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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2010

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from
                     to

Commission file number 001-13709





ANWORTH
MORTGAGE ASSET CORPORATION

(Exact name of registrant as specified in its charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|MARYLAND                                                       |  | 52-2059785                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer
Identification No.)
|                                                               | 
|1299 Ocean Avenue, Second Floor,
Santa Monica, California      |  | 90401                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

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



|                                              |  |                             
|--------------------------------------------- |  | ----------------------------
|Large Accelerated Filer  x                    |  | Accelerated Filer   ̈        
|                                              | 
|Non-Accelerated Filer   ̈                      |  | Smaller Reporting Company   ̈
|(Do not check if a smaller reporting company) |  |                             

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).    Yes   ̈    No  x

At May 4, 2010, the registrant had 118,799,450 shares of common stock issued and outstanding.









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ANWORTH MORTGAGE ASSET CORPORATION

FORM 10-Q

INDEX



|         |  |          |  |                                                                                                                |  |     
|-------- |  | -------- |  | -------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |          |  |                                                                                                                |  | Page
|Part I.  |  |          |  | FINANCIAL INFORMATION                                                                                          |  | 1   
|         |  |          | 
|         |  | Item 1.  |  | Consolidated Financial Statements                                                                              |  | 1   
|         |  |          | 
|         |  |          |  | Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009                             |  | 1   
|         |  |          | 
|         |  |          |  | Consolidated Statements of Income for the three months ended March 31, 2010 and 2009 (unaudited)               |  | 2   
|         |  |          | 
|         |  |          |  | Consolidated Statements of Stockholders Equity for the three months ended March 
31, 2010 (unaudited)         |  | 3   
|         |  |          | 
|         |  |          |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (unaudited)           |  | 4   
|         |  |          | 
|         |  |          |  | Consolidated Statements of Comprehensive Income for the three months ended March 31, 2010 and 2009 (unaudited) |  | 5   
|         |  |          | 
|         |  |          |  | Notes to Unaudited Consolidated Financial Statements                                                           |  | 6   
|         |  |          | 
|         |  | Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                          |  | 27  
|         |  |          | 
|         |  | Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                     |  | 38  
|         |  |          | 
|         |  | Item 4.  |  | Controls and Procedures                                                                                        |  | 42  
|         |  |          | 
|Part II. |  |          |  | OTHER INFORMATION                                                                                              |  | 44  
|         |  |          | 
|         |  | Item 1.  |  | Legal Proceedings                                                                                              |  | 44  
|         |  |          | 
|         |  | Item 1A. |  | Risk Factors                                                                                                   |  | 44  
|         |  |          | 
|         |  | Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                    |  | 46  
|         |  |          | 
|         |  | Item 3.  |  | Defaults Upon Senior Securities                                                                                |  | 46  
|         |  |          | 
|         |  | Item 4.  |  | Reserved                                                                                                       |  | 46  
|         |  |          | 
|         |  | Item 5.  |  | Other Information                                                                                              |  | 46  
|         |  |          | 
|         |  | Item 6.  |  | Exhibits                                                                                                       |  | 47  
|         |  |          | 
|         |  |          |  | Signatures                                                                                                     |  | 50  



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ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

Part I. FINANCIAL INFORMATION



|Item 1. | Consolidated Financial Statements
|------- | ---------------------------------

ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



|                                                                                                                                                                                                                                                             |  |               |           |   |                  |   |           |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                                                                             |  | March 31,2010 |           |   | December 31,2009 |  
|                                                                                                                                                                                                                                                             |  | (unaudited)   |           |   |                  |  
|ASSETS                                                                                                                                                                                                                                                       |  |               |           |   |                  |   |           |  
|Agency MBS:                                                                                                                                                                                                                                                  |  |               |           |   |                  |   |           |  
|Agency MBS pledged to counterparties at fair value                                                                                                                                                                                                           |  | $             | 5,704,836 |   |                  | $ | 5,749,849 |  
|Agency MBS at fair value                                                                                                                                                                                                                                     |  |               | 718,998   |   |                  |   | 725,174   |  
|Paydowns receivable                                                                                                                                                                                                                                          |  |               | 106,758   |   |                  |   | 10,778    |  
|                                                                                                                                                                                                                                                             |  |               |           |   |                  |   |           |  
|                                                                                                                                                                                                                                                             |  |               | 6,530,592 |   |                  |   | 6,485,801 |  
|Non-Agency MBS:                                                                                                                                                                                                                                              |  |               |           |   |                  |   |           |  
|Non-Agency MBS at fair value                                                                                                                                                                                                                                 |  |               | 5,324     |   |                  |   | 4,742     |  
|Cash and cash equivalents                                                                                                                                                                                                                                    |  |               | 835       |   |                  |   | 1,812     |  
|Interest and dividends receivable                                                                                                                                                                                                                            |  |               | 27,129    |   |                  |   | 28,818    |  
|Derivative instruments at fair value                                                                                                                                                                                                                         |  |               | 12        |   |                  |   | 2,059     |  
|Prepaid expenses and other                                                                                                                                                                                                                                   |  |               | 4,009     |   |                  |   | 3,416     |  
|                                                                                                                                                                                                                                                             |  |               |           |   |                  |   |           |  
|Total Assets:                                                                                                                                                                                                                                                |  | $             | 6,567,901 |   |                  | $ | 6,526,648 |  
|                                                                                                                                                                                                                                                             |  |               |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                                                                                                                                                         |  |               |           |   |                  |   |           |  
|Liabilities:                                                                                                                                                                                                                                                 |  |               |           |   |                  |   |           |  
|Accrued interest payable                                                                                                                                                                                                                                     |  | $             | 19,447    |   |                  | $ | 20,838    |  
|Repurchase agreements                                                                                                                                                                                                                                        |  |               | 5,312,000 |   |                  |   | 5,359,000 |  
|Junior subordinated notes                                                                                                                                                                                                                                    |  |               | 37,380    |   |                  |   | 37,380    |  
|Derivative instruments at fair value                                                                                                                                                                                                                         |  |               | 80,633    |   |                  |   | 82,811    |  
|Dividends payable on Series A Preferred Stock                                                                                                                                                                                                                |  |               | 1,011     |   |                  |   | 1,011     |  
|Dividends payable on Series B Preferred Stock                                                                                                                                                                                                                |  |               | 430       |   |                  |   | 433       |  
|Dividends payable on common stock                                                                                                                                                                                                                            |  |               |          |   |                  |   | 32,305    |  
|Payable for securities purchased                                                                                                                                                                                                                             |  |               | 159,581   |   |                  |   | 61,123    |  
|Accrued expenses and other                                                                                                                                                                                                                                   |  |               | 2,757     |   |                  |   | 2,436     |  
|                                                                                                                                                                                                                                                             |  |               |           |   |                  |   |           |  
|Total Liabilities:                                                                                                                                                                                                                                           |  | $             | 5,613,239 |   |                  | $ | 5,597,337 |  
|                                                                                                                                                                                                                                                             |  |               |           |   |                  |   |           |  
|Series B Cumulative Convertible Preferred Stock: par value $0.01 per share; liquidating preference $25.00 per share ($27,540 and
$27,700, respectively); 1,102 and 1,108 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively |  | $             | 25,644    |   |                  | $ | 25,803    |  
|                                                                                                                                                                                                                                                             |  |               |           |   |                  |   |           |  
|Stockholders Equity:                                                                                                                                                                                                                                        |  |               |           |   |                  |   |           |  
|Series A Cumulative Preferred Stock: par value $0.01 per share; liquidating preference $25.00 per share ($46,888 and $46,888,
respectively); 1,876 and 1,876 shares issued and outstanding at March 31, 2010 and December 31, 2009, respectively             |  | $             | 45,397    |   |                  | $ | 45,397    |  
|Common Stock: par value $0.01 per share; authorized 200,000 shares, 117,951 and 115,563 issued and outstanding at March 31,
2010 and December 31, 2009, respectively                                                                                         |  |               | 1,180     |   |                  |   | 1,156     |  
|Additional paid-in capital                                                                                                                                                                                                                                   |  |               | 1,032,610 |   |                  |   | 1,016,821 |  
|Accumulated other comprehensive gain consisting of unrealized losses and gains                                                                                                                                                                               |  |               | 62,148    |   |                  |   | 84,259    |  
|Accumulated deficit                                                                                                                                                                                                                                          |  |               | (212,317  | ) |                  |   | (244,125  | )
|                                                                                                                                                                                                                                                             |  |               |           |   |                  |   |           |  
|Total Stockholders Equity:                                                                                                                                                                                                                                  |  | $             | 929,018   |   |                  | $ | 903,508   |  
|                                                                                                                                                                                                                                                             |  |               |           |   |                  |   |           |  
|Total Liabilities and Stockholders Equity:                                                                                                                                                                                                                  |  | $             | 6,567,901 |   |                  | $ | 6,526,648 |  
|                                                                                                                                                                                                                                                             |  |               |           |   |                  |   |           |  

See accompanying notes to unaudited consolidated financial statements.



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ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)



|                                                            |  |                             |         |   |      |   |        |  
|----------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------ | -
|                                                            |  | Three Months EndedMarch 31, |        
|                                                            |  | 2010                        |         |   | 2009 |  
|Interest income:                                            |  |                             |         |   |      |   |        |  
|Interest on Agency MBS                                      |  | $                           | 61,151  |   |      | $ | 66,895 |  
|Interest on Non-Agency MBS                                  |  |                             | 48      |   |      |   | 75     |  
|Other income                                                |  |                             | 9       |   |      |   | 46     |  
|                                                            |  |                             |         |   |      |   |        |  
|                                                            |  |                             | 61,208  |   |      |   | 67,016 |  
|                                                            |  |                             |         |   |      |   |        |  
|Interest expense:                                           |  |                             |         |   |      |   |        |  
|Interest expense on repurchase agreements                   |  |                             | 23,699  |   |      |   | 32,038 |  
|Interest expense on junior subordinated notes               |  |                             | 305     |   |      |   | 455    |  
|                                                            |  |                             |         |   |      |   |        |  
|                                                            |  |                             | 24,004  |   |      |   | 32,493 |  
|                                                            |  |                             |         |   |      |   |        |  
|Net interest income                                         |  |                             | 37,204  |   |      |   | 34,523 |  
|                                                            |  |                             |         |   |      |   |        |  
|Net gain on derivative instruments                          |  |                             |        |   |      |   | 107    |  
|Expenses:                                                   |  |                             |         |   |      |   |        |  
|Compensation, incentive compensation and benefits           |  |                             | (3,198  | ) |      |   | (3,062 | )
|Other expenses                                              |  |                             | (757    | ) |      |   | (827   | )
|                                                            |  |                             |         |   |      |   |        |  
|Total expenses                                              |  |                             | (3,955  | ) |      |   | (3,889 | )
|                                                            |  |                             |         |   |      |   |        |  
|Net income                                                  |  |                             | 33,249  |   |      |   | 30,741 |  
|                                                            |  |                             |         |   |      |   |        |  
|Dividend on Series A Cumulative Preferred Stock             |  |                             | (1,011  | ) |      |   | (1,011 | )
|Dividend on Series B Cumulative Convertible Preferred Stock |  |                             | (430    | ) |      |   | (471   | )
|                                                            |  |                             |         |   |      |   |        |  
|Net income to common stockholders                           |  | $                           | 31,808  |   |      | $ | 29,259 |  
|                                                            |  |                             |         |   |      |   |        |  
|Basic earnings per common share                             |  | $                           | 0.27    |   |      | $ | 0.30   |  
|Diluted earnings per common share                           |  | $                           | 0.27    |   |      | $ | 0.30   |  
|Basic weighted average number of shares outstanding         |  |                             | 116,755 |   |      |   | 95,974 |  
|Diluted weighted average number of shares outstanding       |  |                             | 120,316 |   |      |   | 99,333 |  



See accompanying notes to unaudited consolidated financial statements.



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ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

(in thousands, except per share amounts)

(unaudited)



|                                                          |  |                               |  |                    |   |  |                                 |        |                      |   |       |                          |  |   |                                    |   |  |                                      |         |                                    |  |   |                 |  |   |             |   |  |       |          |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------- |  | ----------------------------- |  | ------------------ | - |  | ------------------------------- | ------ | -------------------- | - | ----- | ------------------------ |  | - | ---------------------------------- | - |  | ------------------------------------ | ------- | ---------------------------------- |  | - | --------------- |  | - | ----------- | - |  | ----- | -------- | - |  | - | ------- | - |  | - | ------- | -
|                                                          |  | Series APreferredStock Shares |  | CommonStock Shares |   |  | Series APreferredStockPar Value |        | CommonStock ParValue |   |       | AdditionalPaid-InCapital |  |   | Accum. OtherComp. IncomeAgency MBS |   |  | Accum. OtherComp.IncomeNon-AgencyMBS |         | Accum.OtherComp. (Loss)Derivatives |  |   | Accum.(Deficit) |  |   | Comp.Income |   |  | Total |         
|Balance, December 31, 2009                                |  | 1,876                         |  | 115,563            |   |  | $                               | 45,397 |                      | $ | 1,156 |                          |  | $ | 1,016,821                          |   |  | $                                    | 165,250 |                                    |  | $ | 492             |  | $ | (81,483     | ) |  | $     | (244,125 | ) |  |   |         |   |  | $ | 903,508 |  
|                                                          |  |                               |  |                    |   |  |                                 |        |                      |   |       |                          |  |   |                                    |   |  |                                      |         |                                    |  |   |                 |  |   |             |   |  |       |          |   |  |   |         |   |  |   |         |  
|Issuance of common stock                                  |  |                               |  | 2,901              |   |  |                                 |        |                      |   | 29    |                          |  |   | 19,230                             |   |  |                                      |         |                                    |  |   |                 |  |   |             |   |  |       |          |   |  |   |         |   |  |   | 19,259  |  
|Retired treasury stock                                    |  |                               |  | (513               | ) |  |                                 |        |                      |   | (5    | )                        |  |   | (3,511                             | ) |  |                                      |         |                                    |  |   |                 |  |   |             |   |  |       |          |   |  |   |         |   |  |   | (3,516  | )
|Other comprehensive income (loss), fair value adjustments |  |                               |  |                    |   |  |                                 |        |                      |   |       |                          |  |   |                                    |   |  |                                      | (23,751 | )                                  |  |   | 1,451           |  |   | 189         |   |  |       |          |   |  |   | (22,111 | ) |  |   | (22,111 | )
|Net income                                                |  |                               |  |                    |   |  |                                 |        |                      |   |       |                          |  |   |                                    |   |  |                                      |         |                                    |  |   |                 |  |   |             |   |  |       | 33,249   |   |  |   | 33,249  |   |  |   | 33,249  |  
|                                                          |  |                               |  |                    |   |  |                                 |        |                      |   |       |                          |  |   |                                    |   |  |                                      |         |                                    |  |   |                 |  |   |             |   |  |       |          |   |  |   |         |   |  |   |         |  
|Comprehensive income                                      |  |                               |  |                    |   |  |                                 |        |                      |   |       |                          |  |   |                                    |   |  |                                      |         |                                    |  |   |                 |  |   |             |   |  |       |          |   |  | $ | 11,138  |   |  |   |         |  
|                                                          |  |                               |  |                    |   |  |                                 |        |                      |   |       |                          |  |   |                                    |   |  |                                      |         |                                    |  |   |                 |  |   |             |   |  |       |          |   |  |   |         |   |  |   |         |  
|Amortization of restricted stock                          |  |                               |  |                    |   |  |                                 |        |                      |   |       |                          |  |   | 70                                 |   |  |                                      |         |                                    |  |   |                 |  |   |             |   |  |       |          |   |  |   |         |   |  |   | 70      |  
|Dividend declared$0.539063 per Series A preferred share  |  |                               |  |                    |   |  |                                 |        |                      |   |       |                          |  |   |                                    |   |  |                                      |         |                                    |  |   |                 |  |   |             |   |  |       | (1,011   | ) |  |   |         |   |  |   | (1,011  | )
|Dividend declared$0.390625 per Series B preferred share  |  |                               |  |                    |   |  |                                 |        |                      |   |       |                          |  |   |                                    |   |  |                                      |         |                                    |  |   |                 |  |   |             |   |  |       | (430     | ) |  |   |         |   |  |   | (430    | )
|                                                          |  |                               |  |                    |   |  |                                 |        |                      |   |       |                          |  |   |                                    |   |  |                                      |         |                                    |  |   |                 |  |   |             |   |  |       |          |   |  |   |         |   |  |   |         |  
|Balance, March 31, 2010                                   |  | 1,876                         |  | 117,951            |   |  | $                               | 45,397 |                      | $ | 1,180 |                          |  | $ | 1,032,610                          |   |  | $                                    | 141,499 |                                    |  | $ | 1,943           |  | $ | (81,294     | ) |  | $     | (212,317 | ) |  |   |         |   |  | $ | 929,018 |  
|                                                          |  |                               |  |                    |   |  |                                 |        |                      |   |       |                          |  |   |                                    |   |  |                                      |         |                                    |  |   |                 |  |   |             |   |  |       |          |   |  |   |         |   |  |   |         |  

See accompanying notes to unaudited consolidated financial statements.



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ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                  |  |                             |            |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                  |  | Three Months EndedMarch 31, |           
|                                                                                  |  | 2010                        |            |   | 2009 |  
|Operating Activities:                                                             |  |                             |            |   |      |   |            |  
|Net income                                                                        |  | $                           | 33,249     |   |      | $ | 30,741     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |            |   |      |   |            |  
|Amortization of premium and discounts (Agency MBS)                                |  |                             | 12,340     |   |      |   | 4,492      |  
|(Gain) on derivative instruments                                                  |  |                             |           |   |      |   | (107       | )
|Amortization of restricted stock                                                  |  |                             | 70         |   |      |   | 70         |  
|Changes in assets and liabilities:                                                |  |                             |            |   |      |   |            |  
|Decrease (increase) in interest receivable                                        |  |                             | 1,689      |   |      |   | (588       | )
|(Increase) in prepaid expenses and other                                          |  |                             | (593       | ) |      |   | (389       | )
|(Decrease) in accrued interest payable                                            |  |                             | (1,330     | ) |      |   | (21        | )
|Increase in accrued expenses and other                                            |  |                             | 98,779     |   |      |   | 1,835      |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Net cash provided by operating activities                                         |  | $                           | 144,204    |   |      | $ | 36,033     |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Investing Activities:                                                             |  |                             |            |   |      |   |            |  
|Available-for-sale Agency MBS:                                                    |  |                             |            |   |      |   |            |  
|Purchases                                                                         |  | $                           | (530,195   | ) |      | $ | (445,547   | )
|Principal payments                                                                |  |                             | 449,311    |   |      |   | 210,191    |  
|Available-for-sale Non-Agency MBS:                                                |  |                             |            |   |      |   |            |  
|Principal payments                                                                |  |                             | 869        |   |      |   | 544        |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Net cash used in investing activities                                             |  | $                           | (80,015    | ) |      | $ | (234,812   | )
|                                                                                  |  |                             |            |   |      |   |            |  
|Financing Activities:                                                             |  |                             |            |   |      |   |            |  
|Borrowings from repurchase agreements                                             |  | $                           | 7,194,350  |   |      | $ | 7,880,000  |  
|Repayments on repurchase agreements                                               |  |                             | (7,241,350 | ) |      |   | (7,760,000 | )
|Proceeds from common stock issued, net                                            |  |                             | 19,100     |   |      |   | 57,339     |  
|Series A Preferred stock dividends paid                                           |  |                             | (1,011     | ) |      |   | (1,011     | )
|Series B Preferred stock dividends paid                                           |  |                             | (433       | ) |      |   | (471       | )
|Common stock dividends paid                                                       |  |                             | (32,305    | ) |      |   | (23,445    | )
|Treasury stock                                                                    |  |                             | (3,517     | ) |      |   |            |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Net cash (used in) provided by financing activities                               |  | $                           | (65,166    | ) |      | $ | 152,412    |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Net decrease in cash and cash equivalents                                         |  | $                           | (977       | ) |      | $ | (46,367    | )
|Cash and cash equivalents at beginning of period                                  |  |                             | 1,812      |   |      |   | 131,970    |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Cash and cash equivalents at end of period                                        |  | $                           | 835        |   |      | $ | 85,603     |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Supplemental Disclosure of Cash Flow Information:                                 |  |                             |            |   |      |   |            |  
|Cash paid for interest                                                            |  | $                           | 25,335     |   |      | $ | 32,514     |  

See accompanying notes
to unaudited consolidated financial statements.



