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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, 1999

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 Governing Instruments)


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

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

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

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

Name of Each Exchange
Title of Each Class on Which Registered
- ------------------- -------------------
Common Stock, par value $.01 per share New York Stock Exchange

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

None.

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

Yes __X__ No _____

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

At March 22, 2000 the aggregate market value of the voting stock held by
non-affiliates of the Registrant was $114,944,217

The number of shares of the Registrant's Common Stock outstanding on March 22,
2000 was 13,743,363

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the Registrant's definitive Proxy Statement dated March 31, 2000,
issued in connection with the 2000 Annual Meeting of Stockholders of the
Registrant to be held on May 15, 2001 are incorporated by reference into Part
III.




ANNALY MORTGAGE MANAGEMENT, INC.
================================================================================

1999 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

PART I

PAGE
----
ITEM 1. BUSINESS 1

ITEM 2. PROPERTIES 29

ITEM 3. LEGAL PROCEEDINGS 29

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED SHAREHOLDER MATTERS 30

ITEM 6. SELECTED FINANCIAL DATA 31

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

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 46

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

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 46

ITEM 11. EXECUTIVE COMPENSATION 46

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 46

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K 46

FINANCIAL STATEMENTS F-1

SIGNATURES 48

EXHIBIT INDEX 49




PART I

ITEM 1. BUSINESS

THE COMPANY

Background

Annaly Mortgage Management, Inc owns and manages a portfolio of
mortgage-backed securities, including mortgage pass-through certificates,
collateralized mortgage obligations (or CMOs) and other securities representing
interests in or obligations backed by pools of mortgage loans. Our principal
business objective is to generate net income for distribution to our
stockholders from the spread between the interest income on our mortgage-backed
securities and the costs of borrowing to finance our acquisition of
mortgage-backed securities. We have elected to be taxed as a real estate
investment trust (or REIT) under the Internal Revenue Code. Therefore,
substantially all of our assets consist of qualified REIT real estate assets (of
the type described in Section 856(c)(6)(B) of the Internal Revenue Code). We
commenced operations on February 18, 1997. We are self-advised and self-managed.

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

Assets

Under our capital investment policy, at least 75% of our total assets must
be comprised of high-quality mortgage-backed securities and short-term
investments. High quality securities means securities (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 but we determine them to be of comparable quality to rated high
quality mortgage-backed securities.

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

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

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

At December 31, 1999, approximately 31% of our mortgage-backed securities
were adjustable-rate pass-though certificates, approximately 34% of our
mortgage-backed securities were fixed-rate pass-through certificates or CMOs,
and approximately 35% of our mortgage-backed securities were CMO floaters. Our
adjustable-rate pass-through certificates are backed by adjustable-rate mortgage
loans and have coupon rates which adjust over time, subject to interest rate
caps and lag periods, in conjunction with changes in short-term interest rates.
CMO floaters are tranches of CMOs mortgage-backed securities where the interest
rate adjusts in conjunction with changes in short-term interest rates. CMO
floaters may be backed by fixed-rate mortgage loans or, less often, by
adjustable-rate mortgage loans. In this Form 10-K, except where the context
indicates otherwise, we use the term "adjustable-rate securities" or
"adjustable-rate mortgage-backed securities" to refer to adjustable-rate
pass-through certificates and CMO floaters. At December 31, 1999, the weighted


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average yield on our portfolio of earning assets was 6.77%, and the weighted
average term to next rate adjustment was 11 months.

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

Borrowings

We attempt to structure our borrowings to have interest rate adjustment
indices and interest rate adjustment periods that, on an aggregate basis,
correspond generally to the interest rate adjustment indices and periods of our
adjustable-rate mortgage-backed securities. However, periodic rate adjustments
on our borrowings are generally more frequent than rate adjustments on our
mortgage-backed securities. At December 31, 1999, the weighted average cost of
funds for all of our borrowings was 5.26%, the weighted average original term to
next rate adjustment of these borrowings was 72 days, and the weighted average
term to next rate adjustment of these borrowings was 20 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,
1999, our ratio of debt-to-equity was 12.9:1.

Hedging

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

Compliance With REIT and Investment Company Requirements

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

Management

Our executive officers are:

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

o Timothy J. Guba, President and Chief Operating Officer

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

o Kathryn F. Fagan, Chief Financial Officer and Treasurer

Messrs. Farrell and Guba and Ms. St. Claire have an average of 17 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


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association. Since 1994, Messrs. Farrell and Guba and Ms. St. Claire have
managed Fixed Income Discount Advisory Company (or FIDAC), a registered
investment advisor which, at December 31, 1999, managed, assisted in managing or
supervised approximately $1.4 billion in gross assets for a wide array of
clients, of which, at that date, approximately $450 million was managed on a
discretionary basis.

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

Distributions

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

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

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


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BUSINESS STRATEGY

General

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

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

o to acquire mortgage-backed securities that we believe:

- we have the necessary expertise to evaluate and manage;

- we can readily finance;

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

- provide attractive investment returns in a range of scenarios;

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

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

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

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

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

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

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

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

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


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Mortgage-Backed Securities

General

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

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

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

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

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

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

Description of Mortgage-Backed Securities

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

Mortgage-backed securities differ from other forms of traditional debt
securities, which normally provide for periodic payments of interest in fixed
amounts with principal payments at maturity or on specified call dates. Instead,
mortgage-backed securities provide for a monthly payment, which consists of both
interest and principal. In effect, these payments are a "pass-through" of the
monthly interest and principal payments made by the individual borrower on the
mortgage loans, net of any fees paid to the issuer or guarantor of the
securities. Additional payments result from prepayments of principal upon the
sale, refinancing or foreclosure of the underlying residential property, net of
fees or costs which may be incurred. Some mortgage-backed securities, such as
securities issued by GNMA, are described as


5




"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 or not 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.

The occurrence of mortgage prepayments is affected by various factors
including the level of 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 higher or lower interest
rates than the original investment, thus affecting the yield of our investments.

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

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

FHLMC Certificates

FHLMC is a privately-owned government-sponsored enterprise created pursuant
to an Act of Congress on July 24, 1970. The principal activity of FHLMC
currently consists of the purchase of mortgage loans or participation interests
in these 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 our 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, monthly distributions to holders of FHLMC certificates
would be affected by delinquent payments and defaults on such Mortgage Loans.

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 purchased from one
seller in exchange for participation certificates representing interests in the
mortgage loans purchased).

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


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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, monthly distributions to holders of
FNMA certificates would be affected by delinquent payments and defaults on these
mortgage loans.

FNMA certificates may be backed by pools of single-family or multi-family
mortgage loans. The original terms to maturities of the mortgage loans generally
do 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 (or HUD). The National
Housing Act of 1934 authorizes GNMA to guarantee the timely payment of the
principal of and interest on certificates which represent an interest in a pool
of mortgages insured by the Federal Housing Administration (or FHA) or partially
guaranteed by the Department of Veterans Affairs and other loans eligible for
inclusion in mortgage pools underlying GNMA certificates. Section 306(g) of the
Housing Act provides that the full faith and credit of the United States is
pledged to the payment of all amounts which may be required to be paid under any
guaranty by GNMA.

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

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.


7




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

Collateralized Mortgage Obligations and Multi-Class Pass-Through Securities

We may also invest in collateralized mortgage obligations (or CMOs) and
multi-class pass-through securities. CMOs are debt obligations issued by special
purpose entities that are secured by mortgage-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.

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


8




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 have the effect of diminishing 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 (or "Floaters")

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

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

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

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

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

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

Adjustable-rate mortgage pass-through certificates and floating-rate CMOs
are typically issued with lifetime caps on the coupon rate. These caps, similar
to the caps on ARMs, represent a ceiling beyond which the coupon rate on an
adjustable-rate mortgage pass-through certificate or a floating-rate CMO may not
increase regardless of increases in the interest rate index on which the
adjustable-rate mortgage pass-through certificate or floating-rate CMO is based.

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

We believe that adjustable-rate mortgage pass-through certificates and
floaters are particularly well-suited to our investment objective of high
current income, consistent with modest volatility of net asset value, because
the value of adjustable-rate mortgage pass-through certificates and floaters
generally remains relatively stable as compared to


9




traditional fixed-rate debt securities paying comparable rates of interest.
While the value of adjustable-rate mortgage pass-through certificates and
floaters, like other debt securities, generally varies inversely with changes in
market interest rates (increasing in value during periods of declining interest
rates and decreasing in value during periods of increasing interest rates), the
value of adjustable-rate mortgage pass-through certificates and floaters should
generally be more resistant to price swings than other debt securities because
the interest rates on these securities move with market interest rates.

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

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

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

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

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

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

Capital Investment Policy


10




Asset Acquisitions

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

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

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

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

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

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

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

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

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

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

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

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


11




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

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

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

As a requirement for maintaining REIT status, we will distribute to
stockholders aggregate dividends equaling at least 95% of our taxable income
(excluding capital gains) for the taxable year ending December 31, 2000, and at
least 90% of our taxable income (excluding capital gains) for subsequent taxable
years. 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 ration of between 8:1 and
12:1, although the ratio may vary from time to time depending upon market
conditions and other factors our management deems relevant, including the
composition of our balance sheet, haircut levels required by lenders, the market
value of our mortgage-backed securities in our portfolio and "excess capital
cushion" percentages (as described below) set by our board of directors from
time to time. For purposes of calculating this ratio, our equity (or capital
base) is equal to the value of our investment portfolio on a mark-to-market
basis less the book value of our obligations under repurchase agreements and
other collateralized borrowings. At December 31, 1999, our ratio of
debt-to-equity was 12.9:1.

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

We are prohibited from acquiring additional assets during periods when our
capital base is less than the minimum amount required under our capital
investment policy, except as may be necessary to maintain REIT status or our
exemption from the Investment Company Act. In addition, when our capital base
falls below our risk-managed capital requirement, our management is required to
submit to our board a plan for bringing our capital base into


12




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, 1999, the weighted average haircut
level on our securities was 3.4%. 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 Board reviews on a periodic basis various analyses prepared by our
management of the risks inherent in our balance sheet, including an analysis of
the effects of various scenarios on our net cash flow, earnings, dividends,
liquidity and net market value. Should our Board determine that the minimum
required capital base set by our capital investment policy is either too low or
too high, our Board may raise or lower the capital requirement accordingly.

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

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

We expect to continue to use repurchase agreements as our principal
financing device to leverage our mortgage-backed securities portfolio. We
anticipate that, upon repayment of each borrowing under a repurchase agreement,
we will use the collateral immediately for borrowing under a new repurchase
agreement. At present, we have entered into uncommitted facilities with 23
lenders for borrowings in the form of repurchase agreements. We have not at the
present time entered into any commitment agreements under which the lender would
be required to enter into new repurchase agreements during a specified period of
time, nor do we presently plan to have liquidity facilities with commercial
banks. We may, however, enter into such commitment agreements in the future. We
enter into repurchase agreements primarily with national broker-dealers,
commercial banks and other lenders which typically offer this type of financing.
We enter into collateralized borrowings only with financial institutions meeting
credit standards approved by our Board, 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


13




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

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

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

Interest Rate Risk Management

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

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

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

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

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

Although we have not done so to date, we may purchase from time to time
interest rate caps, interest rate swaps, interest rate collars, 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


14




potentially adverse circumstances. Accordingly, our hedging program addresses
both income preservation, as discussed above, and capital preservation concerns.
For capital preservation, we monitor our "duration." This is the expected
percentage change in market value of our assets that would be caused by a 1%
change in short and long-term interest rates. To monitor duration and the
related risks of fluctuations in the liquidation value of our equity, we model
the impact of various economic scenarios on the market value of our
mortgage-backed securities and liabilities. At December 31, 1999, we estimate
that the duration of our assets was 2%. We believe that our interest rate risk
management program will allow us to maintain operations throughout a wide
variety of potentially adverse circumstances. Nevertheless, in order to further
preserve our capital base (and lower our duration) during periods when we
believe a trend of rapidly rising interest rates has been established, we may
decide to enter into or increase hedging activities or to sell assets. Each of
these actions may lower our earnings and dividends in the short term to further
our objective of maintaining attractive levels of earnings and dividends over
the long term.

We may elect to conduct a portion of our hedging operations through one or
more subsidiary corporations which would not be a qualified REIT subsidiary and
would be subject to Federal and state income taxes. To comply with the asset
tests applicable to us as a REIT, the value of the securities of the any taxable
subsidiary we hold must be limited to less than 5% of the value of our total
assets as of the end of each calendar quarter and we may not own more than 10%
of the voting securities of the taxable subsidiary. A taxable subsidiary 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 would result in our disqualification as a REIT
or, in the case of excess hedging income, the payment of a penalty tax for
failure to satisfy certain REIT income tests under the Internal Revenue Code,
provided the failure was for reasonable cause. In addition, asset/liability
management involves transaction costs which increase dramatically as the period
covered by the hedging protection increases. Therefore, we may be unable to
hedge effectively our interest rate and prepayment risks.

