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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 JUNE 30, 2009

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 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   ̈                    |  | Accelerated Filer  x        
|                                              | 
|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 August 4, 2009, the registrant had 107,607,924 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 June 30, 2009 (unaudited) and December 31, 2008                                        |  | 1   
|         |  |          | 
|         |  |          |  | Consolidated Statements of Income for the three and six months ended June 30, 2009 and 2008
(unaudited)                  |  | 2   
|         |  |          | 
|         |  |          |  | Consolidated Statements of Stockholders Equity for the three months ended March 
31, 2009 and June 30, 2009 (unaudited) |  | 3   
|         |  |          | 
|         |  |          |  | Consolidated Statements of Cash Flows for the three and six months ended June 30, 2009 and 2008
(unaudited)              |  | 4   
|         |  |          | 
|         |  |          |  | Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2009 and 2008
(unaudited)    |  | 5   
|         |  |          | 
|         |  |          |  | Notes to Unaudited Consolidated Financial Statements                                                                     |  | 6   
|         |  |          | 
|         |  | Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                                    |  | 28  
|         |  |          | 
|         |  | Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                               |  | 39  
|         |  |          | 
|         |  | Item 4.  |  | Controls and Procedures                                                                                                  |  | 43  
|         |  |          | 
|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                                                              |  | 44  
|         |  |          | 
|         |  | Item 3.  |  | Defaults Upon Senior Securities                                                                                          |  | 44  
|         |  |          | 
|         |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                                      |  | 44  
|         |  |          | 
|         |  | Item 5.  |  | Other Information                                                                                                        |  | 44  
|         |  |          | 
|         |  | Item 6.  |  | Exhibits                                                                                                                 |  | 45  
|         |  |          | 
|         |  |          |  | Signatures                                                                                                               |  | 48  



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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)



|                                                                                                                                                                                                                                                            |  |              |           |   |                  |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                                                                            |  | June 30,2009 |           |   | December 31,2008 |  
|                                                                                                                                                                                                                                                            |  | (unaudited)  |           |   |                  |  
|ASSETS                                                                                                                                                                                                                                                      |  |              |           |   |                  |   |           |  
|Agency MBS:                                                                                                                                                                                                                                                 |  |              |           |   |                  |   |           |  
|Agency MBS pledged to counterparties at fair value                                                                                                                                                                                                          |  | $            | 4,900,347 |   |                  | $ | 5,164,178 |  
|Agency MBS at fair value                                                                                                                                                                                                                                    |  |              | 468,394   |   |                  |   | 137,966   |  
|Paydowns receivable                                                                                                                                                                                                                                         |  |              | 5,141     |   |                  |   | 5,296     |  
|                                                                                                                                                                                                                                                            |  |              |           |   |                  |   |           |  
|                                                                                                                                                                                                                                                            |  |              | 5,373,882 |   |                  |   | 5,307,440 |  
|Non-Agency MBS:                                                                                                                                                                                                                                             |  |              |           |   |                  |   |           |  
|Non-Agency MBS at fair value                                                                                                                                                                                                                                |  |              | 5,828     |   |                  |   | 7,337     |  
|Cash and cash equivalents                                                                                                                                                                                                                                   |  |              | 516       |   |                  |   | 131,970   |  
|Reverse repurchase agreements                                                                                                                                                                                                                               |  |              | 79,000    |   |                  |   |          |  
|Derivative instruments at fair value                                                                                                                                                                                                                        |  |              | 641       |   |                  |   |          |  
|Interest and dividends receivable                                                                                                                                                                                                                           |  |              | 25,080    |   |                  |   | 26,081    |  
|Prepaid expenses and other                                                                                                                                                                                                                                  |  |              | 7,628     |   |                  |   | 4,314     |  
|                                                                                                                                                                                                                                                            |  |              |           |   |                  |   |           |  
|Total Assets:                                                                                                                                                                                                                                               |  | $            | 5,492,575 |   |                  | $ | 5,477,142 |  
|                                                                                                                                                                                                                                                            |  |              |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                                        |  |              |           |   |                  |   |           |  
|Liabilities:                                                                                                                                                                                                                                                |  |              |           |   |                  |   |           |  
|Accrued interest payable                                                                                                                                                                                                                                    |  | $            | 23,306    |   |                  | $ | 26,268    |  
|Repurchase agreements                                                                                                                                                                                                                                       |  |              | 4,487,000 |   |                  |   | 4,665,000 |  
|Junior subordinated notes                                                                                                                                                                                                                                   |  |              | 37,380    |   |                  |   | 37,380    |  
|Derivative instruments at fair value                                                                                                                                                                                                                        |  |              | 102,178   |   |                  |   | 138,592   |  
|Dividends payable on Series A Preferred Stock                                                                                                                                                                                                               |  |              | 1,011     |   |                  |   | 1,011     |  
|Dividends payable on Series B Preferred Stock                                                                                                                                                                                                               |  |              | 471       |   |                  |   | 471       |  
|Dividends payable on common stock                                                                                                                                                                                                                           |  |              |          |   |                  |   | 23,445    |  
|Accrued expenses and other                                                                                                                                                                                                                                  |  |              | 4,640     |   |                  |   | 675       |  
|                                                                                                                                                                                                                                                            |  |              |           |   |                  |   |           |  
|Total Liabilities:                                                                                                                                                                                                                                          |  | $            | 4,655,986 |   |                  | $ | 4,892,842 |  
|                                                                                                                                                                                                                                                            |  |              |           |   |                  |   |           |  
|Series B Cumulative Convertible Preferred Stock: par value $0.01 per share; liquidating preference $25.00 per share ($30,138 and $30,138,
respectively); 1,206 and 1,206 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively |  | $            | 28,096    |   |                  | $ | 28,096    |  
|                                                                                                                                                                                                                                                            |  |              |           |   |                  |   |           |  
|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 June 30, 2009 and December 31, 2008, respectively             |  | $            | 45,397    |   |                  | $ | 45,397    |  
|Common Stock: par value $0.01 per share; authorized 200,000 shares, 104,103 and 90,462 issued and outstanding at June 30, 2009 and
December 31, 2008, respectively                                                                                          |  |              | 1,041     |   |                  |   | 905       |  
|Additional paid-in capital                                                                                                                                                                                                                                  |  |              | 932,917   |   |                  |   | 851,588   |  
|Accumulated other comprehensive loss consisting of unrealized losses and gains                                                                                                                                                                              |  |              | 37,570    |   |                  |   | (101,940  | )
|Accumulated deficit                                                                                                                                                                                                                                         |  |              | (208,432  | ) |                  |   | (239,746  | )
|                                                                                                                                                                                                                                                            |  |              |           |   |                  |   |           |  
|Total Stockholders Equity:                                                                                                                                                                                                                                 |  | $            | 808,493   |   |                  | $ | 556,204   |  
|                                                                                                                                                                                                                                                            |  |              |           |   |                  |   |           |  
|Total Liabilities and Stockholders Equity:                                                                                                                                                                                                                 |  | $            | 5,492,575 |   |                  | $ | 5,477,142 |  
|                                                                                                                                                                                                                                                            |  |              |           |   |                  |   |           |  

See accompanying notes to unaudited consolidated financial statements.



1



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ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)



