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, 2005

                                       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                               (I.R.S. Employer
of incorporation of organization)                         Identification Number)

                     1211 Avenue of the Americas, Suite 2902
                            New York, New York 10036
               (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

7.875% Series A Cumulative Redeemable Preferred Stock    New York Stock Exchange

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

         None.

Indicate by check mark whether the Registrant is a well-known seasoned issuer,
 as defined in Rule 405 of the Securities Act.   Yes [X]  No [_]

Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.  Yes [_]  No  [X]






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.

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

 Large accelerated filer [X]  Accelerated filer [_]  Non-accelerated filer [_]

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

At June 30, 2005, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $2,147,352,789

The number of shares of the Registrant's Common Stock outstanding on
March 7, 2006 was 123,701,656

                       Documents Incorporated by Reference


The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December 31,
2005. Portions of such proxy statement are incorporated by reference into Part
III of this Form 10-K.





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

                          2005 FORM 10-K ANNUAL REPORT

                                TABLE OF CONTENTS

                                     PART I
                                                                            PAGE


ITEM 1.   BUSINESS                                                             2

ITEM 1A.  RISK FACTORS                                                        18

ITEM 1B.  UNRESOLVED STAFF COMMENTS                                           27

ITEM 2.   PROPERTIES                                                          27

ITEM 3.   LEGAL PROCEEDINGS                                                   27

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                 27

                                     PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED
          STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES       28

ITEM 6.   SELECTED FINANCIAL DATA                                             30

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
          AND RESULTS OF OPERATIONS                                           32

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK          47

ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                         49

ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
          AND FINANCIAL DISCLOSURE                                            49

ITEM 9A.  CONTROLS AND PROCEDURES                                             49

ITEM 9B.  OTHER INFORMATION                                                   50

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT                  50

ITEM 11.  EXECUTIVE COMPENSATION                                              50

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
          MANAGEMENT ANDRELATED STOCKHOLDER MATTERS                           50

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                      50

ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES                              50

                                     PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES                          51

FINANCIAL STATEMENTS                                                         F-1

SIGNATURES                                                                  II-1

EXHIBIT INDEX                                                               II-2





                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:

     o    changes in interest rates,

     o    changes in the yield curve,

     o    changes in prepayment rates,

     o    the availability of mortgage-backed securities for purchase,

     o    the availability of financing,

     o    changes in the market value of our assets,

     o    changes in business conditions and the general economy,

     o    risks associated with the investment advisory business of our wholly
          owned subsidiary, Fixed Income Discount Advisory Company (which we
          refer to as FIDAC), including:

          o    the removal by FIDAC's clients of assets FIDAC manages,

          o    FIDAC's regulatory requirements, and

          o    competition in the investment advisory business,

     o    changes in government regulations affecting our business, and

     o    our ability to maintain our qualification as a REIT for federal income
          tax purposes.

For a discussion of the risks and uncertainties which could cause actual results
to differ from those contained in the forward-looking statements, please see the
information under the caption "Risk Factors" described in this Form 10-K. 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.

                                       1



                                     PART I
                                     ------

ITEM 1. BUSINESS
- ----------------

                                   THE COMPANY

     Background

     Annaly Mortgage Management, Inc. owns, manages, and finances a portfolio of
investment securities, including mortgage pass-through certificates,
collateralized mortgage obligations (or CMOs), agency callable debentures, 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 investment securities and the cost of borrowings to finance our acquisition
of investment securities. We are a Maryland corporation that commenced
operations on February 18, 1997. We are self-advised and self-managed. We
acquired Fixed Income Discount Advisory Company (or FIDAC) on June 4, 2004 (See
Note 2 to the Financial Statements). FIDAC is a registered investment advisor
and is our taxable REIT subsidiary.

     We have financed our purchases of investment 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.

     We have elected and believe that we are organized and have operated in a
manner that qualifies us to be taxed as a real estate investment trust (or REIT)
under the Internal Revenue Code of 1986, as amended (or the Code). If we qualify
for taxation as a REIT, we generally will not be subject to federal income tax
on our taxable income that is distributed to our stockholders. Therefore,
substantially all of our assets, other than FIDAC, our taxable REIT subsidiary,
consist of qualified REIT real estate assets (of the type described in Section
856(c)(5)(B) of the Code). We have financed our purchases of investment
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.

     As used herein, "Annaly," the "Company," "we," "our" and similar terms
refer to Annaly Mortgage Management, Inc., unless the context indicates
otherwise.


     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 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 for which a government agency or federally chartered corporation,
such as the Federal Home Loan Mortgage Corporation ("FHLMC"), the Federal
National Mortgage Association ("FNMA"), or the Government National Mortgage
Association ("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.

                                       2



     At December 31, 2005, approximately 55% of our investment securities were
adjustable-rate pass-though certificates, approximately 39% of our investment
securities were fixed-rate pass-through certificates or CMOs, and approximately
6% of our investment 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 short-term interest rates. Our
fixed-rate pass-through certificates are backed by fixed-rate mortgage loans and
have coupon rates which do not adjust over time. CMO floaters are tranches of
mortgage-backed securities where the interest rate adjusts in conjunction with
changes in short-term interest rates. 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 investment securities" to refer
to adjustable-rate pass-through certificates, CMO floaters, and Agency
debentures. At December 31, 2005, the weighted average yield on our portfolio of
earning assets was 4.68% and the weighted average term to next rate adjustment
on adjustable rate securities was 22 months.

     We may also invest in Federal Home Loan Bank ("FHLB"), FHLMC, and FNMA
debentures. We refer to the mortgage-backed securities and agency debentures
collectively as "Investment Securities." We intend to continue to invest in
adjustable-rate pass-through certificates, fixed-rate mortgage-backed
securities, CMO floaters, and Agency debentures. 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 ("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 investment securities. However, periodic rate adjustments on our
borrowings are generally more frequent than rate adjustments on our investment
securities. At December 31, 2005, the weighted average cost of funds for all of
our borrowings was 4.16%, the weighted average original term to maturity was 163
days, and the weighted average term to next rate adjustment of these borrowings
was 79 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,
2005, our ratio of debt-to-equity was 9.0:1.

     Hedging

     To the extent consistent with our election to qualify as a REIT, we enter
into hedging transactions to attempt to protect our investment 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 investment
securities during periods of increasing or decreasing interest rates and to
limit or cap the interest 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.

     Compliance with REIT and Investment Company Requirements

     We constantly monitor our investment securities and the income from these
securities and, to the extent we enter into hedging transactions, we 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 of 1940, as amended.

                                       3



     Executive Officers of the Company

     The following table sets forth certain information as of March 9, 2006
concerning our executive officers:


        Name                     Age           Position held with the Company
        ----                     ---           ------------------------------

Michael A.J. Farrell             54     Chairman of the Board, Chief Executive
                                        Officer and President

Wellington J. Denahan-Norris     42     Vice Chairman of the Board, Chief
                                        Investment Officer and Chief
                                        Operating Officer

Kathryn F. Fagan                 39     Chief Financial Officer and Treasurer

James P. Fortescue               32     Senior Vice President and
                                        Liability Manager

Kristopher Konrad                31     Senior Vice President and Senior
                                        Portfolio Manager

Rose-Marie Lyght                 32     Senior Vice-President and  Senior
                                        Portfolio Manager

Jeremy Diamond                   42     Managing Director

Ronald Kazel                     38     Managing Director

R. Nicholas Singh                47     Executive Vice President, General
                                        Counsel, Secretary and Chief
                                        Compliance Officer

     Mr. Farrell and Ms. Denahan-Norris have an average of 24 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. 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. Mr. Fortescue joined Annaly in 1997. Mr.
Konrad joined Annaly in 1997. Ms. Lyght joined Annaly in April 1999. Mr. Diamond
joined Annaly in March 2002. From 1990 to 2002 he was President of Grant's
Financial Publishing. Mr. Kazel joined Annaly in December 2001. Prior to that he
was a Senior Vice-President in Friedman Billings Ramsey's financial services
investment banking group. Mr. Singh joined Annaly in February 2005. Prior to
that, he was a partner in the law firm of McKee Nelson LLP, and prior to that, a
partner in Sidley Austin Brown & Wood LLP. We had 31 full-time employees at
December 31, 2005.

     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.


                                       4



                                BUSINESS STRATEGY

General

     Our principal business objective is to generate income for distribution to
our stockholders, primarily from the net cash flows on our investment
securities. Our net cash flows result primarily from the difference between the
interest income on our investment securities and borrowing costs of our
repurchase agreements and from dividends we receive from FIDAC. 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;

     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 in our business, including improving
          our ability to monitor the performance of our investment securities
          and to lower our operating costs.

                                       5



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 to date we have only acquired securities with an implied "AAA"
rating, 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 are 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 intend to 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.

     At December 31, 2005, our mortgage-backed securities consist of
pass-through certificates and collateralized mortgage obligations 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 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


                                       6



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 result in a faster than expected amortization of the
premium paid. Conversely, if these securities were purchased at a discount,
faster than expected prepayments 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 guarantees 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 delinquencies 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 ("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 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.

                                       7



     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.

     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 not 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 ("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 ("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.

                                       8



     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" rating 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 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.

                                       9



     Other types of CMO issues include classes such as parallel pay CMOs, some
of which, such as planned amortization class CMOs ("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 ("ARMs").

     We also acquire CMO 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 CMO floaters and may
be backed by fixed or adjustable-rate mortgages.

     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.

                                       10



     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 the value 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
market 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 security.
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 interest 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.

     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

     As of December 31, 2005, we have not invested directly in mortgage loans,
but 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 ARM pass-through certificates. The
interest rate on an ARM pass-through certificate 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.

                                       11



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 that we believe
we have the necessary expertise to evaluate and manage, that we can readily
finance and that 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 and managing the asset.

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 risk management models, 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.

                                       12



     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 may 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
however to sell assets from time to time, 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, or 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 embedded 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 REIT taxable
income (determined without regard to the deduction for dividends paid and by
excluding any net capital gain) 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.

     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 the 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, 2005, our ratio of
debt-to-equity was 9.0:1.

                                       13



     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 of 1940, as amended (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, 2005, the weighted average haircut
level on our securities was 3.3%. 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.

     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 32
lenders for borrowings in the form of repurchase agreements. We have not at the

                                       14



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 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.

     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.

                                       15



     We purchase from time-to-time interest rate swaps. We may in the future
enter into 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 interest rate risk
management 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 weighted average 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, 2005, we estimate that the duration of our assets was 1.80, with
the swap transactions the weighted average duration is 1.63. 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 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, each of which we would elect to treat as a
"taxable REIT subsidiary." To comply with the asset tests applicable to us as a
REIT, 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, such as FIDAC, would not elect REIT status 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 could result in our disqualification as a REIT,
the payment of a penalty tax for failure to satisfy certain REIT 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.

                                       16



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, except for the acquisition of FIDAC, 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
entered into such businesses.

     We may, from time-to- time, continue to explore possible acquisitions,
investments, joint venture arrangements and strategic alliances.

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 an effective shelf registration statement on Form
S-3 which initially registered 2,000,000 shares that could be issued under the
plan. We still sell shares covered by this registration statement 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.

     Employees

     As of December 31, 2005, we had 31 full time employees. None of our
employees are subject to any collective bargaining agreements. We believe we
have good relations with our employees.

Available Information

     Our investor relations website is www.annaly.com. We make available on this
website under "Financial Reports and SEC filings," free of charge, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and amendments to those reports as soon as reasonably practicable after we
electronically file or furnish such materials to the SEC.

                                   COMPETITION

     We believe that our principal competition in the acquisition and holding of
the types of mortgage-backed securities we purchase 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. Some of our competitors have greater financial resources and access to
capital than we do. Our competitors, as well as of additional competitors which
may emerge in the future, may increase the competition for the acquisition of
mortgage-backed securities, which in turn may result in higher prices and lower
yields on assets.

                                       17



ITEM 1A. 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 stock could
decline significantly and you may lose all or part of your investment.

Risks Related to Our Business

An increase in the interest payments on our borrowings relative to the interest
we earn on our investment securities may adversely affect our profitability

     We earn money based upon the spread between the interest payments we earn
on our investment 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 investment 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 investment securities for various
reasons discussed in this section.

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

     We rely primarily on short-term borrowings to acquire investment securities
with long-term maturities. Accordingly, if short-term interest rates increase,
this may adversely affect our profitability.

     Most of the investment 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:

     -    LIBOR. The interest rate that banks in London offer for deposits in
          London of U.S. dollars.

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

     -    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,
2005, approximately 61% of our investment 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 investment
securities. For example, on December 31, 2005, our adjustable-rate investment
securities had a weighted average term to next rate adjustment of 22 months,
while our borrowings had a weighted average term to next rate adjustment of 79
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
investment securities.

o    Interest rate caps on our investment securities may adversely affect our
     profitability

     Our adjustable-rate investment 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 an investment
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 experience a net loss because the interest rates on our
borrowings could increase without limitation while the interest rates on our
adjustable-rate investment securities would be limited by caps.

                                       18



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 investment
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, 2005,
approximately 39% of our investment 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. If the mortgage-backed security is prepaid
in whole or in part prior to its maturity date, however, we must expense all or
a part of the remaining unamortized portion of the premium that was prepaid at
the time of the prepayment. This adversely affects our profitability.

     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 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 also can acquire mortgage-backed securities that are less affected by
prepayments. For example, we can acquire 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 imposes restrictions
on our purchase of CMOs. On December 31, 2005, approximately 6% of our
mortgage-backed securities were CMOs and approximately 55% 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
investment 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 investment
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
investment securities. By incurring this leverage, we can enhance our returns.
Nevertheless, this leverage, which is fundamental to our investment strategy,
also creates significant risks.

                                       19



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:

     -    short-term interest rates increase;

     -    the market value of our investment securities decreases;

     -    interest rate volatility increases; or

     -    the availability of financing in the market decreases.

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

     Because of our leverage, a decline in the value of our investment
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 investment 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 investment securities, we may be unable to comply with these requirements,
ultimately jeopardizing our status as a REIT and our failure to qualify as a
REIT will have adverse tax consequences.

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:

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

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

     -    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.

                                       20



     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:

     -    the movement of interest rates;

     -    the availability of financing in the market; or

     -    the value and liquidity of our investment 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
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.

Our hedging strategies may not be successful in mitigating the risks associated
with interest rates.

     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. We have used interest rate swaps to provide a
level of protection against interest rate risks, but no hedging strategy can
protect us completely. We cannot assure you that our use of derivatives will
offset the risks related to changes in interest rates. It is likely that there
will be periods in the future during which we will incur losses on our
derivative financial instruments that will not be fully offset by gains on our
portfolio. The derivative financial instruments we select may not have the
effect of reducing our interest rate risk. In addition, the nature and timing of
hedging transactions may influence the effectiveness of these strategies. Poorly
designed strategies or improperly executed transactions could significantly
increase our risk and lead to material losses. In addition, hedging strategies
involve transaction and other costs. Our hedging strategy and the derivatives
that we use may not adequately offset the risk of interest rate volatility or
that our hedging transactions may not result in losses.

Our investment strategy may involve credit risk

     We may incur losses if there are payment defaults under our investment
     securities.

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

     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:

     -    75% of our investments must have a "AA" or higher rating by S&P, 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;

     -    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

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

                                       21



     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 enables 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.

We are dependent on our key personnel

     We are dependent on the efforts of our key officers and employees,
including Michael A. J. Farrell, our Chairman of the board of directors, Chief
Executive Officer and President, Wellington J. Denahan-Norris, our Vice
Chairman, Chief Operating Officer and Chief Investment Officer, and Kathryn F.
Fagan, our Chief Financial Officer and Treasurer. 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.

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. 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% of our
REIT taxable income (determined without regard to the deduction for dividends
paid and by excluding any net capital gain). 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.

     A REIT that fails the quarterly asset tests for one or more quarters will
not lose its REIT status as a result of such failure if either (i) the failure
is regarded as a de minimis failure under standards set out in the Internal
Revenue Code, or (ii) the failure is greater than a de minimis failure but is
attributable to reasonable cause and


                                       22



not willful neglect. In the case of a greater than de minimis failure, however,
the REIT must pay a tax and must remedy the failure within 6 months of the close
of the quarter in which the failure was identified. In addition, the Internal
Revenue Code provides relief for failures of other tests imposed as a condition
of REIT qualification, as long as the failures are attributable to reasonable
cause and not willful neglect. A REIT would be required to pay a penalty of
$50,000, however, in the case of each failure.

o    We have certain distribution requirements

     As a REIT, we must distribute at least 90% of our REIT taxable income
(determined without regard to the deduction for dividends paid and by excluding
any net capital gain). 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.

o    Limits on ownership of our common stock could have adverse consequences to
     you and could limit your opportunity to receive a premium on our stock

     To maintain our qualification as a REIT for federal income tax purposes,
not more than 50% in value of the outstanding shares of our capital stock may be
owned, directly or indirectly, by five or fewer individuals (as defined in the
federal tax laws to include certain entities). Primarily to facilitate
maintenance of our qualification as a REIT for federal income tax purposes, our
charter will prohibit ownership, directly or by the attribution provisions of
the federal tax laws, by any person of more than 9.8% of the lesser of the
number or value of the issued and outstanding shares of our common stock and
will prohibit ownership, directly or by the attribution provisions of the
federal tax laws, by any person of more than 9.8% of the lesser of the number or
value of the issued and outstanding shares of any class or series of our
preferred stock. Our board of directors, in its sole and absolute discretion,
may waive or modify the ownership limit with respect to one or more persons who
would not be treated as "individuals" for purposes of the federal tax laws if it
is satisfied, based upon information required to be provided by the party
seeking the waiver and upon an opinion of counsel satisfactory to the board of
directors, that ownership in excess of this limit will not otherwise jeopardize
our status as a REIT for federal income tax purposes.

     The ownership limit may have the effect of delaying, deferring or
preventing a change in control and, therefore, could adversely affect our
shareholders' ability to realize a premium over the then-prevailing market price
for our common stock in connection with a change in control.

