Exhibit 10.1

INVESTMENT MANAGEMENT AGREEMENT

THIS INVESTMENT MANAGEMENT AGREEMENT (this “Agreement”) is entered into this 8th
day of June, 2004 by and between FBR Investment Management, Inc., a Delaware
corporation and registered investment adviser (“Adviser”), and Aether Systems,
Inc., a Delaware corporation (“Client”).

     WHEREAS, Client wishes to employ Adviser to provide certain portfolio
investment management services to Client, including such trading as is
consistent with Client’s Investment Objective and Focus as set forth in
Appendix A, with respect to an investment account (the “Account”) of Client
comprised of residential mortgage-backed securities (“RMBS”), and Adviser
desires to provide such services to Client with respect to the Account, on the
terms and conditions set forth herein.

     NOW, THEREFORE, in consideration of the promises and mutual covenants and
conditions set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows.

Section 1. Investment Management Services. Adviser will manage the investment of
securities and cash in Client’s Account on a commercially prudent basis, subject
to the direction of Client and the terms and conditions hereof. Without limiting
the foregoing, Adviser shall perform such services as may be required from time
to time for the management of the Account as Client shall reasonably request or
Adviser deems appropriate under the circumstances, including, without
limitation, the following (collectively, the “Services”):

     (a) identifying, recommending and implementing investment and funding
criteria and strategies and return and risk management strategies for Account;

     (b) representing Client with mortgage banking parties in connection with
the purchase and commitment to purchase or sell RMBS and implementation of
Client’s leveraging policy;

     (c) monitoring and providing to Client on an ongoing basis price
information and other data obtained from nationally recognized dealers that
maintain markets in RMBS and providing data and advice to Client in connection
with the identification of such dealers;

     (d) managing the day-to-day operations of the Account, to the extent not
performed by the Custodian pursuant to the Trust Agreement, and performing and
supervising the performance of such other administrative functions necessary in
the management of the Account as may be reasonably agreed upon by Adviser and
Client, including the collection of revenues and the payment of debts and
obligations incurred in connection with the Account;

     (e) evaluating, recommending and implementing hedging strategies;

 

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     (f) taking commercially reasonable actions to ensure that there are
sufficient controls in place at all times to establish and maintain the
completeness and accuracy of Account information;

     (g) providing such information to Client as it may reasonably request in
order for Client to prepare any filing required by the Securities and Exchange
Commission (the “SEC”) or any exchange or quotation system on which Client’s
securities are listed or quoted to be filed by Client;

     (h) providing such information that Client may reasonably request to comply
with applicable law, including the Sarbanes-Oxley Act of 2002 and taking
reasonably requested actions necessary for the maintenance of Client’s exemption
under the Investment Company Act of 1940, as amended, and the rules and
regulation thereunder (the “1940 Act”); and

     (i) cooperating reasonably with consultants, auditors, accountants,
attorneys and other designated representatives of Client in connection with any
service provided hereunder.

Client agrees to inform Adviser promptly in writing of any material changes in
Client’s investment objectives or financial circumstances which may affect the
manner in which Client’s assets should be invested, and this Agreement shall be
amended accordingly. In the event Client notifies Adviser of material changes to
its investment objectives or financial circumstances, Adviser shall have a
reasonable period of time, not to exceed 15 days, in which to advise Client of
the amount of time required to alter the manner in which the Account is invested
and the Services are provided to meet such changed investment objectives. Client
understands that Adviser’s duties as described herein relate solely to the
management of the Account and not to any other aspect of Client’s business, and
Adviser is not responsible for Client’s compliance with any laws or regulations
applicable to Client.

Section 2. Portfolio Management Services. Subject to the direction and oversight
of Client and the guidelines set forth in Appendix A and Appendix D, Client
hereby delegates trading authority over the Account to Adviser. Client
acknowledges and agrees that Adviser will be solely responsible for the
investment and reinvestment of the assets in the Account in accordance with this
Agreement, including without limitation, Appendix A and Appendix D, each as
amended from time to time. Adviser will also be solely responsible for the
execution of securities transactions through brokers or dealers.

Section 3. Account Reports. Pursuant to an agreement between Client and the
Account’s Custodian (as defined in Section 10(a)) to be agreed upon by client
and the Custodian, Client will receive from the Custodian periodic reports
reflecting transaction dates, costs, and current market value of assets of the
Account. Adviser will provide to Client weekly, monthly, quarterly and annual
written reports based on information obtained from the Custodian, specifying the
amount of assets and liabilities in the Account which consist of whole pool RMBS
interests (“Qualifying Interests”) and non-whole pool RMBS interests, other real
estate securities (“Non-qualifying Interests”) and

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other investments in the Account. Adviser shall also provide Client such other
Account information concerning the calculation of Fees as set forth in
Appendix B as Client may reasonably request, as well as other information that
Client reasonably requests and that can be obtained without commercially
unreasonable efforts. Client understands the information provided by Adviser
will not be prepared in accordance with generally accepted accounting
principles.

Section 4. Adviser Obligations. (a) Adviser shall refrain from any action which
would violate any law, rule or regulation of any governmental body or agency
having jurisdiction over the Account or which would otherwise not be permitted
by Client’s governing documents or the terms hereof.

     (b) Adviser shall require each seller or transferor of RMBS to the Account
to make such representations and warranties regarding such mortgage securities
or mortgage loans as may be, in the judgment of Adviser, necessary, advisable
and appropriate. In addition, Adviser shall take such other action as it deems
necessary, advisable or appropriate with regard to the protection of the
Account’s investments.

     (c) Adviser shall operate in compliance with the provisions of the
Investment Advisers Act of 1940, as amended, and the rules and regulations
thereunder (the “Advisers Act”) applicable to the performance of Adviser’s
duties hereunder and shall remain registered under the Advisers Act at all times
during the term of this Agreement.

     (d) Adviser shall operate in compliance with the provisions of the
Commodities Exchange Act, as amended, and the rules and regulations thereunder
(the “Commodities Act”) applicable to the performance of Adviser’s duties
hereunder and shall remain registered as a commodity pool operator under the
Commodities Act at all times during the term of this Agreement.

     (e) Adviser shall maintain appropriate books of account and records
relating to services performed hereunder, and such books of account and records
shall be accessible for inspection by representatives of Client at any time
during normal business hours.

     (f) Upon notice from Client that Client intends to rely on section 3(c)(5)
of the 1940 Act, Adviser shall conduct the investment activities of Client in
such a manner as to establish promptly and maintain Client’s exemption under
section 3(c)(5) of the 1940 Act as provided in Appendix A.

     (g) When executing transactions for the Account and selecting brokers and
dealers, Adviser shall endeavor to obtain commercially reasonable terms, taking
into account the market and price for the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of the
commission.

     (h) Adviser shall obtain and maintain a fidelity bond in an amount and with
an insurer that is reasonably acceptable to Client which shall cover, among
other things, losses resulting from the dishonesty or fraudulent acts of
Adviser’s employees. The cost of such bond shall be borne by Adviser.

