##### Table of Contents

---



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-K/A

Amendment No. 1



|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ---------------------------------------------------------------------------------



FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003



OR



| ̈ |  | TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15 OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | --------------------------------------------------------------------------------------



FOR THE TRANSITION PERIOD FROM
                         TO



COMMISSION FILE NUMBER 001-13709



---



ANWORTH MORTGAGE ASSET

CORPORATION

(Exact Name of
Registrant as Specified in Its Charter)



|                                                            |  |                                     
|----------------------------------------------------------- |  | ------------------------------------
|MARYLAND                                                    |  | 52-2059785                          
|(State or Other Jurisdiction of Incorporation Organization) |  | (I.R.S. Employer Identification No.)
|                                                            | 
|1299 OCEAN AVENUE, #250, SANTA MONICA, CALIFORNIA           |  | 90401                               
|(Address of Principal Executive Offices)                    |  | (Zip Code)                          



Registrants
telephone number, including area code: (310) 255-4493

Securities registered pursuant to Section 12(b) of the Act: NONE

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



COMMON STOCK, $0.01 PAR VALUE



---





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 filing requirements for the past 90 days.

Yes  x     No ̈



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



Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes  x     No ̈



The aggregate market value of
the voting stock held by non-affiliates of the registrant, computed by reference to the average closing bid and asked prices of such stock, as of June 30, 2003, was approximately $490,489,922. (All officers and directors of the registrant are
considered affiliates.)



At March 4, 2004 the registrant had
43,958,852 shares of Common Stock issued and outstanding.



DOCUMENTS INCORPORATED BY REFERENCE



Part III
of the Form 10-K incorporates by reference certain portions of the Registrants proxy statement for its 2004 annual meeting of stockholders to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this
report.



EXPLANATORY NOTE



The Registrant amends its Form 10-K for the period ended December
31, 2003 solely to revise data in Item 6 (Selected Financial Data) and Item 7 (Managements Discussion and Analysis of Financial Condition and Results of Operations). Other than the aforementioned changes, all other information
included in the initial filing is unchanged.



---



---

##### Table of Contents

ANWORTH MORTGAGE ASSET CORPORATION



FORM 10-K/A ANNUAL REPORT



FISCAL YEAR
ENDED DECEMBER 31, 2003



TABLE OF CONTENTS



|        |  |                                                                                       |  |     
|------- |  | ------------------------------------------------------------------------------------- |  | ----
|Item    |  |                                                                                       |  | Page
|PART II
|6.      |  | Selected Financial Data                                                               |  | 1   
|7.      |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 3   



---

##### Table of Contents

PART II



|        |  |                        
|------- |  | -----------------------
|Item 6. |  | SELECTED FINANCIAL DATA



The selected
financial data as of December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 are derived from our audited financial statements included in this Form 10-K. The selected financial data as of December 31, 2001, 2000 and 1999
and for the years ended December 31, 2000 and 1999 are derived from audited financial statements not included in this Form 10-K. You should read these selected financial data together with Managements Discussion and Analysis of Financial
Condition and Results of Operations and our audited and unaudited financial statements and notes thereto that are included in this Form 10-K beginning on page F-1.



|                                     |  |                                               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|------------------------------------ |  | --------------------------------------------- | ------ | - | ---- | - | ------ | ---- |  | - | ------ | - |  | ---- | ------- | - |  | - | ------- | -
|                                     |  | Year Ended December 31,                       |       
|                                     |  | 1999                                          |        |   | 2000 |   |        | 2001 |  |   | 2002   |   |  | 2003 |        
|                                     |  | (amounts in thousands, except per share data) |       
|Statement of Operations Data:        |  |                                               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Days in period                       |  |                                               | 365    |   |      |   | 366    |      |  |   | 365    |   |  |      | 365     |   |  |   | 365     |  
|Interest and dividend income         |  | $                                             | 9,501  |   |      | $ | 10,314 |      |  | $ | 10,768 |   |  | $    | 66,855  |   |  | $ | 100,077 |  
|Interest expense                     |  |                                               | (7,892 | ) |      |   | (8,674 | )    |  |   | (6,363 | ) |  |      | (29,576 | ) |  |   | (45,661 | )
|                                     |  |                                               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Net interest income                  |  |                                               | 1,609  |   |      |   | 1,640  |      |  |   | 4,405  |   |  |      | 37,279  |   |  |   | 54,416  |  
|Gain on sales                        |  |                                               |       |   |      |   |       |      |  |   | 430    |   |  |      | 4,709   |   |  |   | 3,497   |  
|Expenses                             |  |                                               | (400   | ) |      |   | (379   | )    |  |   | (1,129 | ) |  |      | (10,318 | ) |  |   | (7,718  | )
|                                     |  |                                               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Net income                           |  | $                                             | 1,209  |   |      | $ | 1,261  |      |  | $ | 3,706  |   |  | $    | 31,670  |   |  | $ | 50,195  |  
|                                     |  |                                               |        |   |      |   |        |      |  |   |        |   |  |      |         |   |  |   |         |  
|Basic net income per average share   |  | $                                             | 0.53   |   |      | $ | 0.54   |      |  | $ | 1.52   |   |  | $    | 1.81    |   |  | $ | 1.52    |  
|Diluted net income per average share |  | $                                             | 0.53   |   |      | $ | 0.54   |      |  | $ | 1.50   |   |  | $    | 1.80    |   |  | $ | 1.52    |  
|Dividends declared per share (1)     |  | $                                             | 0.53   |   |      | $ | 0.40   |      |  | $ | 1.64   |   |  | $    | 2.00    |   |  | $ | 1.56    |  
|Weighted average shares outstanding  |  |                                               | 2,290  |   |      |   | 2,331  |      |  |   | 2,467  |   |  |      | 17,591  |   |  |   | 33,112  |  



|                                    |  |                                               |         |      |   |         |  |      |         |      |   |           |  |   |          
|----------------------------------- |  | --------------------------------------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | --------- |  | - | ---------
|                                    |  | At December 31,                              
|                                    |  | 1999                                          |         | 2000 |   | 2001    |  | 2002 |         | 2003
|                                    |  | (amounts in thousands, except per share data)
|Balance Sheet Data:                 |  |                                               |         |      |   |         |  |      |         |      |   |           |  |   |          
|Mortgage-backed securities, net     |  | $                                             | 161,488 |      | $ | 134,889 |  | $    | 420,214 |      | $ | 2,430,103 |  | $ | 4,245,853
|Total assets                        |  | $                                             | 167,144 |      | $ | 141,834 |  | $    | 424,610 |      | $ | 2,443,884 |  | $ | 4,263,274
|Repurchase agreements               |  | $                                             | 147,690 |      | $ | 121,891 |  | $    | 325,307 |      | $ | 2,153,870 |  | $ | 3,775,691
|Total liabilities                   |  | $                                             | 150,612 |      | $ | 123,633 |  | $    | 369,613 |      | $ | 2,178,362 |  | $ | 3,805,877
|Stockholders equity                |  | $                                             | 16,532  |      | $ | 18,201  |  | $    | 54,997  |      | $ | 265,522   |  | $ | 457,397  
|Number of common shares outstanding |  |                                               | 2,307   |      |   | 2,350   |  |      | 6,951   |      |   | 25,346    |  |   | 42,707   
|Book value per share                |  | $                                             | 7.17    |      | $ | 7.75    |  | $    | 7.91    |      | $ | 10.48     |  | $ | 10.71    



1



---

##### Table of Contents

|                                                         |  |                               |         |   |      |   |         |      |  |   |         |   |  |      |           |   |  |   |           |  
|-------------------------------------------------------- |  | ----------------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | --------- | - |  | - | --------- | -
|                                                         |  | Year Ended December 31,       |        
|                                                         |  | 1999                          |         |   | 2000 |   |         | 2001 |  |   | 2002    |   |  | 2003 |          
|                                                         |  | (dollar amounts in thousands) |        
|Other Data (unaudited):                                  |  |                               |         |   |      |   |         |      |  |   |         |   |  |      |           |   |  |   |           |  
|Average earnings assets                                  |  | $                             | 163,167 |   |      | $ | 152,289 |      |  | $ | 167,890 |   |  | $    | 1,504,350 |   |  | $ | 3,162,330 |  
|Average borrowings                                       |  | $                             | 149,372 |   |      | $ | 135,631 |      |  | $ | 152,870 |   |  | $    | 1,384,887 |   |  | $ | 2,890,779 |  
|Average equity(2)                                        |  | $                             | 18,931  |   |      | $ | 19,154  |      |  | $ | 20,279  |   |  | $    | 160,052   |   |  | $ | 367,429   |  
|Yield on interest earning assets(3)                      |  |                               | 5.82    | % |      |   | 6.77    | %    |  |   | 6.41    | % |  |      | 4.44      | % |  |   | 3.16      | %
|Cost of funds on interest bearing liabilities            |  |                               | 5.28    | % |      |   | 6.40    | %    |  |   | 4.16    | % |  |      | 2.14      | % |  |   | 1.58      | %
|                                                         |  |                               |         |   |     
|Annualized Financial Ratios (unaudited)(2):              |  |                               |         |   |      |   |         |      |  |   |         |   |  |      |           |   |  |   |           |  
|Net interest margin (net interest income/average assets) |  |                               | 0.99    | % |      |   | 1.08    | %    |  |   | 2.62    | % |  |      | 2.48      | % |  |   | 1.72      | %
|G&A expenses as a percentage of average assets(4)        |  |                               | 0.24    | % |      |   | 0.25    | %    |  |   | 0.32    | % |  |      | 0.14      | % |  |   | 0.12      | %
|Return on average assets(4)                              |  |                               | 0.74    | % |      |   | 0.83    | %    |  |   | 2.56    | % |  |      | 2.66      | % |  |   | 1.71      | %
|Return on average equity(4)                              |  |                               | 6.38    | % |      |   | 6.58    | %    |  |   | 21.22   | % |  |      | 24.96     | % |  |   | 14.72     | %

---

|(1) |  | On September 26, 2000, our board of directors announced that, beginning with the third quarter of 2000, dividends would generally be declared after each quarter-end rather than
during the applicable quarter.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Average equity excludes fair value adjustment for mortgage-backed securities.
|--- |  | -----------------------------------------------------------------------------

|(3) |  | Excludes gain on sale of securities.
|--- |  | ------------------------------------

|(4) |  | Excludes incentive fees paid to our management company, incentive compensation paid to our employees and the acquisition costs of $3,475,000 paid for our external manager in
2002.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



2



---

##### Table of Contents

|        |  |                                                                                      
|------- |  | -------------------------------------------------------------------------------------
|Item 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following
discussion should be read in conjunction with our financial statements included elsewhere in this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from
those anticipated in these forward-looking statements as a result of various factors including those set forth under Risk Factors herein.



