SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

                                   (MARK ONE)

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

                  FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2001

                                       OR

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

                  FOR THE TRANSITION PERIOD FROM _____ TO _____

                         COMMISSION FILE NUMBER: 1-13447

                        ANNALY MORTGAGE MANAGEMENT, INC.
             (Exact Name of Registrant as Specified in its Charter)


                MARYLAND                                        22-3479661
     (State or other jurisdiction of                         (I.R.S. Employer
     incorporation  of organization)                      Identification Number)

     12 East 41st Street, Suite 700
           New York, New York                                     10017
(Address of Principal Executive Offices)                       (Zip Code)

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

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

Title of Each Class                    Name of Each Exchange on Which Registered

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

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

         None.

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

                             Yes [X]   No [_]


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

At March 25, 2002 the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $1,393,968,716

The number of shares of the Registrant's Common Stock outstanding on March 25,
2002 was 82,870,659

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's definitive Proxy Statement issued in connection
with the 2002 Annual Meeting of Stockholders of the Registrant to be held on May
17, 2002 are incorporated by reference into Part III.




ANNALY MORTGAGE MANAGEMENT, INC.
- --------------------------------------------------------------------------------

                          2001 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                     PART I
                                                                            PAGE


ITEM 1.     BUSINESS                                                           1

ITEM 2.     PROPERTIES                                                        26

ITEM 3.     LEGAL PROCEEDINGS                                                 26

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

                                     PART II

ITEM 5.     MARKET FOR REGISTRANT'S COMMON EQUITY
            AND RELATED STOCKHOLDER MATTERS                                   27

ITEM 6.     SELECTED FINANCIAL DATA                                           29

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

ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK        44

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                       46

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
            ACCOUNTING AND FINANCIAL DISCLOSURE                               46

                                    PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                46

ITEM 11.    EXECUTIVE COMPENSATION                                            46

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT    46

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                    46

                                     PART IV

ITEM 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K   47

FINANCIAL STATEMENTS                                                         F-1

SIGNATURES                                                                    61

EXHIBIT INDEX                                                                 62



                                     PART I

                SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     Certain statements contained in this annual report, and certain statements
contained in our future filings with the Securities and Exchange Commission (the
"SEC" or the "Commission"), in our press releases or in our other public or
shareholder communications may not be, based on historical facts and are
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements which are based on
various assumptions, (some of which are beyond our control) may be identified by
reference to a future period or periods, or by the use of forward-looking
terminology, such as "may," "will," "believe," "expect," "anticipate,"
"continue," or similar terms or variations on those terms, or the negative of
those terms. Actual results could differ materially from those set forth in
forward-looking statements due to a variety of factors, including, but not
limited to, changes in interest rates, changes in yield curve, changes in
prepayment rates, the availability of mortgage-backed securities for purchase,
the availability of financing and, if available, the terms of any financing. For
a discussion of the risks and uncertainties which could cause actual results to
differ from those contained in the forward-looking statements, see "Risk
Factors." We do not undertake, and specifically disclaim any obligation, to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect the occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.


ITEM 1.  BUSINESS

                                   THE COMPANY

     Background

     Annaly Mortgage Management, Inc owns and manages a portfolio of
mortgage-backed securities, including mortgage pass-through certificates,
collateralized mortgage obligations (or CMOs) and other securities representing
interests in or obligations backed by pools of mortgage loans. Our principal
business objective is to generate net income for distribution to our
stockholders from the spread between the interest income on our mortgage-backed
securities and the costs of borrowing to finance our acquisition of
mortgage-backed securities. We have elected to be taxed as a real estate
investment trust (or REIT) under the Internal Revenue Code. Therefore,
substantially all of our assets consist of qualified REIT real estate assets (of
the type described in Section 856(c)(5)(B) of the Internal Revenue Code). We
commenced operations on February 18, 1997. We are self-advised and self-managed.

     We have financed our purchases of mortgage-backed securities with the net
proceeds of equity offerings and borrowings under repurchase agreements whose
interest rates adjust based on changes in short-term market interest rates.

     Assets

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

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

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

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

     At December 31, 2001, approximately 60% of our mortgage-backed securities
were adjustable-rate pass-though certificates, approximately 22% of our
mortgage-backed securities were fixed-rate pass-through certificates or CMOs,
and approximately 18% of our mortgage-backed securities were CMO floaters. Our
adjustable-rate pass-through certificates are backed by adjustable-rate mortgage
loans and have coupon rates which adjust over time, subject to interest rate
caps and lag periods, in conjunction with changes in


                                       1


short-term interest rates. CMO floaters are tranches of CMOs mortgage-backed
securities where the interest rate adjusts in conjunction with changes in
short-term interest rates. Our fixed-rate pass-through certificates are backed
by fixed-rate mortgage rates which do not adjust over time. CMO floaters may be
backed by fixed-rate mortgage loans or, less often, by adjustable-rate mortgage
loans. In this Form 10-K, except where the context indicates otherwise, we use
the term "adjustable-rate securities" or "adjustable-rate mortgage-backed
securities" to refer to adjustable-rate pass-through certificates and CMO
floaters. At December 31, 2001, the weighted average yield on our portfolio of
earning assets was 4.41%, and the weighted average term to next rate adjustment
on adjustable rate securities was 24 months.

     We intend to continue to invest in adjustable-rate pass-through
certificates, fixed-rate mortgage-backed securities and CMO floaters. Although
we have not done so to date, we may also invest on a limited basis in mortgage
derivative securities representing the right to receive interest only or a
disproportionately large amount of interest. We have not and will not invest in
real estate mortgage investment conduit (or REMIC) residuals, other CMO
residuals or any mortgage-backed securities, such as inverse floaters, which
have imbedded leverage as part of their structural characteristics.

     Borrowings

     We attempt to structure our borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate basis,
correspond generally to the interest rate adjustment indices and periods of our
adjustable-rate mortgage-backed securities. However, periodic rate adjustments
on our borrowings are generally more frequent than rate adjustments on our
mortgage-backed securities. At December 31, 2001, the weighted average cost of
funds for all of our borrowings was 2.18%, the weighted average original term to
maturity was 119 days, and the weighted average term to next rate adjustment of
these borrowings was 85 days.

     We generally expect to maintain a ratio of debt-to-equity of between 8:1
and 12:1, although the ratio may vary from time to time depending upon market
conditions and other factors that our management deems relevant. For purposes of
calculating this ratio, our equity is equal to the value of our investment
portfolio on a mark-to-market basis, less the book value of our obligations
under repurchase agreements and other collateralized borrowings. At December 31,
2001, our ratio of debt-to-equity was 9.5:1.

     Hedging

     To the extent consistent with our election to qualify as a REIT, we may
enter into hedging transactions to attempt to protect our mortgage-backed
securities and related borrowings against the effects of major interest rate
changes. This hedging would be used to mitigate declines in the market value of
our mortgage-backed securities during periods of increasing or decreasing
interest rates and to limit or cap the rates on our borrowings. These
transactions would be entered into solely for the purpose of hedging interest
rate or prepayment risk and not for speculative purposes. To date, we have not
entered into any hedging transactions.

     Compliance With REIT and Investment Company Requirements

     We constantly monitor our mortgage-backed securities and the income from
these securities and, to the extent we enter into hedging transactions in the
future, will monitor income from our hedging transactions as well, so as to
ensure at all times that we maintain our qualification as a REIT and our exempt
status under the Investment Company Act.

     Management

     Our executive officers are:

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

     o    Wellington J. St. Claire, Vice Chairman of the Board and Chief
          Investment Officer;

     o    Kathryn F. Fagan, Chief Financial Officer and Treasurer; and


                                       2


     o    Jennifer A. Stephens, Secretary and Investment Officer.

     Mr. Farrell and Ms. St. Claire have an average of 21 years experience in
the investment banking and investment management industries where, in various
capacities, they have each managed portfolios of mortgage-backed securities,
arranged collateralized borrowings and utilized hedging techniques to mitigate
interest rate and other risk within fixed-income portfolios. Mr. Farrell was
appointed our President effective as of January 1, 2002. Ms. Fagan is a
certified public accountant and, prior to becoming our Chief Financial Officer
and Treasurer, served as Chief Financial Officer and Controller of a publicly
owned savings and loan association. Ms. Stephens has worked for us since
December 1996. Since 1994, Mr. Farrell and Ms. St. Claire have managed Fixed
Income Discount Advisory Company (or FIDAC), a registered investment advisor
which, at December 31, 2001, managed, assisted in managing or supervised
approximately $3 billion in gross assets for a wide array of clients, all of
which, assets on that date were managed on a discretionary basis. Mr. Farrell is
the sole stockholder of FIDAC.

     Management's duties on behalf of FIDAC's clients may create conflicts of
interest if members of management are presented with corporate opportunities
that may benefit both us and clients for which FIDAC acts as investment advisor.
In the event that an investment opportunity arises, the investment will be
allocated to another entity or us by determining the entity or account for which
the investment is most suitable. In making this determination, our management
will consider the investment strategy and guidelines of each entity or account
with respect to acquisition of assets, leverage, liquidity and other factors
which management determines appropriate.

     Distributions

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



                                       3


                                BUSINESS STRATEGY

General

     Our principal business objective is to generate income for distribution to
our stockholders, primarily from the net cash flows on our mortgage-backed
securities. Our net cash flows result primarily from the difference between the
interest income on our mortgage-backed security investments and our borrowing
costs on our mortgage-backed securities. To achieve our business objective and
generate dividend yields, our strategy is:

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

     o    to acquire mortgage-backed securities that we believe:

          -    we have the necessary expertise to evaluate and manage;

          -    we can readily finance;

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

          -    provide attractive investment returns in a range of scenarios;

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

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

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

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

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

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

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

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

     o    utilizing information technology to the fullest extent possible in our
          business, including to improve our ability to monitor the performance
          of our mortgage-backed securities and to lower our operating costs.


                                       4


Mortgage-Backed Securities

     General

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

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

     Under our capital investment policy, the remainder of our assets,
comprising not more than 25% of total assets, may consist of mortgage-backed
securities and other qualified REIT real estate assets which are unrated or
rated less than high quality, but which are at least "investment grade" (rated
"BBB" or better by S&P or the equivalent by another nationally recognized rating
organization) or, if not rated, we determine them to be of comparable credit
quality to an investment which is rated "BBB" or better. We intend to structure
our portfolio to maintain a minimum weighted average rating (including our
deemed comparable ratings for unrated mortgage-backed securities) of our
mortgage-backed securities of at least single "A" under the S&P rating system
and at the comparable level under the other rating systems.

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

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

     Our mortgage-backed securities consist of pass-through certificates and
collateralized mortgage obligations (or CMOs) issued or guaranteed by FHLMC,
FNMA or GNMA. We have not and will not invest in REMIC residuals, other CMO
residuals or mortgage-backed securities, such as inverse floaters, which have
imbedded leverage as part of their structural characteristics.

     Description of Mortgage-Backed Securities

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

     Mortgage-backed securities differ from other forms of traditional debt
securities, which normally provide for periodic payments of interest in fixed
amounts with principal payments at maturity or on specified call dates. Instead,
mortgage-backed securities provide for a monthly payment, which consists of both
interest and principal. In


                                       5


effect, these payments are a "pass-through" of the monthly interest and
principal payments made by the individual borrower on the mortgage loans, net of
any fees paid to the issuer or guarantor of the securities. Additional payments
result from prepayments of principal upon the sale, refinancing or foreclosure
of the underlying residential property, net of fees or costs which may be
incurred. Some mortgage-backed securities, such as securities issued by GNMA,
are described as "modified pass-through." These securities entitle the holder to
receive all interest and principal payments owed on the mortgage pool, net of
certain fees, regardless of whether the mortgagors actually make mortgage
payments when due.

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

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

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

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

     FHLMC Certificates

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

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

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


                                       6


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

     FNMA Certificates

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

     FNMA certificates may be backed by pools of single-family or multi-family
mortgage loans. The original term to maturity of any such mortgage loan
generally does exceed 40 years. FNMA certificates may pay interest at a fixed
rate or an adjustable rate. Each series of FNMA ARM certificates bears an
initial interest rate and margin tied to an index based on all loans in the
related pool, less a fixed percentage representing servicing compensation and
FNMA's guarantee fee. The specified index used in different series has included
the Treasury Index, the 11th District Cost of Funds Index published by the
Federal Home Loan Bank of San Francisco, LIBOR and other indices. Interest rates
paid on fully-indexed FNMA ARM certificates equal the applicable index rate plus
a specified number of basis points. The majority of series of FNMA ARM
certificates issued to date have evidenced pools of mortgage loans with monthly,
semi-annual or annual interest rate adjustments. Adjustments in the interest
rates paid are generally limited to an annual increase or decrease of either 100
or 200 basis points and to a lifetime cap of 500 or 600 basis points over the
initial interest rate. Certain FNMA programs include mortgage loans which allow
the borrower to convert the adjustable mortgage interest rate of the ARM to a
fixed rate. Adjustable-rate mortgages which are converted into fixed-rate
mortgage loans are repurchased by FNMA or by the seller of the loans to FNMA at
the unpaid principal of the loan plus accrued interest to the due date of the
last adjustable rate interest payment. Adjustments to the interest rates on FNMA
ARM certificates are typically subject to lifetime caps and periodic rate or
payment caps.

     GNMA Certificates

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

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


                                       7


     Single-Family and Multi-Family Privately-Issued Certificates

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

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

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

     Collateralized Mortgage Obligations and Multi-Class Pass-Through Securities

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

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


                                       8


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

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

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

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

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

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

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

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

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

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

                                       9


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

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

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

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

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

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

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


                                       10


     Other Floating Rate Instruments

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

     Mortgage Loans

     We may from time to time invest a small percentage of our assets directly
in single-family, multi-family or commercial mortgage loans. We expect that the
majority of these mortgage loans would be ARMs. The interest rate on an ARM is
typically tied to an index (such as LIBOR or the interest rate on Treasury
bills), and is adjustable periodically at specified intervals. These mortgage
loans are typically subject to lifetime interest rate caps and periodic interest
rate or payment caps. The acquisition of mortgage loans generally involves
credit risk. We may obtain credit enhancement to mitigate this risk; however,
there can be no assurances that we will able to obtain credit enhancement or
that credit enhancement would mitigate the credit risk of the underlying
mortgage loans.

Capital Investment Policy

     Asset Acquisitions

     Our capital investment policy provides that at least 75% of our total
assets will be comprised of high quality mortgage-backed securities and
short-term investments. The remainder of our assets (comprising not more than
25% of total assets), may consist of mortgage-backed securities and other
qualified REIT real estate assets which are unrated or rated less than high
quality but which are at least "investment grade" (rated "BBB" or better) or, if
not rated, are determined by us to be of comparable credit quality to an
investment which is rated "BBB" or better.

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

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

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

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

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

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

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


                                       11


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

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

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

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

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

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

     We do not invest in principal-only interests in mortgage-backed securities,
residual interests, accrual bonds, inverse-floaters, two-tiered index bonds,
cash flow bonds, mortgage-backed securities with imbedded leverage or
mortgage-backed securities that would be deemed unacceptable for collateralized
borrowings, excluding shares in mortgage REITs.

     As a requirement for maintaining REIT status, we will distribute to
stockholders aggregate dividends equaling at least 90% of our taxable income
(excluding capital gains) for each taxable year. We will make additional
distributions of capital when the return expectations of the stockholders appear
to exceed returns potentially available to us through making new investments in
mortgage-backed securities. Subject to the limitations of applicable securities
and state corporation laws, we can distribute capital by making purchases of our
own capital stock or through paying down or repurchasing any outstanding
uncollateralized debt obligations.

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


                                       12


     Credit Risk Management

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

     Capital and Leverage

     We expect generally to maintain a debt-to-equity ratio of between 8:1 and
12:1, although the ratio may vary from time to time depending upon market
conditions and other factors our management deems relevant, including the
composition of our balance sheet, haircut levels required by lenders, the market
value of our mortgage-backed securities in our portfolio and "excess capital
cushion" percentages (as described below) set by our board of directors from
time to time. For purposes of calculating this ratio, our equity (or capital
base) is equal to the value of our investment portfolio on a mark-to-market
basis less the book value of our obligations under repurchase agreements and
other collateralized borrowings. At December 31, 2001, our ratio of
debt-to-equity was 9.5:1.

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

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

     The first component of our capital requirements is the current aggregate
over-collateralization amount or "haircut" the lenders require us to hold as
capital. The haircut for each mortgage-backed security is determined by our
lenders based on the risk characteristics and liquidity of the asset. Haircut
levels on individual borrowings generally range from 3% for certain FHLMC, FNMA
or GNMA mortgage-backed securities to 20% for certain privately-issued
mortgage-backed securities. At December 31, 2001, the weighted average haircut
level on our securities was 3.5%. Should the market value of our pledged assets
decline, we will be required to deliver additional collateral to our lenders to
maintain a constant over-collateralization level on our borrowings.