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Section 5. Adviser Representations and Warranties. (a) Adviser is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its formation, has the corporate power to own its assets and to
transact the business in which it is now engaged and is duly qualified to do
business and is in good standing under the laws of each jurisdiction where its
ownership or lease of property or the conduct of its business require such
qualification, except for failures to be so qualified, authorized or licensed
that could not in the aggregate have a material adverse effect on the business
operations, assets or financial conditions of Adviser. Adviser does not do
business under any fictitious business name. Adviser is registered as an
investment adviser under the Advisers Act.

     (b) Adviser has the corporate power and authority to execute, deliver and
perform this Agreement and all obligations required hereunder and has taken all
necessary action to authorize this Agreement and the execution, delivery and
performance of this Agreement and all obligations required hereunder. No consent
of any other person, and no license, permit, approval or authorization of,
exemption by, notice or report to, or registration, filing or declaration with,
any governmental authority, is required to be obtained by Adviser in connection
with this Agreement or the execution, delivery, performance, validity or
enforceability of this Agreement and all obligations required hereunder. This
Agreement has been, and each instrument or document required hereunder will be,
executed and delivered by a duly authorized agent of Adviser. This Agreement
constitutes, and each instrument or document required hereunder when executed
and delivered hereunder will constitute, the legally valid and binding
obligation of Adviser enforceable against Adviser in accordance with its terms.

     (c) The execution, delivery and performance of this Agreement and the
documents or instruments required hereunder do not and will not violate any
provision of any existing law or regulation binding on Adviser, or any order,
judgment, award or decree of any court, arbitrator or governmental authority
binding on Adviser, or any securities issued by Adviser or of any mortgage,
indenture, lease, contract or other agreement, instrument or undertaking to
which Adviser is a party or by which Adviser or any of its assets may be bound,
the violation of which would have a material adverse effect on the business
operations, assets or financial condition of Adviser and will not result in, or
require, the creation or imposition of any lien on any of its property assets or
revenues pursuant to the provisions of any such mortgage indenture, lease,
contract or other agreement, instrument or undertaking.

Section 6. Client Representations and Warranties. (a) Client is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
formation, has the corporate power to own its assets and to transact the
business in which it is now engaged and is duly qualified to do business and is
in good standing under the laws of each jurisdiction where its ownership or
lease of property or the conduct of its business require such qualification,
except for failures to be so qualified, authorized or licensed that could not in
the aggregate have a material adverse effect on the business operations, assets
or financial conditions of Client. Client does not do business under any
fictitious business name.

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     (b) Client has the corporate power and authority to execute, deliver and
perform this Agreement and all obligations required hereunder and has taken all
necessary action to authorize this Agreement and the execution, delivery and
performance of this Agreement and all obligations required hereunder. No consent
of any other person, and no license, permit, approval or authorization of,
exemption by, notice or report to, or registration, filing or declaration with,
any governmental authority, is required to be obtained by Client in connection
with this Agreement or the execution, delivery, performance, validity or
enforceability of this Agreement and all obligations required hereunder. This
Agreement has been, and each instrument or document required hereunder will be,
executed and delivered by a duly authorized agent of Client. This Agreement
constitutes, and each instrument or document required hereunder when executed
and delivered hereunder will constitute, the legally valid and binding
obligation of Client enforceable against Client in accordance with its terms.

     (c) The execution, delivery and performance of this Agreement and the
documents or instruments required hereunder do not and will not violate any
provision of any existing law or regulation binding on Client, or any order,
judgment, award or decree of any court, arbitrator or governmental authority
binding on Client, or any securities issued by Client or of any mortgage,
indenture, lease, contract or other agreement, instrument or undertaking to
which Client is a party or by which Client or any of its assets may be bound,
the violation of which would have a material adverse effect on the business
operations, assets or financial condition of Client and will not result in, or
require, the creation or imposition of any lien on any of its property assets or
revenues pursuant to the provisions of any such mortgage indenture, lease,
contract or other agreement, instrument or undertaking.

Section 7. Fees. Client shall pay Adviser certain fees for the Services, as set
forth in Appendix B attached hereto. Payment of fees for Services hereunder
shall occur within 15 days of Client’s receipt of Adviser’s written notice to
Client of the calculation of a fee, unless Client objects in writing within such
15-day period. Adviser and Client shall negotiate in good faith to resolve any
disputes concerning fee calculations.

Section 8. Client Credit Information. Client authorizes Adviser, in its
reasonable discretion, at any time and from time to time, to make or obtain
reports concerning Client’s credit standing and business conduct under the Fair
Credit Reporting Act, as amended. Adviser shall notify Client promptly following
the making or obtaining of any such reports. Client may make a written request
for a description of the nature and scope of the reports made by Adviser and the
same will be provided promptly to Client.

Section 9. Valuation. Pursuant to the agreement between Client and the Custodian
of the Account to be agreed upon by Client and the Custodian, the Custodian on a
periodic basis will value securities in the Account after obtaining pricing
information from an independent pricing service, approved by Client from time to
time, which initially shall be Bear Stearns Pricing Direct.

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Section 10. Brokerage and Custody.

     (a) Unless otherwise directed by Client, Adviser is authorized to select
the brokers or dealers that will execute purchase and sale transactions for the
Account. Client will be responsible for paying all brokerage commissions.
Custody of Account assets will be maintained with an independent custodian (the
“Custodian”). Client will be responsible for entering into a custodian agreement
with the Custodian. Adviser shall not have custody of any assets or funds in the
Account. Client will be solely responsible for paying all fees or charges of the
Custodian. Client will provide, or will direct the Custodian to provide, to
Adviser copies of all periodic statements and other reports for the Account
prepared by the Custodian, as well as access to Account data via electronic
interface. Adviser shall direct all brokers or dealers executing orders on
behalf of the Account to forward confirmations of those transactions promptly to
the Custodian.

     (b) Upon the receipt by Adviser of a written request signed by a duly
authorized officer of Client, requesting Adviser to release to Client money or
other property held by Adviser for the account of Client (taking into account
liabilities under repurchase agreements and collateralized obligations of the
Account), if any, Adviser shall promptly, but in no event later than thirty
(30) days after such request, release such money or other property to Client.

Section 11. Confidentiality. Except as otherwise agreed in writing or as
required by law: (a) Adviser will keep confidential and will not disclose any
information it obtains from time to time in connection with Services rendered
under this Agreement and (b) Client will keep confidential and for Client’s
exclusive use and benefit all investment advice furnished by Adviser.

Section 12. Service to Other Clients. Client acknowledges and agrees that
Adviser will perform advisory services for various clients, and may give advice
and take action with respect to any Client which may differ from the advice
given or the timing or nature of action taken with respect to the Account.
Except as required by applicable law, nothing in this Agreement shall limit or
prevent Adviser or any of its officers, affiliates, or employees from buying,
selling or trading in any security for its own account.

Section13. Risk Acknowledgment.