|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|----------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------ | ---- |  | - | ------- | - |  | - | ------- | -
|                                                            |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                                            |  | 2009                       |         |   | 2008                     |   |        | 2009 |  |   | 2008    |  
|Interest income:                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Interest on Agency MBS                                      |  | $                          | 67,111  |   |                          | $ | 73,872 |      |  | $ | 134,006 |   |  | $ | 141,450 |  
|Interest on Non-Agency MBS                                  |  |                            | 72      |   |                          |   | 320    |      |  |   | 147     |   |  |   | 740     |  
|Other income                                                |  |                            | 67      |   |                          |   | 125    |      |  |   | 112     |   |  |   | 527     |  
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|                                                            |  |                            | 67,250  |   |                          |   | 74,317 |      |  |   | 134,265 |   |  |   | 142,717 |  
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Interest expense:                                           |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Interest expense on repurchase agreements                   |  |                            | 28,796  |   |                          |   | 44,976 |      |  |   | 60,834  |   |  |   | 93,371  |  
|Interest expense on junior subordinated notes               |  |                            | 402     |   |                          |   | 566    |      |  |   | 857     |   |  |   | 1,261   |  
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|                                                            |  |                            | 29,198  |   |                          |   | 45,542 |      |  |   | 61,691  |   |  |   | 94,632  |  
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net interest income                                         |  |                            | 38,052  |   |                          |   | 28,775 |      |  |   | 72,574  |   |  |   | 48,085  |  
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net gain (loss) on derivative instruments                   |  |                            |        |   |                          |   | 273    |      |  |   | 107     |   |  |   | (6      | )
|Expenses:                                                   |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Compensation and benefits                                   |  |                            | (3,116  | ) |                          |   | (2,388 | )    |  |   | (6,177  | ) |  |   | (4,079  | )
|Other expenses                                              |  |                            | (906    | ) |                          |   | (936   | )    |  |   | (1,733  | ) |  |   | (1,711  | )
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total expenses                                              |  |                            | (4,022  | ) |                          |   | (3,324 | )    |  |   | (7,910  | ) |  |   | (5,790  | )
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Income from continuing operations                           |  |                            | 34,030  |   |                          |   | 25,724 |      |  |   | 64,771  |   |  |   | 42,289  |  
|Income from discontinued operations                         |  |                            |        |   |                          |   | 78     |      |  |   |        |   |  |   | 90      |  
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net income                                                  |  | $                          | 34,030  |   |                          | $ | 25,802 |      |  | $ | 64,771  |   |  | $ | 42,379  |  
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Dividend on Series A Cumulative Preferred Stock             |  |                            | (1,011  | ) |                          |   | (1,011 | )    |  |   | (2,022  | ) |  |   | (2,022  | )
|Dividend on Series B Cumulative Convertible Preferred Stock |  |                            | (471    | ) |                          |   | (471   | )    |  |   | (942    | ) |  |   | (942    | )
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Net income to common stockholders                           |  | $                          | 32,548  |   |                          | $ | 24,320 |      |  | $ | 61,807  |   |  | $ | 39,415  |  
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Basic earnings per common share:                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Continuing operations                                       |  | $                          | 0.32    |   |                          | $ | 0.30   |      |  | $ | 0.62    |   |  | $ | 0.52    |  
|Discontinued operations                                     |  |                            |        |   |                          |   |       |      |  |   |        |   |  |   |        |  
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total basic earnings per common share                       |  | $                          | 0.32    |   |                          | $ | 0.30   |      |  | $ | 0.62    |   |  | $ | 0.52    |  
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Diluted earnings per common share:                          |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Continuing operations                                       |  | $                          | 0.31    |   |                          | $ | 0.29   |      |  | $ | 0.61    |   |  | $ | 0.51    |  
|Discontinued operations                                     |  |                            |        |   |                          |   |       |      |  |   |        |   |  |   |        |  
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Total diluted earnings per common share                     |  | $                          | 0.31    |   |                          | $ | 0.29   |      |  | $ | 0.61    |   |  | $ | 0.51    |  
|                                                            |  |                            |         |   |                          |   |        |      |  |   |         |   |  |   |         |  
|Basic weighted average number of shares outstanding         |  |                            | 102,344 |   |                          |   | 82,191 |      |  |   | 99,177  |   |  |   | 75,950  |  
|Diluted weighted average number of shares outstanding       |  |                            | 105,849 |   |                          |   | 85,125 |      |  |   | 102,682 |   |  |   | 78,884  |  

See accompanying notes to unaudited consolidated financial statements.



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##### Table of Contents

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.(Loss)Non-AgencyMBS |   |         | Accum. OtherComp. Income(Loss)Derivatives |   |      | Accum.(Deficit) |  |   | Comp.Income |   | Total |  
|Balance, December 31, 2008                                |  | 1,876                         |  | 90,462             |  | $                               | 45,397 |                      | $ | 905                      |  | $                                  | 851,588 |                                      | $ | 37,850  |                                           | $ |     |                 |  | $ | (139,790    | ) |       | $ | (239,746 | ) |  |   |         |  | $ | 556,204 |  
|                                                          |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   |          |   |  |   |         |  |   |         |  
|Issuance of common stock                                  |  |                               |  | 9,934              |  |                                 |        |                      |   | 99                       |  |                                    | 57,240  |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   |          |   |  |   |         |  |   | 57,339  |  
|Other comprehensive income (loss), fair value adjustments |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   | 63,721  |                                           |   | (140 | )               |  |   | 11,186      |   |       |   |          |   |  |   | 74,767  |  |   | 74,767  |  
|Net income                                                |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   | 30,741   |   |  |   | 30,741  |  |   | 30,741  |  
|                                                          |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   |          |   |  |   |         |  |   |         |  
|Comprehensive income                                      |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   |          |   |  | $ | 105,508 |  |   |         |  
|                                                          |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   |          |   |  |   |         |  |   |         |  
|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  |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   | (471     | ) |  |   |         |  |   | (471    | )
|                                                          |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   |          |   |  |   |         |  |   |         |  
|Balance, March 31, 2009                                   |  | 1,876                         |  | 100,396            |  | $                               | 45,397 |                      | $ | 1,004                    |  | $                                  | 908,898 |                                      | $ | 101,571 |                                           | $ | (140 | )               |  | $ | (128,604    | ) |       | $ | (210,487 | ) |  |   |         |  | $ | 717,639 |  
|                                                          |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   |          |   |  |   |         |  |   |         |  
|Issuance of common stock                                  |  |                               |  | 3,707              |  |                                 |        |                      |   | 37                       |  |                                    | 23,949  |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   |          |   |  |   |         |  |   | 23,986  |  
|Other comprehensive income (loss), fair value adjustments |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   | 38,901  |                                           |   | (225 | )               |  |   | 26,067      |   |       |   | 34,030   |   |  |   | 64,743  |  |   | 64,743  |  
|Net income                                                |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   |          |   |  |   | 34,030  |  |   | 34,030  |  
|                                                          |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   |          |   |  |   |         |  |   |         |  
|Comprehensive income                                      |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   |          |   |  | $ | 98,773  |  |   |         |  
|                                                          |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   |          |   |  |   |         |  |   |         |  
|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  |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   | (471     | ) |  |   |         |  |   | (471    | )
|Dividend declared$0.30 per common share                  |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   | (30,493  | ) |  |   |         |  |   | (30,493 | )
|                                                          |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   |          |   |  |   |         |  |   |         |  
|Balance, June 30, 2009                                    |  | 1,876                         |  | 104,103            |  | $                               | 45,397 |                      | $ | 1,041                    |  | $                                  | 932,917 |                                      | $ | 140,472 |                                           | $ | (365 | )               |  | $ | (102,537    | ) |       | $ | (208,432 | ) |  |   |         |  | $ | 808,493 |  
|                                                          |  |                               |  |                    |  |                                 |        |                      |   |                          |  |                                    |         |                                      |   |         |                                           |   |      |                 |  |   |             |   |       |   |          |   |  |   |         |  |   |         |  

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 EndedJune 30, |            |   | Six Months EndedJune 30, |  
|                                                                                  |  | 2009                       |            |   | 2008                     |   |            | 2009 |  |   | 2008        |  
|Operating Activities:                                                             |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Net income                                                                        |  | $                          | 34,030     |   |                          | $ | 25,724     |      |  | $ | 64,771      |   |  | $ | 42,289      |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Amortization of premium and discounts (Agency MBS)                                |  |                            | 4,155      |   |                          |   | 3,732      |      |  |   | 8,646       |   |  |   | 7,186       |  
|(Gain) loss on derivative instruments                                             |  |                            |           |   |                          |   | (273       | )    |  |   | (107        | ) |  |   | 6           |  
|Amortization of restricted stock                                                  |  |                            | 70         |   |                          |   | 70         |      |  |   | 141         |   |  |   | 140         |  
|Changes in assets and liabilities:                                                |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Decrease (increase) in interest receivable                                        |  |                            | 1,588      |   |                          |   | 543        |      |  |   | 1,000       |   |  |   | (3,176      | )
|(Increase) decrease in prepaid expenses and other                                 |  |                            | (2,924     | ) |                          |   | 6,073      |      |  |   | (3,314      | ) |  |   | 49,460      |  
|(Decrease) in accrued interest payable                                            |  |                            | (2,636     | ) |                          |   | (6,799     | )    |  |   | (2,656      | ) |  |   | (9,311      | )
|Increase in accrued expenses and other                                            |  |                            | 2,130      |   |                          |   | 2,848      |      |  |   | 3,965       |   |  |   | 3,325       |  
|Net cash (used in) operating activities of discontinued operations                |  |                            |           |   |                          |   | (10        | )    |  |   |            |   |  |   | (44         | )
|                                                                                  |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Net cash provided by operating activities                                         |  | $                          | 36,413     |   |                          | $ | 31,908     |      |  | $ | 72,446      |   |  | $ | 89,875      |  
|                                                                                  |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Investing Activities:                                                             |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Available-for-sale Agency MBS:                                                    |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Purchases                                                                         |  | $                          |           |   |                          | $ | (251,328   | )    |  | $ | (445,547    | ) |  | $ | (1,568,755  | )
|Principal payments                                                                |  |                            | 262,889    |   |                          |   | 279,499    |      |  |   | 473,080     |   |  |   | 536,415     |  
|Available-for-sale Non-Agency MBS:                                                |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Principal payments                                                                |  |                            | 600        |   |                          |   | 1,401      |      |  |   | 1,144       |   |  |   | 3,594       |  
|Purchase of reverse repurchase agreements                                         |  |                            | (79,000    | ) |                          |   |           |      |  |   | (79,000     | ) |  |   |            |  
|                                                                                  |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Net cash provided by (used in) investing activities                               |  | $                          | 184,489    |   |                          | $ | 29,572     |      |  | $ | (50,323     | ) |  | $ | (1,028,746  | )
|                                                                                  |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Financing Activities:                                                             |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Borrowings from repurchase agreements                                             |  | $                          | 6,744,000  |   |                          | $ | 7,282,238  |      |  | $ | 14,624,000  |   |  | $ | 13,755,751  |  
|Repayments on repurchase agreements                                               |  |                            | (7,042,000 | ) |                          |   | (7,386,138 | )    |  |   | (14,802,000 | ) |  |   | (13,009,351 | )
|Proceeds from common stock issued, net                                            |  |                            | 23,986     |   |                          |   | 50,415     |      |  |   | 81,325      |   |  |   | 210,649     |  
|Series A Preferred stock dividends paid                                           |  |                            | (1,011     | ) |                          |   | (1,011     | )    |  |   | (2,022      | ) |  |   | (2,022      | )
|Series B Preferred stock dividends paid                                           |  |                            | (471       | ) |                          |   | (471       | )    |  |   | (942        | ) |  |   | (942        | )
|Common stock dividends paid                                                       |  |                            | (30,493    | ) |                          |   | (16,185    | )    |  |   | (53,938     | ) |  |   | (22,950     | )
|                                                                                  |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Net cash (used in) provided by financing activities                               |  | $                          | (305,989   | ) |                          | $ | (71,152    | )    |  | $ | (153,577    | ) |  | $ | 931,135     |  
|                                                                                  |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Net (decrease) in cash and cash equivalents                                       |  | $                          | (85,087    | ) |                          | $ | (9,672     | )    |  | $ | (131,454    | ) |  | $ | (7,736      | )
|Cash and cash equivalents at beginning of period                                  |  |                            | 85,603     |   |                          |   | 14,343     |      |  |   | 131,970     |   |  |   | 12,440      |  
|Add: net decrease (increase) in cash of discontinued operations                   |  |                            |           |   |                          |   | 10         |      |  |   |            |   |  |   | (23         | )
|                                                                                  |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Cash and cash equivalents at end of period                                        |  | $                          | 516        |   |                          | $ | 4,681      |      |  | $ | 516         |   |  | $ | 4,681       |  
|                                                                                  |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Supplemental Disclosure of Cash Flow Information:                                 |  |                            |            |   |                          |   |            |      |  |   |             |   |  |   |             |  
|Cash paid for interest                                                            |  | $                          | 31,835     |   |                          | $ | 52,341     |      |  | $ | 64,349      |   |  | $ | 103,944     |  