                                       23



o    A REIT cannot invest more than 20% of its total assets in the stock or
     securities of one or more taxable REIT subsidiaries; therefore, FIDAC
     cannot constitute more than 20% of our total assets

     A taxable REIT subsidiary is a corporation, other than a REIT or a
qualified REIT subsidiary, in which a REIT owns stock and which elects taxable
REIT subsidiary status. The term also includes a corporate subsidiary in which
the taxable REIT subsidiary owns more than a 35% interest. A REIT may own up to
100% of the stock of one or more taxable REIT subsidiaries. A taxable REIT
subsidiary may earn income that would not be qualifying income if earned
directly by the parent REIT. Overall, at the close of any calendar quarter, no
more than 20% of the value of a REIT's assets may consist of stock or securities
of one or more taxable REIT subsidiaries.

     The stock and securities of FIDAC, our only taxable REIT subsidiary, are
expected to represent less than 20% of the value of our total assets.
Furthermore, we intend to monitor the value of our investments in the stock and
securities of FIDAC (and any other taxable REIT subsidiary in which we may
invest) to ensure compliance with the above-described 20% limitation. We cannot
assure you, however, that we will always be able to comply with the 20%
limitation so as to maintain REIT status.

o    Taxable REIT subsidiaries are subject to tax at the regular corporate
     rates, are not required to distribute dividends, and the amount of
     dividends a taxable REIT subsidiary can pay to its parent REIT may be
     limited by REIT gross income tests

     A taxable REIT subsidiary must pay income tax at regular corporate rates on
any income that it earns. FIDAC will pay corporate income tax on its taxable
income, and its after-tax net income will be available for distribution to us.
Such income, however, is not required to be distributed.

     Moreover, the annual gross income tests that must be satisfied to ensure
REIT qualification may limit the amount of dividends that we can receive from
FIDAC and still maintain our REIT status. Generally, not more than 25% of our
gross income can be derived from non-real estate related sources, such as
dividends from a taxable REIT subsidiary. If, for any taxable year, the
dividends we received from FIDAC, when added to our other items of non-real
estate related income, represented more than 25% of our total gross income for
the year, we could be denied REIT status, unless we were able to demonstrate,
among other things, that our failure of the gross income test was due to
reasonable cause and not willful neglect.

     The limitations imposed by the REIT gross income tests may impede our
ability to distribute assets from FIDAC to us in the form of dividends. Certain
asset transfers may, therefore, have to be structured as purchase and sale
transactions upon which FIDAC recognizes taxable gain.

o    If interest accrues on indebtedness owed by a taxable REIT subsidiary to
     its parent REIT at a rate in excess of a commercially reasonable rate, or
     if transactions between a REIT and a taxable REIT subsidiary are entered
     into on other than arm's-length terms, the REIT may be subject to a penalty
     tax

     If interest accrues on an indebtedness owed by a taxable REIT subsidiary to
its parent REIT at a rate in excess of a commercially reasonable rate, the REIT
is subject to tax at a rate of 100% on the excess of (i) interest payments made
by a taxable REIT subsidiary to its parent REIT over (ii) the amount of interest
that would have been payable had interest accrued on the indebtedness at a
commercially reasonable rate. A tax at a rate of 100% is also imposed on any
transaction between a taxable REIT subsidiary and its parent REIT to the extent
the transaction gives rise to deductions to the taxable REIT subsidiary that are
in excess of the deductions that would have been allowable had the transaction
been entered into on arm's-length terms. We will scrutinize all of our
transactions with FIDAC in an effort to ensure that we do not become subject to
these taxes. We may not be able to avoid application of these taxes.

Risks of Ownership of Our Common Stock

     o    Issuances of large amounts of our stock could cause the market price
          of our common stock to decline

                                       24



     As of March 7, 2006, 123,701,656 shares of our common stock were
outstanding. If we issue a significant number of shares of common stock or
securities convertible into common 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.

     o    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. 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.

     o    Our governing documents and Maryland law impose limitations on the
          acquisition of our common stock and changes in control that could make
          it more difficult for a third party to acquire us

     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's 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;

     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.

                                       25



     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, there under, 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.

Regulatory Risks

     o    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. 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 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.

     o    Compliance with proposed and recently enacted changes in securities
          laws and regulations increase our costs

     The Sarbanes-Oxley Act of 2002 and rules and regulations promulgated by the
SEC and the New York Stock Exchange have increased the scope, complexity and
cost of corporate governance, reporting and disclosure practices. We believe
that these rules and regulations will make it more costly for us to obtain
director and officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain coverage. These
rules and regulations could also make it more difficult for us to attract and
retain qualified members of management and our board of directors, particularly
to serve on our audit committee.

                                       26



Issuances of shares to FIDAC shareholders

     As a result of our acquisition of FIDAC, FIDAC shareholders may receive
additional shares of our common stock as an earn-out in 2007 worth up to
$49,500,000 if FIDAC meets specific performance goals under the merger
agreement. We cannot calculate how many shares we will issue under the earn-out
provisions since that will vary depending upon whether and the extent to which
FIDAC achieves specific performance goals. Even if FIDAC achieves specific
performance goals for a fiscal year, the number of additional shares to be
issued to the FIDAC shareholders will vary depending on our average share price
for the first 20 trading days of the following fiscal year. Issuance of these
shares may be dilutive to our shareholders.

ITEM 1B. UNRESOLVED STAFF COMMENTS
- ----------------------------------

None.

ITEM 2. PROPERTIES
- ------------------

     Our executive and administrative office is located at 1211 Avenue of the
Americas, Suite 2902 New York, New York 10036, telephone 212-696-0100. This
office is leased under a non-cancelable lease expiring December 31, 2009.

ITEM 3. LEGAL PROCEEDINGS
- -------------------------

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



ITEM 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 2005.

                                       27



                                     PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
        AND ISSUER PURCHASES OF EQUITY SECURITIES
        -----------------------------------------

     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 7, 2006,
we had 123,701,656 shares of common stock issued and outstanding which were held
by approximately 120,000 holders of record.

     The following table sets forth, for the periods indicated, the high, low,
and closing sales prices per share of our 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, 2005          $20.01    $17.34    $18.76
Second Quarter ended June 30, 2005          $20.01    $17.68    $17.93
Third Quarter ended September 30, 2005      $18.05    $12.49    $12.95
Fourth Quarter ended December 31, 2005      $12.90    $10.90    $10.94

                                            High      Low       Close

First Quarter ended March 31, 2004          $21.22    $18.15    $18.02
Second Quarter ended June 30, 2004          $19.63    $15.94    $16.09
Third Quarter ended September 30, 2004      $18.44    $15.95    $16.71
Fourth Quarter ended December 31, 2004      $20.53    $16.33    $19.62


                                               Common Dividends
                                               Declared Per Share

First Quarter ended March 31, 2005                    $0.45
Second Quarter ended June 30, 2005                    $0.36
Third Quarter ended September 30, 2005                $0.13
Fourth Quarter ended December 31, 2005                $0.10

First Quarter ended March 31, 2004                    $0.50
Second Quarter ended June 30, 2004                    $0.48
Third Quarter ended September 30, 2004                $0.50
Fourth Quarter ended December 31, 2004                $0.50



     We intend to pay quarterly dividends and to distribute to our stockholders
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. No dividends can be
paid on our common stock unless we have paid full cumulative dividends on our
preferred stock. From the date of issuance of our preferred stock through
December 31, 2005, we have paid full cumulative dividends on our preferred
stock.

                                       28



                      EQUITY COMPENSATION PLAN INFORMATION

     We have 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 9.5% of the outstanding shares of our common stock.
For a description of our Incentive Plan, see Note 9 to the Financial Statements.

     The following table provides information as of December 31, 2005 concerning
shares of our common stock authorized for issuance under our existing Incentive
Plan.




                                                                                        
                                                                                             Number of securities
                                                                                            remaining available for
                                Number of securities to be    Weighted-average exercise      future issuance under
                                  issued upon exercise of       price of outstanding       Incentive Plan (excluding
        Plan Category               outstanding options                options                previously issued)
- ---------------------------------------------------------------------------------------------------------------------
Incentive Plan approved by
shareholders                             2,333,593                     $16.10                    6,599,328(1)
Incentive Plan not approved                  -                            -                            -
by shareholders                 ------------------------------------------------------------------------------------
Total                                    2,333,593                     $16.10                      6,599,328
                                ====================================================================================



(1) The Incentive Plan authorizes the granting of options or other awards for an
aggregate of the greater of 500,000 or 9.5% of the outstanding shares on a fully
diluted basis of our common stock up to a ceiling of 8,932,921 shares.

                                       29



ITEM 6.     SELECTED FINANCIAL DATA
- -----------------------------------

     The following selected financial data are derived from our audited
financial statements for the years ended December 31, 2005, 2004, 2003, 2002,
and 2001. 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)

                                                     For the Year   For the Year   For the Year    For the Year   For the Year
                                                        Ended           Ended          Ended          Ended           Ended
                                                     December 31,   December 31,   December 31,    December 31,    December 31,
                                                         2005           2004           2003            2002           2001
                                                   ------------------------------------------------------------------------------
Statement of Operations Data:
     Interest income                                       $705,046       $532,328       $337,433        $404,165       $263,058
     Interest expense                                       568,560        270,116        182,004         191,758        168,055
                                                   ------------------------------------------------------------------------------
     Net interest income                                   $136,486       $262,212       $155,429        $212,407        $95,003
Other (loss) income:
     Investment advisory and service fees                    35,625         12,512              -               -              -
     (Loss) gain on sale of investment securities          (53,238)          5,215         40,907          21,063          4,586
     Loss on other than temporarily impaired
        Securities                                         (83,098)              -              -               -              -
                                                   ------------------------------------------------------------------------------
        Total other (loss) income                         (100,711)         17,727         40,907          21,063          4,586
                                                   ------------------------------------------------------------------------------
Expenses
     Distribution fees                                        8,000          2,860              -               -              -
     General and administrative expenses                     26,278         24,029         16,233          13,963          7,311
                                                   ------------------------------------------------------------------------------
      Total Expenses:                                        34,278         26,889         16,233          13,963          7,311
                                                   ------------------------------------------------------------------------------

Income before income  taxes                                   1,497        253,050        180,103         219,507         92,278

                                                   ------------------------------------------------------------------------------
Income taxes                                                 10,744          4,458              -               -              -
                                                   ------------------------------------------------------------------------------

                                                   ------------------------------------------------------------------------------
Net (loss) income                                           (9,247)        248,592        180,103         219,507         92,278

                                                   ------------------------------------------------------------------------------
Dividends on preferred stock                                 14,593          7,745              -               -              -
                                                   ------------------------------------------------------------------------------

                                                   ------------------------------------------------------------------------------
Net (loss) income related to common shareholders          ($23,840)       $240,847       $180,103        $219,507        $92,278
                                                   ==============================================================================

Basic net (loss) income per average common share            ($0.19)          $2.04          $1.95           $2.68          $2.23
Diluted net (loss) income per average common share          ($0.19)          $2.03          $1.94           $2.67          $2.21
Dividends declared per common share                           $1.04          $1.98          $1.95           $2.67          $1.75
Dividends declared per preferred share                        $1.97          $1.45              -               -              -

                                                     December 31,   December 31,   December 31,    December 31,   December 31,
Balance Sheet Data:                                      2005           2004           2003            2002           2001
                                                   ------------------------------------------------------------------------------
     Mortgage-Backed Securities, at fair value          $15,929,864    $19,038,386    $11,956,512     $11,551,857     $7,575,379
     Agency Debentures, at fair value                             -        390,509        978,167               -              -
     Total assets                                        16,063,422     19,560,299     12,990,286      11,659,084      7,717,314
     Repurchase agreements                               13,576,301     16,707,879     11,012,903      10,163,174      6,367,710
     Total liabilities                                   14,559,399     17,859,829     11,841,066      10,579,018      7,049,957
     Stockholders' equity                                 1,504,023      1,700,470      1,149,220       1,080,066        667,357
     Number of common shares outstanding                123,684,931    121,263,000     96,074,096      84,569,206     59,826,975


                                       30





                                                                                                     
                                                  For the Year    For the Year   For the Year   For the Year    For the Year
                                                      Ended          Ended           Ended          Ended          Ended
                                                  December 31,    December 31,   December 31,   December 31,    December 31,
Other Data:                                           2005            2004           2003           2002            2001
                                                 ------------------------------------------------------------------------------
     Average total assets                            $18,724,075     $17,293,174    $12,975,039    $10,486,423      $5,082,852
     Average investment securities                    18,543,749      16,399,184     12,007,333      9,575,365       4,682,778
     Average borrowings                               17,408,828      15,483,118     11,549,368      9,128,933       4,388,900
     Average equity                                    1,614,743       1,550,076      1,122,633        978,107         437,376
     Yield on average interest earning assets              3.80%           3.25%          2.81%          4.22%           5.62%
     Cost of funds on average interest bearing
          liabilities                                      3.27%           1.74%          1.58%          2.10%           3.83%
     Interest rate spread                                  0.53%           1.51%          1.23%          2.12%           1.79%

Financial Ratios:
     Net interest margin (net interest
           income/average total assets)                    0.73%           1.52%          1.20%          2.03%           1.87%
     G&A expense as a percentage of average
           total assets                                    0.14%           0.14%          0.13%          0.13%           0.14%
     G&A expense as a percentage of average
          equity                                           1.63%           1.55%          1.45%          1.43%           1.67%
     Return on average total assets                      (0.05%)           1.44%          1.39%          2.09%           1.82%
     Return on average equity                            (0.57%)          16.04%         16.04%         22.44%          21.10%


                                       31



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

Overview

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

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

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

     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.

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

     The results of our operations are affected by various factors, many of
which are beyond our control. Our results of operations primarily depend on,
among other things, the level of our net interest income, the market value of
our assets and the supply of and demand for such assets. Our net interest
income, which reflects the amortization of purchase premiums and accretion of
discounts, varies primarily as a result of changes in interest rates, borrowing
costs and prepayment speeds, the behavior of which involves various risks and
uncertainties. Prepayment speeds, as reflected by the Constant Prepayment Rate,
or CPR, and interest rates vary according to the type of investment, conditions
in financial markets, competition and other factors, none of which can be
predicted with any certainty. In general, as prepayment speeds on our
Mortgage-Backed Securities portfolio increase, related purchase premium
amortization increases, thereby reducing the net yield on such assets. The CPR
on our Mortgage Backed Securities portfolio averaged 27% and 29% for the years
ended December 31, 2005 and 2004, respectively. Since changes in interest rates
may significantly affect our activities, our operating results depend, in large
part, upon our ability to effectively manage interest rate risks and prepayment
risks while maintaining our status as a REIT.

     During the fourth quarter of 2005, the Company sold assets and began
purchasing assets in the current rate environment. With the federal funds
interest rate continuing to rise in the fourth quarter of the year, the Company
sold lower yielding assets and began replacing them with higher yielding assets.
Certain assets that were purchased in the much lower interest rate environment
of 2003 and 2004 are unlikely to recover to their amortized cost basis and were
not providing attractive returns on a cash flow basis.

                                       32



     We have shortened contractual maturities on borrowings, such that our
weighted average contractual maturity on our repurchase agreements was 163 days
at December 31, 2005, as compared to 211 days at December 31, 2004. The reason
maturities have shortened is because the three year repurchase agreements are
closer to maturity date. Additional three year repurchase agreements have not
been entered into, due to the level of funding rates being offered.

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



                                                                               
                                                Yield on
                         Average                 Average     Average                            Net
                        Investment    Total      Interest   Balance of             Average    Interest
                        Securities   Interest    Earning   Repurchase    Interest  Cost of     Income    Net Interest
                         Held (1)     Income     Assets    Agreements    Expense    Funds      (loss)     Rate Spread
- ----------------------------------------------------------------------------------------------------------------------
                                 (ratios for the quarters have been annualized, dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------------
Quarter Ended
  December 31, 2005     $17,551,868   $179,688    4.10%    $16,547,971   $165,766   4.01%     $13,922        0.09%
Quarter Ended
  September 30, 2005    $18,906,350   $177,474    3.75%    $17,672,690   $155,043   3.51%     $22,431        0.24%
Quarter Ended
  June 30, 2005         $18,918,577   $171,595    3.63%    $17,658,408   $133,758   3.03%     $37,837        0.60%
Quarter Ended
  March 31, 2005        $18,798,200   $176,289    3.75%    $17,756,241   $113,993   2.57%     $62,296        1.18%



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

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

Quarter Ended                        CPR
- -------------                        ---
December 31, 2005                    28%
September 30, 2005                   28%
June 30, 2005                        27%
March 31, 2005                       25%
December 31, 2004                    27%
September 30, 2004                   25%
June 30, 2004                        33%
March 31, 2004                       31%

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

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

Critical Accounting Policies

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

                                       33



     Market Valuation of Investment Securities: All assets classified as
available-for-sale are reported at fair value, based on market prices. Although
we generally intend to hold most of our Investment Securities until maturity, we
may, from time to time, sell any of our Investment Securities as part our
overall management of our portfolio. Accordingly, we are required to classify
all of our Investment Securities as available-for-sale. Our policy is to obtain
market values from independent sources. Management evaluates securities for
other-than-temporary impairment at least on a quarterly basis, and more
frequently when economic or market concerns warrant such evaluation.
Consideration is given to (1) the length of time and the extent to which the
fair value has been less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. Investments with unrealized losses are not
considered other-than-temporarily impaired if the Company has the ability and
intent to hold the investments for a period of time, to maturity if necessary,
sufficient for a forecasted market price recovery up to or beyond the cost of
the investments. Unrealized losses on Investment Securities that are considered
other than temporary, as measured by the amount of decline in fair value
attributable to factors other than temporary, are recognized in income and the
cost basis of the Investment Securities is adjusted. Other-than-temporary
impaired losses on securities totaled $83.1 million at December 31, 2005. There
were no such adjustments for the years ended December 31, 2004 and 2003.

     Interest income: Interest income is accrued based on the outstanding
principal amount of the Investment Securities and their contractual terms.
Premiums and discounts associated with the purchase of the Investment Securities
are amortized or accreted into interest income over the projected lives of the
securities using the interest method. Our policy for estimating prepayment
speeds for calculating the effective yield is to evaluate historical
performance, street consensus prepayment speeds, and current market conditions.
If our estimate of prepayments is incorrect, we may be required to make an
adjustment to the amortization or accretion of premiums and discounts that would
have an impact on future income.

