loss per share:

   Basic and diluted
$
(0.44)
$
(0.06)
$
(0.63)
$
(0.20)
   Dividends per share
$
0.36
$
0.36
$
1.06
$
1.16

(1)	Interest expense related to our interest rate swap contracts is recorded in realized loss on derivatives on the condensed consolidated statements of operations. For additional information, see Note 8 to the condensed consolidated financial statements.

~~(1)~~

Interest expense related to our interest rate swap contracts is recorded in realized losses on derivatives on the consolidated statements of operations. For additional information, see Note 6 to the condensed consolidated financial statements.

See notes to condensed consolidated financial statements.

ARMOUR Residential REIT, Inc. and ~~Subsidiaries~~Subsidiary

CONDENSED CONSOLIDATED STATEMENTS ~~of STOCKHOLDERS’ EQUITY~~OF COMPREHENSIVE INCOME

(dollars in thousands)

(Unaudited)

Accumulated
Other
Comprehensive
Income (loss)

Additional
Paid-In
Capital

Common Stock

Accumulated
Deficit

Comprehensive
Income

Shares

Amount

Total

Balance, January 1, 2011
16,441,554
$
16,442
$
116,748,175
$
(3,826,510)
$
(4,229,530)
$
-
$
108,708,577
Dividends declared

-

-

(57,935,090)

(57,935,090)
Issuance of common stock, net
68,304,774

68,304

489,336,294

-

489,404,598
Stock based compensation, net of withholding requirements
12,177

12

102,274

-

102,286
Net loss
-

-

-

(33,148,661)

(33,148,661)

(33,148,661)
Net change in unrealized gain on available for sale securities
-

-

-

-

67,536,175

67,536,175

67,536,175
Comprehensive income
-

-

-

-

-
$
34,387,514

-
Balance, September 30, 2011
84,758,505
$
84,758
$
606,186,743
$
(94,910,261)
$
63,306,645

$
574,667,885

For the Quarters Ended
For the Nine Months Ended

September 30, 2012
September 30, 2011
September 30, 2012
September 30, 2011
Net Income (Loss)
$ 54,942 $ (34,472
)
$ 106,561 $ (33,149
)
Other comprehensive income :

Reclassification adjustment for realized gain on sale of Agency Securities
(15,062
)
(6,444
)
(20,110
)
(6,444
)
Net unrealized gain on available for sale securities
250,062 37,438 374,012 73,981
Other comprehensive income
235,000 30,994 353,902 67,537
Comprehensive Income (Loss)
$ 289,942 $ (3,478
)
$ 460,463 $ 34,388

See notes to condensed consolidated financial ~~statements.~~statements

ARMOUR Residential REIT, Inc. and ~~Subsidiaries~~Subsidiary

CONDENSED CONSOLIDATED STATEMENTS of STOCKHOLDERS' EQUITY

(dollars in thousands)

(Unaudited)

	Preferred Stock						Common Stock
	Shares		Par Amount		Additional Paid in Capital		Shares		Par Amount		Additional Paid in Capital		Total Additional Paid in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income		Total
Balance, December 31, 2011		-	$	-	$	-		95,437	$	95	$	678,641	$	678,641	$	(100,878	)	$	48,748	$	626,606
Preferred dividends declared		-		-		-		-		-		-		-		(964	)		-		(964	)
Common dividends declared		-		-		-		-		-		-		-		(185,149	)		-		(185,149	)
Issuance of Preferred stock, net		1,785		2		43,302		-		-		-		43,302		-			-		43,304
Issuance of common stock, net		-		-		-		213,460		213		1,497,949		1,497,949		-			-		1,498,162
Stock based compensation, netof withholding requirements		-		-		-		75		1		525		525		-			-		526
Net income		-		-		-		-		-		-		-		106,561			-		106,561
Other comprehensive income		-		-		-		-		-		-		-		-			353,902		353,902
Balance, September 30, 2012		1,785	$	2	$	43,302		308,972	$	309	$	2,177,115	$	2,220,417	$	(180,430	)	$	402,650	$	2,442,948

See notes to condensed consolidated financial statements

ARMOUR Residential REIT, Inc. and Subsidiary

CONDENSED CONSOLIDATED STATEMENTS of CASH FLOWS

(dollars in thousands)

(Unaudited)

Nine months
Ended
September 30, 2011

Nine months
Ended
September 30, 2010
Cash Flows From Operating Activities:

Net loss
$
(33,148,661)
$
(853,147)
Adjustments to reconcile net loss to net cash provided by operating activities:

    Net amortization of premium on Agency Securities

17,636,433

2,426,552
    Unrealized loss on derivatives

91,890,940

5,445,038
    Gain on sale of Agency Securities

(6,443,902)

(208,094)
    Stock based compensation

102,286

-
Changes in operating assets and liabilities:

    Increase in accrued interest receivable

(15,012,608)

(1,764,454)
    Decrease (increase) in prepaid income taxes and other assets

387,464

(16,026)
    Increase in accrued interest payable

16,822,805

59,243
    Increase in accounts payable and accrued expenses

993,760

184,662
Net cash provided by operating activities

73,228,517

5,273,774
Cash Flows From Investing Activities:

    Purchases of Agency Securities

(5,704,829,944)

(502,388,124)
    Principal repayments of Agency Securities

426,473,862

49,559,729
    Proceeds from sales of Agency Securities

512,657,141

31,531,266
    Increase (decrease) in payable for unsettled security purchases

351,861,121

(46,590,233)
Net cash used in investing activities

(4,413,837,820)

(467,887,362)
Cash Flows From Financing Activities:

    Issuance of common stock, net of expenses

489,400,811

32,062,856
    Proceeds from repurchase agreements

28,660,677,323

2,236,866,975
    Principal repayments on repurchase agreements

(24,410,827,641)

(1,792,528,555)
    Increase in restricted cash

(125,243,790)

(6,562,808)
    Dividends paid

(58,255,418)

(1,913,691)
Net cash provided by financing activities

4,555,751,285

467,924,777
Net Increase in cash

215,141,982

5,311,189
Cash - beginning of period

35,343,907

6,653,331
Cash - end of period
$
250,485,889
$
11,964,520
Supplemental Disclosure:

Cash paid for income taxes (not including tax refunds received)
$
18,831
$
3,116
Cash paid during the period for interest
$
5,844,214
$
515,779
Non-Cash Investing and Financing Activities:

Net unrealized gain on investment in available for sale securities
$
67,536,175

5,847,048
Amounts receivable for issuance of common stock
$
3,787
$
-

For the Nine
Months Ended
September 30,
2012
For the Nine
Months Ended
September 30,
2011
Cash Flows From Operating Activities:

Net income (loss)
$ 106,561 $ (33,149
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Net amortization of premium on Agency Securities
71,168 17,636
Unrealized loss on derivatives
68,603 91,891
Realized gain on sale of Agency Securities
(20,110
)
(6,444
)
Stock based compensation
526 102
Changes in operating assets and liabilities:

Increase in accrued interest receivable
(41,660
)
(15,012
)
(Increase) decrease in prepaid income taxes and other assets
(333
)
388
Increase in accrued interest payable
7,148 16,823
Increase in accounts payable and accrued expenses
1,861 994
Net cash provided by operating activities
193,764 73,229
Cash Flows From Investing Activities:

Purchases of Agency Securities
(18,916,083
)
(5,352,969
)
Principal repayments of Agency Securities
1,574,116 426,474
Proceeds from sales of Agency Securities
1,869,332 512,657
Increase in restricted cash
(90,590
)
(125,244
)
Net cash used in investing activities
(15,563,225
)
(4,539,082
)
Cash Flows From Financing Activities:

Issuance of preferred stock, net of expenses
43,041 -
Issuance of common stock, net of expenses
1,498,157 489,401
Proceeds from repurchase agreements
92,966,646 28,660,677
Principal repayments on repurchase agreements
(78,476,690
)
(24,410,828
)
Preferred dividends paid
(964
)
-
Common dividends paid
(185,795
)
(58,255
)
Net cash provided by financing activities
15,844,395 4,680,995
Net increase in cash
474,934 215,142
Cash - beginning of period
252,372 35,344
Cash - end of period
$ 727,306 $ 250,486
Supplemental Disclosure:

Cash paid during the period for interest
$ 61,245 $ 5,844
Non-Cash Investing and Financing Activities:

Receivable for unsettled security sales
$ 357,218 $ -
Payable for unsettled security purchases
$ 1,036,450 $ 475,109
Unrealized gain on investment in available for sale securities
$ 374,012 $ 67,536
Amounts receivable for issuance of common stock
$ 5 $ 4
Amounts receivable for issuance of preferred stock
$ 263 $ -
Common dividends declared, to be paid in subsequent period
$ - $ 9

See notes to condensed consolidated financial ~~statements.~~statements

ARMOUR Residential REIT, Inc. and ~~Subsidiaries~~Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2011~~

(Unaudited)

Note 1 – Basis of Presentation

The ~~consolidated balance sheet as of December 31, 2010, which has been derived from the audited financial statements, and the~~accompanying unaudited financial statements ~~included herein~~ have been prepared ~~from~~in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the ~~books~~instructions to Form 10-Q and ~~records~~Rule 10-01 of ~~ARMOUR Residential REIT, Inc. (“the Company”) pursuant to the rules and regulations of~~Regulation S-X promulgated by the Securities and Exchange ~~Commission (“SEC”) for reporting in~~Commission. Accordingly, they do not include all of the ~~Quarterly Report on Form 10-Q. The~~ information and ~~note disclosures normally included in~~footnotes required by GAAP for complete financial ~~statements prepared in accordance with accounting principles generally accepted in~~statements. In the ~~U.S. (“GAAP”)~~opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been ~~condensed or omitted pursuant to such rules~~included. Operating results for the quarter and ~~regulations. The interim consolidated~~nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the calendar year ending December 31, 2012. These unaudited financial ~~information~~statements should be read in conjunction with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, ~~2010, which are filed on Form 10-K.~~2011.

The ~~Company’s management is responsible for this interim~~condensed consolidated financial ~~information. Interim results may not be indicative~~statements include the accounts of ARMOUR Residential REIT, Inc. and its subsidiary. All intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results ~~that may be expected for~~could differ from those estimates. Significant estimates affecting the ~~year. However, we believe that all adjustments considered necessary for a fair presentation~~accompanying condensed consolidated financial statements include the valuation of ~~this financial information have been included~~Agency Securities and ~~are of a normal and recurring nature.~~ derivative instruments.

Note 2 - Organization and Nature of Business Operations

Business

References to “we”, “us”, “our”, "ARMOUR" or the “Company” are to ARMOUR Residential REIT, Inc. References to "ARRM" are to ARMOUR Residential Management LLC, a Delaware limited liability company. References to “Enterprise” are to Enterprise Acquisition Corp., which is a wholly-owned subsidiary of ARMOUR.

We are an ~~externally-managed~~externally managed Maryland corporation organized in 2008, managed by ~~ARRM.~~ARRM (see Note 14 “Related Party Transactions”for additional discussion). We invest primarily in fixed rate, hybrid adjustable rate ~~adjustable rate~~ and ~~fixed~~adjustable rate residential mortgage backed securities. These securities are issued or guaranteed by a U.S. ~~Government-chartered~~Government-sponsored entity (“GSE”), such as the Federal National Mortgage Association ~~(more commonly known as Fannie~~(Fannie Mae) ~~and~~, the Federal Home Loan Mortgage Corporation ~~(more commonly known as Freddie~~(Freddie Mac), or guaranteed by the Government National Mortgage Administration ~~a U.S. Government corporation (more commonly known as Ginnie~~(Ginnie Mae) (collectively, "Agency Securities"). As of September 30, 2012, Agency Securities account for 100% of our portfolio. It is expected that the percentage will continue to be 100% or close thereto. From time to time, a portion of our portfolio may be invested in unsecured notes and bonds issued by U.S. Government-chartered entities (collectively, “Agency Debt”), U.S. Treasuries and money market instruments, subject to certain income tests we must satisfy for our qualification as a real estate investment trust (“REIT”). On December 1, 2011, our stockholders approved an amendment to our charter to alter our investment asset class restriction in response to potential changes in Agency Securities to include non-Agency as well as Agency Securities in our investment asset class restriction. While we remain committed to investing in Agency Securities for so long as an adequate supply and pricing exists, we believe it is prudent for us to have the flexibility to invest in non-Agency Securities and respond to changes in GSE policy.

We intend to qualify and have elected to be taxed as a REIT under the Internal Revenue Code (“the Code”). Our qualification as a REIT depends on our ability to meet, on a continuing basis, various complex requirements under the Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the concentration of ownership of our capital stock. We believe that we are organized in conformity with the requirements for qualification as a REIT under the Code and our manner of operations enables us to meet the requirements for taxation as a REIT for federal income tax purposes.

As a REIT, we will generally not be subject to federal income tax on the REIT taxable income that we currently distribute to our stockholders. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to federal income tax at regular corporate rates. Even if we qualify as a REIT for federal income tax purposes, we may still be subject to some federal, state and local taxes on our income.

Note 3 - Summary of Significant Accounting Policies

~~Basis of Presentation and Consolidation and Use of Estimates~~

Our financial statements are presented in U.S. dollars in conformity with GAAP. The condensed consolidated financial statements include the accounts of ARMOUR and all subsidiaries; all intercompany accounts and transactions have been eliminated.

The preparation of financial information in conformity with GAAP requires management to make estimates that affect the reported assets and liabilities at the date of the balance sheet and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

~~ARMOUR Residential REIT, Inc. and Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2011~~

~~(Unaudited)~~

~~Reclassification~~

We reclassified previously presented financial information to conform to the presentation in our condensed consolidated financial information as of and for the three and nine month periods ended September 30, 2011. Accrued interest payable, which was previously included in the caption “accounts payable and accrued expenses”, has been reclassified and is presented in a separate item. Previously included in accounts payable and accrued expenses was accrued interest receivable and payable with respect to our interest rate swap contracts which was previously netted, and has been reclassified to accrued interest receivable and accrued interest payable, as applicable. Certain commissions with respect to Futures Contracts which were previously included in interest expense have been reclassified into realized gain or loss on those contracts. The unrealized gains and losses on our derivatives previously classified on our statement of operations as an adjustment to arrive at “net interest income after change in fair value of interest rate contracts” is no longer presented as an adjustment to interest income and has been reclassified into “other income” as part of the unrealized gain or loss on derivatives. This reclassification caused accrued interest receivable to increase by $15,401 and accrued interest payable to increase by $295,005, respectively for the period ending December 31, 2010. This reclassification also caused interest expense to decrease by $9,874 and $30,309 and other income (loss) to decrease by the same amounts, respectively for the three and nine months ended September 30, 2010. In addition, amounts previously reported for the six months ended June 30, 2011 have been reclassified. For the six months ended June 30, 2011 $7,560,821 of interest expense has been reclassified to realized loss on derivatives within other income (loss) for the nine months ended September 30, 2011.

Cash

Cash includes cash on deposit with financial institutions and investments in high quality overnight money market funds, all of which have maturities of three months or less, at time of purchase. We may maintain deposits in federally insured financial institutions in excess of federally insured limits. However, management believes we are not exposed to significant credit risk due to the financial position and creditworthiness of the depository institutions in which those deposits are held.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Restricted Cash

~~Restricted~~The following table presents information related to margin collateral (held) posted for Agency Securities, interest rate swap contracts and Eurodollar Futures Contracts (“Futures Contracts”) which are included in restricted cash aton the accompanying condensed consolidated balance sheets as of September 30, ~~2011~~2012 and December 31, ~~2010, represents approximately $129.9 million and $4.7 million, respectively, held by counterparties as collateral.~~2011.

September 30, 2012
December 31, 2011

(dollars in thousands)

Fair Value (1)
Fair Value (1)
Agency Securities
$ (14,426
)
$ -
Interest rate swap contracts
247,278 141,326
Futures Contracts
4,937 5,873
Totals
$ 237,789 $ 147,199

(1) See Note 6, “Fair Value of Financial Instruments” for additional discussion.

Agency Securities, at Fair Value

We invest primarily in Agency Securities. A portion of our portfolio may be invested in Agency Debt, U.S. Treasuries and money market instruments, subject to certain income tests we must satisfy for our qualification as a REIT. ~~We have committed ourselves to the Agency asset class by including in our charter a requirement that~~As of September 30, 2012, all of our financial instrument investments ~~will~~ consist of Agency Securities, ~~Agency Debt, U.S. Treasuries and money market instruments (including reverse repurchase agreements) and~~ hedging and other derivative instruments related to the foregoing investments.

We ~~classify our Agency Securities as either trading, available for sale or held to maturity securities. Although we~~ generally intend to hold most of our Agency Securities for long-term ~~periods, we~~periods. We may, from time to time, sell any of our Agency Securities as part of ~~our~~the overall management of our portfolio. Management determines the appropriate classifications of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. As of September 30, ~~2011,~~2012, all of our Agency Securities were classified as available for sale. Agency securities classified as available for sale are reported at their estimated fair ~~value,~~values, based on fair values obtained ~~and compared to independent~~from third-party sources, with unrealized gains and losses excluded from earnings and reported as apart of the separate ~~component~~condensed consolidated statements of ~~stockholders’ equity.~~comprehensive income. Agency securities transactions are recorded on the trade ~~date. Realized gains~~date and ~~losses on sales of Agency Securities~~ are ~~determined~~valued using ~~the specific identification method.~~third-party pricing services and dealer quotes.

We evaluate securities for other than temporary impairment at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation. We determine if we (1) have the intent to sell the Agency Securities, (2) ~~are~~believe it is more likely than not that we will be required to sell the securities before recovery or (3) do not expect to recover the entire amortized cost basis of the Agency Securities. There was no other than temporary impairment for the quarters and nine ~~month period~~months ended September 30, ~~2011 or for the year ended December 31, 2010.~~

~~Fair Value of Financial Instruments~~

~~The carrying amounts of cash, restricted cash, accrued interest receivable~~2012 and accounts payable approximate their fair value due to the short maturities of these instruments. See Notes 5 and 6, respectively, for discussion of the fair value of Agency Securities, Available for Sale and Derivatives. The carrying amount of repurchase agreements and accrued interest payable is deemed to approximate fair value due to the short-term maturities of these instruments.

~~ARMOUR Residential REIT, Inc. and Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

September 30, ~~2011~~2011.

~~(Unaudited)~~

~~Agency Security Valuation~~

Agency Securities are valued using third-party pricing services and dealer quotes. If the fair value of a security is not available from the independent pricing service, or such data appears unreliable, we obtain valuations from up to three dealers who make markets in similar financial instruments. Management reviews pricing used to ensure that current market conditions are properly represented. The resulting unrealized gains and losses are reflected in our condensed consolidated balance sheets as accumulated other comprehensive income (loss).

Repurchase Agreements

We finance the acquisition of our Agency Securities through the use of repurchase agreements. Our repurchase agreements are secured by our Agency Securities and bear interest rates that have historically moved in close relationship to the Federal Funds Rate and the London Interbank Offered Rate (“LIBOR”). Under these agreements, we sell securities to a lender and agree to repurchase the same securities in the future for a price that is higher than the original sales price. The difference between the sales price that we receive and the repurchase price that we pay represents interest paid to the lender. ~~Although structured as a sale and repurchase obligation, a~~A repurchase agreement operates as financing under which we pledge our securities as collateral to secure a loan which is equal in value to a specified percentage of the estimated fair value of the pledged collateral. We retain beneficial ownership of the pledged collateral. At the maturity of a repurchase agreement, we are required to repay the loan and concurrently receive back our pledged collateral from the lender or, with the consent of the lender, we may renew such agreement at the then prevailing ~~financing~~interest rate. The repurchase agreements may require us to pledge additional assets to the lender in the event the estimated fair value of the existing pledged collateral declines.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Derivatives

We seek to economically hedge the exposure to potential interest rate mismatches between the interest earned on investments and the borrowing costs caused by fluctuations in short-term interest rates. In a simple interest rate swap, one investor pays a floating rate of interest on a notional principal amount and receives a fixed rate of interest on the same notional principal amount for a specified period of time. Alternatively, an investor may pay a fixed rate and receive a floating rate. During the term of the interest rate swap, we make or receive periodic payments and unrealized gains or losses are recorded as a result of marking the swaps to their fair value. If a swap is terminated prior to maturity, we record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and our cost basis in the contract, if any. Any realized gains or losses are reported under realized gain (loss) on derivatives in our condensed consolidated statement of operations. All unrealized gains or losses are reported under unrealized gain (loss) on derivatives in our condensed consolidated statements of operations. Periodic payments are reported as other income (loss) under the heading of realized loss on derivatives on our condensed consolidated statement of operations. Interest rate swap contracts involve a risk that interest rates will move contrary to our expectations, which may reduce the periodic payments we receive or increase our payment obligations.

We are exposed to credit loss in the event of nonperformance by the counterparty to the swap, limited to any gains recognized. However, as of September 30, 2011, we did not anticipate nonperformance by any counterparty. Should interest rates move unexpectedly, we may not achieve the anticipated benefits of the interest rate swaps and may realize a loss.

We recognize all derivative instruments as either assets or liabilities at fair value on our condensed consolidated balance sheets. We do not designate our ~~hedging~~derivative activities as cash flow hedges, which, among other factors, would require us to match the pricing dates of both ~~hedging~~derivative transactions and repurchase agreements. Operational issues and credit market volatility make such matching impractical for us. Since we ~~will~~have not ~~qualify for~~elected cash flow hedge accounting treatment as ~~prescribed~~allowed by GAAP, all changes in the fair values of our derivatives are reflected in our condensed consolidated statements of operations currently. Accordingly, our operating results may reflect greater volatility than otherwise would be the case, because gains or losses on ~~the interest hedging~~derivatives may not be offset by changes in the fair value or cash flows of the transaction within the same accounting period or ever. Consequently, any declines in the fair value of our derivatives result in a charge to earnings. We will continue to designate ~~hedging~~derivative activities as hedges for tax purposes and any unrealized derivative gains or losses ~~should~~would not affect our distributable net taxable income. ~~This tax designation has no impact on GAAP financial reporting.~~

~~ARMOUR Residential REIT, Inc. and Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2011~~

~~(Unaudited)~~

Accrued Interest Receivable and Payable

Accrued interest receivable includes interest ~~prepaid on purchased agency securities, interest~~ accrued between payment dates on ~~such securities and interest receivable on our derivatives.~~Agency Securities. Accrued interest payable includes interest payable on our repurchase ~~agreements and on our derivatives.~~agreements.

Credit Risk

We have limited our exposure to credit losses on our portfolio of Agency Securities by only purchasing securities issued by Freddie Mac, Fannie Mae or Ginnie Mae. The payment of principal and interest on the Freddie Mac and Fannie Mae Agency Securities are guaranteed by those respective agencies and the payment of principal and interest on the Ginnie Mae Agency Securities are backed by the full faith and credit of the U.S. Government.

In September 2008, both Freddie Mac and Fannie Mae were placed in the conservatorship of the ~~United States government.~~U.S. Government. While it is hoped that the conservatorship will help stabilize Freddie Mac's and Fannie Mae's losses and overall financial position, there can be no assurance that it will succeed or that, if necessary, Freddie Mac or Fannie Mae will be able to satisfy their guarantees of Agency Securities. On August 5, 2011, Standard & ~~Poor’s~~Poor's Corporation downgraded the U.S.’s's credit rating from AAA to AA++, and on August 8, 2011, Fannie Mae and Freddie ~~Mac’s~~Mac's credit ratings were downgraded from AAA to AA+. Because Fannie Mae and Freddie Mac are in conservatorship of the U.S. Government, the U.S.’s's credit rating downgrade and Fannie Mae and Freddie ~~Mac’s~~Mac's credit rating downgrades will impact the credit risk associated with Agency Securities and, therefore, may decrease the value of the Agency Securities in our portfolio.

Market Risk

Weakness in the mortgage market may adversely affect the performance and market value of our investments. This could negatively impact our ~~net~~ book value. Furthermore, if our lenders are unwilling or unable to provide additional financing, we could be forced to sell our Agency Securities at an inopportune time when prices are depressed.