General



We were formed in October 1997 to invest primarily in mortgage-related assets, including mortgage pass-through certificates, collateralized mortgage obligations, mortgage loans and other securities representing
interests in, or obligations backed by, pools of mortgage loans which can be readily financed. We commenced operations on March 17, 1998 upon the closing of our initial public offering. Our principal business objective is to generate net income for
distribution to stockholders based upon the spread between the interest income on our mortgage-backed securities and mortgage loans and the costs of borrowing to finance our acquisition of mortgage-backed securities and mortgage loans.



We are organized for tax purposes as a REIT. Accordingly, we generally
distribute substantially all of our earnings to stockholders without paying federal or state income tax at the corporate level on the distributed earnings. As of December 31, 2003, our qualified REIT assets (real estate assets, as defined in the tax
code, cash and cash items and government securities) were greater than 90% of our total assets, as compared to the tax code requirement that at least 75% of our total assets must be qualified REIT assets. Greater than 99% of our 2003 revenue
qualifies for both the 75% source of income test and the 95% source of income test under the REIT rules. We believe we met all REIT requirements regarding the ownership of our common stock and the distributions of our net income. Therefore, we
believe that we continue to qualify as a REIT under the provisions of the tax code.



From the time of our inception through June 13, 2002, we were externally managed by Anworth Mortgage Advisory Company, or the manager, pursuant to a management agreement. As an externally managed company, we had no
employees of our own and relied on the manager to conduct our business and operations. On June 13, 2002, the manager merged with and into our company. The merger was approved by a special committee consisting solely of our independent directors, our
full board of directors and the vote of a majority of our stockholders. Upon the closing of the merger, the management agreement terminated.



The market value of our common stock issued, valued as of the consummation of the merger, in excess of the fair value of the net tangible assets acquired,
has been accounted for as a non-cash charge to operating income. Since we did not acquire tangible net assets from the manager in the merger, the non-cash charge equaled the value of the consideration paid in the merger, which was approximately $3.2
million. This non-cash charge did not reduce our taxable income, of which at least 90% must be paid as dividends to stockholders to maintain our status as a REIT. It did, however, reduce our reportable net income. In addition, we incurred $295,000
in merger-related expenses.



Over the past year, the
continued decline in the general level of interest rates has had a materially positive impact on our cost of financing. As a result of the interest rate reductions by the Federal Reserve Board, the one-month LIBOR rate has declined from 1.38% as of
December 31, 2002 to 1.12% as of December 31, 2003. This decline in short-term interest rates has reduced the rates at which we borrow funds to finance our portfolio holdings. Our cost of financing has declined from 2.14% for the year ended December
31, 2002 to 1.58% for the year ended December 31, 2003. During the same time period, our yield on interest earning assets decreased from 4.44% to 3.16%, effectively reducing our spread from 2.30% to 1.58%.



3



---

##### Table of Contents

On November 3, 2003, we formed a wholly-owned subsidiary called Belvedere Trust Mortgage Corporation, or
Belvedere Trust. Belvedere Trust was formed as a qualified REIT subsidiary to acquire and own mortgage loans, with a focus on the high credit-quality jumbo adjustable rate, hybrid and second-lien mortgage markets. Belvedere Trust was also formed
with the intent of securitizing the mortgage loans it acquires and selling mortgage-backed securities in the capital markets. We have made an initial investment of $25 million in Belvedere Trust to capitalize its initial mortgage operations. We have
also formed BT Management Company, L.L.C., or BT Management, a Delaware limited liability company that is owned 50% by us, 27.5% by Claus Lund, the Chief Executive Officer of Belvedere Trust, 17.5% by Russell J. Thompson, the Chief Financial Officer
of Belvedere Trust, and 5% by Lloyd McAdams, our Chairman and Chief Executive Officer. BT Management has entered into a management agreement with Belvedere Trust pursuant to which BT Management will manage the day-to-day operations of Belvedere
Trust in exchange for an annual base management fee and a quarterly incentive fee. We believe that over time Belvedere Trusts business will become an important part of our overall operations and business strategy.



Results of Operations



Years Ended December 31, 2003 and 2002



For the year ended December 31, 2003, our net income was $50,195,000, or $1.52 per diluted share, based on an average of
33,112,059 shares outstanding. For the year ended December 31, 2002, our net income was $31,670,000, or $1.80 per diluted share, based on an average of 17,590,888 shares outstanding. The decrease in our earnings per share in 2003 over 2002 was due
to an increase in premium amortization expense. The increase in premium amortization expense resulted from an increase in the constant prepayment rate (CPR) of our mortgage-backed securities, resulting primarily from an extremely high
volume of mortgage refinancings driven by the record-low interest rates. These refinancings occurred mainly in the second quarter, and their net effect was realized through the increase in premium amortization expense in the third quarter.



The table below shows the approximate constant prepayment rate
of our mortgage assets:



|     |  |         |   |  |         |   |  |         |   |  |         |  
|---- |  | ------- | - |  | ------- | - |  | ------- | - |  | ------- | -
|     |  | 1st Qtr |   |  | 2nd Qtr |   |  | 3rd Qtr |   |  | 4th Qtr |  
|2002 |  | 33      | % |  | 33      | % |  | 28      | % |  | 33      | %
|2003 |  | 35      | % |  | 40      | % |  | 46      | % |  | 32      | %



Net interest
income for the year ended December 31, 2003 totaled $54,416,000, or 54.4% of total interest income, compared to $37,279,000, or 55.8% of total interest income, for the year ended December 31, 2002. Net interest income is comprised of the interest
income earned on mortgage investments less interest expense from borrowings. As a result of investing the proceeds of our common stock offerings, our assets and borrowings have increased significantly from last year. This has resulted in a large
increase in our income and interest expense in 2003 compared to 2002. Also, during the year ended December 31, 2003, we realized a net gain on the sale of assets in the amount of $3,497,000, or 3.5% of total interest income, compared to $4,708,605,
or 7.0% of total interest income, during the year ended December 31, 2002.



For the year ended December 31, 2003, our operating expenses increased to $7,718,000, or 7.7% of total interest income, from $4,701,227, excluding acquisition costs and fees paid to external management company,
or 7.0% of total interest income, for the year ended December 31, 2002. This increase was due primarily to the internalization of the management of our company and increased expenses associated with compensation paid under our incentive compensation
plan.



Our return on average equity was 13.66% for the
year ended December 31, 2003, compared to 19.79% for the year ended December 31, 2002.



4



---

##### Table of Contents

Years Ended December 31, 2002 and 2001



For the year ended December 31, 2002, our net income was $31,670,000, or
$1.80 per diluted share, based on an average of 17,590,888 shares outstanding. For the year ended December 31, 2001, our net income was $3,706,000, or $1.50 per diluted share, based on an average of 2,466,817 shares outstanding.



Net interest income for the year ended December 31, 2002 totaled $37,279,000,
or 55.8% of total interest income, compared to $4,405,000, or 40.9% of total interest income, for the year ended December 31, 2001. Also, during the year ended December 31, 2002, we realized a net gain on the sale of assets in the amount of
$4,708,605, or 7.0% of total interest income, compared to $430,000, or 4.0% of total interest income, during the year ended December 31, 2001.



For the year ended December 31, 2002, our operating expenses increased to $4,701,227, or 7.0% of total interest income, from $323,000, or 3.0% of total
interest income, for the year ended December 31, 2001. This increase was due primarily to increased expenses associated with compensation paid under our incentive compensation plan resulting from increased earnings.



Our return on average equity was 19.79% for the year ended December 31, 2002,
compared to 18.28% for the year ended December 31, 2001.



We
paid the manager an incentive fee of $1,741,393 for the period between January 1, 2002 and June 13, 2002, the date of our merger. In 2001, the manager earned an incentive fee of $598,000. We paid incentive compensation under our 2002 Incentive
Compensation Plan of $3,054,911 for the period between June 13, 2002, the date of our merger, and December 31, 2002.