(a) Adviser does not guarantee: (i) the future performance of the Account; (ii)
any specific level of performance; (iii) the success of any investment decision
or strategy that Adviser may use; or (iv) the success of Adviser’s overall
management of the Account. Client understands that the recommendations made for
Client’s Account by Adviser are subject to various market, currency, economic
and business risks as set forth on Appendix C attached hereto, and that such
recommendations will not always be profitable. Adviser will make recommendations
solely with respect to the assets held in Client’s Account, and in making
recommendations for the Account, Adviser will not consider any other securities,
cash or other investments owned by Client.

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(b) Adviser will not be liable to Client for: (i) any loss that Client may
suffer by reason of any recommendation or investment decision made or other
action taken or omitted in good faith by Adviser; (ii) any loss arising from
Adviser’s adherence to Client’s written or verbal instructions; or (iii) any act
or failure to act by the Custodian, any broker or dealer to which transactions
for the Account are directed, except as otherwise provided by law and in the
case of acts or omissions, errors in judgment or mistakes of law by Adviser
constituting bad faith, willful misconduct, gross negligence or recklessness.
The federal securities laws impose liabilities under certain circumstances on
persons who act in good faith, and therefore nothing in this Agreement shall
waive or limit any rights which Client may have under those laws.

Section 14. Proxy Voting and Other Legal Actions. Adviser will not vote, or give
any advice about how to vote, proxies for securities held in the Account.
Adviser will not advise Client or act for Client in any legal proceedings,
including bankruptcies, involving securities held or previously held by the
Account or the issuers of these securities.

Section 15. Termination.

     (a) This Agreement will continue in effect until one year from the date
hereof (the “Initial Term”) unless earlier terminated as provided below.

     (b) This Agreement may be terminated at any time prior to the conclusion of
the Initial Term:

  (i)   by Client, if Adviser breaches a material provision of this Agreement,
upon not less than sixty (60) days prior written notice to Adviser;     (ii)  
by Client, for any reason, upon not less than thirty (30) days prior written
notice to Adviser, subject to Client making the payment described in Section
15(c) below; or     (iii)   by Adviser, if Client breaches a material provision
of this Agreement or changes the investment strategy of the Account from
investing in RMBS and fails to cure such breach to the reasonable satisfaction
of Adviser within thirty (30) days following Client’s receipt of written
notification of such breach.

     (c) In the event Client terminates this Agreement prior to the end of the
Initial Term for any reason other than provided for in Section 15(b)(i) above,
Client shall pay Adviser a termination fee equal to $500,000 per full calendar
quarter (and a pro-rata portion of $500,000 for any period of time less than a
full calendar quarter) of the period remaining from the beginning of the
effective date of termination of this Agreement through September 30, 2005. For
purposes of this Section 15(c) the first calendar quarter shall begin on July 1,
2004.

     (d) In the event this Agreement is not terminated during the Initial Term,
this Agreement shall continue in effect until terminated by either Client or
Adviser upon not

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less than ninety (90) days prior written notice to the other, provided, however,
that no such notice of termination may be given during the Initial Term.

     (e) Notwithstanding the foregoing, Adviser agrees that, if requested by
Client, Adviser shall continue to provide Services and this Agreement shall not
terminate until the earlier of (i) such time that Client is able to find a
substitute adviser on terms reasonably comparable to the terms hereof or (ii)
ninety (90) days from the date Adviser specified as the termination date in its
written notice to Client.

     (f) Termination of this Agreement will not affect: (i) the validity of any
action previously taken by Adviser or Client under this Agreement; (ii)
liabilities or obligations arising from transactions initiated before
termination of this Agreement; or (iii) the force and effect of Section 7,
Section 10(b), Section 11, Section 12, Section 15, Section 18, Section 19 and
Section 20. Upon the termination of this Agreement, Adviser will not have any
obligation to recommend or take any action with regard to the securities, cash
or other investments in the Account except with respect to transactions
initiated before termination of this Agreement and shall not be entitled to
compensation for Services, except for compensation accruing prior to the date of
termination, which shall be pro rated to the date of termination consistent with
the terms and conditions hereof.

     (g) In the event this Agreement is terminated for any reason, Adviser shall
use its reasonable best efforts to assist in the transition to Client or its
designee of any activities or obligations which were being performed by Adviser
hereunder. Without limiting the generality of the foregoing, Adviser shall
(i) make its personnel and other resources reasonably available to Client for a
reasonable period of time not to exceed sixty (60) days from the date of notice
of termination and (ii) deliver to Client (A) a full accounting of the Account,
including a statement showing all payments collected and all property held and
(B) all property and documents of Client then in the custody of Adviser.

Section 16. Client Authority. The person signing this Agreement on behalf of
Client represents that he or she has been authorized to do so by appropriate
corporate action. Client shall inform Adviser of any event which might affect
this authority or the propriety of this Agreement.

Section 17. Binding Agreement; Assignment. This Agreement will bind and be for
the benefit of Client and Adviser and their successors and permitted assigns,
except that this Agreement and none of the rights interests or obligations
hereunder may be assigned (within the meaning of the Advisers Act) by Client or
Adviser without the prior written consent of the other party to this Agreement;
provided, however, Client may assign any or all of its rights, interests and
obligations hereunder to a wholly owned subsidiary of Client without the prior
written consent of Adviser.

Section 18. Governing Law and Dispute Resolution. This Agreement will be
governed by and construed in accordance with the laws of the State of Delaware
without giving effect to any conflict or choice of law provisions; provided,
however, that nothing in this Agreement will be construed in any manner
inconsistent with the Advisers Act or any

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rule or order of the SEC under the Advisers Act. Any controversy or dispute
which may arise between the parties hereto concerning any transaction or the
construction, performance or breach of this Agreement shall be settled by
binding arbitration. The award of the arbitrators shall be final and binding on
the parties and judgment upon the award rendered may be entered into any court
having jurisdiction. THE PARTIES HEREBY WAIVE THE RIGHT TO A TRIAL BY JURY IN
ANY SUCH DISPUTE.

Section 19. Notices. Any notice, advice or report to be given pursuant to this
Agreement shall be in writing and shall be deemed to have been duly given, made
and received (a) when delivered by hand, (b) 1 business day after having been
sent by reputable overnight courier service (charges prepaid), (c) 1 business
day after being sent by facsimile transmission or (d) 4 business days after
being mailed by certified or registered mail, return receipt requested and
postage prepaid, in each case at the address set forth below:

If to Adviser:

FBR Investment Management, Inc.
1001 Nineteenth Street North
Arlington, VA 22209
Attn: Neal Wilson
Facsimile: (703) 312-9501

With a copy to:

William Ginivan, Chief Legal Officer
Friedman, Billings, Ramsey Group, Inc.
1001 Nineteenth Street North
Arlington, VA 22209
Facsimile: (703)469-1140

If to Client:

Aether Systems, Inc.
11500 Cronridge Dr., Suite 110
Owings Mills, Maryland 21117
Attn: Chief Financial Officer

Facsimile: (410) 356-8699

With a copy to:

Kirkland & Ellis LLP
655 15th Street, N.W., Suite 1200
Washington, D.C. 20005

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Attn: Mark D. Director, Esq.
Facsimile: (202) 879-5200