Prepayment Risk Management

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

Future Revisions in Policies and Strategies

Our Board of Directors has established the investment policies and
operating policies and strategies set forth in this prospectus supplement. The
Board has the power to modify or waive these policies and strategies without the
consent of the stockholders to the extent that the Board 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 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, including a strategic alliance with Liberty Capital, a privately-held
financial services company headquartered in Ohio. To date, none of these
discussions have gone beyond the preliminary stage. We have also considered from
time to time entering into related businesses.


15




During 1998, we made an initial investment of $49,980 in Annaly
International Mortgage Management, Inc. Annaly International explores business
opportunities overseas, including the origination of mortgages. Annaly
International has not commenced operations beyond this exploratory stage. We now
own 24.99% of the equity of Annaly International in the form of non-voting
securities. The remaining equity of Annaly International is owned by FIDAC 1
Partners. FIDAC 1 Partners is owned by Michael A.J. Farrell, our Chairman and
Chief Executive Officer, Timothy J. Guba, our President and Chief Operating
Officer, Wellington J. St. Claire, our Vice Chairman and Chief Investment
Officer, Kathryn F. Fagan, our Chief Operating Officer, and other persons.

Annaly International made investments of $39,967 in Annaly.com, Inc.
Annaly.com explores opportunities to acquire or originate mortgages in the
United States. Annaly.com has established a website at http://www.annaly.com but
has not commenced the acquisition or origination of mortgages. Annaly
International owns 51% of the equity of Annaly.com. The remaining equity of
Annaly.com is owned by FIDAC. Mr. Farrell is the sole shareholder of FIDAC.

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

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

Dividend Reinvestment and Share Purchase Plan

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

Legal Proceedings

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

FEDERAL INCOME TAX CONSIDERATIONS

The following discusses the material United States federal income tax
considerations that relate to our treatment as a REIT and that apply to an
investment in our stock. No assurance can be given that the conclusions set out
below would be sustained by a court if challenged by the IRS. This summary deals
only with stock that you hold as a capital asset, which generally means property
that is held for investment. It does not address tax considerations applicable
to you if you are a person subject to special tax rules, such as:

o a dealer or trader in securities;

o a financial institution;

o an insurance company;

o a stockholder that holds our stock as a hedge, part of a straddle,
conversion transaction or other arrangement involving more than one
position;

o a stockholder whose functional currency is not the United States
dollar; or

o a tax-exempt or foreign taxpayer, except to the extent discussed
below.

The discussion below is based upon the provisions of the United States
Internal Revenue Code of 1986 and regulations, rulings and judicial decisions
interpreting the Internal Revenue Code as of the date of this prospectus; any of


16




these authorities may be repealed, revoked or modified, perhaps with retroactive
effect, so as to result in federal income tax consequences different from those
discussed below.

The discussion set out below is intended only as a summary of the material
United States federal income tax consequences of our treatment as a REIT and of
an investment in our stock. We urge you to consult your own tax advisor as to
the tax consequences of an investment in our stock, including the application to
your particular situation of the tax considerations discussed below, as well as
the application of state, local or foreign tax laws. The statements of United
States tax law set out below are based on the laws in force and their
interpretation as of the date of this prospectus, and are subject to any changes
occurring after that date.

General

We have elected to become subject to tax as a REIT for federal income tax
purposes effective for our taxable year ending December 31, 1997. We plan to
continue to meet the requirements for taxation as a REIT. There can be no
assurance, however, that we will qualify as a REIT in any particular taxable
year, given the highly complex nature of the rules governing REITs, the ongoing
importance of factual determinations and the possibility of future changes in
our circumstances. If we were not to qualify as a REIT in any particular year,
we would be subject to federal income tax as a regular domestic corporation, and
you would be subject to tax in the same manner as a stockholder of a regular
domestic corporation. In this event, we could be subject to a potentially
substantial income tax liability in respect of each taxable year that we fail to
qualify as a REIT, and the amount of earnings and cash available for
distribution to you and other stockholders could be significantly reduced or
eliminated. See "Failure to Qualify" below.

REIT Qualification Requirements

The following is a brief summary of the material technical requirements
that we must meet on an ongoing basis in order to qualify, and remain qualified,
as a REIT under the Internal Revenue Code.

Stock Ownership Tests

We must meet the following stock ownership tests:

(1) our capital stock must be transferable;

(2) our capital stock must be held by at least 100 persons during at least
335 days of a taxable year of 12 months (or during a proportionate
part of a taxable year of less than 12 months); and

(2) no more than 50% of the value of our capital stock may be owned,
directly or indirectly, by five or fewer individuals at any time
during the last half of the taxable year. In applying this test, the
Internal Revenue Code treats some entities as individuals.

Tax-exempt entities, other than private foundations and certain
unemployment compensation trusts, are generally not treated as individuals for
these purposes. The requirements of items (2) and (3) above do not apply to the
first taxable year for which we made an election to be taxed as a REIT. However,
these stock ownership requirements must be satisfied in each subsequent taxable
year. Our articles of incorporation provide restrictions regarding the transfer
of our shares in order to aid us in meeting the stock ownership requirements. In
addition, we are required under Treasury Department regulations to demand annual
written statements from the record holders of designated percentages of our
capital stock disclosing actual and constructive stock ownership and to maintain
permanent records showing the information we have received as to the actual and
constructive stock ownership and a list of those persons failing or refusing to
comply with our demand.

Asset Tests

We generally must meet the following asset tests at the close of each
quarter of each taxable year:

(a) at least 75% of the value of our total assets must consist of
Qualified REIT Real Estate Assets, government securities, cash and
cash items; and


17




(b) the value of securities that we hold (other than government
securities) may not exceed 25% of the value of our total assets, and
in addition, we generally may not hold securities of any one issuer
(other than a taxable REIT subsidiary) that constitute

(1) 5% or more of the value of our total assets,

(2) 10% of the outstanding voting securities of the issuer or

(3) 10% of the total value of the securities of the issuer.

A Qualified REIT Real Estate Assets means pass-through certificates,
mortgage loans and other assets of the type described in Section 856(c)(5)(B) of
the Internal Revenue Code.

Gross Income Tests

We generally must meet the following gross income tests for each taxable
year:

(a) at least 75% of our gross income must be derived from the real estate
sources specified in the Internal Revenue Code, including interest
income and gain from the disposition of Qualified REIT Real Estate
Assets or "qualified temporary investment income, which is income
derived from new capital within one year of its receipt; and

(b) at least 95% of our gross income for each taxable year must be derived
from sources of income qualifying for the 75% gross income test
described in (a), dividends, interest, and gains from the sale of
stock or other financial instruments (including interest rate swap and
cap agreements, options, futures contracts, forward rate agreements or
similar financial instruments entered into to hedge variable rate debt
incurred to acquire Qualified REIT Real Estate Assets) not held for
sale in the ordinary course of business.

Distribution Requirement

We generally must distribute to our stockholders at least 95% of our REIT
taxable income before deductions of dividends paid and excluding net capital
gain for the taxable year ending December 31,2000; for subsequent taxable years,
this requirement is 90% of REIT taxable income before deductions of dividends
paid and excluding net capital gain. However, we may elect to retain, rather
than distribute, our net long-term capital gains and pay the tax on these gains,
while our stockholders include their proportionate share of the undistributed
long-term capital gains in income and receive a credit for their share of the
tax that we pay.

Failure to Qualify

If we fail to qualify for taxation as a REIT in any taxable year and relief
provisions do not apply, we will be subject to tax, including any applicable
alternative minimum tax, on our taxable income at regular corporate rates.
Distributions to stockholders in any year in which we fail to qualify as a REIT
will not be deductible by us, nor will we be required to make distributions.
Unless entitled to relief under specific statutory provisions, we also will be
disqualified from taxation as a REIT for four taxable years following the year
during which qualification was lost. It is not possible to state whether in all
circumstances we would be entitled to such statutory relief.

Recent Developments

The Taxpayer Relief Extension Act of 1999 introduced changes that affect
our ability to qualify as a REIT. The Act added a restriction that a REIT may
not own 10% or more of the total value of the securities (except certain debt
instruments) of any issuer in addition to the existing limitation that a REIT
may not own 10% or more of the voting securities of any issuer (see "REIT
Qualification Requirements- -Asset Tests"). The Act did provide a transition
rule under which securities that a REIT held on July 12, 1999 will not be
subject to this new limitation, assuming that the issuer of the securities does
not engage in a substantially new line of business or acquire a substantial
asset. This transition rule should exempt our ownership of 24.99% of the equity
of Annaly International Mortgage Management, Inc., as operated on July 12, 1999,
from the new restriction.


18




In addition, the Act provided that a REIT may own up to 100% of the stock
of "taxable REIT subsidiaries" so long as no more than 20% of a REIT's assets
are represented by securities of taxable REIT subsidiaries. To qualify as a
taxable REIT subsidiary, the subsidiary must join with its parent REIT in making
an election. Although not subject to the 10% vote or value test, a taxable REIT
subsidiary is otherwise subject to the REIT asset tests. Before we form any
taxable REIT subsidiary, we will consult with our tax advisor to determine
whether the formation and contemplation method of operation of the taxable REIT
subsidiary would case us to fail to satisfy these REIT asset tests or any other
REIT requirements.

Finally, the Act reduced the annual distribution requirement of a REIT from
the prior 95% of REIT taxable income to 90%. This reduced distribution
requirement applies to taxable years beginning after December 31, 2000 (see
"REIT Qualification Requirements- -Distribution Requirement").

Taxation of Annaly Mortgage Management

In any year in which we qualify as a REIT, we generally will not be subject
to federal income tax on that portion of our REIT taxable income or capital gain
that we distribute to our stockholders. We will, however, be subject to federal
income tax at normal corporate income tax rates upon any undistributed taxable
income or capital gain.

Notwithstanding our qualification as a REIT, we may also be subject to tax
in the following other circumstances:

o If we fail to satisfy either the 75% or the 95% gross income test, but
nonetheless maintain our qualification as a REIT because we meet other
requirements, we generally would be subject to a 100% tax on the
greater of the amount by which we fail either the 75% or the 95% gross
income test multiplied by a fraction intended to reflect our
profitability.

o We will also be subject to a tax of 100% on net income derived from
any "prohibited transaction" which is, in general, a sale or other
disposition of property held primarily for sale to customers in the
ordinary course of business.

o If we have (1) net income from the sale or other disposition of
foreclosure property that is held primarily for sale to customers in
the ordinary course of business or (2) other non-qualifying income
from foreclosure property, it will be subject to federal income tax at
the highest corporate income tax rate.

o If we fail to distribute during each calendar year at least the sum of
(1) 85% of our REIT ordinary income for such year, (2) 95% of our REIT
capital gain net income for such year and (3) any undistributed amount
of ordinary and capital gain net income from the preceding taxable
years, we would be subject to a 4% federal excise tax on the excess of
the required distribution over the amounts actually distributed during
the taxable year.

o If we acquire any asset from a C corporation in a transaction in which
the basis of the asset is determined by reference to the basis of the
asset in the hands of a C corporation and we recognize gain upon a
disposition of such asset occurring within 10 years of its
acquisition, then we would be subject to tax to the extent of any
built-in gain at the highest regular corporate rate.

o We also may be subject to the corporate alternative minimum tax, as
well as other taxes in situations not presently contemplated.

If we fail to qualify as a REIT in any taxable year and the relief
provisions provided in the Internal Revenue Code do not apply, we would be
subject to federal income tax, including any applicable alternative minimum tax,
on our taxable income in that taxable year and all subsequent taxable years at
the regular corporate income tax rates. We would not be allowed to deduct
distributions to shareholders in these years, nor would we be required to make
them under the Internal Revenue Code. Further, unless entitled to the relief
provisions of the Internal Revenue Code, we also would be disqualified from
re-electing REIT status for the four taxable years following the year during
which we became disqualified.

We intend to monitor on an ongoing basis our compliance with the REIT
requirements described above. In order to maintain our REIT status, we will be
required to limit the types of assets that we might otherwise acquire, or hold


19




some assets at times when we might otherwise have determined that the sale or
other disposition of these assets would have been more prudent.

Taxation of Stockholders

Unless you are a tax-exempt entity, distributions that we make to you,
including constructive distributions, generally will be subject to tax as
ordinary income to the extent of our current and accumulated earnings and
profits as determined for federal income tax purposes. If the amount we
distribute to you exceeds your allocable share of current and accumulated
earnings and profits, the excess will be treated as a return of capital to the
extent of your adjusted basis in your stock, which will reduce your basis in
your stock but will not be subject to tax. If the amount we distribute to you
also exceeds your adjusted basis, this excess amount will be treated as a gain
from the sale or exchange of a capital asset. Distributions you receive, whether
characterized as ordinary income or as capital gain, are not eligible for the
corporate dividends received deduction.