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 EndedJune 30, |        |   | Six Months EndedJune 30, |  
|                                                                        |  | 2009                       |        |   | 2008                     |   |         | 2009 |  |   | 2008    |  
|Net income                                                              |  | $                          | 34,030 |   |                          | $ | 25,802  |      |  | $ | 64,771  |   |  | $ | 42,379  |  
|                                                                        |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Available-for-sale Agency MBS, fair value adjustment                    |  |                            | 38,901 |   |                          |   | (30,183 | )    |  |   | 102,622 |   |  |   | (21,493 | )
|Available-for-sale Non-Agency MBS, fair value adjustment                |  |                            | (225   | ) |                          |   | (837    | )    |  |   | (365    | ) |  |   | (14,933 | )
|Unrealized gains (losses) on cash flow hedges                           |  |                            | 5,877  |   |                          |   | 59,368  |      |  |   | (151    | ) |  |   | (2,541  | )
|Reclassification adjustment for gains on derivative instruments         |  |                            |       |   |                          |   |        |      |  |   | (107    | ) |  |   |        |  
|Reclassification adjustment for interest expense included in net income |  |                            | 20,190 |   |                          |   | 10,149  |      |  |   | 37,511  |   |  |   | 11,444  |  
|                                                                        |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|                                                                        |  |                            | 64,743 |   |                          |   | 38,497  |      |  |   | 139,510 |   |  |   | (27,523 | )
|                                                                        |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Comprehensive income                                                    |  | $                          | 98,773 |   |                          | $ | 64,299  |      |  | $ | 204,281 |   |  | $ | 14,856  |  
|                                                                        |  |                            |        |   |                          |   |         |      |  |   |         |   |  |   |         |  





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

Anworth was incorporated in Maryland on October 20, 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, referred to as Agency
MBS. Agency MBS are securities that are obligations guaranteed by the U.S. government, such as Ginnie Mae, or guaranteed by federally sponsored enterprises, such as Fannie Mae or Freddie Mac. We seek attractive long-term investment returns by
investing our equity capital and borrowed funds in such securities and other mortgage-related 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 and six months ended June 30, 2009 and 2008 are not necessarily indicative of the results that may be expected for the calendar year. The interim
financial information 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, 2008.

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.

Reverse Repurchase Agreements

We use securities purchased under agreements to resell, or reverse repurchase agreements, as a means of investing excess cash. Although
legally structured as a purchase and subsequent resale, reverse repurchase agreements are treated as financing transactions under which the counterparty pledges securities (principally U.S. treasury securities) and accrued interest as collateral to
secure a loan. The difference between the purchase price that we pay and the resale price that we receive represents interest paid to us. It is our policy to generally take possession of securities purchased under reverse repurchase agreements at
the time such agreements are made.



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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 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.

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, Statement of Financial Accounting Standards, or SFAS, No. 91, Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, or SFAS 91, an amendment of FASB Statements No. 13, 60 and 65 and a rescission of FASB Statement No. 17. 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.

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 June 30, 2009, aggregated by investment category and length of time (dollar amounts in thousands):



|                          |  |                     |  |           |                   |                  |   |       |                               |  |           |  |                  |         |  |                    |         |           |  |                  |  |   |         |  |   |         |  
|------------------------- |  | ------------------- |  | --------- | ----------------- | ---------------- | - | ----- | ----------------------------- |  | --------- |  | ---------------- | ------- |  | ------------------ | ------- | --------- |  | ---------------- |  | - | ------- |  | - | ------- | -
|                          |  | Less Than 12 Months |  |           | 12 Months or More |                  |   | Total |                              
|                          |  |                     |  |           |                   |                  |   |       | (dollar amounts in thousands) |  |           |  |                  |         |  |                    |        
|Description of Securities |  | NumberofSecurities  |  | FairValue |                   | UnrealizedLosses |   |       | NumberofSecurities            |  | FairValue |  | UnrealizedLosses |         |  | NumberofSecurities |         | FairValue |  | UnrealizedLosses | 
|Agency MBS                |  | 12                  |  | $         | 41,665            |                  | $ | (269  | )                             |  | 382       |  | $                | 429,390 |  | $                  | (11,190 | )         |  | 394              |  | $ | 471,055 |  | $ | (11,459 | )
|Non-Agency MBS            |  | 1                   |  | $         | 3,824             |                  | $ | (725  | )                             |  |          |  | $                |        |  | $                  |        |           |  | 1                |  | $ | 3,824   |  | $ | (725    | )



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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 bases, which may be at maturity, we do not consider these investments to be
other-than-temporarily impaired at June 30, 2009.

The Company estimates the future cash flows expected for its Non-Agency MBS based
on its review of the underlying mortgage loans and in accordance with paragraphs 23 and 24 of FSP 115-2. The Company evaluates information about the performance of underlying mortgage loans including credit enhancement, default rates, loss
severities, delinquency rates, year of origination, geographic concentration, general market assessments and other general information and data such as home sales and home sale prices. As a result, judgment and assumptions based on both subjective
and objective factors are used in the Companys analysis to determine the expected future cash flows. As the estimate of future cash flows discounted to the present value using the effective interest rates at the acquisition of the Non-Agency
MBS approximates the cost basis, the Company determined at June 30, 2009 that the current unrealized losses on the Non-Agency MBS are not credit related. At June 30, 2009, the Company does 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 the cost basis, which may be at maturity.

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 economic conditions have already caused several large financial institutions involved in repurchase financing of MBS to either have been acquired by
other institutions or to have 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



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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 SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133. 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 major 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.

Accounting for Derivatives and Hedging Activities

In accordance with SFAS 133, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, or SFAS 138, 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 SFAS 133.

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 major financial institutions who are considered to be the 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 12. For more information on the fair value of our swap
agreements, see Note 6.

Credit Risk

At June 30, 2009, we had limited 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



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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 FASB Staff Position No. 115-2 (as more fully described under Recent Accounting Pronouncements), 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 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 other-than-temporary impairment 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 we distribute all of our earnings and our distributions to our stockholders to satisfy the REIT
requirements and that certain asset, income and stock ownership tests are met.

On January 1, 2007, we adopted the provisions of FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, or FIN 48. The adoption of FIN 48 had no effect on our financial statements. We have no unrecognized tax benefits and do not anticipate any increase in unrecognized
benefits during 2009 relative to any tax positions taken prior to January 1, 2009. 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 June 30, 2009. 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 Series B Cumulative Convertible Preferred Stock, or Series B Preferred Stock, on our consolidated balance sheets using the guidance in
Emerging Issues Task Force (EITF) Topic D-98, Classification and Measurement of Redeemable Securities. 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.



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We have analyzed whether the conversion features in the Series B Preferred Stock should be bifurcated
under the guidance in SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities and EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Companys Own Stock, and have determined that bifurcation is not necessary.

Stock-Based Compensation

In accordance with SFAS No. 123(R), Share-Based Payment, any compensation cost relating to share-based payment transactions is recognized
in the unaudited consolidated financial statements.

Restricted stock is expensed over the vesting period (see Note 11).

Earnings Per Share

Basic earnings per share, or EPS,
is computed by dividing net income (loss) 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.