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ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



|                                                                        |  |                             |         |   |      |   |         |  
|----------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                        |  | Three Months EndedMarch 31, |        
|                                                                        |  | 2010                        |         |   | 2009 |  
|Net income                                                              |  | $                           | 33,249  |   |      | $ | 30,741  |  
|                                                                        |  |                             |         |   |      |   |         |  
|Available-for-sale Agency MBS, fair value adjustment                    |  |                             | (23,751 | ) |      |   | 63,721  |  
|Available-for-sale Non-Agency MBS, fair value adjustment                |  |                             | 1,451   |   |      |   | (140    | )
|Unrealized (losses) on cash flow hedges                                 |  |                             | (20,484 | ) |      |   | (6,028  | )
|Reclassification adjustment for gains on derivative instruments         |  |                             |        |   |      |   | (107    | )
|Reclassification adjustment for interest expense included in net income |  |                             | 20,673  |   |      |   | 17,321  |  
|                                                                        |  |                             |         |   |      |   |         |  
|                                                                        |  |                             | (22,111 | ) |      |   | 74,767  |  
|                                                                        |  |                             |         |   |      |   |         |  
|Comprehensive income                                                    |  | $                           | 11,138  |   |      | $ | 105,508 |  
|                                                                        |  |                             |         |   |      |   |         |  



See accompanying notes to unaudited
consolidated financial statements.



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ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

As used in this Quarterly Report on Form 10-Q, company, we, us, our, and
Anworth refer to Anworth Mortgage Asset Corporation.

NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

We were formed in October 1997 and commenced operations on March 17, 1998. We are in the business of investing
primarily in United States, or U.S., agency mortgage-backed securities, or MBS, which are obligations guaranteed by the U.S. government, such as Ginnie Mae, or federally sponsored enterprises, such as Fannie Mae or Freddie Mac. Our principal
business objective is to generate net income for distribution to stockholders based upon the spread between the interest income on our mortgage-related assets and the costs of borrowing to finance our acquisition of these assets.

We have elected to be taxed as a real estate investment trust, or REIT, under the Internal Revenue Code of 1986, or the Code. As a
REIT, we routinely distribute substantially all of the income generated from our operations to our stockholders. As long as we retain our REIT status, we generally will not be subject to federal or state taxes on our income to the extent that we
distribute our net income to our stockholders.

BASIS OF PRESENTATION AND CONSOLIDATION

The accompanying unaudited consolidated financial statements are prepared on the accrual basis of accounting in accordance with generally
accepted accounting principles utilized in the United States of America, or GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Material estimates that are susceptible to change relate to the
determination of the fair value of securities, amortization of security premiums and accretion of security discounts, accounting for derivatives and hedging activities and accounting for impaired securities. Actual results could materially differ
from these estimates. Significant intercompany accounts and transactions have been eliminated. In the opinion of management, all material adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been
included. The operating results for the three months ended March 31, 2010 and 2009 are not necessarily indicative of the results that may be expected for the calendar year. The interim financial information in the accompanying unaudited
consolidated financial statements and the notes thereto should be read in conjunction with the audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

The following is a summary of our significant accounting policies:

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less. The
carrying amount of cash equivalents approximates their fair value.

Mortgage-Backed Securities (MBS)

Agency MBS are securities that are obligations (including principal and interest) which are guaranteed by the U.S. government, such as
Ginnie Mae, or guaranteed by federally sponsored enterprises, such as Fannie Mae or Freddie Mac, which were placed in the conservatorship of the U.S. government in September 2008. Our investment grade Agency MBS portfolio is invested primarily in
fixed-rate and adjustable-rate mortgage-backed



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pass-through certificates and hybrid adjustable-rate MBS. Hybrid adjustable-rate MBS have an initial interest rate that is fixed for a certain period, usually three to five years, and then
adjusts annually for the remainder of the term of the loan. We structure our investment portfolio to be diversified with a variety of prepayment characteristics, investing in mortgage-related assets with prepayment penalties, investing in certain
mortgage security structures that have prepayment protections and purchasing mortgage-related assets at a premium and at a discount.

Non-Agency MBS are securities not issued by government-sponsored enterprises which are secured primarily by first-lien residential
mortgage loans.

We classify our MBS as either trading investments, available-for-sale investments or held-to-maturity
investments. Our management determines the appropriate classification of the securities at the time they are acquired and evaluates the appropriateness of such classifications at each balance sheet date. We currently classify all of our MBS as
available-for-sale. All assets that are classified as available-for-sale are carried at fair value and unrealized gains or losses are generally included in Other comprehensive income or loss as a component of stockholders equity.
Losses that are credit-related on securities classified as available-for-sale, which are determined by management to be other-than-temporary in nature, are reclassified from Other comprehensive income to income/(loss).

The most significant source of our revenue is derived from our investments in MBS. Interest income on our Agency MBS and Non-Agency MBS
is accrued based on the actual coupon rate and the outstanding principal 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 actual prepayments based on the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 320-10. Our policy for estimating prepayment speeds for calculating the effective yield is
to evaluate historical performance, street consensus prepayment speeds and current market conditions. If our estimate of prepayments is incorrect, as compared to the aforementioned references, 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, which could be material and adverse.

Securities are recorded on the date the securities are purchased or sold. Realized gains or losses from securities transactions are
determined based on the specific identified cost of the securities.

The following table shows our investments gross
unrealized losses and fair value of those individual securities that have been in a continuous unrealized loss position at March 31, 2010 and December 31, 2009, aggregated by investment category and length of time (dollar amounts in
thousands):

March 31, 2010



|                          |  |                     |  |           |                   |                  |   |        |                    |  |           |  |                  |         |  |                    |        |           |  |                  |  |   |           |  |   |        |  
|------------------------- |  | ------------------- |  | --------- | ----------------- | ---------------- | - | ------ | ------------------ |  | --------- |  | ---------------- | ------- |  | ------------------ | ------ | --------- |  | ---------------- |  | - | --------- |  | - | ------ | -
|                          |  | Less Than 12 Months |  |           | 12 Months or More |                  |   | Total  |                   
|Description of Securities |  | NumberofSecurities  |  | FairValue |                   | UnrealizedLosses |   |        | NumberofSecurities |  | FairValue |  | UnrealizedLosses |         |  | NumberofSecurities |        | FairValue |  | UnrealizedLosses | 
|Agency MBS                |  | 41                  |  | $         | 759,638           |                  | $ | (3,389 | )                  |  | 339       |  | $                | 300,265 |  | $                  | (4,978 | )         |  | 380              |  | $ | 1,059,903 |  | $ | (8,367 | )

December 31, 2009



|                          |  |                     |  |           |                   |                  |   |        |                    |  |           |  |                  |         |  |                    |        |           |  |                  |  |   |           |  |   |         |  
|------------------------- |  | ------------------- |  | --------- | ----------------- | ---------------- | - | ------ | ------------------ |  | --------- |  | ---------------- | ------- |  | ------------------ | ------ | --------- |  | ---------------- |  | - | --------- |  | - | ------- | -
|                          |  | Less Than 12 Months |  |           | 12 Months or More |                  |   | Total  |                   
|Description of Securities |  | NumberofSecurities  |  | FairValue |                   | UnrealizedLosses |   |        | NumberofSecurities |  | FairValue |  | UnrealizedLosses |         |  | NumberofSecurities |        | FairValue |  | UnrealizedLosses | 
|Agency MBS                |  | 48                  |  | $         | 895,549           |                  | $ | (4,334 | )                  |  | 360       |  | $                | 352,040 |  | $                  | (7,327 | )         |  | 408              |  | $ | 1,247,589 |  | $ | (11,661 | )



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We do not consider those Agency MBS that have been in a continuous loss position for 12
months or more to be other-than-temporarily impaired. The unrealized losses on our investments in Agency MBS were caused by fluctuations in interest rates and recent pricing that is reflective of the liquidity and credit problems surrounding the
mortgage markets generally. We purchased the Agency MBS primarily at a premium relative to their face value and the contractual cash flows of those investments are guaranteed by U.S. government or government-sponsored agencies. Since September 2008,
the government-sponsored agencies have been in the conservatorship of the U.S. government. We do not expect to sell the Agency MBS at a price less than the amortized cost basis of our investments. Because the decline in market value of the Agency
MBS is attributable to changes in interest rates and recent pricing that is reflective of the liquidity and credit problems surrounding the mortgage markets generally and not the credit quality of the Agency MBS in our portfolio, and because we do
not have the intent to sell these investments nor is it more likely than not that we will be required to sell these investments before recovery of their amortized cost basis, which may be at maturity, we do not consider these investments to be
other-than-temporarily impaired at March 31, 2010.

Repurchase Agreements

We finance the acquisition of our MBS primarily through the use of repurchase agreements. Under these repurchase agreements, we sell
securities to a lender and agree to repurchase the same securities in the future for a price that is higher than the original sales price. The difference between the sale price that we receive and the repurchase price that we pay represents interest
paid to the lender. Although structured as a sale and repurchase obligation, a repurchase agreement operates as a financing under which we pledge our securities and accrued interest as collateral to secure a loan which is equal in value to a
specified percentage of the estimated fair value of the pledged collateral. We retain beneficial ownership of the pledged collateral. Upon the maturity of a repurchase agreement, we are required to repay the loan and concurrently receive back our
pledged collateral from the lender or, with the consent of the lender, we may renew such agreement at the then- prevailing financing rate. These repurchase agreements may require us to pledge additional assets to the lender in the event the
estimated fair value of the existing pledged collateral declines. We are operating in an environment where, as a result of economic conditions, several large financial institutions involved in repurchase financing of MBS either have been acquired or
filed bankruptcy.

Derivative Financial Instruments

Interest Rate Risk Management

We use primarily short-term (less than or equal to 12 months) repurchase agreements to finance the purchase of our MBS. These obligations
expose us to variability in interest payments due to changes in interest rates. We continuously monitor changes in interest rate exposures and evaluate hedging opportunities.

Our objective is to limit the impact of interest rate changes on earnings and cash flows. We achieve this by entering into interest rate
swap agreements, which effectively convert a percentage of our repurchase agreements to fixed-rate obligations over a period of up to five years. Under interest rate swap contracts, we agree to pay an amount equal to a specified fixed rate of
interest times a notional principal amount and to receive in return an amount equal to a specified variable-rate of interest times a notional amount, generally based on LIBOR. The notional amounts are not exchanged. We account for these swap
agreements as cash flow hedges in accordance with ASC 815-10. We do not issue or hold derivative contracts for speculative purposes.

We are exposed to credit losses in the event of non-performance by counterparties to these interest rate swap agreements. In order to
limit credit risk associated with swap agreements, our current practice is to only enter into swap agreements with large financial institution counterparties who are market makers for these types of instruments, limit our exposure on each swap
agreement to a single counterparty under our defined guidelines and either pay or receive collateral to or from each counterparty on a periodic basis to cover the net fair market value position of the swap agreements held with that counterparty.



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Accounting for Derivatives and Hedging Activities

In accordance with ASC 815-10, a derivative that is designated as a hedge is recognized as an asset/liability and measured at estimated
fair value. In order for our interest rate swap agreements to qualify for hedge accounting, upon entering into the swap agreement, we must anticipate that the hedge will be highly effective as defined by ASC 815-10.

On the date we enter into a derivative contract, we designate the derivative as a hedge of the variability of cash flows that are to be
received or paid in connection with a recognized asset or liability (a cash flow hedge). Changes in the fair value of a derivative that are highly effective and that are designated and qualify as a cash flow hedge, to the extent that the
hedge is effective, are recorded in Other comprehensive income and reclassified to income when the forecasted transaction affects income (e.g., when periodic settlement interest payments are due on repurchase agreements). The swap
agreements are carried on our consolidated balance sheets at their fair value, based on values obtained from large financial institutions who are market makers for these types of instruments. Hedge ineffectiveness, if any, is recorded in
current-period income.

We formally assess, both at the hedges inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. If it is determined that
a derivative is not (or has ceased to be) highly effective as a hedge, we discontinue hedge accounting.

When we discontinue
hedge accounting, the gain or loss on the derivative remains in Accumulated other comprehensive income and is reclassified into income when the forecasted transaction affects income. In all situations in which hedge accounting is
discontinued and the derivative remains outstanding, we will carry the derivative at its fair value on our balance sheet, recognizing changes in the fair value in current-period income.

For purposes of the cash flow statement, cash flows from derivative instruments are classified with the cash flows from the hedged item.

For more details on the amounts and other qualitative information on our swap agreements, see Note 11. For more information
on the fair value of our swap agreements, see Note 5.

Credit Risk

At March 31, 2010, we have attempted to limit our exposure to credit losses on our MBS by purchasing securities primarily through
Freddie Mac and Fannie Mae. The payment of principal and interest on the Freddie Mac and Fannie Mae MBS are guaranteed by those respective enterprises. In September 2008, both Freddie Mac and Fannie Mae were placed in the conservatorship of the U.S.
government. While it is hoped that the conservatorship will help stabilize Freddie Macs and Fannie Maes losses and overall financial position, there can be no assurance that it will succeed or that, if necessary, Freddie Mac or Fannie
Mae will be able to satisfy its guarantees of Agency MBS.

Our adjustable-rate MBS are subject to periodic and lifetime
interest rate caps. Periodic caps can limit the amount an interest rate can increase during any given period. Some adjustable-rate MBS subject to periodic payment caps may result in a portion of the interest being deferred and added to the principal
outstanding.

Other-than-temporary losses on our available-for-sale MBS, as measured by the amount of decline in estimated
fair value attributable to credit losses that are considered to be other-than-temporary, are charged against income, resulting in an adjustment of the cost basis of such securities. Based on the criteria in ASC-320-10, the determination of whether a
security is other-than-temporarily impaired (OTTI) involves judgments and assumptions based on both subjective and objective factors. When a security is impaired, an OTTI is considered to have occurred if (i) we intend to sell the security,
(ii) it is more likely than not that we will be



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required to sell the security before recovery of its amortized cost basis, or (iii) we do not expect to recover its amortized cost basis (i.e., there is a credit-related loss). The following
are among, but not all of, the factors considered in determining whether and to what extent an OTTI exists and the portion that is related to credit loss: (i) the expected cash flow from the investment; (ii) whether there has been an
other-than-temporary deterioration of the credit quality of the underlying mortgages; (iii) the credit protection available to the related mortgage pool for MBS; (iv) any other market information available, including analysts
assessments and statements, public statements and filings made by the debtor or counterparty; (v) managements internal analysis of the security, considering all known relevant information at the time of assessment; and (vi) the
magnitude and duration of historical decline in market prices. Because managements assessments are based on factual information as well as subjective information available at the time of assessment, the determination as to whether an
other-than-temporary decline exists and, if so, the amount considered impaired, is also subjective and therefore constitutes material estimates that are susceptible to significant change.

Income Taxes

We have
elected to be taxed as a REIT and to comply with the provisions of the Code with respect thereto. Accordingly, we will not be subject to federal income tax to the extent that our distributions to our stockholders satisfy the REIT requirements and
that certain asset, gross income and stock ownership tests are met.

We have no unrecognized tax benefits and do not
anticipate any increase in unrecognized benefits during 2010 relative to any tax positions taken prior to January 1, 2010. Should the accrual of any interest or penalties relative to unrecognized tax benefits be necessary, it is our policy to
record such accruals in our income taxes accounts; and no such accruals existed at March 31, 2010. We file both REIT and taxable REIT subsidiary U.S. federal and California income tax returns. These returns are generally open to examination by
the IRS and the California Franchise Tax Board for all years after 2005 and 2004, respectively.

Cumulative Convertible Preferred Stock

We classify our 6.25% Series B Cumulative Convertible Preferred Stock, or Series B Preferred Stock, on our consolidated
balance sheets using the guidance in ASC 480-10-S99. The Series B Preferred Stock contains certain fundamental change provisions that allow the holder to redeem the preferred stock for cash only if certain events occur, such as a change in control.
As redemption under these circumstances is not solely within our control, we have classified the Series B Preferred Stock as temporary equity.

We have analyzed whether the conversion features in the Series B Preferred Stock should be bifurcated under the guidance in ASC 815-10
and have determined that bifurcation is not necessary.

Stock-Based Compensation

In accordance with ASC 718-10, any compensation cost relating to share-based payment transactions is recognized in the consolidated
financial statements.

Restricted stock is expensed over the vesting period (see Note 10).

Earnings Per Share

Basic earnings per share, or EPS, is computed by dividing net income available to common stockholders by the weighted average number of
common shares outstanding during the period. Diluted EPS assumes the conversion, exercise or issuance of all potential common stock equivalents unless the effect is to reduce a loss or increase the income per share.



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The computation of EPS for the three months ended March 31, 2010 and March 31,
2009 are as follows (amounts in thousands, except per share data):



|                                          |  |                                          |        |               |         |                  |   |     
|----------------------------------------- |  | ---------------------------------------- | ------ | ------------- | ------- | ---------------- | - | ----
|                                          |  | Net IncomeAvailable toCommonStockholders |        | AverageShares |         | EarningsperShare
|For the three months ended March 31, 2010 |  |                                          |        |               |         |                  |   |     
|Basic EPS                                 |  | $                                        | 31,808 |               | 116,755 |                  | $ | 0.27
|Effect of dilutive securities(1)          |  |                                          | 430    |               | 3,561   |                  |   |    
|                                          |  |                                          |        |               |         |                  |   |     
|Diluted EPS                               |  | $                                        | 32,238 |               | 120,316 |                  | $ | 0.27
|                                          |  |                                          |        |               |         |                  |   |     
|For the three months ended March 31, 2009 |  |                                          |        |               |         |                  |   |     
|Basic EPS                                 |  | $                                        | 29,259 |               | 95,974  |                  | $ | 0.30
|Effect of dilutive securities(2)          |  |                                          | 471    |               | 3,359   |                  |   |    
|                                          |  |                                          |        |               |         |                  |   |     
|Diluted EPS                               |  | $                                        | 29,730 |               | 99,333  |                  | $ | 0.30
|                                          |  |                                          |        |               |         |                  |   |     



|(1) | During the three months ended March 31, 2010, diluted earnings per common share included the assumed conversion of 1.1 million shares of Series B Preferred
Stock at the then-current conversion rate of 3.1505 shares of common stock and adding back the Series B Preferred Stock dividend.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | During the three months ended March 31, 2009, diluted earnings per common share included the assumed conversion of 1.206 million shares of Series B Preferred
Stock at the then-current conversion rate of 2.7865 shares of common stock and adding back the Series B Preferred Stock dividend.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Accumulated Other Comprehensive Income (Loss)

In accordance with ASC 220-10-55-2, comprehensive income is divided into net income and other comprehensive income (loss), which includes
unrealized gains and losses on marketable securities classified as available-for-sale, and unrealized gains and losses on derivative financial instruments that qualify for cash flow hedge accounting under ASC 815-10.

USE OF ESTIMATES

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

RECENT ACCOUNTING PRONOUNCEMENTS

On June 12, 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, or SFAS 166, and SFAS
No. 167, Amendments to FASB Interpretation No. 46 (R), or SFAS 167. SFAS 166 is a revision to ASC 860-10 and will require more information about transfers of financial assets, including securitization transactions, and also
companies having continuing exposure to the risks related to transferred financial assets. It eliminates the concept of a qualifying special-purpose entity, changes the requirements for derecognizing financial assets and requires
additional disclosures. SFAS 167 is a revision to ASC 810-10 and changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of
whether to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. SFAS 166
and SFAS 167 are effective beginning January 1, 2010. On December 23, 2009, the FASB issued two updates, Accounting Standards Updates, or ASU, No. 2009-16, Transfers and Servicing (Topic 860)  Accounting for Transfers of
Financial Assets and ASU No. 2009-17, Consolidations (Topic 810)  Improvements to Financial Reporting by



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Enterprises Involved with Variable Interest Entities. These two ASUs were issued to incorporate the above June 2009 pronouncements into the accounting standards codification. We have
adopted these two new standards and updates and they did not have a material impact on our financial statements.