Distributions that we designate as capital gain dividends generally will be
subject to tax as long-term capital gain to you, to the extent that the
distributions to you and the other shareholders do not exceed our actual net
capital gain for the taxable year. In the event that we realize a loss for the
taxable year, you will not be permitted to deduct any share of that loss.
Further, if we, or a portion of our assets, were to be treated as a taxable
mortgage pool, any excess inclusion income that is allocated to you could not be
offset by any net operating loss that you may have. Future Treasury Department
regulations may require that you take into account, for purposes of computing
your individual alternative minimum tax liability, some of our tax preference
items.

Dividends that we declare during the last quarter of the calendar year and
actually pay to you during January of the following taxable year generally are
treated as if we had paid, and you had received, them on December 31 of the
calendar year and not on the date actually paid and received. In addition, we
may elect to treat other dividends distributed after the close of the taxable
year as having been paid during the taxable year, so long as they meet the
requirements described in the Internal Revenue Code, but you will be treated as
having received these dividends in the taxable year in which their distribution
is actually made.

If you sell or otherwise dispose of our stock, you will generally recognize
a capital gain or loss in an amount equal to the difference between the amount
realized and your adjusted basis in the stock, which gain or loss will be
long-term if you have held the stock for more than one year. Any loss that you
recognize on the sale or exchange of our stock that you have held for six months
or less generally will be treated as a long-term capital loss to the extent,
with respect to the stock, of (1) any long-term capital gain dividends that you
receive and (2) any long-term capital gain that we retain and the tax on which
you receive a credit.

If we do not qualify as a REIT in any year, distributions that we make to
you would be taxable in the same manner discussed above, except that:

o we would not be allowed to designate any distributions as capital gain
dividends;

o distributions would be eligible for the corporate dividends received
deduction;

o the excess inclusion income rules would not apply to you; and

o you would not receive any share of our tax preference items.

In this event, however, we could be subject to potentially substantial
federal income tax liability, and the amount of earnings and cash available for
distribution to you and other stockholders could be significantly reduced or
eliminated.

Information Reporting and Backup Withholding

We will report to our domestic stockholders and to the IRS the amount of
distributions that we pay, and the amount of tax that we withhold on these
distributions for each calendar year. Under the backup withholding rules, you
may be subject to backup withholding tax at a rate of 31% with respect to
distributions paid unless you:

o are a corporation or otherwise within an exempt category and
demonstrate this fact when required; or


20




o provide a taxpayer identification number, certify as to no loss of
exemption from backup withholding tax and otherwise comply with
applicable requirements of the backup withholding tax rules.

If you do not provide us with your correct taxpayer identification number,
then you may also be subject to penalties imposed by the IRS.

Backup withholding tax is not an additional tax. Any amounts withheld under
the backup withholding tax rules will be refunded or credited against your
United States federal income tax liability, provided that you furnish the
required information to the IRS.

Taxation of Tax-Exempt Entities

The discussion under this heading only applies to you if you are a
tax-exempt entity.

Subject to the discussion below regarding a pension-held REIT,
distributions received from us or gain realized on the sale of our stock will
not be taxable as unrelated business taxable income (UBTI), provided that:

o you have not incurred indebtedness to purchase or hold our stock;

o you do not otherwise use our shares in an unrelated trade or business;
and

o we, consistent with our present intent, do not hold a residual
interest in a REMIC that gives rise to excess inclusion income as
defined under section 860E of the Internal Revenue Code.

If we were to be treated as a taxable mortgage pool, however, a substantial
portion of the dividends you receive may be subject to tax as UBTI.

In addition, a substantial portion of the dividends you receive may
constitute UBTI if we are treated as a pension-held REIT and you are a qualified
pension trust that holds more than 10% by value of our interests at any time
during a taxable year. For these purposes, a qualified pension trust is any
pension or other retirement trust that qualifies under section 401(a) of the
Internal Revenue Code. We would be treated as a pension-held REIT if (1) we
would not have qualified as a REIT but for the provisions of the Internal
Revenue Code which look through qualified pension trust stockholders to the
qualified pension trusts beneficiaries in determining stock ownership of a REIT
and (2) at least one qualified pension trust holds more than 25% of our stock by
value or one or more qualified pension trusts (each owning more than 10% of our
stock by value) hold in the aggregate more than 50% of our stock by value.
Assuming compliance with the ownership limit provisions set forth in our
articles of incorporation, it is unlikely that pension plans will accumulate
sufficient stock to cause us to be treated as a pension-held REIT.

If you are exempt from federal income taxation under sections 501(c)(7),
(c)(9), (c)(17), and (c)(20) of the Internal Revenue Code, then distributions
you receive may also constitute UBTI; we urge you to consult your tax advisor
concerning the applicable set aside and reserve requirements.

United States Federal Income Tax Considerations Applicable to Foreign Holders

The discussion under this heading applies to you only if you are not a U.S.
person. A U.S. person is a person who is:

o a citizen or resident of the United States;

o a corporation, partnership, or other entity created or organized in
the United States or under the laws of the United States or of any
political subdivision thereof;

o an estate whose income is includible in gross income for United States
Federal income tax purposes regardless of its source; or

o a trust, if (1) a court within the United States is able to exercise
primary supervision over the administration of the trust and one or
more U.S. persons have authority to control all substantial


21




decisions of the trust, or (2) the trust was in existence on August
26, 1996 and has made an election to be treated as a U.S. person;

This discussion is only a brief summary of the United States federal tax
consequences that apply to you, which are highly complex, and does not consider
any specific facts or circumstances that may apply to you and your particular
situation. We urge you to consult your tax advisor regarding the United States
federal tax consequences of acquiring, holding and disposing of our stock, as
well as any tax consequences that may arise under the laws of any foreign,
state, local or other taxing jurisdiction.

Distributions

Except for distributions attributable to gain from the dispositions of real
property interests or designated as capital gains dividends, distributions you
receive from us generally will be subject, to the extent of our earnings and
profits, to withholding of United States federal income tax at the rate of 30%,
unless reduced or eliminated by an applicable tax treaty or unless the
distributions are treated as effectively connected with a United States trade or
business. If you wish to claim the benefits of an applicable tax treaty, you may
need to satisfy certification and other requirements, some of which will change
on January 1, 2001.

Distributions you receive that are in excess of our earnings and profits
will be treated as a tax-free return of capital to the extent of your adjusted
basis in your stock. If the amount of the distribution also exceeds your
adjusted basis, this excess amount will be treated as gain from the sale or
exchange of our stock as described below. If we cannot determine at the time we
make a distribution whether the distribution will exceed our earnings and
profits, the distribution will be subject to withholding at the same rate as
dividends. These withheld amounts, however, will be refundable or creditable
against your United States federal tax liability if it is subsequently
determined that the distribution was, in fact, in excess of our earnings and
profits. If you receive a dividend that is treated as being effectively
connected with your conduct of a trade or business within the United States, the
dividend will be subject to the United States federal income tax on net income
that applies to United States persons generally and may be subject to the branch
profits tax if you are a corporation.

Distributions that we make to you and designate as capital gains dividends,
other than those attributable to the disposition of a United States real
property interest, generally will not be subject to United States federal income
taxation, unless:

o your investment in our stock is effectively connected with your
conduct of a trade or business within the United States; or

o you are a nonresident alien individual who is present in the United
States for 183 days or more in the taxable year and other requirements
are met.

Distributions that are attributable to your disposition of United States
real property interests are subject to income and withholding taxes pursuant to
the Foreign Investment in Real Property Act of 1980 (FIRPTA), and may also be
subject to branch profits tax if you are a corporation that is not entitled to
treaty relief or exemption. However, because we do not expect to hold assets
that would be treated as United States real property interests as defined by
FIRPTA, the FIRPTA provisions should not apply to your investment in our stock.

Gain on Disposition

You generally will not be subject to United States federal income tax on
gain recognized on a sale or other disposition of our stock unless:

o the gain is effectively connected with your conduct of a trade or
business within the United States;

o you are a nonresident alien individual who holds our stock as a
capital asset and is present in the United States for 183 or more days
in the taxable year and other requirements are met; or

o you are subject to tax under the FIRPTA rules discussed below.


22




Gain that is effectively connected with your conduct of a trade or business
within the United States will be subject to the United States federal income tax
on net income that applies to United States persons generally and may be subject
to the branch profits tax if you are a corporation. However, these
effectively-connected gains will not be subject to withholding. We urge you to
consult applicable treaties, which may provide for different rules.

Under FIRPTA, you may be subject to tax on gain recognized from your sale
or other disposition of our stock if we were to both (1) hold United States real
property interests and (2) fail to qualify as a domestically-controlled REIT. A
REIT qualifies as domestically-controlled as long as less than 50% in value of
its shares of beneficial interest are held by foreign persons at all times
during the shorter of (1) the previous five years and (2) the period in which
the REIT is in existence. As mentioned above, we do not expect to hold any
United States real property interests. Furthermore, we will likely qualify as a
domestically-controlled REIT, although no assurances can be provided because our
shares are publicly-traded.

State and Local Taxes

We and our stockholders may be subject to state or local taxation in
various jurisdictions, including those in which we or they transact business or
reside. The state and local tax treatment that applies to us and our
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, we urge you to consult your own tax advisor regarding the
effect of state and local tax laws.

COMPETITION

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

RISK FACTORS

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

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

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

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

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

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

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

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


23




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

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

These indices generally reflect short-term interest rates. On December
31, 1999, approximately 67% of our mortgage-backed securities were
adjustable-rate securities.

The interest rates on our borrowings similarly vary with changes in an
objective index. However, the interest rates on our borrowings generally
adjust more frequently than the interest rates on our mortgage-backed
securities. For example, on December 31, 1999, our adjustable-rate
securities had a weighted average term to next rate adjustment of 11
months, while our borrowings had a weighted average term to next rate
adjustment of 20 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 mortgage-backed securities.

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

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

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
securities, we also invest in fixed-rate mortgage-backed securities. In a
period of rising interest rates, our interest payments would increase while
the interest we earn on our fixed rate securities would not change. This
would adversely affect our profitability. On December 31, 1999,
approximately 34% of our mortgage-backed securities were fixed rate
securities.

An increase in prepayment rates may adversely affect our profitability

The mortgage-backed securities we acquire are backed by pools of mortgage
loans. We receive payments, generally, from the payments that are made on these
underlying mortgage loans. When borrowers prepay their mortgage loans at faster
rates than expected, this results in faster prepayments than expected on the
mortgage-backed securities using the effective yield method. 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 market value to acquire the security.
In accordance with accounting rules, we amortize this premium over the term of
the mortgage-backed security using the effective yield method. If the
mortgage-backed security is prepaid in whole or in part prior to its expected
maturity date, however, we must expense the premium that is being prepaid at the
time of the prepayment. This adversely affects our profitability. On December
31, 1999, approximately 83% of the mortgage-backed securities we owned had been
acquired at a premium.

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

We may seek to reduce prepayment risk by acquiring mortgage-backed
securities at a discount. If a discounted security is prepaid in whole or in
part prior to its expected maturity date, we will earn income on the amount of
the discount that is being prepaid. This will improve our profitability if there
are faster than expected prepayments. On December 31, 1999, approximately 17% of
the mortgage-backed securities we owned had been acquired at a discount.

We can also acquire mortgage-backed securities that are less affected by
prepayments. For example, we can acquire collateralized mortgage obligations or
CMO's, a type of mortgage-backed security. CMO's divide a pool of mortgage loans
into multiple tranches that allow for shifting of prepayment risks from
slower-paying tranches to faster-paying


24




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 CMO's. On December 31, 1999, approximately 35% of our
mortgage-backed securities were CMO's and approximately 65% of our
mortgage-backed securities were pass-through or pay-through securities.

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

An increase in interest rates may adversely affect our book value

Increases in interest rates may negatively affect the market value of our
mortgage-backed securities. Our fixed-rate securities, generally, are more
negatively affected by these increases. In accordance with accounting rules, we
reduce our book value by the amount of any decrease in the market value of our
mortgage-backed securities. During the year 1999, rising interest rates
contributed to a decline in our book value from $9.95 per share at the beginning
of the year to $7.60 per share at the end of the year.

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 be above or below this amount. We incur this leverage by
borrowing against a substantial portion of the market value of our
mortgage-backed securities. By incurring this leverage, we can enhance our
returns. However, this leverage, which is fundamental to our investment
strategy, also creates significant risks.

Our leverage may cause substantial losses

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

o Short-term interest rates increase

o The market value of our mortgage-backed securities decreases

o Interest rate volatility increases

o The availability of financing in the market decreases

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

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

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

Liquidation of collateral may jeopardize our REIT status

To continue to qualify as a REIT, we must comply with requirements
regarding our assets and our sources of income. If we are compelled to
liquidate our mortgage-backed securities, we may be unable to comply with
these requirements, ultimately jeopardizing our status as a REIT. For
further discussion of these asset and source of income requirements and the
consequences of our failure to continue to qualify as a REIT, please see
the "Federal Income Tax Considerations" section above.


25




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, we will incur additional risks of the types described in
this section.