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


                                       13


     Our board of directors reviews on a periodic basis various analyses
prepared by our management of the risks inherent in our balance sheet, including
an analysis of the effects of various scenarios on our net cash flow, earnings,
dividends, liquidity and net market value. Should our board of directors
determine that the minimum required capital base set by our capital investment
policy is either too low or too high, our board of directors may raise or lower
the capital requirement accordingly.

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

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

     We expect to continue to use repurchase agreements as our principal
financing device to leverage our mortgage-backed securities portfolio. We
anticipate that, upon repayment of each borrowing under a repurchase agreement,
we will use the collateral immediately for borrowing under a new repurchase
agreement. At present, we have entered into uncommitted facilities with 22
lenders for borrowings in the form of repurchase agreements. We have not at the
present time entered into any commitment agreements under which the lender would
be required to enter into new repurchase agreements during a specified period of
time, nor do we presently plan to have liquidity facilities with commercial
banks. We may, however, enter into such commitment agreements in the future. We
enter into repurchase agreements primarily with national broker-dealers,
commercial banks and other lenders which typically offer this type of financing.
We enter into collateralized borrowings only with financial institutions meeting
credit standards approved by our board of directors, and we monitor the
financial condition of these institutions on a regular basis.

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

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


                                       14


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

     Interest Rate Risk Management

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

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

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

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

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

     Although we have not done so to date, we may purchase from time to time
interest rate caps, interest rate swaps, interest rate collars, interest rate
caps or floors, "interest only" mortgage-backed securities and similar
instruments to attempt to mitigate the risk of the cost of our variable rate
liabilities increasing at a faster rate than the earnings on our assets during a
period of rising interest rates or to mitigate prepayment risk. We may hedge as
much of the interest rate risk as our management determines is in our best
interests, given the cost of the hedging transactions and the need to maintain
our status as a REIT. This determination may result in our electing to bear a
level of interest rate or prepayment risk that could otherwise be hedged when
management believes, based on all relevant facts, that bearing the risk is
advisable.

     We seek to build a balance sheet and undertake an interest rate risk
management program which is likely to generate positive earnings and maintain an
equity liquidation value sufficient to maintain operations given a variety of
potentially adverse circumstances. Accordingly, our hedging program addresses
both income preservation, as discussed above, and capital preservation concerns.
For capital preservation, we monitor our "duration." This is the expected
percentage change in market value of our assets that would be caused by a 1%
change in short and long-term interest rates. To monitor duration and the
related risks of fluctuations in the liquidation value of our equity, we model
the impact of various economic scenarios on the market value of our
mortgage-backed securities and liabilities. At December 31, 2001, we estimate
that the duration of our assets was 1.2%. We believe that our interest rate risk
management program will allow us to maintain operations throughout a wide
variety of potentially adverse circumstances. Nevertheless, in order to further
preserve our capital base (and lower our duration) during periods when we
believe a trend of rapidly rising interest rates has been established, we may
decide to enter into or increase hedging activities or to sell assets. Each of
these actions may lower our earnings and dividends in the short term to further
our objective of maintaining attractive levels of earnings and dividends over
the long term.

     We may elect to conduct a portion of our hedging operations through one or
more subsidiary corporations which would not be a qualified REIT subsidiary and
would be subject to federal and state income taxes. To comply with the asset
tests applicable to us as a REIT, the value of the securities of the any taxable
subsidiary we hold must be limited to less than 5% of the value of our total
assets as of the end of each calendar quarter and we may not own more than 10%
of the voting securities of the taxable subsidiary. We could, however, elect to
treat a subsidiary as a "taxable REIT subsidiary," in which case we could own
100% of the voting stock of such subsidiary, provided that the value of the
stock that we own in all such taxable REIT subsidiaries does not exceed 20% of
the value of our total assets at the close of any calendar quarter. A taxable
subsidiary would not elect REIT status


                                       15


and would distribute any net profit after taxes to us and its other
stockholders. Any dividend income we receive from the taxable subsidiary
(combined with all other income generated from our assets, other than qualified
REIT real estate assets) must not exceed 25% of our gross income.

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

     Prepayment Risk Management

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

     Future Revisions in Policies and Strategies

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

Potential Acquisitions, Strategic Alliances and Other Investments

     From time to time we have had discussions with other parties regarding
possible transactions including acquisitions of other businesses or assets,
investments in other entities, joint venture arrangements, or strategic
alliances. To date, none of these discussions have gone beyond the preliminary
stage. We have also considered from time to time entering into related
businesses, although to date we have not done entered into such businesses.

     During 1998, we made an initial investment of $49,980 in Annaly
International Mortgage Management, Inc. Annaly International explores business
opportunities overseas, including the origination of mortgages. Annaly
International has not commenced operations beyond this exploratory stage. We now
own 33% of the equity of Annaly International in the form of non-voting
securities. The remaining equity of Annaly International is owned by FIDAC,
Michael A.J. Farrell, our Chairman, Chief Executive Officer, and President,
Wellington J. St. Claire, our Vice Chairman, Chief Investment Officer, Kathryn
F. Fagan, our Chief Financial Officer and Treasurer, Jennifer A. Stephens, our
Secretary and Investment Officer and other persons. Mr. Farrell is the sole
shareholder of FIDAC.

     During 1998, Annaly International made an initial investment of $20,400 in
Annaly.com, Inc. Annaly.com explores opportunities to acquire or originate
mortgages in the United States. Annaly.com has established a website at
http://www.annaly.com but has not commenced the acquisition or origination of
mortgages. Annaly International owns 51% of the equity of Annaly.com. The
remaining equity of Annaly.com is owned by FIDAC I Partners, whose partners
include FIDAC and our executive officers.


                                       16


     Prior to making our investment in Annaly International we consulted with
our tax advisors to ensure that the investment would not cause us to fail to
satisfy the asset and source of income tests applicable to us as a REIT. Prior
to making any additional equity investment in Annaly International or any other
equity investment, we will similarly consult with our tax advisors.

     We may, from time to time, continue to explore possible acquisitions,
investments, joint venture arrangements and strategic alliances, as well as the
further development of the business of Annaly International or Annaly.com.

Dividend Reinvestment and Share Purchase Plan

     We have adopted a dividend reinvestment and share purchase plan. Under the
dividend reinvestment feature of the plan, existing shareholders can reinvest
their dividends in additional shares of our common stock. Under the share
purchase feature of the plan, new and existing shareholders can purchase shares
of our common stock. We have filed and the SEC has declared effective a Form S-3
registration statement registering 2,000,000 shares that may be issued under the
plan.

Legal Proceedings

     There are no material pending legal proceedings to which we are a party or
to which any of our property is subject.

                                   COMPETITION

     We believe that our principal competition in the business of acquiring and
holding mortgage-backed securities are financial institutions such as banks,
savings and loans, life insurance companies, institutional investors such as
mutual funds and pension funds, and certain other mortgage REITs. The existence
of these competitive entities, as well as the possibility of additional entities
forming in the future, may increase the competition for the acquisition of
mortgage-backed securities resulting in higher prices and lower yields on
assets.

                                  RISK FACTORS

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

If the interest payments on our borrowings increase relative to the interest we
earn on our mortgage-backed securities, it may adversely affect our
profitability

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

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

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

     We rely primarily on short-term borrowings to acquire mortgage-backed
securities with long-term maturities. Accordingly, an increase in short-term
interest rates may adversely affect our profitability.


                                       17


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

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

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

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

     These indices generally reflect short-term interest rates. On December 31,
2001, approximately 78% of our mortgage-backed securities were adjustable-rate
securities.

     The interest rates on our borrowings similarly vary with changes in an
objective index. Nevertheless, the interest rates on our borrowings generally
adjust more frequently than the interest rates on our adjustable-rate
mortgage-backed securities. For example, on December 31, 2001, our
adjustable-rate securities had a weighted average term to next rate adjustment
of 24 months, while our borrowings had a weighted average term to next rate
adjustment of 85 days. Accordingly, in a period of rising interest rates, we
could experience a decrease in net income or a net loss because the interest
rates on our borrowings adjust faster than the interest rates on our
adjustable-rate mortgage-backed securities.

o    Interest rate caps on our mortgage-backed securities may adversely affect
     our profitability

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

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

     While the majority of our investments consist of adjustable-rate
mortgage-backed securities, we also invest in fixed-rate mortgage-backed
securities. In a period of rising interest rates, our interest payments could
increase while the interest we earn on our fixed rate mortgage-backed securities
would not change. This would adversely affect our profitability. On December 31,
2001, approximately 22% of our mortgage-backed securities were fixed rate
securities.

An increase in prepayment rates may adversely affect our profitability

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

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


                                       18


adversely affects our profitability. On December 31, 2001, approximately 95% of
the mortgage-backed securities we owned were acquired at a premium.

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

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

     We can also acquire mortgage-backed securities that are less affected by
prepayments. For example, we can acquire collateralized mortgage obligations or
CMOs, a type of mortgage-backed security. CMOs divide a pool of mortgage loans
into multiple tranches that allow for shifting of prepayment risks from
slower-paying tranches to faster-paying tranches. This is in contrast to
pass-through or pay-through mortgage-backed securities, where all investors
share equally in all payments, including all prepayments. As discussed below,
the Investment Company Act of 1940 (or the Investment Company Act) imposes
restrictions on our purchase of CMOs. On December 31, 2001, approximately 18% of
our mortgage-backed securities were CMOs and approximately 72% of our
mortgage-backed securities were pass-through or pay-through securities.

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

An increase in interest rates may adversely affect our book value

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

Our strategy involves significant leverage

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

o    Our leverage may cause substantial losses

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

     o    short-term interest rates increase

     o    the market value of our mortgage-backed securities decreases

     o    interest rate volatility increases; or

     o    the availability of financing in the market decreases

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


                                       19


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

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

o    Liquidation of collateral may jeopardize our REIT status

     To continue to qualify as a REIT, we must comply with requirements
regarding our assets and our sources of income. If we are compelled to liquidate
our mortgage-backed securities, we may be unable to comply with these
requirements, ultimately jeopardizing our status as a REIT.

o    We may exceed our target leverage ratios

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

o    We may not be able to achieve our optimal leverage

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

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

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

     o    our lenders require that we provide additional collateral to cover our
          borrowings

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

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

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

     o    the movement of interest rates;

     o    the availability of financing in the market; or

     o    the value and liquidity of our mortgage-backed securities,

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

     Since we rely primarily on short-term borrowings, our ability to achieve
our investment objectives depends not only on our ability to borrow money in
sufficient amounts and on favorable terms, but also on our ability to renew or


                                       20


replace on a continuous basis our maturing short-term borrowings. If we are not
able to renew or replace maturing borrowings, we would have to sell our assets
under possibly adverse market conditions.

We have not used derivatives to mitigate our interest rate and prepayment risks

     Our policies permit us to enter into interest rate swaps, caps and floors
and other derivative transactions to help us mitigate our interest rate and
prepayment risks described above. However, we have determined in the past that
the cost of these transactions outweighs the benefits. In addition, we will not
enter into derivative transactions if we believe they will jeopardize our status
as a REIT. If we decide to enter into derivative transactions in the future,
these transactions may mitigate our interest rate and prepayment risks but
cannot insulate us from these risks.

Our investment strategy may involve credit risk

     We may incur losses if there are payment defaults under our mortgage-backed
securities.

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

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

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

     o    the remaining 25% of our investments must have a "BBB" or higher
          rating by S&P, or an equivalent rating by a similar nationally
          recognized rating organization, or our management must determine that
          the investments are of comparable credit quality to investments with
          these ratings. Securities with ratings of "BBB" or higher are commonly
          referred to as "investment grade" securities; and

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

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

We have not established a minimum dividend payment level

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

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

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


                                       21


We are dependent on our key personnel

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

Some of our officers and employees have potential conflicts of interest

     Some of our officers and employees have potential conflicts of interest
with us. The material potential conflicts are as follows:

o    Our officers and employees manage assets for other clients

     Mr. Farrell, Ms. St. Claire and other officers and employees are actively
involved in managing mortgage-backed securities and other fixed income assets
for institutional clients through Fixed Income Discount Advisory Company. FIDAC
is a registered investment adviser which on December 31, 2001 managed, assisted
in managing or supervised approximately $3 billion in gross assets on a
discretionary basis for a wide array of clients. FIDAC has advised us that
effective April 30, 2002, it will no longer manage the assets of FBR Asset
Investment Corporation. The U.S. Dollar Floating Rate Fund is a fund managed by
FIDAC. Mr. Farrell is a Director of the Floating Rate Fund. These officers will
continue to perform services for FIDAC, the institutional clients and the
Floating Rate Fund. Mr. Farrell is also the sole shareholder of FIDAC.

     These responsibilities may create conflicts of interest for these officers
and employees if they are presented with corporate opportunities that may
benefit us and the institutional clients and the Floating Rate Fund. Our
officers allocate investments among Annaly Mortgage Management, Inc. (or
Annaly), the institutional clients and the Floating Rate Fund by determining the
entity or account for which the investment is most suitable. In making this
determination, our officers consider the investment strategy and guidelines of
each entity or account with respect to acquisition of assets, leverage,
liquidity, and other factors that our officers determine appropriate.

o    Some of our directors and officers have ownership interests in our
     affiliates that create potential conflicts of interest

     Mr. Farrell, our Chairman, Chief Executive Officer and President, and our
other directors and officers, have direct and indirect ownership interests in
our affiliates that create potential conflicts of interest.

     During 1998, we made an initial investment of $49,980 in Annaly
International Mortgage Management, Inc. (or Annaly International). Annaly
International explores business opportunities overseas, including the
origination of mortgages. Annaly International has not commenced operations
beyond this exploratory stage. We own 33% of the equity of Annaly International
in the form of non-voting securities. The remaining equity of Annaly
International is owned by FIDAC, Michael A.J. Farrell, Wellington J. St. Claire,
our Vice Chairman and Chief Investment Officer, Kathryn F. Fagan, our Chief
Financial Officer and Treasurer.

     During 1998, Annaly International made an initial investment of $20,400 in
Annaly.com, Inc. (or Annaly.Com) Annaly.com explores opportunities to acquire or
originate mortgages in the United States. Annaly.com has established a Web site
at http://www.annaly.com but has not commenced the acquisition or origination of
mortgages. Annaly International owns 51% of the equity of Annaly.com. The
remaining equity of Annaly.com is owned by FIDAC.

     Our management allocates rent and other office expenses between our
affiliate and us. These allocations may create conflicts of interest. Our
management currently allocates rent and other expenses 90% to Annaly and 10% to
FIDAC. Our audit committee must approve any change in these allocation
percentages. In addition, we may enter


                                       22


into agreements, such as technology sharing or research agreements, with our
affiliates in the future. These agreements would present potential conflicts of
interest. Our management will obtain prior approval of our audit committee prior
to entering into any agreements with our affiliates.

We and our shareholders are subject to certain tax risks

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

     We believe that since 1997 we have qualified for taxation as a REIT for
federal income tax purposes. We plan to continue to meet the requirements for
taxation as a REIT. Many of these requirements, however, are highly technical
and complex. The determination that we are a REIT requires an analysis of
various factual matters and circumstances that may not be totally within our
control. For example, to qualify as a REIT, at least 75% of our gross income
must come from real estate sources and 95% of our gross income must come from
real estate sources and certain other sources that are itemized in the REIT tax
laws. We are also required to distribute to stockholders at least 90% (95% with
respect to taxable years beginning before January 1, 2001) of our REIT taxable
income (excluding capital gains). Even a technical or inadvertent mistake could
jeopardize our REIT status. Furthermore, Congress and the Internal Revenue
Service (or IRS) might make changes to the tax laws and regulations, and the
courts might issue new rulings that make it more difficult or impossible for us
to remain qualified as a REIT.

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

o    We have certain distribution requirements

     As a REIT, we must distribute 90% (95% with respect to taxable years
beginning before January 1, 2001) of our annual taxable income. The required
distribution limits the amount we have available for other business purposes,
including amounts to fund our growth. Also, it is possible that because of the
differences between the time we actually receive revenue or pay expenses and the
period we report those items for distribution purposes, we may have to borrow
funds on a short-term basis to meet the 90% distribution requirement.

o    We are also subject to other tax liabilities

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

Loss of Investment Company Act exemption would adversely affect us

     We intend to conduct our business so as not to become regulated as an
investment company under the Investment Company Act of 1940 (or the Investment
Company Act). If we fail to qualify for this exemption, our ability to use
leverage would be substantially reduced and we would be unable to conduct our
business as described in this Form 10-K.