On
January 21, 2010, the FASB issued ASU 2010-06, Improving Disclosures about Fair Value Measurements. This ASU amends ASC 820, Fair Value Measurements and Disclosures to add new requirements about transfers into and out of
Levels 1 and 2 and separate disclosures about purchases, sales, issuances and settlements relating to Level 3 measurements. It also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques
used to measure fair value. ASC 820s existing guidance requires entities to provide fair value measurement disclosures by major category of assets and liabilities. This ASU requires entities to provide fair value measurements for
each class of assets and liabilities. When providing disclosures for equity and debt securities, entities should determine class on the basis of the nature and risks of the securities. In determining the nature and risks of the
securities, entities should consider activity or business sector, vintage, geographic concentration, credit quality, and economic characteristics. The ASU requires an entity, in determining the appropriate classes of assets and liabilities to
consider the nature and risks of the assets and liabilities as well as their placement in the fair value hierarchy (i.e. Level 1, 2 or 3). This ASU became effective for our financial statements for the first quarter ending March 31, 2010 and it
did not have a material impact on our financial statements.

In February 2010, the FASB issued ASU 2010-09 relating to
Subsequent Events. This ASU amends ASC 855 to address certain implementation issues related to an entitys requirements to perform and disclose subsequent events procedures. This ASU requires SEC filers to evaluate subsequent events through the
date the financial statements are issued and exempts SEC filers from disclosing the date through which subsequent events have been evaluated. This ASU was effective immediately for financial statements that are issued or available to be issued as of
the date of the pronouncement. This ASU did not have a material impact on our financial statements.

NOTE 2. MORTGAGE-BACKED SECURITIES
(MBS)

The following tables summarize our Agency MBS and Non-Agency MBS, classified as available-for-sale, at
March 31, 2010 and December 31, 2009, which are carried at their fair value (amounts in thousands):

March 31, 2010



|                              |  |      |           |   |            |   |           |             |  |   |                   |   |  |                 |           |   |  |   |           |  
|----------------------------- |  | ---- | --------- | - | ---------- | - | --------- | ----------- |  | - | ----------------- | - |  | --------------- | --------- | - |  | - | --------- | -
|Agency MBS (By Agency)        |  |      |           |   | Ginnie Mae |   |           | Freddie Mac |  |   | Fannie Mae        |   |  | TotalAgency MBS |          
|Amortized cost                |  |      |           |   |            | $ | 21,175    |             |  | $ | 1,081,147         |   |  | $               | 5,180,013 |   |  | $ | 6,282,335 |  
|Paydowns receivable           |  |      |           |   |            |   |          |             |  |   | 106,758           |   |  |                 |          |   |  |   | 106,758   |  
|Unrealized gains              |  |      |           |   |            |   | 43        |             |  |   | 43,980            |   |  |                 | 105,843   |   |  |   | 149,866   |  
|Unrealized losses             |  |      |           |   |            |   | (214      | )           |  |   | (1,564            | ) |  |                 | (6,589    | ) |  |   | (8,367    | )
|                              |  |      |           |   |            |   |           |             |  |   |                   |   |  |                 |           |   |  |   |           |  
|Fair value                    |  |      |           |   |            | $ | 21,004    |             |  | $ | 1,230,321         |   |  | $               | 5,279,267 |   |  | $ | 6,530,592 |  
|                              |  |      |           |   |            |   |           |             |  |   |                   |   |  |                 |           |   |  |   |           |  
|                              |  |      |           |   |           
|Agency MBS (By Security Type) |  | ARMs |           |   | Hybrids    |   |           | Fixed-Rate  |  |   | Floating-RateCMOs |   |  | TotalAgency MBS |          
|Amortized cost                |  | $    | 1,699,792 |   |            | $ | 3,861,862 |             |  | $ | 715,384           |   |  | $               | 5,297     |   |  | $ | 6,282,335 |  
|Paydowns receivable           |  |      | 26,159    |   |            |   | 80,599    |             |  |   |                  |   |  |                 |          |   |  |   | 106,758   |  
|Unrealized gains              |  |      | 19,785    |   |            |   | 88,462    |             |  |   | 41,616            |   |  |                 | 3         |   |  |   | 149,866   |  
|Unrealized losses             |  |      | (5,306    | ) |            |   | (3,056    | )           |  |   |                  |   |  |                 | (5        | ) |  |   | (8,367    | )
|                              |  |      |           |   |            |   |           |             |  |   |                   |   |  |                 |           |   |  |   |           |  
|Fair value                    |  | $    | 1,740,430 |   |            | $ | 4,027,867 |             |  | $ | 757,000           |   |  | $               | 5,295     |   |  | $ | 6,530,592 |  
|                              |  |      |           |   |            |   |           |             |  |   |                   |   |  |                 |           |   |  |   |           |  



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|                    |  |                    |      
|------------------- |  | ------------------ | -----
|Non-Agency MBS      |  | TotalNon-AgencyMBS
|Amortized cost      |  | $                  | 3,382
|Paydowns receivable |  |                    |     
|Unrealized gains    |  |                    | 1,942
|Unrealized losses   |  |                    |     
|                    |  |                    |      
|Fair value          |  | $                  | 5,324
|                    |  |                    |      

At March 31, 2010, our Non-Agency MBS portfolio
consisted of floating-rate collateralized mortgage obligations (option-adjusted ARMs based on one-month LIBOR), or CMOs, with an average coupon of 0.49%, which were acquired at par value. Non-Agency MBS are securities not issued by the government or
government-sponsored enterprises and are secured primarily by first-lien residential mortgage loans.

At March 31, 2010,
two securities representing the principal balance of our Non-Agency MBS portfolio were rated CC by Standard & Poors and Ca by Moodys Investor Service.

December 31, 2009



|                              |  |      |           |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  
|----------------------------- |  | ---- | --------- | - | ---------- | - | --------- | ----------- |  | - | ------------------ | - |  | --------------- | --------- | - |  | - | --------- | -
|Agency MBS (By Agency)        |  |      |           |   | Ginnie Mae |   |           | Freddie Mac |  |   | Fannie Mae         |   |  | TotalAgency MBS |          
|Amortized cost                |  |      |           |   |            | $ | 22,238    |             |  | $ | 1,294,667          |   |  | $               | 4,992,868 |   |  | $ | 6,309,773 |  
|Paydowns receivable           |  |      |           |   |            |   |          |             |  |   | 10,778             |   |  |                 |          |   |  |   | 10,778    |  
|Unrealized gains              |  |      |           |   |            |   | 10        |             |  |   | 46,884             |   |  |                 | 130,017   |   |  |   | 176,911   |  
|Unrealized losses             |  |      |           |   |            |   | (302      | )           |  |   | (1,881             | ) |  |                 | (9,478    | ) |  |   | (11,661   | )
|                              |  |      |           |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  
|Fair value                    |  |      |           |   |            | $ | 21,946    |             |  | $ | 1,350,448          |   |  | $               | 5,113,407 |   |  | $ | 6,485,801 |  
|                              |  |      |           |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  
|                              |  |      |           |   |           
|Agency MBS (By Security Type) |  | ARMs |           |   | Hybrids    |   |           | Fixed-Rate  |  |   | Floating-Rate CMOs |   |  | TotalAgency MBS |          
|Amortized cost                |  | $    | 1,622,821 |   |            | $ | 3,875,217 |             |  | $ | 806,020            |   |  | $               | 5,715     |   |  | $ | 6,309,773 |  
|Paydowns receivable           |  |      | 2,937     |   |            |   | 7,841     |             |  |   |                   |   |  |                 |          |   |  |   | 10,778    |  
|Unrealized gains              |  |      | 17,298    |   |            |   | 118,859   |             |  |   | 40,754             |   |  |                 |          |   |  |   | 176,911   |  
|Unrealized losses             |  |      | (8,103    | ) |            |   | (3,505    | )           |  |   |                   |   |  |                 | (53       | ) |  |   | (11,661   | )
|                              |  |      |           |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  
|Fair value                    |  | $    | 1,634,953 |   |            | $ | 3,998,412 |             |  | $ | 846,774            |   |  | $               | 5,662     |   |  | $ | 6,485,801 |  
|                              |  |      |           |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  



|                 |  |                    |      
|---------------- |  | ------------------ | -----
|                 | 
|Non-Agency MBS   |  | TotalNon-AgencyMBS
|Amortized cost   |  | $                  | 4,250
|Unrealized gains |  |                    | 492  
|                 |  |                    |      
|Fair value       |  | $                  | 4,742
|                 |  |                    |      

At December 31, 2009, our Non-Agency MBS
portfolio consisted of floating-rate CMOs with an average coupon of 0.48%, which were acquired at par value.

NOTE 3. REPURCHASE
AGREEMENTS

We have entered into repurchase agreements with large financial institutions to finance most of our Agency MBS.
The repurchase agreements are short-term borrowings that are secured by the market value of our MBS and bear fixed interest rates that have historically been based upon LIBOR.



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Relative to our Agency MBS portfolio, at March 31, 2010, our repurchase agreements had
a weighted average term to maturity of 36 days and a weighted average borrowing rate of 0.23%. After adjusting for swap transactions, the weighted average term to the next rate adjustment was 322 days with a weighted average borrowing rate of 1.80%.
At March 31, 2010, Agency MBS with a fair value of approximately $5.7 billion have been pledged as collateral under the repurchase agreements and swap agreements.

One of our former repurchase agreement counterparties, Lehman Brothers, Inc. is in a bankruptcy proceeding. At March 31, 2010, the
receivable from Lehman Brothers, Inc. of $962 thousand is carried in Other assets on our consolidated balance sheets.

Relative to our Agency MBS portfolio, at December 31, 2009, our repurchase agreements had a weighted average term to maturity of 38
days and a weighted average borrowing rate of 0.24%. After adjusting for swap transactions, the weighted average term to the next rate adjustment was 309 days with a weighted average borrowing rate of 1.88%. At December 31, 2009, Agency
MBS with a fair value of approximately $5.75 billion had been pledged as collateral under the repurchase agreements and swap agreements.

At March 31, 2010 and December 31, 2009, the repurchase agreements had the following balances (in thousands), remaining
maturities and weighted average interest rates:



|                                 |  |               |           |                             |                  |   |         |   |                             |  |      |  
|-------------------------------- |  | ------------- | --------- | --------------------------- | ---------------- | - | ------- | - | --------------------------- |  | ---- | -
|                                 |  | March 31,2010 |           |                             | December 31,2009 |  
|                                 |  | Balance       |           | WeightedAverageInterestRate |                  |   | Balance |   | WeightedAverageInterestRate | 
|Overnight                        |  | $             |          |                             |                 |   |         | $ |                            |  |     |  
|Less than 30 days                |  |               | 2,837,000 |                             | 0.22             | % |         |   | 2,427,000                   |  | 0.24 | %
|30 days to 90 days               |  |               | 2,475,000 |                             | 0.24             | % |         |   | 2,932,000                   |  | 0.24 | %
|Over 90 days to less than 1 year |  |               |          |                             |                 |   |         |   |                            |  |     |  
|1 year to 2 years                |  |               |          |                             |                 |   |         |   |                            |  |     |  
|Demand                           |  |               |          |                             |                 |   |         |   |                            |  |     |  
|                                 |  |               |           |                             |                  |   |         |   |                             |  |      |  
|                                 |  | $             | 5,312,000 |                             | 0.23             | % |         | $ | 5,359,000                   |  | 0.24 | %
|                                 |  |               |           |                             |                  |   |         |   |                             |  |      |  

NOTE 4. JUNIOR SUBORDINATED NOTES

On March 15, 2005, we issued $37,380,000 of junior subordinated notes to a newly-formed statutory trust, Anworth Capital Trust I,
organized by us under Delaware law. The trust issued $36,250,000 in trust preferred securities to unrelated third party investors. Both the notes and the trust preferred securities require quarterly payments and bear interest at the prevailing
three-month LIBOR rate plus 3.10%, reset quarterly. The first interest payment was made on June 30, 2005. Both the notes and the securities will mature in 2035 and may be



14



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redeemable, at our option, in whole or in part, without penalty, after March 30, 2010 and April 30, 2010. We used the net proceeds of this private placement to invest in Agency MBS. We
have reviewed the structure of the transaction under ASC 810-10 and concluded that Anworth Capital Trust I does not meet the requirements for consolidation. On September 26, 2005, the notes, the trust preferred securities and the related
agreements were amended. The only material change was that one of the class holders requested that interest payments be made quarterly on January 30, April 30, July 30 and October 30 instead of at the end of each
calendar quarter. This became effective with the quarterly payment after September 30, 2005. As of the date of this filing, we have not redeemed any of the notes or securities.

NOTE 5. FAIR VALUES OF FINANCIAL INSTRUMENTS

As defined in ASC 820-10, fair value is the price that would be received from the sale of an asset or paid to transfer or settle a
liability in an orderly transaction between market participants in the principal (or most advantageous) market for the asset or liability. ASC 820-10 establishes a fair value hierarchy that ranks the quality and reliability of the information used
to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the three following categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. This includes those financial
instruments that are valued using models or other valuation methodologies where substantially all of the assumptions are observable in the marketplace, can be derived from observable market data or are supported by observable levels at which
transactions are executed in the marketplace. We consider the inputs utilized to fair value our Agency MBS to be Level 2. Management bases the fair value for these investments primarily on third party bid price indications provided by dealers who
make markets in these instruments. The Agency MBS market is primarily an over-the-counter market. As such, there are no standard, public market quotations or published trading data for individual MBS securities. As our portfolio consists of hundreds
of similar, but distinct, securities that have each been traded with only one broker counterparty, we generally seek to have each Agency MBS security priced by one broker. The prices received are non-binding offers to trade, but are indicative
quotations of the market value of our securities as of the market close on the last day of each quarter. The brokers receive trading data from several traders that participate in the active markets for these securities and directly observe numerous
trades of securities similar to the securities owned by us. Given the volume of market activity for Agency MBS, it is our belief that the broker pricing accurately reflects market information for actual, contemporaneous transactions. We do not
adjust quotes or prices we obtain from brokers and pricing services. In the limited instances where valuations are received on a security from multiple brokers, we use the median value of the prices received to determine fair value. To validate the
prices we obtain, to ensure our fair value determinations are consistent with ASC 820, and to ensure that we properly classify these securities in the fair value hierarchy, we evaluate the pricing information we receive taking into account factors
such as coupon, prepayment experience, fixed/adjustable rate, coupon index, time to reset and issuing agency, among other factors. Based on these factors, broker prices are compared to prices of similar securities provided by other brokers. If we
determine (based on such a comparison and our market knowledge and expertise) that a security is priced significantly differently than similar securities, the broker is contacted and requested to revisit their valuation of the security. If a broker
refuses to reconsider its valuation, we will request pricing from another broker and use the median value of the prices received to determine fair value. If we are unable to receive a valuation from another broker, the price received from an
independent third party pricing service will be used, if it is determined (based on our market knowledge and expertise) to be more reliable than the broker pricing. However, the fair value reported may not be indicative of the amounts that could be
realized in an actual market exchange. Our derivative assets and derivative liabilities are comprised of swap agreements, in which we pay a fixed rate of interest and receive a variable rate of interest that is based on LIBOR. The fair value of
these instruments is reported to us independently from dealers who are large financial institutions and are market makers for these types of instruments. The LIBOR swap rate is observable at commonly quoted intervals over the



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full term of the swap agreements and therefore is considered a Level 2 item. The fair value of the derivative instruments assets and liabilities are the estimated amounts the Company would
either receive or pay to terminate these agreements at the reporting date, taking into account current interest rates and the companys credit worthiness.

Level 3: Unobservable inputs that are not corroborated by market data. This is comprised of financial instruments whose fair value is
estimated based on internally developed models or methodologies utilizing significant inputs that are generally less readily observable from objective sources. At March 31, 2010 and December 31, 2009, we considered the inputs utilized to
fair value the Non-Agency MBS to be Level 3. Historically (prior to December 31, 2008), we had received non-binding indications of value from brokers who make markets in Non-Agency MBS and also observe market activity in our Non-Agency MBS as
well as other similar securities. As the market for Non-Agency MBS became more volatile and less liquid, we received fewer indications of value on these securities. At March 31, 2010 and December 31, 2009, we were unable to get any brokers
who made markets in these securities to provide valuation information on our Non-Agency MBS. Instead, we obtained valuations at March 31, 2010 and December 31, 2009 for our Non-Agency MBS from an experienced independent third party pricing
service, whose methodologies are based on broker provided pricing information, as well as indirect observation of market activity. Although we continued to monitor market activity for the Non-Agency MBS in our portfolio, as well as for other similar
securities, given the lack of trading activity that we were able to observe, we placed more weight on the third party pricing service valuation as it was both independent and specifically determined. As a result of the lack of valuation information
from brokers and our own observation of market activity, we determined that the market for our Non-Agency MBS was inactive. We also believe that the valuations obtained from the independent third party pricing service already take into account the
illiquidity of the market for Non-Agency MBS and therefore we do not apply our own liquidity discount when determining their fair value. Based on this information, we consider the fair value measurement of the Non-Agency MBS a Level 3 input at
March 31, 2010 and December 31, 2009.

In determining the appropriate levels, the Company performs a detailed
analysis of the assets and liabilities that are subject to ASC 820-10. At each reporting period, all assets and liabilities for which the fair value measurement is based on significant unobservable inputs are classified as Level 3.

At March 31, 2010, fair value measurements were as follows (in thousands):



|                          |  |         |   |         |   |           |  |       |       |  |   |          
|------------------------- |  | ------- | - | ------- | - | --------- |  | ----- | ----- |  | - | ---------
|                          |  | Level 1 |   | Level 2 |   | Level 3   |  | Total
|Assets:                   |  |         |   |         |   |           |  |       |       |  |   |          
|Agency MBS(1)             |  | $       |  |         | $ | 6,530,592 |  | $     |      |  | $ | 6,530,592
|Non-Agency MBS(2)         |  | $       |  |         | $ |          |  | $     | 5,324 |  | $ | 5,324    
|Derivative instruments(3) |  | $       |  |         | $ | 12        |  | $     |      |  | $ | 12       
|Liabilities:              |  |         |   |         |   |           |  |       |       |  |   |          
|Derivative instruments(3) |  | $       |  |         | $ | 80,633    |  | $     |      |  | $ | 80,633   



|(1) | For more detail about the fair value of our Agency MBS by agency and type of security, see Note 2 in the unaudited consolidated financial statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | For more detail about the fair value of our Non-Agency MBS, see Note 2 in the unaudited consolidated financial statements.
|--- | --------------------------------------------------------------------------------------------------------------------------

|(3) | Derivative instruments are hedging instruments under ASC 815-10. For more detail about our derivative instruments, see Notes 1 and 11 in the unaudited consolidated
financial statements.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Cash and cash equivalents, restricted cash, interest receivable, repurchase agreements
and interest payable are reflected in our unaudited consolidated financial statements at their costs, which approximate their fair value because of the nature and short term of these instruments.



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Junior subordinated notes are variable-rate debt and, as we believe the spread would be
consistent with the expectations of market participants as of March 31, 2010 and December 31, 2009, the carrying value approximates fair value.

A reconciliation of the Level 3 Non-Agency MBS fair value measurements is as follows (in thousands):



|                                                          |  |        |       |  
|--------------------------------------------------------- |  | ------ | ----- | -
|                                                          |  | Amount |      
|Balance at December 31, 2009                              |  | $      | 4,742 |  
|Principal paydowns                                        |  |        | (869  | )
|Unrealized gains recognized in other comprehensive income |  |        | 1,451 |  
|Unrealized losses                                         |  |        |      |  
|                                                          |  |        |       |  
|Balance at March 31, 2010                                 |  | $      | 5,324 |  
|                                                          |  |        |       |  

NOTE 6. INCOME TAXES

We have elected to be taxed as a REIT and to comply with the provisions of the Code with respect thereto. Accordingly, we will not be
subject to federal or state income taxes to the extent that our distributions to stockholders satisfy the REIT requirements and certain asset, gross income and stock ownership tests are met. We believe we currently meet all REIT requirements
regarding the ownership of our common stock and the distribution of our net income. Therefore, we believe that we continue to qualify as a REIT under the provisions of the Code.