     Repurchase Agreements: We finance the acquisition of our Investment
Securities through the use of repurchase agreements. Repurchase agreements are
treated as collateralized financing transactions and are carried at their
contractual amounts, including accrued interest, as specified in the respective
agreements.

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

Results of Operations

     Net Income Summary

     For the year ended December 31, 2005, our net loss was $9.2 million or
$0.19 basic loss per average share related to common shareholders, as compared
to $248.6 million net income or $2.04 basic earnings per average share for the
year ended December 31, 2004. For the year ended December 31, 2003, our net
income was $180.1 million or $1.95 basic earnings per average share related to
common shareholders. Net income per average share decreased by $2.23 and total
net income decreased $257.8 million for the year ended December 31, 2005, when
compared to the year ended December 31, 2004. We attribute the decrease in total
net income for the year ended December 31, 2005 compared to the year ended
December 31, 2004 to the decline in interest rate spread, losses on sales of
securities, and losses on other-than-temporarily impaired securities. The
interest rate spread decreased from 1.51% for the year ended December 31, 2004
to 0.53% for the year ended December 31, 2005. The total amortization for the
year ended December 31, 2005 was $154.3 million and for the year ended December
31, 2004 was $179.6 million. For the year ended December 31, 2005, net loss on
sale of Mortgage-Backed Securities was $53.2 million, as compared to a net gain
of $5.2 million in 2004. The table below presents the net (loss) income summary
for the years ended December 31, 2005, 2004, 2003, 2002, and 2001.

                                       34





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

                                                     Year Ended      Year Ended     Year Ended
                                                      December      December 31,   December 31,
                                                      31, 2005          2004           2003
                                                    ---------------------------------------------

Interest income                                          $705,046        $532,328       $337,433
Interest expense                                          568,560         270,116        182,004
                                                    ---------------------------------------------
Net interest income                                       136,486         262,212        155,429
                                                    ---------------------------------------------
Other (loss) income:
  Investment advisory and service fees                     35,625          12,512              -
  (Loss) gain on sale of investment securities           (53,238)           5,215         40,907
 Loss on other-than-temporarily impaired
securities                                               (83,098)               -              -
                                                    ---------------------------------------------
     Total other (loss) income                          (100,711)          17,727         40,907

Expenses:
  Distribution fees                                         8,000           2,860              -
  General and administrative expenses                      26,278          24,029         16,233
                                                    ---------------------------------------------
     Total expenses                                        34,278          26,889         16,233
                                                    ---------------------------------------------

Income before income  taxes                                 1,497         253,050        180,103

Income taxes                                               10,744           4,458              -

                                                    ---------------------------------------------
Net (loss) income                                        ($9,247)         248,592        180,103

Dividends on preferred stock                               14,593           7,745              -
                                                    ---------------------------------------------
Net (loss) income related to common shareholders        ($23,840)        $240,847       $180,103
                                                    =============================================

Weighted average number of basic common shares
outstanding                                           122,475,032     118,223,330     92,215,352
Weighted average number of diluted common shares
outstanding                                           122,475,032     118,459,145     93,031,253


Basic net (loss) income per average common share          ($0.19)           $2.04          $1.95

Diluted net (loss) income per average common share        ($0.19)           $2.03          $1.94

Average total assets                                  $18,724,075     $17,293,174    $12,975,039
Average equity                                          1,614,743       1,550,076      1,122,633

Return on average total assets                            (0.05%)           1.44%          1.39%
Return on average equity                                  (0.57%)          16.04%         16.04%



     Interest Income and Average Earning Asset Yield

We had average earning assets of $18.5 billion for the year ended December 31,
2005. We had average earning assets of $16.4 billion for the year ended December
31, 2004. We had average earning assets of $12.0 billion for the year ended
December 31, 2003. Our primary source of income is interest income. Our interest
income was $705 million for the year ended December 31, 2005, $532.3 million for
the year ended December 31, 2004, and $337.4 million for the year ended December
31, 2003. The yield on average investment securities was 3.80%, 3.25%, and 2.81%
for the respective periods.

                                       35



     Interest Expense and the Cost of Funds

     We anticipate that our largest expense will be the cost of borrowed funds.
We had average borrowed funds of $17.4 billion and total interest expense of
$568.6 million for the year ended December 31, 2005. We had average borrowed
funds of $15.5 billion and total interest expense of $270.1 million for the year
ended December 31, 2004. We had average borrowed funds of $11.5 billion and
total interest expense of $182.0 million for the year ended December 31, 2003.
Our average cost of funds was 3.27% for the year ended December 31, 2005 and
1.74% for the year ended December 31, 2004 and 1.58% for the year December 31,
2003. The cost of funds rate increased by 153 basis points and the average
borrowed funds increased by $1.9 billion for the year ended December 31, 2005
when compared to the year ended December 31, 2004. Interest expense for the year
2004 increased by $88.1 million over the prior year due to the substantial
increase in the average repurchase balance and the increase in the cost of funds
rate. The cost of funds rate increased by 16 basis points and the average
borrowed funds increased by $4.0 billion for the year ended December 31, 2004,
when compared to the year ended December 31, 2003. Interest expense for the year
ended December 31, 2004 increased by $298.5 million over the previous year due
to the increase in the average repurchase balance and substantial increase in
the cost of funds rate. Since a substantial portion of our repurchase agreements
are short term, changes in market rates are directly reflected in our interest
expense. Our average cost of funds was 0.06% below average one-month LIBOR and
0.45% below average six-month LIBOR for the year ended December 31, 2005. Our
average cost of funds was 0.24% above average one-month LIBOR and 0.06% below
average six-month LIBOR for the year ended December 31, 2004. Since the Federal
Reserve continued to raise the federal funds rate after December 31, 2005, we
will experience an increase in funding cost.

     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, 2005, 2004, 2003, 2002, and 2001 and the four quarters in 2005.



                                                                                  
                              Average Cost of Funds
                              ---------------------
 (Ratios for the four quarters in 2005 have been annualized, dollars in thousands)

                                                                                 Average                    Average
                                                                                One-Month    Average Cost   Cost of
                                                                                  LIBOR       of Funds       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
                           --------   --------  -------  ---------  ---------  -----------   ------------  -----------
For the Year Ended
  December 31,2005       $17,408,828  $568,560   3.27%     3.33%      3.72%      (0.39%)       (0.06%)       (0.45%)
For the Year Ended
  December 31 2004       $15,483,118  $270,116   1.74%     1.50%      1.80%      (0.30%)        0.24%        (0.06%)
For the Year Ended
  December  31, 2003     $11,549,368  $182,004   1.58%     1.21%      1.23%      (0.02%)        0.37%         0.35%
For the Year Ended
  December  31, 2002      $9,128,933  $191,758   2.10%     1.77%      1.88%      (0.11%)        0.33%         0.22%
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 Quarter Ended
  December 31, 2005      $16,547,972  $165,766   4.01%     4.10%      4.46%      (0.36%)       (0.09%)       (0.45%)
For the Quarter Ended
  September 30, 2005     $17,672,690  $155,043   3.51%     3.54%      3.91%      (0.37%)       (0.03%)       (0.40%)
For the Quarter Ended
  June 30, 2005          $17,658,408  $133,758   3.03%     3.05%      3.43%      (0.38%)       (0.02%)       (0.40%)
For the Quarter Ended
  March 31, 2005         $17,756,241  $113,993   2.57%     2.58%      3.02%      (0.44%)       (0.01%)       (0.45%)


                                       36



     Net Interest Income

     Our net interest income which equals interest income less interest expense,
totaled $136.5 million for the year ended December 31, 2005, $262.2 million for
the year ended December 31, 2004 and $155.4 million for the year ended December
31, 2003. Our net interest income decreased because the increase in the cost of
funding on our repurchase agreements was only partially offset by the increase
in yield on our investment securities. 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 0.53% for the year ended December 31, 2005 as compared to 1.51%
for the year ended December 31, 2004. This 98 basis point decrease was the
result in the increased funding cost of 153 basis points, offset by the increase
in yield of 55 basis points. Our net interest income increased $106.8 million
for the year ended December 31, 2004 over the prior year. Our net interest
income increased because of the increase in our assets that resulted from the
common stock and preferred stock offerings during 2004.

     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, 2005, 2004, 2003, 2002, and 2001 and the four quarters
in 2005.



                                                                            
                               Net Interest Income
 (Ratios for the four quarters in 2005 have been annualized, dollars in thousands)



                        Average                                 Average              Average              Net
                       Investment    Total     Yield Average   Balance of             Cost     Net      Interest
                       Securities   Interest     Interest      Repurchase   Interest   of    Interest     Rate
                          Held       Income    Earning Assets  Agreements   Expense   Funds   Income     Spread

For the Year Ended
  December 31, 2005    $18,543,749   $705,046      3.80%      $17,408,827   $568,560   3.27%  $136,486    0.53%
For the Year Ended
  December 31, 2004    $16,399,184   $532,328      3.25%      $15,483,118   $270,116   1.74%  $262,212    1.51%
For the Year Ended
  December 31, 2003    $12,007,333   $337,433      2.81%      $11,549,368   $182,004   1.58%  $155,429    1.23%
For the Year Ended
  December 31, 2002     $9,575,365   $404,165      4.22%       $9,128,933   $191,758   2.10%  $212,407    2.12%
For the Year Ended
  December 31, 2001     $4,682,778   $263,058      5.62%       $4,388,900   $168,055   3.83%   $95,003    1.79%
- -----------------------------------------------------------------------------------------------------------------
For the Quarter Ended
  December 31, 2005    $17,551,868   $179,688      4.10%      $16,547,972   $165,766   4.01%   $13,922    0.09%
For the Quarter Ended
  September 30, 2005   $18,906,350   $177,474      3.75%      $17,672,690   $155,043   3.51%   $22,431    0.24%
For the Quarter Ended
  June 30, 2005        $18,918,577   $171,595      3.63%      $17,658,408   $133,758   3.03%   $37,837    0.60%
For the Quarter Ended
  March 31, 2005       $18,798,200   $176,289      3.75%      $17,756,241   $113,993   2.57%   $62,296    1.18%



     Investment Advisory and Service Fees

     FIDAC is a registered investment advisor that generally receives annual net
investment advisory fees of approximately 10 to 20 basis points of the gross
assets it manages, assists in managing or supervises. At December 31, 2005,
FIDAC had under management approximately $2.3 billion in net assets and $18.7
billion in gross assets, compared to $1.9 billion in net assets and $15.9
billion in gross assets at December 31, 2004. Net investment advisory and
service fees for the year ended December 31, 2005 totaled $27.6 million, net of
fees paid to third parties pursuant to distribution service agreements for
facilitating and promoting distribution of shares or units to FIDAC's clients.
Gross assets under management will vary from time to time because of changes in
the amount of net assets FIDAC manages as well as changes in the amount of
leverage used by the various funds and accounts FIDAC manages. Although net
assets under management increased by approximately $400 million from December
31, 2004 to December 31, 2005, net assets under management began to decline
after September 30, 2005 due both to the reduction of their market value and
redemptions. In addition, during the first quarter of 2006, FIDAC was notified
that an additional $130 million in net assets would be removed from its
management although FIDAC would continue to receive advisory fees on these
assets until June 1, 2006. FIDAC's net advisory fees are included in our
consolidated financial statements post our acquisition of FIDAC on June 4, 2004.

                                       37



     Gains and Losses on Sales of Investment Securities

     For the year ended December 31, 2005, we sold investment securities with an
aggregate historical amortized cost of $3.4 billion for an aggregate loss of
$53.2 million. For the year ended December 31, 2004, we sold mortgage-backed
securities with an aggregate historical amortized cost of $591.7 million for an
aggregate gain of $5.2 million. For the year ended December 31, 2003, we sold
mortgage-backed securities with an aggregate historical amortized cost of $2.8
billion for an aggregate gain of $40.9 million. The loss on sale of assets for
the year ended December 31, 2005 was due to portfolio rebalancing that was
initiated in the fourth quarter of 2005. We determined that certain assets
purchased in a much lower interest rate environment of 2003 and 2004 were
unlikely to receive their amortized cost basis, and commenced selling these
assets. The rebalancing was done with the objective of improving future
financial performance. During the year ended December 31, 2003 the amount of
sales were higher than in prior years, with the majority of sales occurring
during the second quarter. The sales in 2003 occurred because of declining
interest rates, which caused fixed rate securities to appreciate significantly
and we determined to take advantage of the appreciation. The gain on sale of
assets for the year ended December 31, 2004 declined by $35.7 million over the
prior year. 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.

     Loss on other-than-temporarily impaired securities

     During the fourth quarter of 2005, in connection with the portfolio
rebalancing discussed above, the Company reviewed each of its securities to
determine if an other-than-temporary impairment charge would be necessary. It
was determined that certain securities that were in an unrealized loss position,
the Company did not intend to hold them for a period of time, to maturity if
necessary, sufficient for a forecasted market price recovery up to or beyond the
cost of the investments. Approximately $2.9 billion face amount of securities
were reclassified as other-than-temporarily impaired, with an approximate loss
of $83 million.

     General and Administrative Expenses

     General and administrative (or G&A) expenses were $26.3 million for the
year ended December 31, 2005, $24.0 million for the year ended December 31,
2004, $16.2 million for the year ended December 31, 2003. G&A expenses as a
percentage of average total assets was 0.14%, 0.14%, and 0.13% for the years
ended December 31, 2005, 2004, and 2003, respectively. The increase in G&A
expenses of $2.3 million for the year December 31, 2005, was primarily the
result of increased salaries, directors and officers insurance and additional
costs related to FIDAC. Staff increased from 20 at the end of 2003 to 30 at the
end of 2004 and 31 at the end of 2005. Salaries and bonuses for the years ended
December 31, 2005, 2004, and 2003 were $18.8 million, $17.2 million and $11.5
million. Even with the increased asset base, G&A expense as a percentage of
average assets has not increased significantly. The table below shows our total
G&A expenses as compared to average total assets and average equity for the
years ended December 31, 2005, 2004, 2003, 2002, and 2001, and the four quarters
in 2005.



                                                                           
                    G&A Expenses and Operating Expense Ratios
                    -----------------------------------------
(Ratios for the four quarters in 2005 have been annualized, dollars in thousands)

                                                                    Total G&A           Total G&A
                                                                 Expenses/Average   Expenses/Average
                                            Total G&A Expenses        Assets             Equity
                                            ------------------   ----------------   ----------------
For the Year Ended December 31, 2005             $26,278              0.14%               1.63%
For the Year Ended December 31, 2004             $24,029              0.14%               1.55%
For the Year Ended December 31, 2003             $16,233              0.13%               1.45%
For the Year Ended December 31, 2002             $13,963              0.13%               1.43%
For the Year Ended December 31, 2001              $7,311              0.14%               1.67%
- ----------------------------------------------------------------------------------------------------
For the Quarter Ended December 31, 2005           $6,359              0.14%               1.66%
For the Quarter Ended September 30, 2005          $6,455              0.13%               1.58%
For the Quarter Ended June 30, 2005               $6,800              0.14%               1.64%
For the Quarter Ended March 31, 2005              $6,664              0.14%               1.61%


                                       38



     Net Income and Return on Average Equity

     Our net loss was $9.2 million for the year ended December 31, 2005, and our
net income was $248.6 million for the year ended December 31, 2004 and $180.1
million for the year ended December 31, 2003. Our return on average equity was
(0.57%) for the year ended December 31, 2005, 16.04% for the year ended December
31, 2004, and 16.04% for the year ended December 31, 2003. We attribute the
decrease in total net income for the year ended December 31, 2005 over the year
ended December 31, 2004 to the decrease in interest rate spread, the loss
realized on sale of assets during the repositioning and the loss on
other-than-temporarily impaired securities. The increase in our net income in
2004, from 2003, was the result of us deploying additional capital of
approximately $581.0 million from December 31, 2003 to December 31, 2004 into
our strategy. To a lesser extent, the seven months of advisory fee income from
FIDAC aided in the income growth for the year 2004.

     The table below shows our net interest income, net investment advisory and
service fees, gain on sale of mortgage-backed securities, G&A expenses, loss on
other-than-temporarily impaired securities and income taxes each as a percentage
of average equity, and the return on average equity for the years ended December
31, 2005, 2004, 2003, 2002, and 2001 and for the four quarters in 2005.




                                                                                               
                     Components of Return on Average Equity
                     --------------------------------------
           (Ratios for the four quarters in 2005 have been annualized)

                                                          Net       (Loss) gain
                                                       Investment    on Sale of     Loss on
                                                      Advisory and  Mortgage-Back  other-than-    G&A
                                      Net Interest      Service     Securities/    Temporarily  Expenses/    Income     Return on
                                     Income/Average   Fees/Average    Average       impaired    Average   Taxes/Average  Average
                                         Equity          Equity        Equity      securities    Equity      Equity       Equity
                                     --------------   ------------  -------------  -----------  --------- ------------- ----------
For the Year Ended December 31, 2005      8.45%          1.71%        (3.30%)       (5.15%)       1.63%       0.67%       (0.57%)
For the Year Ended December 31, 2004     16.92%          0.62%         0.34%           -          1.55%       0.29%       16.04%
For the Year Ended December 31, 2003     13.85%            -           3.64%           -          1.45%         -         16.04%
For the Year Ended December 31, 2002     21.72%            -           2.15%           -          1.43%         -         22.44%
For the Year Ended December 31, 2001     21.72%            -           1.05%           -          1.67%         -         21.10%
- ----------------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended December 31, 2005   3.64%          1.79%       (17.05%)      (21.70%)       1.66%       0.73%      (35.71%)
For the Quarter Ended September 30, 2005  5.50%          2.09%         0.01%           -          1.58%       0.82%        5.20%
For the Quarter Ended June 30, 2005       9.15%          1.82%         2.76%           -          1.64%       0.73%       11.36%
For the Quarter Ended March 31, 2005     15.06%          1.13%         0.14%           -          1.61%       0.38%       14.34%



Financial Condition

     Investment Securities

     All of our Mortgage-Backed Securities at December 31, 2005, 2004, and 2003
were adjustable-rate or fixed-rate mortgage-backed securities backed by
single-family mortgage loans. All of the mortgage assets underlying these
mortgage-backed securities were secured with a first lien position on the
underlying single-family properties. All of our mortgage-backed securities were
FHLMC, FNMA or GNMA mortgage pass-through certificates or CMOs, which carry an
implied "AAA" rating. We mark-to-market all of our earning assets to fair value.