     The Investment Company Act exempts entities that are primarily engaged in
the business of purchasing or otherwise acquiring mortgages and other liens on
and interests in real estate. Under the current interpretation of the SEC staff,
in order to qualify for this exemption, we must maintain at least 55% of our
assets directly in these qualifying real estate interests. Mortgage-backed
securities that do not represent all of the certificates issued with respect to
an underlying pool of mortgages may be treated as securities separate from the
underlying mortgage loans and, thus, may not qualify for purposes of the 55%
requirement. Our ownership of these mortgage-backed securities, therefore, is
limited by the provisions of the Investment Company Act. In addition, in meeting
the 55% requirement under the Investment Company Act, we treat as qualifying
interests mortgage-backed securities issued with respect to


                                       23


an underlying pool as to which we hold all issued certificates. If the SEC or
its staff adopts a contrary interpretation, we could be required to sell a
substantial amount of our mortgage-backed securities, under potentially adverse
market conditions. Further, in order to insure that we at all times qualify for
the exemption from the Investment Company Act, we may be precluded from
acquiring mortgage-backed securities whose yield is somewhat higher than the
yield on mortgage-backed securities that could be purchased in a manner
consistent with the exemption. The net effect of these factors may be to lower
our net income.

Issuances of large amounts of our stock could cause our price to decline

     As of March 25, 2002, 82,870,659 shares of our common stock were
outstanding. We may issue additional shares of common stock or shares of
preferred stock that are convertible into common stock. If we issue a
significant number of shares of common stock or convertible preferred stock in a
short period of time, there could be a dilution of the existing common stock and
a decrease in the market price of the common stock.

We may change our policies without stockholder approval

     Our board of directors and management determine all of our policies,
including our investment, financing and distribution policies. Although they
have no current plans to do so, they may amend or revise these policies at any
time without a vote of our stockholders. Policy changes could adversely affect
our financial condition, results of operations, the market price of our common
stock or our ability to pay dividends or distributions.

Maryland Business Combination Act

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

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

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

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

Maryland Control Share Acquisition Act

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

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


                                       24


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

     o    A majority or more of all voting power.

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

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

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

     o    the last control share acquisition; or

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

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


                                       25


ITEM 2.  PROPERTIES

     Our executive and administrative office is located at 12 East 41st Street,
Suite 700, New York, New York 10017, telephone 212-696-0100. This office is
leased under a noncancelable lease expiring December 2007.

ITEM 3.  LEGAL PROCEEDINGS

     At December 31, 2001, there were no pending legal proceedings to which we
were a party, or to which any of our property was subject.

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

         We did not submit any matters to a vote of our stockholders during the
fourth quarter of 2001.


                                       26


                                     PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Our common stock began trading publicly on October 8, 1997 and is traded on
the New York Stock Exchange under the trading symbol "NLY". As of March 25,
2002, we had 82,870,659 shares of common stock issued and outstanding which were
held by 30,650 holders of record.

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



                                                    Stock Prices

                                                High     Low     Close

                                                        
First Quarter ended March 31, 2001             $11.50   $ 8.75   $11.26
Second Quarter ended June 30, 2001             $13.76   $10.50   $13.71
Third Quarter ended September 30, 2001         $14.93   $12.70   $14.45
Fourth Quarter ended December 31, 2001         $17.01   $13.20   $16.00

                                                High     Low      Close

First Quarter ended March 31, 2000             $ 9.25   $ 7.19   $ 8.88
Second Quarter ended June 30, 2000             $ 9.38   $ 8.19   $ 8.88
Third Quarter ended September 30, 2000         $ 9.50   $ 8.06   $ 9.13
Fourth Quarter ended December 31, 2000         $ 9.50   $ 7.88   $ 9.06

                                                High     Low      Close

First Quarter ended March 31, 1999             $10.25   $ 7.94   $10.25
Second Quarter ended June 30, 1999             $11.38   $ 9.31   $11.25
Third Quarter ended September 30, 1999         $11.50   $ 9.19   $ 9.31
Fourth Quarter ended December 31, 1999         $ 9.44   $ 8.06   $ 8.75




                                                     Cash Dividends
                                                   Declared Per Share

                                                     
First Quarter ended March 31, 2001                      $0.30
Second Quarter ended June 30, 2001                      $0.40
Third Quarter ended September 30, 2001                  $0.45
Fourth Quarter ended December 31, 2001                  $0.60

First Quarter ended March 31, 2000                      $0.35
Second Quarter ended June 30, 2000                      $0.30
Third Quarter ended September 30, 2000                  $0.25
Fourth Quarter ended December 31, 2000                  $0.25

First Quarter ended March 31, 1999                      $0.33
Second Quarter ended June 30, 1999                      $0.35
Third Quarter ended September 30, 1999                  $0.35
Fourth Quarter ended December 31, 1999                  $0.35



                                       27


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


                                       28


ITEM 6.  SELECTED FINANCIAL DATA

     The following selected financial data are derived from our audited
financial statements for the years ended December 31, 2001, 2000, 1999 and 1998,
and the period ended December 31, 1997. The selected financial data should be
read in conjunction with the more detailed information contained in the
Financial Statements and Notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included elsewhere in this
Form 10-K.

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



                                                                                                             February 18,
                                                                                                                 1997
                                                                                                            (commencement
                                                    For the Year  For the Year  For the Year  For the Year  of operations)
                                                       Ended         Ended         Ended         Ended         through
                                                    December 31,  December 31,  December 31,  December 31,   December 31,
                                                        2001          2000          1999          1998         1997 (1)
                                                ----------------  ------------  ------------  ------------  --------------

                                                                                             
  Statement of Operations Data:
       Days in period                                      365           366           365           365           317
       Interest income                              $  263,058    $  109,750    $   89,812    $   89,986   $    24,713
       Interest expense                                168,055        92,902        69,846        75,735        19,677
                                                 -----------------------------------------------------------------------
       Net interest income                          $   95,003    $   16,848    $   19,966    $   14,251   $     5,036
       Gain on sale of mortgage-backed securities        4,586         2,025           454         3,344           735
       General and administrative expenses
              (G&A expense)                              7,311         2,286         2,281         2,106           852
                                                -----------------------------------------------------------------------
       Net income                                   $   92,278    $   16,587    $   18,139    $   15,489   $     4,919
                                                =======================================================================
       Basic net income per average share                $2.23         $1.18         $1.41         $1.22         $0.83
       Diluted net income per average share              $2.21         $1.15         $1.35         $1.19         $0.80
       Dividends declared per share                      $1.75         $1.15         $1.38         $1.21         $0.79

                                                     December 31   December 31,  December 31,  December 31,  December 31,
  Balance Sheet Data:                                    2001          2000          1999          1998          1997
                                                -----------------------------------------------------------------------

       Mortgage-Backed Securities, net              $7,575,379    $1,978,219    $1,437,793    $1,520,289   $ 1,161,779
       Total assets                                  7,717,314     2,035,029     1,491,322     1,527,352     1,167,740
       Repurchase agreements                         6,367,710     1,628,359     1,338,296     1,280,510       918,869
       Total liabilities                             7,049,957     1,899,386     1,388,050     1,401,481     1,032,654
       Stockholders' equity                            667,357       135,642       103,272       125,871       135,086
       Number of common shares outstanding          59,826,975    14,522,978    13,581,316    12,648,424    12,713,900

  Other Data:
       Average total assets                         $5,082,852    $1,652,459    $1,473,765    $1,499,875   $   476,855
       Average earning assets                        4,682,780     1,564,491     1,461,254     1,461,791       448,306
       Average borrowings                            4,388,900     1,449,999     1,350,230     1,360,040       404,140
       Average equity                                  437,376       117,727       117,685       131,265        61,096
       Yield on interest earning assets                  5.62%         7.02%         6.15%         6.16%         6.34%
       Cost of funds on interest bearing
       Liabilities                                       3.83%         6.41%         5.17%         5.57%         5.61%
       Interest rate spread                              1.79%         0.61%         0.98%         0.59%         0.73%



                                       29




                                                                                                  
  Annualized Financial Ratios:
       Net interest margin (net interest
        Income/average total assets)                     1.87%         1.02%         1.35%         0.95%         1.22%
       G&A expense as a percentage of average
             assets                                      0.14%         0.14%         0.15%         0.14%         0.21%
       G&A expense as a percentage of average
            equity                                       1.67%         1.94%         1.94%         1.60%         1.61%
       Return on average assets                          1.82%         1.00%         1.23%         1.03%         1.19%
       Return on average equity                         21.10%        14.09%        15.41%        11.80%         9.27%



(1)  Ratios for the 317-day period ended December 31, 1997 have been annualized.


                                       30


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

Overview

     We are a real estate investment trust that owns and manages a portfolio of
mortgage-backed securities. Our principal business objective is to generate net
income for distribution to our stockholders from the spread between the interest
income on our mortgage-backed securities and the costs of borrowing to finance
our acquisition of mortgage-backed securities.

     We commenced operations on February 18, 1997 upon the consummation of a
private placement. We completed our initial public offering on October 14, 1997.
The 317-day period ended December 31, 1997 was a short operating period and not
a full twelve months.

Result of Operations

     Net Income Summary

     For the year ended December 31, 2001 our GAAP net income was $92.3 million
or $2.23 basic earnings per average share, as compared to $16.6 million or $1.18
basic earnings per average share for the year ended December 31, 2000. For the
year ended December 31, 1999 our GAAP net income was $18.1 million, or $1.41
basic earnings per average share. The increase in 2001 GAAP net income is
attributable to our acquisition of additional mortgage-backed securities using
proceeds raised in three public offerings in 2001 and the increase in the
interest rate spread on our interest-earning assets and our interest-bearing
liabilities. We compute our GAAP net income per share by dividing net income by
the weighted average number of shares of outstanding common stock during the
period, which was 41,439,631 for the year ended December 31, 2001, 14,089,436
for the year ended December 31, 2000, and 12,889,510 for the year ended December
31, 1999. Dividends per share for the year ended December 31, 2001 was $1.75, or
an aggregate of $88.4 million. Dividends per share for the year ended December
31, 2000 was $1.15 per share, or $16.3 million in total. Dividends per share for
the year ended December 31, 1999 was $1.38 per share, or $18.0 million in total.
Our return on average equity was 21.10% for the year ended December 31, 2001,
14.09% for the year ended December 31, 2000, and 15.41% for the year ended
December 31, 1999. The increase in return on equity in 2001 is primarily due to
the favorable interest rate environment. The table below presents the net income
summary for the years ended December 31, 2001, 2000, 1999, 1998, and the period
ended December 31, 1997.

                               Net Income Summary



                                                Year ended     Year Ended     Year Ended    Year Ended   Period Ended
                                               December 31,   December 31,   December 31,  December 31,  December 31,
                                                   2001           2000           1999          1998          1997
                                               ------------   ------------    ----------    ----------   ------------
                                                          (dollars in thousands, except for per share data)

                                                                                            
Interest Income                                $   263,058    $   109,750    $    89,812    $    89,986    $   24,713
Interest Expense                                   168,055         92,902         69,846         75,735        19,677
                                               ----------------------------------------------------------------------
Net Interest Income                            $    95,003    $    16,802    $    19,966    $    14,251    $    5,036
Gain on Sale of Mortgage-Backed Securities           4,586          2,025            454          3,344           735
General and Administrative Expenses                  7,311          2,286          2,281          2,106           852
                                               ----------------------------------------------------------------------
Net Income                                     $    92,278    $    16,587    $    18,139    $    15,489    $    4,919
                                               ======================================================================

Average Number of Basic Shares Outstanding      41,439,631     14,089,436     12,889,510     12,709,116     5,952,126
Average Number of Diluted Shares Outstanding    41,857,498     14,377,459     13,454,007     13,020,648     6,300,623

Basic Net Income Per Share                           $2.23          $1.18          $1.41          $1.22         $0.83
Diluted Net Income Per Share                         $2.21          $1.15          $1.35          $1.19         $0.80

Average Total Assets                           $ 5,082,852    $ 1,652,459    $ 1,473,765    $ 1,499,875    $  476,855
Average Equity                                     437,376        117,727        117,685        131,265        61,096

Annualized Return on Average Assets                   1.82%          1.00%          1.23%          1.03%         1.19%
Annualized Return on Average Equity                  21.10%         14.09%         15.41%         11.80%         9.27%



                                       31


     Interest Income and Average Earning Asset Yield

     We had average earning assets of $4.7 billion for the year ended December
31, 2001. We had average earning assets of $1.6 billion for the year ended
December 31, 2000. We had average earning assets of $1.5 billion for the year
ended December 31, 1999. Our primary source of income for the years ended
December 31 2001, 2000, and 1999 was interest income. A portion of our income
was generated by gains on the sales of our mortgage-backed securities. Our
interest income was $263.1 million for the year ended December 31, 2001, $109.8
million for the year ended December 31, 2000, and $89.8 million for the year
ended December 31, 1999. Our yield on average earning assets was 5.62%, 7.02%,
and 6.15% for the same respective periods. Our yield on average earning assets
decreased by 1.40% and our average earning asset balance increased by $3.1
billion for the year ended December 31, 2001, when compared to the prior year.
Due to the substantial increase in the asset base resulting from the inflow of
capital during the year ended December 31, 2001, interest income increased by
$153.3 million. Our yield on average earning assets increased by 0.87% and our
average earning asset balance increased by $103.2 million for the year ended
December 31, 2000 as compared to the year ended December 31, 1999. This equates
to a $20.0 million increase in interest income. The table below shows our
average balance of cash equivalents and mortgage-backed securities, the yields
we earned on each type of earning assets, our yield on average earning assets
and our interest income for the years ended December 31, 2001, 2000, 1999 and
1998, and the period ended December 31, 1997, and the four quarters in 2001.

                           Average Earning Asset Yield
                 (Ratios for the period ended December 31, 1997
              and the four quarters in 2001 have been annualized)



                                                                                                 Yield on
                                                      Average                     Yield on        Average    Yield on
                                         Average      Mortgage-        Average     Average       Mortgage-    Average
                                          Cash         Backed         Earnings      Cash          Backed      Earning    Interest
                                       Equivalents   Securities        Assets    Equivalents    Securities     Assets     Income
                                       -----------   ----------        ------    -----------    ----------   --------    -------

                                                                      (dollars in thousands)

                                                                                                    
For the Year Ended December 31, 2001       $  2      $4,682,778      $4,682,780      3.25%         5.62%      5.62%      $263,058
For the Year Ended December 31, 2000       $263      $1,564,228      $1,564,491      4.18%         7.02%      7.02%      $109,750
For the Year Ended December 31, 1999       $221      $1,461,033      $1,461,254      4.10%         6.15%      6.15%      $ 89,812
For the Year Ended December 31, 1998       $  2      $1,461,789      $1,461,791      4.32%         6.16%      6.16%      $ 89,986
For the Period Ended December 31, 1997     $ 30      $  448,276      $  448,306      4.20%         6.34%      6.34%      $ 24,713
- ------------------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended December 31, 2001    $  2      $6,708,928      $6,708,930      1.56%         4.77%      4.77%      $ 80,060
For the Quarter Ended September 30, 2001   $  2      $5,263,231      $5,263,233      2.77%         5.76%      5.76%      $ 75,774
For the Quarter Ended June 30, 2001        $  2      $4,256,864      $4,256,866      3.72%         6.09%      6.09%      $ 64,790
For  the Quarter Ended March 31, 2001      $  2      $2,502,088      $2,502,090      4.93%         6.78%      6.78%      $ 42,434



     The constant prepayment rate (or CPR) on our mortgage-backed securities for
the year ended December 31, 2001 was 26%, for the year ended December 31, 2000
was 11%, and for the year ended December 31, 1999 was 18%. CPR is an assumed
rate of prepayment for our mortgage-backed securities, expressed as an annual
rate of prepayment relative to the outstanding principal balance of our
mortgage-backed securities. CPR does not purport to be either a historical
description of the prepayment experience of our mortgage-backed securities or a
prediction of the anticipated rate of prepayment of our mortgage-backed
securities.


                                       32


     Principal prepayments had a negative effect on our earning asset yield for
the years ended December 31, 2001, 2000, and 1999 because we adjust our rates of
premium amortization and discount accretion monthly based upon the effective
yield method, which takes into consideration changes in prepayment speeds.

     Interest Expense and the Cost of Funds

     Our largest expense is the cost of borrowed funds. We had average borrowed
funds of $4.4 billion for the year ended December 31, 2001, $1.4 billion for the
year ended December 31, 2000, and $1.4 billion for the year ended December
31,1999. Interest expense totaled $168.1 million, $92.9 million, and $69.8
million for the years ended December 31, 2001, 2000, and 1999, respectively. Our
average cost of funds was 3.83% for the year ended December 31, 2001, 6.41% for
the year ended December 31, 2000, and 5.17% for the year ended December 31,
1999. The cost of funds rate decreased by 2.58% and the average borrowed funds
increased by $3.0 billion for the year ended December 31, 2001. Interest expense
for the year ended December 31, 2001 increased $75.2 million. We increased our
asset base by raising approximately $474.2 million of additional capital in
2001. As a result, we increased the repurchase agreements we are party to.
Consequently, the increased interest expense for the year is the result of our
growth. The cost of funds rate increased by 1.24% and the average borrowed funds
increased by $99.8 million for the year ended December 31, 2000, when compared
to the year ended December 31, 1999. As a result of the increased funding cost
and the average balance, interest expense increased by $23.1 million in 2000.