Return on Average Equity(1)



The table below shows the components of return on average equity(2):



|                                     |  |                           |   |  |                      |   |  |                        |  
|------------------------------------ |  | ------------------------- | - |  | -------------------- | - |  | ---------------------- | -
|                                     |  | Net InterestIncome/Equity |   |  | G&AExpense(3)/Equity |   |  | NetIncome(3)(4)/Equity |  
|For the year ended December 31, 2003 |  | 14.81                     | % |  | 1.04                 | % |  | 13.77                  | %
|For the year ended December 31, 2002 |  | 23.29                     | % |  | 1.28                 | % |  | 22.01                  | %
|For the year ended December 31, 2001 |  | 21.72                     | % |  | 2.62                 | % |  | 19.10                  | %

---

|(1) |  | The table above presents other than GAAP ratios and is provided by management to present a consistent application of return on average equity ratios with those provided in previous
filings.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Average equity excludes unrealized gain (loss) on available-for-sale securities.
|--- |  | --------------------------------------------------------------------------------

|(3) |  | Excludes incentive fees paid to our management company, incentive compensation paid to our employees and the costs to acquire our external manager.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Excludes gain on sales of securities.
|--- |  | -------------------------------------



Average Cash Equivalents and Average Mortgage Assets



The table below shows our average balances of cash equivalents and mortgage assets, the annualized yields earned on each type of earning assets, the yield
on average earning assets and dividend and interest income:



|                                    |  |                              |       |                                       |   |                      |  |                                |           |  |                                               |   |  |                              |   |  |                           |   |  |   |        
|----------------------------------- |  | ---------------------------- | ----- | ------------------------------------- | - | -------------------- |  | ------------------------------ | --------- |  | --------------------------------------------- | - |  | ---------------------------- | - |  | ------------------------- | - |  | - | -------
|                                    |  | AverageCashEquivalents       |       | AverageAmortizedCost ofMortgageAssets |   | AverageEarningAssets |  | Yield onAverageCashEquivalents |           |  | Yield onAverageAmortizedCost ofMortgageAssets |   |  | Yield onAverageEarningAssets |   |  | DividendandInterestIncome
|                                    |  | (dollar amount in thousands)
|For the year endedDecember 31, 2003 |  | $                            | 4,833 |                                       | $ | 3,157,497            |  | $                              | 3,162,330 |  | 0.89                                          | % |  | 3.17                         | % |  | 3.16                      | % |  | $ | 100,077
|For the year endedDecember 31, 2002 |  | $                            | 8,560 |                                       | $ | 1,495,790            |  | $                              | 1,504,350 |  | 1.88                                          | % |  | 4.47                         | % |  | 4.44                      | % |  | $ | 66,855 
|For the year endedDecember 31, 2001 |  | $                            | 3,444 |                                       | $ | 164,446              |  | $                              | 167,890   |  | 4.00                                          | % |  | 6.46                         | % |  | 6.41                      | % |  | $ | 10,768 



5



---

##### Table of Contents

Average Borrowed Funds and Annualized Average Cost of Funds



The table below shows our average borrowed funds and annualized average cost
of funds:



|                                 |  |                       |           |                 |   |                      |  |      |  
|-------------------------------- |  | --------------------- | --------- | --------------- | - | -------------------- |  | ---- | -
|                                 |  | Average BorrowedFunds |           | InterestExpense |   | Average Costof Funds | 
|For the year ended Dec. 31, 2003 |  | $                     | 2,890,779 |                 | $ | 45,661               |  | 1.58 | %
|For the year ended Dec. 31, 2002 |  | $                     | 1,384,887 |                 | $ | 29,576               |  | 2.14 | %
|For the year ended Dec. 31, 2001 |  | $                     | 152,870   |                 | $ | 6,363                |  | 4.16 | %



Operating
Expenses/Total Assets



The table below shows operating
expenses as a percent of total assets:



|                                     |  |                                                |   |  |                                                     |   |  |                                  |  
|------------------------------------ |  | ---------------------------------------------- | - |  | --------------------------------------------------- | - |  | -------------------------------- | -
|                                     |  | ManagementFee & OtherExpenses (1)/Total Assets |   |  | Incentive Feeand IncentiveCompensation/Total Assets |   |  | Total G&AExpenses(1)/TotalAssets |  
|For the year ended December 31, 2003 |  | 0.09                                           | % |  | 0.09                                                | % |  | 0.18                             | %
|For the year ended December 31, 2002 |  | 0.08                                           | % |  | 0.20                                                | % |  | 0.28                             | %
|For the year ended December 31, 2001 |  | 0.13                                           | % |  | 0.14                                                | % |  | 0.27                             | %

---

|(1) |  | Excludes costs to acquire our external manager of $3,475,000.
|--- |  | -------------------------------------------------------------



Financial Condition



At December 31, 2003, we held total assets of $4,263 million, consisting primarily of $3,844 million of adjustable-rate mortgage-backed securities and
$402 million of fixed-rate mortgage-backed securities. This balance sheet size represents an approximate 175% increase over our balance sheet size at December 31, 2002. At December 31, 2003, we were well within our asset allocation guidelines, with
approximately 100% of total assets consisting of mortgage-backed securities guaranteed by an agency of the United States government such as Fannie Mae, Freddie Mac or Ginnie Mae. Of the adjustable-rate mortgage-backed securities owned by us, 28.7%,
which are calculated based on amortized cost, were adjustable-rate pass-through certificates that reset at least once a year. The remaining 71.3% were 3/1and 5/1hybrid adjustable-rate mortgage-backed securities.
Hybrid adjustable-rate mortgage-backed securities have an initial interest rate that is fixed for a certain period, usually three to five years, and then adjust annually for the remainder of the term of the loan.



Mortgage-Backed Securities by Type of Issuer



The following table presents a schedule of mortgage-backed securities owned
at December 31, 2003 and December 31, 2002, classified by type of issuer:



|                |  |                               |           |                     |                      |   |            |   |                     |  |       |  
|--------------- |  | ----------------------------- | --------- | ------------------- | -------------------- | - | ---------- | - | ------------------- |  | ----- | -
|                |  | At December 31, 2003          |           |                     | At December 31, 2002 |  
|                |  | Fair Value                    |           | PortfolioPercentage |                      |   | Fair Value |   | PortfolioPercentage | 
|                |  | (dollar amounts in thousands) |          
|FNMA            |  | $                             | 2,984,941 |                     | 70.3                 | % |            | $ | 1,631,425           |  | 67.1  | %
|FHLMC           |  |                               | 1,059,517 |                     | 25.0                 | % |            |   | 651,645             |  | 26.8  | %
|GNMA            |  |                               | 201,395   |                     | 4.7                  | % |            |   | 147,033             |  | 6.1   | %
|                |  |                               |           |                     |                      |   |            |   |                     |  |       |  
|Total Portfolio |  | $                             | 4,245,853 |                     | 100.0                | % |            | $ | 2,430,103           |  | 100.0 | %



6



---

##### Table of Contents

Mortgage-Backed Securities by Interest Rate Index



The following table classifies our portfolio of mortgage-backed securities
owned at December 31, 2003 and December 31, 2002 by type of interest rate index (with respect to our hybrid ARMs, the fair value of these securities appears on the line associated with the index based on which the security will eventually reset once
the initial fixed interest rate period has expired):



|                                     |  |                               |           |                     |                   |   |            |   |                     |  |       |  
|------------------------------------ |  | ----------------------------- | --------- | ------------------- | ----------------- | - | ---------- | - | ------------------- |  | ----- | -
|                                     |  | December 31, 2003             |           |                     | December 31, 2002 |  
|                                     |  | Fair Value                    |           | PortfolioPercentage |                   |   | Fair Value |   | PortfolioPercentage | 
|                                     |  | (dollar amounts in thousands) |          
|One-month LIBOR                      |  | $                             | 30,184    |                     | 0.7               | % |            | $ | 77,055              |  | 3.2   | %
|Six-month LIBOR                      |  |                               | 17,131    |                     | 0.4               | % |            |   | 17,614              |  | 0.7   | %
|One-year LIBOR                       |  |                               | 1,439,064 |                     | 33.9              | % |            |   | 613,325             |  | 25.2  | %
|Six-month Certificate of Deposit     |  |                               | 8,831     |                     | 0.2               | % |            |   | 1,239               |  | 0.1   | %
|Six-month Constant Maturity Treasury |  |                               | 1,874     |                     | 0                 | % |            |   |                    |  |      |  
|One-year Constant Maturity Treasury  |  |                               | 2,241,179 |                     | 52.8              | % |            |   | 1,370,783           |  | 56.4  | %
|Cost of Funds Index                  |  |                               | 105,854   |                     | 2.5               | % |            |   | 11,313              |  | 0.5   | %
|Fixed rate                           |  |                               | 401,736   |                     | 9.5               | % |            |   | 338,774             |  | 13.9  | %
|                                     |  |                               |           |                     |                   |   |            |   |                     |  |       |  
|Total Portfolio                      |  | $                             | 4,245,853 |                     | 100.0             | % |            | $ | 2,430,103           |  | 100.0 | %



Our mortgage-backed
securities portfolio had a weighted average coupon of 4.3% at December 31, 2003. The weighted average one-month constant prepayment rates of our mortgage-backed securities portfolio were 36.3%, 32.9% and 25.4%, respectively, for the months of
October, November and December 2003. At December 31, 2003, the unamortized net premium paid for our mortgage-backed securities was $112 million. Our mortgage-backed securities had a weighted average coupon of 5.21% at December 31, 2002. The weighted
average one-month constant prepayment rates of our mortgage-backed securities portfolio were 29.3%, 36.0% and 34.6%, respectively, for the months of October, November and December 2002. At December 31, 2002, the unamortized net premium paid for our
mortgage-backed securities was $60.8 million.



We analyze our
mortgage-backed securities for the extent to which prepayments impact the yield of the securities. When actual prepayments exceed expectations, we amortize the premiums paid on mortgage assets over a shorter time period, resulting in a reduced yield
to maturity on our mortgage assets. Conversely, if actual prepayments are less than the assumed constant prepayment rate, the premium would be amortized over a longer time period, resulting in a higher yield to maturity. We monitor our prepayment
expectations versus our actual prepayment experience on a monthly basis in order to adjust the amortization of the net premium.



As of December 31, 2003, the fair value of our portfolio of mortgage-related assets classified as available-for-sale was reduced by $21.93 million, or
0.52% less than the amortized cost of our portfolio. As of December 31, 2002, the fair value of our portfolio of mortgage-related assets classified as available-for-sale was $14.86 million, or 0.61% more than the amortized cost of our portfolio.



Hedging



We periodically enter into derivative transactions, in the form of forward purchase commitments, which are intended to hedge
our exposure to rising rates on funds borrowed to finance our investments in securities. We have designated these transactions as cash flow hedges. We also enter into derivative transactions, also in the form of forward purchase commitments, which
are not designated as hedges. Other than these types of transactions, we have not entered into any hedging agreements to date.