The computation of EPS for the three and six months
ended June 30, 2009 and 2008 is as follows (amounts in thousands, except per share data):



|                                         |  |                                          |        |               |         |                  |   |       |  
|---------------------------------------- |  | ---------------------------------------- | ------ | ------------- | ------- | ---------------- | - | ----- | -
|                                         |  | Net IncomeAvailable toCommonStockholders |        | AverageShares |         | EarningsperShare |  
|For the three months ended June 30, 2009 |  |                                          |        |               |         |                  |   |       |  
|Basic EPS                                |  | $                                        | 32,548 |               | 102,344 |                  | $ | 0.32  |  
|Effect of dilutive securities(1)         |  |                                          | 471    |               | 3,505   |                  |   | (0.01 | )
|                                         |  |                                          |        |               |         |                  |   |       |  
|Diluted EPS                              |  | $                                        | 33,019 |               | 105,849 |                  | $ | 0.31  |  
|                                         |  |                                          |        |               |         |                  |   |       |  
|                                         |  |                                          |       
|For the three months ended June 30, 2008 |  |                                          |        |               |         |                  |   |       |  
|Basic EPS                                |  | $                                        | 24,320 |               | 82,191  |                  | $ | 0.30  |  
|Effect of dilutive securities(2)         |  |                                          | 471    |               | 2,934   |                  |   | (0.01 | )
|                                         |  |                                          |        |               |         |                  |   |       |  
|Diluted EPS                              |  | $                                        | 24,791 |               | 85,125  |                  | $ | 0.29  |  
|                                         |  |                                          |        |               |         |                  |   |       |  



|                                       |  |                                          |        |               |         |                  |   |       |  
|-------------------------------------- |  | ---------------------------------------- | ------ | ------------- | ------- | ---------------- | - | ----- | -
|                                       |  | Net IncomeAvailable toCommonStockholders |        | AverageShares |         | EarningsperShare |  
|For the six months ended June 30, 2009 |  |                                          |        |               |         |                  |   |       |  
|Basic EPS                              |  | $                                        | 61,807 |               | 99,177  |                  | $ | 0.62  |  
|Effect of dilutive securities(1)       |  |                                          | 942    |               | 3,505   |                  |   | (0.01 | )
|                                       |  |                                          |        |               |         |                  |   |       |  
|Diluted EPS                            |  | $                                        | 62,749 |               | 102,682 |                  | $ | 0.61  |  
|                                       |  |                                          |        |               |         |                  |   |       |  
|                                       |  |                                          |       
|For the six months ended June 30, 2008 |  |                                          |        |               |         |                  |   |       |  
|Basic EPS                              |  | $                                        | 39,415 |               | 75,950  |                  | $ | 0.52  |  
|Effect of dilutive securities(2)       |  |                                          | 942    |               | 2,934   |                  |   | (0.01 | )
|                                       |  |                                          |        |               |         |                  |   |       |  
|Diluted EPS                            |  | $                                        | 40,357 |               | 78,884  |                  | $ | 0.51  |  
|                                       |  |                                          |        |               |         |                  |   |       |  



|(1) | During the three and six months ended June 30, 2009, diluted earnings per common share include the assumed conversion of 1.206 million shares of Series B Preferred Stock
at the conversion rate of 2.9075 shares of common stock and adding back the Series B Preferred Stock dividend.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | During the three and six months ended June 30, 2008, diluted earnings per common share include the assumed conversion of 1.206 million shares of Series B Preferred Stock
at the conversion rate of 2.4318 shares of common stock and adding back the Series B Preferred Stock dividend.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Accumulated Other
Comprehensive Income (Loss)

SFAS No. 130, Reporting Comprehensive Income, divides comprehensive income 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 SFAS 133.

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 April 9, 2009, the FASB issued Staff Position No. FAS
157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, or FSP No. 157-4. This FSP requires entities to consider
whether events and circumstances indicate whether the transaction is or is not orderly as opposed to a forced or distressed transaction. Entities would place more weight on observable transactions determined to be orderly and less weight on
transactions for which there is insufficient information to determine whether the transaction is orderly. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing
activities that are usual and customary for transactions involving such assets or liabilities. This FSP provides additional guidance for making fair value measurements more consistent with the principles presented in SFAS No. 157. This FSP,
which we have adopted, became effective for interim and annual periods ending after June 15, 2009 and it did not have a material impact on our financial statements.

On April 9, 2009, the FASB issued Staff Position No. 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, or FSP FAS 115-2. If an entity does not intend to sell
a debt security (available-for-sale or held-to-maturity) and it is not more likely than not that the entity will have to sell prior to forecasted recovery, but it is probable that the entity will not collect all amounts due according to the
debts contractual terms, the entity will bifurcate the other-than-temporary impairment (OTTI). The impairment due to credit, measured as the difference between amortized cost and the present value of expected cash flows discounted at the
securitys effective rate, would be recognized in earnings. The remaining amount of the impairment would be recognized in Other comprehensive income (separately from Other unrealized gains or loses on available-for-sale
securities). In addition, entities are required to initially apply the provisions of this FSP to previously OTTI instruments existing as of the effective date by making a cumulative-effect adjustment to the opening balance of retained earnings
in the period of adoption. The cumulative-effect adjustment reclassifies the noncredit portion of a previously OTTI instrument held as of the effective date to accumulated other comprehensive income from retained earnings. This FSP, which we have
adopted, became effective for interim and annual periods ending after June 15, 2009 and it did not have a material impact on our financial statements. This reassessment did not result in a cumulative effect adjustment to any component of
stockholders equity in connection with the adoption of this FSP.

On April 9, 2009, the FASB issued Staff Position No. FAS 107-1
and APB 28-1, Interim Fair Value Disclosures for Financial Instruments, or FSP No. FAS 107-1. This FSP requires public entities to disclose the method(s) and significant assumptions used to estimate the fair value of financial
instruments in financial



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statements on an interim and annual basis and to highlight any changes from prior periods. This FSP, which we have adopted, became effective for interim and
annual periods ending after June 15, 2009 and it did not have a material impact on our financial statements.

On May 28, 2009,
the FASB issued Statement on Financial Accounting Standards No. 165, Subsequent Events, or SFAS 165. This pronouncement sets forth general standards of accounting for and disclosure of events that occur after the balance sheet date
but before financial statements are issued or are available to be issued. In particular, SFAS 165 sets forth the following: the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions
that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the
disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165, which we have adopted, became effective for all interim and annual periods ending after June 15, 2009 and it did not have
a material impact on our financial statements.

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. 146 (R), or SFAS 167. SFAS 166 is a revision to SFAS 140, Accounting for Transfer and Servicing of Financial Assets and
Extinguishment of Liabilities, 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 FASB Interpretation No. 46 (R),
Consolidation of Variable Interest Entities, 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. We do not believe these two new standards will have a material impact on our financial statements.

On June 29, 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, or SFAS 168, and with that authorized the
Codification as the new source for authoritative U.S. GAAP (excluding guidance issued by the SEC). SFAS 168 replaces SFAS 162, The Hierarchy of Generally Accepted Accounting Principles, which was issued in May 2008 and identified the
sources of accounting principles and the framework for selecting them. The Codification will supersede the existing collection of FASB Statements, Interpretations, Staff Positions, Technical Bulletins, APB (Accounting Principle Board) Opinions,
AICPA Statements of Position, EITF consensuses and related literature and reorganizes thousands of U.S GAAP pronouncements into approximately 90 topics. SFAS 168 is effective for all financial statements issued for reporting periods that end after
September 15, 2009. We do not believe that SFAS 168 and the Codification will have a material impact on our financial statements, as it does not change U.S. GAAP, but it will change the references in our financial statements from the individual
pronouncements to the appropriate sections in the Codification.

NOTE 2. REVERSE REPURCHASE AGREEMENTS

At June 30, 2009, we had lent $79 million to a counterparty as a means of investing excess cash. These investments were in an overnight reverse
repurchase agreement. This amount is carried at its principal balance, which approximates fair value. The interest rate was 0.20%. The collateral for this loan was U.S. Treasury securities with an aggregate fair value of $79 million.



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NOTE 3. MORTGAGE-BACKED SECURITIES (MBS)

The following tables summarize our Agency MBS and Non-Agency MBS, classified as available-for-sale, at June 30, 2009 and December 31, 2008,
which are carried at their fair value (amounts in thousands):

June 30, 2009



|                              |  |      |           |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  
|----------------------------- |  | ---- | --------- | - | ---------- | - | --------- | ----------- |  | - | ------------------ | - |  | --------------- | --------- | - |  | - | --------- | -
|Agency MBS (By Agency)        |  |      |           |   | Ginnie Mae |   |           | Freddie Mac |  |   | Fannie Mae         |   |  | TotalAgency MBS |          
|Amortized cost                |  |      |           |   |            | $ | 25,358    |             |  | $ | 1,137,667          |   |  | $               | 4,065,244 |   |  | $ | 5,228,269 |  
|Paydowns receivable           |  |      |           |   |            |   |          |             |  |   | 5,142              |   |  |                 |          |   |  |   | 5,142     |  
|Unrealized gains              |  |      |           |   |            |   | 2         |             |  |   | 38,430             |   |  |                 | 113,498   |   |  |   | 151,930   |  
|Unrealized losses             |  |      |           |   |            |   | (328      | )           |  |   | (2,802             | ) |  |                 | (8,329    | ) |  |   | (11,459   | )
|                              |  |      |           |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  
|Fair value                    |  |      |           |   |            | $ | 25,032    |             |  | $ | 1,178,437          |   |  | $               | 4,170,413 |   |  | $ | 5,373,882 |  
|                              |  |      |           |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  
|                              |  |      |           |   |           
|Agency MBS (By Security Type) |  | ARMs |           |   | Hybrids    |   |           | Fixed-Rate  |  |   | Floating-Rate CMOs |   |  | TotalAgency MBS |          
|Amortized cost                |  | $    | 1,046,100 |   |            | $ | 3,274,999 |             |  | $ | 900,452            |   |  | $               | 6,718     |   |  | $ | 5,228,269 |  
|Paydowns receivable           |  |      | 2,407     |   |            |   | 2,735     |             |  |   |                   |   |  |                 |          |   |  |   | 5,142     |  
|Unrealized gains              |  |      | 8,916     |   |            |   | 110,346   |             |  |   | 32,668             |   |  |                 |          |   |  |   | 151,930   |  
|Unrealized losses             |  |      | (11,300   | ) |            |   |          |             |  |   |                   |   |  |                 | (159      | ) |  |   | (11,459   | )
|                              |  |      |           |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  
|Fair value                    |  | $    | 1,046,123 |   |            | $ | 3,388,080 |             |  | $ | 933,120            |   |  | $               | 6,559     |   |  | $ | 5,373,882 |  
|                              |  |      |           |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  