Section 20. Miscellaneous. If any provision of this Agreement is or should
become inconsistent with any law or rule of any governmental or regulatory body
having jurisdiction over the subject matter of this Agreement, the provision
will be deemed to be rescinded or modified in accordance with any such law or
rule. All other provisions of this Agreement will continue and remain in full
force and effect. No terms or provision of this Agreement may be waived or
changed unless in a writing signed by the party against whom such waiver or
change is sought to be enforced, except as otherwise permitted by this Agreement
and that Client shall be permitted to change or amend Appendix A or Appendix D
without the prior consent of Adviser, provided that Adviser receives written
notification prior to such change or amendment. Client’s or Adviser’s failure to
insist at any time upon strict compliance with this Agreement or with any of the
terms of the Agreement or any continued course of such conduct on its part will
not constitute or be considered a waiver by Client or Adviser of any of its
rights or privileges. This Agreement contains the entire agreement and
understanding between the parties hereto and supersedes all prior and
contemporaneous agreements and understanding concerning the subject matter of
this Agreement. Client and Adviser are not partners or joint ventures with each
other, and nothing in this Agreement shall be construed to make them such. The
Appendices identified in this Agreement are incorporated herein by this
reference and made a part hereof. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original as against any
party whose signature appears thereon, and all of which shall constitute one and
the same instrument.

Section 21. Disclosure. Part II of Adviser’s Form ADV is attached as Appendix E.

Signature Page Follows

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     IN WITNESS WHEREOF, the parties hereto have caused this Investment and
Trading Management Agreement to be executed by their duly authorized
representatives as of the day and year first written above.

     

  FBR INVESTMENT MANAGEMENT, INC.
 
   

  By: /s/ Richard Hendrix

 

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  Name: Richard Hendrix

  Title: Co-President and Chief Operating Officer
 
   

  AETHER SYSTEMS, INC.
 
   

  By: /s/ David S. Oros

 

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  Name: David S. Oros

  Title: Chairman and CEO

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Appendix A

INVESTMENT OBJECTIVE AND FOCUS

Investment Objective

The investment objective of the Account is to seek a high risk-adjusted return
on capital. There can be no assurance that the Account will achieve its
investment objective or not lose money.

Investment Strategy

Adviser will seek to achieve the Account’s investment objective by investing
exclusively in adjustable-rate RMBS issued by Federal Home Loan Mortgage
Corporation (“FHLMC”), the Federal National Mortgage Association (“FNMA”) or the
Government National Mortgage Association (“GNMA”). The Account will invest
primarily in mortgage-backed securities that have coupon rates which adjust over
time (subject to certain limitations and lag periods) in conjunction with
changes in short-term interest rates. Those adjustments are based on an
objective index, such as LIBOR, the Treasury Index, or the CD Rate. The Account
will finance its investment in RMBS primarily by entering into reverse
repurchase agreements that seek to enhance the overall performance return on
capital invested in the portfolio.

Adviser will employ risk management systems to actively monitor and manage the
Account’s exposure to interest and mortgage prepayments rates, the shape of the
yield curve, credit risk, risk of capital loss, the availability and cost of
financing, and changing yield spreads relating to RMBS. In particular, the
investment strategy will emphasize relative value asset selection, as well as
liability structuring and use of hedging instruments, including futures,
options, swaps, caps and floors, to manage the differential risks inherent in
the Account’s investment strategy. Notwithstanding the foregoing, there can be
no assurance that the Account will achieve its investment objective or be
successful in executing its investment strategy.

Mortgage Assets

The Account will invest in RMBS, issued or guaranteed by FHLMC, FNMA and GNMA,
that represent an ownership interest in a pool of mortgage loans (“Mortgage
Certificates”).

Adviser will acquire RMBS that are consistent with the Account’s risk management
parameters and the terms and conditions of this Agreement and that Adviser
believes can be readily financed. Because the Account will generally hold its
RMBS until maturity, the Account generally will not seek to acquire assets whose
investment returns are only attractive in a limited range of scenarios. The
Account may, however, sell RMBS prior to maturity to meet the Account liquidity
needs, and withdrawals may affect the management of the Account’s portfolio.
Adviser believes that future interest rates and mortgage prepayment rates are
very difficult to predict. Therefore, Adviser seeks to

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acquire RMBS for the Account that Adviser believes will provide acceptable
performance returns over a broad range of interest rate and prepayment
scenarios.

The RMBS in which the Account will invest may represent the entire or partial
ownership interest in pools of mortgage loans made by lenders such as savings
and loan institutions, mortgage bankers, and commercial banks. Pools of mortgage
loans are assembled for sale to investors (such as the Account) by various
government, government-related and private organizations. Mortgage Certificates
differ from other forms of traditional debt securities, which generally provide
for periodic payments of interest in fixed amounts with principal payments at
maturity or specified call dates. Instead, Mortgage Certificates provide for a
monthly payment that 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 borrowers on their mortgage loans, net of any fees paid
to the issuer or guarantor of such securities. Additional payments denied from
prepayment of principal resulting from the sale of the underlying property,
refinancing or foreclosure, net of fees or costs that may be incurred. Some
Mortgage Certificates, such as securities issued by GNMA, are described as
“modified pass-through.” These securities entitle the holder to receive all
interest and principal payments owed on the mortgage pool, net of certain fees,
regardless of whether or not the mortgagors actually make mortgage payments when
due.

Upon notice from Client that Client intends to rely on section 3(c)(5) of the
1940 Act, Adviser will at all times ensure that the Account holds not less than
55% of its total assets in Qualifying Interests and not less than 25% of its
total assets in Non-qualifying Interests, except that such latter percentage may
be reduced to the extent that the Account’s investments in Qualifying Interests
exceeds 55%. Adviser shall adjust the percentage of assets invested in
Qualifying Interests and Non-qualifying Interests if so directed by Client.

The investment characteristics of pass-through Mortgage Certificates differ from
traditional fixed-rate income securities. The major differences include payment
of interest and principal on the Mortgage Certificates 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 factors including the
level of, and changes in, interest rates, general economic conditions, the
location and age of the mortgage and other social and demographic conditions.
Generally, prepayments on pass-through Mortgage Certificates increase during
periods of falling mortgage interest rates and decrease during periods of rising
mortgage interest rates. Reinvestment of RMBS prepayments may occur at higher or
lower interest rates than the original investment, thus affecting the yield of
the Account’s investments. However, in periods of falling rates, reinvestment
will more likely be at a lower rate.

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Leverage through Reverse Repurchase Agreements

Reverse repurchase agreements are agreements that provide for the transfer of
securities from a “Seller” to a “Buyer.” Under each reverse repurchase
agreement, the Seller sells securities to the Buyer at an agreed upon price (the
“Initial Purchase Price”). The Buyer simultaneously agrees to resell the
securities back to the Seller (and the Seller agrees to repurchase) on a future
date for a price equal to the Initial Purchase Price plus an amount representing
a specified return (effectively, interest) to the Issuer to cover interest cost,
fees and expenses. Adviser will cause Account to enter into reverse repurchase
agreements only with counterparties with the highest available long-term debt
rating as determined by at least one of the nationally recognized rating
agencies.