NOTE 7. SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK

The Series B Preferred Stock has a par value of $0.01 per share and a liquidation preference of $25.00 per share plus accrued and unpaid
dividends (whether or not declared). The Series B Preferred Stock must be paid a dividend at a rate of 6.25% per year on the $25.00 liquidation preference before the common stock is entitled to receive any dividends. The Series B Preferred
Stock is senior to the common stock and on parity with our 8.625% Series A Cumulative Preferred Stock, or Series A Preferred Stock, with respect to the payment of distributions and amounts, upon liquidation, dissolution or winding up.

The Series B Preferred Stock has no maturity date and is not redeemable. Through March 31, 2010, the Series B Preferred Stock was
convertible at the then-current conversion rate of 3.1505 shares of our common stock per $25.00 liquidation preference. The conversion rate will be adjusted in any fiscal quarter in which the cash dividends paid to common stockholders results in an
annualized common stock dividend yield that is greater than 6.25%. The conversion ratio will also be subject to adjustment upon the occurrence of certain specific events such as a change of control. The Series B Preferred Stock is convertible into
shares of our common stock at the option of the holder(s) of Series B Preferred Stock at any time at the then-prevailing conversion rate. On or after January 25, 2012, we may, at our option, convert under certain circumstances each share of
Series B Preferred Stock into a number of common shares at the then-prevailing conversion rate. We may exercise our Company Conversion Option only if our common stock price equals or exceeds 130% of the then-prevailing conversion price of the Series
B Preferred Stock for at least twenty (20) trading days in a period of thirty (30) consecutive trading days (including the last trading day of such period) ending on the trading day immediately prior to our issuance of a press release
announcing the exercise of our Company Conversion Option. The Series B Preferred Stock contains certain fundamental change provisions that allow the holder to redeem the Series B Preferred Stock for cash if certain events occur, such as a change in
control. The Series B Preferred Stock generally does not have voting rights, except if dividends on the Series B Preferred Stock are in arrears for six or more quarterly periods (whether or not consecutive). Under such circumstances, the holder(s)
of Series B Preferred Stock, together with the holders of Series A Preferred Stock, will be entitled to vote to elect two additional directors to our board of directors to serve until all unpaid dividends have been paid or declared and set aside for
payment. In addition, certain material and adverse changes to the terms of the Series B Preferred Stock may not be taken without the affirmative vote of at least two-thirds of the outstanding shares of Series B Preferred Stock and Series A Preferred
Stock voting together as a single class. Through March 31, 2010, we have declared and set aside for payment the required dividends for the Series B Preferred Stock.



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During the three months ended March 31, 2010, there were three transactions to convert
an aggregate of 6,700 shares of Series B Preferred Stock into an aggregate of 21,105 shares of our common stock (based on the then-current conversion rate of 3.1505). During the three months ended March 31, 2010, we did not issue any shares of
Series B Preferred Stock. At March 31, 2010, there were 1.102 million shares of Series B Preferred Stock outstanding.

NOTE 8.
PUBLIC OFFERINGS AND CAPITAL STOCK

At our Annual Meeting of Stockholders held on May 22, 2008, our stockholders
approved an amendment to our Amended Articles of Incorporation to increase our authorized number of shares of common stock from 100 million to 200 million shares. At March 31, 2010, 117.95 million shares of our common stock were
issued and outstanding.

At March 31, 2010, our authorized capital included 20 million shares of $0.01 par value
preferred stock, of which 5.15 million shares had been designated 8.625% Series A Cumulative Preferred Stock (liquidation preference $25.00 per share) and 3.15 million shares had been designated 6.25% Series B Cumulative Convertible
Preferred Stock (liquidation preference $25.00 per share). The undesignated shares of preferred stock may be issued in one or more classes or series, with such distinctive designations, rights and preferences as determined by our board of directors.

On February 1, 2010, we announced that our board of directors had authorized a share repurchase program, permitting us
to acquire 5,850,000 shares of our common stock, or approximately 5% of our total shares of common stock outstanding. The shares are to be acquired at prevailing prices through open market transactions and are made subject to restrictions relating
to volume, price and timing. The manner, price, number and timing of these share repurchases are subject to market conditions and applicable SEC rules. During the three months ended March 31, 2010, we had purchased a total of 513 thousand
shares at a weighted average price of $6.84 per share under this program.

On May 14, 2008, we entered into a new
Controlled Equity Offering Sales Agreement, or the 2008 Sales Agreement, with Cantor Fitzgerald & Co., or Cantor. Under the Controlled Equity Offering Program, or the Program, we may sell, from time to time, in our sole discretion, up to
15 million shares of common stock, 1.25 million shares of Series A Preferred Stock and 2 million shares of Series B Preferred Stock. During the three months ended March 31, 2010, we did not sell any shares of our common stock or
preferred stock under the Program. At March 31, 2010, there were 5,101,900 shares of common stock, 1,225,000 shares of Series A Preferred Stock and 1,902,800 shares of Series B Preferred Stock, respectively, available under the 2008 Sales
Agreement.

Our Dividend Reinvestment and Stock Purchase Plan allows stockholders and non-stockholders to purchase shares of
our common stock and to reinvest dividends therefrom to acquire additional shares of our common stock. On December 28, 2009, we filed a shelf registration statement on Form S-3ASR with the SEC, offering up to 20 million shares of common
stock for our 2009 Dividend Reinvestment and Stock Purchase Plan, or the 2009 Plan. During the three months ended March 31, 2010, we issued approximately 2.88 million shares of common stock under the 2009 Plan, resulting in proceeds to us
of approximately $19.1 million. At March 31, 2010, there were approximately 17.120 million shares remaining under the 2009 Plan.

On February 26, 2010, we filed a shelf registration statement on Form S-3/A with the SEC, offering up to $600 million of our capital
stock. The registration statement was declared effective on March 26, 2010. At March 31, 2010, approximately $600 million of this amount remained available for issuance under the registration statement.

On November 7, 2005, we filed a registration statement on Form S-8 with the SEC to register an aggregate of up to 3.5 million
shares of our common stock to be issued pursuant to the Anworth Mortgage Asset



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Corporation 2004 Equity Compensation Plan. To date, we have issued 2.778 million shares under the plan. This amount includes 1.278 million shares of unexercised stock options and
restricted stock.

NOTE 9. TRANSACTIONS WITH AFFILIATES

Anworth 2002 Incentive Compensation Plan

Under our 2002 Incentive Compensation Plan, or the 2002 Incentive Plan, Lloyd McAdams, our Chief Executive Officer, Joseph E. McAdams, our
Chief Investment Officer, Heather U. Baines, our Executive Vice President, and other executives are eligible to earn incentive compensation during each fiscal quarter. The 2002 Incentive Plan requires that we pay all amounts earned thereunder each
quarter (subject to offset for accrued negative incentive compensation) and we will be required to pay a percentage of such amounts to certain of our executives pursuant to the terms of their employment agreements. Pursuant to their employment
agreements, Lloyd McAdams, Joseph E. McAdams and Heather U. Baines are entitled to minimum percentages of all amounts paid under the 2002 Incentive Plan. Those percentages are 45%, 25% and 5%, respectively. The 2002 Incentive Plan is tied directly
to our performance and is designed to incentivize key employees to maximize return on equity. The total aggregate amount of compensation that may be earned quarterly by all participants under the plan equals a percentage of 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 U.S. Treasury Rate plus 1%, or the Threshold Return. At March 31, 2010, the Threshold Return was 4.72%.

Average net worth, as defined in the 2002 Incentive Plan which was amended by our Compensation Committee on August 3,
2009 and approved by our board of directors on October 8, 2009 (and which amendment was filed with the SEC on October 15, 2009 as an exhibit to a Current Report on Form 8-K), for any period is (i) the daily average of the cumulative
net proceeds to date from all offerings of the Companys equity securities, after deducting any underwriting discounts and commissions and other expenses and costs related to such offerings, plus (ii) the Companys retained earnings
computed by taking the average of such values at the end of each month during such period.

The 2002 Incentive Plan contains a
high water-mark provision requiring that in any fiscal quarter in which net income is an amount less than the amount necessary to earn the Threshold Return, the Company will calculate negative incentive compensation for that fiscal
quarter which will be carried forward and will offset future incentive compensation earned under the 2002 Incentive Plan with respect to participants who were participants during the fiscal quarter(s) in which negative incentive compensation was
generated. At March 31, 2010, the incentive compensation accrual carry forward was a negative $10.4 million, which was reduced from a negative $12.2 million at December 31, 2009. This negative carry forward may provide an incentive to
management to make higher risk investments in an attempt to generate returns to overcome the negative carry forward.

The
percentage of taxable net income in excess of the Threshold Return earned under the 2002 Incentive Plan by all employees is calculated based on our quarterly average net worth as defined in the 2002 Incentive Plan. The percentage rate used in this
calculation is based on a blended average of the following tiered percentage rates:



| |  |  | 25% for the first $50 million of average net worth;
| | - |  | ---------------------------------------------------



| |  |  | 15% for the average net worth between $50 million and $100 million;
| | - |  | -------------------------------------------------------------------



| |  |  | 10% for the average net worth between $100 million and $200 million; and
| | - |  | ------------------------------------------------------------------------



| |  |  | 5% for the average net worth in excess of $200 million.
| | - |  | -------------------------------------------------------

During the three months ended March 31, 2010 and March 31, 2009, eligible employees under the 2002 Incentive Plan did not earn
any incentive compensation due to the negative incentive carry forward under the Plan.



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##### Table of Contents

Employment Agreements

Salary, Incentive and Termination Provisions

Pursuant to the terms of their employment agreements with us, Lloyd McAdams serves as our President, Chairman and Chief Executive Officer,
Joseph E. McAdams serves as our Executive Vice President and Chief Investment Officer, and Heather U. Baines serves as our Executive Vice President. Lloyd McAdams receives a $925 thousand annual base salary, Joseph E. McAdams receives a $700
thousand annual base salary and Heather U. Baines receives a $60 thousand annual base salary.

These employment
agreements also have the following provisions:



| |  |  | the three executives are entitled to participate in the 2002 Incentive Plan and each of these individuals are provided a minimum percentage of the
amounts earned under such plan. Lloyd McAdams is entitled to 45% of all amounts paid under the plan, Joseph E. McAdams is entitled to 25% of all amounts paid under the plan and Heather U. Baines is entitled to 5% of all amounts paid under the
plan.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the 2002 Incentive Plan may not be amended without the consent of Lloyd McAdams and Joseph E. McAdams;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | in the event any of the three executives is terminated without cause, or if they terminate for good reason, or, in the case of
Lloyd McAdams or Joseph E. McAdams, their employment agreements are not renewed, then the executives would be entitled to: (1) all base salary due under the employment agreements, (2) all discretionary bonus due under their employment
agreements, (3) a lump sum payment of an amount equal to three years of the executives then-current base salary, (4) payment of COBRA medical coverage for 18 months, (5) immediate vesting of all pension benefits, (6) all
incentive compensation under the 2002 Incentive Plan to which the executives would have been entitled to under the employment agreements prorated through the termination date, and (7) all expense reimbursements and benefits due and owing the
executives through the termination. In addition, under these circumstances Lloyd McAdams and Joseph E. McAdams would each be entitled to a lump sum payment equal to 150% of the greater of (i) the highest amount paid or that could be payable (in
the aggregate) under the 2002 Incentive Plan during any one of the three fiscal years prior to their termination, and (ii) the highest amount paid, or that could be payable (in the aggregate), under the 2002 Incentive Plan during any of the
three fiscal years following their termination. Ms. Baines would also be entitled to a lump sum payment equal to all incentive compensation that Ms. Baines would have been entitled to under the 2002 Incentive Plan during the three-year
period following her termination;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the equity awards granted to each of the three executives will immediately vest upon the termination of the executives employment if such
termination is in connection with a change in control;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Lloyd McAdams and Joseph E. McAdams are each subject to a one-year non-competition provision following termination of their employment except in the
event of a change in control; and
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | each agreement contains an evergreen provision that permits automatic renewal for one year at the end of each term unless written notice of termination
is provided by either party six months prior to the end of the current term.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Performance-Based Bonus
Pool Provisions

Under the terms of their employment agreements, a long-term equity incentive structure was established for
Messrs. Lloyd McAdams and Joseph E. McAdams. As a result, they are eligible to participate in a performance- based bonus pool that is funded based on the Companys return on average equity, or ROAE. ROAE is calculated as the twelve-month net
income available to common stockholders, excluding the effect of depreciation, preferred stock dividends, gains/losses on asset sales and impairment charges, divided by the average stockholder equity less goodwill and preferred stockholder equity.
The Compensation Committee of our board of directors, or



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the Compensation Committee, evaluated various measures and factors of performance in developing this structure and, in its view, ROAE was determined to be the single best indicator of our overall
performance and therefore of value creation for our stockholders. This is in part due to the fact that ROAE is a metric of our performance that has been calculated and reported on a consistent basis since our inception in 1998.

As structured by the Compensation Committee, the aggregate amount of this performance-based bonus pool available for distribution can
range annually based upon our ROAE in accordance with the following:



| |  |  | if our ROAE is 0% or less, no performance-based bonus is paid.
| | - |  | --------------------------------------------------------------



| |  |  | if our ROAE is greater than 0% but less than 8%, a bonus pool of up to $500 thousand is available in the aggregate.
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | if our ROAE is 8% or greater, then the bonus pool available to be paid to both executives in the aggregate equals $500 thousand plus 10% of the first
$5 million of excess return and 6% of the amount of the excess return greater than $5 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Compensation Committee has the discretionary right to adjust downward the amount available for distribution from the bonus pool by as much as 10% in any given year, based upon its assessment of factors including our leverage, stability of the book
value of our common stock and price per share of our common stock relative to other industry participants. Of the aggregate amount available for distribution from the bonus pool, the Compensation Committee bases annual bonus allocation to each of
Messrs. Lloyd McAdams and Joseph E. McAdams on its assessment of the performance of each executive.

In order to further align
the performance of Messrs. Lloyd McAdams and Joseph E. McAdams with our long-term financial success and the creation of stockholder value, the Compensation Committee also determined that with respect to 2008 and each year thereafter, 25% of the
annual performance-based bonus amount allocated to be distributed to an executive over $100 thousand would be paid in restricted shares of common stock (the Restricted Shares). In addition, neither executive will be permitted to sell or
otherwise transfer any Restricted Shares during the executives employment with us until the value of his respective stock holdings in the company exceeds a seven and one-half times multiple of his base compensation and, once this threshold is
met, only to the extent that the value of such holdings exceeds that multiple.

Prior to the end of any year, the Compensation
Committee, at its discretion, may notify an executive that the executive will not participate in the pool during the following year. If this occurs, the sale or transfer restrictions on previously issued pool shares will be eliminated at that
time.

The Compensation Committee, in its discretion, may provide additional compensation to each of Messrs. Lloyd McAdams and
Joseph E. McAdams beyond the annual performance-based bonus awards earned under the incentive compensation structure in their employment agreements. This additional compensation may be provided in consideration of the Companys execution of our
business and strategic plans. During the three months ended March 31, 2010, no additional compensation was paid to Messrs. Lloyd McAdams and Joseph E. McAdams.

Change in Control and Arbitration Agreements

On June 27, 2006, we entered into Change in Control and Arbitration Agreements with each of Thad M. Brown, our Chief Financial
Officer, Charles J. Siegel, our Senior Vice President-Finance, Bistra Pashamova, our Senior Vice President and Portfolio Manager, and Evangelos Karagiannis, our Vice President and Portfolio Manager, as well as certain of our other employees. The
Change in Control and Arbitration Agreements grant these officers and employees, in the event that a change in control occurs (as defined therein), a lump sum payment equal to (i) 12 months annual base salary in effect on the date of the change
in control, plus (ii) the average annual incentive compensation received for the two complete fiscal years prior to the date of the change



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in control, and plus (iii) the average annual bonus received for the two complete fiscal years prior to the date of the change in control, as well as other benefits. The Change in Control
and Arbitration Agreements also provide for accelerated vesting of equity awards granted to these officers and employees upon a change in control.

Agreements with Pacific Income Advisers, Inc.

On June 13, 2002, we entered into a sublease with Pacific Income Advisers, Inc., or PIA, a company owned by trusts controlled by
certain of our officers. Under the sublease, as amended on July 8, 2003, we lease, on a pass-through basis, 5,500 square feet of office space from PIA and pay rent at an annual rate equal to PIAs obligation, currently $54.16 per square
foot. The sublease runs through June 30, 2012 unless earlier terminated pursuant to the master lease. During the three months ended March 31, 2010, we paid approximately $81 thousand in rent and other operating expenses to PIA under the
sublease, which is included in Other expenses on the consolidated statements of income. During the three months ended March 31, 2009, we paid $80 thousand in rent and related expenses to PIA under this sublease.

At March 31, 2010, the future minimum lease commitment was as follows (in whole dollars):



|           |  |      |         |      |   |         |  |                 |         |  |   |        
|---------- |  | ---- | ------- | ---- | - | ------- |  | --------------- | ------- |  | - | -------
|Year       |  | 2010 |         | 2011 |   | 2012    |  | TotalCommitment
|Commitment |  | $    | 227,866 |      | $ | 311,414 |  | $               | 158,012 |  | $ | 697,292

On October 14,
2002, we entered into an administrative services agreement with PIA. On July 25, 2008, we entered into a new administrative services agreement with PIA which was amended on December 29, 2008. Under the administrative services agreement,
PIA provides administrative services and equipment to us including human resources, operational support and information technology, and we pay an annual fee of 7 basis points on the first $225 million of stockholders equity, 5 basis points on
the next $450 million of stockholders equity and 3.5 basis points thereafter (paid quarterly in arrears) for those services. The administrative services agreement is for an initial term of one year and will renew for successive one-year terms
thereafter unless either party gives notice of termination no less than 30 days before the expiration of the then-current annual term. We may also terminate the administrative services agreement upon 30 days prior written notice for any reason and
immediately if there is a material breach by PIA. Included in Other expenses on the consolidated statements of income are fees of $82 thousand paid to PIA in connection with this agreement during the three months ended March 31,
2010. During the three months ended March 31, 2009, we paid fees of $62 thousand to PIA in connection with this agreement.

Deferred Compensation Plan

On January 15, 2003, we adopted the Anworth Mortgage Asset Corporation Deferred Compensation Plan, or the Deferred Compensation Plan.
We amended the plan effective January 1, 2005 to comply with Section 409A of the Code enacted as part of the American Jobs Creation Act of 2004. The Deferred Compensation Plan permits our eligible officers to defer the payment of all or a
portion of their cash compensation that otherwise would be in excess of the $1 million annual limitation on deductible compensation imposed by Section 162(m) of the Code (based on the officers compensation and benefit elections made prior
to January 1 of the calendar year in which the compensation will be deferred). Under this limitation, compensation paid to our Chief Executive Officer and our four other highest paid officers is not deductible by us for income tax purposes to
the extent the amount paid to any such officer exceeds $1 million in any calendar year, unless such compensation qualifies as performance-based compensation under Section 162(m). Our board of directors designates the eligible officers who may
participate in the Deferred Compensation Plan from among the group consisting of our Chief Executive Officer and our other four highest paid officers. To date, the board has designated all of the executive officers as those who may participate in
the Deferred Compensation Plan. Each eligible officer becomes a participant in the Deferred Compensation Plan by making a written election to defer the payment of cash compensation. With certain limited exceptions, the election must be filed with us
before



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January 1 of the calendar year in which the compensation will be deferred. The election is effective for the entire calendar year and may not be terminated or modified for that calendar
year. If a participant wishes to defer compensation in a subsequent calendar year, a new deferral election must be made before January 1 of that subsequent year.