     All of our agency debentures are callable and carry an implied "AAA"
rating. We mark-to-market all of our agency debentures to fair value.

     We accrete discount balances as an increase in interest income over the
life of discount investment securities and we amortize premium balances as a
decrease in interest income over the life of premium investment securities. At
December 31, 2005, 2004, and 2003 we had on our balance sheet a total of $21.5
million, $1.1 million and $1.5, respectively, of unamortized discount (which is
the difference between the remaining principal value and current historical
amortized cost of our investment securities acquired at a price below principal
value) and a total of $242.1 million, $427.0 million and $301.3 million,
respectively, of unamortized premium (which is the difference between the
remaining principal value and the current historical amortized cost of our
investment securities acquired at a price above principal value).

     We received mortgage principal repayments of $7.1 billion for the year
ended December 31, 2005, $6.5 billion for the year ended December 31, 2004, and
$8.3 billion for the year ended December 31, 2003. The overall prepayment speed
for the year ended December 31, 2005, 2004, and 2003 was 27%, 29%, and 42%
respectively. During the year ended December 31, 2005, the CPR declined to 27%,
from 29%, due to a decline in refinancing activity. During the year ended
December 31, 2003, the annual prepayment speed was the highest in our history at
42%. Given our current portfolio composition, if mortgage principal prepayment

                                       39



rates were to increase over the life of our mortgage-backed securities, all
other factors being equal, our net interest income would decrease during the
life of these mortgage-backed securities as we would be required to amortize our
net premium balance into income over a shorter time period. Similarly, if
mortgage principal prepayment rates were to decrease over the life of our
mortgage-backed securities, all other factors being equal, our net interest
income would increase during the life of these mortgage-backed securities as we
would amortize our net premium balance over a longer time period.

     The table below summarizes our Investment Securities at December 31, 2005,
2004, 2003, 2002, and 2001 and September 30, 2005, June 30, 2005, and March 31,
2005.



                                                                                        
                              Investment Securities
                              ---------------------
                             (dollars in thousands)
                                                                                                Estimated
                                                                     Amortized                     Fair          Weighted
                               Principal       Net      Amortized  Cost/Principal  Estimated   Value/Principal   Average
                                Amount       Premium      Cost         Amount      Fair Value      Amount         Yield
                              -----------    --------  ----------- --------------  ----------- ---------------   --------
At December 31, 2005          $15,915,801    $220,637  $16,136,438     101.39%     $15,929,864     100.09%         4.68%
At December 31, 2004          $19,123,902    $425,792  $19,549,694     102.23%     $19,428,895     101.59%         3.43%
At December 31, 2003          $12,682,130    $299,810  $12,981,940     102.36%     $12,934,679     101.99%         2.96%
At December 31, 2002          $11,202,384    $273,963  $11,476,347     102.45%     $11,551,857     103.12%         3.25%
At December 31, 2001           $7,399,941    $137,269   $7,537,210     101.86%      $7,575,379     102.37%         4.41%
- -------------------------------------------------------------------------------------------------------------------------
At September 30, 2005         $18,884,571    $375,985  $19,260,557     101.99%     $18,956,001     101.38%         3.96%
At June 30, 2005              $19,300,333    $401,356  $19,701,690     102.08%     $19,556,836     101.33%         3.78%
At March 31, 2005             $18,887,801    $416,542  $19,304,343     102.21%     $19,091,063     101.08%         3.61%



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



                                                                                     
               Adjustable-Rate Investment Security Characteristics
               ---------------------------------------------------
                             (dollars in thousands)
                                    Principal
                                                                                                                Amount at
                                                                            Weighted                            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      Investment
                           Amount       Rate        Level      Margin      Adjustment      Cap       Yield      Securities
                        -----------   --------     --------  -----------   ----------    --------   --------    -----------
At December 31, 2005     $9,699,133     4.76%       3.12%       1.64%      22 months      10.26%      4.74%        60.94%
At December 31, 2004    $13,544,872     4.23%       2.45%       1.78%      24 months      10.12%      3.24%        70.83%
At December 31, 2003     $9,294,934     3.85%       2.25%       1.60%      23 months       9.86%      2.47%        73.29%
At December 31, 2002     $7,007,062     4.10%       2.51%       1.59%      11 months      10.37%      2.33%        62.55%
At December 31, 2001     $5,793,250     5.90%       3.95%       1.95%      24 months      11.49%      3.87%        78.29%
- ---------------------------------------------------------------------------------------------------------------------------
At September 30, 2005   $12,437,763     4.56%       2.82%       1.74%      23 months      10.26%      3.91%        65.86%
At June 30, 2005        $12,934,382     4.43%       2.61%       1.82%      24 months      10.30%      3.69%        67.02%
At March 31, 2005       $13,464,087     4.29%       2.50%       1.79%      22 months      10.06%      3.46%        71.28%





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

                                             Weighted        Weighted      Principal Amount as % of
                             Principal    Average Coupon      Average          Total Investment
                              Amount           Rate         Asset Yield           Securities
                            ----------    --------------    -----------    -------------------------
At December 31, 2005        $6,216,668         5.37%           4.60%                39.06%
At December 31, 2004        $5,579,030         5.24%           3.89%                29.17%
At December 31, 2003        $3,387,196         5.77%           4.29%                26.71%
At December 31, 2002        $4,195,322         6.76%           4.78%                37.45%
At December 31, 2001        $1,606,691         6.92%           6.33%                21.71%
- ----------------------------------------------------------------------------------------------------
At September 30, 2005       $6,446,808         5.23%           4.06%                34.14%
At June 30, 2005            $6,365,952         5.22%           3.96%                32.98%
At March 31, 2005           $5,423,714         5.31%           3.99%                28.72%



                                       40


     At December 31, 2005 and 2004, we held investment securities with coupons
linked to various indices. The following tables detail the portfolio
characteristics by index.


                                                                   
                 Adjustable-Rate Investment Securities by Index
                 ----------------------------------------------
                                December 31, 2005

                                                           Six-               11th
                               One-     Six-    Twelve    Month    12-Month  District
                               Month    Month    Month    Auction   Moving   Cost of
                               Libor    Libor    Libor    Average   Average   Funds
                              -------  -------  -------  --------  -------- ---------
Weighted Average Term
 to Next Adjustment            1 mo.   42 mo.    22 mo.     2 mo.     2 mo.     1 mo.

Weighted Average
 Annual Period Cap             7.29%    2.00%     2.00%     1.00%     0.16%     0.00%
Weighted Average
 Lifetime Cap at
  December 31, 2005            7.98%   10.78%    10.33%    13.03%    10.61%    12.07%

Investment Principal
 Value as Percentage of
 Investment Securities at
  December 31, 2005            6.33%    6.42%    24.46%     0.01%     0.19%     0.94%


                             National
                             Financial  Six-                                          Monthly
                             Average    Month  1-Year    2-Year    3-Year     5-Year  Federal
                             Mortgage    CD    Treasury  Treasury  Treasury  Treasury Cost of
                               Rate     Rate    Index     Index     Index     Index    Funds
                            ---------- ------ --------- --------- ---------  -------- --------
Weighted Average Term
 to Next Adjustment            17mo.    3 mo.   18  mo.    14 mo.    21 mo.    34 mo.   1 mo.

Weighted Average
 Annual Period Cap             2.00%    1.00%     1.90%     2.00%     2.03%     1.96%   0.00%
Weighted Average
 Lifetime Cap at
  December 31, 2005           10.90%   11.74%    10.54%    11.93%    13.12%    12.51%  13.40%

Investment Principal
 Value as Percentage of
 Investment Securities at
  December 31, 2005            0.01%    0.03%    21.55%     0.01%     0.25%     0.06%   0.68%





                                                                               
                 Adjustable-Rate Investment Securities by Index
                 ----------------------------------------------
                                December 31, 2004

                                                                                                National
                                                                  Six-                11th      Financial
                                         One-    Six-   Twelve   Month    12-Month   District   Average
                                         Month  Month    Month   Auction   Moving    Cost of    Mortgage
                                         Libor   Libor   Libor   Average   Average    Funds       Rate
                                        ------  ------  ------  --------  --------  ---------  ----------
Weighted Average Term to
  Next Adjustment                        1 mo.  27 mo.  34 mo.     2 mo.     1 mo.     0  mo.       5 mo.
Weighted Average Annual
  Period Cap                             8.01%   1.07%   2.18%     1.00%     0.17%      0.82%       2.00%
Weighted Average Lifetime
  Cap at December 31,  2004              8.88%   9.86%  10.08%    13.03%    10.65%     12.13%      10.58%
Investment  Principal Value
 as Percentage of  Investment
  Securities at  December  31,  2004     8.67%   2.50%  22.96%     0.01%     0.22%      0.98%       0.01%

                                                                                               Monthly
                                           Six-     1-Year     2-Year     3-Year     5-Year    Federal
                                          Month     Treasury   Treasury   Treasury  Treasury   Cost of
                                          CD Rate    Index      Index      Index     Index      Funds
                                         --------  ---------  ---------  ---------  --------  --------
Weighted Average Term to
  Next Adjustment                          3 mo.     25 mo.     10 mo.     17 mo.    31 mo.     0 mo.
Weighted Average Annual
  Period Cap                               1.00%      1.86%      2.00%      2.00%     2.00%     2.00%
Weighted Average Lifetime
  Cap at December 31,  2004               11.66%     10.31%     11.92%     12.96%    12.59%    13.39%
Investment  Principal Value
 as Percentage of  Investment
  Securities at  December  31,  2004       0.05%     34.31%      0.01%      0.25%     0.07%     0.79%


                                       41



     Borrowings

     To date, our debt has consisted entirely of borrowings collateralized by a
pledge of our investment securities. These borrowings appear on our balance
sheet as repurchase agreements. At December 31, 2005, we had established
uncommitted borrowing facilities in this market with 32 lenders in amounts which
we believe are in excess of our needs. All of our investment securities are
currently accepted as collateral for these borrowings. However, we limit our
borrowings, and thus our potential asset growth, in order to maintain unused
borrowing capacity and thus increase the liquidity and strength of our balance
sheet.

     For the year ended December 31, 2005, the term to maturity of our
borrowings ranged from one day to three years, with a weighted average original
term to maturity of 163 days at December 31, 2005. For the year ended December
31, 2004, the term to maturity of our borrowings ranged from one day to three
years, with a weighted average original term to maturity of 211 days at December
31, 2004. For the year ended December 31, 2003, the term to maturity of our
borrowings ranged from one day to three years, with a weighted average original
term to maturity of 203 days at December 31, 2003.

     At December 31, 2005, the weighted average cost of funds for all of our
borrowings was 4.16% and the weighted average term to next rate adjustment was
79 days. At December 31, 2004, the weighted average cost of funds for all of our
borrowings was 2.46% and the weighted average term to next rate adjustment was
111 days. At December 31, 2003, the weighted average cost of funds for all of
our borrowings was 1.51% and the weighted average term to next rate adjustment
was 90 days.

     Liquidity

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

     Borrowings under our repurchase agreements decreased by $3.1 billion to
$13.6 billion at December 31, 2005, from $16.7 billion at December 31, 2004. The
decrease in borrowings was the result of lower assets from the sale of
securities to facilitate the repositioning of our portfolio and lower borrowing
capacity from the decline in equity.

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

     Under our repurchase agreements, we may be required to pledge additional
assets to our repurchase agreement counterparties (i.e., lenders) in the event
the estimated fair value of the existing pledged collateral under such
agreements declines and such lenders demand additional collateral (a "margin
call"), which may take the form of additional securities or cash. Similarly, if
the estimated fair value of investment securities increase due to changes in
market interest rates of market factors, lenders may release collateral back to
us. Specifically, margin calls result from a decline in the value of the our
Mortgage-Backed Securities securing our repurchase agreements, prepayments on
the mortgages securing such Mortgage-Backed Securities and to changes in the
estimated fair value of such Mortgage-Backed Securities generally due to
principal reduction of such Mortgage-Backed Securities from scheduled
amortization and resulting from changes in market interest rates and other
market factors. Through December 31, 2005, we did not have any margin calls on
our repurchase agreements that we were not able to satisfy with either cash or
additional pledged collateral. However, should prepayment speeds on the
mortgages underlying our Mortgage-Backed Securities and/or market interest rates
suddenly increase, margin calls on our repurchase agreements could result,
causing an adverse change in our liquidity position.

     The following table summarizes the effect on our liquidity and cash flows
from contractual obligations for repurchase agreements, the non-cancelable
office lease and employment agreements at December 31, 2005.

                                       42





                                                                          
                                                  (dollars in thousands)
                            -------------------------------------------------------------------
                                                          Three to
                             Within One    One to Three     Five     More than
                                Year          Years        Years     Five Years       Total
                            -------------------------------------------------------------------
Repurchase agreements        $12,176,301    $1,400,000           -            -    $13,576,301
Interest expense on
 repurchase agreements            76,381        22,250                                  98,631
Long-term operating lease
 obligations                         530         1,596           -            -          2,126
Employment contracts               7,106             -           -            -          7,106
                            -------------------------------------------------------------------
Total                        $12,260,318    $1,423,846           -            -    $13,684,164
                            ===================================================================



     Stockholders' Equity

     During the year ended December 31, 2005, we declared dividends to common
shareholders totaling $127.1 million or $1.04 per share, of which $12.4 million
was paid on January 27, 2006. During the year ended December 31, 2005, we
declared and paid dividends to preferred shareholders totaling $14.6 million or
$1.97 per share. During the year ended December 31, 2004, we declared and paid
dividends to common shareholders totaling $237.9 million or $1.98 per share, of
which $60.6 million was paid on January 7, 2005. During the year ended December
31, 2004 we declared and paid dividends to preferred shareholders totaling $7.7
million or $1.45 per share. On January 21, 2004, the Company entered into an
underwriting agreement pursuant to which the Company raised net proceeds of
approximately $363.6 million in an offering of 20,700,000 shares of common
stock. On March 31, 2004, the Company entered into an underwriting agreement
pursuant to which the Company raised net proceeds of approximately $102.9
million through an offering of 4,250,000 shares of 7.875% Series A Cumulative
Redeemable Preferred Stock, which settled on April 5, 2004. On October 14, 2004,
the Company entered into an underwriting agreement pursuant to which the Company
raised net proceeds of approximately $74.5 million through an offering of
3,162,500 shares of 7.875% Series A Cumulative Redeemable Preferred Stock, which
settled on October 19, 2004.

     During the year ended December 31, 2005, 2,381,550 shares of the Company's
common stock were issued through the Equity Shelf Program, totaling net proceeds
of $40.1 million. During the year ended December 31, 2005, 16,128 options were
exercised under the long-term compensation plan for an aggregate exercise price
of $253,000. Also, 24,253 common shares were sold through the dividend
reinvestment and direct purchase program for $440,000 during the year ended
December 31, 2005.

     The FIDAC acquisition was completed on June 4, 2004. We issued 2,201,080
common shares to the shareholders of FIDAC, based on the December 31, 2003
closing price of $18.40. We continue to operate as a self-managed and
self-advised real estate investment trust, with FIDAC operating as our
wholly-owned taxable REIT subsidiary.

     FIDAC's shareholders may also receive additional shares of our common stock
as an earn-out in 2006 worth up to $49,500,000 if FIDAC meets specific
performance goals under the merger agreement. We cannot calculate how many
shares we will issue under the earn-out provisions since that will vary
depending upon whether and the extent to which FIDAC achieves specific
performance goals. Even if FIDAC achieves specific performance goals for a
fiscal year, the number of additional shares to be issued to the FIDAC
shareholders will vary depending on our average share price for the first 20
trading days of the following fiscal year.

     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 investment
securities in our portfolio.



                                                                      
                           Unrealized Gains and Losses
                           ---------------------------
                             (dollars in thousands)
                                                        At December 31,
                                  -----------------------------------------------------------
                                         2005        2004        2003      2002         2001
                                  -----------------------------------------------------------
Unrealized gain                        $5,027     $23,021     $24,886   $90,507      $53,935
Unrealized loss                      (211,601)   (143,821)    (72,147)  (14,996)     (15,766)
                                  -----------------------------------------------------------
Net Unrealized (loss) gain          ($206,574)  ($120,800)   ($47,261)  $75,511      $38,169
                                  ===========================================================

Net unrealized losses as % of
 investment
     securities principal amount       (1.30%)     (0.63%)     (0.37%)     0.67%        0.52%
Net unrealized losses as % of
 investment
   securities amortized cost           (1.28%)     (0.62%)     (0.37%)     0.67%        0.51%


                                       43



     Unrealized changes in the estimated net market value of investment
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 investment securities might impair our liquidity
position, requiring us to sell assets with the likely result of realized losses
upon sale. The net unrealized gains (loss) on available for sale securities was
$(206,574) million, or (1.28%) of the amortized cost of our investment
securities as of December 31, 2005, $120.8 million, or (0.62%) of the amortized
cost of our investment securities as of December 31, 2004 and $47.3 million, or
0.37% of the amortized cost of our investment securities as of December 31,
2003. Mortgage-Backed Securities with a carrying value of $4.6 billion were in a
continuous unrealized loss position over 12 months at December 31, 2005 in the
amount of $111.1 million. Mortgage-Backed Securities with a carrying value of
$8.4 billion were in a continuous unrealized loss position for less than 12
months at December 31, 2005 in the amount of $100.5 million. Mortgage-Backed
Securities with a carrying value of $2.2 billion were in a continuous unrealized
loss position over 12 months at December 31, 2004 in the amount of $34.1
million. Mortgage-Backed Securities with a carrying value of $13.1 billion were
in a continuous unrealized loss position for less than 12 months at December 31,
2004 in the amount of $105.3 million. The decline in value of these securities
is solely due to increases in interest rates. All of the Mortgage-Backed
Securities are "AAA" rated or carry an implied "AAA" rating. At December 31,
2005, $2.9 billion in Mortgage-Backed Securities were deemed to be
other-than-temporarily impaired, which resulted in a loss of $83.1 million. At
September 30, 2005, our investments that were in a loss position were not
considered other-than-temporarily impaired since at the time the Company had the
intent to hold them for a period of time, to maturity if necessary, sufficient
for a forecasted market price recovery up to or beyond the cost of the
investments. With the continued increase in the Federal Funds rate during the
quarter, however, management determined during the fourth quarter that it did
not intend to hold some of its securities until maturity and would reposition a
portion of its assets. The remaining investments are not considered
other-than-temporarily impaired since the Company currently has the ability and
intent to hold the investments for a period of time to maturity, if necessary,
sufficient for a forecasted market price recovery up to or beyond the cost of
the investments. Also, the Company is guaranteed payment on the par value of the
securities.