We may not be able to achieve our optimal leverage

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

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

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

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

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

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

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

o the movement of interest rates

o the availability of financing in the market

o the value and liquidity of our mortgage-backed securities

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

Since we rely primarily on short-term borrowings, our ability to achieve
our investment objectives depends not only on our ability to borrow money in
sufficient amounts and on favorable terms, but also on our ability to renew or
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
mortgage-backed securities under possibly adverse market conditions.

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

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

Our investment strategy may involve credit risk

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

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

o Fannie Mae is a common abbreviation that refers to the Federal National
Mortgage Association, a privately owned, federally chartered corporation
organized under an act of Congress.


26




o Ginnie Mae is a common abbreviation that refers to the Government National
Mortgage Association, a wholly-owned instrumentality of the United States
within the Department of Housing and Urban Development.

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

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

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

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

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

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, Chairman of the Board and Chief Executive
Officer, Timothy J. Guba, President and Chief Operating Officer, Wellington J.
St. Claire, Vice Chairman and Portfolio Manager and Kathryn F. Fagan, Chief
Financial Officer. The loss of any of their services could have an adverse
effect on our operations. Although we have employment agreements with each of
them, we cannot assure you they will remain employed with us.

Some of our officers and employees have potential conflicts of interest

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

Our officers and employees manage assets for other clients

Messrs. Farrell and Guba, Ms. St. Claire and other officers and
employees are actively involved in managing mortgage-backed securities and
other fixed income assets for institutional clients through Fixed Income
Discount Advisory Company. FIDAC is a registered investment adviser which
on December 31, 1999 managed, assisted in managing or supervised
approximately $1.4 billion in gross assets for a wide array of clients. Of
that amount, FIDAC managed approximately $650 million of those gross assets
on a discretionary basis. The U.S. Dollar Floating Rate Fund is a fund
managed by FIDAC. Mr. Farrell is a Director of the Floating Rate Fund.
These officers will continue to perform services for FIDAC, the
institutional clients and the Floating Rate Fund. Mr. Farrell is also the
sole shareholder of FIDAC.

These responsibilities may create conflicts of interest for these
officers and employees if they are presented with corporate opportunities
that may benefit us and the institutional clients and the Floating Rate
Fund. Our officers allocate investments among Annaly, the institutional
clients and the Floating Rate Fund by determining the entity or account for
which the investment is most suitable. In making this determination, our
officers consider the


27




investment strategy and guidelines of each entity or account with respect
to acquisition of assets, leverage, liquidity and other factors that our
officers determine appropriate.

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

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

During 1998, we made an initial investment of $49,980 in Annaly
International Mortgage Management, Inc. Annaly International explores
business opportunities overseas, including the origination of mortgages.
Annaly International has not commenced operations beyond this exploratory
state. We own 24.99% of the equity of Annaly International in the form of
non-voting securities. The remaining equity of Annaly International is
owned by FIDAC 1 Partners FIDAC 1 Partners is owned by Michael A.J.
Farrell, our Chairman and Chief Executive Officer, Timothy J. Guba, our
President and Chief Operating Officer, Wellington J. St. Claire, our Vice
Chairman and Portfolio Manager, Kathryn F. Fagan, our Chief Financial
Officer, and other persons.

Annaly International made investments of $39,967 in Annaly.com, Inc.
Annaly.com explores opportunities to acquire or originate mortgages in the
United States. Annaly.com has established a Web site at
http://www.annaly.com but has not commenced the acquisition or origination
of mortgages. Annaly International owns 51% of the equity of Annaly.com.
The remaining equity of Annaly.com is owned by FIDAC. Mr. Farrell, our
Chairman and Chief Executive Officer, is the sole shareholder of FIDAC.

Our management allocates rent and other office expenses between our
affiliates and us. These allocations may create conflicts of interest. In
addition, we intend to enter into agreements with our affiliates in the
future. These agreements will present potential conflicts of interest. Our
management currently allocates rent and other expenses 90% to Annaly and
10% to FIDAC. Our audit committee must approve any change in these
allocation percentages. In addition, our management will obtain prior
approval of our audit committee prior to entering into any agreements with
our affiliates.

We and our shareholders are subject to certain tax risks

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

We believe that since 1997 we have qualified for taxation as a REIT
for federal income tax purposes. We plan to continue to meet the
requirements for taxation as a REIT. Many of these requirements, however,
are highly technical and complex. The determination that we are a REIT
requires an analysis of various factual matters and circumstances that may
not be totally within our control. For example, to qualify as a REIT, as
least 95% of our gross income must come from certain sources that are
itemized in the REIT tax laws. We are also required to distribute to
shareholders at least 95% of our REIT taxable income (excluding capital
gains) for the taxable year ending December 31, 2000, and at least 90% of
our taxable income (excluding capital gains) for subsequent taxable years.
Even a technical or inadvertent mistake could jeopardize our REIT status.
Furthermore, Congress and the 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 shareholders. This would likely have a significant adverse effect on
the value of our securities. In addition, we would no longer be required to
make any distributions to our shareholders.

We have certain distribution requirements

As a REIT, we must distribute 95% of our annual taxable income for the
taxable year ending December 31, 2000 and 90% of our annual taxable income
for subsequent years. 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


28




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 these requirements.

We are also subject to other tax liabilities

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

Loss of Investment Company Act exemption would adversely affect us

We intend to conduct our business so as not to become regulated as an
investment company under the Investment Company Act. 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 prospectus.

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 staff of
the SEC, 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 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. Therefore, our ownership of these
mortgage-backed securities 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.

We may change our policies without stockholder approval

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

ITEM 2. PROPERTIES

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

ITEM 3. LEGAL PROCEEDINGS

At December 31, 1999, there were no pending legal proceedings to which we
were a party, or to which any of our property was subject.

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

We did not submit any matters to a vote of the Company's stockholders
during the fourth quarter of 1999.

29



PART II

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

Our common stock began trading publicly on October 8, 1997 and is traded on
the New York Stock Exchange under the trading symbol "NLY". As of March 15,
2000, we had 13,743,363 shares of common stock issued and outstanding which were
held by 4,641 holders of record.

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

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


First Quarter ended March 31, 1998 $11.75 $10.00 $11.81
Second Quarter ended June 30, 1998 $11.31 $ 8.69 $ 9.06
Third Quarter ended September 30, 1998 $ 9.00 $ 6.75 $ 8.13
Fourth Quarter ended December 31, 1998 $ 9.00 $ 6.13 $ 8.25

Cash Dividends
Declared Per Share
------------------
First Quarter ended March 31, 1999 $0.33
Second Quarter ended June 30, 1999 $0.35
Third Quarter ended September 30, 1999 $0.35
Fourth Quarter ended December 31, 1999 $0.35

First Quarter ended March 31, 1998 $0.32
Second Quarter ended June 30, 1998 $0.32
Third Quarter ended September 30, 1998 $0.27
Fourth Quarter ended December 31, 1998 $0.305

We intend to pay quarterly dividends and to make distributions to our
stockholders in amounts that all or substantially all of our taxable income in
each year (subject to certain adjustments) is distributed. This will enable us
to qualify for the tax benefits accorded to a REIT under the Code. All
distributions will be made at the discretion of our Board 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.


30




ITEM 6. SELECTED FINANCIAL DATA

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

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



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

Statement of Operations Data:

Days in period 365 365 317
Interest income $89,812 $89,986 $24,713
Interest expense 69,846 75,735 19,677
------------------------------------------------
Net interest income $19,966 $14,251 $ 5,036
Gain on sale of mortgage-backed securities 454 3,344 735
General and administrative expenses (G&A expense) 2,281 2,106 852
------------------------------------------------
Net income $18,139 $15,489 $ 4,919
================================================
Basic net income per average share $1.41 $1.22 $0.83
Diluted net income per average share $1.35 $1.19 $0.80
Dividends declared per average share $1.38 $1.21 $0.79


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

Mortgage-Backed Securities, net $1,437,793 $1,520,289 $1,161,779
Total assets 1,491,322 1,527,352 1,167,740
Repurchase agreements 1,338,296 1,280,510 918,869
Total liabilities 1,388,050 1,401,481 1,032,654
Stockholders' equity 103,272 125,871 135,086
Number of common shares outstanding 13,581,316 12,648,424 12,713,900

Other Data:

Average total assets $1,473,765 $1,499,875 $476,855
Average borrowings 1,350,230 1,360,040 404,140
Average equity 117,685 131,265 61,096
Yield on interest earning assets 6.15% 6.16% 6.34%
Cost of funds on interest bearing liabilities 5.17% 5.57% 5.61%
Interest rate spread 0.98% 0.59% 0.73%

Annualized Financial Ratios:

Net interest margin (net interest income/average
total assets) 1.35% 0.95% 1.22%
G&A expense as a percentage of average assets 0.15% 0.14% 0.21%
G&A expense as a percentage of average equity 1.94% 1.60% 1.61%
Return on average assets 1.23% 1.03% 1.19%
Return on average equity 15.41% 11.80% 9.27%


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


31




ITEM 7.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview

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

We commenced operations on February 18, 1997 upon the consummation of a
private placement. We completed our initial public offering on October 14, 1997.

The 317-day period ended December 31, 1997 was a short operating period and
not a full twelve months. Also, average assets for the period ended December 31,
1997 totaled $476.9 million, whereas average assets for the year ended December
31, 1998 totaled $1.5 billion. As a result, the comparison of net income for the
period ended February 18, 1997 and the year ended December 31, 1998 may show
changes that may not be indicative of future periods.

Results of Operations: For the Years Ended December 31, 1999 and 1998

Net Income Summary

For the year ended December 31, 1999, our GAAP net income was $18.1
million, or $1.41 basic earnings per average share, as compared to $15.5
million, or $1.22 basic earnings per average share, for the year ended December
31, 1998. We compute our GAAP net income per share by dividing net income by the
weighted average number of shares of outstanding common stock during the period,
which was 12,889,510 for the year ended December 31, 1999 and 12,709,116 for the
year ended December 31, 1998. Dividends per weighted average number of shares
outstanding for the year ended December 31, 1999 was $1.38 per share, or $18.0
million in total. Dividends per weighted average number of shares outstanding
for the year ended December 31, 1998 was $1.22 per share, or $15.4 million in
total. Our return on average equity was 15.41% for the year ended December 31,
1999 and 11.80% year ended December 3`, 1998.

Net Income Summary



Year Ended Year Ended
December 31, 1999 December 31, 1998
----------- -----------

Interest Income $ 89,812 $ 89,986
Interest Expense 69,846 75,735
----------- -----------
Net Interest Income 19,966 14,251
Gain on Sale of Mortgage-Backed Securities 454 3,344
General and Administrative Expenses 2,281 2,106
----------- -----------
Net Income $ 18,139 $ 15,489
=========== ===========

Average Number of Basic Shares Outstanding 12,889,510 12,709,116
Average Number of Diluted Shares Outstanding 13,454,007 13,020,648

Basic Net Income Per Share $ 1.41 $ 1.22
Diluted Net Income Per Share $ 1.35 $ 1.19

Average Total Assets $ 1,473,765 $ 1,499,875
Average Equity $ 117,685 $ 131,265

Annualized Return on Average Assets 1.23% 1.03%
Annualized Return on Average Equity 15.41% 11.80%



32




Taxable Income and GAAP Income

For the years ended December 31, 1999 and 1998, our income as calculated
for tax purposes (taxable income) differed from income as calculated according
to GAAP (GAAP income). Our taxable income for the year ended December 31, 1999
was approximately $18.4 million, or $1.43 per share, as compared to taxable
income of $16.5 million, or $1.30 per share, for the year ended December 31,
1998. The differences were in the calculations of premium and discount
amortization, gains on sale of mortgage-backed securities, and general and
administrative expenses.

The distinction between taxable income and GAAP income is important to our
stockholders because dividends are declared on the basis of taxable income.
While we do not pay taxes so long as we satisfy the requirements for exemption
from taxation pursuant to the REIT provisions of the Internal Revenue Code, each
year we complete a corporate tax form on which taxable income is calculated as
if we were to be taxed. This taxable income level determines the amount of
dividends we can pay out over time. The table below presents the major
differences between our GAAP and taxable income for the years ended December 31,
1999, 1998, and 1997, and the four quarters in 1999

Taxable Income



Taxable General Taxable Taxable Gain
& Mortgage on Sale of
GAAP Net Administrative Amortization Securities Taxable Net
Income Differences Differences Differences Income
------ ----------- ----------- ----------- ------
(dollars in thousands)

For the Year Ended
December 31, 1999 $18,139 $9 $814 ($525) $18,437

For the Year Ended
December 31, 1998 $15,489 $6 $959 $23 $16,477

For the Period Ended
December 31, 1997 $ 4,919 $3 ($92) $54 $ 4,884

- -------------------------------------------------------------------------------------------------------------
For the Quarter Ended
December 31, 1999 $ 4,444 $2 $21 ($288) $ 4,179

For the Quarter Ended
September 30, 1999 $ 4,513 $5 ($14) ($235) $ 4,269

For the Quarter Ended
June 30, 1999 $ 4,864 $2 $363 -- $ 5,229

For the Quarter Ended
March 31, 1999 $ 4,318 -- $444 ($2) $ 4,760


Interest Income and Average Earning Asset Yield

We had average earning assets of $1.5 billion for the year ended December
31, 1999 and 1998. Our primary source of income for the years ended December 31,
1999 and 1998 was interest income. A portion of our income was generated by
gains on the sales of our mortgage-backed securities. Our interest income was
$89.8 million for the year ended December 31, 1999 and $90.0 million for the
year ended December 31, 1998. Our yield on average earning assets was 6.15% and
6.16% for the same respective periods. Our average earning asset balance
decreased by $756,000 for the year ended December 31, 1999 as compared to the
year ended December 31, 1998. Interest income decreased by $174,000 for the year
ended December 31, 1999 over prior year, the due to the slight decline in the
average earning asset balance and yield. The table below shows our average
balance of cash equivalents and mortgage-backed securities, the yields we earned
on each type of earning assets, our yield on average earning assets and our
interest income for the years ended December 31, 1999 and 1998, and the period
ended December 31, 1997, and the four quarters in 1999.