Preferred Stock

~~We are~~At September 30, 2012, we were authorized to issue up to 25,000,000 shares of preferred stock, par value $0.001 per share with such designations, voting and other rights and preferences as may be determined from time to time by our Board of Directors (“Board”) or a committee thereof. On June 6, 2012, we filed with the Maryland State Department of Assessments and Taxation to designate 1,610,000 shares of the 25,000,000 authorized preferred stock as 8.250% Series A Cumulative Preferred Shares (“Series A Preferred Stock”) with the powers, designations, preferences and other rights as set forth therein. On July 13, 2012, we entered into an At Market Issuance Sales Agreement with MLV & Co. LLC, as our agent, to offer and sell, from time to time, up to 6,000,000 shares of Series A Preferred Stock. On July 27, 2012, we entered into an Equity Distribution Agreement with Citadel Securities LLC, as our agent, to offer and sell, from time to time, up to 2,000,000 shares of Series A Preferred Stock. At September 30, 2012 there were 9,610,000 shares designated as Series A Preferred Stock. At September 30, 2012, we had issued and outstanding 1,785,000 shares of Series A Preferred Stock, with a par value $0.001 per share and a liquidation preference of $25.00 per share plus accrued and unpaid dividends. The Series A Preferred Stock is entitled to a dividend at a rate of 8.250% per year based on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series A Preferred Stock is redeemable at $25.00 per share plus accrued and unpaid dividends exclusively at our option commencing on June 7, 2017 (subject to our right under limited circumstances to redeem the Series A Preferred Stock earlier in order to preserve our qualification as a REIT). The Series A Preferred Stock is senior to our common stock and therefore in the event of liquidation, dissolution or winding up, the Series A Preferred Stock will receive a liquidation preference of $25.00 per share plus accumulated and unpaid dividends before distributions are paid to holders of our common stock, with no right or claim to any of our remaining assets thereafter. The Series A Preferred Stock generally does not have voting rights except if we fail to pay dividends on the Series A Preferred Stock for eighteen months, whether or not consecutive. Under such circumstances, the Series A Preferred Stock will be entitled to vote to elect two additional directors to the Board, until all unpaid dividends have been paid or declared and set aside for payment. The Series A Preferred Stock has no stated maturity, is not subject to any sinking fund or mandatory redemption and will remain outstanding indefinitely unless repurchased or redeemed by us or converted into our common stock in connection with a change of control by the holders of Series A Preferred Stock.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Common Stock and Warrants

At September 30, ~~2011,~~2012, we were authorized to issue up to 500,000,000 shares of common stock, par value $0.001 per ~~share.~~share, with such designations, voting and other rights and preferences as may be determined from time to time by our Board. We had ~~84,758,505~~308,972,403 shares of common stock issued and ~~outstanding.~~outstanding at September 30, 2012. At September 30, ~~2011,~~2012, we had outstanding warrants to purchase 32,500,000 shares of common stock, which are exercisable at $11.00 per share and expire in 2013.

~~Income per Common Share~~

Basic income per common share for all periods is computed by dividing the earnings applicable to common stockholders by the weighted average number of common shares outstanding for the period. The basic and diluted income per common share for the three and nine month periods ended September 30, 2011 and September 30, 2010, does not include 32,500,000 of outstanding warrants as the effect of including such warrants would be anti-dilutive. Diluted income per share would reflect the potential dilution assuming common shares were issued upon the exercise of outstanding warrants and the proceeds thereof were used to purchase common shares at the average market price during the period. Due to the net loss for the three and nine month periods ended September 30, 2011 and September 30, 2010, basic and diluted income per common share are equal.

Comprehensive Income

~~Other comprehensive~~Comprehensive income refers to ~~revenue, expenses, gains~~change in equity during a period from transactions and ~~losses that are recorded directly as an adjustment to shareholders’ equity. Other comprehensive income arises primarily~~other events and circumstances from non-owner sources. It includes all changes in ~~unrealized gains or losses generated~~equity during a period except those resulting from ~~changes in market values of our Agency Securities held as available for sale.~~investments by owners and distributions to owners.

Revenue Recognition

Interest income is earned and recognized based on the ~~outstanding~~unpaid principal amount of the ~~investment securities~~Agency Securities and their contractual terms. Premiums and discounts associated with the purchase of ~~investment securities~~Agency Securities are amortized or accreted into interest income over the actual lives of the securities.

~~ARMOUR Residential REIT, Inc. and Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2011~~

~~(Unaudited)~~

Income Taxes

We intend to qualify and have elected to be taxed as a REIT under the Code. We will generally not be subject to federal income tax to the extent that we distribute our taxable income to our ~~shareholders,~~stockholders and as long as we satisfy the ongoing REIT requirements under the Code including meeting certain asset, income and stock ownership tests.

Our management is responsible for determining whether a tax position taken by us is more likely than not to be sustained on its merits. We have no material unrecognized tax benefits and have not recognized in ~~these~~the accompanying condensed consolidated financial statements any interest or penalties related to income taxes. Should any such ~~penalties~~interest and ~~interest~~penalties be recognized, they will be included in interest expense and other expenses, ~~and interest expense,~~ respectively. None of our income tax returns have been examined by federal, state or local authorities; therefore ~~all years which are statutorily~~our 2009, 2010 and 2011 federal and state tax returns remain open ~~are subject to examination by the appropriate authorities.~~for examination.

Note 4 - Recent Accounting Pronouncements

~~In April 2011, the FASB issued~~Accounting Standards Adopted in 2012

We adopted recent amendments to authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) in April 2011 related to the accounting for repurchase agreements and other agreements that entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. These amendments eliminate the criteria to assess whether a transferor must have the ability to repurchase or redeem the financial assets in order to demonstrate effective control over the transferred asset. Transferors thatWe maintain effective control over a transferred asset are required to account for the transaction as a secured borrowing rather than a sale. These amendments are effective for annual and interim periods beginning after December 15, 2011 and are to be applied prospectively to transactions or modifications of ~~existing transactions that occur on or after the effective date. We do not anticipate that the application of~~our assets financed by repurchase agreements therefore, this ~~amended guidance will have a material impact~~update had no effect on our condensed consolidated financial statements.

~~In May 2011, the FASB issued~~We adopted recent amendments to authoritative ~~guidanceto~~guidance issued by FASB in May 2011 to establish common fair value measurement and disclosure requirements in GAAP and International Financial Reporting Standards (“IFRSs”). These amendments change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between GAAP and IFRSs as well as expand the disclosures forStandards. We generally do not hold Level 3 ~~measurements. These amendments are to be applied prospectively,~~assets and ~~are effective for annual and interim periods beginning after December 15, 2011. We do not anticipate that the adoption of~~therefore, this ~~amended guidance will materially expand disclosures in~~update had no significant effect on our condensed consolidated financial statements.

~~In June 2011, the FASB issued an amendment~~We adopted recent amendments to authoritative guidance ~~which allows an entity~~issued by FASB in June and December 2011 providing for the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This update resulted in additional disclosure but had no significant effect on our condensed consolidated financial statements.

Accounting Standards to be Adopted in Future Periods

In ~~both choices,~~December 2011, the FASB issued amendments to authoritative guidance requiring entities that have financial instruments and derivative instruments to disclose information about offsetting and related arrangements. The disclosures required under this amended guidance are intended to enable users of an ~~entity is required~~entity's financial statements to ~~present each component~~evaluate the effect or potential effect of ~~net income along~~netting arrangements on an entity's financial position, including the effect or potential effect of rights of offset associated with ~~total net income, each component of other comprehensive income along with a total for other comprehensive income,~~certain financial instruments and a total amount for comprehensive income. This amendment eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity, but does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.derivative instruments. The provisions of ~~this amendment require retrospective application, and~~these amendments are effective for annual ~~and interim~~ periods beginning after ~~December 15, 2011.~~January 1, 2013. We anticipate ~~that~~ the adoption of ~~this amended guidance will~~these amendments may change the presentation of our financial ~~statements.~~statements and related disclosures.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 5 - Agency Securities, Available for Sale

All of our Agency Securities are classified as available for sale and, as such, are reported at their estimated fair value. ~~Management generally determines the fair values~~As of ~~Agency Securities by using third-party pricing services and dealer quotes. Management reviews pricing used to ensure that current market conditions are represented. At~~ September 30, ~~2011~~2012 and December 31, ~~2010, all~~2011, investments in Agency Securities accounted for 100% of our portfolio.

As of September 30, 2012, we had the following securities in an unrealized gain or loss position as presented below. The components of the carrying value of our Agency ~~Security values were based solely on third-party sources.~~

~~ARMOUR Residential REIT, Inc. and Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

Securities as of September 30, ~~2011~~2012 are also presented below.

~~(Unaudited)~~

September 30, 2012
Fannie Mae
Freddie
Mac
Ginnie Mae
Total
Agency
Securities

(dollars in thousands)
Principal Amount
$ 14,408,545 $ 5,899,771 $ 318,873 $ 20,627,189
Net unamortized premium
755,692 314,606 14,738 1,085,036
Amortized cost
15,164,237 6,214,377 333,611 21,712,225

Unrealized gains
274,057 122,875 6,985 403,917
Unrealized losses
(1,057
)
(210
)
- (1,267
)
Fair value
$ 15,437,237 $ 6,337,042 $ 340,596 $ 22,114,875

September 30, 2012
Adjustable Rate
Fixed
Rate
Total
Agency
Securities

(dollars in thousands)
Principal Amount
$ 2,234,747 $ 18,392,442 $ 20,627,189
Net unamortized premium
92,613 992,423 1,085,036
Amortized cost
2,327,360 19,384,865 21,712,225

Unrealized gains
46,143 357,774 403,917
Unrealized losses
(9
)
(1,258
)
(1,267
)
Fair value
$ 2,373,494 $ 19,741,381 $ 22,114,875

As of ~~September 30,~~December 31, 2011, we had the following securities in an unrealized ~~(loss)~~ gain or loss position as presented below. ~~The table below includes $474.1 million of current carrying value of forward settle security purchases.~~


~~(1)~~	The current face is the current monthly remaining dollar amount of principal of an Agency Security. We compute current face by multiplying the original face value of the security by the current principal balance factor. The current principal balance factor is a fraction, where the numerator is the current outstanding balance and the denominator is the original principal balance.
~~(2)~~	For a pass-through certificate, the coupon reflects the weighted average nominal rate of interest paid on the underlying mortgage loans, net of fees paid to the servicer and the agency. The coupon for a pass-through certificate may change as the underlying mortgage loans are prepaid.
~~(3)~~	Amortized purchase price is the dollar amount, per $100 of current face, of our purchase price for the security, adjusted for amortization as a result of scheduled and unscheduled principal repayments.
~~(4)~~	~~Amortized cost is our total purchase price for the Agency Security, adjusted for amortization as a result of scheduled and unscheduled principal repayments.~~
~~(5)~~	Market price is the dollar amount of market value, per $100 of nominal, or face value, of the Agency Security. We value our Agency Securities using a third-party pricing service whose pricing model incorporates common market pricing methods. Management reviews the pricing to ensure that current market conditions are properly represented.
~~(6)~~	~~Market value is the total market value for the security.~~

~~ARMOUR Residential REIT, Inc. and Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2011~~

~~(Unaudited)~~

~~Our investment portfolio consisted of the following breakdown between Fannie Mae, Freddie Mac and Ginnie Mae at September 30, 2011.~~

Agency Securities

September 30, 2011

Estimated Fair
Value

Percentage
of Total

Settled Securities

Fannie Mae Certificates
$
3,880,133,945

64.9
%
Freddie Mac Certificates

1,191,667,093

19.9

Ginnie Mae Certificates

429,926,461

7.2

Forward Settle Securities

Fannie Mae Certificates

398,098,985

6.7

Freddie Mac Certificates

65,126,680

1.1

Ginnie Mae Certificates

10,870,254

0.2

Total Securities
$
5,975,823,418

100.0
%

~~Our investment portfolio consisted of the following breakdown between Fannie Mae, Freddie Mac and Ginnie Mae at December 31, 2010.~~

Agency Securities

December 31, 2010

Estimated Fair
Value

Percentage
of Total

Settled Securities

Fannie Mae Certificates
$
718,542,007

61.8
%
Freddie Mac Certificates

257,316,342

22.2

Ginnie Mae Certificates

60,662,164

5.2

Forward Settle Securities

Fannie Mae Certificates

125,330,167

10.8

Freddie Mac Certificates

-

-

Ginnie Mae Certificates

-

-

Total Securities
$
1,161,850,680

100.0
%

~~As of September 30, 2011~~2012 and December 31, ~~2010,~~2011 in the ~~adjustable~~table above are based upon market factors, assumptions, models and ~~hybrid adjustable rate mortgage loans underlying our~~estimates from the third-party model and also incorporate management's judgment and experience. The actual weighted average lives of the Agency Securities have fixed-interest rates for an average period of approximately 68 months and 64 months, respectively, after which time the interest rates reset and become adjustable. After a reset date, interest rates on our adjustable and hybrid adjustable Agency Securities float based on spreads over various indices, typically LIBORcould be longer or the one-year Constant Maturity Treasury (“CMT”), rate. These interest rates are subject to caps that limit the amount the applicable interest rate can increase during any year, known as an annual cap, and through the maturity of the security, known as a lifetime cap.shorter than estimated.

The following table presents the ~~gross~~ unrealized losses and estimated fair value of our Agency Securities by length of time that such securities have been in a continuous unrealized loss position atas of September 30, ~~2011~~2012 and December 31, ~~2010.~~ 2011.

Less than 12 months

12 Months or More

Total
As of

Estimated Fair Value

Unrealized Losses

Estimated Fair Value

Unrealized Losses

Estimated Fair Value

Unrealized Losses
September 30, 2011
$
1,219,654,037
$
(3,380,556)
$
3,416,148
$
(23,236)
$
1,223,070,185
$
(3,403,792)
December 31, 2010

706,575,108

(7,873,009)

-

-

706,575,108

(7,873,009)

~~ARMOUR Residential REIT, Inc. and Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2011~~

~~(Unaudited)~~

Unrealized Loss Position For:
(dollars in thousands)

Less than 12 months
12 Months or More
Total
As of
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
September 30, 2012
$ 666,322 $ (1,257
)
$ 1,164 $ (10
)
$ 667,486 $ (1,267
)
December 31, 2011
1,173,098 (3,560
)
96,684 (346
)
1,269,782 (3,906
)

The decline in value of these securities is solely due to market conditions and not the credit quality of the assets. All of ~~the~~our Agency Securities are ~~“Aaa/~~issued by the GSEs. The GSEs have a rating of AA+~~” rated or carry an implied “Aaa/AA+” rating.~~. The investments are not considered other than temporarily impaired because we currently have the ability and intent to hold the investments to maturity or for a period of time sufficient for a forecasted market price recovery up to or beyond the cost of the investments and we are not required to sell for regulatory or other reasons. ~~Our ability to hold these securities to maturity would be impaired if we lost our access to financing or our cash flows were insufficient to fund our operations.~~ Also, we are guaranteed payment of the principal amount of the securities by the ~~U.S. Government-chartered entity which~~GSEs that created them.

~~Note 6 - Derivatives~~

~~We enter into transactions~~During the quarter and nine months ended September 30, 2012 we sold $1.6 billion and $1.9 billion of Agency Securities resulting in a realized gain of $15.1 million and $20.1 million, respectively. Of the $20.1 million $1.1 million is a loss due to manage our interest rate risk exposure. These transactions include purchasing or selling Eurodollar Futures Contracts (“Futures Contracts”) as well as purchasing or selling interest rate swap contracts. These transactions are designedthe bankruptcy of a counterparty to ~~lock in funding costs for financing activities associated with our assets in such~~ a ~~way~~repurchase agreement. In addition, due to ~~help assure~~ the ~~realization~~bankruptcy we also recorded $1.0 million of ~~attractive net interest margins. Such transactions are based~~other income resulting from the non-performance of the counterparty on assumptions about prepayments which, if not realized, will cause transaction results to differ from expectations. We do not designate our activities as cash flow hedges, and as such, we recognize changes in the ~~market value of these transactions through earnings (See Note 3). For~~related repurchase agreement. During the ~~three~~quarter and nine months ended September 30, 2011 we ~~recognized unrealized losses~~sold $0.5 billion of $65.8 million and $91.9 million, respectively. During the three and nine months ended September 30, 2011, we realized losses of $8.4 million and $16.4 million, respectively, related to our derivatives. Our derivative instruments are carried on our condensed consolidated balance sheets at fair value, as assets, if their fair value is positive, or as liabilities, if their fair value is negative.

As of September 30, 2011 and December 31, 2010, we had entered into $134.0 million and $214.0 million (notional amount), respectively, of Eurodollar Future strips (“interest rate swap equivalents”) traded in 1,167 and 2,361 individual Futures Contracts transactions, respectively. Our Futures Contracts are traded on the Chicago Mercantile Exchange (“CME”) which requires the use of daily mark-to-market collateral and the CME provides substantial credit support. The collateral requirements of the CME require us to pledge assets under a bi-lateral margin arrangement, including either cash or Agency Securities ~~and these requirements may vary and change over time based on the market value, notional amount, and remaining term~~resulting in a realized gain of the Futures Contracts. In the event we are unable to meet a margin call under one of our Futures Contracts, the counterparty to such agreement may have the option to terminate or close-out all of the outstanding Futures Contracts with us. In addition, any close-out amount due to the counterparty upon termination of the counterparty’s transactions would be immediately payable by us pursuant to the applicable agreement. $6.4 million.

As of September 30, 2011 and December 31, 2010, we had entered into $2.8 billion and $155.0 million (notional amount) of interest rate swap contracts, respectively, traded in 56 and 10 individual transactions, respectively. We have agreements with our swap counterparties that provide for the posting of collateral based on the fair values of our interest rate swap contracts. Through this margining process, either we or our swap counterparty may be required to pledge cash or securities as collateral. Collateral requirements vary by counterparty and change over time based on the market value, notional amount and remaining term of the swap. Certain interest rate swap contracts provide for cross collateralization and cross default with repurchase agreements and other contracts with the same counterparty.

As of September 30, 2011, included in restricted cash on the condensed consolidated balance sheet is $6.6 million related to margin posted for Futures Contracts as well as $126.0 million of restricted cash related to interest rate swap contracts. As of December 31, 2010, we had $4.4 million of restricted cash related to margin posted for Futures Contracts, and $0.3 million related to interest rate swap contracts.

ARMOUR Residential REIT, Inc. and ~~Subsidiaries~~Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2011~~

(Unaudited)

The following tables present information about interest rate swap contracts which are included in derivatives on the accompanying condensed consolidated balance sheet as of September 30, 2011 and December 31, 2010:

Notional
Amount

Value as of
September 30, 2011

Fixed Rate

Interest rate swaps maturing 12-24 months
$
20,000,000
$
(99,541)

0.5
%
Interest rate swaps maturing 24-36 months

290,000,000

(5,557,946)

1.1

Interest rate swaps maturing 36-48 months

830,000,000

(19,831,106)

1.2

Interest rate swaps maturing 48-60 months

1,625,000,000

(63,151,406)

1.7

Totals
$
2,765,000,000
$
(88,639,999)

1.5
%

Notional
Amount

Value as of
December 31, 2010

Fixed Rate

Interest rate swaps maturing 12-24 months
$
20,000,000
$
(9,981)

0.5
%
Interest rate swaps maturing 24-36 months

100,000,000

147,282

1.0

Interest rate swaps maturing 36-48 months

10,000,000

(9,195)

1.4

Interest rate swaps maturing 48-60 months

25,000,000

(26,039)

1.9

Totals
$
155,000,000
$
102,067

1.1
%

The following tables present information about Futures Contracts which are included in derivatives on the accompanying condensed consolidated balance sheet as of September 30, 2011 and December 31, 2010:

Notional
Amount

Fair Value as of
September 30, 2011

Weighted
Average Rate

Eurodollar future strips maturing 6-12 months
$
13,000,000
$
(90,925)

1.0
%
Eurodollar future strips maturing 18-24 months

47,000,000

(1,328,425)

1.6

Eurodollar future strips maturing 30-39 months

64,000,000

(3,696,925)

2.1

Eurodollar future strips maturing 48 months

10,000,000

(665,313)

2.1

Totals
$
134,000,000
$
(5,781,588)

1.8
%

Notional
Amount

Fair Value as of
December 31, 2010

Weighted
Average Rate

Eurodollar future strips maturing 6-12 months
$
28,000,000
$
(137,950)

0.8
%
Eurodollar future strips maturing 18-24 months

107,000,000

(1,114,125)

1.3

Eurodollar future strips maturing 30-39 months

64,000,000

(1,193,113)

1.8

Eurodollar future strips maturing 48 months

15,000,000

(187,524)

2.1

Totals
$
214,000,000
$
(2,632,712)

1.6
%

~~ARMOUR Residential REIT, Inc. and Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2011~~

~~(Unaudited)~~

The following table represents the location and information regarding our derivatives which are included in total other loss on the accompanying condensed consolidated statements of operations for the three and nine months ended September 30, 2011, compared to three and nine months ended September 30, 2010.

~~(1)~~

~~Equal to the fair value of securities sold, minus the sum of repurchase agreement liabilities plus accrued interest expense~~

~~As of September 30, 2011 and December 31, 2010,~~ The Haircut represents the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount.

Note 8 - Derivatives

We enter into transactions to manage our interest rate risk exposure. These transactions include entering into interest rate swap contracts and interest rate swaptions as well as purchasing or selling Futures Contracts. These transactions are designed to lock in funding costs for financing activities associated with our assets in such a way to help assure the realization of net interest margins. Such transactions are based on assumptions about prepayments which, if not realized, will cause transaction results to differ from expectations. Our derivative instruments are carried on our condensed consolidated balance sheets, as assets or as liabilities at their fair value. We do not designate our activities as cash flow hedges and as such, we recognize changes in the market value of these transactions through earnings. For the quarter and nine months ended September 30, 2012, we recognized unrealized losses of $31.5 million and $84.3 million, respectively related to our derivatives. For the quarter and nine months ended September 30, 2011, we recognized unrealized losses of $65.8 million and $91.9 million, respectively related to our derivatives.

We have agreements with our swap counterparties that provide for the posting of collateral based on the fair values of our interest rate swap contracts. Through this margin process, either we or our swap counterparty may be required to pledge cash or Agency Securities as collateral. Collateral requirements vary by counterparty and change over time based on the market value, notional amount ~~which we also refer to as~~and remaining term of the ~~haircut, under all our~~swap. Certain interest rate swap contracts provide for cross collateralization and cross default with repurchase agreements ~~was approximately 5.1%~~ and ~~5.3%, respectively.~~other contracts with the same counterparty.

Interest rate swaptions generally provide us the option to enter into an interest rate swap agreement at a certain point of time in the future with a predetermined notional amount, stated term and stated rate of interest in the fixed leg and interest rate index on the floating leg.

Our Futures Contracts are traded on the CME which requires the use of daily mark-to-market collateral and the CME provides substantial credit support. The collateral requirements of the CME require us to pledge assets under a bi-lateral margin arrangement, including either cash or Agency Securities and these requirements may vary and change over time based on the market value, notional amount and remaining term of the Futures Contracts. In the event we are unable to meet a margin call under one of our Futures Contracts, the counterparty to such agreement may have the option to terminate or close-out all of the outstanding Futures Contracts with us. In addition, any close-out amount due to the counterparty upon termination of the counterparty's transactions would be immediately payable by us pursuant to the applicable agreement.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The following table presents information about interest rate swap contracts, interest rate swaptions and Futures Contracts which are included in derivatives on the accompanying condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011.

September 30, 2012
December 31, 2011

(dollars in thousands)

Notional Amount
Net Fair Value (1)
Notional Amount
Net Fair Value (1)
Interest rate swap contracts
$ 8,690,000 $ (192,120
)
$ 2,765,000 $ (116,435
)
Interest rate swaptions
1,050,000 6,447 - -
Futures Contracts
121,000 (4,656
)
131,000 (5,292
)
Totals
$ 9,861,000 $ (190,329
)
$ 2,896,000 $ (121,727
)

(1)	See Note 6, “Fair Value of Financial Instruments” for additional discussion.

The following table represents the location and information regarding our derivatives which are included in total other loss in the accompanying condensed consolidated statements of operations for the quarters and nine months ended September 30, 2012 and September 30, 2011.

Loss Recognized in Income
(dollars in thousands)

For the Quarters Ended
For the Nine Months Ended
Derivatives
Location on condensed consolidated statements of operations
September 30, 2012
September 30, 2011
September 30, 2012
September 30, 2011
Interest rate swap contracts:

Interest income
Realized loss on derivatives
$ 2,562 $ 415 $ 5,421 $ 983
Interest expense
Realized loss on derivatives
(20,832
)
(8,213
)
(44,779
)
(16,343
)
Realized (loss)
Realized loss on derivatives
- (256
)
- (239 )
Changes in fair value
Unrealized loss on derivatives
(25,153
)
(64,581
)
(66,831
)
(88,742
)
(43,423
)
(72,635
)
(106,189
)
(104,341
)
Interest rate swaptions:

Changes in fair value
Unrealized loss on derivatives
(6,593
)
- (18,070
)
-
(6,593
)
- (18,070
)
-
Futures Contracts:

Realized (loss)
Realized loss on derivatives
(644
)
(366
)
(1,697
)
(826
)
Changes in fair value
Unrealized loss on derivatives
260 (1,228
)
636 (3,149
)
(384
)
(1,594
)
(1,061
)
(3,975
)
Totals
$ (50,400
)
$ (74,229
)
$ (125,320
)
$ (108,316
)

~~Note 8 - Commitments and Contingencies~~

~~Management Agreement with ARRM~~

~~As discussed in Note 14 “~~~~Related Party Transactions,~~” we are party to a management agreement with ARRM. Pursuant to the management agreement, as amended, ARRM is entitled to receive a management fee payable monthly in arrears in an amount equal to 1/12^th ~~of an amount, with a minimum based on 1/12~~^th ~~of $900,000 (inclusive of the original gross merger equity as defined in the management agreement), determined as follows:~~

~~our gross equity raised up to $50 million, 1% (per annum) of gross equity;~~

~~our gross equity raised up to $1.0 billion, 1.5% (per annum) of gross equity;~~

~~our gross equity raised exceeds $1.0 billion, 0.75% (per annum) of gross equity~~

~~Operating Leases~~

~~We are not party to any agreement for the rental of real property and office space, or any significant leases for office, computer and other equipment or office furnishings.~~

~~Indemnifications and Litigation~~

We enter into certain contracts that contain a variety of indemnifications, to third-parties principally with ARRM and brokers. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unknown. We have not incurred any costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of September 30, 2011 and December 31, 2010.