     The table below shows our equity capital base as reported and on a
historical amortized cost basis at December 31, 2005, 2004, 2003, 2002, and 2001
and September 30, 2005, June 30, 2005 and March 31, 2005. Issuances of common
stock, the level of earnings as compared to dividends declared, and other
factors influence our historical cost equity capital base. The reported equity
capital base is influenced by these factors plus changes in the "Net Unrealized
Gains (Losses) on Assets Available for Sale" account.

                                       44





                                                                                            
                              Stockholders' Equity

                         7.875% Series                    Net Unrealized
                          A Cumulative                    Gains (Losses)   Reported Common                         Reported
                           Redeemable      Historical        on Assets       Stock Equity      Historical        Common Stock
                           Preferred      Common Stock     Available for      Base (Book      Common Stock       Equity (Book
                             Stock        Equity Base          Sale             Value)      Equity Per Share   Value) Per Share
                        -------------------------------------------------------------------------------------------------------
                                                 (dollars in thousands, except per share data)
At December 31, 2005        $177,088       $1,534,052       ($207,117)        $1,504,023         $12.40             $10.73
At December 31, 2004        $177,077       $1,821,270       ($120,800)        $1,700,470         $13.56             $12.56
At December 31, 2003           -           $1,196,481        $(47,261)        $1,149,220         $12.45             $11.96
At December 31, 2002           -           $1,004,555         $75,511         $1,080,066         $11.88             $12.77
At December 31, 2001           -             $629,188         $38,169          $ 667,357         $10.52             $11.15
- -------------------------------------------------------------------------------------------------------------------------------
At September 30, 2005       $177,088       $1,686,827       ($304,555)        $1,382,272         $13.64             $11.18
At June 30, 2005            $177,088       $1,668,253        (144,853)        $1,523,400         $13.61             $12.43
At March 31, 2005           $177,077       $1,645,579       ($213,280)        $1,432,299         $13.57             $11.81



     Leverage

     Our debt-to-equity ratio at December 31, 2005, 2004, and 2003 was 9.0:1,
9.8:1, and 9.6:1, respectively. We generally expect to maintain a ratio of
debt-to-equity of between 8:1 and 12:1, although the ratio may vary from this
range from time to time based upon various factors, including our management's
opinion of the level of risk of our assets and liabilities, our liquidity
position, our level of unused borrowing capacity and over-collateralization
levels required by lenders when we pledge assets to secure borrowings.

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

     Asset/Liability Management and Effect of Changes in Interest Rates

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

     We seek to manage the extent to which our net income changes as a function
of changes in interest rates by matching adjustable-rate assets with
variable-rate borrowings. In addition, we have attempted to mitigate the
potential impact on net income of periodic and lifetime coupon adjustment
restrictions in our portfolio of investment securities by entering into interest
rate swaps. At December 31, 2005, we entered into swap agreements with a total
notional amount of $479.0 million. We agree to pay a weighted average pay rate
of 4.88% and receive a floating rate based on one month LIBOR. The interest rate
swap had not settled as of December 31, 2005. We may enter into similar
derivative transactions in the future by entering into interest rate collars,
caps or floors.

     Changes in interest rates may also affect 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.

                                       45



     Off-Balance Sheet Arrangements

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

     Capital Resources

     At December 31, 2005, we had no material commitments for capital
expenditures.

     Inflation

     Virtually all of our assets and liabilities are financial in nature. As a
result, interest rates and other factors drive our performance far more than
does inflation. Changes in interest rates do not necessarily correlate with
inflation rates or changes in inflation rates. Our financial statements are
prepared in accordance with GAAP and our dividends 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 100% of our total assets at December 31, 2005 and 2004 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% and 93.3%,
respectively, of our revenue qualifies for the 75% source of income test, and
100% of our revenue qualifies for the 95% source of income test, under the REIT
rules for the years ended December 31, 2005 and 2004. 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, 2005, 2004 and 2003, 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 of 1940, as
amended (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, 2005, 2004, 2003, and 2002
we were in compliance with this requirement.

                                       46



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
investment securities and our ability to realize gains from the sale of these
assets. We have utilized interest rate swaps, and interest rate caps and floors
and we may in the future utilize a variety of other financial instruments,
including interest rate caps, floors and other interest rate exchange contracts,
in order to limit the effects of interest rates on our operations. Our use of
these types of derivatives to hedge the risk of interest-earning assets or
interest-bearing liabilities may subject us to certain risks, including the risk
that losses on a hedge position will reduce the funds available for payments to
holders of securities and that the losses may exceed the amount we invested in
the instruments. Our profitability and the value of our portfolio 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 by 75 basis points, assuming
the yield curves of the rate shocks will be parallel to each other and the
current yield curve. All changes in income and value are measured as percentage
changes from the projected net interest income and portfolio value at the base
interest rate scenario. The base interest rate scenario assumes interest rates
at December 31, 2005, 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
- ----------------------------------------------------------------------------------------------------

- -75 Basis Points                              28.86%                              1.00%
- -50 Basis Points                              19.80%                              0.71%
- -25 Basis Points                              10.09%                              0.38%
Base Interest Rate                               -                                  -
+25 Basis Points                             (10.34%)                            (0.42%)
+50 Basis Points                             (20.88%)                            (0.89%)
+75 Basis Points                             (31.57%)                            (1.40%)



ASSET AND LIABILITY MANAGEMENT

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

     The following table sets forth the estimated maturity or repricing of our
interest-earning assets and interest-bearing liabilities at December 31, 2005.
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. The interest rate sensitivity of our assets and
liabilities in the table could vary substantially if based on actual prepayment
experience.

                                       47





                                                                               
                                                                   More than 1
                                         Within 3                   Year to 3    3 Years and
                                          Months     4-12 Months      Years          Over       Total
                                                             (dollars in thousands)
                                       -------------------------------------------------------------------
Rate Sensitive Assets:
  Investment Securities (Principal)     $1,980,843    $1,799,297    $3,983,009   $8,152,652   $15,915,801

Rate Sensitive Liabilities:
  Repurchase Agreements                 11,826,301       350,000     1,400,000            -    13,576,301
                                       -------------------------------------------------------------------

Interest rate sensitivity gap          ($9,845,458)   $1,449,297    $2,583,009   $8,152,652    $2,339,500
                                       ===================================================================

Cumulative rate sensitivity gap        ($9,845,458)  ($8,396,161)  ($5,813,152)  $2,339,500
                                       =====================================================

Cumulative interest rate sensitivity
  gap as a percentage of
   total rate-sensitive assets             (61.86%)      (52.75%)      (36.52%)       14.70%
                                       =====================================================



     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."

                                       48



ITEM 8   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------

     Our financial statements and the related notes, together with the Report of
Independent Registered Public Accounting Firm thereon, are set forth on pages
F-1 through F-19 of this Form 10-K.

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

     None.

ITEM 9A  CONTROLS AND PROCEDURES
- --------------------------------

     Our management, including our Chief Executive Officer (or CEO) and Chief
Financial Officer (or CFO), reviewed and evaluated the effectiveness of the
design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act) as of the end of the period
covered by this annual report. Based on that review and evaluation, the CEO and
CFO have concluded that our current disclosure controls and procedures, as
designed and implemented, (1) were structured to ensure that material
information regarding Annaly and its sole subsidiary is made known to our
management, including our CEO and CFO, by our employees and (2) were effective
in providing reasonable assurance that information the Company must disclose in
its periodic reports under the Securities Exchange Act is recorded, processed,
summarized and reported within the time periods prescribed by the SEC's rules
and forms. There have been no significant changes in our internal controls or in
other factors that could significantly affect our internal controls subsequent
to the date of their evaluation. There were no significant material weaknesses
identified in the course of such review and evaluation and, therefore, we have
taken no corrective measures.


Management Report On Internal Control Over Financial Reporting


Dated:  March 9, 2006


     Management of the Company is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rules 13a-15(f) under the Securities Exchange
Act as a process designed by, or under the supervision of, the Company's
principal executive and principal financial officers and effected by the
Company's Board of Directors, management and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:


     o    pertain to the maintenance of records that in reasonable detail
          accurately and fairly reflect the transactions and dispositions of the
          assets of the Company;

     o    provide reasonable assurance that transactions are recorded as
          necessary to permit preparation of financial statements in accordance
          with generally accepted accounting principles, and that receipts and
          expenditures of the Company are being made only in accordance with
          authorizations of management and directors of the Company; and

     o    provide reasonable assurance regarding prevention or timely detection
          of unauthorized acquisition, use or disposition of the Company's
          assets that could have a material effect on the financial statements.

     Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. As a result, even systems
determined to be effective can provide only reasonable assurance regarding the
preparation and presentation of financial statements. Moreover, projections of
any evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may deteriorate.

                                       49



     The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005. In making
this assessment, the Company's management used criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.

     Based on its assessment, the Company's management believes that, as of
December 31, 2005, the Company's internal control over financial reporting was
effective based on those criteria.

     The Company's independent registered public accounting firm, Deloitte &
Touche LLP, have issued an audit report on management's assessment of the
Company's internal control over financial reporting. This report appears on page
F-1 of this annual report on Form 10-K.

ITEM 9B.  OTHER INFORMATION
- ---------------------------

     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 proxy statement to be filed with the SEC within 120
days after December 31, 2005. The information regarding our executive officers
required by Item 10 appears in Part I of this Form 10-K. The information
required by Item 10 as to our compliance with Section 16(a) of the Securities
Exchange Act of 1934 is incorporated by reference to the proxy statement to be
filed with the SEC within 120 days after December 31, 2005.

     We have adopted a Code of Business Conduct and Ethics within the meaning of
Item 406(b) of Regulation S-K. This Code of Business Conduct and Ethics applies
to our principal executive officer, principal financial officer and principal
accounting officer. This Code of Business Conduct and Ethics is publicly
available on our website at www.annaly.com. If we make substantive amendments to
this Code of Business Conduct and Ethics or grant any waiver, including any
implicit waiver, we intend to disclose these events on our website.

ITEM 11   EXECUTIVE COMPENSATION
- --------------------------------

     The information required by Item 11 is incorporated herein by reference to
the proxy statement to be filed with the SEC within 120 days after December 31,
2005.

ITEM 12   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS
          ---------------------------

     The information required by Item 12 is incorporated herein by reference to
the proxy statement to be filed with the SEC within 120 days after December 31,
2005.

ITEM 13   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------

     The information required by Item 13 is incorporated herein by reference to
the proxy statement to be filed with the SEC within 120 days after December 31,
2005.

ITEM 14   PRINCIPAL ACCOUNTANT FEES AND SERVICES
- ------------------------------------------------

     The information required by Item 14 is incorporated herein by reference to
the proxy statement to be filed with the SEC within 120 days after December 31,
2005.

                                       50



                                     PART IV

ITEM 15   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

Exhibit
Number    Exhibit Description

3.1       Articles of Amendment and Restatement of the Articles of Incorporation
          of the Registrant (incorporated by reference to Exhibit 3.2 to the
          Registrant's Registration Statement on Form S-11 (Registration No.
          333-32913) filed with the Securities and Exchange Commission on August
          5, 1997).
3.2       Articles of Amendment of the Articles of Incorporation of the
          Registrant (incorporated by reference to Exhibit 3.1 of the
          Registrant's Registration Statement on Form S-3 (Registration
          Statement 333-74618) filed with the Securities and Exchange Commission
          on June 12, 2002).
3.3       Bylaws of the Registrant, as amended (incorporated by reference to
          Exhibit 3.3 to the Registrant's Registration Statement on Form S-11
          (Registration No. 333-32913) filed with the Securities and Exchange
          Commission on August 5, 1997).
4.1       Specimen Common Stock Certificate (incorporated by reference to
          Exhibit 4.1 to Amendment No. 1 to the Registrant's Registration
          Statement on Form S-11 (Registration No. 333-32913) filed with the
          Securities and Exchange Commission on September 17, 1997).
4.2       Specimen Series A Preferred Stock Certificate (incorporated by
          reference to Exhibit 4.1 of the Registrant's Registration Statement on
          Form 8-A filed with the SEC on April 1, 2004).
4.3       Specimen Preferred Stock Certificate (incorporated by reference to
          Exhibit 4.2 to the Registrant's Registration Statement on Form S-3
          (Registration No. 333-74618) filed with the Securities and Exchange
          Commission on December 5, 2001).
10.1      Long-Term Stock Incentive Plan (incorporated by reference to Exhibit
          10.3 to the Registrant's Registration Statement on Form S-11
          (Registration No. 333-32913) filed with the Securities and Exchange
          Commission on August 5, 1997).*
10.2      Form of Master Repurchase Agreement (incorporated by reference to
          Exhibit 10.7 to the Registrant's Registration Statement on Form S-11
          (Registration No. 333-32913) filed with the Securities and Exchange
          Commission on August 5, 1997).
10.3      Amended and Restated Employment Agreement, effective as of June 4,
          2004, between the Registrant and Michael A.J. Farrell (incorporated by
          reference to Exhibit 10.3 of the Registrant's Form 10-K filed with the
          Securities and Exchange Commission on March 10, 2005).*
10.4      Amended and Restated Employment Agreement, effective as of June 4,
          2004, between the Registrant and Wellington J. Denahan (incorporated
          by reference to Exhibit 10.4 of the Registrant's Form 10-K filed with
          the Securities and Exchange Commission on March 10, 2005).*
10.5      Amended and Restated Employment Agreement, effective as of June 4,
          2004,between the Registrant and Kathryn F. Fagan (incorporated by
          reference to Exhibit 10.5 of the Registrant's Form 10-K filed with the
          Securities and Exchange Commission on March 10, 2005).*


                                       51



10.6      Amended and Restated Employment Agreement, effective as of June 4,
          2004, between the Registrant and James P. Fortescue (incorporated by
          reference to Exhibit 10.7 of the Registrant's Form 10-K filed with the
          Securities and Exchange Commission on March 10, 2005).*
10.7      Amended and Restated Employment Agreement, dated as of January 23,
          2006, between the Registrant and Jeremy Diamond.*
10.8      Amended and Restated Employment Agreement, dated as of January 23,
          2006, between the Registrant and Ronald D. Kazel.*
10.9      Amended and Restated Employment Agreement, effective as of June 4,
          2004, between the Registrant and Rose-Marie Lyght (incorporated by
          reference to Exhibit 10.10 of the Registrant's Form 10-K filed with
          the Securities and Exchange Commission on March 10, 2005).*
10.10     Amended and Restated Employment Agreement, effective as of June 4,
          2004, between the Registrant and Kristopher R. Konrad (incorporated by
          reference to Exhibit 10.11 of the Registrant's Form 10-K filed with
          the Securities and Exchange Commission on March 10, 2005).*
10.11     Amended and Restated Employment Agreement, dated January 23, 2006,
          between the Registrant and R. Nicholas Singh.*
10.12     Agreement and Plan of Merger, dated as of December 31, 2003, by and
          among the Registrant, Fixed Income Discount Advisory Company, FDC
          MergerSub, Inc., Michael A.J. Farrell, Wellington J. Denahan, Jennifer
          S. Karve, Kathryn F. Fagan, Jeremy Diamond, Ronald D. Kazel,
          Rose-Marie Lyght, Kristopher R. Konrad, and James P. Fortescue
          (incorporated by reference to Exhibit 99.2 to the Registrant's Form
          8-K filed with the Securities and Exchange Commission on January 2,
          2004).
23.1      Consent of Independent Registered Public Accounting Firm.
31.1      Certification of Michael A.J. Farrell, Chairman, Chief Executive
          Officer, and President of the Registrant, pursuant to 18 U.S.C.
          Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley
          Act of 2002.
31.2      Certification of Kathryn F. Fagan, Chief Financial Officer and
          Treasurer of the Registrant, pursuant to 18 U.S.C. Section 1350 as
          adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1      Certification of Michael A.J. Farrell, Chairman, Chief Executive
          Officer, and President of the Registrant, pursuant to 18 U.S.C.
          Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
          Act of 2002.
32.2      Certification of Kathryn F. Fagan, Chief Financial Officer and
          Treasurer of the Registrant, pursuant to 18 U.S.C. Section 1350 as
          adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Exhibit Numbers 10.1 and 10.3-10.11 are management contracts or compensatory
plans required to be filed as Exhibits to this Form 10-K.

                                       52



ANNALY MORTGAGE MANAGEMENT, INC. AND SUBSIDIARY

FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------


                                                                            Page

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                      F-1

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
   DECEMBER 31, 2005, 2004, and 2003:

   Consolidated Statements of Financial Condition                            F-3

   Consolidated Statements of Operations and Comprehensive (Loss) Income     F-4

   Consolidated Statements of Stockholders' Equity                           F-5

   Consolidated Statements of Cash Flows                                     F-6

   Notes to Consolidated Financial Statements                                F-7

                                       53



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders of
Annaly Mortgage Management, Inc.
New York, New York


     We have audited the accompanying consolidated statements of financial
condition of Annaly Mortgage Management, Inc. and Subsidiary (the "Company") as
of December 31, 2005 and 2004, and the related consolidated statements of
operations and comprehensive (loss) income, stockholders' equity, and of cash
flows for each of the three years in the period ended December 31, 2005. We also
have audited management's assessment, included in the Management Report On
Internal Control Over Financial Reporting included at Item 9B, that the Company
maintained effective internal control over financial reporting as of December
31, 2005, based on criteria established in Internal Control--Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. The Company's management is responsible for these financial
statements, for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on these financial
statements, an opinion on management's assessment, and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audits.