As part of our asset/liability management policy, we may enter into hedging agreements such as interest rate caps, floors or swaps. These agreements would
be entered into to try to reduce interest rate risk and would be designed to provide us with income and capital appreciation in the event of certain changes in interest rates. We review the need for hedging transactions on a regular basis consistent
with our capital investment policy.



7



---

##### Table of Contents

During the year ended December 31, 2003, we entered into various mortgage-backed securities transactions
where we agreed to take delivery of the securities more than one month from the trade date. As directed by accounting rules for these types of extended delivery transactions, the economic benefit or cost that occurs between the trade date and the
delivery date are designated as a derivative gain or loss. We were not a party to any derivative transactions during the year ended December 31, 2003.



Liquidity and Capital Resources



Our primary source of funds consists of repurchase agreements, which totaled $3,776 million at December 31, 2003. Our other significant source of funds
for the year ended December 31, 2003 consisted of payments of principal and interest from our mortgage securities portfolio in the amount of $1,497.6 million. As of December 31, 2003, we had raised approximately $88.4 million in capital under our
amended Dividend Reinvestment and Direct Stock Purchase Plan, $55.5 million of which was raised in 2003.



In the future, we expect that our primary sources of funds will consist of borrowed funds under repurchase agreement transactions with one- to
twelve-month maturities and of monthly payments of principal and interest on our mortgage-backed securities portfolio. Our liquid assets generally consist of unpledged mortgage-backed securities, cash and cash equivalents.



Our borrowings had a weighted average interest cost during the year ended
December 31, 2003 of 1.58% compared with 2.14% for the year ended December 31, 2002. As of December 31, 2003, all of our repurchase agreements were fixed-rate term repurchase agreements with original maturities ranging from one to twenty-four
months. On December 31, 2003, we had borrowing arrangements with seventeen different financial institutions and had borrowed funds under repurchase agreements with fifteen of these firms. Because we borrow money based on the fair value of our
mortgage-backed securities and because increases in short-term interest rates can negatively impact the valuation of mortgage-backed securities, our borrowing ability could be limited and lenders may initiate margin calls in the event short-term
interest rates increase or the value of our mortgage-backed securities declines for other reasons. During the year ended December 31, 2003, we had adequate cash flow, liquid assets and unpledged collateral with which to meet our margin requirements
during the period.



From time to time, we raise additional
equity dependent upon market conditions and other factors. We intend to raise additional equity through the issuance of capital stock as described in our registration statement on Form S-3 that was initially declared effective by the Securities and
Exchange Commission in September 2002. The registration statement was subsequently amended and the post-effective amendment was declared effective in January 2003. We completed public offerings pursuant to that registration statement in May 2003 and
August 2003 that raised an aggregate of approximately $113.6 million in net proceeds.



In December 2002, we entered into a sales agreement with Cantor Fitzgerald & Co., or Cantor, to sell up to 4.8 million shares of our common stock from time to time through a controlled equity offering program
under which Cantor acts as sales agent. Sales of the shares have been made on the American Stock Exchange and more recently on the New York Stock Exchange by means of ordinary brokers transactions at market prices and through privately
negotiated transactions. Prior to termination of the program on November 24, 2003, we sold all 4.8 million shares under the program, which provided net proceeds to us of approximately $63.25 million. The sales agent received an aggregate of
approximately $1.1 million, which represents a commission of 1.8% on the gross sales price per share under the sales agreement.



Stockholders Equity



We use available-for-sale treatment for our mortgage-backed securities. These assets are carried on the balance sheet at fair value rather than historical
amortized cost. Based upon such available-for-sale treatment, our equity base at December 31, 2003 was $457.4 million, or $10.71 per share.



8



---

##### Table of Contents

With our available-for-sale accounting treatment, unrealized fluctuations in fair values of assets do not
impact GAAP income or taxable income but rather are reflected on the balance sheet by changing the carrying value of the asset and reflecting the change in stockholders equity under Accumulated other comprehensive income, unrealized gain
(loss) on available-for-sale securities.



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.



Unrealized changes in the fair value of mortgage-backed securities have one significant and direct effect on our potential earnings and dividends: positive mark-to-market changes will increase our equity base and allow us to increase our
borrowing capacity while negative changes will 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 reduce our liquidity, requiring us to
sell assets with the likely result of realized losses upon sale. Accumulated other comprehensive income, unrealized loss on available-for-sale securities was $21.9 million, or 0.52% of the amortized cost of mortgage-backed securities at
December 31, 2003.



Critical Accounting Policies



Management has the obligation to ensure that its policies and methodologies
are in accordance with generally accepted accounting principles. During 2003, management reviewed and evaluated its critical accounting policies and believes them to be appropriate.



The preparation of financial statements in accordance with generally accepted accounting principles requires management to
makes estimates and assumptions in certain circumstances that affect amounts reported in the accompanying financial statements. In preparing these financial statements, management has made its best estimates and judgments of certain amounts included
in the financial statements, giving due consideration to materiality. We do not believe that there is a great likelihood that materially different amounts would be reported related to accounting policies described below. Nevertheless, application of
these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates.



Our accounting policies are described in Note 1 to our financial statements. Management believes the more significant of
these to be as follows:



Revenue Recognition



The most significant source of our revenue is derived from our
investments in mortgage-backed securities. We reflect income using the effective yield method, which, through amortization of premiums and accretion of discounts, recognizes periodic income over the term of the investment on a constant yield basis,
as adjusted for actual prepayment activity. Management believes our revenue recognition policies are appropriate to reflect the substance of the underlying transactions.



Interest income on our mortgage-backed securities is accrued based on the actual coupon rate and the outstanding principle
amount of the underlying mortgages. Premiums and discounts are amortized or accreted into interest income over the lives of the securities using the effective interest yield method adjusted for the effects of estimated prepayments based on the
Statement of Financial Accounting Standards, or SFAS, No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leasesan amendment of FASB Statements No. 13, 60, and 65 and a
rescission of FASB Statement No. 17. Our policy for estimating prepayments speeds for calculating the effective yield is to evaluate historical performance, street consensus prepayment speeds and current market conditions. If our estimate of
prepayments is incorrect, we may be required to make an adjustment to the amortization or accretion of premiums and discounts that would have an impact on future income.



9



---

##### Table of Contents

Valuation of Investment Securities



We carry our investment securities on our balance sheet at fair value. The fair values of our mortgage-backed securities are
generally based on market prices provided by certain dealers who make markets in such securities. The fair values of other marketable securities are obtained from the last reported sale of such securities on its principal exchange or, if no
representative sale is reported, the mean between the closing bid and ask prices. If, in the opinion of management, one or more securities prices reported to us are not reliable or unavailable, management estimates the fair value based on
characteristics of the security it receives from the issuer and available market information. The fair values reported reflect estimates and may not necessarily be indicative of the amounts we could realize in a current market exchange.



Income Taxes



Our financial results do not reflect provisions for current or deferred
income taxes. Management believes that we have and intend to continue to operate in a manner that will continue to allow us to be taxed as a REIT and as a result does not expect to pay substantial corporate level taxes. Many of these requirements,
however, are highly technical and complex. If we were to fail to meet these requirements, we would be subject to federal income tax.



Off-Balance Sheet and Contractual Arrangements



Management has addressed the issues of off-balance sheet contractual obligations and has determined that all such obligations are reflected on the
financial statements. In addition, management has also determined that all reverse repurchase agreements and employment obligations under contract and lease commitments are also fully disclosed on the financial statements.



10



---

##### Table of Contents

RISK FACTORS



An investment in our stock involves a number of risks. Before making a decision to purchase our securities, you should
carefully consider all of the risks described in this annual report. If any of the risks discussed in this annual report 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 securities could decline significantly and you may lose all or part of your investment.



Risk Related to Our Business



Interest rate mismatches between our adjustable-rate mortgage-backed securities and our borrowings used to fund our purchases of the assets may reduce our income
during periods of changing interest rates.



We fund
most of our acquisitions of adjustable-rate mortgage-backed securities with borrowings that have interest rates based on indices and repricing terms similar to, but of shorter maturities than, the interest rate indices and repricing terms of our
mortgage-backed securities. 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 a short-term interest rate index. Therefore, in most cases the interest rate indices and repricing terms of the mortgage-backed securities that we acquire and their funding sources will not be identical, thereby creating an interest rate
mismatch between assets and liabilities. While the historical spread between relevant short-term interest rate indices has been relatively stable, there have been periods when the spread between these indices was volatile. During periods of changing
interest rates, these mismatches could reduce our net income, dividend yield and the market price of our stock.



The interest rates on our borrowings generally adjust more frequently than the interest rates on our adjustable-rate mortgage-backed securities. For
example, on December 31, 2003, our adjustable-rate mortgage-backed securities had a weighted average term to next rate adjustment of approximately 22 months, while our borrowings had a weighted average term to next rate adjustment of 268 days.
Accordingly, in a period of rising interest rates, we could experience a decrease in net income or a net loss because the interest rates on our borrowings adjust faster than the interest rates on our adjustable-rate mortgage-backed securities.



We may experience reduced net interest income from holding fixed-rate
investments during periods of rising interest rates.



We generally fund our acquisition of fixed-rate mortgage-backed securities with short-term borrowings. During periods of rising interest rates, our costs associated with borrowings used to fund acquisition of fixed-rate assets are subject
to increases while the income we earn from these assets remains substantially fixed. This reduces or could eliminate the net interest spread between the fixed-rate mortgage-backed securities that we purchase and our borrowings used to purchase them,
which could lower our net interest income or cause us to suffer a loss. On December 31, 2003, 9.5% of our mortgage-backed securities were fixed-rate securities.



Increased levels of prepayments from mortgage-backed securities may decrease our net interest income.