~~ARMOUR Residential REIT, Inc. and Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~September 30, 2011~~

~~(Unaudited)~~

~~We are not party to any pending, threatened or contemplated litigation.~~

Note 9 - Share-Based Compensation

~~2009 Stock Incentive Plan~~

We adopted the 2009 Stock Incentive Plan (the "Plan") to attract, retain and reward directors, officers and other employees of ours and other persons who provide services to us in the course of ~~operations (collectively "Eligible Individuals").~~

operations. The Plan ~~provides for grants of~~authorizes the Board to grant awards including common stock, restricted shares of common stock (“RSUs”), stock options, performance shares, performance units, stock appreciation rights and other equity and cash-based awards (collectively ~~“awards.”~~“Awards”), subject to terms as provided in the Plan.

On May 12, 2010, ~~our~~the Board allocated up to 250,000 shares to be available under the Plan. In considering such allocation, the Board considered the size of the Plan relative to our capital base and our current and potential future performance and capitalization. On July 18, 2011, our stockholders approved an amendment to the Plan to increase the number of shares issuable thereunder from 250,000 shares to 2,000,000 shares and the Plan was amended accordingly.

The Plan allows for the Board to expand the types of awards available under the Plan and determine the maximum number of shares that may underlie these awards in any one year to any Eligible Individual. If an award granted under the Plan expires or terminates, the shares subject to any portion of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards.

~~Awards Under the Plan~~

During the nine months ended September 30, ~~2011,~~2012, we ~~allocated 2,000,000 RSUs subject to various performance conditions and~~ awarded a total of ~~192,500~~655,524 RSUs to members of our Board ~~(the “Board Awards”)~~ and employees of ~~ARRM (the “ARRM Awards”). We account~~ARRM.

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

RSU transactions for the ~~ARRM Awards under ASC Topic No. 505-50~~~~”Equity Based Payments to Non-Employees.”~~ ~~We account for the Board Awards under ASC Topic No. 718~~~~“Compensation- Stock Compensation.”~~ The Board Awards and the ARRM Awards were awarded at a weighted average grant date fair value per RSU of $7.91, determined at the grant date based on the closing price of our common stock. Both awards are service-based awards, and vest quarterly in equal amounts over a five year term ending December 31, 2015. We recorded $0.07 million and $0.21 million of non-cash compensation expense in the three and nine months ended September 30, ~~2011, respectively. These amounts are included in other expenses in our condensed consolidated statement of operations. Of these amounts, $0.06 million at~~2012 and September 30, 2011 were included in accounts payable and accrued expenses representing shares issuable per the agreements and the remaining $0.10 million is included in additional paid in capital; this remaining amount is a net amount which includes $0.05 million of stock compensation withheld to pay income taxes.are summarized below:

September 30, 2012
September 30, 2011

Number of
Awards
Weighted Average Grant Date Fair Value per Award
Number of
Awards
Weighted Average Grant Date Fair Value per Award
Unvested Awards Outstanding beginning of period
153,980 $ 7.91 - -
Granted
655,524 7.13 192,500 7.91
Vested
(138,730
)
7.29 (28,890
)
7.91
Unvested Awards Outstanding end of period
670,774 $ 7.28 163,610 $ 7.91

As of September 30, ~~2011,~~2012, there was approximately ~~$0.2~~$5.3 million of unearned non-cash stock-based compensation related to the ~~Board~~ Awards ~~and $1.0 million related to ARRM awards~~ (based on the September 30, ~~2011~~2012 stock price), that we expect to recognize as an expense over the remaining average service period of ~~4.5~~3.7 years.

Note 10 - Stockholders' Equity

Dividends

The Board Awards are expensed on a straight-line basis over the requisite service period of 5 years; the ARRM Awards are valued and expensed as they vest at each quarter commencing March 31, 2011 and ending December 31, 2015, based on the closing price offollowing tables present our common stock ~~on the last trading day of the quarter. At September 30, 2011, 28,890 of our outstanding RSUs were vested.~~

~~RSU~~dividend transactions for the ~~period~~nine months ended September 30, ~~2011, are summarized below:~~

Number of Awards

Weighted Average Grant Date Fair Value per Award
Unvested Awards Outstanding, December 31, 2010

-
$
-
Granted

192,500

7.91
Vested

(28,890)

7.91
Unvested Awards Outstanding September 30, 2011

163,610
$
7.91

~~ARMOUR Residential REIT, Inc.~~2012 and ~~Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

September 30, ~~2011~~2011.

~~(Unaudited)~~

September 30, 2012

Record Date
Payment Date
Rate per common share
Aggregate amount paid to holders of record (in millions)
January 15, 2012(1)
January 30, 2012
$ 0.11 $ 11.6
February 15, 2012
February 28, 2012
0.11 15.3
March 15, 2012
March 29, 2012
0.11 19.9
April 16, 2012
April 27, 2012
0.10 17.8
May 15, 2012
May 30, 2012
0.10 18.1
June 15, 2012
June 28, 2012
0.10 18.6
July 16, 2012
July 30, 2012
0.10 23.5
August 15, 2012
August 30, 2012
0.10 30.0
September 14, 2012
September 27, 2012
0.10 31.0

~~Note 10 - Shareholders’ Equity~~

On January 26, 2011, we completed an underwritten secondary public offering of 6,000,000 shares of common stock at a price of 7.55 per share. The underwriters fully exercised the over-allotment option for 900,000 additional shares. Net proceeds were $49.0 million, net of issuance costs of approximately $3.1 million.

~~On January 28, 2011, a cash dividend of $0.12~~(1) This amount included $0.006 per common share ~~or $2.0 million in~~of taxable income related to the ~~aggregate, was paid to holders of record on January 15,~~year ended December 31, 2011.

September 30, 2011

Record Date
Payment Date
Rate per common share
Aggregate amount paid to holders of record (in millions)
January 15, 2011(1)
January 28, 2011
$ 0.12 $ 2.0
February 15, 2011
February 25, 2011
0.12 3.9
March 15, 2011
March 30, 2011
0.12 3.9
April 15, 2011
April 28, 2011
0.12 5.9
May 15, 2011
May 27, 2011
0.12 5.9
June 15, 2011
June 29, 2011
0.12 8.3
July 15, 2011
July 28, 2011
0.12 9.1
August 15, 2011
August 30, 2011
0.12 9.1
September 15, 2011
September 29, 2011
0.12 10.1

(1) This amount included $0.02 per common share of taxable income related to the year ended December 31, 2010.

~~On February 8, 2011, we completed an underwritten secondary public offering of 7,750,000 shares of common stock at a price of $7.60 per share.~~

ARMOUR Residential REIT, Inc. and Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The ~~underwriters fully exercised~~following table presents our Series A Preferred Stock dividend transactions for the ~~over-allotment option~~nine months ended September 30, 2012. There were no Series A Preferred Stock dividend transactions for ~~1,162,500 additional shares. Net proceeds were $64.0 million, net of issuance costs of approximately $3.7 million.~~

~~On February 25, 2011, a cash dividend of $0.12 per common share, or $3.9 million in~~ the ~~aggregate, was paid to holders of record on February 15,~~nine months ended September 30, 2011.

September 30, ~~2011, we had issued and sold 5,212,430 shares of our common stock under this agreement for net proceeds of $37.5 million.~~2012

~~On March 30, 2011, a cash dividend of $0.12 per common share, or $3.9~~

Record Date
Payment Date
Rate per Series A Preferred share
Aggregate amount paid to holders of record (in millions)
July 13, 2012(1)
July 27, 2012
$ 0.286500 $ 0.4
August 15, 2012
August 27, 2012
0.171875 0.3
September 14, 2012
September 27, 2012
0.171875 0.3

(1) This amount included $0.2 million ~~in the aggregate, was paid to holders of record on March 15, 2011.~~

On April 7, 2011, we implemented a Dividend Reinvestment and Stock Purchase Plan through which investors may purchase additional shares of our common stock by reinvesting some or all of the cash dividends received on shares of our common stock. Shareholders may also make optional cash purchases of shares of our common stock subject to certain limitations detailed in the plan prospectus. As of September 30, 2011 we had issued and sold 11,879,844 shares under the plan for net proceeds of $86.8 million.

On April 13, 2011, we completed an underwritten secondary public offering of 16,000,000 shares of common stock at a price of $7.40 per share. The underwriters partially exercised the over-allotment option for 1,000,000 additional shares. Net proceeds were $121.1 million, net of issuance costs of approximately $4.7 million.

~~On April 28, 2011, a cash dividend of $0.12 per common share, or $5.9 million in the aggregate, was paid to holders of record on April 15, 2011.~~

~~On May 27, 2011, a cash dividend of $0.12 per common share, or $5.9 million in the aggregate, was paid to holders of record on May 15, 2011.~~

On June 6, 2011, we completed an underwritten secondary public offering of 16,000,000 shares of common stock at a price of $7.40 per share. The underwriters fully exercised the over-allotment option for 2,400,000 additional shares. Net proceeds were $131.0 million, net of issuance costs of approximately $5.2 million.

~~On June 29, 2011, a cash dividend of $0.12 per common share, or $8.3 million in the aggregate, was paid to holders of record on June 15, 2011.~~

~~On July 28, 2011, a cash dividend of $0.12 per common share, or $9.1 million in the aggregate, was~~ paid to holders of record on July ~~15,~~13, 2012 for the period of June 7, 2012 through June 30, 2012.

Equity Capital Raising Activities

The following tables present our equity transactions for the nine months ended September 30, 2012 and September 30, 2011.

~~On August~~

September 30, ~~2011, a cash dividend of $0.12 per common share, or $9.1 million in the aggregate, was paid to holders of record on August 15, 2011.~~2012

Transaction Type
Completion Date
Number of
Shares
Per Share price
Net Proceeds
(in millions)
Follow-on public offering
January 13, 2012
10,350,000 $ 6.80 $ 70.1
Follow-on public offering
February 8, 2012
29,900,000 6.80 203.0
Equity distribution agreement
February 29, 2012
1,287,570 7.06 8.9
Follow-on public offering
March 14, 2012
35,650,000 6.72 239.2
Issuance of Series A Preferred Stock
June 7, 2012
1,400,000 25.00 33.8
Follow-on public offering
July 13, 2012
46,000,000 7.06 324.5
Follow-on public offering
August 8, 2012
63,250,000 7.30 461.4
Common equity distributionagreements
January 1, 2012 to September 30, 2012
19,750,000 7.14 (1) 138.2
Preferred equity distributionagreements
January 1, 2012 to September 30, 2012
385,000 25.56 (1) 9.5
Dividend Reinvestment andStock Purchase Plan
January 1, 2012 to September 30, 2012
7,273,020 7.28 (1) 52.9

(1)Weighted average price

September ~~29,~~30, 2011 ~~a cash dividend of $0.12 per common share, or $10.1 million in the aggregate, was paid to holders of record on September 15, 2011.~~

24
Transaction Type
Completion Date
Number of
Shares
Per Share price
Net Proceeds
(in millions)
Follow-on public offering
January 26, 2011
6,900,000 $ 7.55 $ 49.0
Follow-on public offering
February 8, 2011
8,912,500 7.60 64.0
Equity distribution agreement
February 28, 2011 to September 30, 2011
5,212,430 7.39 (1) 37.5
Follow-on public offering
April 13, 2011
17,000,000 7.40 121.1
Follow-on public offering
June 6, 2011
18,400,000 7.40 131.0
Dividend Reinvestment andStock Purchase Plan
April 7, 2011 to September 30, 2011
11,879,844 7.30 (1) 86.8

(1) Weighted average price

ARMOUR Residential REIT, Inc. and ~~Subsidiaries~~Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2011~~

(Unaudited)

Note 11 ~~- Fair Value of Financial Instruments~~– Income per Common Share

A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of valuation hierarchy are defined as follows:

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

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

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

The following describes the valuation methodologies used for our assets and liabilities measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

~~Cash and restricted cash –~~Cash includes cash on deposit with financial institutions and investments in high quality overnight money market funds, all of which have maturities of three months or less, at the time of purchase. The carrying amount of cash is deemed to be its fair value. Restricted cash includes cash held by counterparties as collateral.

~~Agency Securities Available for Sale~~ - Fair value for the Agency Securities in our portfolio is based on obtaining a valuation for each Agency Security from third-party pricing services and dealer quotes. Management reviews pricing used to ensure that current market conditions are properly represented. Values obtained from the independent pricing service for similar instruments are classified as Level 2 securities if the pricing methods used are consistent with the Level 2 definition. If quoted prices for a security are not reasonably available from the pricing service, but dealer quotes are, the security will be re-classified as a Level 3 security. If neither is available, management will determine the fair value based on characteristics of the security that we receive from the issuer and based on available market information received from dealers and classify it as a Level 3 security. At September 30, 2011 and December 31, 2010, all of our Agency Security values were based solely on third-party sources.

~~Derivative Transactions~~ ~~- The fair value of our Futures Contracts are based on closing prices on the CME. The fair value of our interest rate swap contracts are~~ ~~valued using a third-party.Our Futures Contracts are classified as Level 1 and the value of our interest rate swap contracts are Level 2.~~

~~Repurchase Agreements -~~The fair value of repurchase agreements reflects the present value of the contractual cash flows discounted at the estimated LIBOR based market interest rates at the valuation date for repurchase agreements with a term equivalent to the remaining term to interest rate repricing, which may be at maturity, of our repurchase agreements. The carrying amount of repurchase agreements is deemed to be their fair value.

The following table presents ~~our financial instruments measured at fair value as~~a reconciliation of the net income (loss) and the shares used in calculating basic and diluted earnings per share for the quarters and nine months ended September 30, 2012 and September 30, 2011.

Level 1

Level 2

Level 3

Total
Assets (liabilities) carried at fair value:

Agency Securities, available for sale
$
-
$
5,856,003,961
$
119,819,457
$
5,975,823,418
Derivatives

(5,781,588)

(88,639,999)

-

(94,421,587)
Total
$
(5,781,588)
$
5,767,363,962
$
119,819,457
$
5,881,401,831

~~The following table presents our financial instruments measured at fair value~~

For the Quarters Ended
For the Nine Months Ended

September 30,
2012
September 30,
2011
September 30,
2012
September 30,
2011
Net Income (Loss)
$ 54,942 $ (34,472
)
$ 106,561 $ (33,149
)
Less: Preferred dividends
(804
)
- (964
)
-
Net Income (Loss) available (related) to common stockholders
$ 54,138 $ (34,472
)
$ 105,597 $ (33,149
)

Weighted average common shares outstanding - basic
269,325 78,360 195,272 52,863
Add: Effect of dilutive non-vested restricted stock awards, assumed vested
685 - 1,015 -
Weighted average common shares outstanding - diluted
270,010 78,360 196,287 52,863

32,500,000 warrants were outstanding and considered anti-dilutive as ~~of December 31, 2010.~~

Level 1

Level 2

Level 3

Total
Assets (liabilities) carried at fair value:

Agency Securities, available for sale
$
-
$
1,114,175,921
$
47,674,759
$
1,161,850,680
Derivatives

(2,632,712)

-

102,067

(2,530,645)
Total
$
(2,632,712)
$
1,114,175,921
$
47,776,826
$
1,159,320,035

~~ARMOUR Residential REIT, Inc.~~their exercise price exceeded the average stock price for the quarters and ~~Subsidiaries~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

nine months ended September 30, ~~2011~~

~~(Unaudited)~~

When a new pool of mortgages is created, the third-party pricing services do not always become aware of the new pool for the early period of its existence. To the extent that we purchase a pool which the pricing service does not have listed, we seek independent third-party pricing from other services or brokers. Additionally, we will ask the third-party pricing service to include those assets in its list of priced assets in the future. As of December 31, 2010, we owned certain assets which were not priced by the independent third-party pricing service2012 and those assets were therefore classified as Level 3 assets. On September 30, 2011, these assets were priced by the pricing service and were therefore, reclassified as Level 2 assets. As of September 30, 2011, all Agency Securities except four securities were priced by a pricing service.

~~The following table presents detail of our Level 3 financial instruments measured at fair value as of~~ September 30, 2011.

Level 3
Balance as of December 31, 2010
$
47,776,826
Reclassification of agency securities

(47,674,759)
Reclassification of interest rate swap contracts

(102,067)
Purchases of agency securities, at cost

119,666,138
Unrealized gain on agency securities included in other comprehensive income

153,319
Balance as of September 30, 2011
$
119,819,457

~~The following table presents detail of our Level 3 financial instruments measured at fair value as of December 31, 2010.~~

Level 3
Balance as of January 1, 2010
$
-
Purchases of agency securities, at cost

47,681,986
Unrealized loss on agency securities included in other comprehensive income

(7,227)
Unrealized gain on interest rate swap contracts included in unrealized gain (loss) on derivatives on the condensed consolidated statements of operations

102,067
Balance as of December 31, 2010
$
47,776,826

Note 12 – Income Taxes

We intend to ~~qualify and have elected to be taxed as a~~currently distribute all of our REIT ~~under the Code. We will generally not be subject to federal income tax to the extent that we distribute our~~ taxable ~~income to our shareholders, and as long as we satisfy the ongoing REIT requirements including meeting certain asset, income and stock ownership tests.~~income. Accordingly, there is no provision required for ARMOUR's reported GAAP earnings.

We have elected to treat Enterprise as a taxable REIT subsidiary, which is a tax paying entity for income tax purposes and it is taxed separately from ARMOUR. Because Enterprise is inactive, its taxes are nominal.

Note 13 - Commitments and Contingencies

Management Agreement with ARRM

As discussed in Note 14 “Related Party Transactions,” we are externally managed by ARRM pursuant to a management agreement, as most recently amended and restated on June 18, 2012 (the “2012 Management Agreement”). The 2012 Management Agreement entitles ARRM to receive a management fee payable monthly in arrears in an amount equal to 1/12th of 1% of gross equity raised until gross equity raised was $50 million. Thereafter, the monthly management fee would be 1/12th of the sum of (a) 1.5% of gross equity raised up to $1 billion plus (b) 0.75% of gross equity raised in excess of $1 billion. We are also obligated to reimburse certain expenses incurred by ARRM and its affiliates. ARRM is further entitled to receive a termination fee from us under certain circumstances. The ARRM monthly management fee is not calculated based on the performance of our portfolio. Accordingly, the payment of our monthly management fee may not decline in the event of a decline in our earnings and may cause us to incur losses.

Indemnifications and Litigation

We enter into certain contracts that contain a variety of indemnifications to third-parties, principally with ARRM and brokers. The maximum potential amount of future payments we could be required to make under these indemnification provisions is unknown. We have not incurred any costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated fair value of these agreements is minimal. Accordingly, we have no liabilities recorded for these agreements as of September 30, 2012 and December 31, ~~2010, we had recognized refundable income taxes of $0.5 million, related~~2011.

We are not party to ~~the carry back of net operating losses incurred by Enterprise in 2009 to prior years in which Enterprise reported taxable income. This amount was received in January 2011.~~any pending, threatened or contemplated litigation.

Our provision for income taxes for the three and nine months ended September 30, 2011, included $2,050 and $14,263, respectively, of federal income tax expense resulting from undistributed REIT taxable income for the year ended December 31, 2010. Our provision for income taxes for the three and nine months ended September 30, 2010, included $82 and $2,482, respectively, of federal income tax expense resulting from undistributed REIT taxable income for the year ended December 31, 2009.

ARMOUR Residential REIT, Inc. and ~~Subsidiaries~~Subsidiary

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2011~~

(Unaudited)

Note 14 - Related Party Transactions

We are externally managed by ARRM pursuant to the 2012 Management Agreement. All of our executive officers are also employees of ARRM. ARRM manages our day-to-day operations, subject to the direction and oversight of the Board. The 2012 Management Agreement expires after an initial term of 10 years on June 18, 2022 and is thereafter automatically renewed for an additional five-year term unless terminated under certain circumstances. Either party must provide 180 days prior written notice of any such termination.

Under the terms of the 2012 Management Agreement, ARRM is responsible for costs incident to the performance of its duties, such as compensation of its employees and various overhead expenses. ARRM is responsible for the following primary roles:

●
Advising us with respect to, arrange for and manage the acquisition, financing, management and disposition of, elements of our investment portfolio,
●
Evaluating the duration risk and prepayment risk within the investment portfolio and arranging borrowing and hedging strategies,
●
Coordinating capital raising activities,
●
Advising us on the formulation and implementation of operating strategies and policies, arranging for the acquisition of assets, monitoring the performance of those assets and providing administrative and managerial services in connection with our day-to-day operations and
●
Providing executive and administrative personnel, office space and other appropriate services required in rendering management services to us.

We are required to take actions as may be reasonably required to permit and enable ARRM to carry out its duties and obligations. We are also responsible for any costs and expenses that ARRM incurred solely on behalf of ARMOUR or its subsidiary other tjhan the various overhead expenses specified in the terms of the 2012 Management Agreement.

For the quarter and nine months ended September 30, 2012, we incurred $5.6 million and $13.4 million in management fees to ARRM, respectively. For the quarter and nine months ended September 30, 2011, we incurred $2.2 million and $4.4 million in management fees to ARRM, respectively.

Note 1315 - Interest Rate Risk

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

We seek to manage the extent to which net income changes as a function of changes in interest rates by matching adjustable rate assets with variable rate borrowings. We seek to economically hedge the potential impact on net income of periodic and lifetime coupon adjustment restrictions in the portfolio of Agency Securities by entering into interest rate agreements such as interest rate swaps. As of September 30, 2011 and December 31, 2010, we had entered into interest rate swap contracts to pay a fixed rate and receive a floating rate of interest, with a total notional amount of $2.8 billion and $155.0 million, respectively. Changes in interest rates may also have an effect on the rate of mortgage principal prepayments and, as a result, prepayments on Agency Securities. Prepayments, which result in the expensing of unamortized premium, will reduce net income compared to what net income would be absent such prepayments.

~~Note 14 - Related Party Transactions~~

~~Management Fees~~

We are externally-managed by ARRM pursuant to our Management Agreement (see Note 8). All of our executive officers are also employees of ARRM. ARRM manages our day-to-day operations, subject to the direction and oversight of the Board. The Management Agreement expires on November 6, 2014 and is thereafter automatically renewed for an additional one-year term unless terminated under certain circumstances. ARRM must provide 180 days prior notice of any such termination.

Under the terms of the Management Agreement, ARRM is responsible for costs incident to the performance of its duties, such as compensation of its employees and various overhead expenses. ARRM is responsible for the following primary roles:

~~Advising us with respect to, arrange for, and manage the acquisition, financing, management and disposition of, elements of our investment portfolio,~~

~~Evaluating the duration risk and prepayment risk within the investment portfolio and arranging borrowing and hedging strategies,~~

~~Coordinating capital raising activities,~~

Advising us on the formulation and implementation of operating strategies and policies, arranging for the acquisition of assets, monitoring the performance of those assets, arranging for various types of financing and hedging strategies, and providing administrative and managerial services in connection with our day-to-day operations, and

~~Providing executive personnel along with administrative personnel, office space, and other appropriate services required in rendering management services to us.~~

For the three and nine months ended September 30, 2011, we incurred $2.2 million and $4.4 million in management fees to ARRM, respectively. For the three and nine months ended September 30, 2010, we incurred $0.2 million and $0.4 million in management fees to ARRM, respectively.

Note 1516 – Subsequent Events

Events subsequent to the balance sheet date have been evaluated for inclusion in the accompanying financial statements through the issuance date.

On October 11, 2011, we entered into an equity distribution agreement with Deutsche Bank Securities Inc., JMP Securities LLC and Ladenburg Thalmann & Co. Inc. to offer and sell, from time to time, up to 40,000,000 shares of our common stock in at-the-market transactions. As of September 30, 2011, we have not sold any shares under this agreement.

~~On October 28, 2011,~~29, 2012, a cash dividend of ~~$0.11~~$0.171875 per ~~common~~outstanding share of Series A Preferred Stock, or ~~$9.3~~$0.3 million in the aggregate, was paid to holders of record on October 15, ~~2011.~~2012. We have also announced cash dividends of $0.171875 per outstanding share of Series A Preferred Stock payable November 27, 2012 to holders of record on November 15, 2012 and payable December 27, 2012 to holders of record on December 14, 2012.

On October 30, 2012, a cash dividend of $0.09 per outstanding common share, or $27.9 million in the aggregate, was paid to holders of record on October 15, 2012. We have also announced an expected fourth quarter cash dividend rate of $0.09 per outstanding common share.