Amounts deferred under the Deferred Compensation Plan are not paid to the participant as earned, but are credited to a bookkeeping
account maintained by us in the name of the participant. The balance in the participants account is credited with earnings at a rate of return equal to the annual dividend yield on our common stock. The balance in the participants
account is paid to the participant six months after termination of employment or upon the death of the participant or a change in control of our company. Each participant is a general unsecured creditor of our company with respect to all amounts
deferred under the Deferred Compensation Plan. At March 31, 2010, the aggregate balance of the amounts previously deferred for Lloyd McAdams was $364,874.

NOTE 10. EQUITY COMPENSATION PLAN

2004 Equity Compensation Plan

At our May 27, 2004 annual stockholders meeting, our stockholders adopted the Anworth Mortgage Asset Corporation 2004 Equity
Compensation Plan, or the Plan, which amended and restated our 1997 Stock Option and Awards Plan. The Plan authorized the grant of stock options and other stock-based awards, as of December 31, 2005, for an aggregate of up to 3,500,000 of the
outstanding shares of our common stock. The Plan authorizes our board of directors, or a committee of our Board, to grant incentive stock options, as defined under section 422 of the Code, options not so qualified, restricted stock, dividend
equivalent rights (DERs), phantom shares and other stock-based awards. The exercise price for any option granted under the Plan may not be less than 100% of the fair market value of the shares of common stock at the time the option is granted. At
March 31, 2010, 721,616 shares remained available for future issuance under the Plan through any combination of stock options or other awards. The Plan does not provide for automatic annual increases in the aggregate share reserve or the number
of shares remaining available for grant. We filed a registration statement on Form S-8 on November 7, 2005 to register an aggregate of up to 3,500,000 shares of our common stock to be issued pursuant to the Plan.

In October 2005, our board of directors approved the grant of 200,780 shares of restricted stock to various of our employees under our
2004 Equity Plan. The stock price on the grant date was $7.72. The restricted stock vests 10% per year on each anniversary date for a ten-year period and shall also vest immediately upon the death of the grantee or upon the grantee reaching age
65. Each grantee shall have the right to sell 40% of the restricted stock anytime after such shares have vested. The remaining 60% of such vested restricted stock may not be sold until after termination of employment with us. We amortize the
restricted stock over the vesting period, which is the lesser of ten years or the remaining number of years to age 65.

In
October 2006, our board of directors approved a grant of an aggregate of 197,362 shares of performance-based restricted stock to various of our officers and employees under our 2004 Equity Plan. Such grant was made effective on October 18,
2006. The closing stock price on the effective date of the grant was $9.12. The shares will vest in equal annual installments over the next three years provided that the annually compounded rate of return on our common stock, including dividends,
exceeds 12% measured from the effective date of the grant to each of the next three anniversary dates. If the annually compounded rate of return does not exceed 12%, then the shares will vest on the anniversary date thereafter when the annually
compounded rate of return exceeds 12%. If the annually compounded rate of return does not exceed 12% within ten years after the effective date of the grant, then the shares will be forfeited. The shares will fully vest within the ten-year period
upon the death of a grantee. Upon vesting, each grantee shall have the right to sell 40% of the restricted stock anytime after such shares have vested. The remaining 60% of such vested restricted stock may not be sold, transferred or pledged until
after termination of employment with us or upon the tenth anniversary of the effective date.



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We recognize the compensation expense related to restricted stock over the ten-year vesting
period. During the three months ended March 31, 2010, we expensed approximately $51 thousand related to these restricted stock grants.

At our May 24, 2007 annual meeting of stockholders, our stockholders adopted the Anworth Mortgage Asset Corporation 2007 Dividend
Equivalent Rights Plan, or the 2007 Dividend Equivalent Rights Plan. A dividend equivalent right, or DER, is a right to receive amounts equal in value to the dividend distributions paid on a share of our common stock. DERs are paid in either cash or
shares of our common stock, whichever is specified by our Compensation Committee at the time of grant, at such times as dividends are paid on shares of our common stock during the period between the date a DER is issued and the date the DER expires
or earlier terminates. The committee may impose such other conditions to the grant of DERs as it may deem appropriate. The maximum term for DERs under the 2007 Dividend Equivalent Rights Plan is ten years from the date of grant. There were no awards
of DERs granted during 2007. On February 22, 2008, a grant of an aggregate of 300 thousand DERs under the DER Plan was issued to our employees and officers. On December 22, 2008, a grant of an aggregate of 150 thousand DERs under
the DER Plan was issued to our employees and officers. On December 16, 2009, a grant of an aggregate of 50 thousand DERs under the DER Plan was issued to our employees and officers. These DERs are not attached to any stock and only have
the right to receive the same cash distribution per common share distributed to our common stockholders during the term of the grant. All of these grants have a five-year term from the date of the grant. During the three months ended March 31,
2010, we paid or accrued $135 thousand as compensation related to these grants. During the three months ended March 31, 2009, we paid or accrued approximately $135 thousand as compensation related to these grants.

NOTE 11. HEDGING INSTRUMENTS

At March 31, 2010, we were a counterparty to interest rate swap agreements, which are derivative instruments as defined by ASC
815-10, with an aggregate notional amount of $2.27 billion and a weighted average maturity of 2.0 years. These swap agreements were with the following seven counterparties: (1) Deutsche Bank Securitiesnotional amount: $625 million;
(2) Credit Suisse First Boston Corporationnotional amount: $695 million; (3) Citigroupnotional amount: $400 million; (4) J.P. Morgan Securities Inc.notional amount: $100 million; (5) LBBW Securities, LLC 
notional amount: $50 million; (6) Nomura Securities International, Inc.notional amount: $250 million; and (7) Morgan Stanleynotional amount: $150 million. During the three months ended March 31, 2010, three swap agreements
with an aggregate notional amount of $200 million matured. During the three moths ended March 31, 2010, we entered into two new swap agreements with an aggregate notional amount of $150 million and terms of up to five years. We utilize swap
agreements to manage interest rate risk relating to our repurchase agreements (the hedged item) and do not anticipate entering into derivative transactions for speculative or trading purposes. In accordance with the swap agreements, we will pay a
fixed-rate of interest during the term of the swap agreements (ranging from 1.788% to 5.7375%) and receive a payment that varies with the three-month LIBOR rate.

At March 31, 2010 and December 31, 2009, our swap agreements had the following notional amounts (in thousands) and weighted
average interest rates:



|                    |  |                |           |                              |                  |   |                |   |                              |  |      |  
|------------------- |  | -------------- | --------- | ---------------------------- | ---------------- | - | -------------- | - | ---------------------------- |  | ---- | -
|                    |  | March 31,2010  |           |                              | December 31,2009 |  
|                    |  | NotionalAmount |           | WeightedAverageInterest Rate |                  |   | NotionalAmount |   | WeightedAverageInterest Rate | 
|Less than 12 months |  | $              | 775,000   |                              | 4.46             | % |                | $ | 750,000                      |  | 4.75 | %
|1 year to 2 years   |  |                | 400,000   |                              | 5.09             | % |                |   | 475,000                      |  | 4.36 | %
|2 years to 3 years  |  |                | 695,000   |                              | 3.41             | % |                |   | 520,000                      |  | 3.92 | %
|3 years to 4 years  |  |                | 200,000   |                              | 2.85             | % |                |   | 375,000                      |  | 3.32 | %
|4 years to 5 years  |  |                | 200,000   |                              | 2.60             | % |                |   | 200,000                      |  | 2.43 | %
|                    |  |                |           |                              |                  |   |                |   |                              |  |      |  
|                    |  | $              | 2,270,000 |                              | 3.97             | % |                | $ | 2,320,000                    |  | 4.06 | %
|                    |  |                |           |                              |                  |   |                |   |                              |  |      |  



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For the three months ended March 31, 2010, there was a decrease in unrealized losses of
$189 thousand, from $81.5 million in unrealized losses at December 31, 2009 to $81.3 million in unrealized losses, on our swap agreements included in Other comprehensive income (this decrease consisted of unrealized losses on
cash flow hedges of $20.5 million and a reclassification adjustment for interest expense included in net income of $20.7 million).

At March 31, 2010, we had asset derivatives of $12 thousand and liability derivatives (both shown on our unaudited consolidated
balance sheets) of $80.6 million.

During the three months ended March 31, 2010, there was no gain or loss recognized in
earnings due to hedge ineffectiveness. We have determined that our hedges are still considered highly effective. There were no components of the derivative instruments gain or loss excluded from the assessment of hedge
effectiveness. The maximum length of our swap agreements is five years. We do not anticipate any discontinuance of the swap agreements and thus do not expect to recognize any gain or loss into earnings because of this. On September 18, 2008, we
terminated all of our interest rate swap agreements with Lehman Brothers Special Finance, or LBSF, as the counterparty. The notional balance of these swap agreements was $240 million. The fair value of these swap agreements at termination was
approximately $(1.5) million, reflecting a realized loss. This loss is being amortized into interest expense over the remaining term of the related hedged borrowings. During the three months ended March 31, 2010, the amount amortized into
interest expense was approximately $60 thousand and the remaining amount at March 31, 2010 to be amortized was approximately $703 thousand. For the three months ended March 31, 2009, the amount amortized into interest expense was
approximately $152 thousand.

For more information on our accounting policies, the objectives and risk exposures relating to
derivatives and hedging agreements, see the section on Derivative Financial Instruments in Note 1. For more information on the fair value of our swap agreements, see Note 5.

NOTE 12. COMMITMENTS AND CONTINGENCIES

(a) Lease Commitment and Administrative Services CommitmentWe sublease office space and use administrative services from PIA,
as more fully described in Note 9.

NOTE 13. OTHER EXPENSES



|                                        |  |                             |     |      |   |    
|--------------------------------------- |  | --------------------------- | --- | ---- | - | ---
|                                        |  | Three Months EndedMarch 31,
|                                        |  | 2010                        |     | 2009
|                                        |  | (in thousands)             
|Legal and accounting fees               |  | $                           | 104 |      | $ | 212
|Printing and stockholder communications |  |                             | 12  |      |   | 8  
|Directors and Officers insurance        |  |                             | 109 |      |   | 129
|Software and implementation             |  |                             | 64  |      |   | 60 
|Administrative service fees             |  |                             | 82  |      |   | 62 
|Rent and related expenses               |  |                             | 81  |      |   | 80 
|Stock exchange and filing fees          |  |                             | 59  |      |   | 51 
|Custodian fees                          |  |                             | 32  |      |   | 37 
|Sarbanes-Oxley consulting fees          |  |                             | 36  |      |   | 32 
|Board of directors fees and expenses    |  |                             | 73  |      |   | 66 
|Securities data services                |  |                             | 27  |      |   | 27 
|Other                                   |  |                             | 78  |      |   | 63 
|                                        |  |                             |     |      |   |    
|Total of other expenses:                |  | $                           | 757 |      | $ | 827
|                                        |  |                             |     |      |   |    



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NOTE 14. SUBSEQUENT EVENTS

On April 15, 2010, we declared a common stock dividend of $0.27 per share, which is payable on May 26, 2010 to our holders of
record of common stock as of the close of business on April 30, 2010.

On April 15, 2010, we declared a Series A
Preferred Stock dividend of $0.539063 per share and a Series B Preferred Stock dividend of $0.390625 per share, each of which is payable on July 15, 2010 to our holders of record of Series A Preferred Stock and Series B Preferred Stock,
respectively, as of the close of business on June 30, 2010.

When we pay any cash dividend during any quarterly fiscal
period to all or substantially all of our common stockholders in an amount that results in an annualized common stock dividend yield which is greater than 6.25% (the dividend yield on our Series B Preferred Stock), the conversion rate on our Series
B Preferred Stock is adjusted based on a formula specified in the Series B Preferred Stock prospectus supplement. The conversion rate increased on May 3, 2010 from 3.1505 shares of our common stock to 3.2317 shares of our common stock using the
following information: (1) the average of the closing price of our common stock for the ten (10) consecutive trading day period was $7.03 and (2) the annualized common stock dividend yield was 15.3737%.



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|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

As used in this Quarterly Report on Form 10-Q, company, we, us, our, and
Anworth refer to Anworth Mortgage Asset Corporation.

You should read the following discussion and analysis in
conjunction with the unaudited consolidated financial statements and related notes thereto contained in Item 1 of this Quarterly Report on Form 10-Q. The information contained in this Quarterly Report on Form 10-Q is not a complete description
of our business or the risks associated with an investment in our stock. We urge you to carefully review and consider the various disclosures made by us in this Quarterly Report on Form 10-Q and in our other reports filed with the United States
Securities and Exchange Commission, or the SEC, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the 1933 Act and
Section 21E of the Securities Exchange Act of 1934, as amended, and, as such, may involve known and unknown risks, uncertainties and assumptions. Forward-looking statements are those that predict or describe future events or trends and that do
not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words will, believe, expect, anticipate, intend,
estimate, assume or other similar expressions. You should not rely on our forward-looking statements because the matters they describe are subject to assumptions, known and unknown risks, uncertainties and other unpredictable
factors, many of which are beyond our control.

Statements regarding the following subjects, among others, may be
forward-looking: changes in interest rates and the market value of our MBS; changes in the prepayment rates on the mortgage loans securing our MBS; our ability to borrow to finance our assets; implementation of or changes in government regulations
or programs affecting our business; our ability to maintain our qualification as a REIT for federal income tax purposes; our ability to maintain our exemption from registration under the Investment Company Act of 1940, as amended; and risks
associated with investing in real estate assets, including changes in business conditions and the general economy. These and other risks, uncertainties and factors, including those described in the annual, quarterly and current reports that we
file with the SEC, could cause our actual results to differ materially from those projected in any forward-looking statements we make. All forward-looking statements speak only as of the date they are made. New risks and uncertainties arise
over time and it is not possible to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.

General

Our Company

We were incorporated in October 1997 and commenced operations on March 17, 1998. We are in the business of investing primarily in
United States agency mortgage-backed securities, or MBS, which are obligations guaranteed by the United States government, such as Ginnie Mae, or federally sponsored enterprises such as Fannie Mae or Freddie Mac. Our principal business objective is
to generate net income for distribution to stockholders based upon the spread between the interest income on our mortgage-related assets and the cost of borrowing to finance our acquisition of these assets.

We are organized for tax purposes as a real estate investment trust, or 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. At March 31, 2010, our qualified REIT assets (real estate assets, as defined under the Internal Revenue Code of
1986, as amended, or the Code, cash and cash items and government securities) were greater than 90% of our total assets, as compared to the Code requirement that at least 75% of



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our total assets must be qualified REIT assets. Greater than 99% of our 2009 revenue qualifies for both the 75% source of income test and the 95% source of income test under the REIT rules. At
March 31, 2010, 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 Code.

Credit and liquidity problems surrounding the mortgage markets and impacting the general economy have continued. This, along
with other factors, has created great uncertainty in the financial markets in general and the related general economic recession. General downward economic trends, reduced availability of credit, increased unemployment and concerns over the economy
persist.

Although the U.S. government and other governments have taken various actions (including placing Fannie Mae and
Freddie Mac in conservatorship) intended to protect financial institutions, their respective economies and their respective housing and mortgage markets, we continue to operate under very difficult market conditions. There can be no assurance that
these various actions will have a beneficial impact on the global financial markets and, more specifically, the market for the securities we currently own in our portfolio. We cannot predict what, if any, impact these actions or future actions by
either the U.S. government or foreign governments could have on our business, results of operations and financial condition. These events may impact the availability of financing generally in the marketplace and also may impact the market value of
MBS generally, including the securities we currently own in our portfolio.

Our Portfolio

Our operations consist of the following portfolios: agency mortgage-backed securities, or Agency MBS, and non-agency mortgage-backed
securities, or Non-Agency MBS. Approximately 99.9% of our total portfolio is Agency MBS.

At March 31, 2010, we had total
assets of $6.6 billion. Our Agency MBS portfolio, consisting of $6.5 billion, was distributed as follows: 27% adjustable-rate Agency MBS, 61% hybrid adjustable-rate Agency MBS, 12% fixed-rate Agency MBS and less than 1% agency floating-rate
collateralized mortgage obligations, or CMOs. Our Non-Agency MBS portfolio consisted of approximately $5.3 million of floating-rate CMOs. Stockholders equity available to common stockholders at March 31, 2010 was approximately $880
million, or $7.46 per share. The $880 million equals total stockholders equity of $929 million less the Series A Preferred Stock liquidating value of approximately $46.9 million and less the difference between the Series B Preferred Stock
liquidating value of $27.5 million and the proceeds from its sale of $25.6 million. For the three months ended March 31, 2010, we reported net income of $33.2 million. Net income to common stockholders was $31.8 million, or net income of
$0.27 per diluted share, based on a weighted average of 120.3 million fully diluted shares outstanding, which consisted of net income of $33.2 million minus payment of preferred dividends of $1.4 million.

Recent Regulatory Developments

During the first quarter of 2010, Freddie Mac and Fannie Mae both announced that they would be repurchasing seriously delinquent mortgage
loans from the MBS pools that they guarantee. These buyouts will result in a higher level of principal prepayments on our MBS portfolio. Freddie Macs buyout program was substantially completed during the quarter and was the primary factor
causing the increase in portfolio CPR during the quarter. Fannie Mae announced that its buyout activity would take place over a period of four or more months and would be first reflected in MBS prepayments received in April 2010. Based on
delinquency information provided by Fannie Mae, we estimate that our Fannie Mae MBS pools will experience approximately $650 million in delinquent loan buyouts during this period. The majority of these principal prepayments are expected to be
received during the second quarter and it is anticipated that this will result in further significant increases in our portfolios near-term CPR.



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Results of Operations

Three Months Ended March 31, 2010 Compared to March 31, 2009

For the three months ended March 31, 2010, our net income was $33.2 million. Our net income available to common stockholders was
$31.8 million, or $0.27 per diluted share, based on a weighted average of 120.3 million fully diluted shares outstanding. This includes net income of $33.2 million minus the payment of preferred dividends of $1.4 million. For the three months
ended March 31, 2009, our net income was $30.8 million. Our net income available to common stockholders was $29.3 million, or $0.30 per diluted share, based on a weighted average of 99.3 million fully diluted shares outstanding. This
included net income of $30.8 million minus the payment of preferred dividends of $1.5 million.

Net interest income for the
three months ended March 31, 2010 totaled $37.2 million, or 50.6% of gross income, compared to $34.5 million, or 48% of gross income, for the three months ended March 31, 2009. Net interest income is comprised of the interest income earned
on mortgage investments (net of premium amortization expense) less interest expense from borrowings. Interest income (net of premium amortization expense) for the three months ended March 31, 2010 was $61.2 million, compared to $67.0 million
for the three months ended March 31, 2009, a decrease of 8.7% due primarily to an increase in premium amortization expense, a decrease in the weighted average coupons on Agency MBS (from 5.47% at March 31, 2009 to 4.88% at March 31,
2010), partially offset by an increase in the weighted average portfolio outstanding of approximately $6 billion at March 31, 2010 from approximately $5.3 billion at March 31, 2009. Interest expense for the three months ended
March 31, 2010 was $24.0 million, compared to $32.5 million for the three months ended March 31, 2009, a decrease of 26.1%, which resulted from a decline in short-term interest rates, partially offset by an increase in average
borrowings.

The results of our operations are affected by a number of factors, many of which are beyond our control, and
primarily depend on, among other things, the level of our net interest income, the market value of our MBS, the supply of, and demand for, MBS in the marketplace, and the terms and availability of financing. Our net interest income varies primarily
as a result of changes in interest rates, the slope of the yield curve (the differential between long-term and short-term interest rates), borrowing costs (our interest expense) and prepayment speeds on our MBS portfolios, the behavior of which
involves various risks and uncertainties. Interest rates and prepayment speeds, as measured by the constant prepayment rate, vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which
can be predicted with any certainty. With respect to our business operations, increases in interest rates, in general, may, over time, cause: (i) the interest expense associated with our borrowings, which are primarily comprised of repurchase
agreements, to increase; (ii) the value of our MBS portfolios and, correspondingly, our stockholders equity to decline;



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(iii) coupons on our MBS to reset, although on a delayed basis, to higher interest rates; (iv) prepayments on our MBS portfolios to slow, thereby slowing the amortization of our MBS
purchase premiums; and (v) the value of our interest rate swap agreements and, correspondingly, our stockholders equity to increase. Conversely, decreases in interest rates, in general, may, over time, cause: (i) prepayments on our
MBS portfolios to increase, thereby accelerating the amortization of our MBS purchase premiums; (ii) the interest expense associated with our borrowings to decrease; (iii) the value of our MBS portfolios and, correspondingly, our
stockholders equity to increase; (iv) the vale of our interest rate swap agreements and, correspondingly, our stockholders equity to decrease; and (v) coupons on our MBS to reset, although on a delayed basis, to lower interest
rates. In addition, our borrowing costs and credit lines are further affected by the type of collateral pledged and general conditions in the credit markets.