|                    |  |                    |       |  
|------------------- |  | ------------------ | ----- | -
|Non-Agency MBS      |  | TotalNon-AgencyMBS |      
|Amortized cost      |  | $                  | 6,193 |  
|Paydowns receivable |  |                    |      |  
|Unrealized gains    |  |                    | 360   |  
|Unrealized losses   |  |                    | (725  | )
|                    |  |                    |       |  
|Fair value          |  | $                  | 5,828 |  
|                    |  |                    |       |  

At June 30, 2009, 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 0.56%, 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 June 30, 2009, a security representing approximately 33% of the
principal balance of our Non-Agency MBS portfolio was rated BB by Standard & Poors and a security representing approximately 67% of the principal balance of our Non-Agency MBS portfolio was downgraded from B to CCC by
Standard & Poors. At June 30, 2009, Moodys rated these two securities as Ca. These ratings were unchanged from March 31, 2009.



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December 31, 2008



|                              |  |      |         |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  
|----------------------------- |  | ---- | ------- | - | ---------- | - | --------- | ----------- |  | - | ------------------ | - |  | --------------- | --------- | - |  | - | --------- | -
|Agency MBS (By Agency)        |  |      |         |   | Ginnie Mae |   |           | Freddie Mac |  |   | Fannie Mae         |   |  | TotalAgency MBS |          
|Amortized cost                |  |      |         |   |            | $ | 27,193    |             |  | $ | 1,283,909          |   |  | $               | 3,953,192 |   |  | $ | 5,264,294 |  
|Paydowns receivable           |  |      |         |   |            |   |          |             |  |   | 5,296              |   |  |                 |          |   |  |   | 5,296     |  
|Unrealized gains              |  |      |         |   |            |   |          |             |  |   | 23,900             |   |  |                 | 33,113    |   |  |   | 57,013    |  
|Unrealized losses             |  |      |         |   |            |   | (650      | )           |  |   | (3,956             | ) |  |                 | (14,557   | ) |  |   | (19,163   | )
|                              |  |      |         |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  
|Fair value                    |  |      |         |   |            | $ | 26,543    |             |  | $ | 1,309,149          |   |  | $               | 3,971,748 |   |  | $ | 5,307,440 |  
|                              |  |      |         |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  
|                              |  |      |         |   |           
|Agency MBS (By Security Type) |  | ARMs |         |   | Hybrids    |   |           | Fixed-Rate  |  |   | Floating-Rate CMOs |   |  | TotalAgency MBS |          
|Amortized cost                |  | $    | 823,356 |   |            | $ | 3,407,874 |             |  | $ | 1,025,071          |   |  | $               | 7,993     |   |  | $ | 5,264,294 |  
|Paydowns receivable           |  |      | 2,531   |   |            |   | 2,765     |             |  |   |                   |   |  |                 |          |   |  |   | 5,296     |  
|Unrealized gains              |  |      | 1,089   |   |            |   | 33,639    |             |  |   | 22,285             |   |  |                 |          |   |  |   | 57,013    |  
|Unrealized losses             |  |      | (14,970 | ) |            |   | (3,153    | )           |  |   | (716               | ) |  |                 | (324      | ) |  |   | (19,163   | )
|                              |  |      |         |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  
|Fair value                    |  | $    | 812,006 |   |            | $ | 3,441,125 |             |  | $ | 1,046,640          |   |  | $               | 7,669     |   |  | $ | 5,307,440 |  
|                              |  |      |         |   |            |   |           |             |  |   |                    |   |  |                 |           |   |  |   |           |  



|                     |  |                    |         |  
|-------------------- |  | ------------------ | ------- | -
|Non-Agency MBS       |  | TotalNon-AgencyMBS |        
|Amortized cost       |  | $                  | 44,875  |  
|Paydowns receivable  |  |                    |        |  
|Unrealized gains     |  |                    |        |  
|Unrealized losses(1) |  |                    | (37,538 | )
|                     |  |                    |         |  
|Fair value           |  | $                  | 7,337   |  
|                     |  |                    |         |  



|(1) | Taken in 2008 through earnings as impairment charges.
|--- | -----------------------------------------------------

At
December 31, 2008, our Non-Agency MBS portfolio consisted of floating-rate CMOs with an average coupon of 0.72%, which were acquired at par value.

NOTE 4. REPURCHASE AGREEMENTS

We have entered into repurchase agreements with major 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. Relative to our Agency MBS portfolio, at
June 30, 2009, our repurchase agreements had a weighted average term to maturity of 44 days and a weighted average borrowing rate of 0.53%. After adjusting for swap transactions, the weighted average term to the next rate adjustment was 371
days with a weighted average borrowing rate of 2.46%. At June 30, 2009, Agency MBS with a fair value of approximately $4.9 billion have been pledged as collateral under the repurchase agreements and swap agreements.

Relative to our Agency MBS portfolio, at December 31, 2008, our repurchase agreements had a weighted average term to maturity of 34 days and a
weighted average borrowing rate of 2.07%. After adjusting for swap transactions, the weighted average term to the next rate adjustment was 422 days with a weighted average borrowing rate of 3.25%. At December 31, 2008, Agency MBS with
a fair value of approximately $5.2 billion have been pledged as collateral under the repurchase agreements and swap agreements.



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At June 30, 2009 and December 31, 2008, the repurchase agreements had the following balances
(in thousands), remaining maturities and weighted average interest rates:



|                                 |  |              |           |                             |                  |   |         |   |                             |  |      |  
|-------------------------------- |  | ------------ | --------- | --------------------------- | ---------------- | - | ------- | - | --------------------------- |  | ---- | -
|                                 |  | June 30,2009 |           |                             | December 31,2008 |  
|                                 |  | Balance      |           | WeightedAverageInterestRate |                  |   | Balance |   | WeightedAverageInterestRate | 
|Overnight                        |  | $            |          |                             |                 |   |         | $ |                            |  |     |  
|Less than 30 days                |  |              | 1,535,000 |                             | 0.56             | % |         |   | 2,540,000                   |  | 2.15 | %
|30 days to 90 days               |  |              | 2,852,000 |                             | 0.51             | % |         |   | 2,005,000                   |  | 1.78 | %
|Over 90 days to less than 1 year |  |              | 100,000   |                             | 0.49             | % |         |   | 120,000                     |  | 5.10 | %
|1 year to 2 years                |  |              |          |                             |                 |   |         |   |                            |  |     |  
|Demand                           |  |              |          |                             |                 |   |         |   |                            |  |     |  
|                                 |  |              |           |                             |                  |   |         |   |                             |  |      |  
|                                 |  | $            | 4,487,000 |                             | 0.53             | % |         | $ | 4,665,000                   |  | 2.07 | %
|                                 |  |              |           |                             |                  |   |         |   |                             |  |      |  

NOTE 5. 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 redeemable, in whole or in part, without penalty, at our option, 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 FIN 46 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.

NOTE 6. FAIR VALUES OF FINANCIAL INSTRUMENTS

On
January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements, or SFAS 157, which had no material impact. As defined in SFAS 157, 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. SFAS 157 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. However, the fair value reported may not be indicative of the amounts that could be realized in an actual
market exchange. Our 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 major financial institutions and are considered to be the market makers for these types of instruments and the LIBOR swap rate is observable at commonly quoted



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intervals over the full term of the swap agreements and therefore is considered a Level 2 item. The fair value of the derivative instruments
liabilities is the estimated amount the Company would have to pay to terminate these agreements at the reporting date, taking into account current interest rates and the companys credit worthiness. For more information on our swap agreements,
see Note 1 and Note 12.

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 December 31, 2008, we considered the inputs utilized to fair
value the Non-Agency MBS to be Level 3. We received indications of value 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. Generally, we would consider this to be a Level 2 input. However, given the severely reduced trading activity surrounding the Non-Agency MBS, we reduced the fair value measurement to a Level 3 input at December 31, 2008 and it remains
a Level 3 input at June 30, 2009.