Leverage

The Account will finance the acquisition of RMBS by entering into reverse
repurchase agreements. The effect of these agreements is that the invested
capital of the Account will be leveraged. The assets-to-equity ratio of the
Account’s portfolio of RMBS will generally range from 6.0 to 9.0 times, although
the ratio may vary from time-to-time depending upon market conditions and other
factors Adviser deems relevant, including haircut levels required by lenders and
the market value of the RMBS in the Account’s portfolio. For purposes of
calculating this ratio, the Account’s equity is equal to the value of the
Account’s investment portfolio on a mark-to-market basis less the book value of
the Account’s obligations under repurchase agreements and other collateralized
borrowings.

Adviser’s goal is to strike a balance between the under-utilization of leverage,
which reduces potential returns to investors, and the over-utilization of
leverage, which could reduce the Account’s ability to meet its obligations
during adverse market conditions. The Account’s capital investment policy limits
its ability to acquire additional assets during times when the Account’s
assets-to-equity ratio exceeds 9.0. The Account’s capital base represents the
approximate liquidation value of its investments and approximates the market
value of assets that the Account can pledge or sell to meet
over-collateralization levels for its borrowings. The unpledged portion of the
Account’s capital base is available for the Account to pledge or sell as
necessary to maintain over-collateralization for its borrowings.

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Appendix B

FEES

A. Management Fee. Adviser shall receive a management fee (the “Management Fee”)
payable quarterly in arrears at a rate of 0.0375% multiplied by the Aggregate
Cost Basis of the securities in the Account on the last day of each calendar
quarter; for periods of less than one quarter, the amount shall be pro-rated to
reflect the actual number of days the Account was managed.

B. Incentive Fee. Adviser shall receive an incentive fee (the “Incentive Fee”)
payable quarterly in arrears. For each calendar quarter, the Incentive Fee shall
be equal to 25% of the “Incentive Calculation Amount” for the four quarter
period ending with the end of that calendar quarter. For periods in which this
Agreement has been in effect for less than four quarters, the Net RMBS Income
(Loss), reduced by the Management Fee, shall be annualized for each such period.

The “Incentive Calculation Amount” per quarter is an amount equal to 10% of the
amount by which the Net RMBS Income (Loss), reduced by the Management Fee for
the applicable quarter, exceeds 10% per annum of the RMBS Equity Account
Statement Balance at the closing of the last day of the preceding quarter.

The “RMBS Equity Account Statement Balance” shall be equal to the RMBS Equity
Account Statement Balance as of the prior period plus (1) cash contributions
made by Client to the Account during the quarter plus (2) the Net RMBS Income
(Loss) (as defined below) minus (a) cash distributions from the Account during
the quarter (including distributions to Adviser for the Management Fee). Adviser
shall deliver the RMBS Equity Account Statement Balance within 15 days of the
end of each quarter.

“Net RMBS Income (Loss)” shall be the net interest income or expense of the
Account, including income and expenses related to hedging instruments, realized
gains and losses on the sales of securities in the Account and the amortization
of premiums and discounts on securities in the Account, in each case determined
on an accrual basis and in accordance with generally accepted accounting
principles as in effect from time to time, for and as of the end of each
quarter. Adviser shall deliver the Net RMBS Income (Loss) Statement within
15 days of the end of each quarter.

“Aggregate Cost Basis” shall be the price paid for the securities multiplied by
the month end factor.

The following table illustrates the calculation of the Incentive Fee.

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INCENTIVE FEE CALCULATION

                                              Q1   Q2   Q3   Q4   TOTAL
Book Value of Equity
  $ 80,000,000     $ 80,000,000     $ 80,000,000     $ 80,000,000     $
80,000,000  
Annual Hurdle (10% ROE)
  $ 8,000,000     $ 8,000,000     $ 8,000,000     $ 8,000,000     $ 8,000,000  
Net MBS Income
  $ 3,250,000     $ 3,750,000     $ 4,000,000     $ 4,500,000     $ 15,500,000  
Annualized ROE
    16.3 %     18.8 %     20.0 %     22.5 %     19.4 %
Annualized or Prior 4 Quarters Net MBS Income
  $ 13,000,000     $ 14,000,000     $ 14,666,667     $ 15,500,000          
Amount in excess of hurdle
  $ 5,000,000     $ 6,000,000     $ 6,666,667     $ 7,500,000     $ 7,500,000  
Incentive Fee (10.0% of annualized excess)
  $ 500,000     $ 600,000     $ 666,667     $ 750,000          
Incentive Fee (10.0% of annualized excess for quarter)
  $ 125,000     $ 150,000     $ 166,667     $ 187,500     $ 629,167  

         
ROE Hurdle
   
10.0
%
Incentive Fee % of ROE in Excess of Hurdle
   
10.0
%

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Appendix C

RISK FACTORS

An investment in the Account involves a significant degree of risk which
investors should carefully consider. There is no guarantee of successful
performance, that the objective can be reached or that a positive return can be
achieved or losses avoided. As a general rule, investors can expect that
investments with higher return potential will also have higher potential of risk
or loss of capital or income.

Investors in the Account should consider the following risks, which are intended
to be illustrative but not all-inclusive.

INVESTMENT RISKS

Interest Rate Risk

The Account is subject to several risks associated with changes in interest
rates. An increase in the interest payments on the Account’s borrowings relative
to the interest earned on the Account’s RMBS may adversely affect profitability.
The interest payments on the Account’s borrowings may increase relative to the
interest earned on adjustable-rate RMBS.

Differences in timing of interest rate adjustments on the Account’s RMBS and the
Account’s borrowings (through reverse repurchase agreements) may adversely
affect profitability. The Account will rely primarily on short-term borrowings
to acquire RMBS with long-term maturities. Accordingly, if short-term interest
rates increase, this may adversely affect profitability.

Most of the RMBS the Account intends to acquire will be adjustable rate RMBS.
This means that their interest rates may vary over time based upon changes in an
objective index, such as:

•   LIBOR. The interest rate that certain major banks in London offer for
deposits in London of U.S. dollars.   •   Treasury Index. A monthly or weekly
average yield of benchmark U.S. Treasury securities, as published by the Federal
Reserve Board.   •   CD Rate. The weekly average of secondary market interest
rates on six-month negotiable certificates of deposit, as published by the
Federal Reserve Board.

These indices generally reflect the impact of a movement in short-term interest
rates. The interest rates on the Account’s borrowings similarly vary with
changes in an objective index. Nevertheless, the interest rates on the Account’s
borrowings will generally adjust more frequently than the interest rates on the
Account’s adjustable-rate RMBS.

All of the Account’s investments are intended to consist of adjustable rate
RMBS. In a period of rising interest rates, interest payments could increase
while the interest earned on fixed-rate

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RMBS would not change. This would adversely affect profitability and the ability
of the Account to make distributions and may result in losses.