On October 30, 2012 our Board approved an amendment to our charter to increase our authorized shares of common stock from 500,000,000 shares to 1,000,000,000 shares and to increase our authorized shares of preferred stock from 25,000,000 shares to 50,000,000 shares. Pursuant to Maryland corporate law and Section 6.1 of our charter, the amendment was approved by our Board and did not require any action by our stockholders. Our charter was amended effectively on October 31, 2012 to increase our authorized shares of common stock from 500,000,000 shares to 1,000,000,000 shares and to increase our authorized shares of preferred stock from 25,000,000 shares to 50,000,000 shares.

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

The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report. In addition, reference should be made to our audited financial statements and notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations included in our most recent Annual Report on Form 10-K.

References to “we”, “us”, “our”, “ARMOUR” or the “Company” are to ARMOUR Residential REIT, Inc. References to “ARRM” are to ARMOUR Residential Management LLC, a Delaware limited liability company. ~~References to “Enterprise” are to Enterprise Acquisition Corp., which is a wholly-owned subsidiary of ARMOUR.~~

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains various “forward-looking statements.” Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “would,” “could,” “should,” “seeks,” “approximately,” “intends,” “plans,” “projects,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. All forward-looking statements may be impacted by a number of risks and uncertainties, including statements regarding the following subjects:

●
our business and investment strategy;
●
our anticipated results of operations;
●
statements about future dividends;
●
our ability to obtain financing arrangements;
●
our understanding of our competition and ability to compete effectively;
●
market, industry and economic trends; and
●
interest rates.

~~our anticipated results of operations;~~

~~statements about future dividends;~~

~~our ability to obtain financing arrangements;~~

~~our understanding of our competition and ability to compete effectively;~~

~~market, industry and economic trends; and~~

~~interest rates.~~

The forward-looking statements in this report are based on our beliefs, assumptions and expectations of our future performance, taking into account all information currently available to us. These beliefs, assumptions and expectations are subject to risks and uncertainties and can change as a result of many possible events or factors, not all of which are known to us. If a change occurs, our business, financial condition, liquidity and results of operations may vary materially from those expressed in our forward-looking statements. You should carefully consider these risks before you make an investment decision with respect to our ~~common~~ stock.

We cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on forward-looking statements, which apply only as of the date of this report. We do not intend and disclaim any duty or obligation to update or revise any industry information or forward-looking statements set forth in this report to reflect new information, future events or otherwise, except as required under the U.S. Federal securities laws.

Overview

We are ~~an externally-managed~~a Maryland corporation ~~organized in 2008, managed by ARRM. We~~formed to invest primarily in hybrid adjustable rate, adjustable rate and fixed rate residential mortgage backed securities (“RMBS”). These securities are issued or guaranteed by a U.S. ~~Government-chartered~~Government-sponsored entity (“GSE”), such as the Federal National Mortgage Association ~~(more commonly known as Fannie~~(Fannie Mae) ~~and~~, the Federal Home Loan Mortgage Corporation ~~(more commonly known as Freddie~~(Freddie Mac), or guaranteed by the Government National Mortgage Administration ~~a U.S. Government corporation (more commonly known as Ginnie~~(Ginnie Mae)~~, which we refer to collectively as Agency Securities.~~ (collectively, “Agency Securities”). From time to time, a portion of our portfolio may be invested in unsecured notes and bonds issued by U.S. Government-chartered entities ~~which we refer to as Agency Debt,~~(collectively, “Agency Debt”), U.S. Treasuries and money market instruments, subject to certain income tests we must satisfy for our qualification as a real estate investment trust (“REIT”). As of September 30, 2012, Agency Securities account for 100% of our portfolio. It is expected that the percentage will continue to be 100% or ~~REIT.~~close thereto. On December 1, 2011, our stockholders approved an amendment to our charter to alter our investment asset class restriction in response to potential changes in Agency Securities to include non-Agency as well as Agency Securities in our investment asset class restriction. While we remain committed to investing in Agency Securities for so long as an adequate supply and pricing exists, we believe it is prudent for us to have the flexibility to invest in non-Agency Securities and respond to changes in GSE policy.

We are externally managed by ARRM, an investment advisor registered with the Securities and Exchange Commission ("SEC"). ARRM is also the external manager of JAVELIN Mortgage Investment Corp. ("JAVELIN"), a publicly traded REIT, which invests in and manages a leveraged portfolio of Agency Securities, non-Agency Securities and other mortgage-related investments. Our Co-Chief Executive Officers ("Co-CEOs"), Scott J. Ulm and Jeffrey J. Zimmer, and Chief Financial Officer ("CFO"), James R. Mountain, also serve as the Co-CEOs and CFO of JAVELIN, respectively. ARRM is an entity affiliated with the executive officers of ARMOUR and JAVELIN.

We seek attractive long-term investment returns by investing our equity capital and borrowed funds in our targeted asset ~~class.~~class of Agency Securities. We earn returns on the spread between the yield on our assets and our costs, including the interest cost of the funds we borrow, after giving effect to our hedges. We intend to qualify and have elected to be taxed as a REIT under the Internal Revenue Code (“the Code”). We will generally not be subject to federal income tax to the extent that we distribute our taxable income to our ~~shareholders,~~stockholders and as long as we satisfy the ongoing REIT requirements including meeting certain asset, income and stock ownership tests. Our business plan is to identify and acquire Agency Securities, finance our acquisitions with borrowings under a series of short-term repurchase agreements at the most competitive interest rates available to us and then cost-effectively hedge our interest rate and other risks based on our entire portfolio of assets, liabilities and derivatives and our management's view of the market. Successful implementation of our business plan requires us to address interest rate risk, maintain adequate liquidity and effectively hedge interest rate risks. We execute our business plan in a manner consistent with our intention of qualifying as a REIT and ~~avoiding~~avoid regulation as an investment ~~company.~~

~~On August 31, 2011, the Securities and Exchange Commission (“SEC”) voted to request comment on~~company under the Investment Company Act of 1940 ~~(“the~~(the “1940 Act”) treatment of mortgage-related pools, which includes mortgage REITs. Currently, mortgage REITs avoid classification as investment companies by claiming an exemption provided by Section 3(c)(5)(C) of the Act and relying on private letter rulings, which allows them to use financial leverage far in excess of the leverage limitations of 0.5x to 1.0x that apply to mutual funds and closed-end funds. While we believe the primary goal of the SEC is to clarify the 3(c)(5)(C) exemption, which was created to exclude companies engaged in the mortgage banking business and has not been reviewed for over 50 years, we do not believe the SEC is concerned with “safety and soundness” issues related to mortgage REITs generally, and believe the most likely outcome will be that mortgage REITs will continue to be allowed to be classified as investment companies and not face specific leverage limitations. However, if mortgage REITs are no longer allowed to claim exemption from the Act, or if leverage is explicitly limited, mortgage REIT business economics could be materially adversely impacted..

~~Our Manager~~

We are externally-managed by ARRM pursuant to our Management Agreement (see Note 8 to the condensed consolidated financial statements). All of our executive officers are also employees of ARRM. ARRM manages our day-to-day operations, subject to the direction and oversight of the Board of Directors (“Board”). The Management Agreement expires on November 6, 2014 and is thereafter automatically renewed for an additional one-year term unless terminated under certain circumstances. ARRM must provide 180 days prior notice of any such termination.

~~ARRM is entitled to receive a management fee payable monthly in arrears in an amount equal to 1/12th of an amount, with a minimum based on 1/12~~^th ~~of $900,000, (inclusive of the original gross merger equity as defined in the management agreement), determined as follows:~~

~~our gross equity raised up to $50 million, 1% (per annum) of gross equity;~~

~~our gross equity raised up to $1.0 billion, 1.5% (per annum) of gross equity;~~

~~our gross equity raised in excess of $1.0 billion, 0.75% (per annum) of gross equity~~

~~Factors that Affect our Results of Operations and Financial Condition~~

Our results of operations and financial condition are affected by various factors, many of which are beyond our control, including, among other things, our net interest income, the market value of our assets and the supply of and demand for such assets. We invest in financial assets and ~~markets, and recent~~markets. Recent events, such as those discussed below, can affect our business in ways that are difficult to predict and may produce results outside of typical operating variances. Our net interest income varies primarily as a result of changes in interest rates, borrowing costs and prepayment speeds, the behavior of which involves various risks and uncertainties. Prepayment rates, as reflected by the rate of principal pay downs and interest rates vary according to the type of investment, conditions in financial markets, government actions, competition and other factors, none of which can be predicted with any certainty. In general, as prepayment rates on our Agency Securities purchased at a premium increase, related purchase premium amortization increases, thereby reducing the net yield on such assets. Because changes in interest rates may significantly affect our activities, our operating results depend, in large part, upon our ability to manage interest rate risks and prepayment risks effectively while maintaining our status as a REIT. In addition, since we have not elected ~~not~~ to use cash flow hedge accounting, earnings reported in accordance with ~~accounting principles~~U.S. generally accepted ~~in the U.S.~~accounting principles (“GAAP”) will fluctuate even in situations where our ~~hedges~~derivatives are operating as intended. As a result of this mark-to-market accounting treatment, our results of operations are likely to fluctuate far more than if we were to designate our ~~hedging~~derivative activities as cash flow hedges. Comparisons with companies that use cash flow hedge accounting for all or part of their ~~hedging~~derivative activities may not be meaningful.

We anticipate that, for any period during which changes in the interest rates earned on our assets do not coincide with interest rate changes on our borrowings, such assets will reprice more slowly than the corresponding liabilities. Consequently, changes in interest rates, particularly short-term interest rates, may significantly influence our net interest income. With the maturities of our assets generally of longer term than those of our liabilities, interest rate increases will tend to decrease our net interest income and the market value of our assets (and therefore our book value). Such rate increases could possibly result in operating losses or adversely affect our ability to make distributions to our ~~shareholders.~~stockholders.

Prepayments on Agency Securities and the underlying mortgage loans may be influenced by changes in market interest rates and a variety of economic and geographic factors beyond our control, as well as policy decisions by Fannie Mae, Freddie Mac, their regulator the Federal Housing Finance Agency (“FHFA”), Ginnie Mae and ~~Ginnie Mae.~~others. Consequently prepayment rates cannot be predicted with certainty. To the extent we have acquired Agency Securities at a premium or discount to par, or face value, changes in prepayment rates may impact our anticipated yield. In periods of declining interest rates, prepayments on our Agency Securities will likely increase. If we are unable to reinvest the proceeds of such prepayments at comparable yields, our net interest income may suffer. The recent climate of government intervention in the mortgage markets significantly increases the risk associated with prepayments.

While we intend to use strategies to economically hedge some of our interest rate risk, we do not intend to hedge all of our exposure to changes in interest rates and prepayment rates, as there are practical limitations on our ability to insulate our portfolio from all potential negative consequences associated with changes in short-term interest rates in a manner that will allow us to seek attractive net spreads on our portfolio.

In addition, a variety of other factors relating to our business may also impact our financial condition and operating ~~performance. These~~performance; these factors ~~include:~~include,

●

our degree of leverage;

●

our access to funding and borrowing capacity;

●

our use of derivatives to hedge interest rate risk;

●

the REIT requirements; and

●

~~our degree of leverage;~~

~~our access to funding and borrowing capacity;~~

~~our use of derivatives to hedge interest rate risk; and~~

~~the REIT requirements,~~ the requirements to qualify for an exemption under the 1940 Act and other regulatory and accounting policies related to our business.

For a discussion of additional risks relating to our business see “Risk Factors” in Item 1A, the Risk Factors below, and in our Annual Report on Form 10-K for the year ended December 31, 2011.

Our Manager

We are externally managed by ARRM pursuant to an amended and restated management agreement as further amended and restated on June 18, 2012 (the “2012 Management Agreement”) (see Note 14 to the condensed consolidated financial statements). All of our executive officers are also employees of ARRM. ARRM manages our day-to-day operations, subject to the direction and oversight of the Board of Directors (“Board”). The 2012 Management Agreement expires after an initial term of 10 years on June 18, 2022 and is thereafter automatically renewed for an ~~exemption~~additional five-year term unless terminated under certain circumstances. Either party must provide 180 days prior written notice of any such termination.

Pursuant to the ~~Act~~2012 Management Agreement, ARRM is entitled to receive a management fee payable monthly in arrears in an amount equal to 1/12th of 1% of gross equity raised until gross equity raised was $50 million. Thereafter, the monthly management fee would be 1/12th of the sum of (a) 1.5% of gross equity raised up to $1 billion plus (b) 0.75% of gross equity raised in excess of $1 billion. We are also obligated to reimburse certain expenses incurred by ARRM and ~~other regulatory and accounting policies related~~its affiliates. ARRM is further entitled to ~~our business.~~receive a termination fee from us under certain circumstances.

ARRM ~~our manager,~~ is entitled to receive a monthly management fee ~~that is based on our equity (as defined in our Management Agreement),~~ regardless of the performance of our portfolio. Accordingly, the payment of our monthly management fee may not decline in the event of a decline in our ~~profitability~~earnings and may cause us to incur losses.

~~For a discussion of additional risks relating to our business see “Risk Factors” in Item 1A, Risk Factors, below, and in our Annual Report on Form 10-K for the year ended December 31, 2010.~~

Market and Interest Rate Trends and the Effect on our Portfolio

~~Credit Market Disruption and Current Conditions~~

During the past few years, the residential housing and mortgage markets in the United States have experienced a variety of difficulties and changed economic conditions including loan defaults, credit losses and decreased liquidity. These conditions have resulted in volatility in the value of the Agency Securities we purchase and an increase in the average collateral requirements under our repurchase agreements. While these markets recovered a great deal in 2010, further increased volatility and deterioration in the broader residential mortgage and Residential Mortgage Backed Securities (“RMBS”) markets may adversely affect the performance and market value of the Agency Securities and other high quality RMBS.

The uncertainty in the U.S. interest rate markets in 2011 has produced volatility and opportunities in our markets. Early in 2011, optimism about an economic acceleration caused many economists to increase their U.S. GDP forecast, with some predicting a U.S. Federal Reserve tightening of monetary policy in early 2012. However, due to (i) U.S. Department of Labor payroll data, (ii) states continued paring of payrolls and the potential of the federal government implementing further deficit reduction measures, and (iii) the cautious pace of private sector job growth, most economists are now expecting continued lackluster economic growth in the U.S. As a result, many economists have pushed out their forecasts for a tightening of monetary policy in the U.S. to late 2012 or 2013 at the earliest. This environment has created strong demand for Agency Securities and has also reduced the costs of our financing and hedging.

On August 5, 2011, Standard & Poor’s Corporation downgraded the U.S.’s credit rating from AAA to AA+, and on August 8, 2011, Fannie Mae and Freddie Mac’s credit ratings were downgraded from AAA to AA+. Because Fannie Mae and Freddie Mac are in conservatorship of the U.S. Government, the U.S.’s credit rating downgrade and Fannie Mae and Freddie Mac’s credit rating downgrades will impact the credit risk associated with Agency Securities and, therefore, may decrease the value of the Agency Securities in our portfolio.

Developments at Fannie Mae and Freddie Mac

Payments on the Agency Securities in which we invest are guaranteed by Fannie Mae and Freddie Mac. Because of the guarantee and the underwriting standards associated with mortgages underlying Agency Securities, Agency Securities historically have had high stability in value and been considered to present low credit risk. In 2008, Fannie Mae and Freddie Mac were placed under the conservatorship of the U.S. Government due to the significant weakness of their financial condition. The turmoil in the residential mortgage sector and concern over the future role of Fannie Mae and Freddie Mac have generally increased credit spreads and decreased price stability of Agency Securities. It is unclear how and when Fannie Mae and Freddie Mac may be restructured by the U.S. Government and the impact that may have on our existing portfolio and continuing investment strategy.

In response to the credit market disruption and the deteriorating financial condition of Fannie Mae and Freddie Mac, Congress and the U.S. Treasury undertook a series of actions in 2008 aimed at stabilizing the financial markets in general, and the mortgage market in particular. These actions include the large-scale buying of mortgage backed securities, significant equity infusions into banks and aggressive monetary policy.

In addition, the U.S. Federal Reserve initiated a program in 2008 to purchase $200.0 billion in direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and $1.3 trillion in Agency Securities issued and guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. The U.S. Federal Reserve stated that its actions were intended to reduce the cost and increase the availability of credit for the purchase of houses, which in turn was expected to support housing markets and foster improved conditions in financial markets more generally. This purchase program was completed on March 31, 2010. We are unable to predict the timing or manner in which the U.S. Treasury or the Federal Reserve will liquidate their holdings or make further interventions in the Agency Securities markets, or what impact, if any, such action could have on the Agency Securities market, the Agency Securities we hold, our business, results of operations and financial condition.

In February 2010, Fannie Mae and Freddie Mac announced that they would execute wholesale repurchases of loans which they considered seriously delinquent from existing mortgage pools. This action temporarily decreased the value of these securities until complete details of the programs and the timing were announced and reduced our yield in the months of repayment. Freddie Mac implemented its purchase program in February 2010 with actual purchases beginning in March 2010. Fannie Mae began their process in March 2010 and announced it would implement the initial purchases over a period of three months, beginning in April 2010. Further, both agencies announced that on an ongoing basis they would purchase loans from the pools of mortgage loans underlying their mortgage pass-through certificates that became 120 days delinquent.

In February 2011, the U.S. Treasury along with the U.S. Department of Housing and Urban Development released a report entitled, “Reforming ~~America’s~~America's Housing Finance Market” to the U.S. Congress outlining recommendations for reforming the U.S. housing system, specifically Fannie Mae and Freddie Mac and transforming the U.S. ~~Government’s~~Government's involvement in the housing market. It is unclear how future legislation may impact the housing finance market and the investing environment for Agency Securities as the method of reform is undecided and has not yet been defined by the regulators. Without U.S. Government support for residential mortgages, we may not be able to execute our current business model in an efficient manner.

We cannot predict whether or when new actions may occur, the timing and pace of current actions already implemented, or what impact if any, such actions, or future actions, could have on our business, results of operations and financial condition.

U.S. Government Market Intervention

~~One of the main factors impacting market prices was the~~The U.S. Federal ~~Reserve’s~~Reserve's (“the Fed”) program to purchase ~~agency securities~~Agency Securities which had commenced in January 2009 and was terminated on March 31, ~~2010.~~2010 had a significant impact on market prices. In total, $1.3 trillion of ~~agency securities~~Agency Securities were purchased. In addition, through the course of 2009, the U.S. Treasury purchased $250.0 billion of ~~agency securities.~~Agency Securities. An effect of these purchases has been an increase in the prices of ~~agency securities,~~Agency Securities, which has decreased our net interest margin. When these programs terminated, the market expectation was that it might cause a decrease in demand for these securities which would likely reduce their market price. However, this has not happened and we continue to see strong demand as these securities remain desirable assets in this rather volatile economic environment. It is difficult to quantify the impact, as there are many factors at work at the same time that affect the price of Agency Securities and, therefore, our yield and book value. Due to the unpredictability in the markets for our securities in particular and yield generating assets in general, there is no pattern that can be implied with any certainty. In March 2011, the U.S. Treasury announced that it will begin the orderly wind down of its remaining ~~agency securities~~Agency Securities with sales up to $10.0 billion per month, subject to market conditions. It is unclear how these sales will affect market conditions and pricing. On September 21, 2011, the U.S. Federal Reserve announced that it will begin reinvesting principal payments from its holdings of Agency Debt and Agency ~~MBS into~~Securities. In September 2012, the Fed announced a program, popularly referred to as “QE3,” to purchase an additional $40 billion of Agency ~~MBS.~~Securities per month until the unemployment rate and other economic indicators improve. QE3 plus its existing investment programs are expected to grow the Fed's Agency Securities holding by approximately $85 billion per month at least through the end of 2012. The Fed also extended through at least mid-2015 its plan to keep the Federal Funds Rate between zero and 0.25%. The Fed expects these measures will put downward pressure on long-term interest rates.

In the short term, the Fed's actions have driven Agency Securities prices to record highs, thereby compressing interest rate spreads and reducing the correlation between mortgage rates and rates on U.S. Treasuries and interest rate swaps. These factors have contributed to a challenging reinvestment and interest rate hedging environment.

Financial Regulatory Reform Bill and Other Government Activity

We believe that we conduct our business in a manner that allows us to avoid being regulated as an investment company under the 1940 Act pursuant to the exemption provided by Section 3(c)(5)(C) for entities that are primarily engaged in the business of purchasing or otherwise acquiring “mortgages and other liens on and interests in real estate.” On August 31, 2011, the SEC issued a concept release (No. IC-29778; File No. SW7-34-11, Companies Engaged in the Business of Acquiring Mortgages and Mortgage-Related Instruments) pursuant to which it is reviewing whether certain companies that invest in mortgage backed securities (“MBS”) and rely on the exemption from registration under Section 3(c)(5)(C) of the 1940 Act (such as us) should continue to be allowed to rely on such exemption from registration. If we fail to continue to qualify for this exemption from registration as an investment company, or the SEC determines that companies that invest in MBS are no longer able to rely on this exemption, our ability to use leverage would be substantially reduced and we would be unable to conduct our business as planned, or we may be required to register as an investment company under the 1940 Act, either of which could negatively affect the value of shares of our stock and our ability to make distributions to our stockholders.

Certain programs initiated by the U.S. Government, through the Federal Housing Administration ~~(“FHA”)~~ and the Federal Deposit Insurance Corporation (“FDIC”), to provide homeowners with assistance in avoiding residential mortgage loan foreclosures are currently in effect. The programs may involve, among other things, the modification of mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans, or to extend the payment terms of the loans. While the effect of these programs has not been as extensive as originally expected, the effect of such programs for holders of ~~agency securities~~Agency Securities could be that such holders would experience changes in the anticipated yields of their ~~agency securities~~Agency Securities due to (i) increased prepayment rates and (ii) lower interest and principal payments.

In March 2009, the Home Affordable Modification Program (“HAMP”) was introduced to provide homeowners with assistance in avoiding residential mortgage loan foreclosures. HAMP is designed to help at risk homeowners, both those who are in default and those who are at imminent risk of default, by providing the borrower with affordable and sustainable monthly payments. In an effort to continue to provide meaningful solutions to the housing crisis, effective June 1, 2012, the Obama administration expanded the population of homeowners that may be eligible for HAMP.

On July 21, 2010, President Obama signed ~~into law~~ the Dodd-Frank ~~Wall Street Reform~~Act into law. The Dodd-Frank Act is extensive, complicated and ~~Consumer Protection Act. This~~comprehensive legislation ~~aims to restore responsibility~~that impacts practically all aspects of banking, and ~~accountability to~~a significant overhaul of many aspects of the regulation of the financial ~~system.~~services industry. Although many provisions remain subject to further rulemaking, the Dodd-Frank Act implements numerous and far-reaching changes that affect financial companies, including our company, and other banks and institutions which are important to our business model. Certain notable rules are, among other things:

●

Requiring regulation and oversight of large, systemically important financial institutions by establishing an interagency council on systemic risk and implementation of heightened prudential standards and regulation by the Board of Governors of the U.S. Federal Reserve for systemically important financial institutions (including nonbank financial companies), as well as the implementation of the FDIC resolution procedures for liquidation of large financial companies to avoid market disruption;

●

Applying the same leverage and risk-based capital requirements that apply to insured depository institutions to most bank holding companies, savings and loan holding companies and systemically important nonbank financial companies;

●

Limiting the U.S. Federal Reserve's emergency authority to lend to nondepository institutions to facilities with broad-based eligibility, and authorizing the FDIC to establish an emergency financial stabilization fund for solvent depository institutions and their holding companies, subject to the approval of Congress, the Secretary of the U.S. Treasury and the U.S. Federal Reserve;

●

Creating regimes for regulation of over-the-counter derivatives and non-admitted property and casualty insurers and reinsurers;

●

Implementing regulation of hedge fund and private equity advisers by requiring such advisers to register with the SEC;

●

Providing for the implementation of corporate governance provisions for all public companies concerning proxy access and executive compensation; and

●

Reforming regulation of credit rating agencies.

Many of the provisions of the Dodd-Frank Act, including certain provisions described above are subject to further study, rulemaking, and the discretion of regulatory bodies. As the hundreds of regulations called for by the Dodd-Frank Act are promulgated, we will continue to evaluate the impact of any such regulations. It is unclear how this legislation may impact the borrowing environment, investing environment for ~~agency securities~~Agency Securities and interest rate ~~swaps~~swap contracts as much of the ~~legislation~~bill's implementation has not yet been defined by the regulators.

In addition, in 2010, the Group of Governors and Heads of Supervisors of the Basel Committee on Banking Supervision, the oversight body of the Basel Committee, published its “calibrated” capital standards for major banking institutions (“Basel III”). Under these standards, when fully phased in on January 1, 2019, banking institutions will be required to maintain heightened Tier 1 common equity, Tier 1 capital and total capital ratios, as well as maintaining a “capital conservation buffer.” Beginning with the Tier 1 common equity and Tier 1 capital ratio requirements, Basel III will be phased in incrementally between January 1, 2013 and January 1, 2019. The final package of Basel III reforms were approved by the G20 leaders in November 2010 and are subject to individual adoption by member nations, including the United States by January 1, 2013. It is unclear how the adoption of Basel III will affect our business at this time.