In determining the appropriate levels, the Company performs a detailed analysis of the assets and
liabilities that are subject to SFAS 157. 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 June 30, 2009, fair value measurements were as follows (in thousands):



|                          |  |         |   |         |   |           |  |       |       |  |   |          
|------------------------- |  | ------- | - | ------- | - | --------- |  | ----- | ----- |  | - | ---------
|                          |  | Level 1 |   | Level 2 |   | Level 3   |  | Total
|Assets:                   |  |         |   |         |   |           |  |       |       |  |   |          
|Agency MBS                |  | $       |  |         | $ | 5,373,882 |  | $     |      |  | $ | 5,373,882
|Non-Agency MBS            |  | $       |  |         | $ |          |  | $     | 5,828 |  | $ | 5,828    
|Derivative instruments(1) |  | $       |  |         | $ | 641       |  | $     |      |  | $ | 641      
|Liabilities:              |  |         |   |         |   |           |  |       |       |  |   |          
|Derivative instruments(1) |  | $       |  |         | $ | 102,178   |  | $     |      |  | $ | 102,178  



|(1) | Derivative instruments are hedging instruments under SFAS 133.
|--- | --------------------------------------------------------------

Cash and cash equivalents, restricted cash, reverse repurchase agreements, 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.

Junior subordinated notes are variable-rate debt and, as we
believe the spread would be consistent with the expectations of market participants as of June 30, 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 March 31, 2009                                  |  | $      | 6,653 |  
|Principal paydowns                                         |  |        | (600  | )
|Unrealized gains                                           |  |        | 218   |  
|Unrealized losses recognized in other comprehensive income |  |        | (443  | )
|                                                           |  |        |       |  
|Balance at June 30, 2009                                   |  | $      | 5,828 |  
|                                                           |  |        |       |  

NOTE 7. 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



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stockholders satisfy the REIT requirements and certain asset, 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 8. SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK

We have issued an aggregate of
1.206 million shares of Series B 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 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 June 30, 2009, the Series B Preferred Stock was convertible at the
then-current conversion rate of 2.9075 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. The Series B Preferred Stock contains certain fundamental change provisions that allow the holder to redeem the 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 our 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 June 30, 2009, we have declared and set aside for payment the required dividends for the Series B Preferred Stock.

NOTE 9. 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 June 30, 2009, 104.1 million shares of our common stock were issued and outstanding.

At June 30, 2009, 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 remaining 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 9, 2009, we issued 8 million shares of common stock in a secondary public
offering and received net proceeds of approximately $46 million (net of underwriting fees, commissions and other costs). We used all of the net proceeds from this offering to acquire Agency MBS.



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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 June 30, 2009, we sold 1.140 million shares of our common stock under the Program, which provided net proceeds to us of
approximately $7.622 million, net of sales commissions less reimbursement of fees. The sales agent received an aggregate of approximately $155 thousand, which represents an average commission of approximately 2.0% on the gross sales price per share.
At June 30, 2009, there were 10,672,900 shares 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 April 11, 2008, we filed a shelf registration statement on Form S-3
with the SEC to register 15 million shares of common stock for our 2008 Dividend Reinvestment and Stock Purchase Plan, or the 2008 Plan. During the three months ended June 30, 2009, we issued approximately 2.6 million shares of common
stock under the 2008 Plan, resulting in proceeds to us of approximately $16.5 million. At June 30, 2009 there were approximately 7 million shares remaining under the 2008 Plan.

On May 23, 2007, we filed a shelf registration statement on Form S-3 with the SEC, offering up to $500 million of our capital stock. The
registration statement was declared effective on June 8, 2007. At June 30, 2009, approximately $131 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 Corporation 2004 Equity Compensation Plan. To date, we have issued 2.583 million shares under the plan. This amount includes 1.612 million shares of unexercised stock options
and restricted stock.

NOTE 10. 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 have the opportunity 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 three executives may be paid up to 50% of their respective incentive compensation earned under such plan in the form of our common stock. 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 June 30, 2009, the Threshold Return was 4.30%.

Average net worth, as defined in the agreement, 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 (without taking into account any losses
incurred in prior periods) computed by taking the average of such values at the end of each month during such period.



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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 plan with respect to participants who were participants during the fiscal quarter(s) in which negative incentive compensation was generated. At June 30, 2009, the negative incentive compensation accrual carry
forward was $15.7 million, which was reduced from a negative $17.5 million at March 31, 2009 and a negative $19.1 million at December 31, 2008. 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.
| | - |  | -------------------------------------------------------

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. During the three months ended June 30, 2009 and 2008, eligible employees under the 2002 Incentive Plan did not earn any incentive compensation due to the negative
incentive carry forward under the Plan.

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 agreements automatically renew each year unless written notice is provided by either party six months prior to the end of the current term.

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 three
executives may be paid up to 50% of their respective incentive compensation earned under such plan in the form of common stock;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | 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 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 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 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, or the Executives. As a result, the Executives 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 GAAP
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 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 designed by the Compensation Committee, the aggregate amount of this performance-based bonus pool available for distribution to the
Executives is determined 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 to be paid.
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | if our ROAE is 8% or greater, then the bonus pool available to be paid 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 Executives 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 Executives bonus pool, the Compensation Committee bases annual bonus allocation to each of the Executives on its assessment of
the performance of each Executive.



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In order to further align the performance of the Executives with our long-term financial success and the
creation of stockholder value, the Compensation Committee also determined that (1) with respect to 2009, at least 25% of the annual performance-based bonus amount to be distributed to an Executive over $100 thousand would be paid in restricted
shares of common stock, preferred stock or a combination of both classes of securities (the Restricted Shares) and (2) with respect to each year thereafter, at least 25% of any annual performance-based bonus amount over $100
thousand will be paid in 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 the Executives stock holdings in
the company exceeds a seven and one-half times multiple of the Executives base compensation and, once this threshold is met, only to the extent that the value of the Executives 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 June 30, 2009, 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 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 $52.58 per square foot. The sublease runs through June 30, 2012 unless earlier terminated pursuant to the master lease.
During the three and six months ended June 30, 2009, we paid $86 thousand and $166 thousand, respectively, 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 and six months ended June 30, 2008, we paid $70 thousand and $140 thousand, respectively, in rent to PIA under this sublease.

The future minimum lease commitment is as follows (in whole dollars):



|           |  |      |         |      |   |         |  |      |         |                 |   |         |  |   |        
|---------- |  | ---- | ------- | ---- | - | ------- |  | ---- | ------- | --------------- | - | ------- |  | - | -------
|Year       |  | 2009 |         | 2010 |   | 2011    |  | 2012 |         | TotalCommitment
|Commitment |  | $    | 148,930 |      | $ | 302,332 |  | $    | 311,414 |                 | $ | 158,012 |  | $ | 920,688



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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 $79 thousand and $141 thousand, respectively, paid to PIA in connection with this agreement during the three and six months ended June 30, 2009. During the three and six
months ended June 30, 2008, we paid fees of $80 thousand and $150 thousand, respectively, 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
Lloyd McAdams, our Chairman, President and Chief Executive Officer, and Joseph E. McAdams, our Chief Investment Officer and Executive Vice President, as the only officers 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 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.

NOTE 11. EQUITY COMPENSATION PLANS

2004 Equity Compensation Plan

At our May 27, 2004 Annual Meeting of Stockholders, 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 for an aggregate of up to 3,500,000 of the outstanding shares of our common stock. The Plan authorizes our board of



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directors, or a committee of our board, to grant incentive stock options, as defined under section 422 of the Code, non-qualified stock options, restricted
stock, dividend equivalent rights (DERs), phantom shares, stock-based awards that qualify as performance-based awards under Section 162(m) of the Code 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 June 30, 2009, 916,863 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. On November 7, 2005, we filed a registration statement on Form S-8 with the SEC 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 a grant under the Plan, made effective October 27, 2005, of an aggregate of 200,780 shares of restricted stock to various of our officers and employees. The closing price of our common stock 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 the grantees 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
under the Plan, made effective October 18, 2006, of an aggregate of 197,362 shares of performance-based restricted stock to various of our officers and employees. The closing price of our common stock on the grant date was $9.12. The shares
will vest in equal annual installments over the subsequent 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 until after the earlier to occur of the termination of employment with us or upon the tenth anniversary of the effective
date.

During the three months ended June 30, 2009, we expensed approximately $51 thousand relating to these two restricted stock
grants.

2007 Dividend Equivalent Rights Plan

At our Annual Meeting of Stockholders held on May 24, 2007, our stockholders adopted the Anworth Mortgage Asset Corporation 2007 Dividend Equivalent Rights Plan, or the DER Plan. A 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 the 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 Compensation Committee may impose such other conditions to the grant of DERs as it may deem
appropriate. The DER Plan authorizes our board of directors to grant DERs with respect to a maximum of 2,000,000 shares of our common stock. Payments under DERs made in shares of our common stock, rather than cash, will be made from shares of our
common stock reserved and available for issuance under the 2004 Equity Compensation Plan, subject to the limitations of the 2004 Equity Compensation Plan.

In 2008, our board of directors approved grants under the DER Plan of an aggregate of 450 thousand DERs, which were issued to certain of our employees and officers. These DERs are paid in cash and are not
attached to any stock and only have the right to receive the same cash distribution distributed to our common stockholders



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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 June 30, 2009, we
expensed $144 thousand in compensation related to these grants.