     With our current asset/liability management strategy, changes in our cost
of funds are expected to be closely correlated with changes in short-term LIBOR,
although we may choose to extend the maturity of our liabilities at any time.
During the year ended December 31, 2001, we entered into three-year repurchase
agreements. Our average cost of funds was 0.05% less than average one-month
LIBOR for the year ended December 31, 2001, and 0.10% greater than to average
six-month LIBOR Our average cost of funds was equal to average one-month LIBOR
for the year ended December 31, 2000, and 0.25% less than average six-month
LIBOR. Our cost of funds was 0.08% below average one-month LIBOR for the year
ended December 31, 1999, and 0.36% less than average six-month LIBOR. During the
year ended December 31, 2001, average one-month LIBOR, which was 3.88%, was
0.15% greater than average six-month LIBOR, which was 3.73%. During the year
ended December 31, 2000, average one-month LIBOR, which was 6.41%, was 0.25%
lower than average six-month LIBOR, which was 6.66%. During the year ended
December 31, 1999, average one-month LIBOR, which was 5.25%, was 0.28% lower
than average six-month LIBOR, which was 5.53%. The table below shows our average
borrowed funds and average cost of funds as compared to average one-month and
average six-month LIBOR for the years ended December 31, 2001, 2000, 1999, 1998,
the period ended December 31, 1997 and the four quarters in 2001.


                                       33


                              Average Cost of Funds
                 (Ratios for the period ended December 31, 1997
              and the four quarters in 2001 have been annualized)




                                                                                Average
                                                                               One-Month    Average Cost   Average Cost
                                                                                 LIBOR        of Funds       of Funds
                                                                               Relative to   Relative to   Relative to
                          Average               Average   Average    Average      Average       Average       Average
                          Borrowed    Interest  Cost of  One-Month  Six-Month   Six-Month     One-Month     Six-Month
                           Funds      Expense    Funds     LIBOR      LIBOR       LIBOR         LIBOR          LIBOR
                         --------     --------  -------  -------    ---------  -----------  ------------   ------------
                                                               (dollars in thousands)

                                                                                     
For the Year Ended
   December  31, 2001    $4,388,900   $168,055   3.83%     3.88%     3.73%       0.15%        (0.05%)        0.10%
For the Year Ended
  December 31, 2000      $1,449,999   $92,902    6.41%     6.41%     6.66%      (0.25%)          --         (0.25%)
For the Year Ended
  December 31, 1999      $1,350,230   $69,846    5.17%     5.25%     5.53%      (0.28%)       (0.08%)       (0.36%)
For the Year Ended
  December 31, 1998      $1,360,040   $75,735    5.57%     5.57%     5.54%       0.03%           --          0.03%
For the Period Ended
  December 31, 1997       $404,140    $19,677    5.61%     5.67%     5.87%      (0.20%)       (0.06%)       (0.26%)
- -------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
   December 31, 2001     $6,166,998   $40,698    2.64%     2.20%     2.16%       0.04%         0.44%         0.48%
For the Quarter Ended
   September 30, 2001    $4,997,922   $48,620    3.89%     3.55%     3.47%       0.08%         0.34%         0.42%
For the Quarter Ended
  June 30, 2001          $4,035,022   $45,284    4.49%     4.27%     4.12%       0.15%         0.22%         0.37%
For the Quarter Ended
  March 31, 2001         $2,355,658   $33,453    5.68%     5.51%     5.18%       0.33%         0.17%         0.50%


     Net Interest Rate Agreement Expense

     We have not entered into any interest rate agreements to date. As part of
our asset/liability management process, we may enter into interest rate
agreements such as interest rate caps, floors or swaps. These agreements would
be entered into with the intent to reduce interest rate or prepayment risk and
would be designed to provide us income and capital appreciation in the event of
certain changes in interest rates. However, even after entering into these
agreements, we would still be exposed to interest rate and prepayment risks. We
review the need for interest rate agreements on a regular basis consistent with
our capital investment policy.

     Net Interest Income

     Our net interest income, which equals interest income less interest expense
totaled $95.0 million for the year ended December 31, 2001, $16.8 million for
the year ended December 31, 2000, and $20.0 million for the year ended December
31, 1999. Our net interest income increased by $78.2 million for the year ended
December 31, 2001 over the prior year. The increase in our balance sheet which
resulted from our raising additional capital in 2001, along with the 1.18%
increase in the interest rate spread, caused the significant increase in the net
interest income for the year. Our net interest income decreased for the year
ended December 31, 2000 because of higher funding costs for the year. The
substantial increase in interest expense for the year ended December 31, 2000
was only partially offset by the increase in interest income. Our net interest
spread, which equals the yield on our average assets for the period less the
average cost of funds for the period, was 1.79% for the year ended December 31,
2001, which is a 1.18% increase over the prior year. The net interest spread for
the year ended December 31, 2000 was 0.61%, as compared to 0.98% for the year
ended December 31, 1999. This 0.37% decrease in spread income is reflected in
the $3.2 million decrease in net interest income. Net interest margin, which
equals net interest income divided by average interest earning assets, was 1.87%
for the year ended December 31, 2001, 1.02% for the year ended December 31,
2000, and 1.35% for the year ended December 31, 1999. The principal reason that
net interest margin exceeded net interest spread is that average interest
earning assets exceeded average interest bearing liabilities. A portion of our
assets is funded with equity rather than borrowings. We did not have any
interest rate agreement expenses to date.


                                       34


     The table below shows our interest income by earning asset type, average
earning assets by type, total interest income, interest expense, average
repurchase agreements, average cost of funds, and net interest income for the
years ended December 31, 2001, 2000, 1999, 1998 and the period ended December
31, 1997, and the four quarters in 2001.

                            GAAP Net Interest Income
                 (Ratios for the period ended December 31, 1997
              and the four quarters in 2001 have been annualized)



                         Average     Interest                           Yield on
                         Mortgage-  Income on                           Average       Average
                          Backed    Mortgage-    Average      Total     Interest     Balance of              Average     Net
                        Securities    Backed       Cash      Interest   Earning      Repurchase  Interest    Cost of  Interest
                           Held     Securities  Equivalents   Income     Assets      Agreements   Expense     Funds    Income
                        ----------  ----------  -----------  --------   --------     ----------  --------    -------  --------
                                                            (dollars in the thousands)

                                                                                            
For the Year Ended
  December 31, 2001     $4,682,778   $263,058      $  2      $263,058    5.62%      $4,388,900   $168,055     3.83%    $95,003
For the Year Ended
  December 31, 2000     $1,564,228   $109,739      $263      $109,750    7.02%      $1,449,999   $ 92,902     6.41%    $16,848
For the Year Ended
  December 31, 1999     $1,461,033   $ 89,801      $221      $ 89,812    6.15%      $1,350,230   $ 69,846     5.17%    $19,966
For the Year Ended
  December 31, 1998     $1,461,789   $ 89,986      $  2      $ 89,986    6.16%      $1,360,040   $ 75,735     5.57%    $14,251
For the Period Ended
  December 31, 1997     $  448,276   $ 24,682      $ 31      $ 24,713    6.34%      $  404,140   $ 19,677     5.61%    $ 5,036
- ------------------------------------------------------------------------------------------------------------------------------
For the QuarterEnded
  December 31, 2001     $6,708,928   $ 80,060      $  2      $ 80,060    4.77%      $6,166,998   $ 40,698     2.64%    $39,361
For the Quarter Ended
  September 30, 2001    $5,263,231   $ 75,774      $  2      $ 75,774    5.76%      $4,997,922   $ 48,620     3.89%    $27,154
For the Quarter Ended
  June 30, 2001         $4,256,864   $ 64,790      $  2      $ 64,790    6.09%      $4,035.022   $ 45,284     4.49%    $19,506
For the Quarter Ended
  March 31, 2001        $2,502,088   $ 42,434      $  2      $ 42,434    6.78%      $2,355,658   $ 33,453     5.68%    $ 8,981



     Gains and Losses on Sales of Mortgage-Backed Securities

     For the year ended December 31, 2001, we sold mortgage-backed securities
with an aggregate historical amortized cost of $1.2 billion for an aggregate
gain of $4.6 million. For the year ended December 31, 2000, we sold
mortgage-backed securities with an aggregate historical amortized cost of $487.8
million for an aggregate gain of $2.0 million. For the year ended December 31,
1999, we sold mortgage-backed securities with an aggregate historical amortized
cost of $122.1 million for an aggregate gain of $455,000. The gain on sale of
assets for the year ended December 31, 2001 increased by $2.6 million over the
prior year. Even though the gain for the year 2001 increased over the prior
year, as a percentage of total income it declined. Our gain on the sale of
assets increased substantially for the year ended December 31, 2000, when
compared to the year ended December 31, 1999. For the year ended December 31,
1999, there was a greater emphasis on spread income and not gains. The
difference between the sale price and the historical amortized cost of our
mortgage-backed securities is a realized gain and increases income accordingly.
We do not expect to sell assets on a frequent basis, but may from time to time
sell existing assets to move into new assets, which our management believes
might have higher risk-adjusted returns, or to manage our balance sheet as part
of our asset/liability management strategy.

     Credit Losses


                                       35


     We have not experienced credit losses on our mortgage-backed securities to
date. We have limited our exposure to credit losses on our mortgage-backed
securities by purchasing only securities, issued or guaranteed by FNMA, FHLMC or
GNMA, which, although not rated, carry an implied "AAA" rating. Under our
capital investment policy, however, up to 25% of our securities could be rated
"BBB" or better or if unrated, securities we deem to be of a quality "BBB" or
better

     General and Administrative Expenses

     General and administrative expenses ("G&A") were $7.3 million for the year
ended December 31, 2001, $2.3 million for the year ended December 31, 2000, and
$2.3 million for the year ended December 31, 1999. G&A expenses as a percentage
of average assets was 0.14%, 0.14%, and 0.15% for the years ended December 31,
2001, 2000, and 1999, respectively. G&A expense has increased proportionately
with our increased capital base. Increases in salaries were the primary reason
for the overall increase in G&A. G&A expenses in total were materially unchanged
for the years ended December 31, 2000 and 1999. The table below shows our total
G&A expenses as compared to average assets and average equity for the years
ended December 31, 2001, 2000, 1999, 1998, the period ended December 31, 1997,
and the four quarters in 2001.

                 GAAP G&A Expenses and Operating Expense Ratios
                 (Ratios for the period ended December 31, 1997
              and the four quarters in 2001 have been annualized)



                                                         Total G&A       Total G&A
                                                         Expenses/       Expenses/
                                           Total          Average         Average
                                            G&A           Assets          Equity
                                          Expenses     (annualized)    (annualized)
                                          --------     ------------    ------------

                                                (dollars in the thousands)

                                                                 
For the Year Ended December 31, 2001       $7,311          0.14%          1.67%
For the Year Ended December 31, 2000       $2,286          0.14%          1.94%
For the Year Ended December 31, 1999       $2,281          0.15%          1.94%
For the Year Ended December 31, 1998       $2,106          0.14%          1.60%
For the Period Ended December 31, 1997     $  852          0.21%          1.61%

- --------------------------------------------------------------------------------
For the Quarter Ended December 31, 2001    $3,004          0.17%          1.78%
For the Quarter Ended September 30, 2001   $1,993          0.13%          1.76%
For the Quarter Ended June 30, 2001        $1,393          0.12%          1.44%
For the Quarter Ended March 31, 2001       $  921          0.13%          1.90%


     Net Income and Return on Average Equity

     Our net income was $92.3 million for the year ended December 31, 2001,
$16.6 million for the year ended December 31, 2000, and $18.1 million for the
year ended December 31, 1999. Our return on average equity was 21.1% for the
year ended December 31, 2001, 14.1% for the year ended December 31, 2000, and
15.4% for the year ended December 31, 1999. The increase in net income for the
year ended December 2001, as compared to the year ended December 31, 2000, is a
direct result of growth in our balance sheet following our three pubic offerings
in 2001, as well as the favorable interest rate environment during the year
2001.

     The substantial increase in interest expense, resulting from an overall
increase in interest rates, for the year ended December 31, 2000 was the primary
reason that our earnings decreased, when compared to the year ended


                                       36


December 31, 1999. We were able to take advantage of appreciation in asset value
in 2001. The gain on sale of securities increased by $2.6 million for the year
ended December 31, 2001, as compared to the prior year. The G&A expenses
remained relatively constant during the years ended December 31, 2000 and 1999.
The table below shows our net interest income, gain on sale of mortgage-backed
securities and G&A expenses each as a percentage of average equity, and the
return on average equity for the years ended December 31, 2001, 2000, 1999,
1998, and period ended December 31, 1997, and for the four quarters in 2001.

                     Components of Return on Average Equity
                 (Ratios for the period ended December 31, 1997
              and the four quarters in 2001 have been annualized)



                                                      Gain on Sale of
                                       Net Interest   Mortgage-Backed           G&A         Return on
                                      Income/Average  Securities/Average  Expenses/Average   Average
                                          Equity           Equity             Equity         Equity
                                      --------------  ------------------  ----------------  ---------

                                                                                  
For the Year Ended December 31, 2001       21.72%          1.05%               1.67%          21.10%
For the Year Ended December 31, 2000       14.31%          1.72%               1.94%          14.09%
For the Year Ended December 31, 1999       16.97%          0.38%               1.94%          15.41%
For the Year Ended December 31, 1998       10.85%          2.55%               1.60%          11.80%
For the Period Ended December 31, 1997     9.49%           1.39%               1.61%           9.27%
- ------------------------------------------------------------------------------------------------------
For the Quarter Ended December 30, 2001    23.34%          1.57%               1.78%          23.13%
For the Quarter Ended September 30, 2001   23.97%          1.05%               1.76%          23.26%
For the Quarter Ended June 30, 2001        20.37%          0.50%               1.45%          19.42%
For the Quarter Ended March 31, 2001       18.54%          0.56%               1.90%          17.20%


Financial Condition

     Mortgage-Backed Securities

     All of our mortgage-backed securities at December 31, 2001, 2000, and 1999
were adjustable-rate or fixed-rate mortgage-backed securities backed by
single-family mortgage loans. All of the mortgage assets underlying these
mortgage-backed securities were secured with a first lien position on the
underlying single-family properties. All our mortgage-backed securities were
FHLMC, FNMA or GNMA mortgage pass-through certificates or CMOs, which carry an
implied "AAA" rating. We mark-to-market all of our earning assets at liquidation
value.

     We accrete discount balances as an increase in interest income over the
life of discount mortgage-backed securities and we amortize premium balances as
a decrease in interest income over the life of premium mortgage-backed
securities. At December 31, 2001, 2000, and 1999 we had on our balance sheet a
total of $2.1 million, $989,000, and $1.1 million, respectively, of unamortized
discount (which is the difference between the remaining principal value and
current historical amortized cost of our mortgage-backed securities acquired at
a price below principal value) and a total of $139.4 million, $24.3 million, and
$23.6 million, respectively, of unamortized premium (which is the difference
between the remaining principal value and the current historical amortized cost
of our mortgage-backed securities acquired at a price above principal value).

     We received mortgage principal repayments of $1.7 billion for the year
ended December 31, 2001, $168.5 million for the year ended December 31, 2000,
and $362.7 million for the year ended December 31, 1999. The increase in
prepayments in 2001 from 2000 was primarily because we acquired more
mortgage-backed securities following our three public offerings. The decrease in
2000 compared to 1999 was due to higher interest rates during the year. Given
our current portfolio composition, if mortgage principal prepayment rates were
to increase over the life of our mortgage-backed securities, all other factors
being equal, our net interest income would decrease during the life of these
mortgage-backed securities as we would be required to amortize our net premium
balance into income over a shorter time period. Similarly, if mortgage principal
prepayment rates were to decrease over the life of our mortgage-backed
securities, all other factors being equal, our net interest income would
increase during the life of these mortgage-backed securities as we would
amortize our net premium balance over a longer time period.


                                       37


         The table below summarizes our mortgage-backed securities at December
31, 2001, 2000, 1999, 1998 and 1997, September 30, 2001, June 30, 2001, and
March 31, 2001.