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

Mortgage-backed Securities

An RMBS is a general obligation of the issuer, which generally is secured by
mortgages or mortgage-backed collateral. RMBS may be issued or guaranteed by
U.S. Government agencies or instrumentalities or by private entities such as
banks, savings and loans, mortgage bankers and other non-governmental issuers.

Faster or slower prepayments than expected on underlying mortgage loans can
dramatically alter the yield to maturity of an RMBS. The value of most RMBS,
like traditional debt securities, tends to vary inversely with changes in
interest rates (i.e., as interest rates increase, the value of such securities
decrease). RMBS, however, may benefit less than traditional debt securities from
declining interest rates because prepayment of mortgages tends to accelerate
during periods of declining interest rates. Prepayments shorten the life of the
security and shorten the time over which the Account receives income at the
higher rate. Additionally, when mortgage loans underlying RMBS held by the
Account are prepaid, the Account then reinvests the prepaid amounts in other
income securities, the yields of which will reflect interest rates prevailing at
the time. Therefore, the Account’s ability to hold higher-yielding RMBS will be
adversely affected by decreasing interest rates and to the extent that
prepayments occur the Account may be forced to reinvest in securities that have
lower yields. Alternatively, during periods of rising interest rates, RMBS are
often more susceptible to extension risk than traditional debt securities (i.e.,
rising interest rates could cause property owners to prepay their mortgages more
slowly than expected when the security was purchased by the Account which may
further reduce the market value of such security and lengthen the duration of
the security).

RMBS are not traded on an organized exchange and may, therefore, be difficult to
value.

Decline in Market Value of Mortgage Assets: Margin Calls and Defaults

The Account will pledge its RMBS to secure funding for its investment strategy.
A decline in market value of pledged RMBS may limit the Account’s ability to
borrow or result in lenders initiating margin calls (i.e. requiring pledge of
cash or additional RMBS to re-establish the ratio of amount of borrowing to the
value of the collateral). This remains true despite effective hedging against
such fluctuations as the hedging instruments may not be part of the collateral
securing the collateralized borrowings. The Account may be required to sell RMBS
under adverse market conditions in order to maintain liquidity. Such sales may
be effected by the Account when deemed necessary in order to preserve the
capital base of the Account. If these

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sales were made at prices lower than the amortized cost of the RMBS, the Account
would experience losses. A default by the Account under its collateralized
borrowings could also result in a liquidation of the collateral and a resulting
loss of the difference between the value of the collateral and the amount
borrowed.

Reverse Repurchase Agreements

Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Account may decline below the price of the securities
the Account has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Account’s use of the proceeds of the
agreement may be restricted pending a determination by the other party, or its
trustee or receiver, of whether to enforce the Account’s obligation to
repurchase the securities. Leverage may increase losses.

Prepayment Rates

The RMBS acquired by the Account are backed by pools of mortgage loans. The
Account receives payments, generally, from the payments that are made on
underlying mortgage loans. When borrowers prepay their mortgage loans at rates
that are faster than expected, the result is prepayments are faster than
expected on the RMBS. These faster-than-expected prepayments on the RMBS may
adversely affect the Account’s profitability.

The Account may purchase RMBS that have a higher interest rate than the market
interest rate at the time. In exchange for this higher interest rate, a premium
over the market value must be paid to acquire the security. In accordance with
accounting rules, this premium is amortized over the term of the RMBS. If the
RMBS is prepaid in whole or in part prior to its maturity date the premium that
was prepaid at the time of the prepayment must be expensed. This could adversely
affect the Account’s profitability.

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

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

While Adviser seeks to manage prepayment risk to the extent practical, in
selecting investments the prepayment risk must be balanced against other risks
and the potential returns of each investment. No strategy can completely
insulate the Account from prepayment risk.

Financing Terms

Since the Account will rely primarily on short-term borrowings, the ability to
achieve the investment objectives of the Account depends not only on the ability
to obtain money in

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sufficient amounts and on favorable terms, but also on the ability to renew or
replace on a continuous basis the maturing short-term borrowings. If the Account
is not able to renew or replace maturing borrowings, it may have to sell assets
under possibly adverse market conditions.

Competition for Assets

The Account’s net income depends, in large part, on its ability to acquire
adjustable RMBS at favorable spreads over its financing costs. In acquiring
RMBS, the Account competes with REITs, investment banking firms, savings and
loan associations, banks, insurance companies, mutual funds, other lenders and
other entities that purchase RMBS, many of which have greater financial
resources than the Account. As a result, the Account may not be able to acquire
sufficient RMBS at favorable spreads over its financing costs.

Investment Portfolio Risks

Investments in securities are by their nature speculative. The value of
securities can be affected by economic conditions, trends in business and
finance, national and world affairs and other events and circumstances affecting
the businesses of the issuers of the securities and the markets for securities.

There can be no assurance that the Account will be successful or profitable, or
will not suffer losses or that the operations and results of the Account will be
similar to or consistent with the historical operations and results of any
business with which Adviser or its related companies have been associated in the
past. The past performance of entities with which Adviser and its related
companies have been associated is not intended to be, and is not to be
considered as, an indication of the likely future performance of the Account.

Securities markets are by nature volatile, and the value of an investment in the
Account may go down as well as up. Investments of the Account may be illiquid or
difficult to value.

Concentration of Account

Because the Account focuses on a single investment strategy, its performance
depends in large part on the performance of that strategy. As a result, the
value of the Account’s investment may fluctuate more widely than it would in a
fund that is diversified across investment strategies.

Changes in interest rates could negatively affect the value of the Account’s
mortgage loans and RMBS

Under a normal yield curve, an investment in RMBS will decline in value if
long-term interest rates increase. Although Fannie Mae, Freddie Mac, or Ginnie
Mae may guarantee payments on the RMBS the Account owns directly, those
guarantees do not protect the Account from declines in market value caused by
changes in interest rates.

A significant risk associated with a portfolio of RMBS is the risk that both
long-term and short-term interest rates will increase significantly. If
long-term rates were to increase significantly, the market value of its RMBS
would decline and the weighted average life of the investments

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would increase. The Account could realize a loss if the securities were sold. At
the same time, an increase in short-term interest rates would increase the
amount of interest owed on its reverse repurchase agreement borrowings.

An increase in the Account’s borrowing costs relative to the interest it
receives on its RMBS may adversely affect its profitability

The Account will earn money based upon the spread between the interest payments
it receives on the RMBS investments and the interest payments it must make on
the borrowings. The Account will rely primarily on short-term borrowings of
funds to acquire mortgage-backed securities with long-term maturities. The
interest the Account pays on its borrowings may increase relative to the
interest it earns on its RMBS. If the interest payments on its borrowings
increase relative to the interest it earns on its RMBS, the Account’s
profitability may be adversely affected.

Prepayment rates could negatively affect the value of the Account’s RMBS

Although Fannie Mae, Freddie Mac or Ginnie Mae may guarantee payments on the
RMBS the Account owns directly, those guarantees do not protect investors
against prepayment risks.