In September 2011, the White House announced work on a major initiative to allow certain homeowners who owe more on their mortgages than their homes are worth to refinance. In October 2011, the FHFA announced changes to the Home Affordable Refinance Program, (“HARP”) to expand access to refinancing for qualified individuals and families whose homes have lost value, including increasing the HARP loan-to-value ratio above 125%. However, this would only apply to mortgages guaranteed by the GSEs. In addition, the expansion does not change the time period which these loans were originated, maintaining the requirement that the loans must have been guaranteed by Fannie Mae or Freddie Mac prior to June 2009. There are many challenging issues to this proposal, notably the question as to whether a loan with a loan-to-value ratio of 125% qualifies as a mortgage or an unsecured consumer loan. The chances of this initiative's success have created additional uncertainty in the Agency Securities market, particularly with respect to possible increases in prepayment rates. We do not expect this announcement to have a significant impact on our results of operations.

On January 4, 2012, the Fed released a report titled “The U.S. Housing Market: Current Conditions and Policy Considerations” to Congress providing a framework for contemplating certain issues and tradeoffs that policy makers might consider. It is unclear how future legislation may impact the housing finance market and the investing environment for Agency Securities as the method of reform is undecided and has not yet been defined by the regulators.

On September 28, 2012 the United Kingdom Financial Services Authority (“FSA”) released the results of its review of the process for setting the London Interbank Offered Rate (“LIBOR”) interest rate for various currencies and maturities (“Wheatley Review”). Some of our derivative positions use various maturities of U.S. dollar LIBOR. Our borrowings in the repurchase market have also historically tracked these LIBOR rates. The Wheatley Review found, among other things, that potential conflicts of interests coupled with insufficient oversight and accountability resulted in some reported LIBOR rates that did not reflect the true cost of inter-bank borrowings they were meant to represent.

The Wheatley Review also proposes a number of remedial actions, including:

	●	New statutory authority for the FSA to supervise and regulate the LIBOR setting process.
	●	Establishing a new independent oversight body to administer the LIBOR setting process.

●

Eliminating LIBOR rates for certain currencies and maturities where markets are not sufficiently deep and liquid.

●

Ceasing immediate reporting of rates submitted by individual participating banks.

●

Establishing controls to ensure that submitted rates represent actual transactions.

There can be no assurance whether or when the Wheatley Review recommendations will be implemented in whole or in part. The company's derivatives and repurchase borrowings are conducted in U.S. dollars for maturities with historically deep and liquid markets. However, there can be no assurance whether the implementation of any Wheatley Review recommendations would have a material impact on the future reported levels of LIBOR rates relevant to the company's derivatives or repurchase borrowings.

Credit Market Disruption and Current Conditions

During the ~~third quarter of 2011, concern intensified about~~past few years, the ~~financial conditions~~residential housing and ~~creditworthiness of several European nations, particularly Greece. European nations~~mortgage markets in the U.S. have ~~been working through~~experienced a variety of ~~entities~~difficulties and ~~strategies to resolve these concerns though success is uncertain. Continuation and worsening of these concerns may severely impact financial market~~changed economic conditions including loan defaults, credit losses and decreased liquidity. These conditions have resulted in volatility in the ~~valuation~~value of the Agency Securities we purchase and an increase in the average collateral requirements under our ~~investments,~~repurchase agreements we have obtained. While these markets have recovered significantly, further increased volatility and deterioration in the ~~terms~~broader residential mortgage and RMBS markets may adversely affect the performance and market value of the Agency Securities and ~~potentially, our ability~~other high quality RMBS.

Despite modest economic expansion during the first quarter of 2012, signs of decline remain evident in job growth, housing, and inflation. While the first quarter of 2012 U.S. economic performance reflected an upward trend in job growth and U.S. real gross domestic product, preliminary second quarter results reflect a slowing in the first quarter improvements, notably in job growth and the unemployment rate, which, in May, remained unchanged at 8.2% in March. Consumer price inflation also declined, reflecting decreases in crude oil and gasoline prices. Expectations of long-run inflation are projected to ~~borrow in order~~be subdued, at or below 2% due to ~~finance our investment operations.~~a slightly increased unemployment rate as well as anchored long run inflation projections. Data suggests that the economy continues to grow modestly, however, not at the rate anticipated.

Interest Rates

The overall credit market deterioration since August 2007 has also affected prevailing interest rates. For example, interest rates have been unusually volatile ~~since the third quarter~~between September of ~~2007.~~2007 and October of 2008. Since September 18, 2007, the ~~U.S. Federal Reserve~~Fed has lowered the target for the Federal Funds Rate nine times from 4.75% to 1.00% in October 2008. In December 2008, the ~~Federal Reserve~~Fed stated that it was adopting a policy of “quantitative easing” and would target keeping the Federal Funds Rate between 0.00% and 0.25%. To date, the ~~Federal Reserve~~Fed has maintained that target range. Our funding costs, which traditionally have tracked the 30-day ~~London Interbank Offered Rate (“LIBOR”)~~LIBOR have generally benefited by this easing of monetary policy, although to a somewhat lesser extent. Because of continued uncertainty in the credit markets and U.S. economic conditions, we expect that interest rates are likely to experience continued volatility, which will likely affect our financial results since our cost of funds is largely dependent on short-term rates.

Historically, 30-day LIBOR has closely tracked movements in the Federal Funds Rate and the Effective Federal Funds Rate. The Effective Federal Funds Rate can differ from the Federal Funds Rate in that the Effective index represents the volume weighted average of interest rates at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight (actual transactions, rather than target rate).

Our borrowings in the repurchase market have also historically closely tracked the Federal Funds Rate and LIBOR. ~~So traditionally,~~Traditionally, a lower Federal Funds Rate has indicated a time of increased net interest margin and higher asset values. However, since July 2007 ~~(prior to our commencement of operations)~~ LIBOR and repurchase market rates have varied greatly and often have been significantly higher than the target and the Effective Federal Funds Rate. The difference between 30-day LIBOR and the Effective Federal Funds ~~rate~~Rate has also been quite volatile, with the spread alternately returning to more normal levels and then widening out again. The volatility in these rates and divergence from the historical relationship among these rates could negatively impact our ability to manage our portfolio. If this were to occur, our net interest margin and the value of our portfolio might suffer as a result.

The following table shows 30-day LIBOR as compared to the Effective Federal Funds Rate for the quarterly periods presented.

Quarter ended
30-Day
LIBOR
Effective Federal
Funds Rate
September 30, 2012
0.21
%
0.09
%
June 30, 2012
0.25 0.09
March 31, 2012
0.24 0.09
December 31, 2011
0.30 0.04
September 30, 2011
0.24 0.06

Results of Operations

As a result of our continued equity raising efforts, our earnings as reported in our condensed consolidated financial statements, particularly on a per share basis, may take time to reach a level in which we consider to be indicative of a full run-rate. Some period over period comparisons in the discussion below may not be meaningful.

Net Income Summary

Our primary source of income is the interest income we earn on our investment portfolio. Our net income for the quarter and nine months ended September 30, 2012 available to common stockholders was $54.1 million and $105.6 million, respectively, or $0.20 and $0.54 per basic and diluted weighted average common share. These results compare to net loss of ($34.5) million and ($33.1) million, respectively, related to common stockholders or, ($0.44) and ($0.63) per basic and diluted weighted average common share for the quarter and nine months ended September 30, 2011. The main drivers of the difference were the increased equity capital resources from 2011 through the nine months ended September 30, 2012 and the continued implementation of our investment strategy, offset by unrealized losses from our derivatives and increased management fees.

As of September 30, 2012 and December 31, 2011, our Agency Securities portfolio was carried at a net premium to par value with a weighted average amortized cost, of 105.26% and 104.23% respectively, due to the average interest rates on these securities being higher than prevailing market rates.

The following table presents the components of the yield earned on our Agency Security portfolio for the quarterly periods presented.

Quarter Ended
Asset Yield
Cost of
Funds
Net Interest
Margin
Interest Expense on Repurchase Agreements
September 30, 2012
2.70
%
0.89
%
1.82
%
0.45
%
June 30, 2012
2.97 0.82 2.15 0.39
March 31, 2012
3.04 0.81 2.23 0.34
December 31, 2011
2.60 0.98 1.62 0.35
September 30, 2011
3.11 0.93 2.18 0.27

The yield on our assets is most significantly affected by the rate of repayments on our Agency Securities. Our rate of portfolio repayment for the quarter ended September 30, 2012, was 13.0% on a constant prepayment basis compared to 12.4% for the quarter ended September 30, 2011.

Our repurchase agreements are secured by our Agency Securities and bear interest at ~~each~~rates that have historically moved in close relationship to the Federal Funds Rate and LIBOR. The Federal Funds Rate was 0.09% and LIBOR was 0.21% at September 30, 2012. During the quarter and nine months ended September 30, 2012, we realized losses of $18.9 million and $41.1 million, respectively, related to our derivatives. During the quarter and nine months ended September 30, 2011, we realized losses of $8.4 million and $16.4 million, respectively, related to our derivatives. We increased our total interest rate swap contracts aggregate notional balance from $2.8 billion at December 31, 2011 to $8.7 billion at September 30, 2012, with, a weighted average swap rate of 1.2% and a weighted average term of 67 months. During the quarter ended September 30, 2012, we entered into interest rate swaptions with an aggregate notional balance of $1.1 billion, with an underlying weighted average swap rate of 2.1% and a weighted average term of 8 months. We had not entered into any interest rate swaptions as of December 31, 2011. Our total Eurodollar Futures Contracts (“Futures Contracts”) notional amount decreased from $131.0 million at December 31, 2011 to $121.0 million at September 30, 2012 due to the maturity of contracts. Our Futures Contracts had a weighted average swap equivalent rate of 1.8% and weighted average term of 21 months as of September 30, 2012.

Net Interest Income

Our net interest income for the quarter and nine months ended September 30, 2012, was $97.5 million and $228.4 million, respectively compared to $36.2 million and $75.1 million, respectively for the quarter and nine months ended September 30, 2011. The continued growth of our net interest income is due to the completion of equity raises in the nine months ended September 30, 2012. The proceeds from these equity raises were invested in Agency Securities, creating a larger investment portfolio able to generate increasing levels of interest income. As of September 30, 2012 and December 31, 2011, our portfolio of Agency Securities consisted of $22.1 billion and $5.4 billion of securities, respectively.

Gains and Losses on Sale of Agency Securities

During the quarter and nine months ended September 30, 2012 we sold $1.6 billion and $1.9 billion of Agency Securities resulting in a realized gain of $15.1 million and $20.1 million, respectively. Of the $20.1 million $1.1 million is a loss due to the bankruptcy of a counterparty to a repurchase agreement. In addition, due to the bankruptcy we also recorded $1.0 million of other income resulting from the non-performance of the counterparty on the related repurchase agreement. During the quarter and nine months ended September 30, 2011, we sold $0.5 billion of Agency Securities resulting in a realized gain of $6.5 million.

Operating Expenses

Our total operating expenses for the quarter and nine months ended September 30, 2012, were $7.2 million and $17.7 million, respectively as compared to $2.9 million and $6.4 million, respectively for the quarter and nine months ended September 30, 2011. The increase in operating expenses from 2011 to 2012 is primarily due to two factors. The first factor being increased management fees. Our total management fee expense for the quarter and nine months ended September 30, 2012, were $5.6 million and $13.4 million, respectively as compared to $2.2 million and $4.4 million, respectively for the quarter and nine months ended September 30, 2011. Management fees are determined based on gross equity raised. Therefore as we continue to successfully raise capital our management fee continues to increase. However, because the management fee rate stepped down to 0.75% per annum for gross equity raised in excess of $1 billion; the effective average management fee rate will continue to decline. The second factor is an increase in professional fees and operating costs to support our current portfolio.

Taxable Income

We have negative retained earnings (titled “Accumulated deficit” in the stockholders' equity section of our accompanying condensed consolidated balance sheets) as of September 30, 2012, due to the consequences of our tax qualification as a REIT. Our dividends are based on our REIT taxable income, as determined for federal income tax purposes and not our net income computed in accordance with GAAP as reported in our condensed consolidated financial statements. Accordingly, we may be required to pay out more in dividends than we have calculated in distributable earnings on a GAAP basis.

For the quarter and nine months ended September 30, 2012, our estimated REIT taxable income was approximately $86.4 million and $190.9 million, respectively. For the quarter and nine months ended September 30, 2011, our estimated REIT taxable income was approximately $31.3 million and $58.8 million, respectively. The most significant difference between GAAP and tax income was the unrealized loss on derivatives which is reflected in GAAP earnings but does not decrease REIT taxable income.

Financial Condition

Agency Securities

We typically purchase Agency Securities at premium prices. The premium price paid over par value on those assets is expensed as the underlying mortgages experience repayment or prepayment. The lower the constant prepayment rate, the lower the amount of amortization expense for a particular period. Accordingly, the yield on an asset and earnings, are higher. If prepayment rates increase, the amount of amortization expense for a particular period ~~end:~~will go up. These increased prepayment rates would act to decrease the yield on an asset and would decrease earnings.

Quarter ended

30-Day
LIBOR

Effective Federal
Funds Rate

September 30, 2011

0.24
%
0.06
%
June 30, 2011

0.19

0.07

March 31, 2011

0.24

0.10

December 31, 2010

0.26

0.13

September 30, 2010

0.26

0.15

June 30, 2010

0.35

0.09

March 31, 2010

0.25

0.09

December 31, 2009

0.23

0.05

~~Principal Repayment~~The tables below summarize certain characteristics of our Agency Securities for the periods presented (dollars in thousands).

Agency Securities:

Quarter ended
Principal Amount
Net Unamortized
Premium
Amortized Cost
Amortized Cost divided by
Principal
Fair Value
Fair Value divided by
Principal
September 30, 2012
$ 20,627,189 $ 1,085,036 $ 21,712,225 105.26
%
$ 22,114,875 107.21
%
June 30, 2012
12,561,600 599,264 13,160,864 104.77 13,328,514 106.11
March 31, 2012
11,550,912 532,588 12,083,500 104.61 12,137,554 105.08
December 31, 2011
5,128,230 216,697 5,344,927 104.23 5,393,675 105.18
September 30, 2011
5,675,822 236,695 5,912,517 104.17 5,975,823 105.29

Adjustable and Hybrid Adjustable Rate Agency Securities:

Quarter ended
Principal Amount
Weighted Average Coupon
Weighted Average Months to Reset
Percentage of Total Agency Securities
September 30, 2012
$ 2,234,747 3.70
%
$ 68 10.8
%
June 30, 2012
2,685,281 3.71 75 21.4
March 31, 2012
2,514,725 3.72 73 21.8
December 31, 2011
2,681,911 3.72 76 52.2
September 30, 2011
2,858,964 3.71 75 50.4

Fixed Rate Agency Securities:

Quarter ended
Principal Amount
Weighted Average Coupon
Weighted Average Months to Maturity
Percentage of Total Agency Securities
September 30, 2012
$ 18,392,442 3.52
%
271 89.2
%
June 30, 2012
9,876,319 3.62 217 78.6
March 31, 2012
9,036,187 3.64 219 78.2
December 31, 2011
2,446,319 3.97 188 47.8
September 30, 2011
2,816,858 4.00 172 49.6

The following table shows the average principal repayment rate for those securities which have settled for the quarterly periods presented.

Quarter ended
Average
Quarterly Principal
Repayment Rate
September 30, 2012
13.0
%
June 30, 2012
9.1
March 31, 2012
11.4
December 31, 2011
19.3
September 30, 2011
12.4

As of September 30, 2012, our Agency Security portfolio consisted of approximately $22.1 billion in market value of Agency Securities with initial fixed-interest rate periods of three, five, seven, ten, fifteen and twenty years.

Our net income is primarily a function of the difference between the yield on our assets and the financing cost of owning those assets. Since we tend to purchase assets at a premium to par, the main item that can affect the yield on our assets after they are purchased is the rate at which the mortgage borrowers repay the loan. While the scheduled repayments, which are the principal portion of the ~~homeowners’~~homeowners' regular monthly payments, are fairly predictable, the unscheduled repayments, which are generally refinancing of the mortgage but can also result from repurchases of delinquent, defaulted, or modified loans, are less so. Being able to accurately estimate and manage these repayment rates is a critical portion of the management of our portfolio, not only for estimating current yield but also for considering the rate of reinvestment of those proceeds into new securities, the yields which those new securities may add to our portfolio and our hedging strategy. We expect that prepayment rates will be elevated due to repurchases of loans that reach 120 day or more delinquency by Freddie Mac and Fannie Mae on a continuing basis.

The following table shows the average principal repayment rate for those securities which have settled for each quarter since our commencement of operations (as our operations commenced in November 2009, there is only one month of prepayment data for 2009 for our portfolio of settled Agency Securities):


~~Quarter ended~~	~~Average~~ ~~Quarterly Principal~~ ~~Repayment Rate~~
~~September 30, 2011~~	~~12.4~~	%
~~June 30, 2011~~	~~9.3~~
~~March 31, 2011~~	~~11.7~~
~~December 31, 2010~~	~~10.8~~
~~September 30, 2010~~	~~11.1~~
~~June 30, 2010~~	~~15.4~~
~~March 31, 2010~~	~~14.5~~
~~December 31, 2009~~	~~8.6~~

We typically purchase Agency Securities at premium prices. The premium price paid over par value on those assets is expensed as the underlying mortgages experience repayment or prepayment. The lower the constant prepayment rate, the lower the amount of amortization expense for a particular period. Accordingly, the yield on an asset, and earnings, are higher. If prepayment rates increase, the amount of amortization expense for a particular period will go up. These increased prepayment rates would act to decrease the yield on an asset and would decrease earnings.

~~Book Value per Share~~

As of September 30, 2011, our book value per share of common stock (total shareholders’ equity divided by shares of common stock outstanding) was $6.78, an increase of $0.17 from $6.61 at December 31, 2010. This increase was primarily attributable to shareholder accretion from the equity capital raised during the period, issuing 56,424,930 shares of common stock. In addition, 11,879,844 shares were issued in the Dividend Reinvestment and Stock Purchase Plan.

Although we attempt to structure our derivatives to offset the changes in asset prices, they are not perfectly correlated, and depend on the corresponding durations and sections of the yield curve that moves to offset each other. Our derivatives, which consist of interest rate swap contracts and Futures Contracts act to fix the borrowing cost on a portion of our financing and generally help to hedge some of the change in our book value. Generally, the value of our derivatives move in the opposite direction of the value of our Agency Securities. In an environment of very low interest rates, further interest rate reductions may cause the value of our derivative positions to decline more than the absolute and pro rata increase in the value of our Agency Securities. For the nine month period ending September 30, 2011, the unrealized change of our derivative positions decreased by $91.9 million and the unrealized change of our Agency Securities increased by $67.5 million. For the year ended December 31, 2010, the unrealized change of our derivative positions declined by $2.5 million and the unrealized change of our Agency Securities decreased by $4.3 million.

~~Investments~~

~~Agency Securities~~

As of September 30, 2011, our Agency Security portfolio, both trades that have settled and forward settle trades that we have committed to settle, consisted of approximately $6.0 billion in market value of Agency Securities with initial fixed-interest rate periods of three years, five years, seven years, ten years and fifteen years.

~~The following table represents key data regarding our results of operations since the beginning of operations on November 6, 2009:~~

~~Our investment portfolio consisted of the following breakdown between Fannie Mae, Freddie Mac and Ginnie Mae at September 30, 2011.~~

~~Our investment portfolio consisted of the following breakdown between Fannie Mae, Freddie Mac and Ginnie Mae at December 31, 2010.~~

~~As of September 30, 2011~~2012 and December 31, ~~2010,~~2011, the adjustable and hybrid adjustable rate mortgage loans underlying our Agency Securities have fixed-interest rates for an average period of approximately 68 months and 6476 months, respectively, after which time the interest rates reset and become adjustable. After a reset date, interest rates on our adjustable and hybrid adjustable Agency Securities float based on spreads over various indices, typically LIBOR or the one-year Constant Maturity Treasury ~~(“CMT”),~~ rate. These interest rates are subject to caps that limit the amount the applicable interest rate can increase during any year, known as an annual cap and through the maturity of the security, known as a lifetime cap.

Liabilities

We have entered into repurchase agreements to finance most of our Agency Securities. Our repurchase agreements are secured by our Agency Securities and bear interest at rates that have historically moved in close relationship to the Federal Funds Rate and LIBOR. We have established borrowing relationships with several investment banking firms and other lenders, ~~twenty-four~~26 of which we had done repurchase trades with as of September 30, ~~2011~~2012 and ~~eleven~~23 of which we had done repurchases trades with as of December 31, ~~2010.~~2011. We had outstanding balances under our repurchase agreements atas of September 30, ~~2011~~2012 and December 31, ~~2010~~2011 of ~~$5.2~~$19.8 billion and ~~$1.0~~$5.3 billion, respectively.

Derivative Instruments

We generally intend to hedge as much of our interest rate risk as our manager deems prudent in light of market conditions and the associated costs. We generally pay a fixed rate and receive a floating rate with the objective of fixing a portion of our borrowing costs and hedging the change in our book value to some degree. The floating rate we receive is generally the Federal Funds Rate or LIBOR. While our policies do not contain specific requirements as to the percentages or amount of interest rate risk that we are required to hedge, we maintain an overall target of hedging at least 40% of our non-adjustable rate mortgages (“ARMs”). For interest rate risk mitigation purposes, we consider Agency Securities to be ARMs if their interest rate is either currently subject to adjustment according to prevailing rates or if they are within 18 months of the period where such adjustments will occur. No assurance can be given that our derivatives will have the desired beneficial impact on our results of operations or financial condition. We have not elected cash flow hedge accounting treatment ~~under the authoritative guidance. Our policies do not contain specific requirements~~ as ~~to the percentages or amount of interest rate risk that our manager is required to hedge. As~~allowed by GAAP. Since we do not designate our ~~hedging~~derivative activities as cash flow hedges, realized as well as unrealized gains/losses from these transactions will impact our ~~GAAP income.~~earnings.

Use of derivative instruments may fail to protect or could adversely affect us because, among other things:

●

available derivatives may not correspond directly with the interest rate risk for which protection is sought;

●

the duration of the derivatives may not match the duration of the related liability;

●

the party owing money on the derivatives may default on its obligation to pay;

●

the credit-quality of the party owing money on the derivatives may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and

●

the value of derivatives may be adjusted from time to time in accordance with GAAP to reflect changes in fair value; downward adjustments, or “mark-to-market losses,” would reduce our net income or increase any net loss.

~~available derivatives may not correspond directly with the interest rate risk for which protection is sought;~~

~~the duration of the derivatives may not match the duration of the related liability;~~

~~the party owing money on the derivatives may default on its obligation to pay;~~

~~the credit-quality of the party owing money on the derivatives may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction; and~~

the value of derivatives may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value; downward adjustments, or “mark-to-market losses,” would reduce our net income or increase any net loss.

As of September 30, ~~2011~~2012 and December 31, ~~2010,~~2011, we had interest rate swap contracts with an aggregate notional balance of $8.7 billion and $2.8 billion, ~~and $155.0 million,~~ respectively. As of September 30, 2012, we had entered into interest rate swaptions with an aggregate notional balance of $1.1 billion. We had not entered into any interest rate swaptions as of December 31, 2011. In addition, as of September 30, ~~2011~~2012 and December 31, ~~2010,~~2011 we had ~~entered into $134.0~~purchased or sold Futures Contracts with an aggregate notional balance of $121.0 million and ~~$214.0~~$131.0 million, (notional amount), respectively, of Eurodollar Futures strips (“interest rate swap equivalents”) traded in 1,167 and 2,361 individual Eurodollar Futures Contracts (“Futures Contracts”) transactions, respectively. Futures Contracts are traded on the Chicago Mercantile Exchange (“CME”). Counterparty risk of interest rate swap contracts, interest rate swaptions and Futures Contracts are limited to some degree because of daily mark-to-market and collateral requirements. In addition, substantial credit support for the Futures Contracts is provided by the CME. These derivative transactions are designed to lock in some funding costs for financing activities associated with our assets in such a way as to help assure the realization of attractive net interest margins and to vary inversely in value with our Agency Securities. Such contracts are based on assumptions about prepayments which, if not realized, will cause results to differ from expectations.

~~Results~~Although we attempt to structure our derivatives to offset the changes in asset prices, they are not perfectly correlated and depend on the corresponding durations and sections of ~~Operations~~

~~Three and Nine Months Ended~~the yield curve that moves to offset each other. For the nine months ended September 30, ~~2011, Compared to Three~~2012, the change in the fair value of our derivative positions decreased by $68.6 million and ~~Nine Months Ended September 30, 2010~~

~~We commenced~~the unrealized change in the fair value of our ~~operations in November 2009, upon completion of the merger with Enterprise. We continued to raise equity capital during~~Agency Securities increased by $374.0 million. For the nine months ended September 30, 2011, ~~issuing 56,424,930~~the unrealized change in the fair value of our derivative positions decreased by $91.9 million and the unrealized change in the fair value of our Agency Securities increased by $74.0 million.