                           Mortgage-Backed Securities



                                                                           Amortized                   Estimated Fair   Weighted
                                              Net        Amortized      Cost/Principal   Estimated     Value/Principal  Average
                        Principal Value     Premium         Cost             Value       Fair Value         Value        Yield
                        ---------------     -------      ---------       -------------   ----------    ---------------  --------
                                                                   (dollars in thousands)

                                                                                                    
At December 31, 2001       $7,399,941      $137,269      $7,537,210         101.86%      $7,575,379         102.37%      4.41%
At December 31, 2000       $1,967,967      $ 23,296      $1,991,263         101.18%      $1,978,219         100.52%      7.09%
At December 31, 1999       $1,452,917      $ 22,444      $1,475,361         101.54%      $1,437,793          98.96%      6.77%
At December 31, 1998       $1,502,414      $ 24,278      $1,526,692         101.62%      $1,520,289         101.19%      6.43%
At December 31, 1997       $1,138,365      $ 21,390      $1,159,755         101.88%      $1,161,779         102.06%      6.57%

- ------------------------------------------------------------------------------------------------------------------------------------
At September 30, 2001      $6,275,501      $ 96,674      $6,372,175         101.54%      $6,428,853         102.44%      5.17%
At June 30, 2001           $5,498,235      $ 69,193      $5,567,428         101.26%      $5,572,288         101.34%      5.75%
At March 31, 2001          $3,455,436      $ 42,023      $3,497,459         101.22%      $3,500,610         101.31%      6.43%


     The tables below set forth certain characteristics of our mortgage-backed
securities. The index level for adjustable-rate mortgage-backed securities is
the weighted average rate of the various short-term interest rate indices, which
determine the coupon rate.

            Adjustable-Rate Mortgage-Backed Security Characteristics



                                                                                                                      Principal
                                                                                                                       Value at
                                                                                  Weighted                             Period End
                                            Weighted    Weighted                  Average      Weighted    Weighted    as % of
                                             Average    Average    Weighted       Term to       Average    Average      Total
                           Principal         Coupon      Index    Average Net       Next       Lifetime     Asset   Mortgage-Backed
                             Value            Rate       Level      Margin       Adjustment       Cap       Yield     Securities
                           ---------        --------    --------  ----------     ----------    --------    -------  ---------------
                                                                   (dollars in thousands)

                                                                                                 
At December 31, 2001       $5,793,250         5.90%      3.95%       1.95%         24 months      11.49%      3.87%      78.29%
At December 31, 2000       $1,454,356         7.61%      5.76%       1.85%         15 months      11.47%      7.24%      73.90%
At December 31, 1999       $  951,839         7.33%      5.84%       1.49%         11 months      10.30%      7.64%      65.51%
At December 31, 1998       $1,030,654         6.84%      5.18%       1.66%         12 months      10.63%      6.42%      68.60%
At December 31, 1997       $  994,653         7.13%      5.52%       1.61%         22 months      10.78%      6.50%      87.38%

- ------------------------------------------------------------------------------------------------------------------------------------
At September 30, 2001      $4,789,570         6.24%      4.31%       1.93%         27 months      11.46%      4.76%      76.32%
At June 30, 2001           $3,997,580         6.47%      4.60%       1.87%         26 months      11.37%      5.38%      72.71%
At March 31, 2001          $2,495,296         7.01%      5.14%       1.87%         26 months      11.57%      6.35%      72.21%


               Fixed-Rate Mortgage-Backed Security Characteristics



                                                                                Principal Value as
                                                    Weighted        Weighted        % of Total
                                     Principal       Average         Average      Mortgage-Backed
                                       Value       Coupon Rate     Asset Yield      Securities
                                     ---------     -----------     -----------  ------------------
                                                      (dollars in thousands)

                                                                         
At December 31, 2001                $1,606,691         6.92%          6.33%          21.71%
At December 31, 2000                $  513,611         6.62%          6.68%          26.10%
At December 31, 1999                $  501,078         6.58%          7.01%          34.49%
At December 31, 1998                $  471,760         6.55%          6.47%          31.40%
At December 31, 1997                $  143,712         7.50%          7.08%          12.62%
- ----------------------------------------------------------------------------------------------
At September 30, 2001               $1,485,931         6.88%          6.48%          23.68%
At June 30, 2001                    $1,500,655         6.83%          6.71%          27.29%
At March 31, 2001                   $  960,140         6.79%          6.69%          27.79%



                                       38


     At December 31, 2001 we held mortgage-backed securities with coupons linked
to the one-year, three-year, and five-year Treasury indices, one-month and
six-month LIBOR, six-month Auction Average, twelve-month moving average and the
six-month CD rate. At December 31, 2000 and 1999 we held mortgage-backed
securities with coupons linked to the one-year, three-year, and five-year
Treasury indices, one-month LIBOR and the six-month CD rate.

               Adjustable-Rate Mortgage-Backed Securities by Index
                                December 31, 2001



                                           _________  Six-Month  12-Month               1-Year       3-Year      5-Year
                                One-Month  Six-Month   Auction    Moving    Six-Month  Treasury     Treasury    Treasury
                                  LIBOR      LIBOR     Average    Average    CD Rate     Index       Index        Index
                                ---------  ---------  ---------  --------   ---------  --------     --------    --------

                                                                                        
Weighted Average Adjustment
  Frequency                        1mo.     60 mo.      6 mo.     12 mo.      6 mo.      6 mo.       36 mo.     60 mo.
Weighted Average Term to
  Next Adjustment                  1mo.     55 mo.      2 mo.     11 mo.      2 mo.     33 mo.       16 mo.     33 mo.
Weighted Average Annual
  Period Cap                       None      2.00%      0.50%       None      1.00%      1.98%        2.00%      1.96%
Weighted Average Lifetime
  Cap at December 31, 2001        9.09%     11.50%     12.53%     10.63%     11.40%     12.22%       13.08%     12.92%
Mortgage Principal Value as
  Percentage of Mortgage-
  Backed Securities at
  December 31, 2001              18.32%      0.13%      0.12%      1.06%      0.22%     56.20%        1.35%      0.89%


               Adjustable-Rate Mortgage-Backed Securities by Index
                                December 31, 2000



                                                                                            3-Year
                                                 One-Month    Six-Month       1-Year       Treasury        5-Year
                                                   LIBOR       CD Rate    Treasury Index     Index     Treasury Index
                                                 ---------    ---------   --------------   --------    --------------

                                                                                           
Weighted Average Adjustment Frequency              1 mo.        6 mo.         12 mo.        36 mo.        60 mo.
Weighted Average Term to Next Adjustment           1 mo.        2 mo.         23 mo.        20 mo.        40 mo.
Weighted Average Annual Period Cap                  None        1.00%          1.98%         2.00%         1.76%
Weighted Average Lifetime Cap at
  December 31, 2000                                9.11%       11.37%         12.61%        13.24%        12.42%
Mortgage Principal Value as Percentage of
  Mortgage-Backed Securities at
  December 31, 2000                               24.08%       1.21%%         44.52%         2.97%         1.12%



               Adjustable-Rate Mortgage-Backed Securities by Index
                                December 31, 1999



                                                                                            3-Year
                                                 One-Month    Six-Month       1-Year       Treasury        5-Year
                                                   LIBOR       CD Rate    Treasury Index     Index     Treasury Index
                                                 ---------    ---------   --------------   --------    --------------

                                                                                           
Weighted Average Adjustment Frequency              1 mo.        6 mo.         12 mo.        36 mo.        60 mo.
Weighted Average Term to Next Adjustment           1 mo.        2 mo.         25 mo.        16 mo.        36 mo.
Weighted Average Annual Period Cap                  None        1.00%          1.93%         1.57%         1.35%
Weighted Average Lifetime Cap at
  December 31, 1999                                9.20%       11.36%         11.19%        13.23%        11.68%
Mortgage Principal Value as Percentage of
  Mortgage-Backed Securities at
  December 31, 1999                               34.89%        2.12%         22.62%         5.22%         0.66%



                                       39


     Interest Rate Agreements

     Interest rate agreements are assets that are carried on a balance sheet at
estimated liquidation value. We have not entered into any interest rate
agreements since our inception.

     Borrowings

     To date, our debt has consisted entirely of borrowings collateralized by a
pledge of our mortgage-backed securities. These borrowings appear on our balance
sheet as repurchase agreements. At December 31, 2001, we had established
uncommitted borrowing facilities in this market with 22 lenders in amounts,
which we believe, are in excess of our needs. We believe that we have used
approximately 52% of our uncommitted borrowing line. All of our mortgage-backed
securities are currently accepted as collateral for these borrowings. However,
we limit our borrowings, and thus our potential asset growth, in order to
maintain unused borrowing capacity and thus increase the liquidity and strength
of our balance sheet. At December 31, 2001, we had collateral in excess of the
required haircut on our repurchase agreements in the amount of $452.3 million.

     For the year ended December 31, 2001, the term to maturity of our
borrowings ranged from one day to three years, with a weighted average original
term to maturity of 119 days at December 31, 2001. For the years ended December
31, 2000 and 1999, the term to maturity of our borrowings ranged from one day to
one year, with a weighted average original term to maturity of 56 days at
December 31, 2000, and 50 days at December 31, 1999. At December 31, 2001, the
weighted average cost of funds for all of our borrowings was 2.18% and the
weighted average term to next rate adjustment was 85 days. At December 31, 2000,
the weighted average cost of funds for all of our borrowings was 6.55% and the
weighted average term to next rate adjustment was 29 days. At December 31, 1999,
the weighted average cost of funds for all of our borrowings was 5.26% and the
weighted average term to next rate adjustment was 20 days. At December 31, 2001,
the weighted average original term increase because of the use of three year
repurchase agreements.

     Liquidity

     Liquidity, which is our ability to turn non-cash assets into cash, allows
us to purchase additional mortgage-backed securities and to pledge additional
assets to secure existing borrowings should the value of our pledged assets
decline. Potential immediate sources of liquidity for us include cash balances
and unused borrowing capacity. Unused borrowing capacity will vary over time as
the market value of our mortgage-backed securities varies. Our balance sheet
also generates liquidity on an on-going basis through mortgage principal
repayments and net earnings held prior to payment as dividends. Should our needs
ever exceed these on-going sources of liquidity plus the immediate sources of
liquidity discussed above, we believe that our mortgage-backed securities could
in most circumstances be sold to raise cash. The maintenance of liquidity is one
of the goals of our capital investment policy. Under this policy, we limit asset
growth in order to preserve unused borrowing capacity for liquidity management
purposes.

     Stockholders' Equity

     We use "available-for-sale" treatment for our mortgage-backed securities;
we carry these assets on our balance sheet at estimated market value rather than
historical amortized cost. Based upon this "available-for-sale" treatment, our
equity base at December 31, 2001 was $667.4 million, or $11.15 per share. If we
had used historical amortized cost accounting, our equity base at December 31,
2001 would have been $629.2 million, or $10.52 per share. Our equity base at
December 31, 2000 was $135.6 million, or $9.34 per share. If we had used
historical amortized cost accounting, our equity base at December 31, 2000 would
have been $148.6 million, or $10.24 per share. Our equity base at December 31,
1999 was $103.3 million, or $7.60 per share. If we had used historical amortized
cost accounting, our equity base at December 31, 1999 would have been $140.8
million, or $10.37 per share. We completed three public offerings during the
year ended December 31, 2001 in which we issued a total of


                                       40


45,060,100 shares of common stock, and received aggregate net proceeds of $474.2
million. Subsequently, we completed a secondary offering of 23,000,000 shares of
stock common in January 2002. Our aggregate net proceeds for this offering was
$347.4 million.

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

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

     The table below shows unrealized gains and losses on the mortgage-backed
securities in our portfolio.

                          Unrealized Gains and Losses



                                                                           (dollars in thousands)
                                                                               At December 31,
                                                       2001           2000           1999          1998          1997
                                                    ---------      ---------      ---------      --------      --------

                                                                                                
Unrealized Gain                                     $ 53,935       $  3,020       $  1,531       $ 3,302       $ 3,253
Unrealized Loss                                      (15,766)       (16,064)       (39,100)       (9,706)       (1,229)
                                                    ------------------------------------------------------------------
Net Unrealized Gain (Loss)                          $ 38,169       $(13,044)      $(37,569)      $(6,404)      $ 2,024
                                                    ==================================================================

Net Unrealized Gain (Loss) as % of Mortgage-
  Backed Securities Principal Value                    0.52%         (0.66%)        (2.59%)       (0.43%)        0.18%
Net Unrealized Gain (Loss) as % of Mortgage-
  Backed Securities Amortized Cost                     0.51%         (0.66%)        (2.54%)       (0.42%)        0.17%


     Unrealized changes in the estimated net market value of mortgage-backed
securities have one direct effect on our potential earnings and dividends:
positive mark-to-market changes increase our equity base and allow us to
increase our borrowing capacity while negative changes tend to limit borrowing
capacity under our capital investment policy. A very large negative change in
the net market value of our mortgage-backed securities might impair our
liquidity position, requiring us to sell assets with the likely result of
realized losses upon sale. "Unrealized Gains on Available-for-Sale Securities"
was $38.2 million, or 0.51% or the amortized cost of our mortgage-backed
securities as of December 31, 2001. " Unrealized Losses on Available-for-Sale
Securities" was $13.0 million, or 0.66% of the amortized cost of our
mortgage-backed securities at December 31, 2000. "Unrealized Losses on
Available-for-Sale Securities" was $37.6 million or 2.54% of the amortized cost
of our mortgage-backed securities at December 31, 1999.

     The table below shows our equity capital base as reported and on a
historical amortized cost basis at December 31, 2001, 2000, 1999, 1998, and
1997, and September 30, 2001, June 30, 2001 and March 31, 2001. Issuances of
common stock, the level of GAAP earnings as compared to dividends declared, and
other factors influence our historical cost equity capital base. The GAAP
reported equity capital base is influenced by these factors plus changes in the
"Net Unrealized Losses on Assets Available for Sale" account.


                                       41


                              Stockholders' Equity



                                                                                  Historical
                             Historical      Net Unrealized     GAAP Reported    Amortized Cost    GAAP Reported
                           Amortized Cost   Gains on Assets      Equity Base       Equity Per      Equity (Book
                             Equity Base   Available for Sale    (Book Value)        Share       Value) Per Share
                           --------------  ------------------   -------------    --------------  ---------------
                                               (dollars in thousands, except per share data)

                                                                                     
At December 31, 2001           $629,188          $ 38,169           $667,357        $10.52          $11.15
At December 31, 2000           $148,686          $(13,044)          $135,642        $10.24          $ 9.34
At December 31, 1999           $140,841          $(37,569)          $103,272        $10.37          $ 7.60
At December 31, 1998           $132,275          $ (6,404)          $125,871        $10.46          $ 9.95
At December 31, 1997           $133,062          $  2,024           $135,086        $10.47          $10.62
- -----------------------------------------------------------------------------------------------------------------
At September 30, 2001          $625,368          $ 56,677           $682,045        $10.47          $11.41
At June 30, 2001               $445,091          $  4,860           $449,951        $ 9.96          $10.07
At March 31, 2001              $248,732          $  3,151           $251,883        $ 9.67          $ 9.80


     Leverage

     Our debt-to-GAAP reported equity ratio at December 31, 2001, 2000, and 1999
was 9.5:1, 12.0:1, and 12.9:1, respectively. We generally expect to maintain a
ratio of debt-to-equity of between 8:1 and 12:1, although the ratio may vary
from this range from time to time based upon various factors, including our
management's opinion of the level of risk of our assets and liabilities, our
liquidity position, our level of unused borrowing capacity and
over-collateralization levels required by lenders when we pledge assets to
secure borrowings.

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

     Asset/Liability Management and Effect of Changes in Interest Rates

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

     We seek to manage the extent to which our net income changes as a function
of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. In addition, although we have not done so to date, we
may seek to mitigate the potential impact on net income of periodic and lifetime
coupon adjustment restrictions in our portfolio of mortgage-backed securities by
entering into interest rate agreements such as interest rate caps and interest
rate swaps.

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

     Inflation

     Virtually all of our assets and liabilities are financial in nature. As a
result, interest rates and other factors drive our performance far more than
does inflation. Changes in interest rates do not necessarily correlate with
inflation rates or changes in inflation rates. Our financial statements are
prepared in accordance with GAAP and our


                                       42


dividends based upon our net income as calculated for tax purposes; in each
case, our activities and balance sheet are measured with reference to historical
cost or fair market value without considering inflation.

     Other Matters

     We calculate that our qualified REIT assets, as defined in the Internal
Revenue Code, are 98.2% of our total assets at December 31, 2001, 99.9% of our
total assets at December 31, 2000 and 1999, as compared to the Internal Revenue
Code requirement that at least 75% of our total assets be qualified REIT assets.
We also calculate that 100% of our revenue qualifies for the 75% source of
income test, and 100% of its revenue qualifies for the 95% source of income
test, under the REIT rules for the years ended December 31, 2001, 2000, and
1999. We also met all REIT requirements regarding the ownership of our common
stock and the distribution of our net income. Therefore, as of December 31,
2001, 2000, and 1999 we believe that we qualified as a REIT under the Internal
Revenue Code.