     We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of financial statements included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. Our
audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.


     A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.


     Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.

                                      F-1




     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2005 and 2004, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 2005, in
conformity with accounting principles generally accepted in the United States of
America. Also in our opinion, management's assessment that the Company
maintained effective internal control over financial reporting as of December
31, 2005, is fairly stated, in all material respects, based on the criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Furthermore, in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2005, based on the criteria
established in Internal Control--Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.


/s/ Deloitte & Touche LLP


New York, New York
March 9, 2006

                                      F-2





                                                                             
                 ANNALY MORTGAGE MANAGEMENT, INC. AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                           DECEMBER 31, 2005 AND 2004
                  (dollars in thousands, except for share data)


                                                                    DECEMBER 31,    DECEMBER 31,
                                                                        2005            2004
                                                                  ------------------------------

                                     ASSETS
                                     ------

Cash and cash equivalents                                         $       4,808    $       5,853
Mortgage-Backed Securities, at fair value                            15,929,864       19,038,386
Agency debentures, at fair value                                              -          390,509
Receivable for Mortgage-Backed Securities sold                           13,449            1,025
Accrued interest receivable                                              71,340           81,557
Receivable for advisory and service fees                                  3,497            2,359
Intangible for customer relationships, net                               15,183           15,613
Goodwill                                                                 23,122           23,122
Other assets                                                              2,159            1,875
                                                                  ------------------------------

     Total assets                                                 $  16,063,422    $  19,560,299
                                                                  ==============================

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

Liabilities:
  Repurchase agreements                                           $  13,576,301    $  16,707,879
  Payable for Mortgage-Backed Securities purchased                      933,051        1,044,683
  Accrued interest payable                                               27,994           35,721
  Dividends payable                                                      12,368           60,632
  Other liabilities                                                         305            2,819
  Accounts payable                                                        8,837            8,095
  Interest rate swaps, at fair value                                        543                -
                                                                  ------------------------------

     Total liabilities                                               14,559,399       17,859,829
                                                                  ------------------------------

Stockholders' Equity:
  7.875% Series A Cumulative Redeemable Preferred Stock:
    8,000,000 authorized 7,412,500 shares issued and outstanding        177,088          177,077
  Common stock: par value $.01 per share; 500,000,000 authorized,
    123,684,931 and 121,263,000  shares
    issued and outstanding, respectively                                  1,237            1,213
  Additional paid-in capital                                          1,679,452        1,638,635
  Accumulated other comprehensive loss                                 (207,117)        (120,800)
  Retained (deficit)  earnings                                         (146,637)           4,345
                                                                  ------------------------------

     Total stockholders' equity                                       1,504,023        1,700,470
                                                                  ------------------------------

Total liabilities and stockholders' equity                        $  16,063,422    $  19,560,299
                                                                  ==============================


See notes to financial statements.

                                      F-3





                                                                              
                 ANNALY MORTGAGE MANAGEMENT, INC. AND SUBSIDIARY
      CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE (LOSS) INCOME
                  YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
                (dollars in thousands, except per share amounts)

                                                          For the        For the       For the
                                                        Year  Ended    Year Ended     Year Ended
                                                        December 31,   December 31,  December 31,
                                                            2005          2004          2003
                                                       -----------------------------------------
Interest  income                                            $705,046      $532,328     $337,433

Interest  expense                                            568,560       270,116      182,004

                                                       -----------------------------------------
Net interest income                                          136,486       262,212      155,429

Other (loss) income:
  Investment advisory and service fees                        35,625        12,512            -
  (Loss) gain on sale of Investment Securities               (53,238)        5,215       40,907
  Loss on other-than-temporarily impaired securities         (83,098)            -            -
                                                       -----------------------------------------

     Total other (loss) income                              (100,711)       17,727       40,907
                                                       -----------------------------------------

Expenses:
  Distribution fees                                            8,000         2,860            -
  General and administrative expenses                         26,278        24,029       16,233
                                                       -----------------------------------------

     Total expenses                                           34,278        26,889       16,233
                                                       -----------------------------------------

 Income before income taxes                                    1,497       253,050      180,103

Income taxes                                                  10,744         4,458            -
                                                       -----------------------------------------

Net (loss) income                                             (9,247)      248,592      180,103

Dividends on preferred stock                                  14,593         7,745            -
                                                       -----------------------------------------

Net (loss)  income related to common shareholders           ($23,840)     $240,847     $180,103
                                                       =========================================

Net (loss)  income per average common  share:
  Basic                                                       ($0.19)        $2.04        $1.95
                                                       =========================================

  Diluted                                                     ($0.19)        $2.03        $1.94
                                                       =========================================

Weighted average number of common shares outstanding:
  Basic                                                  122,475,032   118,223,330   92,215,352
                                                       =========================================

  Diluted                                                122,475,032   118,459,145   93,031,253
                                                       =========================================

Net (loss) income                                            ($9,247)     $248,592     $180,103
                                                       -----------------------------------------

Comprehensive (loss) income:
  Unrealized loss on available-for sale securities          (222,110)      (68,324)     (81,865)
  Unrealized loss on interest rate swaps                        (543)            -            -
  Reclassification adjustment for net losses (gains)
    included in net income or loss                           136,336        (5,215)     (40,907)
                                                       -----------------------------------------

Other comprehensive loss                                     (86,317)      (73,539)    (122,772)
                                                       -----------------------------------------

Comprehensive (loss) income                                 ($95,564)     $175,053      $57,331
                                                       =========================================


See notes to financial statements.

                                      F-4





                                                                                        
                 ANNALY MORTGAGE MANAGEMENT, INC.AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
                  (dollars in thousands, except per share data)

                                                                                        Other
                                                               Common     Additional  Accumulated    Retained
                                                  Preferred     Stock      Paid-In    Comprehensive  (Deficit)
                                                    Stock     Par Value    Capital    Income (Loss)  Earnings     Total
                                                 --------------------------------------------------------------------------
BALANCE, JANUARY 1, 2003                                          $846   $1,003,200       $75,511        $509   $1,080,066
  Net Income                                                                                          180,103
 Other comprehensive loss                                                                (122,772)
 Comprehensive income                                                                                               57,331
 Exercise of stock options                                           1          913                                    914
 Net proceeds from direct purchase and dividend
  reinvestment                                                       2        4,199                                  4,201
 Net proceeds from follow-on offering                               93      151,222                                151,315
 Net proceeds from equity shelf program offering                    19       34,625                                 34,644
 Common dividends declared, $1.95 per share                                                          (179,251)    (179,251)
                                                 --------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2003                                        $961   $1,194,159      ($47,261)     $1,361   $1,149,220
  Net Income                                                                                          248,592
  Other comprehensive loss                                                                (73,539)
  Comprehensive income                                                                                             175,053
  Exercise of stock options                                          1          855                                    856
  Net proceeds from direct purchase and dividend
   reinvestment                                                      1        2,285                                  2,286
  Net proceeds from follow-on offering                             207      363,385                                363,592
  Common shares issued in FIDAC transaction                         22       40,478                                 40,500
  Net proceeds from preferred offering              $177,077                                                       177,077
  Net proceeds from equity shelf program                            21       37,473                                 37,494
  Preferred dividends declared, $1.45 per share                                                        (7,745)      (7,745)
  Common dividends declared, $1.98 per share                                                         (237,863)    (237,863)
                                                 --------------------------------------------------------------------------
BALANCE, DECEMBER  31, 2004                         $177,077    $1,213   $1,638,635     ($120,800)     $4,345   $1,700,470
  Net loss                                                                                             (9,247)
  Other comprehensive Loss                                                                (86,317)
  Comprehensive loss                                                                                               (95,564)
  Reduction in estimated legal cost of preferred
   offering                                               11                                                            11
  Exercise of stock options                                                     253                                    253
  Net proceeds from direct purchase and dividend
   reinvestment                                                                 440                                    440
  Net proceeds from equity shelf program                            24       40,124                                 40,148
  Preferred dividends declared, $1.97 per share                                                       (14,593)     (14,593)
  Common dividends declared, $1.04 per share                                                         (127,142)    (127,142)
                                                 --------------------------------------------------------------------------
BALANCE, DECEMBER  31, 2005                         $177,088    $1,237   $1,679,452     ($207,117)  ($146,637)  $1,504,023
                                                 ==========================================================================


See notes to financial statements.

                                      F-5





                                                                                             
                 ANNALY MORTGAGE MANAGEMENT, INC. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
      YEARS ENDED DECEMBER 31, 2005, 2004, AND 2003 (dollars in thousands)

                                                                For the Year    For the Year     For the Year
                                                                   Ended            Ended           Ended
                                                                 December 31,    December 31,     December 31,
                                                                    2005            2004             2003
                                                               -----------------------------------------------
Cash flows from operating activities:
Net (loss) income                                                    ($9,247)         $248,592       $180,103
Adjustments to reconcile net income to net cash provided
  by operating activities:
    Amortization of Mortgage Backed Securities premiums
    and discounts, net                                                154,309          179,602        216,570
    Amortization of intangibles                                           571              130              -
    Loss (gain) on sale of  Investment Securities                      53,238          (5,215)       (40,907)
    Stock option expense                                                   56              317            121
    Market value adjustment on long-term repurchase agreement         (2,514)          (1,133)          1,607
    Loss on other-than-temporarily impaired securities                 83,098                -
    Decrease (increase) in accrued interest receivable                 10,555         (27,964)        (2,833)
    Increase in other assets                                            (425)          (1,749)          (776)
    (Increase)   decrease  in  advisory   and  service   fees                            (795)              -
receivable                                                            (1,138)
    (Decrease) increase in accounts payable                           (7,727)           20,732             55
    Increase in accrued expenses and other liabilities                    753            4,400            979
                                                               -----------------------------------------------
         Net cash  provided by operating activities                   281,529          416,917        354,919
                                                               -----------------------------------------------
Cash flows from investing activities:
  Purchase of Mortgage-Backed Securities                          (7,416,869)     (14,147,323)   (11,404,133)
  Purchase of agency debentures                                             -        (250,000)    (1,735,940)
  Proceeds from sale of Investment Securities                       3,231,219          596,962      2,899,267
  Proceeds from called agency debentures                              130,000          845,000        746,000
  Principal payments of Mortgage-Backed Securities                  7,053,867        6,495,911      8,290,724
  Cash from FIDAC acquisition                                               -            2,526              -
                                                               -----------------------------------------------
       Net cash provided by (used in) investing activities          2,998,217      (6,456,924)    (1,204,082)
                                                               -----------------------------------------------
Cash flows from financing activities:
  Proceeds from repurchase agreements                             245,514,548      152,739,827    117,066,588
  Principal payments on repurchase agreements                   (248,646,126)    (147,045,071)  (116,217,261)
  Proceeds from exercise of stock options                                 197              539            792
  Proceeds from direct purchase and dividend reinvestment                 440            2,286          4,201
  Net proceeds from follow-on  offerings                                    -          363,592        151,315
  Net proceeds from preferred stock offering                                -          177,077              -
  Net proceeds from equity shelf program                               40,148           37,494         34,644
  Dividends paid                                                    (189,998)        (230,131)      (191,595)
                                                               -----------------------------------------------
       Net cash (used in) provided by financing activities        (3,280,791)        6,045,613        848,684
                                                               -----------------------------------------------

Net (decrease) increase in cash and cash equivalents                  (1,045)            5,606          (479)

Cash and cash equivalents, beginning of year                            5,853              247            726
                                                               -----------------------------------------------

Cash and cash equivalents, end of year                                 $4,808           $5,853          $ 247
                                                               ===============================================

Supplemental disclosure of cash flow information:
  Interest paid                                                      $576,287         $249,384       $181,949
                                                               ===============================================
  Taxes paid                                                          $11,740           $3,462              -
                                                               ===============================================
Noncash financing activities:
  Net change in unrealized loss on available-for-sale
securities and                                                                                     ($122,772)
    interest rate swaps net of reclassification adjustment          ($86,317)        ($73,539)
                                                               ===============================================

  Dividends declared, not yet paid                                    $12,368          $60,632        $45,155
                                                               ===============================================
Noncash investing and financing activities:
  Noncash acquisition of FIDAC                                              -          $40,500              -
                                                               ===============================================


See notes to financial statements.

                                      F-6



                 ANNALY MORTGAGE MANAGEMENT, INC. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2005, 2004 AND 2003
- --------------------------------------------------------------------------------

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.
The Company acquired Fixed Income Discount Advisory Company ("FIDAC") on June 4,
2004 (See Note 2). FIDAC is a registered investment advisor and is a taxable
Real Estate Investment Trust ("REIT") subsidiary of the Company.

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

     Basis of Presentation - The consolidated financial statements as of and for
the year ended December 31, 2005 include the accounts of the Company and FIDAC.
All material intercompany balances have been eliminated.

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

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

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

     Management evaluates securities for other-than-temporary impairment at
least on a quarterly basis, and more frequently when economic or market concerns
warrant such evaluation. Consideration is given to (1) the length of time and
the extent to which the fair value has been lower than carrying value, (2) the
financial condition and near-term prospects of the issuer, and (3) the intent
and ability of the Company to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in fair value.
Unrealized losses on Investment Securities that are considered other than
temporary, as measured by the amount of decline in fair value attributable to
other-than-temporary factors, are recognized in income and the cost basis of the
Investment Securities is adjusted. The loss on other-than-temporarily impaired
securities was $83.1 million during the year ended December 31, 2005. There were
no impairment losses recognized in 2004 and 2003.

     SFAS No. 107, Disclosure About Fair Value of Financial Instruments,
requires disclosure of the fair value of financial instruments for which it is
practicable to estimate that value. The fair value of Mortgage-Backed Securities
and agency debentures available-for-sale and interest rate swaps is equal to
their carrying value presented in the consolidated statements of financial
condition. The fair value of cash and cash equivalents, accrued interest
receivable, receivable for securities sold, receivable for advisory and service
fees, repurchase agreements, and payable for mortgage-backed securities
purchased, dividends payable, accounts payable, and accrued interest payable,
generally approximates cost as of December 31, 2005 due to the short term nature
of these financial instruments.

                                      F-7



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

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


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

     Upon entering into hedging transactions, the Company documents the
relationship between the Hedging Instruments and the hedged liability. The
Company also documents its risk-management policies, including objectives and
strategies, as they relate to its hedging activities. The Company assesses, both
at inception of a hedge and on an on-going basis, whether or not the hedge is
"highly effective," as defined by SFAS 133. The Company discontinues hedge
accounting on a prospective basis with changes in the estimated fair value
reflected in earnings when (i) it is determined that the derivative is no longer
effective in offsetting cash flows of a hedged item (including hedged items such
as forecasted transactions); (ii) it is no longer probable that the forecasted
transaction will occur; or (iii) it is determined that designating the
derivative as a Hedging Instrument is no longer appropriate.

     When the Company enters into an interest rate swap, it agrees to pay a
fixed rate of interest and to receive a variable interest rate, generally based
on the London Interbank Offered Rate ("LIBOR"). The Company's interest rate
swaps are designated as cash flow hedges against the benchmark interest rate
risk associated with the Company's borrowings.

     All changes in the unrealized gains/losses on any interest rate swap are
recorded in accumulated other comprehensive income or loss and are reclassified
to earnings as interest expense is recognized on the Company's hedged
borrowings. If it becomes probable that the forecasted transaction, which in
this case refers to interest payments to be made under the Company's short-term
borrowing agreements, will not occur by the end of the originally specified time
period, as documented at the inception of the hedging relationship, then the
related gain or loss in accumulated other comprehensive income or loss would be
reclassified to income or loss.

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

                                      F-8



     Credit Risk - The Company has limited its exposure to credit losses on its
portfolio of Investment Securities by only purchasing securities issued by
FHLMC, FNMA, GNMA or FHLB. 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. All of the
Company's Investment Securities have an actual or implied "AAA" rating.

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

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

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

     Intangible assets - The Company's acquisition of FIDAC was accounted for
using the purchase method. Under the purchase method, net assets and results of
operations of acquired companies are included in the consolidated financial
statements from the date of acquisition. In addition, the cost of FIDAC was
allocated to the assets acquired, including identifiable intangible assets, and
the liabilities assumed based on their estimated fair values at the date of
acquisition. The excess of purchase price over the fair value of the net assets
acquired was recognized as goodwill.

     Recent Accounting Pronouncements - In March 2004, the Emerging Issues Task
Force, or EITF, reached a consensus on Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and its Application to Certain Investments. This
Issue provides clarification with respect to the meaning of other-than-temporary
impairment and its application to investments classified as either
available-for-sale or held-to-maturity under SFAS No. 115, and investments
accounted for under the cost method or the equity method. On November 3, 2005 a
FASB Staff Position ("FSP FAS 115-1") was released to address the determination
as to when an investment is considered impaired, whether that impairment is
other than temporary, and the measurement of an impairment loss. The Company
adopted the provisions of FSP 115-1 effective as of December 31, 2005 and
recorded a loss on other-than-temporary impaired securities of $83.1 million
consistent with the applications of this guidance.

     In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections ("SFAS NO. 154"). which replaces APB Opinion No. 20, Accounting
Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial
Statement. SFAS No. 154 changes the requirements for accounting and reporting a
change in accounting principle, and applies to all voluntary changes in
accounting principles, as well as changes required by an accounting
pronouncement in the unusual instance it does not include specific transition
provision. Specifically, SFAS No. 154 requires retrospective application to
prior periods' financial statements, unless it is impracticable to determine the
period-specific effects or the cumulative effect of the change. When it is
impracticable to determine the effects of the change, the new accounting
principle must be applied to the balances of assets and liabilities as of the
beginning of the earliest period for which retrospective application is
practicable and a corresponding adjustment must be made to the opening balance
of retained earnings for that period rather than being reported in an income
statement. When it is impracticable to determine the cumulative effect of the
change, the new principle must be applied as if it were adapted prospectively
from the earliest date practicable, SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning after December
15, 2005. SFAS No. 154 does not change the transition provisions of any existing
pronouncements. The Company has evaluated the impact of SFAS No. 154 and does
not expect the adoption of this Statement to have a significant impact on its
consolidated statement of operations and comprehensive income or financial
condition. The Company will apply SFAS No. 154 in future periods, when
applicable.