33




Average Earning Asset Yield



Yield on
Average Yield on Average Yield on
Average Mortgage- Average Average Mortgage- Average
Cash Backed Earning Cash Backed Earning Interest
Equivalents Securities Assets Equivalents Securities Assets Income
----------- ---------- ------ ----------- ---------- ------ ------
(dollars in thousands)

For the Year Ended December 31, 1999 $221 $1,461,033 $1,461,254 4.10% 6.15% 6.15% $89,812

For the Year Ended December 31, 1998 $2 $1,461,789 $1,461,791 4.32% 6.16% 6.16% $89,986

For the Period Ended December 31, 1997 $30 $448,276 $448,306 4.20% 6.34% 6.34% $24,713
- ----------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended December 31, 1999 $2 $1,420,308 $1,420,310 4.05% 6.58% 6.58% $23,371

For the Quarter Ended September 30, 1999 $877 $1,416,525 $1,417,404 4.10% 6.26% 6.25% $22,161

For the Quarter Ended June 30, 1999 $2 $1,504,669 $1,504,671 4.30% 5.92% 5.92% $22,265

For the Quarter Ended March 31, 1999 $2 $1,502,627 $1,502,629 4.01% 5.87% 5.87% $22,015


The constant prepayment rate (or CPR) on our mortgage-backed securities for
the year ended December 31, 1999 was 18% and for the year ended December 31,
1998 was 23%. CPR is an assumed rate of prepayment for our mortgage-backed
securities, expressed as an annual rate of prepayment relative to the
outstanding principal balance of our mortgage-backed securities. CPR does not
purport to be either a historical description of the prepayment experience of
our mortgage-backed securities or a prediction of the anticipated rate of
prepayment of our mortgage-backed securities.

Principal prepayments had a negative effect on our earning asset yield for
the years ended December 31, 1999 and 1998 because we adjust our rates of
premium amortization and discount accretion monthly based upon the effective
yield method, which takes into consideration changes in prepayment speeds.

Interest Expense and the Cost of Funds

We anticipate that our largest expense will be the cost of borrowed funds.
We had average borrowed funds of $1.4 billion and total interest expense of
$69.8 million for the year ended December 31, 1999. We had average borrowed
funds of $1.4 billion and total interest expense of $75.7 million for the year
ended December 31, 1998. Our average cost of funds was 5.17% for the year ended
December 31, 1999 and 5.57% for the year ended December 31, 1998. The cost of
funds rate declined 0.40% and the average borrowed funds declined by $9.8
million for the year ended December 31, 1999 when compared to the year ended
December 31, 1998; consequently, interest expense decreased by 8%.

With our current asset/liability management strategy, changes in our cost
of funds are expected to be closely correlated with changes in short-term LIBOR,
although we may choose to extend the maturity of our liabilities at any time.
Our average cost of funds was 0.08% below one-month LIBOR for the year ended
December 31, 1999 and equal to average one-month LIBOR for the year ended
December 31, 1998. We generally have structured our borrowings to adjust with
one-month LIBOR because we believe that one-month LIBOR may continue to be lower
than six-month LIBOR in the present interest rate environment. During the year
ended December 31, 1999, average one-month LIBOR, which was 5.25%, was 0.28%
lower than average six-month LIBOR, which was 5.53%. During the year ended
December 31, 1998, average one-month LIBOR, which was 5.57%, was 0.03% higher
than average six-month LIBOR, which was 5.54%.

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, 1999 and 1998, the period ended December 31, 1997 and the four
quarters in 1999.


34








Average Cost of Funds

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

For the Year Ended
December 31, 1999 $1,350,230 $69,846 5.17% 5.25% 5.53% (0.28%) (0.08%) (0.36%)

For the Year Ended
December 31, 1998 $1,360,040 $75,735 5.57% 5.57% 5.54% 0.03% -- 0.03%

For the Period Ended
December 31, 1997 $404,140 $19,677 5.61% 5.67% 5.87% (0.20%) (0.06%) (0.26%)
- --------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
December 31, 1999 $1,324,326 $18,597 5.61% 5.78% 6.08% (0.30%) (0.17%) (0.47%)

For the Quarter Ended
September 30, 1999 $1,320,776 $17,232 5.22% 5.28% 5.80% (0.52%) (0.06%) (0.58%)

For the Quarter Ended
June 30, 1999 $1,374,154 $16,865 4.91% 4.96% 5.19% (0.23%) (0.05%) (0.28%)

For the Quarter Ended
March 31, 1999 $1,381,663 $17,151 4.97% 4.96% 5.05% (0.09%) 0.01% (0.08%)


Net Interest Rate Agreement Expense

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

Net Interest Income

Our net interest income, which equals interest income less interest
expense, totaled $20.0 million for the year ended December 31, 1999 and $14.3
million for the year ended December 31, 1998. Our net interest income increased
because of lower funding costs for the year. 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 0.98% for the year ended December 31, 1999 as compared
to 0.59% for the year ended December 31, 1998. This 0.39% increase in spread
income is reflected in the $6.7 million increase in net interest income. Net
interest margin, which equals net interest income divided by average interest
earning assets, was 1.35% for the year ended December 31, 1999 and 0.95% for the
year ended December 31, 1998. The principal reason that net interest margin
exceeded net interest spread is that average interest earning assets exceeded
average interest bearing liabilities. A portion of our assets is funded with
equity rather than borrowings. We did not have any interest rate agreement
expenses to date.

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, 1999 and 1998, the period ended December 31, 1997, and
the four quarters in 1999.


35




GAAP Net Interest Income



Average Interest Yield on
Mortgage- Income on Average Average
Backed Mortgage- Average Total Interest Balance of Average Net
Securities Backed Cash Interest Earning Repurchase Interest Cost Interest
Held Securities Equivalents Income Assets Agreements Expense of Funds Income
---------- ------- ---- ------- ----- ---------- ------- ----- -------

For the Year Ended
December 31, 1999 $1,461,033 $89,801 $221 $89,812 6.15% $1,350,230 $69,846 5.17% $19,966

For the Year Ended
December 31, 1998 $1,461,789 $89,986 $2 $89,986 6.16% $1,360,040 $75,735 5.57% $14,251

For the Period Ended
December 31, 1997 $448,276 $24,682 $31 $24,713 6.34% $404,140 $19,677 5.61% $5,036
- -----------------------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
December 31, 1999 $1,420,308 $23,372 $2 $23,372 6.58% $1,324,326 $18,597 5.61% $4,774

For the Quarter Ended
September 30, 1999 $1,416,525 $22,151 $877 $22,160 6.26% $1,320,776 $17,232 5.22% $4,929

For the Quarter Ended
June 30, 1999 $1,504,669 $22,265 $2 $22,265 5.92% $1,374,154 $16,865 4.91% $5,399

For the Quarter Ended
March 31, 1999 $1,502,629 $22,015 $2 $22,015 5.87% $1,381,663 $17,151 4.97% $4,864


Gains and Losses on Sales of Mortgage-Backed Securities

For the year ended December 31, 1999, we sold mortgage-backed securities
with an aggregate historical amortized cost of $167.3 million for an aggregate
gain of $455,000. For the year ended December 31, 1998, we sold mortgage-backed
securities with an aggregate historical amortized cost of $565.2 million for an
aggregate gain of $3.3 million. As stated above, our gain on the sale of assets
declined substantially. For the year ended December 31, 1999, there was a
greater emphasis on spread income and not gains. The difference between the sale
price and the historical amortized cost of our mortgage-backed securities is a
realized gain and increases income accordingly. We do not expect to sell assets
on a frequent basis, but may from time to time sell existing assets to move into
new assets, which our management believes might have higher risk-adjusted
returns, or to manage our balance sheet as part of our asset/liability
management strategy.

Credit Losses

We have not experienced credit losses on our mortgage-backed securities to
date. We have limited our exposure to credit losses on our mortgage-backed
securities by purchasing only securities, issued or guaranteed by FNMA, FHLMC or
GNMA, which, although not rated, carry an implied "AAA" rating.

General and Administrative Expenses

G&A expenses were $2.3 million for the year ended December 31, 1999 and
$2.1 million for the year ended December 31, 1998. G&A expenses as a percentage
of average assets was 0.15% and 0.14% for the years ended December 31, 1999 and
1998, respectively. G&A expenses increased by $175,000 for 1999, when compared
to 1998. Salaries and benefits increased by $102,000, with the addition of one
employee and higher benefits cost. Also, accounting, legal, and printing cost
increased for the year as a direct result of secondary offering cost.


36




GAAP G&A Expenses and Operating Expense Ratios



Cash Total G&A Total G&A
Compensation Other Expenses/Average Expenses/Average
and Benefits G&A Total G&A Assets Equity
Expense Expenses Expenses (annualized) (annualized)
------- -------- -------- ------------ ------------
(dollars in thousands)

For the Year Ended
December 31, 1999 $1,312 $969 $2,281 0.15% 1.94%

For the Year Ended
December 31, 1998 $1,210 $896 $2,106 0.14% 1.60%

For the Period Ended
December 31, 1997 $492 $360 $852 0.21% 1.61%
- ----------------------------------------------------------------------------------------------------
For the Quarter Ended
December 31, 1999 $304 $292 $596 0.16% 2.21%

For the Quarter Ended
September 30, 1999 $337 $177 $514 0.14% 1.81%

For the Quarter Ended
June 30, 1999 $338 $223 $561 0.15% 1.44%

For the Quarter Ended
March 31, 1999 $333 $277 $610 0.16% 1.93%


Net Income and Return on Average Equity

Our net income was $18.1 million for the year ended December 31, 1999 and
$15.5 million for the year ended December 31, 1998. Our return on average equity
was 15.4% for the year ended December 31, 1999 and 11.8% for the year ended
December 31, 1998. The increase in net income is a direct result of an increase
in spread income. As previously mentioned, the substantial decline in interest
expense was the primary reason that our earnings increased. The table below
shows our net interest income, gain on sale of mortgage-backed securities and
G&A expenses each as a percentage of average equity, and the return on average
equity for the years ended December 31, 1999, 1998, and 1997, and for the four
quarters in 1999.

Components of Return on Average Equity

(Ratios for the Quarters Ended December 31, 1999, September 30, 1999,
June 30, 1999, March 31, 1999 and the
Period ended December 31, 1997 are annualized)



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

For the Year Ended December 31, 1999 16.97% 0.38% 1.94% 15.41%
For the Year Ended December 31, 1998 10.85% 2.55% 1.60% 11.80%
For the Period Ended December 31, 1997 9.49% 1.39% 1.61% 9.27%
- ---------------------------------------------------------------------------------------------------------------
For the Quarter Ended December 30, 1999 17.65% 0.99% 2.21% 16.43%
For the Quarter Ended September 30, 1999 17.40% 0.34% 1.81% 15.93%
For the Quarter Ended June 30, 1999 17.99% 0.08% 1.87% 16.20%
For the Quarter Ended March 31, 1999 15.43% 0.20% 1.93% 13.70%


Dividends and Taxable Income

We have elected to be taxed as a REIT under the Internal Revenue Code.
Accordingly, we have distributed substantially all of our taxable income for
each year since inception to our stockholders, including income resulting from


37




gains on sales of our mortgage-backed securities. From inception through
December 31, 1999, approximate taxable income exceeded dividend declarations by
$1.7 million, or $0.12 per share, based on the number of shares of common stock
outstanding at period end.