     We at all times intend to conduct our business so as not to become
regulated as an investment company under the Investment Company Act. If we were
to become regulated as an investment company, then our use of leverage would be
substantially reduced. The Investment Company Act exempts entities that are
"primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" (qualifying
interests). Under current interpretation of the staff of the SEC, in order to
qualify for this exemption, we must maintain at least 55% of our assets directly
in qualifying interests. In addition, unless certain mortgage securitites
represent all the certificates issued with respect to an underlying pool of
mortgages, the mortgage-backed securities may be treated as securities separate
from the underlying mortgage loans and, thus, may not be considered qualifying
interests for purposes of the 55% requirement. We calculate that as of December
31, 2001, 2000, and 1999 we were in compliance with this requirement.


                                       43


ITEM 7A   QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

     Market risk is the exposure to loss resulting from changes in interest
rates, foreign currency exchange rates, commodity prices and equity prices. The
primary market risk to which we are exposed is interest rate risk. 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 our net interest income, which is the difference between the
interest income earned on interest-earning assets and the interest expense
incurred in connection with our interest-bearing liabilities, by affecting the
spread between our interest-earning assets and interest-bearing liabilities.
Changes in the level of interest rates also can affect the value of our
mortgage-backed securities and our ability to realize gains from the sale of
these assets. We may utilize a variety of financial instruments, including
interest rate swaps, caps, floors and other interest rate exchange contracts, in
order to limit the effects of interest rates on our operations. If we use these
types of derivatives to hedge the risk of interest-earning assets or
interest-bearing liabilities, we may be subject to certain risks, including the
risk that losses on a hedge position will reduce the funds available for
payments to holders of securities and that the losses may exceed the amount we
invested in the instruments. To date, we have not purchased any hedging
instruments.

     Our profitability and the value of our portfolio may be adversely affected
during any period as a result of changing interest rates. The following table
quantifies the potential changes in net interest income and portfolio value
should interest rates go up or down 200 basis points, assuming the yield curves
of the rate shocks will be parallel to each other and the current yield curve.
All changes in income and value are measured as percentage changes from the
projected net interest income and portfolio value at the base interest rate
scenario. The base interest rate scenario assumes interest rates at December 31,
2001, and various estimates regarding prepayment and all activities are made at
each level of rate shock. Actual results could differ significantly from these
estimates.



                            Projected Percentage Change in  Projected Percentage Change in
  Change in Interest Rate        Net Interest Income               Portfolio Value
- --------------------------  ------------------------------  ------------------------------

                                                                    
- -200 Basis Points                          5%                              2%
- -100 Basis Points                          3%                              1%
- -50 Basis Points                           1%                              1%
Base Interest Rate
+50 Basis Points                          (3%)                            (1%)
+100 Basis Points                         (6%)                            (2%)
+200 Basis Points                        (14%)                            (6%)


ASSET AND LIABILITY MANAGEMENT

     Asset and liability management is concerned with the timing and magnitude
of the repricing of assets and liabilities. We attempt to control risks
associated with interest rate movements. Methods for evaluating interest rate
risk include an analysis of our interest rate sensitivity "gap", which is the
difference between interest-earning assets and interest-bearing liabilities
maturing or repricing within a given time period. A gap is considered positive
when the amount of interest-rate sensitive assets exceeds the amount of
interest-rate sensitive liabilities. A gap is considered negative when the
amount of interest-rate sensitive liabilities exceeds interest-rate sensitive
assets. During a period of rising interest rates, a negative gap would tend to
adversely affect net interest income, while a positive gap would tend to result
in an increase in net interest income. During a period of falling interest
rates, a negative gap would tend to result in an increase in net interest
income, while a positive gap would tend to affect net interest income adversely.
Because different types of assets and liabilities with the same or similar
maturities may react differently to changes in overall market rates or
conditions, changes in interest rates may affect net interest


                                       44


income positively or negatively even if an institution were perfectly matched in
each maturity category.

     The following table sets forth the estimated maturity or repricing of our
interest-earning assets and interest-bearing liabilities at December 31, 2001.
The amounts of assets and liabilities shown within a particular period were
determined in accordance with the contractual terms of the assets and
liabilities, except adjustable-rate loans, and securities are included in the
period in which their interest rates are first scheduled to adjust and not in
the period in which they mature. Mortgage-backed securities reflect estimated
prepayments that were estimated based on analyses of broker estimates, the
results of a prepayment model that we utilized and empirical data. Our
management believes that these assumptions approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of our assets
and liabilities in the table could vary substantially if different assumptions
were used or actual experience differs from the historical experience on which
the assumptions are based.



                                                                 More than
                                    Within 3        4-12         1 Year to      3 Years
                                     Months         Months        3 Years       and Over      Total
                                    --------        ------       ---------      --------      -----

                                                                             
Rate Sensitive Assets:
  Mortgage-Backed Securities      $ 1,385,708    $   580,104    $ 2,176,418    $3,257,711   $7,399,941

Rate Sensitive Liabilities:
  Repurchase Agreements             5,653,155        253,133                      461,422    6,367,710
                                  --------------------------------------------------------------------

Interest rate sensitivity gap     $(4,267,447)   $   326,971    $ 2,176,418    $2,796,289   $1,032,231
                                  ====================================================================


Cumulative rate sensitivity gap   $(4,267,447)   $(3,940,476)   $(1,764,058)   $1,032,231
                                  ====================================================================

Cumulative interest rate
sensitivity gap as a percentage
of total rate-sensitive assets        (57.67%)       (53.25%)       (23.84%)        13.95%


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


                                       45


ITEM 8    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Our financial statements and the related notes, together with the
Independent Auditors' Report thereon, are set forth on pages F-1 through F-17 of
this Form 10-K.

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

          None.

                                    PART III

ITEM 10   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by Item 10 as to our directors is incorporated
herein by reference to the definitive proxy statement we are filing pursuant to
Regulation 14A under the headings "Election of Directors," "Directors,"
"Management," and "Section 16(a) Beneficial Ownership Reporting Compliance." The
information required by Item 10 as to our executive officers is included in Part
I of this Form 10-K.

ITEM 11   EXECUTIVE COMPENSATION

     The information required by Item 11 is incorporated herein by reference to
the definitive proxy statement we are filing pursuant to Regulation 14A under
the heading "Executive Compensation."

ITEM 12   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by Item 12 is incorporated herein by reference to
the definitive proxy statement we are filing pursuant to Regulation 14A under
the heading "Security Ownership of Certain Beneficial Owners and Management."

ITEM 13   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by Item 13 is incorporated herein by reference to
the definitive proxy statement we are filing pursuant to Regulation 14A under
the heading "Executive Compensation."


                                       46


                                     PART IV

ITEM 14   EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)  Documents filed as part of this report:

1.   Financial Statements.

2.   Schedules to Financial Statements:

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

3.   Exhibits:

                                  EXHIBIT INDEX
                                                                   Sequentially
Exhibit                                                              Numbered
Number                          Exhibit Description                    Page

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

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

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

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

10.1      Purchase Agreement, dated February 12, 1997, between
          the Registrant and Friedman, Billings, Ramsey & Co.,
          Inc. ("FBR") (incorporated by reference to Exhibit 10.1
          to our Registration Statement on Form S-11
          (Registration No. 333-32913), filed with the Securities
          and Exchange Commission on August 5, 1997).

10.2      Registration Rights Agreement, dated February 12, 1997,
          between the Registrant and FBR (incorporated by
          reference to Exhibit 10.2 to our Registration Statement
          on Form S-11 (Registration No. 333-32913) filed with
          the Securities and Exchange Commission on August 5,
          1997).

10.3      Long-Term Stock Incentive Plan (incorporated by
          reference to Exhibit 10.3 to our Registration Statement
          on Form S-11 (Registration No. 333-32913) filed with
          the Securities and Exchange Commission on August 5,
          1997).*

10.4      Form of Master Repurchase Agreement (incorporated by
          reference to Exhibit 10.7 to our Registration Statement
          on Form S-11 (Registration No. 333-32913) filed with
          the Securities and Exchange Commission on August 5,
          1997).

10.5      Form of Purchase Agreement, between the Registrant and
          the purchasers in the Direct Offering (incorporated by
          reference to Exhibit 10.8 to our Registration Statement
          on Form S-11 (Registration No. 333-32913) filed with
          the Securities and Exchange Commission on August 5,
          1997).

10.6      Amended and Restated Employment Agreement, effective as
          of May 1, 2001 between the Registrant and Michael A.J.
          Farrell (incorporated by reference to Exhibit 10.1 to
          our Form

                               47


          10-Q/A for its quarterly period ended June 30, 2001
          filed with the Securities and Exchange Commission on
          August 27, 2001).*

10.7      Amended and Restated Employment Agreement, effective as
          of May 1, 2001, between the Registrant and Wellington
          St. Claire (incorporated by reference to Exhibit 10.2
          to our Form 10-Q/A for its quarterly period ended June
          30, 2001 filed with the Securities and Exchange
          Commission on August 27, 2001).*

10.8      Amended and Restated Employment Agreement, effective as
          of May 1, 2001 between the Registrant and Kathryn F.
          Fagan (incorporated by reference to Exhibit 10.3 to our
          Form 10-Q/A for its quarterly period ended June 30,
          2001 filed with the Securities and Exchange Commission
          on August 27, 2001).*

10.9      Amended and Restated Employment Agreement, effective as
          of May 1, 2001, between the Registrant and Jennifer A.
          Stephens (incorporated by reference to Exhibit 10.4 to
          our Form 10-Q/A for its quarterly period ended June 30,
          2001 filed with the Securities and Exchange Commission
          on August 27, 2001).*

23.1      Consent of Independent Accountants.

*Exhibit Numbers 10.3 and 10.6 - 10.9 are management contracts or compensatory
plans required to be filed as Exhibits to this Form 10-K

(b)  Reports on Form 8-K

     We filed the following reports on Form 8-K during the last quarter of the
period covered by this report:

     o    We filed a Form 8-K on October 2, 2001 with respect to our entering
          into an underwriting agreement with UBS Warburg LLC, ABN AMRO
          Rothschild LLC, Friedman, Billings, Ramsey & Co., Inc., and Tucker
          Anthony Incorporated, as representatives of the several underwriters.

     o    We filed a Form 8-K on December 4, 2001 with respect to the
          resignation of Timothy J. Guba as President, Chief Operating Officer
          and a member of our board of directors effective December 31, 2001.

     The following current report on Form 8-K was filed by us subsequent to the
fourth quarter 2001:

     o    We filed a Form 8-K on January 25, 2002 with respect to our entering
          into an underwriting agreement with UBS Warburg LLC, Merrill Lynch,
          Pierce, Fenner & Smith Incorporated, ABN AMRO Rothschild LLC,
          Friedman, Billings, Ramsey & Co., Inc., RBC Dain Rauscher Inc., and
          U.S. Bancorp Piper Jaffray Inc., as representatives of the several
          underwriters.


                                       48


Annaly Mortgage
Management, Inc.

Independent Auditors' Report

Financial Statements
Years Ended December 31, 2001, 2000, and 1999




Annaly Mortgage Management, Inc.

NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------

                                                                            Page

INDEPENDENT AUDITORS' REPORT                                                 F-1

FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2001, 2000, AND 1999:

   Statements of Financial Condition                                         F-2

   Statements of Operations                                                  F-3

   Statements of Stockholders' Equity                                        F-4

   Statements of Cash Flows                                                  F-5

   Notes to Financial Statements                                        F-6-F-17




INDEPENDENT AUDITORS' REPORT

To the board of directors and Stockholders of
Annaly Mortgage Management, Inc.

We have audited the accompanying statements of financial condition of Annaly
Mortgage Management, Inc. (the "Company") as of December 31, 2001 and 2000, and
the related statements of operations, changes in stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 2001 and 2000,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.



/s/ Deloitte & Touche LLP

New York, New York
February 15, 2002


                                      F-1


ANNALY MORTGAGE MANAGEMENT, INC.

STATEMENTS OF FINANCAL CONDITION
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------



ASSETS                                                        2001              2000
                                                        --------------   ---------------

                                                                   
CASH AND CASH EQUIVALENTS                               $      429,247   $       113,061

MORTGAGE-BACKED SECURITIES - At fair value               7,575,379,313     1,978,219,376

RECEIVABLE FOR MORTGAGE-BACKED
  SECURITIES SOLD                                           94,502,807        44,933,631

ACCRUED INTEREST RECEIVABLE                                 46,803,644        11,502,482

OTHER ASSETS                                                   198,888           260,238
                                                        --------------   ---------------

TOTAL ASSETS                                            $7,717,313,899   $ 2,035,028,788
                                                        ==============   ===============

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
  Repurchase agreements                                 $6,367,710,186   $ 1,628,359,000
  Payable for Mortgage-Backed Securities purchased         627,063,523       258,798,138
  Accrued interest payable                                  16,043,004         8,314,414
  Dividends payable                                         35,896,185         3,630,745
  Other liabilities                                          2,009,533
  Accounts payable                                           1,234,463           284,105
                                                        --------------   ---------------

           Total liabilities                             7,049,956,894     1,899,386,402
                                                        --------------   ---------------

STOCKHOLDERS' EQUITY:
  Common stock: par value $.01 per share;
    100,000,000 authorized, 59,826,975 and 14,522,978
    shares issued and outstanding, respectively                598,270           145,230
  Additional paid-in capital                               623,985,662       147,844,861
  Accumulated other comprehensive income (loss)             38,169,285       (13,044,259)
  Retained earnings                                          4,603,788           696,554
                                                        --------------   ---------------

          Total stockholders' equity                       667,357,005       135,642,386
                                                        --------------   ---------------

TOTAL LIABILITIES AND STOCKHOLDERS'
   EQUITY                                               $7,717,313,899   $ 2,035,028,788
                                                        ==============   ===============


See notes to financial statements


                                      F-2


ANNALY MORTGAGE MANAGEMENT, INC.

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------



                                                                    2001             2000            1999
                                                               -------------    -------------    ------------

                                                                                        
INTEREST INCOME:
  Mortgage-Backed Securities and cash equivalents              $ 263,057,732    $ 109,750,406    $ 89,811,994

INTEREST EXPENSE -
  Repurchase agreements                                          168,055,304       92,901,697      69,846,206
                                                               -------------    -------------    ------------

NET INTEREST INCOME                                               95,002,428       16,848,709      19,965,788

GAIN ON SALE OF MORTGAGE-BACKED
  SECURITIES                                                       4,586,465        2,025,205         454,782

GENERAL AND ADMINISTRATIVE EXPENSES                                7,311,208        2,286,626       2,281,290
                                                               -------------    -------------    ------------

NET INCOME                                                        92,277,685       16,587,288      18,139,280
                                                               -------------    -------------    ------------

OTHER COMPREHENSIVE INCOME (LOSS):
  Unrealized gain (loss) on available-for-sale securities         55,800,009       26,549,456     (30,709,453)
  Less reclassification adjustment for gains included in net
    income                                                        (4,586,465)      (2,025,205)       (454,782)
                                                               -------------    -------------    ------------

           Other comprehensive income (loss)                      51,213,544       24,524,251     (31,164,235)
                                                               -------------    -------------    ------------

TOTAL COMPREHENSIVE INCOME (LOSS)                              $ 143,491,229    $  41,111,539    $(13,024,955)
                                                               =============    =============    ============

NET INCOME PER SHARE:
  Basic                                                        $        2.23    $        1.18    $       1.41
                                                               =============    =============    ============

  Diluted                                                      $        2.21    $        1.15    $       1.35
                                                               =============    =============    ============

AVERAGE NUMBER OF SHARES OUTSTANDING:
  Basic                                                           41,439,631       14,089,436      12,889,510
                                                               =============    =============    ============

  Diluted                                                         41,857,498       14,377,459      13,454,007
                                                               =============    =============    ============


See notes to financial statements


                                      F-3


ANNALY MORTGAGE MANAGEMENT, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------



                                                                                                        Accumulated
                                         Common        Additional                                          Other
                                          Stock         Paid-in       Comprehensive      Retained      Comprehensive
                                        Par Value       Capital          Income          Earnings      Income (Loss)      Total
                                        ---------     -----------     -------------      --------      -------------      -----

                                                                                                   
BALANCE, DECEMBER 31, 1998            $    126,484   $ 131,868,108                   $     280,992   $  (6,404,275)  $ 125,871,309

  Net income                                    --              --   $  18,139,280      18,139,280              --

  Other comprehensive income:
    Unrealized net losses on
       securities, net of
       reclassification adjustment              --              --     (31,164,235)             --     (31,164,235)
                                                                     -------------

  Comprehensive loss                            --              --   $ (13,024,955)             --              --     (13,024,955)
                                                                     =============

  Exercise of stock options                    572         232,704                              --              --         233,276

  Proceeds from direct purchase              8,757       8,161,845                              --              --       8,170,602

  Dividends declared for the year
    ended December 31, 1999, $1.38
    per share                                   --              --                     (17,977,754)             --     (17,977,754)
                                     -------------   -------------                   -------------   -------------   -------------