                                      F-9



     On December 16, 2004, the Financial Accounting Standards Board (FASB)
issued SFAS No. 123 (Revised 2004) - Share-Based Payment ("SFAS No. 123R"). SFAS
123R, which replaces SFAS No. 123, requires the Company to measure and recognize
in the financial statements the compensation cost relating to share-based
payment transactions. The compensation cost should be recognized based on the
fair value of the equity instruments issued. SFAS No. 123R is effective for the
Company on January 1, 2006. The Company adopted SFAS No. 123(R), using the
modified-prospective transition approach, effective January 1, 2006 with no
cumulative effect on net income. The adoption of SFAS No. 123R is not expected
to have a significant impact on the Company's financial position and results of
operations.

     The Company accounts for the share-based payments under the intrinsic value
method in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
date of grant. The following table illustrates the effect on net income and
earnings per share as if the Company had applied the fair value recognition
provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to
stock-based employee compensation:



                                                                                  
                                                            For the year ended December 31,
                                                     (dollars in thousands, except per share data)
                                                           2005           2004            2003
                                                     -----------------------------------------------
Net (loss) income related to common
shareholders, as reported                                 ($23,840)        $240,847        $180,103
Deduct:  Total stock-based employee compensation
expense determined under fair value based method
                                                              (357)           (149)            (48)
                                                     -----------------------------------------------
Pro-forma net (loss) income related to common
shareholers                                               ($24,197)        $240,698        $180,055
                                                     ===============================================


Net (loss) income per share related to common shareholders, as reported
Basic                                                       ($0.19)           $2.04           $1.95
Diluted                                                     ($0.19)           $2.03           $1.94

Pro-forma net (loss) income per share related to common shareholders
Basic                                                       ($0.20)           $2.03           $1.95
Diluted                                                     ($0.20)           $2.03           $1.94



     The Emerging Issues Task Force of the FASB is considering placing an item
on its agenda relating to the accounting treatment under SFAS 140, Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, a replacement of FASB Statement 125, of transactions where assets
purchased from a particular counterparty are financed via a repurchase agreement
with the same counterparty. Currently, the Company records such assets and the
related financing in the consolidated statement of financial condition, and the
corresponding interest income and interest expense in the Company's consolidated
statement of operations and comprehensive (loss) income. For assets representing
available-for-sale investment securities, as in the Company's case, any change
in fair value is reported through other comprehensive income under SFAS No. 115,
with the exception of impairment losses, which are recorded in the consolidated
statement of operations and comprehensive (loss) income as realized losses.

     However, a transaction where assets are acquired from and financed under a
repurchase agreement with the same counterparty may not qualify for a sale
treatment by a seller under the interpretation of SFAS 140, which would require
the seller to continue to carry such sold asset on their books based on their
"continuing involvement" with such assets. Depending on the ultimate outcome of
the EITF deliberations, the result may be that the Company would be precluded
from recording the assets purchased in the transaction described above as well
as the related financing in the Company's consolidated statement of financial
condition and would instead be treating the Company's net investment in such
assets as a derivative.

                                      F-10



     This potential change in accounting treatment would not affect the economic
substance of the transactions but would affect how the transactions would be
reported in the Company's financial statements. The Company's cash flows,
liquidity and ability to pay a dividend would be unchanged, and the Company does
not believe the Company's taxable income or net equity would be affected. If the
Company were to change the current accounting treatment for these transactions,
total assets and total liabilities would each be reduced by approximately $1.9
billion.

2.   FIXED INCOME DISCOUNT ADVISORY COMPANY

     On December 31, 2003, the Company entered into a merger agreement with
FIDAC. At the annual meeting of the Company's shareholders held on May 27, 2004,
shareholders voted to approve the merger. The merger closed before the opening
of business on June 4, 2004. The merger was accounted for using the purchase
method of accounting in accordance with SFAS No. 141. Accordingly, the
consolidated statements of financial condition as of December 31, 2005 and 2004
include the effects of the merger and the Company's application of the purchase
method of accounting. Additionally, the consolidated statements of operations
and of cash flows for the year ended December 31, 2004 include the consolidated
results of the Company and FIDAC for the period from June 4, 2004 to December
31, 2004. The consolidated statements of operation and cash flows for the year
ended December 31, 2005 include a full year of results of operations of the
Company and FIDAC.

     Upon completion of the merger and pursuant to the merger agreement, FDC
Merger Sub, ("Merger Sub"), the Company's wholly owned subsidiary created solely
for the purpose of effectuating the merger, merged with and into FIDAC. As a
result of the merger, Merger Sub ceased to exist, and FIDAC is the surviving
corporation and operates as the Company's wholly owned taxable REIT subsidiary.
At the time of the merger, each FIDAC shareholder received approximately 2,935
shares of the Company's common stock for each share of FIDAC stock the
shareholder owned and has the right to receive additional shares of the
Company's common stock in the future, based on FIDAC achieving specific
performance goals. FIDAC's shareholders may also receive additional shares of
the Company's common stock as an earn-out in 2006 worth up to $49,500,000 if
FIDAC meets specific performance goals under the merger agreement. The Company
cannot calculate how many shares the Company will issue under the earn-out
provisions since that will vary depending upon whether and the extent to which
FIDAC achieves specific performance goals. Even if FIDAC achieves specific
performance goals for a fiscal year, the number of additional shares to be
issued to the FIDAC shareholders will vary depending on the Company's average
share price for the first 20 trading days of the following fiscal year.

     The value of the shares of the Company's common stock issued to the FIDAC
shareholders immediately upon the consummation of the acquisition was fixed at
$40,500,000 based upon the closing price of the Company's common stock on
December 31, 2003, and was paid on June 4, 2004 by delivering 2,201,080 shares
of the Company's common stock. The total amount of goodwill represents the
purchase price in excess of the fair value of the net assets acquired. Under
SFAS No. 142, Goodwill and Other Intangible Assets, goodwill is not amortized,
but tested at least annually for impairment. Certain customer relationships are
deemed by the Company to have an indefinite life based on a lack of attrition
history and management's expectation of continued service to FIDAC clients and,
accordingly, are not being amortized. Instead, they are required to be tested at
least annually for impairment. FIDAC trademark and non-compete agreements are
considered intangible assets subject to amortization over their estimated life
of three years and one year, respectively. For the years ended December 31, 2005
and 2004, amortization expense related to these intangibles was $571,000 and
$130,000, respectively. Over the next five years the amortization is expected to
be $2.4 million in total.

A summary of the fair values of the net assets acquired is as follows:

                                            (dollars in thousands)

Cash and cash equivalents                                  $2,526
Receivable for advisory fees and services                   1,564
Other assets                                                  591
Customer relationships                                     15,613
FIDAC trademark                                               250
Non-compete agreements                                        140
Goodwill                                                   22,905
Accounts payable                                            (748)
                                            ----------------------
  Total fair value of net assets,
    including acquisition cost                            $42,841
                                            ======================

                                      F-11



3.   MORTGAGE-BACKED SECURITIES

     The following tables present the Company's available-for-sale
Mortgage-Backed Securities portfolio as of December 31, 2005 and 2004:



                                                               
December 31, 2005             Federal Home     Federal      Government        Total
                                  Loan         National       National       Mortgage-
                                Mortgage       Mortgage       Mortgage        Backed
                               Corporation    Association    Association    Securities
                           ------------------------------------------------------------
                                               (dollars in thousands)
Mortgage-Backed
 Securities, gross             $5,689,898     $9,881,672       $344,231    $15,915,801
Unamortized discount               (4,043)       (17,345)           (62)       (21,450)
Unamortized premium                92,228        144,726          5,133        242,087
                           ------------------------------------------------------------
Amortized cost                  5,778,083     10,009,053        349,302     16,136,438

Gross unrealized gains              3,174          1,853              -          5,027
Gross unrealized losses           (80,733)      (124,330)        (6,538)      (211,601)
                           ------------------------------------------------------------

Estimated fair value           $5,700,524     $9,886,576       $342,764    $15,929,864
                           ============================================================
                                                Gross          Gross
                             Amortized        Unrealized     Unrealized     Estimated
                                Cost             Gain           Loss       Fair Value
                           ------------------------------------------------------------
                                               (dollars in thousands)
Adjustable rate                $9,844,261         $3,973      ($120,480)    $9,727,754

Fixed rate                      6,292,177          1,054        (91,121)     6,202,110
                           ------------------------------------------------------------

Total                         $16,136,438         $5,027      ($211,601)   $15,929,864
                           ============================================================


December 31, 2004             Federal Home     Federal      Government        Total
                                  Loan         National       National       Mortgage-
                                Mortgage       Mortgage       Mortgage        Backed
                               Corporation    Association    Association    Securities
                           ------------------------------------------------------------
                                               (dollars in thousands)
Mortgage-Backed
 Securities, gross             $6,063,131    $12,061,462       $604,310    $18,728,903
Unamortized discount                 (171)          (843)          (109)        (1,123)
Unamortized premium               130,211        288,217          8,528        426,956
                           ------------------------------------------------------------
Amortized cost                  6,193,171     12,348,836        612,729     19,154,736

Gross unrealized gains             11,534          9,905          1,582         23,021
Gross unrealized losses           (39,429)       (97,890)        (2,052)      (139,371)
                           ------------------------------------------------------------

Estimated fair value           $6,165,276    $12,260,851       $612,259    $19,038,386
                           ============================================================
                                                Gross          Gross
                             Amortized        Unrealized     Unrealized     Estimated
                                Cost             Gain           Loss       Fair Value
                           ------------------------------------------------------------
                                               (dollars in thousands)
Adjustable rate               $13,833,122        $20,713       ($93,796)   $13,760,039

Fixed rate                      5,321,614          2,308        (45,575)     5,278,347
                           ------------------------------------------------------------

Total                         $19,154,736        $23,021      ($139,371)   $19,038,386
                           ============================================================



                                      F-12



     Actual maturities of mortgage-backed securities are generally shorter than
stated contractual maturities. Actual maturities of the Company's
mortgage-backed securities are affected by the contractual lives of the
underlying mortgages, periodic payments of principal, and prepayments of
principal. The following table summarizes the Company's mortgage-backed
securities on December 31, 2005 and 2004 according to their estimated
weighted-average life classifications:




                                                                                  
                                                     December 31, 2005           December 31, 2004
                                                                Amortized                   Amortized
          Weighted-Average Life                   Fair Value       Cost       Fair Value       Cost
                                                                 (dollars in thousands)
- -------------------------------------------------------------------------------------------------------
Less than one year                                  $508,851      $514,560      $357,135      $359,433
Greater than one year and less than five years    12,648,106    12,824,736    14,623,143    14,705,212
Greater than or equal to five years                2,772,907     2,797,142     4,058,108     4,090,091

                                                 ------------------------------------------------------
Total                                            $15,929,864   $16,136,438   $19,038,386   $19,154,736
                                                 ======================================================



     The weighted-average lives of the mortgage-backed securities at December
31, 2005 and 2004 in the table above are based upon data provided through
subscription-based financial information services, assuming constant principal
prepayment rates to the reset date of each security. The prepayment model
considers current yield, forward yield, steepness of the yield curve, current
mortgage rates, mortgage rate of the outstanding loans, loan age, margin and
volatility.

     Mortgage-Backed Securities with a carrying value of $4.6 billion were in a
continuous unrealized loss position over 12 months at December 31, 2005 in the
amount of $111.1 million. Mortgage-Backed Securities with a carrying value of
$8.4 billion were in a continuous unrealized loss position for less than 12
months at December 31, 2005 in the amount of $100.5 million. Mortgage-Backed
Securities with a carrying value of $2.2 billion were in a continuous unrealized
loss position over 12 months at December 31, 2004 in the amount of $34.1
million. Mortgage-Backed Securities with a carrying value of $13.1 billion were
in a continuous unrealized loss position for less than 12 months at December 31,
2004 in the amount of $105.3 million. The decline in value of these securities
is solely due to increases in interest rates. All of the Mortgage-Backed
Securities are "AAA" rated or carry an implied "AAA" rating. At December 31,
2005, $2.9 billion in Mortgage-Backed Securities were deemed to be
other-than-temporarily impaired, which resulted in an impairment loss of $83.1
million. At September 30, 2005, the Company's investments that were in a loss
position were not considered other-than-temporarily impaired since at the time
the Company had the intent to hold them for a period of time, to maturity if
necessary, sufficient for a forecasted market price recovery up to or beyond the
cost of the investments. With the continued increase in the Federal Funds rate
during the fourth quarter, however, management determined during the fourth
quarter that it did not intend to hold some of its securities until maturity and
would reposition a portion of its assets. The remaining investments are not
considered other-than-temporarily impaired since the Company currently has the
ability and intent to hold the investments for a period of time or to maturity,
if necessary, sufficient for a forecasted market price recovery up to or beyond
the cost of the investments. Also, the Company is guaranteed payment on the par
value of the securities.

     The adjustable rate Mortgage-Backed Securities are limited by periodic caps
(generally interest rate adjustments are limited to no more than 1% every nine
months) and lifetime caps. The weighted average lifetime cap was 10.3% at
December 31, 2005 and 10.1% at December 31, 2004.

     During the year ended December 31, 2005, the Company realized $53.2 million
in net losses from sales of Investment Securities. During year ended December
31, 2004, the Company realized $5.2 million in net gains from sales of
Mortgage-Backed Securities.

                                      F-13



4.   AGENCY DEBENTURES

     At December 31, 2005, the Company did not own agency debentures. At
December 31, 2004 the Company owned callable agency debentures totaling $395.0
million par value, which were issued by FHLMC, FNMA, and FHLB. All of the
Company's agency debentures were classified as available-for-sale. The agency
debentures had carrying values of $390.5 million at December 31, 2004. During
the year ended December 31, 2005, the Company realized $8.3 million in net
losses from sales of agency debentures.


5.   REPURCHASE AGREEMENTS

     The Company had outstanding $13.6 billion and $16.7 billion of repurchase
agreements with weighted average borrowing rates of 4.16% and 2.46%, and
weighted average remaining maturities of 79 days and 111 days as of December 31,
2005 and December 31, 2004, respectively. Investment Securities pledged as
collateral under these repurchase agreements had an estimated fair value of
$14.3 billion at December 31, 2005 and $17.4 billion at December 31, 2004.

     At December 31, 2005 and December 31, 2004, the repurchase agreements had
the following remaining maturities:

                          December 31, 2005             December 31, 2004
                                      (dollars in thousands)
                       ---------------------------------------------------
Within 30 days                  $10,575,945                   $13,059,810
30 to 59 days                     1,250,356                     1,598,069
60 to 89 days                             -                             -
90 to 119 days                            -                             -
Over 120 days                     1,750,000                     2,050,000
                       ---------------------------------------------------
Total                           $13,576,301                   $16,707,879
                       ===================================================

     The Company had an amount at risk greater than 10% of the equity of the
Company with the following counterparty.

                       Amount at risk(1)
                    (dollars in thousands)     Weighted average days to maturity
                    ------------------------------------------------------------
UBS Securities LLC            $179,959                      121

(1) Equal to the sum of fair value of securities sold plus accrued interest
income minus the sum of repurchase agreements plus accrued interest expense.

6.   OTHER LIABILITIES

     In 2001, the Company entered into a repurchase agreement with an original
maturity in July 2004. This repurchase agreement provided the buyer with the
right to extend its maturity date, in whole or in part, in three-month
increments up to July 2006. The buyer has continuously exercised its right to
extend the maturity date, and the agreement is currently set to mature in July
2006. The repurchase agreement has a principal amount of $100,000,000, and is
included in repurchase agreements in the consolidated statements of financial
condition. The Company accounts for the extension option as a separate interest
rate floor liability carried at fair value. The initial fair value of $1.2
million allocated to the extension option resulted in a similar discount on the
repurchase agreement borrowings that was amortized over the initial term of
three years using the effective yield method. At December 31, 2005 and December
31, 2004, the fair value of this interest rate floor was $149,000 and $2.7
million, respectively, and is included in other liabilities in the consolidated
statements of financial condition. The amount of change in fair value of this
interest rate floor has been rewarded in the consolidated statement of
operations and comprehensive (loss) income in the interest expense balance.


7.   PREFERRED STOCK AND COMMON STOCK

     During the year ended December 31, 2005, the Company declared dividends to
common shareholders totaling $127.1 million or $1.04 per share, of which $12.4
million were paid on January 27, 2006. During the year ended December 31, 2005,
the Company declared and paid dividends to preferred shareholders totaling $14.6
million or $1.97 per share. During the twelve months ended December 31, 2005,
2,381,550 shares of the Company's common stock were issued through the Equity
Shelf Program, totaling net proceeds of $40.1 million. During the year ended
December 31, 2005, 16,128 options were exercised under the long-term
compensation plan for an aggregate exercise price of $253,000. In addition,
24,253 common shares were sold through the dividend reinvestment and direct
purchase program for $440,000 during the year ended December 31, 2005.

                                      F-14



     During the year ended December 31, 2004, the Company declared dividends to
common shareholders totaling $237.9 million or $1.98 per share, of which $60.6
million were paid on January 27, 2005. During the year ended December 31, 2004,
the Company declared and paid dividends to preferred shareholders totaling $7.7
million or $1.45 per share. On January 21, 2004, the Company entered into an
underwriting agreement pursuant to which the Company raised net proceeds of
approximately $363.6 million in an offering of 20,700,000 shares of common
stock. On March 31, 2004, the Company entered into an underwriting agreement
pursuant to which the Company raised net proceeds of approximately $102.9
million through an offering of 4,250,000 shares of 7.875% Series A Cumulative
Redeemable Preferred Stock, which settled on April 5, 2004. On October 14, 2004,
the Company entered into an underwriting agreement pursuant to which the Company
raised net proceeds of approximately $74.5 million through an offering of
3,162,500 shares of 7.875% Series A Cumulative Redeemable Preferred Stock, which
settled on October 19, 2004.