During the three months ended March 31, 2010, premium amortization expense increased $7.8 million, or 175%, from $4.5 million during
the three months ended March 31, 2009 to $12.3 million, due primarily to an increase in prepayments.

The table below
shows the approximate constant prepayment rate of our Agency MBS and Non-Agency MBS for each of the following quarters:



|                              |  |                  |   |  |                  |  
|----------------------------- |  | ---------------- | - |  | ---------------- | -
|Portfolio                     |  | FirstQuarter2010 |   |  | FirstQuarter2009 |  
|Agency MBS and Non-Agency MBS |  | 30               | % |  | 15               | %

During the
three months ended March 31, 2010, there was no gain or loss recognized in earnings due to hedge ineffectiveness, compared to a net gain of $107 thousand due to hedge ineffectiveness during the three months ended March 31, 2009. We have
determined that our hedges are still considered highly effective. There were no components of the derivative instruments gain or loss excluded from the assessment of hedge effectiveness.

Total expenses were $4.0 million for the three months ended March 31, 2010, compared to $3.9 million for the three months ended
March 31, 2009. The increase of $66 thousand in total expenses was due primarily to an increase in compensation costs of $136 thousand (due to an increase in the accrual for bonus and incentive compensation) partially offset by a decrease in
Other expenses (as detailed in Note 13 to the accompanying unaudited consolidated financial statements) of $70 thousand.

Financial Condition

Agency MBS Portfolio

At March 31, 2010, we held agency mortgage assets whose amortized cost was approximately $6.28 billion, consisting primarily of $5.56
billion of adjustable-rate Agency MBS, $715 million of fixed-rate Agency MBS and $5 million of floating-rate CMOs. This amount represents an approximate 0.5% decrease from the $6.31 billion held at December 31, 2009. Of the adjustable-rate
Agency MBS owned by us, 30% were adjustable-rate pass-through certificates whose coupons reset within one year. The remaining 70% consisted of hybrid adjustable-rate Agency MBS whose coupons will reset between one year and five years. Hybrid
adjustable-rate Agency MBS have an initial interest rate that is fixed for a certain period, usually three to five years, and thereafter adjust annually for the remainder of the term of the loan.



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The following table presents a schedule of the fair value of our Agency MBS owned at
March 31, 2010 and December 31, 2009, classified by type of issuer (dollar amounts in thousands):



|                    |  |                |           |                     |                   |   |            |   |                     |  |       |  
|------------------- |  | -------------- | --------- | ------------------- | ----------------- | - | ---------- | - | ------------------- |  | ----- | -
|                    |  | March 31, 2010 |           |                     | December 31, 2009 |  
|Agency              |  | Fair Value     |           | PortfolioPercentage |                   |   | Fair Value |   | PortfolioPercentage | 
|Fannie Mae (FNM)    |  | $              | 5,279,267 |                     | 80.8              | % |            | $ | 5,113,407           |  | 78.8  | %
|Freddie Mac (FHLMC) |  |                | 1,230,321 |                     | 18.9              |   |            |   | 1,350,448           |  | 20.8  |  
|Ginnie Mae (GNMA)   |  |                | 21,004    |                     | 0.3               |   |            |   | 21,946              |  | 0.4   |  
|                    |  |                |           |                     |                   |   |            |   |                     |  |       |  
|Total Agency MBS:   |  | $              | 6,530,592 |                     | 100.0             | % |            | $ | 6,485,801           |  | 100.0 | %
|                    |  |                |           |                     |                   |   |            |   |                     |  |       |  

The following table classifies the fair value of our Agency MBS owned at March 31, 2010 and
December 31, 2009 by type of interest rate index (dollar amounts in thousands):



|                                     |  |                |           |                     |                   |   |            |   |                     |  |       |  
|------------------------------------ |  | -------------- | --------- | ------------------- | ----------------- | - | ---------- | - | ------------------- |  | ----- | -
|                                     |  | March 31, 2010 |           |                     | December 31, 2009 |  
|Index                                |  | Fair Value     |           | PortfolioPercentage |                   |   | Fair Value |   | PortfolioPercentage | 
|One-month LIBOR                      |  | $              | 5,295     |                     | 0.1               | % |            | $ | 5,661               |  | 0.1   | %
|Six-month LIBOR                      |  |                | 127,169   |                     | 1.9               |   |            |   | 138,715             |  | 2.1   |  
|One-year LIBOR                       |  |                | 5,153,682 |                     | 78.9              |   |            |   | 4,982,800           |  | 76.8  |  
|Six-month certificate of deposit     |  |                | 1,406     |                     |                  |   |            |   | 1,426               |  |      |  
|Six-month constant maturity treasury |  |                | 545       |                     |                  |   |            |   | 559                 |  |      |  
|One-year constant maturity treasury  |  |                | 452,888   |                     | 7.0               |   |            |   | 476,461             |  | 7.4   |  
|Cost of Funds Index                  |  |                | 32,607    |                     | 0.5               |   |            |   | 33,405              |  | 0.5   |  
|Fixed-rate                           |  |                | 757,000   |                     | 11.6              |   |            |   | 846,774             |  | 13.1  |  
|                                     |  |                |           |                     |                   |   |            |   |                     |  |       |  
|Total Agency MBS:                    |  | $              | 6,530,592 |                     | 100.0             | % |            | $ | 6,485,801           |  | 100.0 | %
|                                     |  |                |           |                     |                   |   |            |   |                     |  |       |  

The fair values indicated do not include interest earned but not yet paid. With respect to our hybrid
adjustable-rate Agency MBS, 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. The fair value of our Agency MBS
is reported to us independently from dealers who are major financial institutions and are considered to be market makers for these types of instruments. For more detail on the fair value of our Agency MBS, see Note 5 to the accompanying unaudited
consolidated financial statements.

At March 31, 2010, our total Agency MBS portfolio had a weighted average coupon of
4.88%. The average coupon of the adjustable-rate securities was 4.05%, the hybrid securities average coupon was 5.10%, the fixed-rate securities average coupon was 5.77% and the CMO floaters average coupon was 1.04%. At December 31, 2009, our
total Agency MBS portfolio had a weighted average coupon of 5.08%. The average coupon of the adjustable-rate securities was 4.11%, the hybrid securities average coupon was 5.35%, the fixed-rate securities average coupon was 5.79% and the CMO
floaters average coupon was 1.04%.

At March 31, 2010, the average amortized cost of our Agency MBS was 101.94%, the
average amortized cost of our adjustable-rate securities was 102.14% and the average amortized cost of our fixed-rate securities was 100.41%. Relative to our Agency MBS portfolio at March 31, 2010, the average interest rate on outstanding
repurchase agreements was 0.23% and the average days to maturity was 36 days. After adjusting for interest rate swap transactions, the average interest rate on outstanding repurchase agreements was 1.80% and the weighted average term to next rate
adjustment was 322 days.

At December 31, 2009, the average amortized cost of our Agency MBS was 101.92%, the average
amortized cost of our adjustable-rate securities was 102.14% and the average amortized cost of our fixed-rate securities was 100.40%. Relative to our Agency MBS portfolio at December 31, 2009, the average interest rate



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on outstanding repurchase agreements was 0.24% and the average days to maturity was 38 days. After adjusting for interest rate swap transactions, the average interest rate on outstanding
repurchase agreements was 1.88% and the weighted average term to next rate adjustment was 309 days.

At March 31, 2010
and December 31, 2009, the unamortized net premium paid for our Agency MBS was $120.5 million and $118 million, respectively.

At March 31, 2010, the current yield on our Agency MBS portfolio was 4.79%, based on a weighted average coupon of 4.88% divided by
the average amortized cost of 101.94%. At December 31, 2009, the current yield on our Agency MBS portfolio was 4.98%, based on a weighted average coupon of 5.08% divided by the average amortized cost of 101.92%.

One of the factors that impacts the reported yield on our MBS portfolio is the actual prepayment rate on the underlying mortgages. We
analyze our MBS and the extent to which prepayments impact the yield. When the rate of prepayments exceeds 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, or CPR, the premium would be amortized over a longer time period, resulting in a higher yield to maturity.

Non-Agency MBS Portfolio

At March 31, 2010, our Non-Agency MBS portfolio consisted of a fair value of $5.3 million of floating-rate CMOs with an average
coupon of 0.49%, which were acquired at par value. At December 31, 2009, our Non-Agency MBS portfolio consisted of a fair value of $4.7 million of floating-rate CMOs with an average coupon of 0.48%, which were acquired at par value. Non-Agency
MBS are securities not issued by the government or government-sponsored enterprises and are secured primarily by first-lien residential mortgage loans.

At March 31, 2010, the fair value of our Non-Agency MBS portfolio increased to approximately $5.3 million, from a fair value of
approximately $4.7 million at December 31, 2009. The detail is shown on page 17 to the accompanying unaudited consolidated financial statements.

At March 31, 2010, two securities representing the principal balance of our Non-Agency MBS portfolio were rated CC by
Standard & Poors and Ca by Moodys Investor Service.

We received valuations at March 31, 2010 and
December 31, 2009 for the Non-Agency MBS from an independent third party pricing service whose methodologies are based on broker-provided pricing as well as indirect observation of market activity and consider the fair value measurement a Level
3 input at March 31, 2010 and December 31, 2009. For more detail on the fair value of our Non-Agency MBS, see Note 5 to the accompanying unaudited consolidated financial statements.



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The table below provides additional details regarding our Non-Agency MBS portfolio at
March 31, 2010 and December 31, 2009:



|                                                                         |  |               |               |   |                  |   |               |  
|------------------------------------------------------------------------ |  | ------------- | ------------- | - | ---------------- | - | ------------- | -
|                                                                         |  | March 31,2010 |               |   | December 31,2009 |  
|Non-Agency MBS at fair value                                             |  | $             | 5.3 million   |   |                  | $ | 4.7 million   |  
|Principal balance of Non-Agency MBS                                      |  | $             | 40.92 million |   |                  | $ | 41.79 million |  
|Original principal balance on Non-Agency MBS                             |  | $             | 60 million    |   |                  | $ | 60 million    |  
|Original FICO (credit score)                                             |  |               | 730           |   |                  |   | 730           |  
|                                                                         |  |              
|Information on Loan Collateral of Non-Agency MBS Securitizations         |  |               |               |   |                  |   |               |  
|Loan principal as percentage of original loan principal                  |  |               | 68.2          | % |                  |   | 69.7          | %
|                                                                         |  |              
|Weighted average original loan-to-value (LTV)                            |  |               | 69            | % |                  |   | 69            | %
|Weighted average original LTV adjusted for negative loan amortization    |  |               | 73            | % |                  |   | 73            | %
|                                                                         |  |              
|California loans(1)                                                      |  |               | 69            | % |                  |   | 69            | %
|Pay-option ARM loans(1)                                                  |  |               | 100           | % |                  |   | 100           | %
|2006 loan originations(1)                                                |  |               | 99            | % |                  |   | 99            | %
|                                                                         |  |              
|3-month CPR                                                              |  |               | 11.1          | % |                  |   | 13.1          | %
|                                                                         |  |              
|Loans in foreclosure(1)                                                  |  |               | 17.8          | % |                  |   | 16.5          | %
|Real estate owned (REO)(1)(2)                                            |  |               | 3.5           | % |                  |   | 3.5           | %
|Total seriously delinquent(1)(3)                                         |  |               | 30.4          | % |                  |   | 27.2          | %
|Realized losses (as percentage of original collateral balance)           |  |               | 4.4           | % |                  |   | 3.6           | %
|                                                                         |  |              
|Information on Subordination Levels of Non-Agency MBS Securitizations(4) |  |               |               |   |                  |   |               |  
|Average securitization principal subordinate to Anworth-owned tranches   |  |               | 5.0           | % |                  |   | 6.0           | %
|Average securitization principal of Anworth-owned tranches               |  |               | 16.3          | % |                  |   | 16.1          | %
|Average securitization principal senior to Anworth-owned tranches        |  |               | 78.7          | % |                  |   | 77.9          | %



|(1) | As a percentage of collateral loan principal.
|--- | ---------------------------------------------

|(2) | Represents the amount of collateral loan principal where the properties are now REO.
|--- | ------------------------------------------------------------------------------------

|(3) | Includes 90+ days delinquent plus foreclosures plus bankruptcy plus REO.
|--- | ------------------------------------------------------------------------

|(4) | Weighted average as percentage of collateral loan principal at March 31, 2010 and December 31, 2009.
|--- | ----------------------------------------------------------------------------------------------------

Hedging

We periodically
enter into derivative transactions, in the form of forward purchase commitments and interest rate swap agreements, which are intended to hedge our exposure to rising interest rates on funds borrowed to finance our investments in securities. We
designate interest rate swap transactions as cash flow hedges. We also periodically enter into derivative transactions, in the form of forward purchase commitments, which are not designated as hedges. To the extent that we enter into hedging
transactions to reduce our interest rate risk on indebtedness incurred to acquire or carry real estate assets, any income or gain from the disposition of hedging transactions should be qualifying income under the REIT rules for purposes of the 95%
gross income test. The hedging rules that exclude certain hedging income from the computation of the 95% income test have been extended to exclusion under the 75% income test as well. To qualify for this exclusion, the hedging transaction must be
clearly identified as such before the close of the day on which it was acquired, originated or entered into. The transaction must hedge indebtedness incurred or to be incurred by us to acquire or carry real estate assets.

As part of our asset/liability management policy, we may enter into hedging agreements such as interest rate caps, floors or swaps. These
agreements are entered into to try to reduce interest rate risk and are designed to provide us with income and capital appreciation in the event of certain changes in interest rates. We review the



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need for hedging agreements on a regular basis consistent with our capital investment policy. At March 31, 2010, we were a counter-party to swap agreements, which are derivative instruments
as defined by ASC 815-10, with an aggregate notional amount of $2.27 billion and an average maturity of 2.0 years. We utilize swap agreements to manage interest rate risk and do not anticipate entering into derivative transactions for speculative or
trading purposes. In accordance with the swap agreements, we pay a fixed rate of interest during the term of the swap agreements and receive a payment that varies with the three-month LIBOR rate. At March 31, 2010, there were unrealized losses
of approximately $81.3 million on our swap agreements.

For more information on the amounts, policies, objectives and other
qualitative data on our hedge agreements, see Notes 1, 5 and 11 to the accompanying unaudited consolidated financial statements.

Liquidity
and Capital Resources

Agency MBS and Non-Agency MBS Portfolios

Our primary source of funds consists of repurchase agreements which totaled $5.3 billion at March 31, 2010. As collateral for these
repurchase agreements, we pledged approximately $5.7 billion in Agency MBS. Our other significant source of funds for the three months ended March 31, 2010 consisted of payments of principal from our Agency MBS portfolio in the amount of $449
million.

For the three months ended March 31, 2010, there was a net decrease in cash and cash equivalents of
approximately $977 thousand. This consisted of the following components:



| |  |  | Net cash provided by operating activities for the three months ended March 31, 2010 was approximately $144.2 million. This is comprised primarily
of net income of $33.2 million, adding back the following non-cash items: the amortization of premiums and discounts of approximately $12.3 million and the amortization of restricted stock of $70 thousand. Net cash provided by operating activities
also included a decrease in interest receivable of approximately $1.7 million and an increase in accrued expenses of approximately $98.8 million (due primarily to an increase in payable for securities purchased), partially offset by a decrease in
accrued interest payable of approximately $1.3 million and a decrease in prepaid expenses of approximately $593 thousand;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net cash used in investing activities for the three months ended March 31, 2010 was approximately $80 million, which consisted of purchases of
Agency MBS of approximately $530.2 million, partially offset by $449.3 million from principal payments on Agency MBS and $869 thousand from principal payments on Non-Agency MBS; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net cash used in financing activities for the three months ended March 31, 2010 was approximately $65.2 million. This consisted of borrowings on
repurchase agreements of approximately $7.194 billion, partially offset by repayments on repurchase agreements of approximately $7.241 billion. This also included net proceeds from common stock issued of approximately $19.1 million, less dividends
paid of $32.3 million on common stock, dividends paid of approximately $1.4 million on preferred stock and retirement of treasury stock of approximately $3.5 million.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Relative to our Agency MBS portfolio at March 31, 2010, all of our repurchase agreements were fixed-rate term repurchase agreements
with original maturities ranging from two days to three months. At March 31, 2010, we had borrowed funds under repurchase agreements with 16 different financial institutions. As the repurchase agreements mature, we enter into new repurchase
agreements to take their place. Because we borrow money based on the fair value of our MBS and because increases in short-term interest rates or increasing market concern about the liquidity or value of our MBS can negatively impact the valuation of
MBS, our borrowing ability could be reduced and lenders may initiate margin calls in the event short-term interest rates increase or the value of our MBS declines for other reasons. We had adequate cash flow, liquid assets and unpledged collateral
with which to meet our margin requirements during the three months ended March 31, 2010 but there can be no assurance we will have adequate cash flow, liquid assets and unpledged collateral with which to meet our margin requirements in the
future.



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Our leverage on capital (including all preferred stock and junior subordinated notes)
decreased from 5.5x at December 31, 2009 to 5.35x at March 31, 2010.

In the future, we expect that our primary
sources of funds will continue to consist of borrowed funds under repurchase agreement transactions and monthly payments of principal and interest on our MBS portfolio. Our liquid assets generally consist of unpledged MBS, cash and cash equivalents.
A large negative change in the market value of our MBS might reduce our liquidity, requiring us to sell assets with the likely result of realized losses upon sale.

During the three months ended March 31, 2010, we raised approximately $19.1 million in capital under our Dividend Reinvestment and
Stock Purchase Plan.

At March 31, 2010, our authorized capital included 20 million shares of $0.01 par value
preferred stock, which we have classified as Series A Preferred Stock and Series B Preferred Stock. During the three months ended March 31, 2010, we did not issue any shares of Series A Preferred Stock or Series B Preferred Stock. During the
three months ended March 31, 2010, there were three transactions to convert an aggregate of 6,700 shares of Series B Preferred Stock into an aggregate of 21,105 shares of our common stock (based on the then-current conversion rate of 3.1505).

During the three months ended March 31, 2010, we did not issue any shares of common stock or preferred stock under our
Controlled Equity Offering Sales Agreement with Cantor Fitzgerald & Co. (as described in Note 8 to the accompanying unaudited consolidated financial statements).

During the three months ended March 31, 2010, we repurchased (as more fully described in Note 8 to the accompanying unaudited
consolidated financial statements) 513 thousand shares of our common stock at a weighted average price of $6.84 per share. The shares were acquired at prevailing prices through open market transactions and were made subject to restrictions
related to volume, pricing and timing subject to applicable SEC rules.

Disclosure of Contractual Obligations

There were no material changes outside the normal course of business during the three months ended March 31, 2010 to the contractual
obligations identified in our Form 10-K for the fiscal year ended December 31, 2009.

Off-balance Sheet Arrangements

At March 31, 2010, we did not have any off-balance sheet arrangements.

Stockholders Equity

We use available-for-sale treatment for our Agency MBS and Non-Agency MBS, which are carried on our consolidated balance sheets at fair
value rather than historical cost. Based upon this treatment, our total equity base at March 31, 2010 was $929 million. Common stockholders equity was approximately $880 million, or a book value of $7.46 per share.