BALANCE, DECEMBER 31, 1999                 135,813     140,262,657                         442,518     (37,568,510)    103,272,478

  Net income                                                          $ 16,587,288      16,587,288

  Other comprehensive income:
    Unrealized net gains on
      securities, net of
      reclassification adjustment               --              --      24,524,251              --      24,524,251
                                                                     -------------

  Comprehensive income                          --              --   $  41,111,539              --              --      41,111,539
                                                                     =============

  Exercise of stock options                    475         198,287                              --              --         198,762

  Proceeds from direct purchase              8,942       7,383,917              --              --              --       7,392,859

  Dividends declared for the year
    ended December 31, 2000, $1.15
    per share                                   --              --                     (16,333,252)             --     (16,333,252)
                                     -------------   -------------                   -------------   -------------   -------------

BALANCE, DECEMBER 31, 2000                 145,230     147,844,861                         696,554     (13,044,259)    135,642,386
  Net income                                                          $ 92,277,685      92,277,685

  Other comprehensive income:
    Unrealized net gains on
      securities, net of
      reclassification adjustment               --              --      51,213,544              --      51,213,544
                                                                     -------------

  Comprehensive income                          --              --   $ 143,491,229              --              --     143,491,229
                                                                     =============

  Exercise of stock options                  2,747       2,971,919                              --              --       2,974,666

  Shares exchanged upon exercise
     of stock options                         (416)       (587,652)                             --              --        (588,068)

  Proceeds from direct purchase                108         142,348              --              --              --         142,456

  Proceeds from secondary offerings        450,601     473,614,186                                                     474,064,787

  Dividends declared for the year
    ended December 31, 2001, $1.75
    per share                                   --              --                     (88,370,451)             --     (88,370,451)
                                      ------------   -------------                   -------------   -------------   -------------
BALANCE, DECEMBER 31, 2001            $    598,270   $ 623,985,662                   $   4,603,788   $  38,169,285   $ 667,357,005
                                      ============   =============                   =============   =============   =============


See notes to financial statements


                                      F-4


STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------



                                                                  2001                2000                1999
                                                           ----------------    ----------------    ----------------

                                                                                          
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                               $     92,277,685    $     16,587,288    $     18,139,280
  Adjustments to reconcile net income to
    net cash provided by operating activities:
    Amortization of mortgage premiums and discounts, net         36,865,112           2,646,753           6,103,239
    Market value adjustment on long term
      repurchase agreement                                          985,719
    Gain on sale of Mortgage-Backed Securities                   (4,586,465)         (2,025,205)           (454,782)
    Stock option expense                                            789,889
    Increase in accrued interest receivable                     (35,301,162)         (4,644,799)            (98,310)
    (Increase) decrease in other assets                              61,350             (62,342)             36,988
    Increase in accrued interest payable                          7,728,590           1,631,727           1,630,061
    Increase in other liabilities and accounts payable              950,358             120,005              24,864
                                                           ----------------    ----------------    ----------------

           Net cash provided by operating activities             99,771,076          14,253,427          25,381,340
                                                           ----------------    ----------------    ----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of Mortgage-Backed Securities                     (8,194,215,283)       (952,737,643)       (559,695,956)
  Proceeds from sale of Mortgage-Backed Securities            1,248,811,946         489,809,698         122,552,293
  Principal payments on Mortgage-Backed Securities            1,685,874,506         168,516,759         362,657,549
                                                           ----------------    ----------------    ----------------

           Net cash used in investing activities             (5,259,528,831)       (294,411,186)        (74,486,114)
                                                           ----------------    ----------------    ----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from repurchase agreements                        49,773,649,527      14,196,953,221      11,202,660,000
  Principal payments on repurchase agreements               (45,033,274,527)    (13,906,889,971)    (11,144,874,250)
  Proceeds from exercise of stock options                         1,596,709             198,762             233,276
  Proceeds from direct equity offering                              142,456           7,392,859           8,170,602
  Preoceeds from secondary offerings                            474,064,787                  --                  --
  Dividends paid                                                (56,105,011)        (17,455,969)        (17,081,956)
                                                           ----------------    ----------------    ----------------

           Net cash provided by financing activities          5,160,073,941         280,198,902          49,107,672
                                                           ----------------    ----------------    ----------------

NET INCREASE IN CASH AND CASH EQUIVALENTS                           316,186              41,143               2,898

CASH AND CASH EQUIVALENTS,
  BEGINNING OF YEAR                                                 113,061              71,918              69,020
                                                           ----------------    ----------------    ----------------

CASH AND CASH EQUIVALENTS, END OF YEAR                     $        429,247    $        113,061    $         71,918
                                                           ================    ================    ================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
  INFORMATION:
  Interest paid                                            $    160,326,714    $     91,269,970    $     68,216,145
                                                           ================    ================    ================

NONCASH FINANCING ACTIVITIES:
  Net change in unrealized loss on available-for-sale
  securities                                               $     51,213,544    $     24,524,251    $    (31,164,235)
                                                           ================    ================    ================

  Dividends declared, not yet paid                         $     35,896,185    $      3,630,745    $      4,753,461
                                                           ================    ================    ================



See notes to financial statements.


                                      F-5


ANNALY MORTGAGE MANAGEMENT, INC.

NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------


1.   ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Annaly Mortgage Management, Inc. (the "Company") was incorporated in Maryland on
November 25, 1996. The Company commenced its operations of purchasing and
managing an investment portfolio of Mortgage-Backed Securities on February 18,
1997, upon receipt of the net proceeds from the private placement of equity
capital. An initial public offering was completed on October 14, 1997.

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

     Cash and Cash Equivalents - Cash and cash equivalents includes cash on hand
     and money market funds. The carrying amounts of cash equivalents
     approximates their value.

     Mortgage-Backed Securities - The Company invests primarily in mortgage
     pass-through certificates, collateralized mortgage obligations and other
     mortgage-backed securities representing interests in or obligations backed
     by pools of mortgage loans (collectively, "Mortgage-Backed Securities").

     Statement of Financial Accounting Standards No. 115, Accounting for Certain
     Investments in Debt and Equity Securities, requires the Company to classify
     its investments as either trading investments, available-for-sale
     investments or held-to-maturity investments. Although the Company generally
     intends to hold most of its Mortgage-Backed Securities until maturity, it
     may, from time to time, sell any of its Mortgage-Backed Securities as part
     of its overall management of its balance sheet. Accordingly, this
     flexibility requires the Company to classify all of its Mortgage-Backed
     Securities as available-for-sale. All assets classified as
     available-for-sale are reported at fair value, based on market prices
     provided by certain dealers who make markets in these financial
     instruments, with unrealized gains and losses excluded from earnings and
     reported as a separate component of stockholders' equity.

     Unrealized losses on Mortgage-Backed Securities that are considered other
     than temporary, as measured by the amount of decline in fair value
     attributable to factors other than temporary, are recognized in income and
     the cost basis of the Mortgage-Backed Securities is adjusted. There were no
     such adjustments for the years ended December 31, 2001, 2000, and 1999.

     Interest income is accrued based on the outstanding principal amount of the
     Mortgage-Backed Securities and their contractual terms. Premiums and
     discounts associated with the purchase of the Mortgage-Backed Securities
     are amortized into interest income over the lives of the securities using
     the interest method.

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


                                      F-6


     Credit Risk - At December 31, 2001 and 2000, the Company has limited its
     exposure to credit losses on its portfolio of Mortgage-Backed Securities by
     only purchasing securities issued by Federal Home Loan Mortgage Corporation
     ("FHLMC"), Federal National Mortgage Association ("FNMA"), or Government
     National Mortgage Association ("GNMA"). The payment of principal and
     interest on the FHLMC and FNMA Mortgage-Backed Securities are guaranteed by
     those respective agencies and the payment of principal and interest on the
     GNMA Mortgage-Backed Securities are backed by the full-faith-and-credit of
     the U.S. government. At December 31, 2001 and 2000, all of the Company's
     Mortgage-Backed Securities have an implied "AAA" rating.

     Income Taxes - The Company has elected to be taxed as a Real Estate
     Investment Trust ("REIT") and intends to comply with the provisions of the
     Internal Revenue Code of 1986, as amended (the "Code") with respect
     thereto. Accordingly, the Company will not be subjected to federal income
     tax to the extent of its distributions to shareholders and as long as
     certain asset, income and stock ownership tests are met.

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

     Recent Accounting Pronouncements - The Company adopted the provisions of
     Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting
     for Derivative Instruments and Hedging Activities, as amended by SFAS No.
     137, Accounting for Derivative Instruments and Hedging Activities -
     Deferral of the Effective Date for FASB Statement No. 133, and No. 138,
     Accounting for Certain Derivative Instruments and Certain Hedging
     Activities, and as interpreted by the FASB and the Derivatives
     Implementation Group through Statement No. 133, Implementation Issues, as
     of January 1, 2000. As of January 1, 2002, the Company had not entered into
     any derivative agreements; therefore, there was no transition adjustment.


                                      F-7


2.   MORTGAGE-BACKED SECURITIES

The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of December 31, 2001, which are carried at
their fair value:



                                      Federal              Federal         Government        Total
                                     Home Loan            National          National       Mortgage-
                                      Mortgage             Mortgage         Mortgage         Backed
                                    Corporation          Association      Association      Securities
                                                                            
Mortgage-Backed
  Securities, gross               $ 4,426,194,568    $ 2,894,026,227    $ 79,719,749    $ 7,399,940,544

Unamortized discount                   (1,345,955)          (755,106)             --         (2,101,061)
Unamortized premium                    83,775,464         54,118,304       1,476,777        139,370,545
                                  ---------------    ---------------    ------------    ---------------

Amortized cost                      4,508,624,077      2,947,389,425      81,196,526      7,537,210,028

Gross unrealized gains                 32,636,111         21,223,896          75,100         53,935,107
Gross unrealized losses                (7,985,994)        (7,313,534)       (466,294)       (15,765,822)
                                  ---------------    ---------------    ------------    ---------------

Estimated fair value              $ 4,533,274,194    $ 2,961,299,787    $ 80,805,332    $ 7,575,379,313
                                  ===============    ===============    ============    ===============


                                                     Gross Unrealized       Gross         Estimated Fair
                                   Amortized Cost          Gain        Unrealized Loss        Value
                                   --------------    ----------------  ---------------    --------------

Adjustable Rate                   $ 5,908,236,449    $    44,469,272    $(10,049,070)   $ 5,942,656,651

Fixed Rate                          1,628,973,579          9,465,834      (5,716,751)     1,632,722,662
                                  ---------------    ---------------    ------------    ---------------

Total                             $ 7,537,210,028    $    53,935,106    $(15,765,821)   $ 7,575,379,313
                                  ===============    ===============    ============    ===============



                                      F-8


The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of December 31, 2000, which are carried at
their fair value:



                                                      Federal           Federal         Government        Total
                                                     Home Loan         National          National       Mortgage-
                                                      Mortgage          Mortgage         Mortgage         Backed
                                                    Corporation       Association      Association      Securities
                                                                                          
Mortgage-Backed
  Securities, gross                               $ 1,029,045,622    $ 853,777,836    $ 85,143,889    $ 1,967,967,347

Unamortized discount                                     (221,944)        (767,116)             --           (989,060)
Unamortized premium                                    11,203,043       11,569,619       1,512,687         24,285,349
                                                  ---------------    -------------    ------------    ---------------

Amortized cost                                      1,040,026,721      864,580,339      86,656,576      1,991,263,636

Gross unrealized gains                                  2,220,525          798,984              --          3,019,509
Gross unrealized losses                                (5,426,076)      (9,503,333)     (1,134,360)       (16,063,769)
                                                  ---------------    -------------    ------------    ---------------

Estimated fair value                              $ 1,036,821,170    $ 855,875,990    $ 85,522,216    $ 1,978,219,376
                                                  ===============    =============    ============    ===============

                                                                    Gross Unrealized       Gross         Estimated Fair
                                                   Amortized Cost          Gain        Unrealized Loss        Value
                                                   --------------   ----------------   ---------------   --------------

Adjustable Rate                                   $ 1,475,409,337    $      12,565    $ (7,819,597)   $ 1,467,602,305

Fixed Rate                                            515,854,299        3,006,944      (8,244,172)       510,617,071
                                                  ---------------    -------------    ------------    ---------------

Total                                             $ 1,991,263,636    $   3,019,509    $(16,063,769)   $ 1,978,219,376
                                                  ===============    =============    ============    ===============


The adjustable rate Mortgage-Backed Securities are limited by periodic caps
(generally interest rate adjustments are limited to no more than 1% every six
months) and lifetime caps. The weighted average lifetime cap was 11.5% at
December 31, 2001 and 2000.

During the year ended December 31, 2001, the Company realized $6,770,754 in
gains from sales of Mortgage-Backed Securities. Losses totaled $2,184,289 for
the year ended December 31, 2001. During the year ended December 31, 2000, the
Company realized $2,025,205 in gains from sales of Mortgage-Backed Securities.
During the year ended December 31, 1999, the Company realized $563,259 in gains
from sales of Mortgage-Backed Securities. Losses totaled $108,477 for the year
ended December 31, 1999.

3.   REPURCHASE AGREEMENTS

The Company had outstanding $6,367,710,186 and $1,628,359,000 of repurchase
agreements with a weighted average borrowing rate of 2.18% and 6.55% and a
weighted average remaining maturity of 85 days and 29 days as of December 31,
2001 and 2000, respectively. At December 31, 2001 and 2000, Mortgage-Backed
Securities actually pledged had an estimated fair value of $6,564,249,752 and
$1,668,161,860, respectively.


                                      F-9


At December 31, 2001 and 2000, the repurchase agreements had the following
remaining maturities:



                                               2001             2000
                                         --------------   --------------

                                                    
Within 30 days                           $5,380,006,000   $1,135,886,000
30 to 59 days                               206,947,000      363,810,000
60 to 89 days                                66,202,000       48,845,000
90 to 119 days                               65,037,000               --
Over 120 days                               649,518,186       79,818,000
                                         --------------   --------------

                                         $6,367,710,186   $1,628,359,000


4.   OTHER LIABILITIES

In 2001, the Company entered into a repurchase agreement maturing in July 2004,
at which time, the repurchase agreement gives the buyer the right to extend, in
whole or in part, in three-month increments up to July 2006. The repurchase
agreement has a principal value of $100,000,000. The Company accounts for the
extension option as a separate interest rate floor liability carried at fair
value. The initial fair value of $1,200,000 allocated to the interest rate floor
resulted in a similar discount on the repurchase agreement borrowings that is
being amortized over the initial term of 3 years using the effective yield
method. At December 31, 2001, the fair value of this interest rate floor was a
$2,009,533 and was classified as other liabilities. The aggregate charge of
$985,719 is included in interest expense for 2001.

5.   COMMON STOCK

During the Company's year ending December 31, 2001, the Company declared
dividends to shareholders totaling $88,370,451, or $1.75 per share, of which
$52,474,266 was paid during the year and $35,896,185 was paid on January 30,
2002.

During the year ended December 31, 2001, 274,231 options were exercised at
$2,974,666. Total shares exchanged upon exercise of the stock options were
41,620 at a value of $588,068. Also, 10,856 shares were purchased in dividend
reinvestment and share purchase plan, totaling $142,456. The Company completed
an offering of common stock in the third quarter issuing 14,991,600 shares, with
aggregate net proceeds of $179.6 million. An offering of common stock during the
second quarter of 2001 was completed issuing 18,918,500 shares, with aggregate
net proceeds of $195.3 million. Additional offerings for 11,150,000 shares were
completed during the first quarter for aggregate net proceeds of $99.3 million.

During the Company's year ending December 31, 2000, the Company declared
dividends to shareholders totaling $16,333,252, or $1.15 per share, of which
$12,702,507 was paid during the year and $3,630,745 was paid on January 30,
2001.

During the year ended December 31, 2000, 47,499 options were exercised at
$198,762. Also, 894,163 shares were purchased in direct offerings, totaling
$7,392,859. During the year ended December 31, 1999, 57,204 options were
exercised at $233,276. Also, 875,688 shares were purchased in the dividend
reinvestment and share purchase plan, totaling $8,170,602.

6.   EARNINGS PER SHARE (EPS)

In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting No. 128, Earnings Per Share (SFAS No. 128),
which requires dual presentation of basic EPS and diluted EPS on the face of the
income statement for all entities with complex capital structures. SFAS No. 128
also requires a reconciliation of the numerator and denominator of basic EPS and
diluted EPS computation.