     During the year ended December 31, 2004, 2,103,525 shares were issued
through the Equity Shelf Program, totaling net proceeds of $37.5 million. During
the year ended December 31, 2004, 57,000 options were exercised under the
long-term compensation plan for an aggregate exercise price of $856,000. In
addition, 127,020 shares were purchased in the dividend reinvestment and direct
purchase program at $2.3 million.

     On April 1, 2003, the Company entered into an underwriting agreement
pursuant to which the Company raised net proceeds of approximately $151.3
million in equity in an offering of 9,300,700 shares of common stock. During the
year ended December 31, 2003, 1,879,600 shares were issued through the Equity
Shelf Program, totaling net proceeds of $34.6 million. During the year ended
December 31, 2003, 92,697 options were exercised under the long-term
compensation plan at $914,000. Also, 231,893 shares were purchased in the
dividend reinvestment and direct purchase program at $4.2 million.

8.   NET (LOSS) INCOME PER COMMON SHARE

The following table presents a reconciliation of the net (loss) income and
shares used in calculating basic and diluted earnings per share for the year
ended December 31, 2005, 2004 and 2003.

                                                  For the year ended
                                           December     December     December
                                           31, 2005     31, 2004     31, 2003
                                          -----------------------------------

Net (loss)  income                         ($9,247)    $248,592     $180,103
Less: Preferred stock dividends             14,593        7,745            -
                                          -----------------------------------
Net (loss) income related to common
Shareholders                              ($23,840)    $240,847     $180,103
                                          ===================================

Weighted average shares of common stock
outstanding-basic                          122,475      118,223       92,215
Add: Effect of dilutive stock options            -          236          816
                                          -----------------------------------
Weighted average shares of common
  stock outstanding-diluted                122,475      118,459       93,031
                                          ===================================

Because the Company had a net loss related to common shareholders, options to
purchase 2,333,593 shares of common stock were considered anti-dilutive for the
year ended December 31, 2005.

Options to purchase 12,500 of common stock were outstanding and considered
anti-dilutive as their exercise price exceeded the average stock price for the
year ended December 31, 2004.

Options to purchase 12,500 of common stock were outstanding and considered
anti-dilutive as their exercise price exceeded the average stock price for the
year ended December 31, 2003.

                                      F-15



9.   LONG-TERM STOCK INCENTIVE PLAN

     The Company has adopted a long term stock incentive plan for executive
officers, key employees and non employee directors (the "Incentive Plan"). The
Incentive Plan authorizes the Compensation Committee of the board of directors
to grant awards, including non-qualified options as well as incentive stock
options as defined under Section 422 of the Code. The Incentive Plan authorizes
the granting of options or other awards for an aggregate of the greater of
500,000 shares or 9.5% of the diluted outstanding shares of the Company's common
stock. The following table sets forth activity relating to the Company's stock
options awards:



                                                                                  
                                                 For the years ended December 31
                                    2005                      2004                       2003
                         ----------------------------------------------------------------------------------
                                         Weighted                  Weighted                     Weighted
                                         Average                   Average                      Average
                            Number of    Exercise     Number of    Exercise      Number of      Exercise
                             Shares        Price       Shares        Price        Shares         Price
                         ----------------------------------------------------------------------------------
Options outstanding at
 the beginning of year      1,645,721      $15.66    1,063,259        $14.28       512,706          $8.59
Granted                       737,750       17.08      639,750         17.39       643,450          18.00
Exercised                     (16,128)      12.21      (57,288)         9.40       (92,697)          8.54
Expired                       (33,750)      17.87            -             -          (200)         17.97
                         ----------------------------------------------------------------------------------

Options outstanding at
 the end of year            2,333,593      $16.10    1,645,721        $15.66     1,063,259         $14.28
                         ==================================================================================



The following table summarizes information about stock options outstanding at
December 31, 2005:

                                                             Weighted Average
Range of Exercise                        Weighted Average  Remaining Contractual
     Prices         Options Outstanding   Exercise Price        Life (Years)
- -----------------------------------------------------------------------------

   $7.94-$19.99           2,323,593              $16.08                 7.76
  $20.00-$29.99              10,000               20.53                 1.99

                  -----------------------------------------------------------
                          2,333,593              $16.10                 7.74
                  ===========================================================

10.  INCOME TAXES

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

     During the year ended December 31, 2005, the Company recorded $8.7 million
of income tax expense for income attributable to FIDAC, its taxable REIT
subsidiary, and the portion of earnings retained based on Code Section 162(m)
limitations. During the year ended December 31, 2005, the Company recorded $2.0
million of income tax expense for a portion of earnings retained based on
Section 162(m) limitations. The effective tax rate was 47% for the year ended
December 31, 2005.

     During the year ended December 31, 2004, the Company recorded $4.5 million
of income tax expense for income attributable to taxable REIT subsidiary and the
portion of earnings retained based on Code Section 162(m) limitations. The
Company's effective tax rate was 45% for the year ended December 31, 2004. Such
rate differed from the federal statutory rate as a result of state and local
taxes and permanent difference pertaining to employee remuneration as discussed
above. During the years ended December 31, 2003, 100% of the taxable income of
the Company was distributed and as a result, the Company was not subject to
income taxes.

                                      F-16



11.  LEASE COMMITMENTS

     The Company has a noncancelable lease for office space, which commenced in
May 2002 and expires in December 2009. Office rent expense was $573,000,
$591,000, and $612,000 for the years ended December 31, 2005, 2004 and 2003,
respectively. The expense was net of sub-lease payments received of $84,000 and
$7,000 for the years ended December 31, 2005 and 2004, respectively.

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

                                                    Total per Year
                                                (dollars in thousands)
         2006                                                    $  530
         2007                                                       532
         2008                                                       532
         2009                                                       532
                                                ------------------------
         Total remaining lease payments                          $2,126
                                                ========================

12.  INTEREST RATE RISK

          The primary market risk to the Company is interest rate risk. Interest
     rates are highly sensitive to many factors, including governmental monetary
     and tax policies, domestic and international economic and political
     considerations and other factors beyond the Company's control. Changes in
     the general level of interest rates can affect net interest income, which
     is the difference between the interest income earned on interest-earning
     assets and the interest expense incurred in connection with the
     interest-bearing liabilities, by affecting the spread between the
     interest-earning assets and interest-bearing liabilities. Changes in the
     level of interest rates also can affect the value of the Investment
     Securities and the Company's ability to realize gains from the sale of
     these assets. A decline in the value of the Investment Securities pledged
     as collateral for borrowings under repurchase agreements could result in
     the counterparties demanding additional collateral pledges or liquidation
     of some of the existing collateral to reduce borrowing levels. Liquidation
     of collateral at losses could have an adverse accounting impact, as
     discussed in Note 3.

          The Company seeks to manage the extent to which net income changes as
     a function of changes in interest rates by matching adjustable-rate assets
     with variable-rate borrowings. The Company may seek to mitigate the
     potential impact on net income of periodic and lifetime coupon adjustment
     restrictions in the portfolio of Investment Securities by entering into
     interest rate agreements such as interest rate caps and interest rate
     swaps. As of December 31, 2005, the Company entered into interest rate
     swaps to pay a fixed rate and receive a floating rate of interest, with
     total notion amount of $479.0 million.

          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.


13.  CONTINGENCIES

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


                                      F-17



14.  SUMMARIZED QUARTERLY RESULTS (UNAUDITED)

          The following is a presentation of the quarterly results of operations
     for the year ended December 31, 2005.



                                                                                            
                                                           March 31,     June 30,   September 30,   December 31,
                                                             2005          2005         2005           2005
                                                              (dollars in thousands, except per share data)
                                                        ---------------------------------------------------------
Interest income                                               $176,289      $171,595      $177,474      $179,688
Interest expense                                               113,993       133,758       155,043       165,766
                                                        ---------------------------------------------------------
Net interest income                                             62,296        37,837        22,431        13,922
                                                        ---------------------------------------------------------

Other (loss) income
  Investment advisory and service fees                           6,309         9,669        10,945         8,702
  Gain (loss) on sale of Mortgage-Backed Securities                580        11,435            32       (65,285)
  Loss on other-than-temporarily impaired securities                 -             -             -       (83,098)
                                                        ---------------------------------------------------------
      Total other (loss) income                                  6,889        21,104        10,977      (139,681)
                                                        ---------------------------------------------------------

Expenses
  Distribution fees                                              1,610         2,126         2,414         1,850
  General and administrative expenses                            6,664         6,800         6,455         6,359
                                                        ---------------------------------------------------------
      Total expenses                                             8,274         8,926         8,869         8,209
                                                        ---------------------------------------------------------

Income (loss) before income taxes                               60,911        50,015        24,539      (133,968)
Income taxes                                                     1,578         3,022         3,353         2,791
                                                        ---------------------------------------------------------
Net income (loss)                                               59,333        46,993        21,186      (136,759)
Dividends on preferred stock                                     3,648         3,648         3,648         3,649
                                                        ---------------------------------------------------------
Net income (loss) related to common shareholders               $55,685       $43,345       $17,538     ($140,408)
                                                        =========================================================

Weighted average number of basic
  common shares outstanding                                121,270,867   121,740,256   123,169,910   123,684,931
                                                        =========================================================
Weighted average number of diluted
  common shares outstanding                                121,564,320   122,013,050   123,330,645   123,684,931
                                                        =========================================================

Net income (loss) per average common share:
Basic                                                            $0.46         $0.36         $0.14        ($1.14)
                                                        =========================================================
Diluted                                                          $0.46         $0.36         $0.14        ($1.14)
                                                        =========================================================


                                      F-18



     The following is a presentation of the quarterly results of operations for
the year ended December 31, 2004.



                                                                                            
                                                           March 31,      June 30,    September 30,  December 31,
                                                             2004           2004          2004           2004
                                                              (dollars in thousands, except per share data)
                                                        ---------------------------------------------------------

Interest income                                               $114,341      $122,234      $138,970      $156,783
Interest expense                                                50,303        55,648        70,173        93,992
                                                        ---------------------------------------------------------
Net interest income                                             64,038        66,586        68,797        62,791
                                                        ---------------------------------------------------------

Other income
Investment advisory and service fees                                 -         1,260         4,811         6,143
Gain on sale of Mortgage-Backed Securities                         595         2,126         1,350         1,144
                                                        ---------------------------------------------------------
     Total other income                                            595         3,386         6,161         7,287
                                                        ---------------------------------------------------------

Expenses:
Distribution Fees                                                    -           298         1,024         1,538
General and administrative expenses                              5,790         5,643         6,159         6,862
                                                        ---------------------------------------------------------
     Total expenses                                              5,790         5,941         7,183         8,400
                                                        ---------------------------------------------------------

Income before income taxes                                      58,843        64,031        67,775        61,678
Income taxes                                                         -           494         1,155         2,384
                                                        ---------------------------------------------------------
Net income                                                      58,843        63,537        66,620        59,294

Dividends on preferred stock                                         -         1,998         2,082         3,665
                                                        ---------------------------------------------------------
Net income available to common shareholders                    $58,843       $61,539       $64,538       $55,629
                                                        =========================================================

Weighted average number of basic
  common shares outstanding                                112,506,206   118,276,509   120,802,814   121,246,246
                                                        =========================================================
Weighted average number of diluted
  common shares outstanding                                112,804,001   118,469,756   120,994,191   121,514,941
                                                        =========================================================
Net income per share available to common
 shareholders:
Basic                                                            $0.52         $0.52         $0.53         $0.46
                                                        =========================================================
Diluted                                                          $0.52         $0.52         $0.53         $0.46
                                                        =========================================================


                                     ******

                                      F-19



                                   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 9, 2006                   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                Director                                    March 9, 2006
         ------------------
             Kevin P. Brady

         /s/ KATHRYN F. FAGAN              Chief Financial Officer and Treasurer       March 9, 2006
         ---------------------             (principal financial and accounting
             Kathryn F. Fagan              officer)


         /s/ MICHAEL A.J. FARRELL          Chairman of the Board, Chief Executive      March 9, 2006
         ------------------------          Officer, President and Director
             Michael A. J. Farrell         (principal executive officer)

         /s/ JONATHAN D. GREEN             Director                                    March 9, 2006
         ----------------------
             Jonathan D. Green

         /s/ JOHN A. LAMBIASE              Director                                    March 9, 2006
          -------------------
             John A. Lambiase

         /s/ E. WAYNE NORDBERG             Director                                    March 9, 2006
         ---------------------
             E. Wayne Nordberg

         /s/ DONNELL A. SEGALAS            Director                                    March 9, 2006
         ----------------------
             Donnell A. Segalas

         /s/ WELLINGTON DENAHAN-NORRIS     Vice Chairman of the Board, Chief           March 9, 2006
         -----------------------------     Investment Officer, Chief Operating
             Wellington Denahan-Norris     Officer and Director




                                      F-20



                                  EXHIBIT INDEX
Exhibit
Number    Exhibit Description

3.1       Articles of Amendment and Restatement of the Articles of Incorporation
          of the Registrant (incorporated by reference to Exhibit 3.2 to the
          Registrant's Registration Statement on Form S-11 (Registration No.
          333-32913) filed with the Securities and Exchange Commission on August
          5, 1997).
3.2       Articles of Amendment of the Articles of Incorporation of the
          Registrant (incorporated by reference to Exhibit 3.1 of the
          Registrant's Registration Statement on Form S-3 (Registration
          Statement 333-74618) filed with the Securities and Exchange Commission
          on June 12, 2002).
3.3       Bylaws of the Registrant, as amended (incorporated by reference to
          Exhibit 3.3 to the Registrant's Registration Statement on Form S-11
          (Registration No. 333-32913) filed with the Securities and Exchange
          Commission on August 5, 1997).
4.1       Specimen Common Stock Certificate (incorporated by reference to
          Exhibit 4.1 to Amendment No. 1 to the Registrant's Registration
          Statement on Form S-11 (Registration No. 333-32913) filed with the
          Securities and Exchange Commission on September 17, 1997).
4.2       Specimen Series A Preferred Stock Certificate (incorporated by
          reference to Exhibit 4.1 of the Registrant's Registration Statement on
          Form 8-A filed with the SEC on April 1, 2004).
4.3       Specimen Preferred Stock Certificate (incorporated by reference to
          Exhibit 4.2 to the Registrant's Registration Statement on Form S-3
          (Registration No. 333-74618) filed with the Securities and Exchange
          Commission on December 5, 2001).
10.1      Long-Term Stock Incentive Plan (incorporated by reference to Exhibit
          10.3 to the Registrant's Registration Statement on Form S-11
          (Registration No. 333-32913) filed with the Securities and Exchange
          Commission on August 5, 1997).*
10.2      Form of Master Repurchase Agreement (incorporated by reference to
          Exhibit 10.7 to the Registrant's Registration Statement on Form S-11
          (Registration No. 333-32913) filed with the Securities and Exchange
          Commission on August 5, 1997).
10.3      Amended and Restated Employment Agreement, effective as of June 4,
          2004, between the Registrant and Michael A.J. Farrell (incorporated by
          reference to Exhibit 10.3 of the Registrant's Form 10-K filed with the
          Securities and Exchange Commission on March 10, 2005).*
10.4      Amended and Restated Employment Agreement, effective as of June 4,
          2004, between the Registrant and Wellington J. Denahan (incorporated
          by reference to Exhibit 10.4 of the Registrant's Form 10-K filed with
          the Securities and Exchange Commission on March 10, 2005).*


                                      F-21



10.5      Amended and Restated Employment Agreement, effective as of June 4,
          2004,between the Registrant and Kathryn F. Fagan (incorporated by
          reference to Exhibit 10.5 of the Registrant's Form 10-K filed with the
          Securities and Exchange Commission on March 10, 2005).*
10.6      Amended and Restated Employment Agreement, effective as of June 4,
          2004, between the Registrant and James P. Fortescue (incorporated by
          reference to Exhibit 10.7 of the Registrant's Form 10-K filed with the
          Securities and Exchange Commission on March 10, 2005).*
10.7      Amended and Restated Employment Agreement, dated as of January 23,
          2006, between the Registrant and Jeremy Diamond.*
10.8      Amended and Restated Employment Agreement, dated as of January 23,
          2006, between the Registrant and Ronald D. Kazel.*
10.9      Amended and Restated Employment Agreement, effective as of June 4,
          2004, between the Registrant and Rose-Marie Lyght (incorporated by
          reference to Exhibit 10.10 of the Registrant's Form 10-K filed with
          the Securities and Exchange Commission on March 10, 2005).*
10.10     Amended and Restated Employment Agreement, effective as of June 4,
          2004, between the Registrant and Kristopher R. Konrad (incorporated by
          reference to Exhibit 10.11 of the Registrant's Form 10-K filed with
          the Securities and Exchange Commission on March 10, 2005).*
10.11     Amended and Restated Employment Agreement, dated January 23, 2006,
          between the Registrant and R. Nicholas Singh.*
10.12     Agreement and Plan of Merger, dated as of December 31, 2003, by and
          among the Registrant, Fixed Income Discount Advisory Company, FDC
          MergerSub, Inc., Michael A.J. Farrell, Wellington J. Denahan, Jennifer
          S. Karve, Kathryn F. Fagan, Jeremy Diamond, Ronald D. Kazel,
          Rose-Marie Lyght, Kristopher R. Konrad, and James P. Fortescue
          (incorporated by reference to Exhibit 99.2 to the Registrant's Form
          8-K filed with the Securities and Exchange Commission on January 2,
          2004).
23.1      Consent of Independent Registered Public Accounting Firm.
31.1      Certification of Michael A.J. Farrell, Chairman, Chief Executive
          Officer, and President of the Registrant, pursuant to 18 U.S.C.
          Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley
          Act of 2002.
31.2      Certification of Kathryn F. Fagan, Chief Financial Officer and
          Treasurer of the Registrant, pursuant to 18 U.S.C. Section 1350 as
          adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1      Certification of Michael A.J. Farrell, Chairman, Chief Executive
          Officer, and President of the Registrant, pursuant to 18 U.S.C.
          Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
          Act of 2002.
32.2      Certification of Kathryn F. Fagan, Chief Financial Officer and
          Treasurer of the Registrant, pursuant to 18 U.S.C. Section 1350 as
          adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* Exhibit Numbers 10.1 and 10.3-10.11 are management contracts or compensatory
plans required to be filed as Exhibits to this Form 10-K.

                                      F-22