Pools of mortgage loans underlie the mortgage-backed securities that we
acquire. We generally receive payments from principal payments that are made on these underlying mortgage loans. When borrowers prepay their mortgage loans faster than expected, this results in prepayments that are faster than expected on the
mortgage-backed securities. Faster than expected prepayments could adversely affect our profitability, including in the following ways:



| |  |  | We usually 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 pay a premium over the par value
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



11



---

##### Table of Contents

| | to acquire the security. In accordance with accounting rules, we amortize this premium over the term of the mortgage-backed security. If the mortgage-backed
security is prepaid in whole or in part prior to its maturity date, however, we expense the premium that was prepaid at the time of the prepayment. On December 31, 2003, approximately 99.9% of our mortgage-backed securities were acquired at a
premium.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | We anticipate that a substantial portion of our adjustable-rate mortgage-backed securities may bear interest rates that are lower than their fully indexed rates, which are
equivalent to the applicable index rate plus a margin. If an adjustable-rate mortgage-backed security is prepaid prior to or soon after the time of adjustment to a fully-indexed rate, we will have held that mortgage-backed security while it was less
profitable and lost the opportunity to receive interest at the fully indexed rate over the remainder of its expected life.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | If we are unable to acquire new mortgage-backed securities similar to the prepaid mortgage-backed securities, our financial condition, results of operation and cash flow would
suffer.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, seasonal
periods and the relative interest rates on fixed-rate and adjustable-rate mortgage loans.



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.



Our officers devote a portion of their
time to another company in capacities that could create conflicts of interest that may adversely affect our investment opportunities; this lack of a full-time commitment could also adversely affect our operating results.



Lloyd McAdams, Joseph E. McAdams, Evangelos Karagiannis, Bistra Pashamova
and other of our officers and employees are officers and employees of Pacific Income Advisers, Inc., or PIA, where they devote a portion of their time. These officers and employees are under no contractual obligations mandating minimum amounts of
time to be devoted to our company. In addition, a trust controlled by Lloyd McAdams and Heather U. Baines is the principal stockholder of PIA.



These officers and employees are involved in investing both our assets and approximately $4.3 billion in mortgage-backed securities and other fixed income
assets for institutional clients and individual investors through PIA. These multiple responsibilities and ownerships may create conflicts of interest if these officers and employees of our company are presented with opportunities that may benefit
both us and the clients of PIA. These officers allocate investments among our portfolio and the clients of PIA by determining the entity or account for which the investment is most suitable. In making this determination, these officers consider the
investment strategy and guidelines of each entity or account with respect to acquisition of assets, leverage, liquidity and other factors that our officers determine appropriate. These officers, however, have no obligation to make any specific
investment opportunities available to us and the above mentioned conflicts of interest may result in decisions or allocations of securities that are not in our best interests.



Several of our officers and employees are also directors, officers and managers of BT Management Company, L.L.C., the
company that will manage the day-to-day operations of Belvedere Trust Mortgage Corporation, our newly formed mortgage loan subsidiary, and Lloyd McAdams is also an owner and officer of Syndicated Capital, a registered broker-dealer. Our officers
service to PIA, BT Management Company, L.L.C. and Syndicated Capital allow them to spend only part of their time and effort managing our company as they are required to devote a portion of their time and effort to the management of other companies
and this may adversely affect our overall management and operating results.



12



---

##### Table of Contents

We may incur increased borrowing costs related to repurchase agreements and that 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, that 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:



| |  |  | the movement of interest rates;
| | - |  | -------------------------------



| |  |  | the availability of financing in the market; and
| | - |  | ------------------------------------------------



| |  |  | the value and liquidity of our mortgage-backed securities.
| | - |  | ----------------------------------------------------------



Interest rate caps on our adjustable-rate mortgage-backed securities may reduce our income or cause us to suffer a loss during periods of rising interest rates.



Our adjustable-rate mortgage-backed securities are
typically subject to periodic and lifetime interest rate caps. Periodic interest rate caps limit the amount an interest rate can increase during any given period. Lifetime interest rate caps limit the amount an interest rate can increase through
maturity of a mortgage-backed security. Our borrowings are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates paid on our borrowings could increase without limitation while interest
rate caps would limit the interest rates on our adjustable-rate mortgage-backed securities. This problem is magnified for our adjustable-rate mortgage-backed securities that are not fully indexed. Further, some adjustable-rate mortgage-backed
securities may be subject to periodic payment caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, we could receive less cash income on adjustable-rate mortgage-backed securities than we
need to pay interest on our related borrowings. These factors could lower our net interest income or cause us to suffer a loss during periods of rising interest rates. On December 31, 2003, approximately 90.5% of our mortgage-backed securities were
adjustable-rate securities.



Our leveraging strategy increases the risks
of our operations.



We generally borrow between eight
and twelve times the amount of our equity, although our borrowings may at times be above or below this amount. We incur this leverage by borrowing against a substantial portion of the market value of our mortgage-backed securities. Use of leverage
can enhance our investment returns. Leverage, however, also increases risks. In the following ways, the use of leverage increases our risk of loss and may reduce our net income by increasing the risks associated with other risk factors, including a
decline in the market value of our mortgage-backed securities or a default of a mortgage-related asset:



| |  |  | The use of leverage increases our risk of loss resulting from various factors including rising interest rates, increased interest rate volatility, downturns in the economy and
reductions in the availability of financing or deteriorations in the conditions of any of our mortgage-related assets.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A majority of our borrowings are secured by our mortgage-backed securities, generally under repurchase agreements. A decline in the market value of the mortgage-backed securities
used to secure these debt obligations could limit our ability to borrow or result in lenders requiring us to pledge additional collateral to secure our borrowings. In that situation, we could be required to sell mortgage-backed securities under
adverse market conditions in order to obtain the additional collateral required by the lender. If these sales are made at prices lower than the carrying value of the mortgage-backed securities, we would experience losses.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | A default of a mortgage-related asset that constitutes collateral for a loan could also result in an involuntary liquidation of the mortgage-related asset. This
would result in a loss to us of the difference
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



13



---

##### Table of Contents

| | between the value of the mortgage-related asset upon liquidation and the amount borrowed against the mortgage-related asset.
| | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | To the extent we are compelled to liquidate qualified REIT assets to repay debts, our compliance with the REIT rules regarding our assets and our sources of income could be
affected, which could jeopardize our status as a REIT. Losing our REIT status would cause us to lose tax advantages applicable to REITs and may decrease our overall profitability and distributions to our stockholders.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have not extensively used derivatives to mitigate our
interest rate and prepayment risks and this leaves us exposed to certain risks.



Our policies permit us to enter into interest rate swaps, caps and floors and other derivative transactions to help us reduce our interest rate and prepayment risks described above. We have made only limited use of
these types of instruments as discussed under Hedging above. We have determined that, generally, the costs of these transactions outweigh their benefits. This strategy saves us the additional costs of such hedging transactions, but it
leaves us exposed to the types of risks that such hedging transactions would be designed to reduce. If we decide to enter into derivative transactions in the future, these transactions may mitigate our interest rate and prepayment risks but cannot
eliminate these risks. Additionally, the use of derivative transactions could have a negative impact on our earnings.



An increase in interest rates may adversely affect our book value.



Increases in interest rates may negatively affect the market value of our mortgage-related assets. Our fixed-rate securities are generally 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-related assets. Losses on securities classified as available-for sale which are
determined by management to be other than temporary in nature are reclassified from accumulated other comprehensive income to current operations.



We may invest in leveraged mortgage derivative securities that generally experience greater volatility in market prices, thus exposing us to greater risk with
respect to their rate of return.



We may acquire
leveraged mortgage derivative securities that may expose us to a high level of interest rate risk. The characteristics of leveraged mortgage derivative securities result in greater volatility in their market prices. Thus, acquisition of leveraged
mortgage derivative securities would expose us to the risk of greater price volatility in our portfolio and that could adversely affect our net income and overall profitability.



We depend on borrowings to purchase mortgage-related assets and reach our desired amount of leverage. If we fail to obtain or renew
sufficient funding on favorable terms, we will be limited in our ability to acquire mortgage-related assets and our earnings and profitability would decline.



We depend on short-term borrowings to fund acquisitions of mortgage-related assets and reach our desired amount of leverage.
Accordingly, our ability to achieve our investment and leverage objectives depends on our ability to borrow money in sufficient amounts and on favorable terms. In addition, we must be able to renew or replace our maturing short-term borrowings on a
continuous basis. Moreover, we depend on a limited number of lenders to provide the primary credit facilities for our purchases of mortgage-related assets.



If we cannot renew or replace maturing borrowings, we may have to sell our mortgage-related assets under adverse market conditions and may incur permanent
capital losses as a result. Any number of these factors in combination may cause difficulties for us, including a possible liquidation of a major portion of our portfolio at disadvantageous prices with consequent losses, which may render us
insolvent.



14



---

##### Table of Contents

Possible market developments could cause our lenders to require us to pledge additional assets as collateral. If
our assets are insufficient to meet the collateral requirements, then we may be compelled to liquidate particular assets at an inopportune time.



Possible market developments, including a sharp rise in interest rates, a change in prepayment rates or increasing market concern about the value or
liquidity of one or more types of mortgage-related assets in which our portfolio is concentrated, may reduce the market value of our portfolio, which may cause our lenders to require additional collateral. This requirement for additional collateral
may compel us to liquidate our assets at a disadvantageous time, thus adversely affecting our operating results and net profitability.



Our use of repurchase agreements to borrow funds may give our lenders greater rights in the event that either we or a lender files for bankruptcy.



Our borrowings under repurchase agreements may
qualify for special treatment under the bankruptcy code, giving our lenders the ability to avoid the automatic stay provisions of the bankruptcy code and to take possession of and liquidate our collateral under the repurchase agreements without
delay in the event that we file for bankruptcy. Furthermore, the special treatment of repurchase agreements under the bankruptcy code may make it difficult for us to recover our pledged assets in the event that a lender files for bankruptcy. Thus,
the use of repurchase agreements exposes our pledged assets to risk in the event of a bankruptcy filing by either a lender or us.



Because assets we acquire may experience periods of illiquidity, we may lose profits or be prevented from earning capital gains if we cannot sell mortgage-related
assets at an opportune time.