Dividend Summary



Weighted
Average Dividends
Taxable Common Taxable Net Declared Dividend Cumulative
Net Shares Income Per Per Total Pay-out Undistributed
Income Outstanding Share Share Dividends Ratio Taxable Income
------ ----------- ----- ----- --------- ----- --------------
(dollars in thousands, except per share data)

For the Year Ended
December 31, 1999 $18,437 12,889,510 $1.43 $1.39 $17,978 97.5% $1,697

For the Year Ended
December 31, 1998 $16,477 12,709,116 $1.30 $1.21 $15,437 93.7% $1,234

For the Period Ended
December 31, 1997 $4,884 5,952,123 $0.82 $0.79 $4,690 96.0% $194
- ----------------------------------------------------------------------------------------------------------------------
For the Quarter Ended
December 31, 1999 $4,179 13,383,426 $0.31 $0.35 $4,754 113.74% $1,697

For the Quarter Ended
September 30, 1999 $4,269 12,745,416 $0.34 $0.35 $4,588 91.1% $2,271

For the Quarter Ended
June 30, 1999 $5,229 12,697,338 $0.41 $0.35 $4,444 87.1% $2,589

For the Quarter Ended
March 31, 1999 $4,760 12,657,884 $0.37 $0.33 $4,190 94.9% $1,804


Financial Condition

Mortgage-Backed Securities

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

We accrete discount balances as an increase in interest income over the
life of discount mortgage-backed securities and we amortize premium balances as
a decrease in interest income over the life of premium mortgage-backed
securities. At December 31, 1999 and 1998, we had on our balance sheet a total
of $1.1 million and $609,000 respectively, of unamortized discount (which is the
difference between the remaining principal value and current historical
amortized cost of our mortgage-backed securities acquired at a price below
principal value) and a total of $23.6 million and $24.9 million, respectively,
of unamortized premium (which is the difference between the remaining principal
value and the current historical amortized cost of our mortgage-backed
securities acquired at a price above principal value).

We received mortgage principal repayments of $362.7 million for the year
ended December 31, 1999 and $486.3 million for the year ended December 31, 1998.
Given our current portfolio composition, if mortgage principal prepayment rates
were to increase over the life of our mortgage-backed securities, all other
factors being equal, our net interest income would decrease during the life of
these mortgage-backed securities as we would be required to amortize our net
premium balance into income over a shorter time period. Similarly, if mortgage
principal prepayment rates were to decrease over the life of our mortgage-backed
securities, all other factors being equal, our net interest income would


38




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 mortgage-backed securities at December 31,
1999, 1998 and 1997, September 30, 1999, June 30, 1999, and March 31, 1999.

Mortgage-Backed Securities



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

At December 31, 1999 $1,452,917 $22,444 $1,475,361 101.54% $1,437,793 98.96% 6.77%
At December 31, 1998 $1,502,414 $24,278 $1,526,692 101.62% $1,520,289 101.19% 6.43%
At December 31, 1997 $1,138,365 $21,390 $1,159,755 101.88% $1,161,779 102.06% 6.57%
- ----------------------------------------------------------------------------------------------------------------------------
At September 30, 1999 $1,402,565 $22,981 $1,425,546 101.64% $1,401,770 99.94% 6.41%
At June 30, 1999 $1,468,547 $24,985 $1,493,532 101.70% $1,474,104 100.38% 6.21%
At March 31, 1999 $1,527,530 $26,071 $1,553,601 101.71% $1,547,618 101.32% 5.94%


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

Adjustable-Rate Mortgage-Backed Security Characteristics



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

At December 31, 1999 $951,839 7.33% 5.84% 1.49% 11 months 10.30% 7.64% 65.51%
At December 31, 1998 $1,030,654 6.84% 5.18% 1.66% 12 months 10.63% 6.42% 68.60%
At December 31, 1997 $994,653 7.13% 5.52% 1.61% 22 months 10.78% 6.50% 87.38%
- -----------------------------------------------------------------------------------------------------------------------------------
At September 30, 1999 $889,293 6.76% 5.13% 1.63% 9 months 10.82% 6.14% 63.40%
At June 30, 1999 $941,559 6.67% 4.96% 1.71% 11 months 11.00% 5.84% 64.12%
At March 31, 1999 $1,036,947 6.63% 4.97% 1.66% 11 months 11.01% 5364% 67.88%



39




Fixed-Rate Mortgage-Backed Security Characteristics



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

At December 31, 1999 $501,078 6.58% 7.01% 34.49%
At December 31, 1998 $471,760 6.55% 6.47% 31.40%
At December 31, 1997 $143,712 7.50% 7.08% 12.62%
- ---------------------------------------------------------------------------------------------
At December 31, 1999
At September 30, 1999 $513,272 6.58% 6.91% 36.60%
At June 30, 1999 $526,988 6.58% 6.88% 35.88%
At March 31, 1999 $401,002 6.82% 6.65% 26.02%


At December 31, 1999 and 1998 we held mortgage-backed securities with
coupons linked to the one-year, three-year, and five-year Treasury indices,
one-month LIBOR and the six-month CD rate.

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



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

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


Adjustable-Rate Mortgage-Backed Securities by Index
December 31, 1998



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

Weighted Average Adjustment Frequency 1 mo. 6 mo. 12 mo. 36 mo. 60 mo.
Weighted Average Term to Next Adjustment 1 mo. 3 mo. 23 mo. 9 mo. 2 mo.
Weighted Average Annual Period Cap None 1.00% 1.83% 2.00% 2.00%
Weighted Average Lifetime Cap at
December 31, 1998 9.16% 11.04% 11.76% 13.07% 11.57%
Mortgage Principal Value as Percentage of
Mortgage-Backed Securities at December 31,
1998 29.60% 3.73% 33.33% 1.62% 0.32%


Interest Rate Agreements

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


40




Borrowings

To date, our debt has consisted entirely of borrowings collateralized by a
pledge of our mortgage-backed securities. These borrowings appear on our balance
sheet as repurchase agreements. At December 31, 1999, we had established
uncommitted borrowing facilities in this market with twenty-three lenders in
amounts, which we believe, are in excess of our needs. All of our
mortgage-backed securities are currently accepted as collateral for these
borrowings. However, we limit our borrowings, and thus our potential asset
growth, in order to maintain unused borrowing capacity and thus increase the
liquidity and strength of our balance sheet.

For the years ended December 31, 1999 and 1998, the term to maturity of our
borrowings ranged from one day to one year, with a weighted average original
term to maturity of 50 days at December 31, 1999 and 49 days at December 31,
1998. At December 31, 1999, the weighted average cost of funds for all of our
borrowings was 5.26% and the weighted average term to next rate adjustment was
20 days. At December 31, 1998, the weighted average cost of funds for all of our
borrowings was 5.21% and the weighted average term to next rate adjustment was
29 days.

Liquidity

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

Stockholders' Equity

We use "available-for-sale" treatment for our mortgage-backed securities;
we carry these assets on our balance sheet at estimated market value rather than
historical amortized cost. Based upon this "available-for-sale" treatment, our
equity base at December 31, 1999 was $103.3 million, or $7.60 per share. If we
had used historical amortized cost accounting, our equity base at December 31,
1999 would have been $140.8 million, or $10.37 per share. Our equity base at
December 31, 1998 was $125.9 million, or $9.95 per share. If we had used
historical amortized cost accounting, our equity base at December 31, 1998 would
have been $132.3 million, or $10.46 per share. During the year ended December
31, 1999, the Company raised additional capital in the amount of $8.2 million
through its direct purchase program.

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

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

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

Unrealized Gains and Losses
(dollars in thousands)



At December 31, At December 31, At December 31,
1999 1998 1997
-------- ------- -------

Unrealized Gain $1,531 $3,302 $3,253
Unrealized Loss (39,100) (9,706) (1,229)
-------- ------- -------
Net Unrealized Gain (Loss) ($37,569) ($6,404) $2,024
======== ======= =======

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



41




Unrealized changes in the estimated net market value of mortgage-backed
securities have one direct effect on our potential earnings and dividends:
positive market-to-market changes increase our equity base and allow us to
increase our borrowing capacity while negative changes tend to limit borrowing
capacity under our capital investment policy. A very large negative change in
the net market value of our mortgage-backed securities might impair our
liquidity position, requiring us to sell assets with the likely result of
realized losses upon sale. "Unrealized Losses on Available for Sale Securities"
was $37.6 million, or 2.54% of the amortized cost of our mortgage-backed
securities at December 31, 1999. "Unrealized Losses on Available for Sale
Securities" was $6.4 million or 0.43% of the amortized cost of our
mortgage-backed securities at December 31, 1998.

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

Stockholders' Equity



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

At December 31, 1999 $140,841 ($37,569) $103,272 $10.37 $ 7.60
At December 31, 1998 $132,275 ($ 6,404) $125,871 $10.46 $ 9.95
At December 31, 1997 $133,062 $ 2,024 $135,086 $10.47 $10.62
- ------------------------------------------------------------------------------------------------------------
At September 30, 1999 $136,850 ($23,776) $113,074 $10.44 $ 8.63
At June 30, 1999 $133,020 ($19,428) $113,592 $10.48 $ 8.95
At March 31, 1999 $133,055 ($ 1,910) $131,145 $10.43 $10.28


Leverage

Our debt-to-GAAP reported equity ratio at December 31, 1999 and, 1998 was
12.9:1 and 10.1:1, respectively. We generally expect to maintain a ratio of
debt-to-equity of between 8:1 and 12:1, although the ratio may vary from this
range from time to time based upon various factors, including our management's
opinion of the level of risk of our assets and liabilities, our liquidity
position, our level of unused borrowing capacity and over-collateralization
levels required by lenders when we pledge assets to secure borrowings.

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


42




Asset/Liability Management and Effect of Changes in Interest Rates

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

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

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

Inflation

Virtually all of our assets and liabilities are financial in nature. As a
result, interest rates and other factors drive our performance far more than
does inflation. Changes in interest rates do not necessarily correlate with
inflation rates or changes in inflation rates. Our financial statements are
prepared in accordance with GAAP and our 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 99.5% of our total assets at December 31, 1999 and 1998, as
compared to the Internal Revenue Code requirement that at least 75% of our total
assets be qualified REIT assets. We also calculate that 99.5% and 96.4% of our
revenue qualifies for the 75% source of income test, and 100% of its revenue
qualifies for the 95% source of income test, under the REIT rules for the years
ended December 31, 1999 and 1998, respectively. 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, 1999 and 1998, we believe that we
qualified as a REIT under the Internal Revenue Code.

We at all times intend to conduct our business so as not to become
regulated as an investment company under the Investment Company Act. If we were
to become regulated as an investment company, then our use of leverage would be
substantially reduced. The Investment Company Act exempts entities that are
"primarily engaged in the business of purchasing or otherwise acquiring
mortgages and other liens on and interests in real estate" (qualifying
interests). Under current interpretation of the staff of the SEC, in order to
qualify for this exemption, we must maintain at least 55% of our assets directly
in qualifying interests. In addition, unless certain mortgage securitites
represent all the certificates issued with respect to an underlying pool of
mortgages, the mortgage-backed securities may be treated as securities separate
from the underlying mortgage loans and, thus, may not be considered qualifying
interests for purposes of the 55% requirement. We calculate that as of December
31, 1999 and 1998 we were in compliance with this requirement.


43




ITEM. 7A QUANTITATIVE AND QUALITIATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

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

Our profitability and the value of our portfolio may be adversely affected
during any period as a result of changing interest rates. The following table
quantifies the potential changes in net interest income and portfolio value
should interest rates go up or down 200 basis points, assuming the yield curves
of the rate shocks will be parallel to each other and the current yield curve.
All changes in income and value are measured as percentage changes from the
projected net interest income and portfolio value at the base interest rate
scenario. The base interest rate scenario assumes interest rates at December 31,
1999 and various estimates regarding prepayment and all activities are made at
each level of rate shock. Actual results could differ significantly from these
estimates.



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

- -200 Basis Points 38% 2%
- -100 Basis Points 12% 1%
- -50 Basis Points 3% 0%
Base Interest Rate
+50 Basis Points (20%) (2%)
+100 Basis Points (37%) (3%)
+200 Basis Points (61%) (5%)


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


44




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, 1999.
The amounts of assets and liabilities shown within a particular period were
determined in accordance with the contractual terms of the assets and
liabilities, except adjustable-rate loans, and securities are included in the
period in which their interest rates are first scheduled to adjust and not in
the period in which they mature. Mortgage-backed securities reflect estimated
prepayments that were estimated based on analyses of broker estimates, the
results of a prepayment model that we utilized and empirical data. Our
management believes that these assumptions approximate actual experience and
considers them reasonable; however, the interest rate sensitivity of our assets
and liabilities in the table could vary substantially if different assumptions
were used or actual experience differs from the historical experience on which
the assumptions are based.



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

Rate Sensitive Assets:
Mortgage-Backed Securities $ 528,728 $ 172,905 $ 129,032 $622,252 $1,452,917

Rate Sensitive Liabilities:
Repurchase Agreements 1,223,183 115,113 $1,338,296
----------- --------- ----------- -------- ----------

Interest rate sensitivity gap ($ 694,455) $ 57,792 $ 129,032 $622,252 $ 114,624
=========== ========= =========== ======== ==========

Cumulative rate sensitivity gap ($ 694,455) ($636,663) ($ 507,631) $114,621
=========== ========= =========== ========

Cumulative interest rate
sensitivity gap as a percentage of
total rate-sensitive assets (45%) (44%) (35%) 8%


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


45




ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our financial statements and the related notes, together with the
Independent Auditors' Report thereon, are set forth on pages F-1 through F-14 of
this Form 10-K.