Under our available-for-sale accounting treatment, unrealized fluctuations in fair values of assets are assessed to determine whether
they are other-than-temporary. To the extent we determine that these unrealized fluctuations are temporary, they do not impact GAAP income or taxable income but rather are reflected on our consolidated balance sheets by changing the carrying value
of the assets and reflecting the change in stockholders equity under Accumulated other comprehensive income, unrealized gain (loss) on available-for-sale securities.



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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 on all of our assets. As a result, comparisons with some companies that use historical cost accounting for all of their balance sheets may not be meaningful.

Unrealized changes in the fair value of MBS 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 reduce borrowing capacity under our capital investment policy. A very large negative change in the net
market value of our MBS might reduce our liquidity, requiring us to sell assets with the likely result of realized losses upon sale. Accumulative other comprehensive income, unrealized gain on available-for-sale Agency MBS was
approximately $141.5 million, or 2.25% of the amortized cost of our Agency MBS, at March 31, 2010. This, along with Accumulative other comprehensive loss, derivatives of approximately $81.3 million and Accumulated other
comprehensive gain, Non-Agency MBS of $1.9 million, constitutes the total Accumulative other comprehensive income of approximately $62.1 million.

Critical Accounting Policies

Management has the obligation to ensure that its policies and methodologies are in accordance with GAAP. Management has reviewed and
evaluated its critical accounting policies and believes them to be in accordance with GAAP.

The preparation of financial
statements in accordance with GAAP requires management to make estimates and assumptions in certain circumstances that affect amounts reported in the accompanying unaudited consolidated financial statements. In preparing these unaudited consolidated
financial statements, management has made its best estimates and judgments on the basis of information then readily available to it of certain amounts included in the unaudited consolidated 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 the 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 materially and adversely from these estimates.

Our accounting policies are described in Note 1 to the accompanying unaudited consolidated financial statements. Management believes the
more significant of our accounting policies are the following:

Revenue Recognition

The most significant source of our revenue is derived from our investments in MBS. We reflect income using the effective yield method,
which, through amortization of premiums and accretion of discounts at an effective yield, recognizes periodic income over the estimated life 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 MBS is accrued based on the actual coupon rate and the outstanding principal amounts of the underlying mortgages. Premiums and discounts are amortized or accreted into interest income over the expected lives of the securities using the effective
interest yield method, adjusted for the effects of actual prepayments and estimated prepayments based on ASC 320-10. Our policy for estimating prepayment speeds for calculating the effective yield is to evaluate historical performance, street
consensus prepayment speeds and current market conditions. If our estimate of prepayments is incorrect, we may be required to make an adjustment to the amortization or accretion of premiums and discounts that would have an impact on future income.



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Valuation and Classification of Investment Securities

We carry our investment securities on our consolidated balance sheets at fair value. The fair values of our Agency MBS are generally based
on third party bid price indications provided by certain dealers who make markets in such securities. The fair value of our Non-Agency MBS are obtained from an independent third party pricing service whose methodologies are based on broker-provided
pricing as well as indirect observation of market activity. If, in the opinion of management, one or more securities prices reported to us are not reliable or unavailable, management reviews 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. We review various factors (e.g., expected cash
flows, changes in interest rates, credit protection, etc.) in determining whether and to what extent an other-than-temporary impairment exists. To the extent that unrealized losses on our Agency MBS and Non-Agency MBS are attributable to changes in
interest rates and not credit quality, and because we do not have the intent to sell these investments, nor is it not more likely than not that we will be required to sell these investments before recovery of their amortized cost bases, which may be
at maturity, we do not consider these investments to be other-than-temporarily impaired. Losses (that are related to credit quality) 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-period income. For more detail on the fair value of our securities, see Note 5 to the accompanying unaudited consolidated financial statements.

Accounting for Derivatives and Hedging Activities

In accordance with ASC 815-10, a derivative that is designated as a hedge is recognized as an asset/liability and measured at estimated
fair value. In order for our interest rate swap agreements to qualify for hedge accounting, upon entering into the swap agreement, we must anticipate that the hedge will be highly effective, as defined by ASC 815-10.

On the date we enter into a derivative contract, we designate the derivative as a hedge of the variability of cash flows that are to be
received or paid in connection with a recognized asset or liability (a cash flow hedge). Changes in the fair value of a derivative that are highly effective and that are designated and qualify as a cash flow hedge, to the extent that the
hedge is effective, are recorded in Other comprehensive income and reclassified to income when the forecasted transaction affects income (e.g., when periodic settlement interest payments are due on repurchase agreements). The swap
agreements are carried on our consolidated balance sheets at their fair value based on values obtained from large financial institutions who are considered market makers for these types of instruments. Hedge ineffectiveness, if any, is recorded in
current-period income.

We formally assess, both at the hedges inception and on an ongoing basis, whether the
derivatives that are used in hedging transactions have been highly effective in offsetting changes in the cash flows of hedged items and whether those derivatives may be expected to remain highly effective in future periods. If it is determined that
a derivative is not (or has ceased to be) highly effective as a hedge, we discontinue hedge accounting.

When we discontinue
hedge accounting, the gain or loss on the derivative remains in Accumulated other comprehensive income and is reclassified into income when the forecasted transaction affects income. In all situations in which hedge accounting is
discontinued and the derivative remains outstanding, we will carry the derivative at its fair value on our consolidated balance sheets, recognizing changes in the fair value in current-period income.

For purposes of the cash flow statement, cash flows from derivative instruments are classified with the cash flows from the hedged item.
For more detail on our derivative instruments, see Notes 1, 5 and 11 to the accompanying unaudited consolidated financial statements.



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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 allow us to be taxed as a REIT and, as a result, management does not expect to pay substantial, if any, 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.

Subsequent Events

On April 15, 2010, we declared a common stock dividend of $0.27 per share, which is payable on May 26, 2010 to our holders of
record of common stock as of the close of business on April 30, 2010.

On April 15, 2010, we declared a Series A
Preferred Stock dividend of $0.539063 per share and a Series B Preferred Stock dividend of $0.390625 per share, each of which is payable on July 15, 2010 to our holders of record of Series A Preferred Stock and Series B Preferred Stock,
respectively, as of the close of business on June 30, 2010.

When we pay any cash dividend during any quarterly fiscal
period to all or substantially all of our common stockholders in an amount that results in an annualized common stock dividend yield that is greater than 6.25% (the dividend yield on our Series B Preferred Stock), the conversion rate on our Series B
Preferred Stock is adjusted based on a formula specified in the Series B Preferred Stock prospectus supplement. This conversion rate increased on May 3, 2010 from 3.1505 shares of our common stock to 3.2317 shares of our common stock using the
following information: (1) the average of the closing price of our common stock for the ten (10) consecutive trading day period was $7.03 and (2) the annualized common stock dividend yield was 15.3737%.



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

We seek to manage the interest rate, market value, liquidity, prepayment and credit risks inherent in all financial instruments in a
prudent manner designed to insure our longevity while, at the same time, seeking to provide an opportunity for stockholders to realize attractive total rates of return through ownership of our common stock. While we do not seek to avoid risk
completely, we do seek, to the best of our ability, to assume risk that can be quantified from historical experience, to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels
consistent with the risks we undertake.

Interest Rate Risk

We primarily invest in adjustable-rate, hybrid and fixed-rate mortgage-related assets. Hybrid mortgages are ARMs that have a fixed
interest rate for an initial period of time (typically three years or greater) and then convert to an adjustable-rate for the remaining loan term. Our debt obligations are generally repurchase agreements of limited duration that are periodically
refinanced at current market rates.

ARM-related assets are typically subject to periodic and lifetime interest rate caps that
limit the amount an ARM-related assets interest rate can change during any given period. ARM securities are also typically subject to a minimum interest rate payable. Our borrowings are not subject to similar restrictions. Hence, in a period
of increasing interest rates, interest rates on our borrowings could increase without limitation, while the interest rates on our mortgage-related assets could be limited. This problem would be magnified to the extent we acquire mortgage-related
assets that are not fully indexed. Further, some ARM-related assets may be subject to periodic payment caps that result in some portion of the interest being deferred and added to the principal outstanding. These factors could lower our net interest
income or cause a net loss during periods of rising interest rates, which would negatively impact our liquidity, net income and our ability to make distributions to stockholders.



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We fund the purchase of a substantial portion of our ARM-related assets 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 assets. Thus, we anticipate that in most cases the interest rate indices and repricing
terms of our mortgage assets and our funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. During periods of changing interest rates, such interest rate mismatches could negatively impact
our net interest income, dividend yield and the market price of our common stock.

Most of our adjustable-rate assets are
based on the one-year constant maturity treasury rate and the one-year LIBOR rate and our debt obligations are generally based on LIBOR. These indices generally move in the same direction, but there can be no assurance that this will continue to
occur.

Our ARM-related assets and borrowings reset at various different dates for the specific asset or obligation. In
general, the repricing of our debt obligations occurs more quickly than on our assets. Therefore, on average, our cost of funds may rise or fall more quickly than does our earnings rate on the assets.

Further, our net income may vary somewhat as the spread between one-month interest rates and six- and twelve-month interest rates varies.

At March 31, 2010, our Agency MBS and Non-Agency MBS and the related borrowings will prospectively reprice based on the
following time frames (dollar amounts in thousands):



|                                           |  |                   |           |                               |            |   |        |   |                              |  |       |  
|------------------------------------------ |  | ----------------- | --------- | ----------------------------- | ---------- | - | ------ | - | ---------------------------- |  | ----- | -
|                                           |  | Investments(1)(2) |           |                               | Borrowings |  
|                                           |  | Amount            |           | Percentageof TotalInvestments |            |   | Amount |   | Percentageof TotalBorrowings | 
|Investment Type/Rate Reset Dates:          |  |                   |           |                               |            |   |        |   |                              |  |       |  
|Fixed-rate investments                     |  | $                 | 757,000   |                               | 11.6       | % |        | $ |                             |  |      |  
|Adjustable-Rate Investments/Obligations:   |  |                   |           |                               |            |   |        |   |                              |  |       |  
|Less than 3 months                         |  |                   | 411,165   |                               | 6.3        |   |        |   | 5,312,000                    |  | 100.0 | %
|Greater than 3 months and less than 1 year |  |                   | 1,339,885 |                               | 20.5       |   |        |   |                             |  |       |  
|Greater than 1 year and less than 2 years  |  |                   | 1,369,428 |                               | 20.9       |   |        |   |                             |  |      |  
|Greater than 2 years and less than 3 years |  |                   | 1,633,815 |                               | 25.0       |   |        |   |                             |  |      |  
|Greater than 3 years and less than 5 years |  |                   | 1,024,623 |                               | 15.7       |   |        |   |                             |  |      |  
|                                           |  |                   |           |                               |            |   |        |   |                              |  |       |  
|Total:                                     |  | $                 | 6,535,916 |                               | 100.0      | % |        | $ | 5,312,000                    |  | 100.0 | %
|                                           |  |                   |           |                               |            |   |        |   |                              |  |       |  



|(1) | Based on when they contractually reprice and does not consider the effect of any prepayments.
|--- | ---------------------------------------------------------------------------------------------

|(2) | The Company assumes that if the repricing of the investment is just beyond 3 months but less than 4 months, it is included in the Less than 3 months
category.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



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At December 31, 2009, our Agency MBS and Non-Agency MBS and the related borrowings will
prospectively reprice based on the following time frames (dollar amounts in thousands):



|                                           |  |                   |           |                               |            |   |        |   |                              |  |       |  
|------------------------------------------ |  | ----------------- | --------- | ----------------------------- | ---------- | - | ------ | - | ---------------------------- |  | ----- | -
|                                           |  | Investments(1)(2) |           |                               | Borrowings |  
|                                           |  | Amount            |           | Percentageof TotalInvestments |            |   | Amount |   | Percentageof TotalBorrowings | 
|Investment Type/Rate Reset Dates:          |  |                   |           |                               |            |   |        |   |                              |  |       |  
|Fixed-rate investments                     |  | $                 | 846,774   |                               | 13.1       | % |        | $ |                             |  |      |  
|Adjustable-Rate Investments/Obligations:   |  |                   |           |                               |            |   |        |   |                              |  |       |  
|Less than 3 months                         |  |                   | 302,345   |                               | 4.7        |   |        |   | 5,359,000                    |  | 100.0 | %
|Greater than 3 months and less than 1 year |  |                   | 1,343,012 |                               | 20.7       |   |        |   |                             |  |      |  
|Greater than 1 year and less than 2 years  |  |                   | 1,414,173 |                               | 21.8       |   |        |   |                             |  |      |  
|Greater than 2 years and less than 3 years |  |                   | 1,422,397 |                               | 21.9       |   |        |   |                             |  |      |  
|Greater than 3 years and less than 5 years |  |                   | 1,161,842 |                               | 17.8       |   |        |   |                             |  |      |  
|                                           |  |                   |           |                               |            |   |        |   |                              |  |       |  
|Total:                                     |  | $                 | 6,490,543 |                               | 100.0      | % |        | $ | 5,359,000                    |  | 100.0 | %
|                                           |  |                   |           |                               |            |   |        |   |                              |  |       |  



|(1) | Based on when they contractually reprice and does not consider the effect of any prepayments.
|--- | ---------------------------------------------------------------------------------------------

|(2) | The Company assumes that if the repricing of the investment is just beyond 3 months but less than 4 months, it is included in the Less than 3 months
category.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

Market Value Risk

All of our MBS are classified as available-for-sale assets. As such, they are reflected at fair value (i.e., market value) with the
periodic adjustment to fair value (that is not considered to be an other-than-temporary impairment) reflected as part of Accumulated other comprehensive income that is included in the equity section of our balance sheet. The market value
of our assets can fluctuate due to changes in interest rates and other factors.

Liquidity Risk

Our primary liquidity risk arises from financing long-maturity MBS with short-term debt. The interest rates on our borrowings generally
adjust more frequently than the interest rates on our adjustable-rate MBS. For example, at March 31, 2010, our Agency MBS and Non-Agency adjustable-rate MBS had a weighted average term to next rate adjustment of approximately 24 months while
our borrowings had a weighted average term to next rate adjustment of 36 days. After adjusting for interest rate swap transactions, the weighted average term to next rate adjustment was 322 days. Accordingly, in a period of rising interest rates,
our borrowing costs will usually increase faster than our interest earnings from MBS. As a result, we could experience a decrease in net income or a net loss during these periods. Our assets that are pledged to secure short-term borrowings are
high-quality liquid assets. As a result, we have been able to roll over our short-term borrowings as they mature. There can be no assurance that we will always be able to roll over our short-term debt.

During the past year, there were continuing liquidity and credit concerns surrounding the mortgage markets generally and continuing
concerns about the general economy. While the U.S. government and other governments have taken various actions to address these concerns, there continue to be severe restrictions on the availability of financing in general and concerns about the
potential impact on product availability, liquidity, interest rates and changes in the yield curve. While we have been able to meet all of our liquidity needs to date, there are still concerns in the mortgage sector about the availability of
financing generally.

At March 31, 2010, we had unrestricted cash of $835 thousand and $719 million in unpledged Agency
MBS and Non-Agency MBS available to meet margin calls on short-term borrowings that could be caused by asset value declines or changes in lender collateralization requirements.



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Prepayment Risk

Prepayments are the full or partial repayment of principal prior to the original term to maturity of a mortgage loan and typically occur
due to refinancing of mortgage loans. Prepayment rates on mortgage-related securities and mortgage loans vary from time to time and may cause changes in the amount of our net interest income. Prepayments of ARM loans usually can be expected to
increase when mortgage interest rates fall below the then-current interest rates on such loans and decrease when mortgage interest rates exceed the then-current interest rate on such loans, although such effects are not entirely predictable.
Prepayment rates may also be affected by the conditions in the housing and financial markets, general economic conditions and the relative interest rates on fixed-rate loans and ARM loans underlying MBS. The purchase prices of MBS are generally
based upon assumptions regarding the expected amounts and rates of prepayments. Where slow prepayment assumptions are made, we may pay a premium for MBS. To the extent such assumptions differ from the actual amounts of prepayments, we could
experience reduced earnings or losses. The total prepayment of any MBS purchased at a premium by us would result in the immediate write-off of any remaining capitalized premium amount and a reduction of our net interest income by such amount. In
addition, in the event that we are unable to acquire new MBS to replace the prepaid MBS, our financial condition, cash flows and results of operations could be harmed.

We often purchase mortgage-related assets that have a higher interest rate than the market interest rate at the time. In exchange for
this higher interest rate, we must pay a premium over par value to acquire these assets. In accordance with accounting rules, we amortize this premium over the term of the MBS. As we receive repayments of mortgage principal, we amortize the premium
balances as a reduction to our income. If the mortgage loans underlying MBS were prepaid at a faster rate than we anticipate, we would amortize the premium at a faster rate. This would reduce our income.

General

Many assumptions are made to present the information in the tables below and, as such, there can be no assurance that assumed events will
occur, or that other events will not occur, that would affect the outcomes; therefore, the tables below and all related disclosures constitute forward-looking statements. The analyses presented utilize assumptions and estimates based on
managements judgment and experience. Furthermore, future sales, acquisitions and restructuring could materially change the interest rate risk profile for us. The tables quantify the potential changes in net income and net asset value should
interest rates immediately change (are shocked). The results of interest rate shocks of plus and minus 100 and 200 basis points are presented. The cash flows associated with the portfolio of mortgage-related assets for each rate shock
are calculated based on a variety of assumptions including prepayment speeds, time until coupon reset, yield on future acquisitions, slope of the yield curve and size of the portfolio. Assumptions made on the interest rate-sensitive liabilities,
which are repurchase agreements, include anticipated interest rates (no negative rates are utilized), collateral requirements as a percent of the repurchase agreement and amount of borrowing. Assumptions made in calculating the impact on net asset
value of interest rate shocks include interest rates, prepayment rates and the yield spread of mortgage-related assets relative to prevailing interest rates.

Tabular Presentation

The information presented in the tables below projects the impact of sudden changes in interest rates on Anworths annual Projected
Net Interest Income and Projected Portfolio Value, as more fully discussed below, based on our investments in place at March 31, 2010 and includes all of our interest rate-sensitive assets, liabilities and hedges, such as interest rate swap
agreements.

Changes in Projected Net Interest Income equals the change that would occur in the calculated Projected Net
Interest Income for the next twelve months relative to the 0% change scenario if interest rates were to instantaneously parallel shift to and remain at the stated level for the next twelve months.



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Changes in Projected Portfolio Value equals the change in the value of our assets that we
carry at fair value and any change in the value of any derivative instruments or hedges, such as interest rate swap agreements. We acquire interest rate-sensitive assets and fund them with interest rate-sensitive liabilities. We generally plan to
retain such assets and the associated interest rate risk to maturity.



|                         |  |                                                   |   |  |                                               |  
|------------------------ |  | ------------------------------------------------- | - |  | --------------------------------------------- | -
|Change in Interest Rates |  | Percentage Change inProjected Net Interest Income |   |  | Percentage Change inProjected Portfolio Value |  
|2%                      |  | 39.6                                             | % |  | 0.8                                          | %
|1%                      |  | 16.8                                             | % |  | 0.2                                           | %
|0%                       |  |                                                  |   |  |                                              |  
|1%                       |  | 7.4                                              | % |  | 1.9                                          | %
|2%                       |  | 19.9                                             | % |  | 4.4                                          | %

When interest
rates are shocked, prepayment assumptions are adjusted based on managements best estimate of the effects of changes in interest rates on prepayment speeds. For example, under current market conditions, a 100 basis point decline in interest
rates is estimated to result in a 83.9% increase in the prepayment rate of our Agency MBS and Non-Agency MBS portfolios. The base interest rate scenario assumes interest rates at March 31, 2010. Actual results could differ significantly from
those estimated in the tables. The above table includes the effect of interest rate swap agreements. At March 31, 2010, the aggregate notional amount of the interest rate swap agreements was $2.27 billion and the weighted average
maturity was 2.0 years.