We bear the risk of
being unable to dispose of our mortgage-related assets at advantageous times or in a timely manner because mortgage-related assets generally experience periods of illiquidity. The lack of liquidity may result from the absence of a willing buyer or
an established market for these assets, as well as legal or contractual restrictions on resale. As a result, the illiquidity of mortgage-related assets may cause us to lose profits and the ability to earn capital gains.



We depend on our key personnel and the loss of any of our key personnel could severely
and detrimentally affect our operations.



We depend on
the diligence, experience and skill of our officers and other employees for the selection, structuring and monitoring of our mortgage-related assets and associated borrowings. Our key officers include Lloyd McAdams, President, Chairman and Chief
Executive Officer, Joseph E. McAdams, Chief Investment Officer, Executive Vice President and Director, Thad Brown, Chief Financial Officer, Evangelos Karagiannis, Vice President, and Bistra Pashamova, Vice President. Our dependence on our key
personnel is heightened by the fact that we have a relatively small number of employees, and the loss of any key person could harm our entire business, financial condition, cash flow and results of operations. In particular, the loss of the services
of Lloyd McAdams or Joseph E. McAdams could seriously harm our business.



Our board of directors may change our operating policies and strategies without prior notice or stockholder approval and such changes could harm our business, results of operation and stock price.



Our board of directors can modify or waive our current operating policies
and our strategies without prior notice and without stockholder approval. We cannot predict the effect any changes to our current operating policies and strategies may have on our business, operating results and stock price, however, the effects may
be adverse.



Our incentive compensation plan may create an incentive to
increase the risk of our mortgage portfolio in an attempt to increase compensation.



In addition to their base salaries, management and key employees are eligible to earn incentive compensation for each fiscal year pursuant to our incentive compensation plan. Under the plan, the aggregate



15



---

##### Table of Contents

amount of compensation that may be earned by all employees equals a percentage of taxable net income, before incentive compensation, in excess of the amount
that would produce an annualized return on average net worth equal to the ten-year US Treasury Rate plus 1%. In any fiscal quarter in which our taxable net income is an amount less than the amount necessary to earn this threshold return, we
calculate negative incentive compensation for that fiscal quarter which will be carried forward and will offset future incentive compensation earned under the plan, but only with respect to those participants who were participants during the fiscal
quarter(s) in which negative incentive compensation was generated. Although negative incentive compensation is used to offset future incentive compensation, as our management evaluates different mortgage-backed securities for our investment, there
is a risk that management will cause us to assume more risk than is prudent.



Competition may prevent us from acquiring mortgage-related assets at favorable yields and that would negatively impact our profitability.



Our net income largely depends on our ability to acquire mortgage-related assets at favorable spreads over our borrowing
costs. In acquiring mortgage-related assets, 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-related assets, many
of which have greater financial resources than us. As a result, we may not in the future be able to acquire sufficient mortgage-related assets at favorable spreads over our borrowing costs. If that occurs, our profitability will be harmed.



Our investment policy involves risks associated with the credit quality
of our investments. If the credit quality of our investments declines or if there are defaults on the investments we make, our profitability may decline and we may suffer losses.



Our mortgage-backed securities have primarily been agency certificates that, although not rated, carry an implied
AAA rating. Agency certificates are mortgage-backed securities where either Freddie Mac or Fannie Mae guarantees payments of principal or interest on the certificates. Freddie Mac and Fannie Mae are government-sponsored enterprises and
securities guaranteed by these entities are not guaranteed by the United States government. Our capital investment policy, however, provides us with the ability to acquire a material amount of lower credit quality mortgage-backed securities. If we
acquire mortgage-backed securities of lower credit quality, our profitability may decline and we may incur losses if there are defaults on the mortgages backing those securities or if the rating agencies downgrade the credit quality of those
securities or the securities of Fannie Mae and Freddie Mac.



We have not
previously engaged in the business of acquiring and securitizing whole mortgage loans and we may not be successful.



We recently formed a new subsidiary called Belvedere Trust Mortgage Corporation, or Belvedere Trust, to engage in the business of acquiring and
securitizing whole mortgage loans. Although we hired a management team that we believe has appropriate experience managing the acquisition and securitization of whole loans, we have never engaged in this particular business and we may not be
successful. The acquisition of whole loans and the securitization process are inherently complex and involve risks related to the types of mortgages we seek to acquire, interest rate changes, funding sources, delinquency rates, borrower bankruptcies
and other factors that we may not be able to manage. Our failure to manage these and other risks could have a material adverse affect on our business and results of operations.



Belvedere Trusts investment strategy of acquiring, accumulating and securitizing loans involves credit risk.



While Belvedere Trust intends to securitize the loans that it acquires
into high quality assets in order to achieve better financing rates and to improve its access to financing, it bears the risk of loss on any loans that its acquires or originates and which it subsequently securitizes. Belvedere Trust will acquire
loans that are not credit enhanced and that do not have the backing of Fannie Mae or Freddie Mac. Accordingly, it will be subject to risks of borrower default, bankruptcy and special hazard losses (such as those occurring from earthquakes) with



16



---

##### Table of Contents

respect to those loans to the extent that there is any deficiency between the value of the mortgage collateral and insurance and the principal amount of the
loan. In the event of a default on any such loans that it holds, Belvedere Trust would bear the loss of principal between the value of the mortgaged property and the outstanding indebtedness, as well as the loss of interest.



Belvedere Trust will require a significant amount of cash, and if it is not available,
the business and financial performance of Belvedere Trust will be significantly harmed.



Belvedere Trust will require substantial cash to fund its loan acquisitions, to pay its loan acquisition expenses and to hold its loans pending sale or
securitization. Belvedere Trust will also need cash to meet its working capital and other needs. Pending sale or securitization of a pool of mortgage loans, Belvedere Trust will acquire mortgage loans that it expects to finance through borrowings
from warehouse lines of credit and repurchase facilities. It is possible that Belvedere Trusts future warehouse lenders could experience changes in their ability to advance funds to Belvedere Trust, independent of the performance of Belvedere
Trust or its loans. We anticipate that Belvedere Trusts repurchase facilities will be dependent on the ability of counter-parties to re-sell Belvedere Trusts obligations to third parties. If there is a disruption of the repurchase market
generally, or if one of Belvedere Trusts counter-parties is itself unable to access the repurchase market, Belvedere Trusts access to this source of liquidity could be adversely affected. Cash could also be required to meet margin calls
under the terms of Belvedere Trusts borrowings in the event that there is a decline in the market value of the loans that collateralize its debt, the terms of short-term debt become less attractive, or for other reasons. Any of these events
would have a material adverse affect on Belvedere Trust.



For
some period of time, Belvedere Trust will use the net proceeds of our investment in Belvedere Trust to meet its operating expenses as it acquires new loans for its portfolio. If Belvedere Trust has fully invested all of the net proceeds of our
investment in it prior to the point at which Belvedere Trust generates sufficient cash for it to fund its operations, if it ever does, then Belvedere Trust will need to either restructure the securities supporting its portfolio, require additional
capital from us or third parties or, if it is unable to sell additional securities on reasonable terms or at all, it will need to either reduce its acquisition business or sell a higher portion of its loans. In the event that Belvedere Trusts
liquidity needs exceed its access to liquidity, it may need to sell assets at an inopportune time, thus reducing its earnings. Adverse cash flow could threaten Belvedere Trusts ability to maintain its solvency or to satisfy the income and
asset tests necessary to elect and maintain REIT status.



The use of
securitizations with over-collateralization requirements may have a negative impact on Belvedere Trusts cash flow.



Belvedere Trust expects that its securitizations will restrict its cash flow if the loan delinquencies exceed certain levels. The terms of the
securitization will generally provide that, if certain delinquencies and/or losses exceed the specified levels based on rating agencies (or the financial guaranty insurers, if applicable) analysis of the characteristics of the loans
pledged to collateralize the securities, the required level of over-collateralization may be increased or may be prevented from decreasing as would otherwise be permitted if losses and/or delinquencies did not exceed those levels. Other tests (based
on delinquency levels or other criteria) may restrict Belvedere Trusts ability to receive net interest income from a securitization transaction. We cannot assure you that the performance tests will be satisfied. Nor can we assure you, in
advance of completing negotiations with the rating agencies or other key transaction parties on our future securitizations, the actual terms of the delinquency tests, over-collateralization terms, cash flow release mechanisms or other significant
factors regarding the calculation of net excess income to Belvedere Trust. Failure to obtain the terms on a favorable basis may materially and adversely affect the availability of net excess income to Belvedere Trust.



The success of Belvedere Trusts loan business will depend upon its ability to
ensure that loans to be held in its securitizations are serviced effectively.



The success of Belvedere Trusts mortgage loan business will depend to a great degree upon its ability to ensure that its loans held for securitization are serviced effectively. In general, it is the intention of
Belvedere



17



---

##### Table of Contents

Trust to acquire loans servicing retained, where the loans will be serviced by the originating or selling institution. Belvedere Trust has no
experience servicing a portfolio of loans. If Belvedere Trust is required to purchase the servicing of a loan portfolio in order to acquire a portfolio with desirable attributes, Belvedere Trust will be required to implement a servicing function or
contract with a third party to service the loans in order for Belvedere Trust to implement its strategy. We cannot assure you that Belvedere Trust will be able to service the loans or effectively supervise a sub-servicing relationship according to
industry standards. Failure to service the loans properly will harm Belvedere Trusts business and operating results. Prior to either building the servicing capabilities that Belvedere Trust may require or acquiring an existing servicing
operation that has such capabilities, if ever, Belvedere Trust anticipates contracting with an experienced servicer of non-conforming loans to sub-service its loans. The fees paid to a subservicer will reduce to a certain extent the
revenue Belvedere Trust is able to retain from its loans, and its net interest income will be reduced by and at risk, depending on the effectiveness of the servicing company.



If actual prepayments or defaults with respect to mortgages serviced occurs more quickly than originally assumed, the value of
Belvedere Trusts mortgage servicing rights would be subject to downward adjustment.