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

None.

PART III

ITEM 10 DIRECTORS AND OFFICERS OF THE REGISTRANT

The information required by Item 10 is incorporated herein by reference to
the definitive proxy statement we are filing pursuant to Regulation 14A under
the headings "Election of Directors," "Nominees for Directors of the Company,"
"Board of Directors," and "Management of the Company."

ITEM 11 EXECUTIVE COMPENSATION

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

ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

PART IV

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

(a) Documents filed as part of this report:

1. Financial Statements.

2. Schedules to Financial Statements:

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

3. Exhibits:

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


46




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

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

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

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

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

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

10.4 Employment Agreement, effective as of January 27, 1997, between the
Company and Michael A.J. Farrell (incorporated by reference to Exhibit
10.4 to our Registration Statement on Form S-11 (Registration No.
333-32913) filed with the Securities and Exchange Commission on August 5,
1997).

10.5 Employment Agreement, effective as of January 27, 1997, between the
Company and Timothy J. Guba (incorporated by reference to Exhibit 10.5 to
our Registration Statement on Form S-11 (Registration No. 333-32913) filed
with the Securities and Exchange Commission on August 5, 1997).

10.6 Employment Agreement, effective as of January 27, 1997, between the
Company and Wellington J. St. Claire (incorporated by reference to Exhibit
10.6 to our Registration Statement on Form S-11 (Registration No.
333-32913) filed with the Securities and Exchange Commission on August 5,
1997).

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

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

10.9 Employment Agreement, effective as of November 1, 1997, between the
Company and Kathryn F. Fagan (incorporated by reference to Exhibit 10.9 to
our Form 10-K for the fiscal year ended December 31, 1997).

23.1 Consent of Independent Accountants.

27 Financial Data Schedule.

(b) Reports on Form 8-K

We have not filed any reports on Form 8-K during the last quarter of the
period covered by this report.


47




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.

ANNALY MORTGAGE MANAGEMENT, INC.

Date: March 29, 2000 By: /s/ Michael A. J. Farrell
----------------------------
Michael A. J. Farrell
Chairman and Chief Executive Officer

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 29, 2000
-------------------------
Kevin P. Brady


/s/ KATHRYN F. FAGAN Chief Financial Officer and Treasurer March 29, 2000
------------------------- (principal financial and accounting officer)
Kathryn F. Fagan


/s/ MICHAEL A.J. FARRELL Chairman of the Board, Chief Executive Officer March 29, 2000
------------------------- and Director (principal executive officer)
Michael A. J. Farrell

/s/ TIMOTHY J. GUBA President, Chief Operating Officer and Director March 29,2000
-------------------------
Timothy J. Guba

/s/ JOHN A. LAMBIASE Director March 29, 2000
-------------------------
John A. Lambiase

/s/ WELLINGTON J. ST. CLAIRE Vice Chairman of the Board, Chief Investment March 29, 2000
------------------------- Officer and Director
Wellington J. St. Claire



48





Annaly Mortgage Management, Inc.

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

Page

INDEPENDENT AUDITORS' REPORT F-2

FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998:

Balance Sheets F-3

Statements of Operations F-4

Statements of Stockholders' Equity F-5

Statement of Cash Flows F-6

Notes to Financial Statements F-7


F-1




INDEPENDENT AUDITORS' REPORT

To the Stockholders of
Annaly Mortgage Management, Inc.

We have audited the accompanying balance sheets of Annaly Mortgage Management,
Inc. (the "Company") as of December 31, 1999 and 1998, and the related
statements of operations, stockholders' equity and cash flows for the years
ended December 31, 1999 and 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

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

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company at December 31, 1999 and 1998
and the results of its operations and its cash flows for the year ended December
31, 1999 and 1998 in conformity with generally accepted accounting principles.

February 11, 2000

Deloitte & Touche
New York, New York


F-2






ANNALY MORTGAGE MANAGEMENT, INC.

BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------



ASSETS 1999 1998

CASH AND CASH EQUIVALENTS $ 71,918 $ 69,020

MORTGAGE-BACKED SECURITIES - At fair value 1,437,792,631 1,520,288,762

RECEIVABLE FOR MORTGAGE-BACKED
SECURITIES SOLD 46,402,360 --

ACCRUED INTEREST RECEIVABLE 6,857,683 6,782,043

OTHER ASSETS 197,896 212,214
--------------- ---------------

TOTAL ASSETS $ 1,491,322,488 $ 1,527,352,039
=============== ===============


LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:

Repurchase agreements $ 1,338,295,750 $ 1,280,510,000
Payable for Mortgage-Backed Securities purchased 38,154,012 111,921,205
Accrued interest payable 6,682,687 5,052,626
Dividends payable 4,753,461 3,857,663
Accounts payable 164,100 139,236
--------------- ---------------

Total liabilities 1,388,050,010 1,401,480,730
--------------- ---------------

STOCKHOLDERS' EQUITY:
Common stock: par value $.01 per share;
100,000,000 authorized, 13,581,316 and 12,648,424
shares issued and outstanding, respectively 135,813 126,484
Additional paid-in capital 140,262,657 131,868,108
Accumulated other comprehensive loss (37,568,510) (6,404,275)
Retained earnings 442,518 280,992
--------------- ---------------

Total stockholders' equity 103,272,478 125,871,309
--------------- ---------------

TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 1,491,322,488 $ 1,527,352,039
=============== ===============



See notes to financial statements.



F-3






ANNALY MORTGAGE MANAGEMENT, INC.

STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------



1999 1998

INTEREST INCOME:
Mortgage-Backed Securities $ 89,801,353 $ 89,985,526
Other interest income 10,641 105
------------ ------------

Total interest income 89,811,994 89,985,631

INTEREST EXPENSE:
Repurchase agreements 69,846,206 75,735,280
------------ ------------

NET INTEREST INCOME 19,965,788 14,250,351

GAIN ON SALE OF MORTGAGE-BACKED
SECURITIES 454,782 3,344,106

GENERAL AND ADMINISTRATIVE EXPENSES 2,281,290 2,105,534
------------ ------------

NET INCOME 18,139,280 15,488,923
------------ ------------

OTHER COMPREHENSIVE LOSS:
Unrealized loss on available-for-sale securities (30,709,453) (5,083,920)
Less reclassification adjustment for gains included in net
income (454,782) (3,344,106)
------------ ------------

Other comprehensive gain (loss) (31,164,235) (8,428,026)
------------ ------------

COMPREHENSIVE INCOME $(13,024,955) $ 7,060,897
============ ============

NET INCOME PER SHARE:
Basic $ 1.41 $ 1.22
============ ============

Diluted $ 1.35 $ 1.19
============ ============

AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic 12,889,510 12,709,116
============ ============

Diluted 13,454,007 13,020,648
============ ============



See notes to financial statements.



F-4


ANNALY MORTGAGE MANAGEMENT, INC.

STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------



Common Additional
Stock Paid-in Comprehensive Retained
Par Value Capital Income Earnings

BALANCE, DECEMBER 31, 1997 $ 127,139 $ 132,705,765 $ -- $ 229,623

Net income -- -- 15,488,923 15,488,923

Other comprehensive income:
Unrealized net losses on securities,
net of reclassification adjustment -- -- (8,428,026) --
-------------

Comprehensive income -- -- $ 7,060,897 --
=============

Exercise of stock options 441 194,658 -- --

Additional cost of initial public offering -- (130,248) -- --

Stock buyback (1,096) (902,067) -- --

Dividends declared for the year ended
December 31, 1998, $1.22 per average share -- -- (15,437,554)
------------- ------------- -------------

BALANCE, DECEMBER 31, 1998 126,484 131,868,108 280,992

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

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

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

Exercise of stock options 572 232,704 --

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

Dividends declared for the year ended
December 31, 1999, $1.39 per average share -- -- (17,977,754)
------------- ------------- -------------

BALANCE, DECEMBER 31, 1999 $ 135,813 $ 140,262,657 $ 442,518
============= ============= =============

Disclosure of reclassification amounts:
Unrealized holding losses arising during period $ (30,709,459)
Less reclassification adjustment of gains included
in net income (454,782)
-------------

Net unrealized losses on securities $ (31,164,235)
=============


Other
Comprehensive
Income Total

BALANCE, DECEMBER 31, 1997 $ 2,023,751 $ 135,086,278

Net income -- --

Other comprehensive income:
Unrealized net losses on securities,
net of reclassification adjustment (8,428,026) --


Comprehensive income -- 7,060,897


Exercise of stock options -- 195,099

Additional cost of initial public offering -- (130,248)

Stock buyback -- (903,163)

Dividends declared for the year ended
December 31, 1998, $1.22 per average share -- (15,437,554)
------------- -------------

BALANCE, DECEMBER 31, 1998 (6,404,275) 125,871,309

Net income --

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


Comprehensive income -- (13,024,955)


Exercise of stock options -- 233,276

Proceeds from direct purchase -- 8,170,602

Dividends declared for the year ended
December 31, 1999, $1.39 per average share -- (17,977,754)
------------- -------------

BALANCE, DECEMBER 31, 1999 $ (37,568,510) $ 103,272,478
============= =============

Disclosure of reclassification amounts:
Unrealized holding losses arising during period
Less reclassification adjustment of gains included
in net income


Net unrealized losses on securities



See notes to financial statements.




F-5





ANNALY MORTGAGE MANAGEMENT, INC.

STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------



1999 1998

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,139,280 $ 15,488,923
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization of mortgage premiums and discounts, net 6,103,239 8,235,371
Depreciation of fixed assets 22,670 14,154
Gain on sale of Mortgage-Backed Securities (454,782) (3,344,106)
Increase in accrued interest receivable (98,310) (1,443,182)
Decrease (increase) in other assets 14,318 (115,112)
Increase in accrued interest payable 1,630,061 60,179
Increase (decrease) in accounts payable 24,864 (62,740)
---------------- ----------------

Net cash provided by operating activities 25,381,340 18,833,487
---------------- ----------------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Mortgage-Backed Securities (559,695,956) (1,420,592,798)
Proceeds from sale of Mortgage-Backed Securities 122,552,293 568,553,814
Principal payments on Mortgage-Backed Securities 362,657,549 486,337,605
---------------- ----------------

Net cash used in investing activities (74,486,114) (365,701,379)
---------------- ----------------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from repurchase agreements 11,202,660,000 11,506,566,000
Principal payments on repurchase agreements (11,144,874,250) (11,144,925,000)
Proceeds from exercise of stock options 233,276 195,100
Proceeds from direct equity offering 8,170,602 --
Additional cost of initial public offering -- (130,248)
Purchase of Treasury Stock -- (903,163)
Dividends paid (17,081,956) (14,376,949)
---------------- ----------------

Net cash provided by financing activities 49,107,672 346,425,740
---------------- ----------------

NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,898 (442,152)

CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 69,020 511,172
---------------- ----------------

CASH AND CASH EQUIVALENTS, END OF YEAR $ 71,918 $ 69,020
================ ================

SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:

Interest paid $ 68,216,145 $ 75,675,101
================ ================

NONCASH FINANCING ACTIVITIES:
Net change in unrealized loss on available-for-sale securities $ (31,164,235) $ (8,428,026)
================ ================

Dividends declared, not yet paid $ 4,753,461 $ 3,857,663
================ ================


See notes to financial statements.




F-6





Annaly Mortgage Management, Inc.

NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

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

Unrealized losses on Mortgage-Backed Securities that are considered other than
temporary, as measured by the amount of decline in fair value attributable to
factors other than temporary, are recognized in income and the cost basis of the
Mortgage-Backed Securities is adjusted. There were no such adjustments for the
years ended December 31, 1999 and 1998.

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

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

Credit Risk - At December 31, 1999 and 1998, the Company has limited its
exposure to credit losses on its portfolio of Mortgage-Backed Securities by only
purchasing securities from Federal Home Loan Mortgage Corporation ("FHLMC"),
Federal National Mortgage Association ("FNMA"), or Government National Mortgage
Association ("GNMA"). The payment of principal and interest on the FHLMC and
FNMA Mortgage-Backed Securities are guaranteed by those respective agencies and
the payment of principal and interest on the GNMA Mortgage-Backed Securities are
backed by the full-faith-and-credit of the U.S. government. At December 31, 1999
and 1998, all of the Company's Mortgage-Backed Securities have an implied "AAA"
rating.

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

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

Reclassifications - Certain prior year amounts have been reclassified to conform
to the current year presentation.