For the year ended December 31, 2001, the reconciliation is as follows:


                                      F-10




                                                  For the Year Ended
                                                  December 31, 2001
                                      ------------------------------------------
                                        Income           Shares        Per-Share
                                      (Numerator)     (Denominator)      Amount

                                                                
Net income                            $92,277,685
                                      -----------

Basic EPS                              92,277,685       41,439,631       $ 2.23
                                                                         ======

Effective of dilutive securities:
   Dilutive stock options                      --          417,867
                                      -----------       ----------

   Diluted EPS                        $92,277,685       41,857,498       $ 2.21
                                      ===========       ==========       ======


Options to purchase 629,576 shares were outstanding during the year and were
dilutive as the exercise price of between $4.00 and $11.25 was less than the
average stock price for the year of $12.70. Options to purchase 6,250 shares of
stock were outstanding and not considered dilutive. The exercise price of $13.69
was greater than the average stock price for the year of $12.70.

For the year ended December 31, 2000, the reconciliation is as follows:



                                                  For the Year Ended
                                                  December 31, 2001
                                      ------------------------------------------
                                        Income           Shares        Per-Share
                                      (Numerator)     (Denominator)      Amount

                                                                
Net income                            $16,587,288
                                      -----------

Basic EPS                              16,587,288       14,089,436       $ 1.18
                                                                         ======

Effective of dilutive securities:
   Dilutive stock options                      --          288,023
                                      -----------       ----------

   Diluted EPS                        $16,587,288       14,377,459       $ 1.15
                                      ===========       ==========       ======


Options to purchase 334,881 shares were outstanding during the year and were
dilutive as the exercise price of between $4.00 and $8.13 was less than the
average stock price for the year of $8.51. Options to purchase 568,926 shares of
stock were outstanding and not considered dilutive. The exercise price of
between $8.63 and $11.25 was greater than the average stock price for the year
of $8.51.

For the year ended December 31, 1999, the reconciliation is as follows:




                                                  For the Year Ended
                                                  December 31, 2001
                                      ------------------------------------------
                                        Income           Shares        Per-Share
                                      (Numerator)     (Denominator)      Amount

                                                                
Net income                            $18,139,280
                                      -----------

Basic EPS                              18,139,280       12,889,510       $ 1.41
                                                                         ======

Effective of dilutive securities:
   Dilutive stock options                      --          564,497
                                      -----------       ----------

   Diluted EPS                        $18,139,280       13,454,007       $ 1.35
                                      ===========       ==========       ======

Options to purchase 708,380 shares were outstanding during the year and were
dilutive as the exercise price (between $4.00 and $8.94) was less than the
average stock price for the year for the Company of $9.58. Options to purchase


                                      F-11


135,676 shares of stock were outstanding and not considered dilutive. The
exercise price (between $10.00 and $11.25) was greater than the average stock
price for the year of $9.58.

7.   LONG-TERM STOCK INCENTIVE PLAN

The Company has adopted a long term stock incentive plan for executive officers,
key employees and nonemployee directors (the "Incentive Plan"). The Incentive
Plan authorizes the Compensation Committee of the board of directors to grant
awards, including incentive stock options as defined under Section 422 of the
Code ("ISOs") and options not so qualified ("NQSOs"). The Incentive Plan
authorizes the granting of options or other awards for an aggregate of the
greater of 500,000 shares or 9.95% of the outstanding shares of the Company's
common stock.

The Company adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation.
Accordingly, no compensation cost for the Incentive Plan has been determined
based on the fair value at the grant date for awards consistent with the
provisions of SFAS No. 123. For the Company's pro forma net earnings, the
compensation cost will be amortized over the vesting period of the options. The
Company's net earnings per share would have been reduced to the pro forma
amounts indicated below:



                                         2001             2000           1999
                                     -----------      -----------    -----------

                                                            
Net earnings - as reported           $92,277,685      $16,587,288    $18,139,280
Net earnings - pro forma              92,012,080       16,468,550     18,010,908
Earnings per share - as reported           $2.23            $1.18          $1.41
Earnings per share - pro forma             $2.22            $1.17          $1.40


The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in the year ended December 31, 2001: dividend yield
of 15.32%; expected volatility of 28%; risk-free interest rate of 4.21%; and the
weighted average expected lives of five years. For the year ended December 31,
2000: dividend yield of 12.69%; expected volatility of 28.33%; risk-free
interest rate of 5.16%; and the weighted average expected lives of nine years.
For the year ended December 31, 1999, dividend yield of 15%; expected volatility
of 32%; risk-free interest rate of 5.61%; and the weighted average expected
lives of seven years.

Information regarding options at December 31, 2001 is as follows:



                                                                     Weighted
                                                                      Average
                                                                     Exercise
                                                        Shares         Price
                                                      ---------      --------

                                                                
Outstanding, January 1, 2001                           903,807        $ 8.28

   Granted (6,250 NSQOs)                                 6,250         13.69
   Exercised                                          (274,231)         7.95
                                                      --------        ------

Outstanding, December 31, 2001                         635,826        $ 8.48
                                                      ========        ======

Weighted average value of options granted
   during the year (per share)                        $   0.33
                                                      ========



                                      F-12


Information regarding options at December 31, 2000 is as follows:



                                                                     Weighted
                                                                      Average
                                                                     Exercise
                                                        Shares         Price
                                                      ---------      --------

                                                                
Outstanding, January 1, 2000                           844,056        $ 8.03

   Granted (36,500 ISOs, 86,000 NQSOs)                 122,500          8.00
   Exercised                                           (15,250)         9.17
   Expired                                             (47,499)         4.18
                                                      --------        ------

Outstanding, December 31, 2000                         903,807        $ 8.28
                                                      ========        ======

Weighted average value of options granted
   during the year (per share)                        $   0.33
                                                      ========


Information regarding options at December 31, 1999 is as follows:



                                                                     Weighted
                                                                      Average
                                                                     Exercise
                                                        Shares         Price
                                                      ---------      --------

                                                                
Outstanding, January 1, 1999                           593,760        $ 7.42

   Granted (298,068 ISOs, 545,988 NQSOs)               307,500          8.63
   Exercised                                           (57,204)         4.08
   Expired                                                  --            --
                                                      --------        ------

Outstanding, December 31, 1999                         844,056        $ 8.03
                                                      ========        ======

Weighted average value of options granted
   during the year (per share)                        $   0.63
                                                      ========


The following table summarizes information about stock options outstanding at
December 31, 2001:



      Exercise Price              Outstanding              Life (Yrs.)
      --------------              -----------              -----------

                                                          
          $ 7.94                     110,362                    9
            8.13                     213,381                    7
            8.63                     264,705                    8
            8.94                       2,500                    1
            9.06                       3,438                    2
           10.00                      27,000                    1
           10.75                       6,250                    1
           11.25                       1,940                    1
           13.69                       6,250                    5
                                     -------                 ----
                                     635,826                  7.4
                                     =======                 ====



                                      F-13


At December 31, 2001, 2000, and 1999 297,018, 341,013, and 162,389 options were
vested and not exercised, respectively.

8.   COMPREHENSIVE INCOME

The Company adopted Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income. Statement No. 130 requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income. The Company at December 31, 2001
and 2000 held securities classified as available-for-sale. At December 31, 2001,
the net unrealized gains totaled $38,169,285 and at December 31, 2000, the net
unrealized losses totaled $13,044,259.

9.   LEASE COMMITMENTS

The Corporation has a noncancelable lease for office space, which commenced in
April 1998 and expires in December 2007.

The Corporation's aggregate future minimum lease payments are as follows:

        2002                                100,515
        2003                                110,261
        2004                                113,279
        2005                                116,388
        2006                                119,590
        2007                                122,888
                                           --------

        Total remaining lease payments     $682,921
                                           ========

10.  RELATED PARTY TRANSACTION

     Included in "Other Assets" on the Balance sheet is an investment in Annaly
International Money Management, Inc. On June 24, 1998, the Company acquired
99,960 nonvoting shares, at a cost of $49,980. The Company continues to report
the investment at cost. The officers and directors of Annaly International Money
Management Inc. are also officers and directors of the Company. Officers and
employees of the Company are actively involved in managing mortgage-backed
securities and other fixed income assets for institutional clients through Fixed
Income Discount Advisory Company ("FIDAC"). FIDAC is a registered investment
advisor, which 100% owned by the Chief Executive Officer of Annaly Mortgage
Management, Inc. Our management currently allocates rent and other general and
administrative expenses 90% to Annaly and 10% to FIDAC.

11.  INTEREST RATE RISK

     The primary market risk to the Company is interest rate risk. Interest
rates are highly sensitive to many factors, including governmental monetary and
tax policies, domestic and international economic and political considerations
and other factors beyond the Company's control. Changes in the general level of
interest rates can affect net interest income, which is the difference between
the interest income earned on interest-earning assets and the interest expense
incurred in connection with the interest-bearing liabilities, by affecting the
spread between the interest-earning assets and interest-bearing liabilities.
Changes in the level of interest rates also can affect the value of the
mortgage-backed securities and the Company's ability to realize gains from the
sale of these assets.

     The Company seeks to manage the extent to which net income changes as a
function of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. In addition, although the Company has not done so to
date, the Company may seek to mitigate the potential impact on net income of
periodic and lifetime coupon adjustment


                                      F-14


restrictions in the portfolio of mortgage-backed securities by entering into
interest rate agreements such as interest rate caps and interest rate swaps.

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

12.  SUBSEQUENT EVENT

The Company completed a secondary offering of 20,000,000 shares of company
common stock on January 24, 2002. The aggregate net proceeds to the Company
after deducting expenses are estimated to be $302.1 million. The underwriters
exercised an option to purchase 3,000,000 additional shares of common stock to
cover over-allotments on January 31, 2002, providing the Company with additional
net proceeds of $45.4 million.

13.  SUMMARIZED QUARTERLY RESULTS (UNAUDITED)

The following is a presentation of the quarterly results of operations for the
year ended December 31, 2001.



                                                            Quarters Ending
                                        ------------------------------------------------------
                                         March 31,      June 30,   September 30,  December 31,
                                           2001           2001         2001           2001

                                                                      
Interest income from Mortgage-
  Backed Securities and cash            $42,434,421   $64,789,651   $75,774,532   $80,059,128

Interest expense on repurchase
  agreements                             33,453,077    45,283,966    48,620,332    40,697,929
                                        -----------   -----------   -----------   -----------

           Net interest income            8,981,344    19,505,685    27,154,200    39,361,199

Gain on sale of
  Mortgage-Backed Securities                269,478       481,936     1,184,399     2,650,651

General and administrative
  expenses                                  920,549     1,392,778     1,993,431     3,004,450
                                        -----------   -----------   -----------   -----------

Net income                              $ 8,330,273   $18,594,843   $26,345,168   $39,007,400
                                        ===========   ===========   ===========   ===========

Net income per share:
  Basic                                       $0.38         $0.48         $0.58         $0.65
                                              =====         =====         =====         =====

  Dilutive                                    $0.37         $0.48         $0.57         $0.65
                                              =====         =====         =====         =====

Average number of shares outstanding:
  Basic                                  21,851,481    38,473,928    45,503,179    59,776,777
                                        ===========   ===========   ===========   ===========

  Dilutive                               22,535,210    39,054,488    45,959,693    60,155,994
                                        ===========   ===========   ===========   ===========



                                      F-15


The following is a presentation of the quarterly results of operations for the
year ended December 31, 2000.



                                                            Quarters Ending
                                        ------------------------------------------------------
                                         March 31,      June 30,   September 30,  December 31,
                                           2000           2000         2000           2000

                                                                      
Interest income from Mortgage-
  Backed Securities and cash            $24,616,782   $25,734,520   $28,239,125   $31,159,979

Interest expense on repurchase
  agreements                             19,292,954    21,453,016    24,779,096    27,376,631
                                        -----------   -----------   -----------   -----------

           Net interest income            5,323,828     4,281,504     3,460,029     3,783,348

Gain on sale of
  Mortgage-Backed Securities                106,853        64,774       872,949       980,629

General and administrative
  expenses                                  582,319       507,322       526,881       670,104
                                        -----------   -----------   -----------   -----------

Net income                              $ 4,848,362   $ 3,838,956   $ 3,806,097   $ 4,093,873
                                        ===========   ===========   ===========   ===========

Net income per share:
  Basic                                       $0.35         $0.27         $0.27         $0.28
                                              =====         =====         =====         =====

  Dilutive                                    $0.35         $0.26         $0.26         $0.28
                                              =====         =====         =====         =====
Average number of shares outstanding:
  Basic                                  13,660,539    14,039,741    14,238,680    14,413,578
                                        ===========   ===========   ===========   ===========

  Dilutive                               13,971,112    14,631,940    14,529,142    14,702,189
                                        ===========   ===========   ===========   ===========


                                  * * * * * *


                                      F-16


                                   SIGNATURES

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

                                         ANNALY MORTGAGE MANAGEMENT, INC.

Date:  March 28, 2002               By:  /s/ Michael A. J. Farrell

                                         Michael A. J. Farrell
                                         Chairman, Chief Executive Officer,
                                           and President

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





                 Signature                                        Title                                 Date

                                                                                             

         /s/ KEVIN P. BRADY
         -------------------------------
             Kevin P. Brady                      Director                                          March 28, 2002


         /s/ SPENCER I. BROWNE
         -------------------------------
             Spencer Browne                      Director                                          March 28, 2002


         /s/ KATHRYN F. FAGAN
         -------------------------------
             Kathryn F. Fagan                    Chief Financial Officer and Treasurer
                                                 (principal financial and accounting officer)      March 28, 2002

         /s/ MICHAEL A.J. FARRELL
         -------------------------------
             Michael A. J. Farrell               Chairman of the Board, Chief Executive Officer,
                                                 President and Director (principal executive
                                                 officer)                                          March 28, 2002


         /s/ JONATHAN D. GREEN
         -------------------------------
             Jonathan D. Green                   Director                                          March 28, 2002


         /s/ JOHN A. LAMBIASE
         -------------------------------
             John A. Lambiase                    Director                                          March 28, 2002


         /s/ DONNELL A. SEGALAS
         -------------------------------
             Donnell A. Segalas                  Director                                          March 28, 2002


         /s/ WELLINGTON J. ST. CLAIRE
         -------------------------------
             Wellington J. St. Claire            Vice Chairman of the Board and Director           March 28, 2001






                                  EXHIBIT INDEX
                                                                   Sequentially
Exhibit                                                              Numbered
Number                     Exhibit Description                        Page

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

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

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

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

10.1      Purchase Agreement, dated February 12, 1997, between
          the Registrant and Friedman, Billings, Ramsey & Co.,
          Inc. ("FBR") (incorporated by reference to Exhibit 10.1
          to our Registration Statement on Form S-11
          (Registration No. 333-32913), filed with the Securities
          and Exchange Commission on August 5, 1997).

10.2      Registration Rights Agreement, dated February 12, 1997,
          between the Registrant and FBR (incorporated by
          reference to Exhibit 10.2 to our Registration Statement
          on Form S-11 (Registration No. 333-32913) filed with
          the Securities and Exchange Commission on August 5,
          1997).

10.3      Long-Term Stock Incentive Plan (incorporated by
          reference to Exhibit 10.3 to our Registration Statement
          on Form S-11 (Registration No. 333-32913) filed with
          the Securities and Exchange Commission on August 5,
          1997).*

10.4      Form of Master Repurchase Agreement (incorporated by
          reference to Exhibit 10.7 to our Registration Statement
          on Form S-11 (Registration No. 333-32913) filed with
          the Securities and Exchange Commission on August 5,
          1997).

10.5      Form of Purchase Agreement, between the Registrant and
          the purchasers in the Direct Offering (incorporated by
          reference to Exhibit 10.8 to our Registration Statement
          on Form S-11 (Registration No. 333-32913) filed with
          the Securities and Exchange Commission on August 5,
          1997).

10.6      Amended and Restated Employment Agreement, effective as
          of May 1, 2001 between the Registrant and Michael A.J.
          Farrell (incorporated by reference to Exhibit 10.1 to
          our Form 10-Q/A for its quarterly period ended June 30, 2001
          filed with the Securities and Exchange Commission on
          August 27, 2001).*

10.7      Amended and Restated Employment Agreement, effective as
          of May 1, 2001, between the Registrant and Wellington
          St. Claire (incorporated by reference to Exhibit 10.2
          to our Form 10-Q/A for its quarterly period ended June
          30, 2001 filed with the Securities and Exchange
          Commission on August 27, 2001).*

10.8      Amended and Restated Employment Agreement, effective as
          of May 1, 2001 between the Registrant and Kathryn F.
          Fagan (incorporated by reference to Exhibit 10.3 to our
          Form 10-Q/A for its quarterly period ended June 30,
          2001 filed with the Securities and Exchange Commission
          on August 27, 2001).*

10.9      Amended and Restated Employment Agreement, effective as
          of May 1, 2001, between the Registrant and Jennifer A.
          Stephens (incorporated by reference to Exhibit 10.4 to
          our Form 10-Q/A for its quarterly period ended June 30,
          2001 filed with the Securities and Exchange Commission
          on August 27, 2001).*

23.1      Consent of Independent Accountants.

* Exhibit Numbers 10.3 and 10-6-10.9 are management contracts or compensatory
plans required to be filed as Exhibits to this Form 10-K.