When Belvedere Trust purchases mortgages that include the associated servicing rights, the allocated cost of the servicing rights will be reflected on its
financial statements as mortgage servicing rights. To determine the fair value of these servicing rights, Belvedere Trust will use assumptions to estimate future net servicing income including projected discount rates, mortgage loan prepayments and
credit losses. If actual prepayments or defaults with respect to loans serviced occur more quickly than Belvedere Trust originally assumed, Belvedere Trust would have to reduce the carrying value of its mortgage servicing rights. Belvedere Trust
does not know if its assumptions will prove correct.



Belvedere Trust
will be externally managed and this may diminish or eliminate our return on our investment in this line of business.



Belvedere Trust will be externally managed pursuant to a management agreement between Belvedere Trust and BT Management Company, L.L.C., or BT Management.
Although we own 50% of BT Management, it is also owned 27.5% by Claus Lund, the Chief Executive Officer of Belvedere Trust, 17.5% by Russell J. Thompson, the Chief Financial Officer of Belvedere Trust and 5% by Lloyd McAdams, our Chairman and Chief
Executive Officer. Our ability to generate profits from our ownership of Belvedere Trust, if any, could be greatly diminished due to the fact that we will be required to pay a base management fee to BT Management and we may also be required to pay
an incentive fee. An externally managed structure may not optimize our interest in Belvedere Trust and, if we are unable to properly manage fixed costs at Belvedere Trust could, when combined with the base management fee, result in losses at
Belvedere Trust.



Our Chairman has an ownership interest in BT Management
that creates potential conflicts of interest.



Mr.
McAdams, our Chairman and Chief Executive Officer, has a direct ownership interest in BT Management that creates potential conflicts of interest. Mr. McAdams is Chairman of the Board and Chief Executive Officer and a member of the Board of
Managers of BT Management and owns an equity interest in BT Management. Under the management agreement between Belvedere Trust and BT Management, BT Management is entitled to earn certain incentive compensation based on the level of
Belvedere Trusts annualized net income. In evaluating mortgage assets for investment and with respect to other management strategies, an undue emphasis on the maximization of income at the expense of other criteria could result in increased
risk to the value of our portfolio.



Risks Related to REIT
Compliance and Other Matters



If we are disqualified as a REIT, we
will be subject to tax as a regular corporation and face substantial tax liability.



We believe that since our initial public offering in 1998 we have operated so as to qualify as a REIT under the Internal Revenue Code of 1986, as amended (the tax code), and we intend to continue to meet the
requirements



18



---

##### Table of Contents

for taxation as a REIT. Nevertheless, we may not remain qualified as a REIT in the future. Qualification as a REIT involves the application of highly
technical and complex tax code provisions for which only a limited number of judicial or administrative interpretations exist. Even a technical or inadvertent mistake could jeopardize our REIT status. Furthermore, Congress or the IRS might change
tax laws or regulations and the courts might issue new rulings, in each case potentially having retroactive effect that could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:



| |  |  | we would be taxed as a regular domestic corporation, which, among other things, means being unable to deduct distributions to stockholders in computing taxable income and being
subject to federal income tax on our taxable income at regular corporate rates;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | any resulting tax liability could be substantial and would reduce the amount of cash available for distribution to stockholders; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------



| |  |  | unless we were entitled to relief under applicable statutory provisions, we would be disqualified from treatment as a REIT for the subsequent four taxable years following the year
during which we lost our qualification, and thus, our cash available for distribution to stockholders would be reduced for each of the years during which we do not qualify as a REIT.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Complying with REIT requirements may cause us to forego otherwise attractive
opportunities.



In order to qualify as a REIT for
federal income tax purposes, we must continually satisfy tests concerning, among other things, our sources of income, the nature and diversification of our mortgage-backed securities and other assets, including our stock in Belvedere Trust, the
amounts we distribute to our stockholders and the ownership of our stock. We may also be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution. Thus, compliance with
REIT requirements may hinder our ability to operate solely on the basis of maximizing profits.



Complying with REIT requirements may limit our ability to hedge effectively.



The REIT provisions of the tax code may substantially limit our ability to hedge mortgage-backed securities and related borrowings by requiring us to
limit our income in each year from qualified hedges, together with any other income not generated from qualified REIT real estate assets, to less than 25% of our gross income. In addition, we must limit our aggregate income from hedging and services
from all sources, other than from qualified REIT real estate assets or qualified hedges, to less than 5% of our annual gross income. As a result, although we do not currently engage in hedging transactions, we may in the future have to limit our use
of advantageous hedging techniques. This could result in greater risks associated with changes in interest rates than we would otherwise want to incur. If we were to violate the 25% or 5% limitations, we may have to pay a penalty tax equal to the
amount of income in excess of those limitations, multiplied by a fraction intended to reflect our profitability. If we fail to satisfy the 25% and 5% limitations, unless our failure was due to reasonable cause and not due to willful neglect, we
could lose our REIT status for federal income tax purposes.



Complying
with REIT requirements may force us to liquidate otherwise attractive investments.



In order to qualify as a REIT, we must also ensure that at the end of each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate
assets. The remainder of our investment in securities generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in
general, no more than 5% of the value of our assets can consist of the securities of any one issuer. The 5% and 10% limitations described above will apply to our investment in Belvedere Trust unless Belvedere Trust is a qualified REIT subsidiary of
ours (i.e., we own 100% of Belvedere Trusts outstanding stock), Belvedere Trust is a qualified REIT, or Belvedere Trust is a taxable REIT subsidiary of ours. If we fail to comply with these requirements, we must dispose of a portion of our
assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and suffering adverse tax consequences.



19



---

##### Table of Contents

Complying with REIT requirements may force us to borrow to make distributions to stockholders.



As a REIT, we must distribute 90% of our annual taxable income (subject
to certain adjustments) to our stockholders. From time to time, we may generate taxable income greater than our net income for financial reporting purposes from, among other things, amortization of capitalized purchase premiums, or our taxable
income may be greater than our cash flow available for distribution to stockholders. For example, our taxable income would exceed our net income for financial reporting purposes to the extent that compensation paid to our chief executive officer and
our other four highest paid officers exceeds $1,000,000 for any such officer for any calendar year under Section 162(m) of the tax code. Since payments under our 2002 Incentive Compensation Plan do not qualify as performance-based compensation under
Section 162(m), a portion of the payments made under such plan to certain of such officers would not be deductible for federal income tax purposes under such circumstances. If we do not have other funds available in these situations, we may be
unable to distribute substantially all of our taxable income as required by the REIT provisions of the tax code. Thus, we could be required to borrow funds, sell a portion of our mortgage-backed securities at disadvantageous prices or find another
alternative source of funds. These alternatives could increase our costs or reduce our equity.



If Belvedere Trust fails to qualify as a REIT, a qualified REIT subsidiary or a taxable REIT subsidiary, we may lose our REIT status.



As long as we own 100% of Belvedere Trusts outstanding stock, Belvedere Trust will be treated as a qualified REIT
subsidiary for federal income tax purposes. As such, for federal income tax purposes, we will not be treated as owning stock in Belvedere Trust and Belvedere Trusts assets, liabilities and income will generally be treated as our assets,
liabilities and income for purposes of the REIT qualification tests described above under Certain Federal Income Tax Considerations. If, however, we do not own 100% of Belvedere Trusts outstanding stock, and Belvedere Trust does
not qualify as a REIT or a taxable REIT subsidiary, we will lose our REIT status if, at the end of any calendar quarter, the value of our Belvedere Trust securities exceeds 5% of the value of our total assets or we own more than 10% of the value or
voting power of Belvedere Trusts outstanding securities. If we fail to satisfy the 5% test or the 10% test at the end of any calendar quarter, a 30-day cure period may apply following the close of the quarter. If we make an
election to treat Belvedere Trust as a taxable REIT subsidiary, the total value of any securities we own in Belvedere Trust and all of our other taxable REIT subsidiaries, if any, may not exceed 20% of the value of our total assets at the end of any
calendar quarter. Since Belvedere Trust may elect to be taxed as a REIT in the future, however, we do not intend to make a taxable REIT subsidiary election for Belvedere Trust



If Belvedere Trust fails to qualify as a REIT, Belvedere Trust will be subject to corporate income taxes on its taxable income, which
will reduce the amount available for distribution to us.



Belvedere Trust was formed as a qualified REIT subsidiary, but may elect to be taxed to be as a REIT in the future, possibly as early as its taxable year ending December 31, 2004.Although Belvedere Trust expects to operate in a
manner to permit it to qualify as a REIT if and when it makes a REIT election and to continue to maintain such qualification, the actual results of Belvedere Trusts operations for any particular taxable year may not satisfy these requirements.
If Belvedere Trust fails to qualify for taxation as a REIT in any taxable year after it makes a REIT election, and the relief provisions of the tax code do not apply, Belvedere Trust will be required to pay tax on Belvedere Trusts taxable
income in that taxable year and all subsequent taxable years at regular corporate rates. Distributions to us in any year in which Belvedere Trust fails to qualify as a REIT will not be deductible by Belvedere Trust. As a result, we anticipate that
Belvedere Trusts failure to qualify as a REIT after it makes a REIT election would reduce the cash available for distribution to us. Unless entitled to relief under specific statutory provisions, if Belvedere Trust fails to maintain its REIT
status after it makes a REIT election, Belvedere Trust will also be disqualified from taxation as a REIT for the four taxable years following the year in which it loses its qualification.



20



---

##### Table of Contents

Failure to maintain an exemption from the Investment Company Act would adversely affect our results of operations.



We believe that we conduct our business in a manner
that allows us to avoid being regulated as an investment company under the Investment Company Act of 1940, as amended. If we fail to continue to qualify for an exemption from registration as an investment company, our ability to use leverage would
be substantially reduced and we would be unable to conduct our business as planned. 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 SECs current interpretation, qualification for this exemption generally requires us to maintain at least 55% of our assets directly in 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 Investment Company Act. 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 for 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 maintain our exemption from registration as an investment company, 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.