F-7




2. MORTGAGE-BACKED SECURITIES

The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of December 31, 1999, which are carried at
their fair value:



Federal Federal Government
Home Loan National National Total
Mortgage Mortgage Mortgage Mortgage
Corporation Association Association Assets

Mortgage-Backed
Securities, gross $ 454,711,462 $ 900,782,563 $ 97,423,038 $ 1,452,917,063

Unamortized discount (171,241) (964,133) -- (1,135,374)
Unamortized premium 8,454,547 13,359,448 1,765,457 23,579,452
--------------- --------------- --------------- ---------------
Amortized cost 462,994,768 913,177,878 99,188,495 1,475,361,141

Gross unrealized gains 359,888 1,171,250 -- 1,531,138
Gross unrealized losses (12,091,145) (22,966,353) (4,042,150) (39,099,648)
--------------- --------------- --------------- ---------------
Estimated fair value $ 451,263,511 $ 891,382,775 $ 95,146,345 $ 1,437,792,631
=============== =============== =============== ===============



The following table pertains to the Company's Mortgage-Backed Securities
classified as available-for-sale as of December 31, 1998, which are carried at
their fair value:



Federal Federal Government
Home Loan National National Total
Mortgage Mortgage Mortgage Mortgage
Corporation Association Association Assets

Mortgage-Backed
Securities, gross $ 449,433,408 $ 955,650,670 $ 97,330,495 $ 1,502,414,573

Unamortized discount (184,996) (423,583) -- (608,579)
Unamortized premium 8,852,370 14,264,277 1,770,397 24,887,044
--------------- --------------- --------------- ---------------

Amortized cost 458,100,782 969,491,364 99,100,892 1,526,693,038

Gross unrealized gains 659,557 2,092,119 549,900 3,301,576
Gross unrealized losses (3,487,784) (5,692,759) (525,309) (9,705,852)
--------------- --------------- --------------- ---------------

Estimated fair value $ 455,272,555 $ 965,890,724 $ 99,125,483 $ 1,520,288,762
=============== =============== =============== ===============


The adjustable rate Mortgage-Backed Securities are limited by periodic caps
(generally interest rate adjustments are limited to no more than 1% every six
months) and lifetime caps. The weighted average lifetime cap was 10.6% at
December 31, 1999 and 1998.

During the year ended December 31, 1999, the Company realized $563,259 in gains
from sales of Mortgage-Backed Securities. Losses totaled $108,477 for the year
ended December 31, 1999. During the year ended December 31, 1998, the Company
realized $3,344,070 in gains from sales of Mortgage-Backed Securities. Losses
totaled $9,964 for the year ended December 31, 1998.

3. REPURCHASE AGREEMENTS

The Company had outstanding $1,338,295,750 and $1,280,510,000 of repurchase
agreements with a weighted average borrowing rate of 5.26% and 5.21% and a
weighted average remaining maturity of 20 days and 29 days as of December 31,
1999 and 1998, respectively. At December 31, 1999 and 1998, Mortgage-Backed
Securities actually pledged had an estimated fair value of $1,376,684,559 and
$1,458,669,078, respectively.




F-8




At December 31, 1999 and 1998, the repurchase agreements had the following
remaining maturities:

1999 1998

Within 30 days $1,197,416,250 $1,222,542,000
30 to 59 days 25,767,000 31,346,000
60 to 89 days -- 26,622,000
90 to 119 days 115,112,500 --
-------------- --------------
$1,338,295,750 $1,280,510,000
============== ==============

4. COMMON STOCK

During the year ended December 31, 1999, 57,204 options were exercised at
$233,276. Also, 875,688 shares were purchased in direct offerings, totaling
$8,170,602. During the year ended December 31, 1998, 44,124 options were
exercised at $195,099. Stock buybacks during the year ended December 31, 1998
totaled 109,600 shares at a cost of $903,163.

During the Company's year ending December 31, 1999, the Company declared
dividends to shareholders totaling $17,977,754, or $1.39 per weighted average
share, of which $13,224,293 was paid during the year and $4,753,461 was paid on
January 27, 2000. During the Company's year ending December 31, 1998, the
Company declared dividends to shareholders totaling $15,437,554, or $1.22 per
weighted average share, of which $11,579,891 was paid during the year and
$3,857,663 was paid on January 25, 1999.

5. EARNINGS PER SHARE (EPS)

In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting No. 128, Earnings Per Share (SFAS No. 128),
which requires dual presentation of Basic EPS and Diluted EPS on the face of the
income statement for all entities with complex capital structures. SFAS No. 128
also requires a reconciliation of the numerator and denominator of Basic EPS and
Diluted EPS computation. For the year ended December 31, 1999, the
reconciliation is as follows:

Year Ended
December 31, 1999
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount

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

Basic EPS 18,139,280 12,889,510 $1.41
=====
Effect of dilutive securities:
Dilutive stock options -- 564,497
----------- ----------
Diluted EPS $18,139,280 13,454,007 $1.35
=========== ========== =====


Options to purchase 708,380 shares were outstanding during the year (Note 6) and
were dilutive as the exercise price (between $4.00 and $8.94) was less than the
average stock price for the year for the Company of $9.58. Options to purchase
135,676 shares of stock were outstanding and not considered dilutive. The
exercise price (between $10.00 and $11.25) was greater than the average stock
price for the year of $9.58.




F-9




For the year ended December 31, 1998, the reconciliation is as follows:

Year Ended
December 31, 1999
-----------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount

Net income $15,488,923
-----------

Basic EPS 15,488,923 12,709,116 $1.22
=====
Effect of dilutive securities:
Dilutive stock options -- 311,532
----------- ----------
Diluted EPS $15,488,923 13,020,648 $1.19
=========== ========== =====


Options to purchase 446,084 shares were outstanding during the year (Note 6) and
were dilutive as the exercise price (between $4.00 and $8.13) was less than the
average stock price for the year for the Company of $9.36. Options to purchase
147,676 shares of stock were outstanding and not considered dilutive. The
exercise price (between $10.00 and $11.28) was greater than the average stock
price for the year of $9.36.

6. LONG TERM STOCK INCENTIVE PLAN

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

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

Year Ending
December 31,
-----------------------------------
1999 1998

Net earnings - as reported $ 18,139,280 $ 15,488,925
Net earnings - pro forma 18,010,908 15,280,631
Earnings per share - as reported $ 1.41 $ 1.22
Earnings per share - pro forma $ 1.40 $ 1.20


The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in the year ended December 31, 1999: dividend yield
of 15%; expected volatility of 32%; risk-free interest rate of 5.61%; and the
weighted average expected lives of seven years. For the year ended December 31,
1998, dividend yield of 10%; expected volatility of 33%; risk-free interest rate
of 5.56%; and the weighted average expected lives of six years.




F-10




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



Weighted
Average
Exercise
Shares Price

Outstanding, January 1, 1999 593,760 $7.42

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

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

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



Information regarding options at December 31, 1998, is as follows:



Weighted
Average
Exercise
Shares Price

Outstanding, January 1, 1998 348,500 $6.42

Granted (282,272 ISOs, 311,488 NQSOs) 289,384 8.17
Exercised (44,124) 4.34
Expired -- --
-------- -----
Outstanding, December 31, 1998 593,760 $7.42
======== =====

Weighted average fair value of options granted during the year
(per share) $ 1.99
========



The following table summarizes information about stock options outstanding at
December 31, 1999:

Weighted Average
Range of Options Remaining Contractual
Exercise Prices Outstanding Life (Yrs.)

$ 4.00 122,502 2
8.13 278,378 9
8.63 300,000 10
8.94 7,500 3
10.00 125,750 2
10.75 7,500 3
11.25 2,426 3

844,056 7.2
=======


At December 31, 1999 and 1998, 162,389 and 56,241 options were vested and not
exercised, respectively.

7. COMPREHENSIVE INCOME

The Company adopted FASB Statement No. 130, Reporting Comprehensive Income.
Statement No. 130 requires the reporting of comprehensive income in addition to
net income from operations. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net income. The
Company at December 31, 1999 and 1998 held securities classified as
available-for-sale. At December 31, 1999, the net unrealized losses totaled
$37,568,510 and at December 31, 1998, the net unrealized losses totaled
$6,404,275.




F-11




8. LEASE COMMITMENTS

The Corporation has a noncancelable lease for office space, which commenced in
April 1998 and expires in December 2007. The Corporation's aggregate future
minimum lease payments are as follows:

2000 $ 95,299
2001 97,868
2002 100,515
2003 110,261
2004 113,279
2005 116,388
2006 119,590
2007 122,888
---------
Total remaining lease payments $ 876,088
=========


9. RELATED PARTY TRANSACTION

Included in "Other Assets" on the Balance sheet is an investment in Annaly
International Money Management, Inc. On June 24, 1998, the Company acquired
99,960 nonvoting shares, at a cost of $49,980. The officers and directors of
Annaly International Money Management Inc. are also officers and directors of
the Company.

10. SUMMARIZED QUARTERLY RESULTS (UNAUDITED)

The following is a presentation of the quarterly results of operations for the
year ended December 31, 1999.



Quarters Ending
-----------------------------------------------------------
March 31, June 30, September 30, December 31,
1999 1999 1999 1999

Interest income from Mortgage-
Backed Securities and cash $22,014,941 $22,264,930 $22,161,272 $23,370,851
Interest expense on repurchase
agreements 17,151,041 16,865,824 17,232,086 18,597,255
----------- ----------- ----------- -----------

Net interest income 4,863,900 5,399,106 4,929,186 4,773,596

Gain on sale of
Mortgage-Backed Securities 64,560 25,853 97,656 266,713

General and administrative
expenses 610,004 561,010 513,600 596,676
----------- ----------- ----------- -----------

Net income $ 4,318,456 $ 4,863,949 $ 4,513,242 $ 4,443,633
=========== =========== =========== ===========

Net income per share:
Basic $ 0.34 $ 0.38 $ 0.35 $ 0.33
----------- ----------- ----------- -----------

Dilutive $ 0.33 $ 0.37 $ 0.35 $ 0.32
----------- ----------- ----------- -----------

Average number of shares
outstanding:
Basic 12,657,884 12,697,338 12,745,416 13,383,426
=========== =========== =========== ===========

Dilutive 12,952,822 13,110,275 13,025,096 13,992,414
=========== =========== =========== ===========



F-12




The following is a presentation of the quarterly results of operations for the
year ended December 31, 1998.



Quarters Ending
-----------------------------------------------------------
March 31, June 30, September 30, December 31,
1998 1998 1998 1998

Interest income from Mortgage-
Backed Securities and cash $20,078,721 $23,761,953 $24,008,567 $22,136,390
Interest expense on repurchase
agreements 16,313,474 20,177,580 20,765,301 18,478,925
----------- ----------- ----------- -----------

Net interest income 3,765,247 3,584,373 3,243,266 3,657,465

Gain on sale of
Mortgage-Backed Securities 1,427,084 295,875 993,630 627,517

General and administrative
expenses 484,181 493,718 528,240 599,185
----------- ----------- ----------- -----------

Net income $ 4,708,150 $ 3,386,530 $ 3,708,656 $ 3,685,797
=========== =========== =========== ===========

Net income per share:
Basic $ 0.37 $ 0.27 $ 0.29 $ 0.29
=========== =========== =========== ===========

Dilutive $ 0.36 $ 0.26 $ 0.29 $ 0.29
=========== =========== =========== ===========

Average number of shares
outstanding:
Basic 12,727,405 12,757,674 12,704,194 12,648,116
=========== =========== =========== ===========

Dilutive 12,923,195 12,959,771 12,785,765 12,731,192
=========== =========== =========== ===========



F-13




Exhibit Exhibit Description Sequentially
Number Numbered
Page

3.1 Articles of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 to the Company'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 and Restatement of the Articles of
Incorporation of the Registrant (incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on Form
S-11 (Registration No. 333-32913) filed with the Securities
and Exchange Commission on August 5, 1997).

3.3 Bylaws of the Registrant, as amended (incorporated by
reference to Exhibit 3.3 to the Company'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 Company's
Registration Statement on Form S-11 (Registration No.
333-32913) filed with the Securities and Exchange Commission
on September 17, 1997.

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

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

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

10.4 Employment Agreement, effective as of January 27, 1997,
between the Company and Michael A.J. Farrell (incorporated by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-11 (Registration No. 333-32913) filed with
the Securities and Exchange Commission on August 5, 1997).

10.5 Employment Agreement, effective as of January 27, 1997,
between the Company and Timothy J. Guba (incorporated by
reference to Exhibit 10.5 to the Company's Registration
Statement on Form S-11 (Registration No. 333-32913) filed with
the Securities and Exchange Commission on August 5, 1997).

10.6 Employment Agreement, effective as of January 27, 1997,
between the Company and Wellington J. St. Claire (incorporated
by reference to Exhibit 10.6 to the Company's Registration
Statement on Form S-11 (Registration No. 333-32913) filed with
the Securities and Exchange Commission on August 5, 1997).

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

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

10.9 Employment Agreement, effective, (incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement to 1997
Form 10-K the fiscal year ended December 31, 1997), effective
as of November 1, 1997, between the Company and Kathryn F.
Fagan.

23.1 Consent of Independent Accountants.

27 Financial Data Schedule.


49