Liquidity and Capital Resources

During the nine months ended September 30, 2012, we issued 213,460,590 shares of common stock and ~~raising~~raised additional net common equity of approximately ~~$402.6 million. In addition, we issued 11,879,844 shares under~~$1.5 billion. During the Dividend Reinvestment and Stock Purchase Plan for net proceeds of $86.8 million. These changes were material to our company and significantly affect the results we report. We believed that the timing for additional investment, in both assets and liabilities, was appropriate and beneficial to our long-term performance. In addition, there are economies of scale that also are reached as our managed assets grow. As we invest the proceeds of our offerings, we are methodical, at times purchasing our assets with forward settlements up to 90 days out, in order to minimize purchase price. This means that our earnings, particularly on a per share basis, may take time to reach a level which we consider to be indicative of a full run-rate. This also means that some quarterly comparisons will not be meaningful or may be misleading.

~~Our net interest income for the three and~~ nine months ended September 30, ~~2011, was $36.2 million~~2012, we issued 1,785,000 shares of 8.250% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”) and ~~$75.1 million, respectively, compared~~raised net preferred equity of approximately $43.3 million. As a result, we were able to ~~$3.5 million~~acquire additional assets, arrange additional repurchase agreement funding and ~~$5.8 million~~increase economies of scale. At times, we purchased assets for forward settlement up to 90 days in the ~~three and nine months ended September 30, 2010, respectively. As~~future to minimize purchase prices. Our management fee expense also increased in absolute terms under the provisions of ~~September 30, 2011,~~ our Agency Securities portfolio consisted of $6.0 billion of securities, including $474.1 million of current carrying value of forward settle security sales. As of December 31, 2010, our Agency Securities portfolio consisted of $1.2 billion of securities, including $125.3 million of current carrying value of forward settle security sales.

~~The following table presents the components of the yield earned on our Agency Security portfolio:~~

Quarter Ended

Asset Yield

Cost of
Funds

Net Interest
Margin

Interest Expense on Repurchase Agreements

September 30, 2011

3.11
%
0.93
%
2.18
%
0.27
%
June 30, 2011

3.35

0.99

2.36

0.28

March 31, 2011

3.20

0.80

2.40

0.33

December 31, 2010

3.42

0.47

2.95

0.34

September 30, 2010

3.32

0.44

2.88

0.27

June 30, 2010

2.98

0.37

2.61

0.30

March 31, 2010

3.06

0.38

2.68

0.27

December 31, 2009

4.59

0.72

3.86

0.26

The yield on our assets is most significantly affected by the rate of repayments on our Agency Securities. Our rate of portfolio repayment for the three and nine months ended September 30, 2011, was 12.4% and 11.1%, respectively, on a Constant Prepayment Basis (“CPR”) compared to 11.1% and 13.7% for the three and nine months ended September 30, 2010, respectively.

As of September 30, 2011, our Agency Securities portfolio was purchased at a net premium to par value with a weighted average amortized cost, including settled and forward settle securities, of 104.17%, due tomanagement agreement. However, the average ~~interest rates on these securities being higher than prevailing market rates.~~

The main indicator of our borrowing costs is 30-day LIBOR, which generally closely parallels the rates we pay on our repurchase agreements. LIBOR was 0.24% at September 30, 2011. During the three and nine months ended September 30, 2011, we realized losses of $8.4 million and $16.4 million related to our derivatives, respectively. During the three and nine months ended September 30, 2010, we realized losses of $0.2 million and $0.2 million, respectively. We decreased our total Eurodollar Future strips notional amount from $214.0 million at December 31, 2010, to $134.0 million at September 30, 2011, with a weighted average swap equivalenteffective management fee rate of 1.8% and weighted average term of 31 months. In addition, during the period ended September 30, 2011, we increased our total interest rate swap contracts aggregate notional balance from $155.0 million to $2.8 billion with, a weighted average swap rate of 1.5% and a weighted average term of 49 months.

Our total operating expenses for the three and nine months ended September 30, 2011, were $2.9 million and $6.4 million, respectively, as compared to $0.4 million and $1.2 million, respectively, for the three and nine months ended September 30, 2010. The respective period increases are a combination of increased management fees related to our successful equity capital raising initiatives as well as increased professional fees and operating costs to support our current portfolio.

Our primary source of income is the interest income we earn on our investment portfolio. Our net loss for the three and nine months ended September 30, 2011 was ($34.5) million and ($33.1) million, respectively, or ($0.44) and ($0.63), per weighted average share, respectively. These results compare to a net loss of ($0.5) million and ($0.9) million or ($0.06) and ($0.20), per weighted average share, respectively, for the three and nine months ended September 30, 2010. The main drivers of the difference were the increased equity capital resources from 2010 through the period ended September 30, 2011 and the implementation of our investment strategy, offset by unrealized losses from our derivatives and increasing management fees. As discussed elsewhere in this document, management fees are calculated on gross equity raised, therefore, as we complete additional equity offerings,declined because the management fee ~~expense will continue to increase.~~ rate stepped down as the amounts of equity raised exceeded $1.0 billion.

We have negative retained earnings (titled “Accumulated deficit” in the stockholders’ equity section of our accompanying condensed consolidated balance sheets) as of September 30, 2011, due to the consequences of our tax qualification as a REIT. Our dividends are based on our REIT taxable income, as determined for federal income tax purposes, and not our net income computed in accordance with GAAP as reported in our condensed consolidated financial statements. Accordingly, we may be required to pay out more in dividends than we have earned on a GAAP basis.

For the three and nine months ended September 30, 2011, our estimated REIT taxable income was approximately $31.3 million and $58.8 million, respectively. The most significant difference was the unrealized loss on derivatives which is reflected in GAAP earnings but does not reduce REIT taxable income.

~~Liquidity and Capital Resources~~

Our primary sources of funds are borrowings under repurchase arrangements, monthly principal and interest payments on our investments and cash generated from our operating results. Other sources of funds may include proceeds from equity and debt offerings and asset sales. We generally maintain liquidity to pay down borrowings under repurchase arrangements to reduce borrowing costs and otherwise efficiently manage our long-term investment capital. Because the level of ~~these~~our borrowings can be adjusted on a daily basis, the level of cash and cash equivalents carried on our balance sheet is significantly less important than our potential liquidity available under our borrowing arrangements. We currently believe that we have sufficient liquidity and capital resources available for the acquisition of additional investments, repayments on borrowings and the payment of cash dividends as required for continued qualification as a REIT.

Our primary uses of cash are to purchase Agency Securities, pay interest and principal on our borrowings, fund our operations and pay dividends. During the ~~period~~nine months ended September 30, ~~2011,~~2012, we purchased ~~$5.7~~$18.9 billion current face amount of Agency Securities using proceeds from ~~the~~ equity raises, repurchase agreements and principal ~~repayments and cash.~~repayments. During the ~~period~~nine months ended September 30, ~~2011,~~2012, we received cash of ~~$426.5 million~~$1.6 billion from prepayments and scheduled principal payments on our ~~investment securities and we~~Agency Securities. We received net proceeds of ~~$489.4 million~~$1.5 billion from equity issuances, including our dividend reinvestment and stock purchase ~~plan.~~plan (“DRIP”) and $43.3 million of proceeds from the issuance of 1,785,000 shares of Series A Preferred Stock during the nine months ended September 30, 2012. We had a net cash increase from our repurchase agreements of ~~$4.2~~$14.5 billion for the ~~period~~nine months ended September 30, ~~2011. We~~2012 and made cash interest payments of approximately ~~$5.8~~$61.2 million on our ~~borrowings~~liabilities for the nine months ended September 30, ~~2011.~~2012. Part of funding our operations includes providing margin cash ~~margin~~ to offset liability balances on our derivatives. This required an additional ~~$125.2~~$90.6 million of cash to be maintained in a restricted account with our counterparties ~~as of~~for the nine months ended September 30, ~~2011. If rates increase over time, we may recover some or all of this cash.~~2012.

In response to the growth of our Agency Securities portfolio and to the relatively weak financing market, we have continued to pursue additional lending counterparties in order to help increase our financial flexibility and ability to withstand periods of contracting liquidity in the credit markets. ~~Currently, we have~~

Repurchase Facilities

The following table represents the contractual repricing regarding our repurchase agreements as of September 30, 2012 and December 31, 2011.

September 30, 2012
December 31, 2011

(dollars in thousands)
Within 30 days
$ 9,925,408 $ 4,068,197
31 days to 60 days
5,679,332 1,111,480
61 days to 90 days
2,933,517 156,285
Greater than 90 days
1,288,731 -
Total
$ 19,826,988 $ 5,335,962

The following table represents the Master Repurchase Agreements (“MRAs”)~~, which are uncommitted~~ and other information regarding our repurchase ~~facilities, with twenty-nine lending counterparties~~agreements to finance ~~our portfolio, subject to certain conditions, and have borrowings outstanding with twenty-four of these counterparties.~~

~~Dividends~~

On January 28, 2011, a cash dividend of $0.12 per common share, or $2.0 million in the aggregate, was paid to holders of record on January 15, 2011. This amount included $0.02 per common share of taxable income related to the year ended December 31, 2010.

~~On February 25, 2011, a cash dividend of $0.12 per common share, or $3.9 million in the aggregate, was paid to holders of record on February 15, 2011.~~

~~On March 30, 2011, a cash dividend of $0.12 per common share, or $3.9 million in the aggregate, was paid to holders of record on March 15, 2011.~~

~~On April 28, 2011, a cash dividend of $0.12 per common share, or $5.9 million in the aggregate, was paid to holders of record on April 15, 2011.~~

~~On May 27, 2011, a cash dividend of $0.12 per common share, or $5.9 million in the aggregate, was paid to holders of record on May 15, 2011.~~

~~On June 29, 2011, a cash dividend of $0.12 per common share, or $8.3 million in the aggregate, was paid to holders of record on June 15, 2011.~~

~~On July 28, 2011, a cash dividend of $0.12 per common share, or $9.1 million in the aggregate, was paid to holders of record on July 15, 2011.~~

~~On August 30, 2011, a cash dividend of $0.12 per common share, or $9.1 million in the aggregate, was paid to holders of record on August 15, 2011.~~

~~On September 29, 2011, a cash dividend of $0.12 per common share, or $10.1 million in the aggregate, was paid to holders of record on September 15, 2011.~~

Our Board will continue to evaluate our dividend policy each quarter and will make adjustments as necessary, based on a variety of factors, including, among other things, the need to maintain our REIT status, our financial condition, liquidity, earnings projections and business prospects. Our dividend policy does not constitute an obligation to pay dividends, which only occurs when our Board declares a dividend.

We intend to make distributions to our stockholders to comply with the various requirements to maintain our REIT status and to minimize corporate income tax and the nondeductible excise tax. However, REIT taxable income is calculated according to the requirements of the Code rather than GAAP which can cause differences between GAAP income reported by us and taxable income calculated to determine distribution requirements to stockholders. These differences are primarily due to non-taxable unrealized changes in the value of our derivatives. These differences may be large and can be either positive or negative variances from GAAP income. In addition, differences in timing between the recognition of REIT taxable income and the actual receipt of cash could require us to sell assets or to borrow funds on a short-term basis to meet the REIT distribution requirements and to minimize corporate income tax and the nondeductible excise tax.

~~Equity Capital Raising Activities~~

On January 26, 2011, we completed an underwritten secondary public offering of 6,000,000 shares of common stock at a price of $7.55 per share. The underwriters fully exercised the over-allotment option for 900,000 additional shares. Net proceeds were $49.0 million, net of issuance costs of approximately $3.1 million.

On February 8, 2011, we completed an underwritten secondary public offering of 7,750,000 shares of common stock at a price of $7.60 per share. The underwriters fully exercised the over-allotment option for 1,162,500 additional shares. Net proceeds were $64.0 million, net of issuance costs of approximately $3.7 million.

On February 28, 2011, we entered into an equity distribution agreement with JMP Securities LLC and Ladenburg Thalmann & Co. Inc. to offer and sell from time to time up to 6,500,000 shares of our common stock in at-the-market transactions. As of September 30, 2011, we had issued and sold 5,212,430 shares of our common stock under this agreement for net proceeds of $37.5 million.

On April 7, 2011, we implemented a Dividend Reinvestment and Stock Purchase Plan through which investors may purchase additional shares of our common stock by reinvesting some or all of the cash dividends received on shares of our common stock. Shareholders may also make optional cashAgency Security purchases of shares of our common stock subject to certain limitations detailed in the plan prospectus. As of September 30, 2011 we had issued and sold 11,879,844 shares under the plan for net proceeds of $86.8 million.

~~Off-Balance Sheet Arrangements~~

As of September 30, 2011 and December 31, 2010, we did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, as of September 30, ~~2011~~2012 and December 31, ~~2010, we had not guaranteed any obligations of any unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.~~2011.

~~Liquidity Sources—Repurchase Facilities~~

September 30, 2012
December 31, 2011

(dollars in thousands)
Number of MRAs
32 29
Number of counterparties with repurchase agreements outstanding
26 23
Weighted average maturity in days
39 18
Weighted average contractual rate
0.43
%
0.37
%
Haircut for repurchase agreements
4.8
%
5.0
%

~~At September 30, 2011, our repurchase agreements had the following counterparties, amount at risk and weighted average remaining maturities:~~

~~(1)~~

~~Equal to the fair value of securities sold, minus the sum of repurchase agreement liabilities plus accrued interest expense.~~

~~(2)~~

~~Industrial and Commercial Bank of China Financial Services LLC~~

~~(3)~~

~~At December 31, 2010, our repurchase agreements had the following counterparties, amount at risk and weighted average remaining maturities:~~

Repurchase Agreement
Counterparties

Amount
Outstanding

Amount at Risk (1)

Weighted
Average
Maturity of
Repurchase
Agreements in Days

Percent of
Total
Amount
Outstanding

Guggenheim Liquidity Securities, LLC
$
141,026,000
$
4,425,424

56

14.5
%
South Street Securities, LLC

135,297,000

6,204,002

29

13.9

Goldman Sachs & Company

132,638,000

6,424,071

19

13.7

MF Global Inc.

127,809,000

4,197,001

56

13.2

Cantor Fitzgerald & Co.

111,982,000

7,658,536

16

11.5

Nomura Securities International, Inc.

95,228,000

2,037,191

40

9.8

RBS Securities Inc.

86,535,658

4,774,360

18

8.9

UBS Securities LLC

46,535,000

2,805,301

27

4.8

Mizuho Securities USA Inc.

39,826,000

1,593,285

10

4.0

Jefferies and Company, Inc.

31,822,000

426,829

10

3.3

Daiwa Securities America Inc.

22,977,000

1,690,799

18

2.4

Total
$
971,675,658
$
42,236,799

100.0
%

~~(1)~~

~~Equal to the fair value of securities sold, minus the sum of repurchase agreement liabilities plus accrued interest expense~~

As of September 30, 2011, the weighted average margin requirement, or the percentage amount by which the collateral value must exceed the loan amount, which we also refer to as the haircut, under all our repurchase agreements was approximately 5.1%. As of December 31, 2010, the weighted average margin requirement, under all our repurchase agreements was approximately 5.3%. Declines in the value of our Agency Securities portfolio can trigger margin calls by our lenders under our repurchase agreements. An event of default or termination event under the standard MRA would give our counterparty the option to terminate all repurchase transactions existing with us and require any amount due to be payable immediately.

~~As discussed above under “Market and Interest Rate Trends and the Effect on our Portfolio,” the~~The residential mortgage market in the ~~United States has recently~~U.S. experienced difficult economic conditions over the last several years including:

●

increased volatility of many financial assets, including Agency Securities and other high-quality RMBS assets;

●

increased volatility and deterioration in the broader residential mortgage and RMBS markets; and

●

significant disruption in financing of RMBS.

~~increased volatility of many financial assets, including Agency Securities and other high-quality RMBS assets;~~

~~increased volatility and deterioration in the broader residential mortgage and RMBS markets; and~~

~~significant disruption in financing of RMBS.~~

While conditions have improved, should there be a reoccurrence of difficulties in the residential mortgage market, our lenders may be forced to exit the repurchase market, become insolvent or further tighten lending standards or increase the amount of required equity capital or haircut, any of which could make it more difficult or costly for us to obtain financing.

Financial sector volatility can also lead to increased demand and prices for high quality debt securities, including Agency Securities. While increased prices may increase the value of our Agency Securities, higher values may also reduce the return on reinvestment of capital, thereby lowering our future profitability.

Effects of Margin Requirements, Leverage and Credit Spreads

Our Agency Securities have values that fluctuate according to market conditions and, as discussed above, the market value of our Agency Securities will decrease as prevailing interest rates or credit spreads increase. When the value of the securities pledged to secure a repurchase loan decreases to the point where the positive difference between the collateral value and the loan amount is less than the haircut, our lenders may issue a margin call, which means that the lender will require us to pay the margin call in cash or pledge additional collateral to meet that margin call. Under our repurchase facilities, our lenders have full discretion to determine the value of the Agency Securities we pledge to them. Most of our lenders will value securities based on recent trades in the market. Lenders also issue margin calls as the published current principal balance factors change on the pool of mortgages underlying the securities pledged as collateral when scheduled and unscheduled principal repayments are announced monthly.

We experience margin calls in the ordinary course of our business and under certain conditions, such as during a period of declining market value for Agency Securities and we may experience margin calls monthly or more frequently. In seeking to effectively manage ~~effectively~~ the margin requirements established by our lenders, we maintain a position of cash and unpledged securities. We refer to this position as our liquidity. The level of liquidity we have available to meet margin calls is directly affected by our leverage levels, our haircuts and the price changes on our securities. If interest rates increase as a result of a yield curve shift or for another reason or if credit spreads widen, the prices of our collateral (and our unpledged assets that constitute our liquidity) will decline and we may experience margin calls. We will use our liquidity to meet such margin calls. There can be no assurance that we will maintain sufficient levels of liquidity to meet any margin calls. If our haircuts increase, our liquidity will proportionately decrease. If we increase our borrowings, our liquidity will decrease by the amount of additional haircut on the increased level of indebtedness. In addition, certain of our MRAs contain a restriction that prohibits our leverage from exceeding twelve times our ~~stockholders’~~stockholders' equity as well as termination events in the case of significant reductions in equity capital.

We intend to maintain a level of liquidity in relation to our assets that enables us to meet reasonably anticipated margin calls but that also allows us to be substantially invested in Agency Securities. We may misjudge the appropriate amount of our liquidity by maintaining excessive liquidity, which would lower our investment returns, or by maintaining insufficient liquidity, which would force us to liquidate assets into unfavorable market conditions and harm our results of operations and financial condition.

We generally seek to borrow (on a recourse basis) between six and ten times the amount of our total stockholders' equity. At September 30, 2012 and December 31, 2011, our total borrowings were approximately $19.8 billion and $5.3 billion (excluding accrued interest), respectively, which represented a leverage ratio of approximately 8.12:1 and 8.52:1, respectively.

Forward-Looking Statements Regarding Liquidity

Based on our current portfolio, leverage rate and available borrowing arrangements, we believe that our ~~common~~ equity, combined with cash flow from operations and available borrowing capacity, will be sufficient to enable us to meet anticipated short-term (one year or less) liquidity requirements such as to fund our investment activities, pay fees under ~~our management agreement,~~the 2012 Management Agreement, fund our distributions to ~~shareholders~~stockholders and general corporate expenses.

~~Our ability to meet our long-term (greater than one year) liquidity and capital resource requirements will be subject to obtaining additional debt financing and/or equity capital.~~ We may increase our capital resources by obtaining long-term credit facilities or making public or private offerings of equity or debt securities, ~~possibly~~ including classes of preferred stock, common stock and senior or subordinated ~~notes.~~notes to meet our long-term (greater than one year) liquidity. Such financing will depend on market conditions for capital raises and for the investment of any proceeds. ~~If we are unable~~

Stockholder's Equity

Dividends

The following tables present our common stock dividend transactions for the nine months ended September 30, 2012 and September 30, 2011.

September 30, 2012

(1) This amount included $0.006 per common share of taxable income related to ~~renew, replace or expand our sources of financing on substantially similar terms, it may have an adverse effect on our business and results of operations.~~the year ended December 31, 2011.

~~We generally seek to borrow (on a recourse basis) between six and ten times the amount of our shareholders’ equity, although we are not limited to that range. At~~ September 30, 2011

(1) This amount included $0.02 per common share of taxable income related to the year ended December 31, 2010.

We have announced an expected fourth quarter cash dividend rate of $0.09 per outstanding common share.

The following table presents our Series A Preferred Stock dividend transactions for the nine months ended September 30, 2012. There were no Series A Preferred Stock transactions for the nine months ended September 30, 2011.

September 30, 2012

(1) This amount included $0.2 million paid to holders of record on July 13, 2012 for the period of June 7, 2012 through June 30, 2012

Series A Preferred Stock dividends will continue to be contractually payable without further declaration at the rate of $0.171875 per outstanding share per month.

Equity Capital Raising Activities

The following tables present our equity transactions for the nine months ended September 30, 2012 and September 30, 2011.

September 30, 2012

Transaction Type
Completion Date
Number of
Shares
Per Share price
Net Proceeds
(in millions)
Follow-on public offering
January 13, 2012
10,350,000 $ 6.80 $ 70.1
Follow-on public offering
February 8, 2012
29,900,000 6.80 203.0
Equity distribution agreement
February 29, 2012
1,287,570 7.06 8.9
Follow-on public offering
March 14, 2012
35,650,000 6.72 239.2
Issuance of Series APreferred Stock
June 7, 2012
1,400,000 25.00 33.8
Follow-on public offering
July 13, 2012
46,000,000 7.06 324.5
Follow-on public offering
August 8, 2012
63,250,000 7.30 461.4
Common equity distributionagreements
January 1, 2012 to September 30, 2012
19,750,000 7.14 (1) 138.2
Preferred equity distributionagreements
January 1, 2012 to September 30, 2012
385,000 25.56 (1) 9.5
Dividend Reinvestment andStock Purchase Plan
January 1, 2012 to September 30, 2012
7,273,020 7.28 (1) 52.9

(1) Weighted average price

September 30, 2011

Transaction Type
Completion Date
Number of
Shares
Per Share price
Net Proceeds
(in millions)
Follow-on public offering
January 26, 2011
6,900,000 $ 7.55 $ 49.0
Follow-on public offering
February 8, 2011
8,912,500 7.60 64.0
Equity distribution agreement
February 28, 2011 to September 30, 2011
5,212,430 7.39 (1) 37.5
Follow-on public offering
April 13, 2011
17,000,000 7.40 121.1
Follow-on public offering
June 6, 2011
18,400,000 7.40 131.0
Dividend Reinvestment andStock Purchase Plan
April 7, 2011 to September 30, 2011
11,879,844 7.30 (1) 86.8

(1) Weighted average price

Off-Balance Sheet Arrangements

As of September 30, 2012 and December 31, ~~2010, our total borrowings were approximately $5.2 billion~~2011, we did not maintain any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance, or special purpose or variable interest entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, as of September 30, 2012 and ~~$1.0 billion (excluding accrued interest), respectively, which represented a leverage ratio~~December 31, 2011, we had not guaranteed any obligations of ~~approximately 9.09:1 and 8.94:1, respectively.~~any unconsolidated entities or entered into any commitment or intent to provide funding to any such entities.

Critical Accounting Policies

A summary of our critical accounting policies is included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, ~~2010.~~2011. There have been no significant changes to those policies during ~~2011.~~2012.

Inflation

Virtually all of our assets and liabilities are interest rate-sensitive in nature. As a result, interest rates and other factors influence our performance far more than inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and any distributions we may make will be determined by our Board based in part on our REIT taxable income as calculated according to the requirements of the Code; in each case, our activities and balance sheet are measured with reference to fair value without considering inflation.

Subsequent Events

See Note 16 to the condensed consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We seek to manage our risks related to the credit-quality of our assets, interest rates, liquidity, prepayment speeds and market value while, at the same time, seeking to provide an opportunity to ~~shareholders~~stockholders to realize attractive ~~risk-adjusted~~risk adjusted returns through ownership of our capital stock. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.

Interest Rate, Cap and Mismatch Risk

We invest in fixed rate, hybrid adjustable rate ~~hybrid~~ and ~~fixed~~adjustable rate Agency Securities. Hybrid mortgages are ~~adjustable rate mortgages (“ARMs”)~~ARMs that have a fixed-interest rate for an initial period of time (typically three years or greater) and then convert to an adjustable rate for the remaining loan term. Our debt obligations are generally repurchase agreements of limited duration that are periodically refinanced at current market rates.

ARM-related assets are typically subject to periodic and lifetime interest rate caps that limit the amount an ARM-related ~~asset’s~~asset's interest rate can change during any given period. ARM securities are also typically subject to a minimum interest rate payable. Our borrowings are not subject to similar restrictions. Hence, in a period of increasing interest rates, interest rates on our borrowings could increase without limitation, while the interest rates on our ~~mortgage-related~~mortgage related assets could be limited. This ~~problem~~exposure would be magnified to the extent we acquire fixed rate Agency Securities or ARM securities that are not fully indexed. Further, some ARM-related assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. These factors could lower our net interest income or cause a net loss during periods of rising interest rates, which would negatively impact our liquidity, net income and our ability to make distributions to stockholders.