NOTE 12. HEDGING INSTRUMENTS

At June 30, 2009, we were a counter-party to interest rate swap agreements, which are derivative instruments as defined by SFAS 133 and SFAS 138,
with an aggregate notional amount of $2.48 billion and a weighted average maturity of 1.8 years. These swap agreements were with the following four counterparties: (1) Deutsche Bank Securitiesnotional amount: $1.075 billion;
(2) Credit Suisse First Boston Corporationnotional amount: $905 million; (3) Citigroupnotional amount: $400 million; and (4) J.P. Morgan Securities Inc.notional amount: $100 million. During the three months ended
June 30, 2009, one swap agreement with a notional amount of $100 million matured. During the three months ended June 30, 2009, we did not enter into any new swap agreements. 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 June 30, 2009 and
December 31, 2008, our swap agreements had the following notional amounts (in thousands) and weighted average interest rates:



|                    |  |                |           |                             |                  |   |                |   |                             |  |      |  
|------------------- |  | -------------- | --------- | --------------------------- | ---------------- | - | -------------- | - | --------------------------- |  | ---- | -
|                    |  | June 30,2009   |           |                             | December 31,2008 |  
|                    |  | NotionalAmount |           | WeightedAverageInterestRate |                  |   | NotionalAmount |   | WeightedAverageInterestRate | 
|Less than 12 months |  | $              | 760,000   |                             | 4.39             | % |                | $ | 760,000                     |  | 4.20 | %
|1 year to 2 years   |  |                | 925,000   |                             | 4.58             | % |                |   | 750,000                     |  | 4.75 | %
|2 years to 3 years  |  |                | 250,000   |                             | 3.48             | % |                |   | 475,000                     |  | 4.36 | %
|3 years to 4 years  |  |                | 545,000   |                             | 4.05             | % |                |   | 420,000                     |  | 4.43 | %
|4 years to 5 years  |  |                |          |                             |                 |   |                |   | 275,000                     |  | 3.77 | %
|                    |  |                |           |                             |                  |   |                |   |                             |  |      |  
|                    |  | $              | 2,480,000 |                             | 4.29             | % |                | $ | 2,680,000                   |  | 4.37 | %
|                    |  |                |           |                             |                  |   |                |   |                             |  |      |  

At June 30, 2009, there was a decrease in unrealized losses of $37.3 million, from $139.8
million in unrealized losses at December 31, 2008 to $102.5 million in unrealized losses, on our swap agreements included in Other comprehensive income (this decrease consisted of unrealized losses on cash flow hedges of
$151 thousand, a reclassification adjustment for gains on derivative instruments included in net income of $107 thousand and a reclassification adjustment for interest expense included in net income of $37.5 million).

At June 30, 2009, we had asset derivatives of $641 thousand and liability derivatives (both shown on our unaudited consolidated balance sheets) of
$102.2 million.

For the three months ended June 30, 2009, 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 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. For the three months ended June 30, 2009, the amount amortized into interest expense was approximately $154 thousand
and the remaining amount at June 30, 2009 to be amortized was approximately $1.03 million.



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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 6.

NOTE 13. 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 10.

NOTE 14. OTHER EXPENSES



|                                        |  |                    |     |                  |   |      |  |      |       |  |   |      
|--------------------------------------- |  | ------------------ | --- | ---------------- | - | ---- |  | ---- | ----- |  | - | -----
|                                        |  | Three Months Ended |     | Six Months Ended
|                                        |  | June 30,           |     | June 30,        
|                                        |  | 2009               |     | 2008             |   | 2009 |  | 2008
|                                        |  | (in thousands)     |     | (in thousands)  
|Legal and accounting fees               |  | $                  | 158 |                  | $ | 179  |  | $    | 370   |  | $ | 364  
|Printing and stockholder communications |  |                    | 76  |                  |   | 109  |  |      | 86    |  |   | 109  
|Directors and Officers insurance        |  |                    | 109 |                  |   | 138  |  |      | 238   |  |   | 260  
|Software and implementation             |  |                    | 61  |                  |   | 57   |  |      | 122   |  |   | 114  
|Administrative service fees             |  |                    | 79  |                  |   | 80   |  |      | 141   |  |   | 150  
|Rent and related expenses               |  |                    | 86  |                  |   | 70   |  |      | 166   |  |   | 140  
|Stock exchange and filing fees          |  |                    | 49  |                  |   | 72   |  |      | 99    |  |   | 137  
|Custodian fees                          |  |                    | 48  |                  |   | 46   |  |      | 85    |  |   | 79   
|Sarbanes-Oxley consulting fees          |  |                    | 16  |                  |   | 23   |  |      | 48    |  |   | 35   
|Board of directors fees and expenses    |  |                    | 122 |                  |   | 79   |  |      | 188   |  |   | 146  
|Securities data services                |  |                    | 27  |                  |   | 26   |  |      | 53    |  |   | 52   
|Other                                   |  |                    | 75  |                  |   | 57   |  |      | 137   |  |   | 125  
|                                        |  |                    |     |                  |   |      |  |      |       |  |   |      
|Total of other expenses:                |  | $                  | 906 |                  | $ | 936  |  | $    | 1,733 |  | $ | 1,711
|                                        |  |                    |     |                  |   |      |  |      |       |  |   |      

NOTE 15. DISCONTINUED OPERATIONS

In September 2008, the assets of Belvedere Trust Mortgage Corporation and its subsidiaries, or Belvedere Trust, and the assets of BT Management Company,
L.L.C., or BT Management, were assigned for the benefit of their creditors to an independent third party. As control of these operations has now been turned over to this third party, Belvedere Trust and BT Management have been deconsolidated. As a
result, there were no remaining assets or liabilities recorded on our unaudited consolidated financial statements for these entities at September 30, 2008 and thereafter.

NOTE 16. SUBSEQUENT EVENTS

We have evaluated subsequent events through August 5, 2009, which is
the date that our consolidated financial statements are issued. For purposes of these financial statements, we have not evaluated any subsequent events after this date.

From July 1, 2009 through August 4, 2009, we sold 3.1 million shares of common stock pursuant to our amended Controlled Equity Offering Sales Agreement with Cantor (as described in Note 9 to the accompanying
unaudited consolidated financial statements), which provided net proceeds to us of approximately $22.6 million, net of sales commissions less reimbursement of fees. Cantor, as the sales agent, received an aggregate commission of approximately $462
thousand, which represents an average commission of approximately 2.0% on the gross sales price per share.

On July 10, 2009, our
board of directors declared a common stock dividend of $0.32 per share, which is payable on August 19, 2009 to our holders of record of common stock as of the close of business on July 24, 2009.



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On July 10, 2009, our board of directors 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 October 15, 2009 to our holders of record of Series A Preferred Stock and Series B Preferred Stock, respectively, as of the close of business
on September 30, 2009.

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 from 2.9075 shares of our common stock to 3.0035 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 $7.39 and (2) the annualized common stock dividend yield was 17.3207%.



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ANWORTH MORTGAGE ASSET CORPORATION



|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 SEC, including our Annual Report on Form 10-K for the fiscal year
ended December 31, 2008.

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 (or Investment Company Act); 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 formed in October 1997 and commenced operations on March 17, 1998. We are in the business of investing primarily in 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 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 June 30, 2009, our qualified REIT assets (real estate assets, as



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defined under the Internal Revenue Code of 1986, 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 our total assets must be qualified REIT assets. Greater than 99% of our 2008 revenue qualifies for both the 75% source of income test and the 95% source of income test under the REIT rules. We
believe we met all REIT requirements regarding the ownership of our common stock and the distributions of our net income. Therefore, we believe that we continue to qualify as a REIT under the provisions of the Code.

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 June 30, 2009, we had total assets of $5.5 billion. Our Agency MBS portfolio, consisting of $5.37 billion, was distributed as follows: 20%
adjustable-rate Agency MBS, 63% hybrid adjustable-rate Agency MBS, 17% fixed-rate Agency MBS and less than 1% agency floating-rate collateralized mortgage obligations, or CMOs. Our Non-Agency MBS portfolio consisted of approximately $5.8 million of
floating-rate CMOs. Stockholders equity available to common stockholders at June 30, 2009 was approximately $759.6 million, or $7.30 per share. The $759.6 million equals total stockholders equity of $808.5 million less the Series A
Cumulative Preferred Stock, or Series A Preferred Stock, liquidating value of $46.9 million and less the difference between the Series B Cumulative Convertible Preferred Stock, or Series B Preferred Stock, liquidating value of $30.1 million and the
proceeds from its sale of $28.1 million. For the three months ended June 30, 2009, we reported net income to common stockholders of $32.5 million. Net income to common stockholders consists of net income of $34.0 million minus payment of
preferred dividends of approximately $1.5 million.

Recent Regulatory Developments

In March 2009, the U.S. Treasury, the Federal Deposit Insurance Corporation, or FDIC, and the Federal Reserve announced the creation of the Public Private
Investment Program, or PPIP. The PPIP has two components: the Legacy Loans Program (which has been temporarily postponed) and the Legacy Securities Program. The Legacy Securities Program contemplates the establishment of joint public and
private investment funds, or PPIFs to purchase legacy non-Agency residential MBS, as well as commercial mortgage backed securities, that were originally AAA-rated. Legacy Securities PPIFs will have access to equity capital from the U.S.
Treasury, as well as debt financing provided by the U.S. Government. In July 2009, the Treasury announced that it will invest up to $30 billion in equity and debt issued by Legacy Securities PPIFs and announced that it has selected nine asset
managers to manage these PPIFs. These nine asset managers are expected to organize PPIFs to purchase, in partnership with private capital, Senior MBS as well as other eligible assets. The PPIFs established by these managers will increase
the competition for Senior MBS assets, which could cause prices of these assets to rise. Higher prices means lower effective yields on available assets and potentially higher values for our existing Senior MBS portfolio.