Additional Risk Factors



We may not be able to use the money we raise to acquire investments
at favorable prices.



We intend to seek to raise
additional capital from time to time if we determine that it is in our best interests and the best interests of our stockholders, including through public offerings of our stock. The net proceeds of any offering could represent a significant
increase in our equity. Depending on the amount of leverage that we use, the full investment of the net proceeds of any offering might result in a substantial increase in our total assets. There can be no assurance that we will be able to invest all
of such additional funds in mortgage-backed securities at favorable prices. We may not be able to acquire enough mortgage-backed securities to become fully invested after an offering, or we may have to pay more for mortgage-backed securities than we
have historically. In either case, the return that we earn on stockholders equity may be reduced.



We have not established a minimum dividend payment level and there are no assurances of our ability to pay dividends in the future.



We intend to pay quarterly dividends and to make distributions to our stockholders in amounts such that all or substantially
all of our taxable income in each year, subject to certain adjustments, is distributed. This, along with other factors, should enable us to qualify for the tax benefits accorded to a REIT under the tax code. We have not established a minimum
dividend payment level and our ability to pay dividends may be adversely affected by the risk factors described in this annual report on Form 10-K. All distributions will be made at the discretion of our board of directors and will depend on our
earnings, our financial condition, maintenance of our REIT status and such other factors as our board of directors may deem relevant from time to time. There are no assurances of our ability to pay dividends in the future.



If we raise additional capital, our earnings per share and dividends per
share may decline since we may not be able to invest all of the new capital during the quarter in which additional shares are sold and possibly the entire following calendar quarter.



We may incur excess inclusion income that would increase the tax liability of our stockholders.



In general, dividend income that a tax-exempt entity receives from us should
not constitute unrelated business taxable income as defined in Section 512 of the tax code. If we realize excess inclusion income and allocate



21



---

##### Table of Contents

it to stockholders, this income cannot be offset by net operating losses. If the stockholder was a tax-exempt entity, then this income would be fully taxable
as unrelated business taxable income under Section 512 of the tax code. If the stockholder was foreign, then it would be subject to federal income tax withholding on this income without reduction pursuant to any otherwise applicable income-tax
treaty.



Excess inclusion income could result if we or
Belvedere Trust held a residual interest in a REMIC. Excess inclusion income also would be generated if we or Belvedere Trust were to issue debt obligations with two or more maturities and the terms of the payments on these obligations bore a
relationship to the payments that we received on our mortgage-backed securities securing those debt obligations. We generally structure our borrowing arrangements in a manner designed to avoid generating significant amounts of excess inclusion
income. We do, however, enter into various repurchase agreements that have differing maturity dates and afford the lender the right to sell any pledged mortgage securities if we default on our obligations. The IRS may determine that these borrowings
give rise to excess inclusion income that should be allocated among stockholders. Furthermore, some types of tax-exempt entities, including, without limitation, voluntary employee benefit associations and entities that have borrowed funds to acquire
their shares of our common stock, may be required to treat a portion of or all of the dividends they may receive from us as unrelated business taxable income. We also invest in equity securities of other REITs. If we were to receive excess inclusion
income from another REIT, we may be required to distribute the excess inclusion income to our stockholders, which may result in the recognition of unrelated business taxable income.



Our charter does not permit ownership of over 9.8% of our common or preferred stock and attempts to acquire our common or preferred
stock in excess of the 9.8% limit are void without prior approval from our board of directors.



For the purpose of preserving our REIT qualification and for other reasons, our charter prohibits direct or constructive ownership by any person of more
than 9.8% of the lesser of the total number or value of the outstanding shares of our common stock or more than 9.8% of the outstanding shares of our preferred stock. Our charters constructive ownership rules are complex and may cause the
outstanding stock owned by a group of related individuals or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of the outstanding stock by an individual or entity could cause
that individual or entity to own constructively in excess of 9.8% of the outstanding stock, and thus be subject to our charters ownership limit. Any attempt to own or transfer shares of our common or preferred stock in excess of the ownership
limit without the consent of the board of directors shall be void, and will result in the shares being transferred by operation of law to a charitable trust. Our board of directors has previously granted Lloyd McAdams, our President, Chairman and
Chief Executive Officer, and his family members an exemption from the 9.8% ownership limitation as set forth in our charter documents. This exemption allowed Lloyd McAdams, Heather Baines and Joseph McAdams collectively to hold up to 19% of our
outstanding shares. Our board of directors has recently terminated this exemption.



Because provisions contained in Maryland law, our charter and our bylaws may have an anti-takeover effect, investors may be prevented from receiving a control premium for their shares.



Provisions contained in our charter and bylaws, as well as Maryland
corporate law, may have anti-takeover effects that delay, defer or prevent a takeover attempt, which may prevent stockholders from receiving a control premium for their shares. For example, these provisions may defer or prevent tender
offers for our common stock or purchases of large blocks of our common stock, thereby limiting the opportunities for our stockholders to receive a premium for their common stock over then-prevailing market prices. These provisions include the
following:



| |  |  | Ownership limit. The ownership limit in our charter limits related investors, including, among other things, any voting group, from acquiring over 9.8% of our common stock
without our permission.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22



---

##### Table of Contents

| |  |  | Preferred stock. Our charter authorizes our board of directors to issue preferred stock in one or more classes and to establish the preferences and rights of any class of
preferred stock issued. These actions can be taken without soliciting stockholder approval.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Maryland business combination statute. Maryland law restricts the ability of holders of more than 10% of the voting power of a corporations shares to engage in a
business combination with the corporation.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Maryland control share acquisition statute. Maryland law limits the voting rights of control shares of a corporation in the event of a control share
acquisition.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



We may
issue additional shares of common stock or shares of preferred stock that are convertible into common stock. If we issue a significant number of shares of common stock or convertible preferred stock in a short period of time, there could be a
dilution of the existing common stock and a decrease in the market price of the common stock.



Future offerings of debt securities, which would be senior to our common stock upon liquidation, or equity securities, which would dilute our existing stockholders and may be senior to our common stock for the
purposes of dividend distributions, may adversely affect the market price of our common stock.



In the future, we may attempt to increase our capital resources by making additional offerings of debt or equity securities, including commercial paper,
medium-term notes, senior or subordinated notes and classes of preferred stock or common stock. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive a distribution
of our available assets prior to the holders of our common stock. Our preferred stock, if issued, may have a preference on dividend payments that could limit our ability to make a dividend distribution to the holders of our common stock. Because our
decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk of
our future offerings reducing the market price of our common stock.



23



---

##### Table of Contents

PART IV



Item 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K



(a) Documents filed as part of this report:



(1) The following financial statements of the Company are included in Part II, Item 8 of this Annual Report on Form 10-K:



| |  |  | Report of Independent Accountants, BDO Seidman, LLP;
| | - |  | ----------------------------------------------------

| |  |  | Report of Independent Accountants, PricewaterhouseCoopers LLP;
| | - |  | --------------------------------------------------------------

| |  |  | Balance Sheets as of December 31, 2003 and December 31, 2002;
| | - |  | -------------------------------------------------------------

| |  |  | Statements of Operations: Years Ended December 31, 2003, December 31, 2002 and December 31, 2001;
| | - |  | -------------------------------------------------------------------------------------------------

| |  |  | Statements of Stockholders Equity: Years Ended December 31, 2003, December 31, 2002 and December 31, 2001;
| | - |  | -----------------------------------------------------------------------------------------------------------

| |  |  | Statements of Cash Flows: Years Ended December 31, 2003, December 31, 2002 and December 31, 2001; and
| | - |  | -----------------------------------------------------------------------------------------------------

| |  |  | Notes to Financial Statements.
| | - |  | ------------------------------



(2) Schedules to financial statements:



All financial statement schedules have been omitted because they are either inapplicable or the information required is provided in the
Companys Financial Statements and Notes thereto, included in Part II, Item 8 of this Annual Report on Form 10-K.



(3) The following exhibits are filed herewith:



|              |  |                                                                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                   
|              | 
|31.1          |  | Certification of the Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934                                            
|              | 
|31.2          |  | Certification of the Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934                                            
|              | 
|32.1          |  | Certifications of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|              | 
|32.2          |  | Certifications of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002



(b)
Reports on Form 8-K.



We filed the following current reports on
Form 8-K during the quarter ended December 31, 2003:



| |  |  | Form 8-K filed on October 17, 2003 to announce the issuance of our press release that announced our earnings for the quarter ended September 30, 2003 (Item 12).
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Form 8-K filed on November 5, 2003 to announce the issuance of our press release that announced the formation of a wholly-owned subsidiary of the Company, Belvedere Trust Mortgage
Corporation (Item 5).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Form 8-K filed on November 5, 2003 to announce the change in our independent accountants (Item 4).
| | - |  | --------------------------------------------------------------------------------------------------



| |  |  | Form 8-K filed on December 18, 2003 to announce the issuance of our press release that addressed the declaration of a dividend for the quarter ended December 31, 2003 (Item 12).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



---

##### Table of Contents

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.



|                      |  |  |  |                                    |  |                                                                                   |  | 
|--------------------- |  |  |  | ---------------------------------- |  | --------------------------------------------------------------------------------- |  | 
|DATED: March 23, 2004 |  |  |  | ANWORTH MORTGAGE ASSET CORPORATION
|                      |  |  | 
|                      |  |  |  |                                    |  | /s/    JOSEPH LLOYD
MCADAMS                                                      
|                      |  |  |  |                                    |  | Joseph Lloyd McAdams Chairman of the Board, President and Chief Executive Officer



25



---

##### Table of Contents

EXHIBIT INDEX



|              |  |                                                                                                                                                               
|------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                   
|              | 
|31.1          |  | Certification of the Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934                                            
|              | 
|31.2          |  | Certification of the Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934                                            
|              | 
|32.1          |  | Certifications of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|              | 
|32.2          |  | Certifications of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002