Hedging against interest rate exposure may adversely affect the Account’s
earnings

The Account’s hedging activity will vary in scope based on the level and
volatility of interest rates and principal prepayments, the type of RMBS held,
and other changing market conditions. Interest rate hedging may fail to protect
or adversely affect the Account because, among other things:

•   interest rate hedging can be expensive, particularly during periods of
rising and volatile interest rates;   •   available interest rate hedging may
not correspond directly with the interest rate risk for which protection is
sought;   •   the duration of the hedge may not match the duration of the
related liability; and   •   the credit quality of the party owing money on the
hedge may be downgraded to such an extent that it impairs its ability to sell or
assign its side of the hedging transaction.

Hedging and Interest Rate Management

The Account may acquire derivative financial instruments to hedge all or a
portion of the interest rate risk associated with its borrowings. The Account
does not intend to acquire derivative instruments for speculative purposes. The
Account’s hedging activities may include entering into interest rate swaps and
caps, options to purchase swaps and caps, and futures and options on futures.

The Account may engage in a variety of interest rate management techniques that
are intended to match the effective maturity of, and the interest received on,
its assets with the effective maturity of, and the interest owed on, its
liabilities. However, Adviser cannot give any assurances that it

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can successfully implement its investment and leverage strategies for the
Account. Adviser’s interest rate management techniques may include:

•   puts and calls on securities or indices of securities;   •   Eurodollar
futures contracts and options on such contracts;   •   interest rate swaps,
which are the exchange of fixed-rate payments for floating-rate payments; or   •
  other similar transactions.

The Account may also use these techniques in an attempt to protect itself
against declines in the market value of its assets that result from general
trends in debt markets. The inability to match closely the maturities and
interest rates, or the inability to protect adequately against declines in the
market value of its assets, could result in losses with respect to its RMBS.

To limit the adverse effect of rising short-term interest rates under its
short-term repurchase agreements, interest rate management techniques do not
eliminate risk. For example, if both long-term and short-term interest rates
were to increase significantly, it could be expected that:

•   the weighted average life of the RMBS would be extended because prepayments
of the underlying mortgage loans would decrease; and   •   the market value of
RMBS would decline as long-term interest rates increased.

Exchange-Traded Futures Contracts and Options on Futures Contracts

The Account may use financial futures contracts and related options to hedge
against changes in the market value of its portfolio securities or securities
that it intends to purchase. The Account’s use of futures contracts and options
on futures contracts will present the same types of volatility and leverage
risks associated with transactions in derivative instruments generally. In
addition, such transactions present a number of risks which might not be
associated with the purchase and sale of other types of investments.

An interest rate futures contract obligates the seller of the contract to
deliver, and the purchaser to take delivery of, the interest rate securities
called for in the contract at a specified future time and at a specified price.
An option on a financial futures contract gives the purchaser the right to
assume a position in the contract (a long position if the option is a call and
short position if the option is a put) at a specified exercise price at any time
during the period of the option. A single stock futures contract or stock index
futures contract obligates the purchaser and seller to deliver, at a future date
specified in the contract, a cash amount equal to a multiple of the difference
between the value of a single stock or a specified stock index on that date, and
the settlement price specified by the contract.

Prior to exercise or expiration, a futures or option position can be terminated
only by entering into an offsetting transaction. A futures contract sale is
closed out by effecting a futures contract purchase for the same aggregate
amount of securities and the same delivery date. If the sale price

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exceeds the offsetting purchase price, the seller immediately would be paid the
difference and would realize a gain. If the offsetting purchase price exceeds
the sale price, the seller immediately would pay the difference and would
realize a loss. Similarly, a futures contract purchase is closed out by
effecting a futures contract sale for the same securities and the same delivery
date. If the offsetting sale price exceeds the purchase price, the purchaser
would realize a gain. If the purchase price exceeds the offsetting sale price,
the purchaser would realize a loss. This risk may be magnified for a single
stock futures transaction, because Adviser must predict the direction of the
price of an individual stock, as opposed to securities prices generally.

The termination of a futures position requires a liquid secondary market on the
exchange on which the original position was established. Adviser intends to
enter into futures and option positions on behalf of the Account only if there
appears to be a liquid secondary market for such instruments, however, there can
be no assurance that such a market will exist for any particular contract at any
point in time. In that event, it might not be possible to establish or liquidate
a position.

The liquidity of a secondary market in futures contracts and options on futures
contracts is also subject to the risk of trading halts, suspensions, exchange or
clearing house equipment failures, government intervention, insolvency of a
brokerage firm, clearing house or exchange or other disruptions of normal
trading activity.

Adviser’s ability to utilize futures or options on futures to hedge the
Account’s exposure to certain positions, or as an alternative to investments in
instruments or markets, will depend on the degree of correlation between the
value of the instrument or market being hedged, or to which exposure is sought,
and the value of the futures or option contract. Because the instrument
underlying a futures contract or option traded by the Account will often be
different from the instrument or market being hedged or to which exposure is
sought, the correlation risk could be significant and could result in
substantial losses to the Account. The use of futures and options involves the
risk that changes in the value of the underlying instrument will not be fully
reflected in the value of the futures contract or option.

Fixed Income Securities

Fixed income securities, including RMBS, are not traded on exchanges. The
over-the-counter market may be illiquid and there may be times when no
counterparty is willing to purchase or sell certain securities. The nature of
the market may make valuations difficult or unreliable.

FHLMC

FHLMC, better known as “Freddie Mac,” is a privately owned government-sponsored
enterprise created pursuant to Title III of the Emergency Home Finance Act of
1970. Freddie Mac’s principal activities currently consist of the purchase of
mortgage loans or participation interests in mortgage loans and the resale of
the loans and participations in the form of guaranteed RMBS. Freddie Mac
guarantees to holders of Freddie Mac certificates, such as the Account, 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 underlying mortgage loans, but does not guarantee the
timely payment of scheduled principal on the underlying mortgage loans.

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The obligations of Freddie Mac under its guarantees are solely those of Freddie
Mac and are not backed by the full faith and credit of the United States. If
Freddie Mac were unable to satisfy its obligations, the distributions made to
the Account would consist solely of payments and other recoveries on the
underlying mortgage loans, and accordingly, monthly distributions to the Account
would be adversely affected by delinquent payments and defaults on those
mortgage loans. Freddie Mac has a line of credit with the U.S. Treasury, which
has never been drawn upon. FHLMC certificates may pay interest at a fixed rate
or an adjustable rate. The interest rate paid on adjustable-rate FHLMC
certificates (“FHLMC ARMs”) adjusts periodically within 60 days prior to the
month in which the interest rates on the underlying mortgage loans adjust. The
interest rates paid on certificates issued under FHLMC’s standard FHLMC 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 FHLMC ARM
certificates issued to date have included 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 the FHLMC or by the seller of the loan to FHLMC at the
unpaid principal balance of the loan plus accrued interest to the due date of
the last adjustable rate interest payment.