We fund the purchase of a substantial portion of our ARM-related assets with borrowings that have interest rates based on indices and repricing terms similar to, but of shorter maturities than, the interest rate indices and repricing terms of our mortgage assets. Thus, we anticipate that in most cases the interest rate indices and repricing terms of our mortgage assets and our funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. During periods of changing interest rates, such interest rate mismatches could negatively impact our net interest income, dividend yield and the market price of our ~~common~~ stock. Most of our adjustable rate assets are based on the one-year ~~CMT~~constant maturity treasury rate and the one-year LIBOR rate and our debt obligations are generally based on LIBOR. These indices generally move in the same direction, but there can be no assurance that this will continue to occur.

Our ARM-related assets and borrowings reset at various different dates for the specific asset or obligation. In general, the repricing of our debt obligations occurs more quickly than on our assets. Therefore, on average, our cost of funds may rise or fall more quickly than does our earnings rate on ~~the~~our assets.

Further, our net income may vary somewhat as the spread between one-month interest rates, the typical term for our repurchase agreements and six-month and twelve-month interest rates, the typical reset term of adjustable rate Agency Securities, varies.

Prepayment Risk

As we receive repayments of principal on our Agency Securities from prepayments and scheduled payments, premiums paid on such securities are amortized against interest income and discounts are accreted to interest income as realized. Premiums arise when we acquire Agency Securities at prices in excess of the principal balance of the mortgage loans underlying such Agency Securities. Conversely, discounts arise when we acquire Agency Securities at prices below the principal balance of the mortgage loans underlying such Agency Securities. To date, all of our Agency Securities have been purchased at a premium.

Interest Rate Risk and Effect on Market Value Risk

Another component of interest rate risk is the effect changes in interest rates will have on the market value of our Agency Securities. We face the risk that the market value of our Agency Securities will increase or decrease at different rates than that of our liabilities, including our ~~hedging~~derivative instruments.

We primarily assess our interest rate risk by estimating the effective duration of our assets and the effective duration of our liabilities and by estimating the time difference between the interest rate adjustment of our assets and the interest rate adjustment of our liabilities. Effective duration essentially measures the market price volatility of financial instruments as interest rates change. We generally estimate effective duration using various financial models and empirical data. Different models and methodologies can produce different effective duration estimates for the same securities.

The sensitivity analysis tables presented below ~~reflects~~reflect the estimated impact of an instantaneous parallel shift in the yield curve, up and down 50 and 100 basis points, on the market value of our interest rate-sensitive investments and net interest income, at September 30, ~~2011~~2012 and December 31, ~~2010,~~2011, assuming a static portfolio. When evaluating the impact of changes in interest rates, prepayment assumptions and principal reinvestment rates are adjusted based on our ~~manager’s~~manager's expectations. The analysis presented utilized assumptions, models and estimates of the manager based on the ~~manager’s~~manager's judgment and experience.

As of September 30, ~~2011~~2012

Change in Interest Rates

Percentage Change in
Projected Net
Interest Income

Percentage Change in
Projected Portfolio
Value Including
Derivatives

1.00
%
2.57
%
(0.05)
%
0.50

4.64

0.15

(0.50)

(7.16)

(0.67)

(1.00)

(20.43)

(1.92)

Change in Interest Rates			Percentage Change in Projected Net Interest Income			Percentage Change in Projected Portfolio Value Including Derivatives
	1.00	%		9.01	%		(0.46)	%
	0.50			12.81			(0.41)
	(0.50)			(3.97)			(1.38)
	(1.00)			(24.79)			(2.10)

As of December 31, ~~2010~~2011

Change in Interest Rates

Percentage Change in
Projected Net
Interest Income

Percentage Change in
Projected Portfolio
Value Including
Derivatives

1.00
%
(19.58)
%
(2.40)
%
0.50

(11.55)

(1.12)

(0.50)

5.35

0.93

(1.00)

(1.14)

1.70

Change in Interest Rates			Percentage Change in Projected Net Interest Income			Percentage Change in Projected Portfolio Value Including Derivatives
	1.00	%		(9.79)	%		0.08	%
	0.50			1.35			0.19
	(0.50)			8.91			(0.41)
	(1.00)			(7.53)			(0.94)

While the ~~table~~tables above ~~reflects~~reflect the estimated immediate impact of interest rate increases and decreases on a static portfolio, we rebalance our portfolio from time to time either to seek to take advantage of or reduce the impact of changes in interest rates. It is important to note that the impact of changing interest rates on market value and net interest income can change significantly when interest rates change beyond 100 basis points from current levels. Therefore, the volatility in the market value of our assets could increase significantly when interest rates change beyond amounts shown in the table above. In addition, other factors impact the market value of and net interest income from our interest rate-sensitive investments and ~~hedging~~derivative instruments, such as the shape of the yield curve, market expectations as to future interest rate changes and other market conditions. Accordingly, interest income would likely differ from that shown above and such difference might be material and adverse to our ~~shareholders.~~stockholders.

The above ~~table quantifies~~tables quantify the potential changes in net interest income and portfolio value, which includes the value of our derivatives, should interest rates immediately change. Given the low level of interest rates at September 30, ~~2011~~2012 and December 31, ~~2010,~~2011, we applied a floor of 0% for all anticipated interest rates included in our assumptions. Due to the presence of this floor, it is anticipated that any hypothetical interest rate decrease would have a limited positive impact on our funding costs beyond a certain level; however, because prepayments speeds are unaffected by this floor, it is expected that any increase in our prepayment speeds (occurring as a result of any interest rate decrease or otherwise) could result in an acceleration of our premium amortization and the reinvestment of such prepaid principal in lower yielding assets. As a result, the presence of this floor limits the positive impact of any interest rate decrease on our funding costs. Therefore, at some point, hypothetical interest rate decreases could cause the fair value of our financial instruments and our net interest income to decline.

Market Value Risk

All of our Agency Securities are classified as available for sale assets. As such, they are reflected at fair value ~~(i.e., market value)~~ with the periodic adjustment to fair value (that is not considered to be an other than temporary impairment) reflected as part of “Accumulated other comprehensive ~~income (loss)”~~income” that is included in the stockholders' equity section of our condensed consolidated balance ~~sheet.~~sheets. The market value of our assets can fluctuate due to changes in interest rates and other factors. Weakness in the mortgage market may adversely affect the performance and market value of our investments. This could negatively impact our ~~net~~ book value. Furthermore, if our lenders are unwilling or unable to provide additional financing, we could be forced to sell our Agency Securities at an inopportune time when prices are depressed. The principal payments are guaranteed by Freddie Mac, Fannie Mae, or Ginnie Mae on our Agency Securities.

Liquidity Risk

Our primary liquidity risk arises from financing long-maturity Agency Securities with short-term debt. The interest rates on our borrowings generally adjust more frequently than the interest rates on our adjustable rate Agency Securities. Accordingly, in a period of rising interest rates, our borrowing costs will usually increase faster than our interest earnings from Agency Securities.

~~Credit Risk~~

Item 4. Controls and Procedures

Our Co-CEOs and CFO participated in an evaluation by our management ~~including our Co-Chief Executive Officer (the CEO) and Chief Financial Officer (the CFO), reviewed and evaluated~~of the effectiveness ~~of the design and operation~~ of our disclosure controls and procedures ~~(as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act)~~ as of the end of ~~the period covered by this quarterly report.~~our fiscal quarter that ended on September 30, 2012. Based on their participation in that ~~review~~evaluation, our Co-CEOs and ~~evaluation,~~(as defined in Rules 13a-15(e) and 15d-15(e) under the ~~CEO and~~Securities Exchange Act of 1934, as amended (the “Exchange Act”)) CFO ~~have~~ concluded that our ~~current~~ disclosure controls and procedures ~~as designed and implemented, (1)~~ were effective ~~in ensuring~~as of September 30, 2012 to ensure that information ~~regarding us and our subsidiaries is accumulated and communicated~~required to our management, including our CEO and CFO, by our employees, as appropriate to allow timely decisions regarding required disclosure and (2) were effective in providing reasonable assurance that information we must disclosebe disclosed in our ~~periodic~~ reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods ~~prescribed by~~specified in the SEC's rules and forms, and to ensure that information required to be disclosed in our reports filed or furnished under the Securities Exchange Act of 1934, as amended, is accumulated and ~~Exchange Commission’s rules~~communicated to our management, including our Co-CEOs and ~~forms.~~

~~There have been no~~CFO, as appropriate, to allow timely decisions regarding required disclosures. Our Co-CEOs and CFO also participated in an evaluation by our management of any changes in our internal ~~controls~~control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the ~~three and nine month periods~~quarter ended September 30, ~~2011,~~2012. That evaluation did not identify any changes that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Our company and our manager are not currently subject to any legal proceedings.

Item 1A. Risk Factors

~~Except as provided below, there~~

There have been no material changes from the risk factors disclosed in the “Risk Factors” section of our Annual Report on Form 10-K filed on March ~~10, 2011 with the SEC.~~

~~Our Annual Report on Form 10-K filed on March 10, 2011~~6, 2012 with the SEC, ~~included a risk factor titled “~~except as set forth below.

~~Maintenance~~There are conflicts of interest in our relationship with ARRM and its affiliates, which could result in decisions that are not in the best interests of our stockholders or warrant holders.

We are subject to conflicts of interest arising out of our relationship with JAVELIN, ARRM and their affiliates. Each of our executive officers and certain of our non-independent directors is also an employee or affiliated with JAVELIN and ARRM and they will not be exclusively dedicated to our business. Each of Mr. Ulm and Mr. Zimmer is a Co-Managing Member of ARRM and owner of equity interests in JAVELIN.

In addition, Daniel C. Staton and Marc H. Bell, two of our directors, are principal owners of Staton Bell Blank Check LLC, our Sub-Manager, which, in consideration for services to be provided to ARRM under a sub-management agreement is entitled to receive a percentage of the net management fee earned by ARRM from us and JAVELIN. As a result, the Management Agreement with ARRM may create a conflict of interest and its terms, including fees payable to ARRM, may not be as favorable to us as if they had been negotiated with an unaffiliated third party. In addition, we may choose not to enforce, or to enforce less vigorously, our rights under the Management Agreement because of our desire to maintain our ongoing relationship with ARRM. ARRM maintains a contractual and fiduciary relationship with us. The Management Agreement with ARRM does not prevent ARRM and its affiliates from engaging in additional management or investment opportunities some of which will compete with us. ARRM and its affiliates may engage in additional management or investment opportunities that have overlapping objectives with ours and may thus face conflicts in the allocation of investment opportunities to these other investments. Such allocation is at the discretion of ARRM and there is no guarantee that this allocation would be made in the best interest of our stockholders or warrant holders. We are not entitled to receive preferential treatment as compared with the treatment given by ARRM or its affiliates to any investment company, fund or advisory account other than any fund or advisory account which contains only funds invested by ARRM (and not of any of its clients or customers) or its officers and directors. Additionally, the ability of ARRM and its respective officers and employees to engage in other business activities, including their activities related to JAVELIN, may reduce the time spent managing our activities.

In the future, we may enter, or ARRM may cause us to enter, into additional transactions with ARRM or its affiliates. In particular, we may purchase, or ARRM may cause us to purchase, assets from ARRM or its affiliates or make co-purchases alongside ARRM or its affiliates. These transactions may not be the result of arm's length negotiations and may involve conflicts between our interests and the interests of ARRM and/or its affiliates in obtaining favorable terms and conditions.

Members of our management team have competing duties to other entities, which could result in decisions that are not in the best interests of our stockholders or warrant holders.

Our executive officers and the employees of ARRM do not spend all of their time managing our activities and our investment portfolio. Our executive officers and the employees of ARRM allocate some, or a material portion, of their time to other businesses and activities. For example, each of our executive officers is also an officer of JAVELIN and an employee of ARRM. None of these individuals is required to devote a specific amount of time to our affairs. As a result of these overlapping responsibilities, there may be conflicts of interest among and reduced time commitments from our officers and the officers and employees of JAVELIN and our Manager that we will face in making investment decisions on behalf of ARMOUR. Accordingly, we will compete with both JAVELIN and ARRM, and their existing activities, other ventures and possibly other entities in the future for the time and attention of these officers.

We cannot predict the impact of QE3 on the prices and liquidity of Agency Securities or other securities in which we invest, although the Federal Reserve action could increase the prices of our target assets and reduce the spread on our investments.

On November 25, 2008, the Federal Reserve announced a program to purchase Agency Securities in the open market. The stated goal of this program was to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally. On March 18, 2009, this program was expanded to a target size of $1.25 trillion. The Federal Reserve completed this purchase program in March 2010. The Federal Reserve announced on November 3, 2010 that it intended to purchase an additional $600 billion of long-term securities by the end of the second quarter of 2011, at a pace of about $75 billion per month. On September 13, 2012, the Federal Reserve announced a program, popularly referred to as “QE3,” to purchase an additional $40 billion of Agency Securities per month until the unemployment rate and other economic indicators improve. QE3 plus its existing investment programs are expected to grow the Federal Reserve's Agency Securities holding by approximately $85 billion per month at least through the end of 2012. The Fed also extended through at least mid-2015 its plan to keep the Federal Funds Rate between zero and 0.25%. The Federal Reserve expects these measures will put downward pressure on long-term interest rates.

While the Federal Reserve hopes that QE3 will expedite an economic recovery, stabilize prices, reduce unemployment and restart business and household spending, we cannot predict the long-term impact of these programs or any future actions by the Federal Reserve on the prices and liquidity of Agency Securities or other securities in which we invest. In the short term, the Federal Reserve's actions have driven Agency Securities prices to record highs, thereby compressing interest rate spreads and reducing the correlation between mortgage rates and rates on U.S. Treasuries and interest rate swaps. These factors have contributed to a challenging reinvestment and interest rate hedging environment.

Failure to obtain and maintain an exemption from ~~the 1940 Act will impose limits on~~being regulated as a commodity pool operator could subject us to additional regulation and compliance requirements and may result in fines and other penalties which could materially adversely affect our business and financial condition..

Recently adopted rules under the Dodd-Frank Act establish a comprehensive new regulatory framework for derivative contracts commonly referred to as “swaps.” ~~The following is additional information~~Under these recently adopted rules, any investment fund that trades in swaps may be considered a “commodity pool,” which would cause its directors to ~~accompany such risk factor.~~

The SEC recently solicited public comment via a Concept Release on a wide range of issues relating to the Section 3(c)(5)(C) exemption from the 1940 Act, including the nature of the assets that qualify for purposes of the exemption and whether mortgage-related REITs should be regulated as ~~investment companies. There~~“commodity pool operators” ("CPOs"). Under the new rules, which become effective on October 12, 2012 for those who become CPOs solely because of their use of swaps, CPOs must register with the National Futures Association (the "NFA"), which requires compliance with NFA's rules, and are subject to regulation by the U.S. Commodity Futures Trading Commission (the “CFTC”) including with respect to disclosure, reporting, recordkeeping and business conduct.

Our hedging strategies are designed to reduce the impact on our earnings caused by the potential adverse effects of changes in interest rates on our assets and liabilities. Subject to complying with REIT requirements, we use hedging techniques to limit the risk of adverse changes in interest rates on the value of our assets as well as the differences between the interest rate adjustments on our assets and borrowings. These techniques primarily consist of entering into interest rate swap contracts and purchasing or selling Futures Contracts and may also include entering into interest rate cap or floor agreements, purchasing put and call options on securities or securities underlying Futures Contracts, or entering into forward rate agreements. Although we are not legally limited to our use of hedging, we intend to limit our use of derivative instruments to only those techniques described above and to enter into derivative transactions only with counterparties that we believe have a strong credit rating to help limit the risk of counterparty default or insolvency. These transactions are not entered into for speculative purposes. We do not use these instruments for the purpose of trading in commodity interests, and we do not consider our company or its operations to be a commodity pool as to which CPO regulation or compliance is required. We, along with numerous other mortgage REITs, have submitted a no-action letter request to the CFTC seeking exemptive relief for our directors from CPO registration under these new rules. However, at this time, our directors do not intend to register as CPOs with the NFA. While we have reason to believe that the CFTC may provide us with exemptive relief prior to December 31, 2012, there can be no assurance that any such relief will be granted. If exemptive relief is granted, we may be restricted to operating within certain parameters discussed in the no-action letter we submitted to the CFTC. For example, exemptive relief might limit our ability to enter into interest rate hedging transactions if the amount of income we receive from such hedges will exceed five percent of our gross income or the initial margin and premiums for such hedges will exceed five percent of the fair market value of our total assets.

The CFTC has substantial enforcement power with respect to violations of the laws over which it has jurisdiction, including their anti-fraud and ~~regulations governing~~anti-manipulation provisions. Among other things, CFTC may suspend or revoke the ~~1940 Act status~~registration of ~~REITs, including guidance~~a person who fails to comply, prohibit such a person from trading or doing business with registered entities, impose civil money penalties, require restitution and ~~interpretations~~seek fines or imprisonment for criminal violations. Additionally, a private right of action exists against those who violate the laws over which CFTC has jurisdiction or who willfully aid, abet, counsel, induce or procure a violation of those laws. In the event we fail to receive exemptive relief from the ~~Division~~CFTC on this matter and our directors fail to comply with the regulatory requirements of ~~Investment Management~~these new rules, we may be subject to significant fines, penalties and other civil or governmental actions or proceedings, any of which could have a materially adverse effect on our business, financial condition and results of operations.

We cannot predict the impact, if any, on our earnings or cash available for distribution to our stockholders of the ~~SEC regarding~~FHFA's proposed revisions to Fannie Mae's, Freddie Mac's and Ginnie Mae's existing infrastructures to align the ~~Section 3(c)(5)(C) exemption,~~standards and practices of the three entities.

On February 21, 2012, the FHFA released itsStrategic Plan for Enterprise Conservatorships, which set forth three goals for the next phase of the Fannie Mae and Freddie Mac conservatorships. These three goals are to (i) build a new infrastructure for the secondary mortgage market, (ii) gradually contract Fannie Mae and Freddie Mac's presence in the marketplace while simplifying and shrinking their operations, and (iii) maintain foreclosure prevention activities and credit availability for new and refinanced mortgages. On October 4, 2012, the FHFA released its white paper entitledBuilding a New Infrastructure for the Secondary Mortgage Market, which proposes a new infrastructure for Fannie Mae and Freddie Mac that has two basic goals.

The first such goal is to replace the current, outdated infrastructures of Fannie Mae and Freddie Mac with a common, more efficient infrastructure that aligns the standards and practices of the two entities, beginning with core functions performed by both entities such as issuance, master servicing, bond administration, collateral management and data integration. The second goal is to establish an operating framework for Fannie Mae and Freddie Mac that is consistent with the progress of housing finance reform and encourages and accommodates the increased participation of private capital in assuming credit risk associated with the secondary mortgage market.

The FHFA recognizes that there are a number of impediments to their goals which may or may not be surmountable, such as the absence of any significant secondary mortgage market mechanisms beyond Fannie Mae, Freddie Mac and Ginnie Mae, and that their proposals are in the formative stages. As a result, it is unclear if the proposals will ~~not change~~be enacted. If such proposals are enacted, it is unclear how closely what is enacted will resemble the proposals from the FHFA White Paper or what the effects of the enactment will be in ~~a manner that adversely affects~~terms of our ~~operations~~net asset value, earnings or ~~business.~~cash available for distribution to our stockholders.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. ~~Removed and Reserved~~Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~None.~~

On October 30, 2012, our Board approved an amendment to our charter to increase our authorized shares of common stock from 500,000,000 shares to 1,000,000,000 shares and to increase our authorized shares of preferred stock from 25,000,000 shares to 50,000,000 shares. Pursuant to Maryland corporate law and Section 6.1 of our charter, the amendment was approved by our Board and did not require any action by our stockholders. Accordingly, our charter was amended effectively on October 31, 2012 to increase our authorized shares of common stock from 500,000,000 shares to 1,000,000,000 shares and to increase our authorized shares of preferred stock from 25,000,000 shares to 50,000,000 shares. A copy of the Articles of Amendment is attached hereto as Exhibit 3.3 and is incorporated herein by reference.

Item 6. Exhibits

See Exhibit Index.

SIGNATURES

~~SIGNATURES~~

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


Date: November ~~3, 2011~~1, 2012	ARMOUR RESIDENTIAL REIT, INC.
	/s/ ~~Scott J. Ulm~~James R. Mountain
	~~Scott J. Ulm~~James R. Mountain
	~~Co-Chief Executive~~Chief Financial Officer, ~~Chief Investment~~Duly Authorized Officer ~~Head of Risk Management~~ and ~~Co-Vice Chairman (Principal Executive Officer)~~Principal Financial and Accounting Officer

EXHIBIT INDEX


Exhibit Number		Description
3.1		~~Amended and Restated~~ Articles Supplementary classifying 6,000,000 shares of Incorporation.*ARMOUR Residential REIT, Inc.'s preferred stock into additional shares of Series A Cumulative Preferred Stock (1)
3.2		Articles Supplementary classifying 2,000,000 shares of ARMOUR Residential REIT, Inc.'s preferred stock into additional shares of Series A Cumulative Preferred Stock (2)
3.3		Articles of Amendment to ~~Amended and Restated Articles~~the charter of Incorporation **
~~3.3~~		Amended Bylaws.*
~~10.1~~		~~Amended and Restated~~ ARMOUR 2009 Stock Incentive Plan ***Residential REIT, Inc. (3)
31.1		Certification of Chief Executive Officer Pursuant to SEC Rule 13a-14(a)/15d-14(a)~~****~~ (3)
31.2		Certification of Chief ~~Financial~~Executive Officer Pursuant to SEC Rule 13a-14(a)/15d-14(a)~~****~~ (3)
31.3		Certification of Chief Financial Officer Pursuant to SEC Rule 13a14(a)/15d-14(a) (3)
32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350****§1350 (4)
32.2		Certification of Chief Executive Officer Pursuant to 18 U.S.C. §1350 (4)
32.3		Certification of Chief Financial Officer Pursuant to 18 U.S.C. §1350****§1350 (4)
101.INS#		XBRL Instance Document
101.SCH#		XBRL Taxonomy Extension Schema Document
101.CAL#		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF#		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB#		XBRL Taxonomy Extension Label Linkbase Document
101.PRE#		XBRL Taxonomy Extension Presentation Linkbase Document

(1)	Incorporated by reference to Exhibit 3.1 to ARMOUR's Current report on Form 8-K filed with the SEC on July 13, 2012

(2)	Incorporated by reference to Exhibit 3.1 to ARMOUR's Current Report on Form 8-K filed with the SEC on July 27, 2012.

(3)	Filed herewith

(4)	Furnished herewith

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability under those sections.

* Incorporated by reference to Exhibit 3.5 to ARMOUR’s Current Report on Form 8-K filed with the SEC on November 12, 2009.

** Incorporated by reference to Exhibit 3.1 to ARMOUR’s Current Report on Form 8-K filed with the SEC on August 8, 2011.

*** Incorporated by reference to Exhibit 10.1 to ARMOUR’s Registration Statement on form S-8 filed with the SEC on July 22, 2011.