The information presented in the table below projects the impact of sudden changes in interest rates
on Anworths annual Projected Net Income and Projected Portfolio Value compared to the base case used in the table above and excludes the effect of the interest rate swap agreements.



|                         |  |                                                   |   |  |                                               |  
|------------------------ |  | ------------------------------------------------- | - |  | --------------------------------------------- | -
|Change in Interest Rates |  | Percentage Change inProjected Net Interest Income |   |  | Percentage Change inProjected Portfolio Value |  
|2%                      |  | 11.6                                              | % |  | 0.5                                           | %
|1%                      |  | 34.4                                              | % |  | 0.9                                           | %
|0%                       |  |                                                  |   |  |                                              |  
|1%                       |  | 28.6                                              | % |  | 2.5                                          | %
|2%                       |  | 3.9                                               | % |  | 5.7                                          | %



|Item 4. | Controls and Procedures
|------- | -----------------------

Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are
designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules, regulations
and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and
evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management is
required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Our
management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness in design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly
Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in the timely and accurate recording,
processing, summarizing and reporting of



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information required to be disclosed by us in our reports filed or submitted under the Exchange Act within the time periods specified in the SECs rules, regulations and forms. Our
management, with the participation of our Chief Executive Officer and Chief Financial Officer, has concluded that our disclosure controls and procedures are also effective to ensure that information required to be disclosed in the reports that we
file or submit under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings.
|------- | ------------------

We
are not a party to any material pending legal proceedings.



|Item 1A. | Risk Factors.
|-------- | -------------

The
following risk factors in our Annual Report on Form 10-K for the year ended December 31, 2009 have been modified as follows. The materialization of any risks and uncertainties identified in our Forward Looking Statements contained in this
report together with those previously disclosed in the Form 10-K or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations and cash flows. See Item 2,
Managements Discussion and Analysis of Financial Condition and Results of Operations  Forward Looking Statements in this Quarterly Report on Form 10-Q.

New laws may be passed affecting the relationship between Fannie Mae and Freddie Mac, on the one hand, and the federal government, on the other,
which could adversely affect the price of Agency MBS.

The interest and principal payments we expect to receive on the
Agency MBS in which we invest will be guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Unlike the Ginnie Mae certificates in which we invest, the principal and interest on securities issued by Fannie Mae and Freddie Mac are not guaranteed by the
U.S. government. All the Agency MBS in which we invest depend on a steady stream of payments on the mortgages underlying the securities.

Since September 2008, there have been increased market concerns about Fannie Maes and Freddie Macs ability to withstand
future credit losses associated with securities held in their investment portfolios, and on which they provide guarantees, without the direct support of the federal government. Fannie Mae and Freddie Mac were placed into the conservatorship of the
Federal Housing Finance Agency, or FHFA, their federal regulator, pursuant to its powers under The Federal Housing Finance Regulatory Reform Act of 2008, a part of the Housing and Economic Recovery Act of 2008.

In addition to FHFA becoming the conservator of Fannie Mae and Freddie Mac, the U.S. Department of the Treasury has taken various actions
intended to provide Fannie Mae and Freddie Mac with additional liquidity and ensure their financial stability, including a temporary program to purchase MBS issued by Fannie Mae and Freddie Mac, which program expired on December 31, 2009 with
the U.S. Treasury announcing that it purchased approximately $220 billion of securities across a range of maturities. The U.S. Treasury can hold its portfolio of agency securities to maturity and, based on mortgage market conditions, may make
adjustments to the portfolio. This flexibility may adversely affect the pricing and availability for our target assets. It is also possible that if and when the U.S. Treasury commits to purchase agency securities in the future, it could create
additional demand that would increase the pricing of agency securities that we seek to acquire.

On February 10, 2010,
Fannie Mae and Freddie Mac announced their intention to purchase delinquent loans from certain mortgage pools guaranteed by them. For purposes of these purchases, delinquent loans are those that are 120 days or greater delinquent as of the
measurement date. Freddie Mac estimated the amount of such mortgage loans at nearly $70 billion as of the end of December 2009. Fannie Mae estimated the amount of such mortgage loans at approximately $127 billion as of the end of
December 2009. These purchases may increase prepayment rates on our Agency MBS, which could negatively impact our results of operations and financial condition. The magnitude of the effect of these repurchases on a particular Agency MBS will
depend upon the composition of the mortgage pool underlying each Agency MBS, although for many Agency MBS the effect is expected to be significant.

Shortly after Fannie Mae and Freddie Mac were placed in federal conservatorship, the Secretary of the U.S. Treasury suggested that the
guarantee payment structure of Fannie Mae and Freddie Mac should be re-examined. The future roles of Fannie Mae and Freddie Mac could be significantly reduced and the nature of their guarantees could be eliminated or considerably limited relative to
historical measurements. The U.S. Treasury could also stop providing credit support to Fannie Mae and Freddie Mac in the future. Any changes to the nature of the guarantees provided by Fannie Mae and Freddie Mac could redefine what constitutes an
agency security and could have broad adverse market implications.

The problems faced by Fannie Mae and Freddie Mac resulting
in their being placed into federal conservatorship have stirred debate among some federal policy makers regarding the continued role of the federal government in providing liquidity for mortgage loans. Each of Fannie Mae and Freddie Mac could be
dissolved and the federal government could determine to stop providing liquidity support of any kind to the mortgage market. If Fannie Mae or Freddie Mac were eliminated, or their structures were to change radically, we would not be able to acquire
agency securities from these companies, which would eliminate the major component of our business model.



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Our income could be negatively affected in a number of ways depending on the manner in which
related events unfold. For example, the current credit support provided by the U.S. Treasury to Fannie Mae and Freddie Mac, and any additional credit support it may provide in the future, could have the effect of lowering the interest rate we expect
to receive from agency securities that we seek to acquire, thereby tightening the spread between the interest we earn on our portfolio of targeted assets and our cost of financing that portfolio. A reduction in the supply of agency securities could
also negatively affect the pricing of agency securities we seek to acquire by reducing the spread between the interest we earn on our portfolio of targeted assets and our cost of financing that portfolio.

Any law affecting these government-sponsored enterprises may create market uncertainty and have the effect of reducing the actual or
perceived credit quality of securities issued or guaranteed by Fannie Mae or Freddie Mac. As a result, such laws could increase the risk of loss on investments in Fannie Mae and/or Freddie Mac agency securities. It also is possible that such laws
could adversely impact the market for such securities and spreads at which they trade. All of the foregoing could materially adversely affect our business, operations and financial condition.

We are subject to the risk that, despite recent actions or proposals by the U.S. Department of the Treasury and the Board of Governors of the
Federal Reserve System, banks and other financial institutions may not be willing to lend and/or interest rates and the yield curve may change, which could adversely affect our financing and our operating results.

In September 2008, the U.S. government placed both Fannie Mae and Freddie Mac under its conservatorship. Shortly thereafter, Lehman
Brothers Holdings Inc. filed bankruptcy, Merrill Lynch & Co., Inc. was acquired by Bank of America, the U.S. government announced it would lend approximately $85 billion (which was subsequently increased to over $150 billion) to American
International Group and Washington Mutual was seized by federal regulators, who then sold its assets to JPMorgan Chase.

The
Emergency Economic Stabilization Act of 2008, or EESA, was enacted. The EESA provides the U.S. Secretary of the Treasury with the authority to establish a Troubled Asset Relief Program, or TARP, to purchase up to $700 billion of certain assets and
equity from financial institutions. Under the TARP, the U.S. government has invested approximately $250 billion into hundreds of the countrys banks. In November 2008, after using a significant portion of the funds available under TARP to make
preferred equity investments in certain financial institutions, the Secretary of the U.S. Treasury announced that following enactment of EESA, the U.S. Treasury had continued to examine the relative benefits of purchasing illiquid mortgage-related
assets and had determined that its assessment at that time was that such purchases were not the most effective way to use limited TARP funds. However, the Secretary of the U.S. Treasury indicated that it would continue to examine whether targeted
forms of asset purchase can play a useful role, relative to other potential uses of TARP resources.

On November 25,
2008, the Federal Reserve announced that it would initiate a program to purchase $100 billion in direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Banks and $500 billion in Agency MBS and on March 18, 2009 it was announced
that the program would be expanded to purchase up to $1.25 trillion of Agency MBS. The Federal Reserve stated that its actions are intended to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should
support housing markets and foster improved conditions in financial markets more generally. The purchases of direct obligations began during the first week of December 2008 and purchases of residential MBS began on January 5, 2009. In March
2010, the Federal Reserve completed its agency securities purchase program. As a result of the Federal Reserves completion of its agency securities purchase program, spreads for mortgage-backed securities may widen, negatively impacting the
carrying values of our portfolio. We cannot predict whether or when such actions may occur, and such actions could have a dramatic impact on our business, results of operations and financial condition.

The U.S. Government, including the Board of Governors of the Federal Reserve System, the Department of Treasury and other governmental
and regulatory bodies have taken and are considering taking other actions to address the financial crisis. We cannot predict whether or when such actions may occur or what impact, if any, such actions could have on our business, results of
operations and financial condition. While such programs may provide for more availability of credit to Anworth, there are no assurances that there will be increased availability of credit. In fact, these actions could negatively affect the
availability of financing, the quantity and quality of available products, cause changes in interest rates and the yield curve, which could adversely affect our business, results of operations and financial condition, as well as those of the entire
mortgage sector in general.



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|Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.
|------- | ------------------------------------------------------------

None.



|Item 3. | Defaults Upon Senior Securities.
|------- | --------------------------------

None.



|Item 4. | Reserved.
|------- | ---------



|Item 5. | Other Information.
|------- | ------------------



| | (a) | Additional Disclosures. None.
| | --- | -----------------------------



| | (b) | Stockholder Nominations. There have been no material changes to the procedures by which stockholders may recommend nominees to our board of directors during the quarter
ended March 31, 2010. Please see the discussion of our procedures in our most recent proxy statement.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|Item 6. | Exhibits.
|------- | ---------

The following
exhibits are either filed herewith or incorporated herein by reference:



|               |  |                                                                                                                                                                                                                                         
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  | Description                                                                                                                                                                                                                             
|1.1            |  | Controlled Equity Offering Sales Agreement dated May 14, 2008 between Anworth Mortgage Asset Corporation and Cantor Fitzgerald & Co. (incorporated by reference from our Current
Report on Form 8-K filed with the SEC on May 15, 2008) 
|               | 
|3.1            |  | Amended Articles of Incorporation of Anworth (incorporated by reference from our Registration Statement on Form S-11, Registration No. 333-38641, which became effective under the
Securities Act of 1933 on March 12, 1998)            
|               | 
|3.2            |  | Amended Bylaws of Anworth (incorporated by reference from our Current Report on Form 8-K filed with the SEC on March 13, 2009)                                                                                                          
|               | 
|3.3            |  | Articles of Amendment to Amended Articles of Incorporation (incorporated by reference from our Definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange
Act of 1934, as filed with the SEC on May 14, 2003)
|               | 
|3.4            |  | Articles Supplementary for Series A Cumulative Preferred Stock (incorporated by reference from our Current Report on Form 8-K filed with the SEC on November 3,
2004)                                                                   
|               | 
|3.5            |  | Articles Supplementary for Series A Cumulative Preferred Stock (incorporated by reference from our Current Report on Form 8-K filed with the SEC on January 21,
2005)                                                                   
|               | 
|3.6            |  | Articles Supplementary for Series B Cumulative Convertible Preferred Stock (incorporated by reference from our Current Report on Form 8-K filed with the SEC on January 30, 2007)                                                       
|               | 
|3.7            |  | Articles Supplementary for Series B Cumulative Convertible Preferred Stock (incorporated by reference from our Current Report on Form 8-K filed with the SEC on May 21,
2007)                                                           
|               | 
|3.8            |  | Articles of Amendment to Amended Articles of Incorporation (incorporated by reference from our Current Report on Form 8-K filed with the SEC on May 28, 2008)                                                                           
|               | 
|4.1            |  | Specimen Common Stock Certificate (incorporated by reference from our Registration Statement on Form S-11, Registration No. 333-38641, which became effective under the Securities
Act of 1933 on March 12, 1998)                       
|               | 
|4.2            |  | Specimen Series A Cumulative Preferred Stock Certificate (incorporated by reference from our Current Report on Form 8-K filed with the SEC on November 3, 2004)                                                                         
|               | 
|4.3            |  | Specimen Series B Cumulative Convertible Preferred Stock Certificate (incorporated by reference from our Current Report on Form 8-K filed with the SEC on January 30,
2007)                                                             
|               | 
|4.4            |  | Specimen Anworth Capital Trust I Floating Rate Preferred Stock Certificate (liquidation amount $1,000 per Preferred Security) (incorporated by reference from our Current Report on
Form 8-K filed with the SEC on March 16, 2005)      
|               | 
|4.5            |  | Specimen Anworth Capital Trust I Floating Rate Common Stock Certificate (liquidation amount $1,000 per Common Security) (incorporated by reference from our Current Report on Form
8-K filed with the SEC on March 16, 2005)            
|               | 
|4.6            |  | Specimen Anworth Floating Rate Junior Subordinated Note Due 2035 (incorporated by reference from our Current Report on Form 8-K filed with the SEC on March 16,
2005)                                                                   
|               | 
|4.7            |  | Junior Subordinated Indenture dated as of March 15, 2005, between Anworth and JPMorgan Chase Bank (incorporated by reference from our Current Report on Form 8-K filed with the SEC
on March 16, 2005)                                  



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##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|-------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|10.1           |  | 2002 Incentive Compensation Plan (incorporated by reference from our Definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, as filed with
the SEC on May 17, 2002), as amended by Amendment No. 1 to 2002 Incentive Compensation Plan (incorporated by reference from our Current Report on Form 8-K filed with the SEC on October 15, 2009)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|               | 
|10.2*          |  | 2004 Equity Compensation Plan (incorporated by reference from our Definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, as filed with
the SEC on April 26, 2004)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|               | 
|10.3           |  | 2007 Dividend Equivalent Rights Plan (incorporated by reference from our Definitive Proxy Statement filed pursuant to Section 14(a) of the Securities Exchange Act of 1934, as filed
with the SEC on April 26, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|               | 
|10.4*          |  | 2009 Dividend Reinvestment and Stock Purchase Plan (incorporated by reference from our Registration Statement on Form S-3ASR, Registration No. 333-164047, which became effective
under the Act on December 28, 2009)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|               | 
|10.5*          |  | Employment Agreement dated January 1, 2002, between the Manager and Lloyd McAdams (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June 30,
2002, as filed with the SEC on August 14, 2002) as amended by Addenda dated April 18, 2002 (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as filed with the SEC on August 14, 2002), May 28, 2004
(incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2004, as filed with the SEC on August 9, 2004), June 27, 2006 (incorporated by reference from our Current Report on Form 8-K filed with the SEC on
June 28, 2006), February 22, 2008 (incorporated by reference from our Current Report on Form 8-K filed with the SEC on February 27, 2008) , December 30, 2008 (incorporated by reference from our Current Report on Form 8-K filed with the SEC on
January 2, 2009) and October 14, 2009 (incorporated by reference from our Current Report on Form 8-K, filed with the SEC on October 15, 2009).                                                                                                                                                                                                                                                                                               
|               | 
|10.6*          |  | Employment Agreement dated January 1, 2002, between the Manager and Heather U. Baines (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June
30, 2002, as filed with the SEC on August 14, 2002) as amended by Addenda dated April 18, 2002 (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as filed with the SEC on August 14, 2002), June 27,
2006 (incorporated by reference from our Current Report on Form 8-K filed with the SEC on June 28, 2006) and February 13, 2008 (incorporated by reference from our Current Report on Form 8-K filed with the SEC on February 15, 2008) and October 14,
2009 (incorporated by reference from our Current Report on Form 8-K, filed with the SEC on October 15, 2009).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|               | 
|10.7*          |  | Employment Agreement dated January 1, 2002, between the Manager and Joseph E. McAdams (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June
30, 2002, as filed with the SEC on August 14, 2002) as amended by Addenda dated April 18, 2002 (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as filed with the SEC on August 14, 2002), June 13,
2002 (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as filed with the SEC on August 14, 2002), May 28, 2004 (incorporated by reference from our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004, as filed with the SEC on August 9, 2004), June 27, 2006 (incorporated by reference from our Current Report on Form 8-K filed with the SEC on June 28, 2006), February 13, 2008 (incorporated by reference from our Current
Report on Form 8-K filed with the SEC on February 15, 2008), February 22, 2008 (incorporated by reference from our Current Report on Form 8-K filed with the SEC on February 27, 2008) , December 30, 2008 (incorporated by reference from our Current
Report on Form 8-K filed with the SEC on January 2, 2009) and October 14, 2009 (incorporated by reference from our Current Report on Form 8-K, filed with the SEC on October 15, 2009).



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|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                             
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                 
|10.8           |  | Sublease dated June 13, 2002, between Anworth and PIA (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as filed with the SEC on
August 14, 2002) as amended by Amendment to Sublease dated July 8, 2003 (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2003, as filed with the SEC on August 8, 2003)               
|               | 
|10.9           |  | Deferred Compensation Plan (incorporated by reference from our Annual Report on Form 10-K for the year ended December 31, 2002, as filed with the SEC on March 26,
2003)                                                                                                                                                                                                                                                    
|               | 
|10.10*         |  | Purchase Agreement dated as of March 15, 2005, by and among Anworth, Anworth Capital Trust I, TABERNA Preferred Funding I, Ltd., and Merrill Lynch International (incorporated by
reference from our Current Report on Form 8-K filed with the SEC on March 16, 2005)                                                                                                                                                       
|               | 
|10.11          |  | Second Amended and Restated Trust Agreement dated as of September 26, 2005 by and among Anworth, JPMorgan Chase Bank, National Association, Chase Bank USA, National Association,
Lloyd McAdams, Joseph McAdams, Thad Brown and the several Holders, as defined therein (incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as filed with the SEC on March 16,
2006)
|               | 
|10.12*         |  | Change in Control and Arbitration Agreement dated June 27, 2006, between Anworth and Thad M. Brown (incorporated by reference from our Current Report on Form 8-K filed with the SEC
on June 28, 2006)                                                                                                                                                                                                                      
|               | 
|10.13*         |  | Change in Control and Arbitration Agreement dated June 27, 2006, between Anworth and Charles J. Siegel (incorporated by reference from our Current Report on Form 8-K filed with the
SEC on June 28, 2006)                                                                                                                                                                                                                  
|               | 
|10.14          |  | Change in Control and Arbitration Agreement dated June 27, 2006, between Anworth and Evangelos Karagiannis (incorporated by reference from our Current Report on Form 8-K filed with
the SEC on June 28, 2006)                                                                                                                                                                                                              
|               | 
|10.15*         |  | Change in Control and Arbitration Agreement dated June 27, 2006, between Anworth and Bistra Pashamova (incorporated by reference from our Current Report on Form 8-K filed with the
SEC on June 28, 2006)                                                                                                                                                                                                                   
|               | 
|10.16          |  | Administrative Services Agreement dated December 29, 2008, between Anworth and PIA (incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended December
31, 2008, as filed with the SEC on March 12, 2009)                                                                                                                                                                                     
|               | 
|31.1           |  | Certification of the Principal Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934                                                                                                                                                                                                                                                                                                      
|               | 
|31.2           |  | Certification of the Principal Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934                                                                                                                                                                                                                                                                                                      
|               | 
|32.1           |  | Certifications of the Principal 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 Principal Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002                                                                                                                                                                                                                                                          



|* | Represents a management contract or compensatory plan, contract or arrangement in which any director or any of the named executives participates.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------



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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.



|                  |  |  |  |                                                                                                            
|----------------- |  |  |  | -----------------------------------------------------------------------------------------------------------
|                  |  |  |  | ANWORTH MORTGAGE ASSET CORPORATION                                                                         
|                  |  | 
|Date: May 4, 2010 |  |  |  | /S/    JOSEPH LLOYD
MCADAMS                                                                                
|                  |  |  |  | Joseph Lloyd McAdams
Chairman of the Board, President and Chief Executive Officer (Chief Executive Officer)
|                  |  | 
|Date: May 4, 2010 |  |  |  | /S/    THAD M.
BROWN                                                                                       
|                  |  |  |  | Thad M. Brown
(Chief Financial Officer and Principal Accounting Officer)                                   



50