FNMA

FNMA, better known as “Fannie Mae,” is a privately owned, federally chartered
corporation organized and existing under the Federal National Mortgage
Association Charter Act. Fannie Mae provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. Fannie Mae guarantees to
registered holders of Fannie Mae certificates, such as the Account, that it will
distribute amounts representing scheduled principal and interest (at the rate
provided by the Fannie Mae certificate) on the mortgage loans in the pool
underlying the Fannie Mae certificate, whether or not received, and the full
principal amount of any mortgage loan foreclosed or otherwise finally
liquidated, whether or not the principal amount is actually received. The
obligations of Fannie Mae under its guarantees are solely those of Fannie Mae
and are not backed by the full faith and credit of the United States. If Fannie
Mae were unable to satisfy its obligations, the distributions made to the
Account would consist solely of payments and other recoveries on the underlying
mortgage loans, and accordingly, monthly distributions to the Account would be
adversely affected by delinquent payments and defaults on the mortgage loans.
Fannie Mae has a line of credit with the U.S. Treasury, which has never been
drawn upon. FNMA certificates may pay interest at a fixed rate or an adjustable
rate. Each series of FNMA ARM certificates bears an initial interest and margin
rates 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 FNMA ARM certificates issued to date have

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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
the FNMA or by the seller of the loan 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

GNMA, better known as “Ginnie Mae,” is a wholly owned corporate instrumentality
of the United States within the Department of Housing and Urban Development.
Title III of the National Housing Act of 1934 authorizes Ginnie Mae to guarantee
the timely payment of principal and interest on certificates that represent an
interest in a pool of mortgages insured by the Federal Housing Administration
under the Housing Act or partially guaranteed by the Veteran’s Administration
under the Servicemen’s Readjustment Act of 1944 and other loans eligible for
inclusion in mortgage pools underlying Ginnie Mae 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 that may be required to be paid under
any guaranty under this subsection.” An opinion, dated December 12, 1969, of an
Assistant Attorney General of the United States provides that guarantees under
section 306(g) of Ginnie Mae certificates of the type that the Account may
purchase are authorized to be made by Ginnie Mae and “would constitute general
obligations of the United States backed by its full faith and credit.” 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 the annual increase or decrease of 100
basis points and to a lifetime cap of 500 basis points over the initial coupon
rate.

OTHER RISKS

Past Performance of Adviser

The Account is newly established and has no performance history available to
evaluate its likely future performance. There can be no assurance that the
Account will achieve its investment objective. The past investment performance
of Adviser cannot be construed as an indication of the future results of an
investment in the Account.

The Account’s performance may initially be adversely affected pending the
purchase of securities and the implementation of its investment policies,
particularly in the several-month period following the initial closing, during
which time the Account may not be at its targeted range of leverage.

C-9

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Reliance on Management Team

The Account’s success depends on the abilities of the Account’s portfolio
manager and his investment team. If Account’s portfolio manager dies or becomes
incapacitated or for any other reason ceases to act in that capacity, the
Account could be adversely affected. The Account is not the beneficiary of any
insurance on the life of the Account’s portfolio manager. The Account’s
portfolio manager will only devote such time and attention to the Account as he
in his discretion deems necessary or appropriate.

Securities Ratings

Investment grade debt ratings are generally assigned to an obligor whose
capacity to meet its financial commitment on the obligation is extremely strong.
Investment grade debt is said to be of the best quality and considered to carry
the smallest degree of investment risk. Non-investment grade debt ratings denote
speculative investments, which are vulnerable to the nonpayment of interest and
risk the inability to repay principal. Ratings are the opinion of the agency
issuing them, are subject to change, and are not a guarantee of the ability of
the issuer to pay.

Conflicts Of Interests

As a diversified asset management, institutional brokerage, securities research
and investment banking firm, Adviser’s parent company, Friedman, Billings,
Ramsey Group, Inc. (“FBR”) engages in a broad spectrum of activities, including
financial advisory, underwriting and brokerage services. Instances may arise
where the interests of one or more Adviser affiliates, customers or clients,
conflict with the interests of the Account. For example, as of December 31,
2003, FBR manages approximately $10 billion of its own assets in an RMBS
portfolio strategy similar to that proposed for the Account. Adviser, or an
affiliated entity, also may manage RMBS portfolio strategies similar to that
proposed for the Account for other asset management clients. The relationships
among the various Adviser affiliates may also give rise to potential conflicts
of interest.

The Account’s portfolio manager will devote a substantial part of his time to
activities other than those of the Account. The Account’s portfolio manager may
provide financial advice and portfolio management services to clients other than
the Account, some of whose objectives may be similar to that of the Account. For
additional information, see Adviser’s Form ADV, Part II. The Account hereby
acknowledges and agrees that (i) Adviser may buy securities from and sell
securities for the account of other clients of Adviser with an Adviser affiliate
acting as broker; (ii) it agrees that any confirmations, disclosures or notices
required by Rule 206(3)-2 to be given to an advisory client will be given to the
Account’s portfolio manager on behalf of the Account; and (iii) Adviser and its
shareholders, including the principals of Adviser, may receive an indirect
benefit from all fees, commissions and other benefits received by Adviser from
the Account or in connection with the Account’s transactions.

Adviser and its affiliates may provide investment advice with respect to
securities, may directly or indirectly invest in and dispose of securities for
their own account or for other accounts, in which the Account may from time to
time invest, or in which the Account is able to invest or

C-10

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otherwise have any interest, provided that any investments made by Adviser for
its own account in securities in which the Account invests, and which are made
at the same time as the investment of the Account, shall be made on terms and
conditions no better than those received by the Account and only after the
Account has achieved its desired investment position.

C-11

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Appendix D

     Adviser must obtain Client’s approval before taking the following actions:

•   Purchasing RMBS individually in an amount exceeding $50 million.   •  
Exceeding asset-to-equity ratio of 9:1 or reducing asset-to-equity ratio below
4:1.   •   Purchasing hybrid ARMs greater than 5 years to reset, fixed-rate
RMBS, or RMBS derivatives (e.g., interest-only securities, CMOs with a
weighted-average life of 5 years).   •   Enter into interest rate SWAPS
agreements and future contracts.   •   Entering into repurchase agreements with
any one counter-party in an amount that exceeds 35% of outstanding repurchase
agreements.

     Adviser must promptly inform Client in writing of the occurrence of any of
the following events:

•   Any material adverse change in credit standing of a repurchase agreement
counterparty, as well as its plan for replacing such agreements with another
counterparty, if necessary.   •   Any material adverse change in collateral
terms required by repurchase agreement counterparties or asset-backed commercial
paper.   •   Any material margin calls that a counterparty has requested Adviser
to meet.   •   Any plan to maintain an effective duration between its assets and
liabilities of greater than 2 years, including a rationale for this
recommendation, and a timeframe under which duration will return to target
levels.   •   Any inability to price the RMBS portfolio or significant
components of it for a period exceeding five (5) consecutive trading days or any
inability to obtain month-end or quarter-end prices.   •   Any trades that are
not approved on a timely basis.

D-1

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Appendix E

     Part II of Adviser’s Form ADV is attached.

E-1