**** Filed herewith.


		Amortized Cost		Fair Value		Unrealized Loss		Unrealized Gain		Net Unrealized Gain
Fannie Mae Certificates	$	4,235,696,313	$	4,278,232,930	$	(2,848,749)	$	45,385,366	$	42,536,617
Freddie Mac Certificates		1,241,119,120		1,256,793,773		(512,468)		16,187,121		15,674,653
Ginnie Mae Certificates		435,701,340		440,796,715		(42,575)		5,137,950		5,095,375
Total Agency Securities	$	5,912,516,773	$	5,975,823,418	$	(3,403,792)	$	66,710,437	$	63,306,645


		Amortized Cost		Fair Value		Unrealized Loss		Unrealized Gain		Net Unrealized (Loss)Gain
Fannie Mae Certificates	$	847,473,686	$	843,872,174	$	(5,767,276)	$	2,165,764	$	(3,601,512)
Freddie Mac Certificates		258,457,021		257,316,342		(2,060,057)		919,378		(1,140,679)
Ginnie Mae Certificates		60,149,503		60,662,164		(45,676)		558,337		512,661
Total Agency Securities	$	1,166,080,210	$	1,161,850,680	$	(7,873,009)	$	3,643,479	$	(4,229,530)


		September 30, 2011
Principal balance settled securities	$	5,222,486,992
Principal balance forward settle securities		453,334,717
Unamortized premium settled securities		215,010,120
Unamortized premium forward settle securities		21,684,944
Gross unrealized gains		66,710,437
Gross unrealized losses		(3,403,792)
Carrying value/estimated fair value	$	5,975,823,418


		December 31, 2010
Principal balance settled securities	$	995,994,552
Principal balance forward settle securities		120,473,239
Unamortized premium settled securities		44,724,477
Unamortized premium forward settle securities		4,887,942
Gross unrealized gains		3,643,479
Gross unrealized losses		(7,873,009)
Carrying value/estimated fair value	$	1,161,850,680


Months to Reset	Percentage of Settled Securities Portfolio		Weighted Average Months to Reset		Current Face Value(1)	Weighted Average Coupon(2)			Weighted Average Amortized Purchase Price(3)		Amortized Cost(4)		Weighted Average Market Price(5)		Current Market Value(6)
0-18	2.4	%	6	$	124,233,465	3.32	%	$	104.67	$	130,038,168	$	105.32	$	130,837,529
19-36	2.6		27		136,176,672	4.70			105.02		143,017,340		105.67		143,902,961
37-60	13.7		48		714,075,997	3.71			103.97		742,401,310		105.29		751,883,333
61-84	20.0		75		1,052,164,027	3.57			103.40		1,087,942,924		104.71		1,101,770,105
85+	7.9		114		417,313,027	3.85			104.61		436,554,979		104.79		437,320,162
Total/Average	46.6	%	68	$	2,443,963,188	3.71	%	$	104.67	$	2,539,954,721	$	104.98	$	2,565,714,090


☒	~~FORM 10-Q~~	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


PART I. FINANCIAL INFORMATION	3

Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2822
Item 3. Quantitative and Qualitative Disclosures About Market Risk	4435
Item 4. Controls and Procedures	47
	37
PART II. OTHER INFORMATION	47
	37
Item 1. Legal Proceedings	4737
Item 1A. Risk Factors	4737
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4739
Item 3. Defaults Upon Senior Securities	4739
Item 4. ~~Removed and Reserved~~Mine Safety Disclosures	4739
Item 5. Other Information	4740
Item 6. Exhibits	4740


Assets		(Unaudited) September 30, 2011		December 31, 2010
Cash	$	250,485,889	$	35,343,907
Restricted cash		129,924,393		4,680,603
Agency securities, available for sale, at fair value (including pledged assets of $5,475,284,566 and $1,023,749,488)		5,975,823,418		1,161,850,680
Principal payments receivable		8,541,768		2,642,149
Accrued interest receivable		18,905,442		3,908,235
Prepaid and other assets		430,100		266,203
Refundable income taxes		-		547,574
Total Assets	$	6,384,111,010	$	1,209,239,351

Liabilities and Stockholders’ Equity
Liabilities:
Repurchase agreements	$	5,221,525,340	$	971,675,658
Payable for unsettled securities		475,109,262		125,418,369
Derivatives, at fair value		94,421,587		2,530,645
Accrued interest payable		17,051,708		295,005
Accounts payable and accrued expenses		1,219,235		174,775
Dividends payable		115,993		436,322
Total Liabilities		5,809,443,125		1,100,530,774

Stockholders’ Equity:
Preferred stock, $0.001 par value, 25,000,000 shares authorized, none outstanding at September 30, 2011 and December 31, 2010		-		-
Common stock, $0.001 par value, 500,000,000 and 250,000,000 shares authorized, 84,758,505 and 16,441,554 shares issued and outstanding at September 30, 2011 and December 31, 2010		84,758		16,442
Additional paid-in capital		606,186,743		116,748,175
Accumulated deficit		(94,910,261)		(3,826,510)
Accumulated other comprehensive income (loss)		63,306,645		(4,229,530)
Total Stockholders’ Equity		574,667,885		108,708,577
Total Liabilities and Stockholders’ Equity	$	6,384,111,010	$	1,209,239,351

Assets	September 30, 2012			December 31, 2011
Cash	$	727,306		$	252,372
Restricted cash		237,789			147,199
Agency securities, available for sale, at fair value (including pledged assets of $20,846,817 and $5,225,234)		22,114,875			5,393,675
Receivable for unsettled securities		357,218			382,931
Derivatives, at fair value		8,069			-
Principal payments receivable		10,799			12,493
Accrued interest receivable		60,548			18,637
Prepaid and other assets		742			440
Total Assets	$	23,517,346		$	6,207,747

Liabilities and Stockholders' Equity
Liabilities:
Repurchase agreements	$	19,826,988		$	5,335,962
Payable for unsettled securities		1,036,450			117,885
Derivatives, at fair value		198,398			121,727
Accrued interest payable		9,302			2,154
Accounts payable and accrued expenses		3,157			2,663
Dividends payable		103			750
Total Liabilities		21,074,398			5,581,141

Stockholders' Equity:
Preferred stock, $0.001 par value, 25,000,000 shares authorized, 1,785,000 8.250% Series A Cumulative Preferred Stock issued and outstanding at September 30, 2012 and none issued and outstanding at December 31, 2011		2			-
Common stock, $0.001 par value, 500,000,000 shares authorized, 308,972,403 and 95,436,949 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively		309			95
Additional paid-in capital		2,220,417			678,641
Accumulated deficit		(180,430	)		(100,878	)
Accumulated other comprehensive income		402,650			48,748
Total Stockholders' Equity		2,442,948			626,606
Total Liabilities and Stockholders' Equity	$	23,517,346		$	6,207,747

	For the Quarters Ended						For the Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Interest Income:
Interest income, net of amortization of premium	$	116,693		$	39,665		$	265,660		$	82,293
Interest expense:
Repurchase agreements		(19,222	)		(3,451	)		(37,258	)		(7,158	)
Net interest income		97,471			36,214			228,402			75,135
Other (Loss) Income:
Realized gain on sale of agency securities		15,062			6,444			20,110			6,444
Other income		-			-			1,043			-
Subtotal		15,062			6,444			21,153			6,444
Realized loss on derivatives(1)		(18,914	)		(8,421	)		(41,055	)		(16,425	)
Unrealized loss on derivatives		(31,486	)		(65,808	)		(84,265	)		(91,891	)
Subtotal		(50,400	)		(74,229	)		(125,320	)		(108,316	)
Total other (loss)		(35,338	)		(67,785	)		(104,167	)		(101,872	)
Expenses:
Management fee		5,545			2,191			13,356			4,441
Professional fees		472			270			1,408			883
Insurance		85			60			189			164
Compensation		426			135			1,417			406
Other		660			243			1,331			504
Total expenses		7,188			2,899			17,701			6,398
Net income (loss) before taxes		54,945			(34,470	)		106,534			(33,135	)
Income tax (expense) benefit		(3	)		(2	)		27			(14	)
Net Income (Loss)	$	54,942		$	(34,472	)	$	106,561		$	(33,149	)
Dividends declared on preferred stock		(804	)		-			(964	)		-
Net Income (Loss) available (related) to common stockholders	$	54,138		$	(34,472	)	$	105,597		$	(33,149	)
Net income (loss) available (related) per share to common stockholders:
Basic	$	0.20		$	(0.44	)	$	0.54		$	(0.63	)
Diluted	$	0.20		$	(0.44	)	$	0.54		$	(0.63	)
Dividends per common share	$	0.30		$	0.36		$	0.92		$	1.06
Weighted average common shares outstanding:
Basic		269,325			78,360			195,272			52,863
Diluted		270,010			78,360			196,287			52,863


		Three months Ended September 30, 2011		Three months Ended September 30, 2010		Nine months Ended September 30, 2011		Nine months Ended September 30, 2010
Interest Income:
Interest income, net of amortization of premium	$	39,665,171	$	3,891,240	$	82,293,745	$	6,415,001
Interest expense:
Repurchase agreements		(3,450,885)		(376,728)		(7,157,796)		(650,021)
Total interest expense		(3,450,885)		(376,728)		(7,157,796)		(650,021)
Net interest income		36,214,286		3,514,512		75,135,949		5,764,980
Other Income (Loss):
Realized gain on sale of agency securities		6,443,902		-		6,443,902		208,094
Subtotal		6,443,902		-		6,443,902		208,094
Realized loss on derivatives (1)		(8,420,990)		(197,657)		(16,424,950)		(218,134)
Unrealized loss on derivatives		(65,808,206)		(3,391,588)		(91,890,940)		(5,445,038)
Subtotal		(74,229,196)		(3,589,245)		(108,315,890)		(5,663,172)
Total other loss		(67,785,294)		(3,589,245)		(101,871,988)		(5,455,078)
Expenses:
Professional fees		270,392		84,497		883,411		311,509
Insurance		60,488		37,241		163,425		140,261
Management fee		2,190,502		225,000		4,441,302		367,996
Other		377,480		36,541		910,221		340,801
Total expenses		2,898,862		383,279		6,398,359		1,160,567
Loss before income taxes		(34,469,870)		(458,012)		(33,134,398)		(850,665)
Income tax expense		(2,050)		(82)		(14,263)		(2,482)
Net Loss	$	(34,471,920)	$	(458,094)	$	(33,148,661)	$	(853,147)
Weighted average shares outstanding:
Basic and diluted		78,360,049		7,414,054		52,862,872		4,306,875
Net loss per share:
Basic and diluted	$	(0.44)	$	(0.06)	$	(0.63)	$	(0.20)
Dividends per share	$	0.36	$	0.36	$	1.06	$	1.16


									Accumulated Other Comprehensive Income (loss)
					Additional Paid-In Capital
	Common Stock						Accumulated Deficit				Comprehensive Income
	Shares		Amount				Accumulated Deficit				Comprehensive Income		Total

Balance, January 1, 2011	16,441,554	$	16,442	$	116,748,175	$	(3,826,510)	$	(4,229,530)	$	-	$	108,708,577
Dividends declared			-		-		(57,935,090)						(57,935,090)
Issuance of common stock, net	68,304,774		68,304		489,336,294		-						489,404,598
Stock based compensation, net of withholding requirements	12,177		12		102,274		-						102,286
Net loss	-		-		-		(33,148,661)				(33,148,661)		(33,148,661)
Net change in unrealized gain on available for sale securities	-		-		-		-		67,536,175		67,536,175		67,536,175
Comprehensive income	-		-		-		-		-	$	34,387,514		-
Balance, September 30, 2011	84,758,505	$	84,758	$	606,186,743	$	(94,910,261)	$	63,306,645			$	574,667,885


		Nine months Ended September 30, 2011		Nine months Ended September 30, 2010
Cash Flows From Operating Activities:
Net loss	$	(33,148,661)	$	(853,147)
Adjustments to reconcile net loss to net cash provided by operating activities:
Net amortization of premium on Agency Securities		17,636,433		2,426,552
Unrealized loss on derivatives		91,890,940		5,445,038
Gain on sale of Agency Securities		(6,443,902)		(208,094)
Stock based compensation		102,286		-
Changes in operating assets and liabilities:
Increase in accrued interest receivable		(15,012,608)		(1,764,454)
Decrease (increase) in prepaid income taxes and other assets		387,464		(16,026)
Increase in accrued interest payable		16,822,805		59,243
Increase in accounts payable and accrued expenses		993,760		184,662
Net cash provided by operating activities		73,228,517		5,273,774
Cash Flows From Investing Activities:
Purchases of Agency Securities		(5,704,829,944)		(502,388,124)
Principal repayments of Agency Securities		426,473,862		49,559,729
Proceeds from sales of Agency Securities		512,657,141		31,531,266
Increase (decrease) in payable for unsettled security purchases		351,861,121		(46,590,233)
Net cash used in investing activities		(4,413,837,820)		(467,887,362)
Cash Flows From Financing Activities:
Issuance of common stock, net of expenses		489,400,811		32,062,856
Proceeds from repurchase agreements		28,660,677,323		2,236,866,975
Principal repayments on repurchase agreements		(24,410,827,641)		(1,792,528,555)
Increase in restricted cash		(125,243,790)		(6,562,808)
Dividends paid		(58,255,418)		(1,913,691)
Net cash provided by financing activities		4,555,751,285		467,924,777
Net Increase in cash		215,141,982		5,311,189
Cash - beginning of period		35,343,907		6,653,331
Cash - end of period	$	250,485,889	$	11,964,520
Supplemental Disclosure:
Cash paid for income taxes (not including tax refunds received)	$	18,831	$	3,116
Cash paid during the period for interest	$	5,844,214	$	515,779
Non-Cash Investing and Financing Activities:
Net unrealized gain on investment in available for sale securities	$	67,536,175		5,847,048
Amounts receivable for issuance of common stock	$	3,787	$	-

September 30, 2012	Fannie Mae			Freddie Mac			Ginnie Mae		Total Agency Securities
	(dollars in thousands)
Principal Amount	$	14,408,545		$	5,899,771		$	318,873	$	20,627,189
Net unamortized premium		755,692			314,606			14,738		1,085,036
Amortized cost		15,164,237			6,214,377			333,611		21,712,225

Unrealized gains		274,057			122,875			6,985		403,917
Unrealized losses		(1,057	)		(210	)		-		(1,267	)
Fair value	$	15,437,237		$	6,337,042		$	340,596	$	22,114,875

September 30, 2012	Adjustable Rate			Fixed Rate			Total Agency Securities
	(dollars in thousands)
Principal Amount	$	2,234,747		$	18,392,442		$	20,627,189
Net unamortized premium		92,613			992,423			1,085,036
Amortized cost		2,327,360			19,384,865			21,712,225

Unrealized gains		46,143			357,774			403,917
Unrealized losses		(9	)		(1,258	)		(1,267	)
Fair value	$	2,373,494		$	19,741,381		$	22,114,875

December 31, 2011	Fannie Mae			Freddie Mac			Ginnie Mae			Total Agency Securities
	(dollars in thousands)
Principal Amount	$	3,451,906		$	1,283,848		$	392,476		$	5,128,230
Net unamortized premium		144,337			54,059			18,301			216,697
Amortized cost		3,596,243			1,337,907			410,777			5,344,927

Unrealized gains		33,558			13,657			5,439			52,654
Unrealized losses		(3,269	)		(613	)		(24	)		(3,906	)
Fair value	$	3,626,532		$	1,350,951		$	416,192		$	5,393,675


Months to Maturity	Percentage of Settled Securities Portfolio		Weighted Average Months to Maturity		Current Face Value(1)	Weighted Average Coupon(2)			Weighted Average Amortized Purchase Price(3)		Amortized Cost(4)		Weighted Average Market Price(5)		Current Market Value(6)
0-90	0.1	%	66	$	1,356,368	5.57	%	$	106.56	$	1,445,382	$	107.83	$	1,462,610
91-180	53.3		172		2,776,755,411	4.00			104.28		2,895,660,326		105.67		2,934,102,760
181+	0.0		181		412,025	5.50			105.98		436,683		108.74		448,039
Total/Average	53.4	%	172	$	2,778,523,804	4.01	%	$	104.28	$	2,897,542,391	$	105.67	$	2,936,013,409


Months to Reset	Percentage of Forward Settle Portfolio		Weighted Average Months to Reset		Current Face Value(1)	Weighted Average Coupon(2)			Weighted Average Amortized Purchase Price(3)		Amortized Cost(4)		Weighted Average Market Price(5)		Current Market Value(6)
85+	91.6	%	118	$	415,000,597	3.70	%	$	104.80	$	434,905,124	$	104.63	$	434,203,392
Total/Average	91.6	%	118	$	415,000,597	3.70	%	$	104.80	$	434,905,124	$	104.63	$	434,203,392


Months to Maturity	Percentage of Forward Settle Portfolio		Weighted Average Months to Maturity		Current Face Value(1)	Weighted Average Coupon(2)			Weighted Average Amortized Purchase Price(3)		Expected Amortized Cost(4)		Weighted Average Market Price(5)		Current Market Value(6)
91-180	8.4	%	179	$	38,334,120	3.50	%	$	104.64	$	40,114,537	$	104.07	$	39,892,527
Total/Average	8.4	%	179	$	38,334,120	3.50	%	$	104.64	$	40,114,537	$	104.07	$	39,892,527


Months to Maturity	Percentage of Settled Securities Portfolio		Weighted Average Months to Maturity		Current Face Value(1)	Weighted Average Coupon(2)			Weighted Average Amortized Purchase Price(3)		Amortized Cost(4)		Weighted Average Market Price(5)		Current Market Value(6)
0-90	0.1	%	63	$	1,171,170	6.15	%	$	107.23	$	1,255,843	$	108.53	$	1,271,054
91-180	29.9		172		295,562,459	4.33			105.19		310,903,484		104.65		309,319,711
Total/Average	30.0	%	171	$	296,733,629	4.34	%	$	105.20	$	312,159,327	$	104.67	$	310,590,765


Agency Securities		September 30, 2011
		Estimated Fair Value	Percentage of Total
Settled Securities
Fannie Mae Certificates	$	3,880,133,945	64.9	%
Freddie Mac Certificates		1,191,667,093	19.9
Ginnie Mae Certificates		429,926,461	7.2

Forward Settle Securities
Fannie Mae Certificates		398,098,985	6.7
Freddie Mac Certificates		65,126,680	1.1
Ginnie Mae Certificates		10,870,254	0.2
Total Securities	$	5,975,823,418	100.0	%


		Less than 12 months				12 Months or More				Total
As of		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses		Estimated Fair Value		Unrealized Losses
September 30, 2011	$	1,219,654,037	$	(3,380,556)	$	3,416,148	$	(23,236)	$	1,223,070,185	$	(3,403,792)
December 31, 2010		706,575,108		(7,873,009)		-		-		706,575,108		(7,873,009)


		Notional Amount		Value as of September 30, 2011	Fixed Rate
Interest rate swaps maturing 12-24 months	$	20,000,000	$	(99,541)	0.5	%
Interest rate swaps maturing 24-36 months		290,000,000		(5,557,946)	1.1
Interest rate swaps maturing 36-48 months		830,000,000		(19,831,106)	1.2
Interest rate swaps maturing 48-60 months		1,625,000,000		(63,151,406)	1.7
Totals	$	2,765,000,000	$	(88,639,999)	1.5	%


		Notional Amount		Value as of December 31, 2010	Fixed Rate
Interest rate swaps maturing 12-24 months	$	20,000,000	$	(9,981)	0.5	%
Interest rate swaps maturing 24-36 months		100,000,000		147,282	1.0
Interest rate swaps maturing 36-48 months		10,000,000		(9,195)	1.4
Interest rate swaps maturing 48-60 months		25,000,000		(26,039)	1.9
Totals	$	155,000,000	$	102,067	1.1	%


		Notional Amount		Fair Value as of September 30, 2011	Weighted Average Rate
Eurodollar future strips maturing 6-12 months	$	13,000,000	$	(90,925)	1.0	%
Eurodollar future strips maturing 18-24 months		47,000,000		(1,328,425)	1.6
Eurodollar future strips maturing 30-39 months		64,000,000		(3,696,925)	2.1
Eurodollar future strips maturing 48 months		10,000,000		(665,313)	2.1
Totals	$	134,000,000	$	(5,781,588)	1.8	%


		Notional Amount		Fair Value as of December 31, 2010	Weighted Average Rate
Eurodollar future strips maturing 6-12 months	$	28,000,000	$	(137,950)	0.8	%
Eurodollar future strips maturing 18-24 months		107,000,000		(1,114,125)	1.3
Eurodollar future strips maturing 30-39 months		64,000,000		(1,193,113)	1.8
Eurodollar future strips maturing 48 months		15,000,000		(187,524)	2.1
Totals	$	214,000,000	$	(2,632,712)	1.6	%


			Gain (Loss) Recognized in Income
Fair value hedges	Location on condensed consolidated financial statements		Three months Ended September 30, 2011		Three months Ended September 30, 2010		Nine months Ended September 30, 2011		Nine months Ended September 30, 2010
Interest rate swap contracts:
Interest income	Realized loss on derivatives	$	414,897	$	-	$	982,725	$	-
Interest expense	Realized loss on derivatives		(8,213,937)		(9,874)		(16,342,586)		(30,309)
Realized gain (loss)	Realized loss on derivatives		(256,000)		-		(239,000)		-
Changes in fair value	Unrealized loss on derivatives		(64,580,618)		-		(88,742,065)		-
			(72,635,658)		(9,874)		(104,340,926)		(30,309)
Futures Contracts:
Realized gain (loss)	Realized loss on derivatives		(365,950)		(187,783)		(826,089)		(187,825)
Changes in fair value	Unrealized loss on derivatives		(1,227,588)		(3,391,588)		(3,148,875)		(5,445,038)
			(1,593,538)		(3,579,371)		(3,974,964)		(5,632,863)
Total		$	(74,229,196)	$	(3,589,245)	$	(108,315,890)	$	(5,663,172)

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at September 30, 2012
	(dollars in thousands)
Assets at Fair Value:
Agency Securities, available for sale	$	-	$	22,114,875	$	-	$	22,114,875
Derivatives, at fair value	$	-	$	8,069	$	-	$	8,069
Liabilities at Fair Value:
Derivatives, at fair value	$	4,656	$	193,742	$	-	$	198,398

	Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2011
	(dollars in thousands)
Assets at Fair Value:
Agency Securities, available for sale	$	-	$	5,393,675	$	-	$	5,393,675
Liabilities at Fair Value:
Derivatives, at fair value	$	5,292	$	116,435	$	-	$	121,727

	At September 30, 2012				Fair Value Measurements using:
	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(dollars in thousands)
Financial Assets:
Cash	$	727,306	$	727,306	$	727,306	$	-	$	-
Restricted Cash		237,789		237,789		-		237,789		-
Receivable for unsettled securities		357,218		357,218		-		357,218		-
Principal payments receivable		10,799		10,799		-		10,799		-
Accrued interest receivable		60,548		60,548		-		60,548		-
Financial Liabilities:
Repurchase agreements	$	19,826,988	$	19,826,988	$	-	$	19,826,988	$	-
Payable for unsettled securities		1,036,450		1,036,450		-		1,036,450		-
Accrued interest payable		9,302		9,302		-		9,302		-

	At December 31, 2011				Fair Value Measurements using:
	Carrying Value		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(dollars in thousands)
Financial Assets:
Cash	$	252,372	$	252,372	$	252,372	$	-	$	-
Restricted Cash		147,199		147,199		-		147,199		-
Receivable for unsettled securities		382,931		382,931		-		382,931		-
Principal payments receivable		12,493		12,493		-		12,493		-
Accrued interest receivable		18,637		18,637		-		18,637		-
Financial Liabilities:
Repurchase agreements	$	5,335,962	$	5,335,962	$	-	$	5,335,962	$	-
Payable for unsettled securities		117,885		117,885		-		117,885		-
Accrued interest payable		2,154		2,154		-		2,154		-


September 30, 2011		Balance	Weighted Average Contractual Rate			Contractual Interest Payments		Total Contractual Obligation
Within 30 days	$	2,595,609,896	0.26	%	$	489,725	$	2,596,099,621
31 days to 60 days		2,121,339,000	0.28			334,896		2,121,673,896
61 days to 90 days		504,576,444	0.25			79,533		504,655,977
Total	$	5,221,525,340	0.27	%	$	904,154	$	5,222,429,494


Repurchase Agreement Counterparties		Amount Outstanding		Amount at Risk (1)	Weighted Average Maturity of Repurchase Agreements in Days	Percent of Total Amount Outstanding
BNP Paribas Securities Corp.	$	422,786,000	$	16,169,847	36	8.1	%
MF Global Inc.		331,932,000		15,640,763	35	6.4
Goldman Sachs & Company		325,919,000		15,638,846	25	6.2
UBS Securities LLC		325,228,000		16,172,127	26	6.2
Guggenheim Liquidity Securities, LLC		323,983,000		15,656,042	47	6.2
South Street Securities, LLC		290,131,444		17,406,562	46	5.5
Mitsubishi UFJ Securities (USA)		285,727,000		13,470,747	35	5.5
Merrill Lynch, Pierce, Fenner & Smith Inc.		274,302,000		10,351,846	20	5.2
Cantor Fitzgerald & Co.		271,736,000		16,739,202	5	5.2
Citigroup Global Markets Inc.		245,286,000		12,175,704	70	4.7
RBS Securities Inc.		243,587,800		11,846,208	11	4.7
J.P. Morgan Securities LLC		231,782,000		11,372,121	41	4.4
Pierpont Securities LLC		222,168,000		8,653,392	28	4.3
Nomura Securities International, Inc.		216,941,000		11,648,240	20	4.2
ING Financial Markets LLC		205,354,000		10,166,744	7	3.9
Deutsche Bank Securities Inc.		174,983,500		8,520,325	11	3.4
Daiwa Securities America Inc.		148,866,000		7,918,325	37	2.9
CRT Capital Group LLC		123,433,500		7,964,598	11	2.4
Mizuho Securities USA Inc.		116,547,000		4,997,972	32	2.2
Credit Suisse Securities (USA) LLC		107,278,096		4,512,181	14	2.0
ICBC Financial Services LLC (2)		95,900,000		4,647,395	38	1.8
Jefferies and Company, Inc.		94,140,000		4,324,100	18	1.8
Barclays Capital Inc.		76,014,000		3,263,715	39	1.5
Wells Fargo Bank, N.A.		67,500,000		3,598,069	17	1.3
Total	$	5,221,525,340	$	252,855,071		100.0	%

	September 30, 2012					September 30, 2011
	Number of Awards			Weighted Average Grant Date Fair Value per Award		Number of Awards			Weighted Average Grant Date Fair Value per Award
Unvested Awards Outstanding beginning of period		153,980		$	7.91		-			-
Granted		655,524			7.13		192,500			7.91
Vested		(138,730	)		7.29		(28,890	)		7.91
Unvested Awards Outstanding end of period		670,774		$	7.28		163,610		$	7.91


	Number of Awards		Weighted Average Grant Date Fair Value per Award
Unvested Awards Outstanding, December 31, 2010	-	$	-
Granted	192,500		7.91
Vested	(28,890)		7.91
Unvested Awards Outstanding September 30, 2011	163,610	$	7.91