Further, the Federal Reserve, the Federal Housing Administration and the FDIC have stepped up implementation of programs designed to provide homeowners
with assistance in avoiding residential mortgage loan foreclosures. These programs may involve the modification of mortgage loans to reduce the principal amount of the loans or the rate of interest payable on the loans, or may extend the
payment terms of the loans. These loan modification programs, as well as future legislative or regulatory actions that result in the modification of outstanding mortgage loans, may affect the value of, and the returns on, our MBS portfolio.

The U.S. Government, Federal Reserve, U.S. Treasury, FDIC and other governmental and regulatory bodies have taken or are considering
taking other actions to address the financial crisis. We are unable to 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.



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Results of Operations

Three Months Ended June 30, 2009 Compared to June 30, 2008

For the three months ended
June 30, 2009, our net income available to common stockholders was $32.5 million. This includes net income of $34.0 million and the payment of preferred stock dividends of approximately $1.5 million. For the three months ended June 30,
2008, our net income was $25.8 million and our net income available to common stockholders was $24.3 million

Net interest income for the
three months ended June 30, 2009 was $38.1 million, or 53.3% of gross income, compared to $28.8 million, or 36.9% of gross income, for the three months ended June 30, 2008. Net interest income is comprised of the interest income earned on
mortgage investments less interest expense from borrowings. Interest income net of premium amortization expense for the three months ended June 30, 2009 was $67.3 million, compared to $74.3 million for the three months ended June 30, 2008,
a decrease of 9.5%, due primarily to a decrease in the weighted average coupon of our Agency MBS from 5.63% at June 30, 2008 to 5.42% at June 30, 2009, and a decline in the average balance outstanding of our portfolio, from approximately
from $5.61 billion at June 30, 2008 to approximately $5.36 billion at June 30, 2009. Interest expense for the three months ended June 30, 2009 was $29.2 million, compared to $45.5 million for the three months ended June 30, 2008,
a decrease of 35.9%. This decrease was due primarily to the decrease in short-term interest rates.

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 from 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, or CPR, 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; (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 June 30, 2009, premium amortization
expense based on the effective interest yield method increased $0.43 million, or 11.5%, from $3.73 million during the three months ended June 30, 2008 to $4.16 million.

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



|                              |  |              |   |  |               |   |  |              |   |  |               |  
|----------------------------- |  | ------------ | - |  | ------------- | - |  | ------------ | - |  | ------------- | -
|                              |  | 2009         |   |  | 2008          |  
|Portfolio                     |  | FirstQuarter |   |  | SecondQuarter |   |  | FirstQuarter |   |  | SecondQuarter |  
|Agency MBS and Non-Agency MBS |  | 15           | % |  | 17            | % |  | 18           | % |  | 18            | %



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For the three months ended June 30, 2009, there was no gain or loss on derivative instruments due to
hedge ineffectiveness, compared to a net gain on derivative instruments of approximately $273 thousand for the three months ended June 30, 2008.

Total expenses were $4.0 million for the three months ended June 30, 2009, compared to $3.3 million for the three months ended June 30, 2008. The increase of $0.7 million in total expenses was due to an
increase in compensation and benefits of $0.7 million (due primarily to an increase of $0.7 million in the accrual for year-end 2009 additional compensation over the additional compensation accrued in the second quarter of 2008).

Six Months Ended June 30, 2009 Compared to June 30, 2008

For the six months ended June 30, 2009, our net income available to common stockholders was $61.8 million. This includes net income of $64.8 million and the payment of preferred stock dividends of approximately
$3 million. For the six months ended June 30, 2008, our net income was $42.4 million and our net income available to common stockholders was $39.4 million.

Net interest income for the six months ended June 30, 2009 was $72.6 million, or 50.8% of gross income, compared to $48.1 million, or 32.1% of gross income, for the six months ended June 30, 2008. Net
interest income is comprised of the interest income earned on mortgage investments less interest expense from borrowings. Interest income net of premium amortization expense for the six months ended June 30, 2009 was $134.3 million, compared to
$142.7 million for the six months ended June 30, 2008, a decrease of 5.9%, due primarily to a decrease in the weighted average coupon of our Agency MBS from 5.63% at June 30, 2008 to 5.42% at June 30, 2009 and an increase in premium
amortization expense. Interest expense for the six months ended June 30, 2009 was $61.7 million, compared to $94.6 million for the six months ended June 30, 2008, a decrease of 34.8%. This decrease was due primarily to the decrease in
short-term interest rates.

During the six months ended June 30, 2009, premium amortization expense based on the effective interest
yield method increased $1.46 million, or 20.3%, from $7.19 million during the six months ended June 30, 2008 to $8.65 million.

For
the six months ended June 30, 2009, there was a gain of approximately $107 thousand on derivative instruments due to hedge ineffectiveness, compared to a net loss on derivative instruments of approximately $6 thousand for the six months ended
June 30, 2008.

Total expenses were $7.9 million for the six months ended June 30, 2009, compared to $5.8 million for the six
months ended June 30, 2008. The increase of $2.1 million in total expenses was due to an increase in compensation and benefits of $2.1 million (due primarily to an increase of $1.9 million in the accrual for year-end 2009 additional
compensation over the additional compensation accrued through June 2008).

Financial Condition

Agency MBS Portfolio

At June 30,
2009, we held Agency MBS whose amortized cost was approximately $5.23 billion, consisting primarily of $4.3 billion of adjustable-rate MBS, $0.9 billion of fixed-rate MBS and $7 million of floating-rate CMOs. This amount represents an approximate
0.6% decrease from the $5.26 billion held at December 31, 2008. Of the adjustable-rate Agency MBS owned by us, 24% were adjustable-rate pass-through certificates whose coupons reset within one year. The remaining 76% consisted of hybrid
adjustable-rate MBS whose coupons will reset between one year and five years. Hybrid adjustable-rate 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 our Agency MBS at fair value owned at June 30, 2009 and
December 31, 2008, classified by type of issuer (dollar amounts in thousands):



|                    |  |               |           |                     |                   |   |           |   |                     |  |       |  
|------------------- |  | ------------- | --------- | ------------------- | ----------------- | - | --------- | - | ------------------- |  | ----- | -
|                    |  | June 30, 2009 |           |                     | December 31, 2008 |  
|Agency              |  | FairValue     |           | PortfolioPercentage |                   |   | FairValue |   | PortfolioPercentage | 
|Fannie Mae (FNM)    |  | $             | 4,170,413 |                     | 77.6              | % |           | $ | 3,971,748           |  | 74.8  | %
|Freddie Mac (FHLMC) |  |               | 1,178,437 |                     | 21.9              |   |           |   | 1,309,149           |  | 24.7  |  
|Ginnie Mae (GNMA)   |  |               | 25,032    |                     | 0.5               |   |           |   | 26,543              |  | 0.5   |  
|                    |  |               |           |                     |                   |   |           |   |                     |  |       |  
|Total Agency MBS:   |  | $             | 5,373,882 |                     | 100.0             | % |           | $ | 5,307,440           |  | 100.0 | %
|                    |  |               |           |                     |                   |   |           |   |                     |  |       |  

The following table classifies our portfolio of Agency MBS owned at June 30, 2009 and
December 31, 2008 by type of interest rate index (dollar amounts in thousands):



|                                     |  |               |           |                     |                   |   |           |   |                     |  |       |  
|------------------------------------ |  | ------------- | --------- | ------------------- | ----------------- | - | --------- | - | ------------------- |  | ----- | -
|                                     |  | June 30, 2009 |           |                     | December 31, 2008 |  
|Index                                |  | FairValue     |           | PortfolioPercentage |                   |   | FairValue |   | PortfolioPercentage | 
|One-month LIBOR                      |  | $             | 6,559     |                     | 0.1               | % |           | $ | 7,669               |  | 0.2   | %
|Six-month LIBOR                      |  |               | 102,855   |                     | 1.9               |   |           |   | 43,192              |  | 0.8   |  
|One-year LIBOR                       |  |               | 3,847,170 |                     | 71.6              |   |           |   | 3,690,221           |  | 69.5  |  
|Six-month certificate of deposit     |  |               | 1,623     |                     |                  |   |           |   | 1,653               |  | 0.1   |  
|Six-month constant maturity treasury |  |               | 587       |                     |                  |   |           |   | 671                 |  |      |  
|One-year constant maturity treasury  |  |               | 445,456   |                     | 8.3               |   |           |   | 478,422             |  | 9.0   |  
|Cost of Funds Index                  |  |               | 36,512    |                     | 0.7               |   |           |   | 38,972              |  | 0.7   |  
|Fixed-rate                           |  |               | 933,120   |                     | 17.4              |   |           |   | 1,046,640           |  | 19.7  |  
|                                     |  |               |           |                     |                   |   |           |   |                     |  |       |  
|Total Agency MBS:                    |  | $             | 5,373,882 |                     | 100.0             | % |           | $ | 5,307,440           |  | 100.0 | %
|                                     |  |               |           |                     |                   |   |           |   |                     |  |       |  

The fair values indicated do not include interest earned but not yet paid. With respect to our
hybrid adjustable-rate 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.

At June 30, 2009, our total Agency MBS portfolio had a weighted average coupon of 5.42%. The average coupon of the adjustable-rate securities was 4.57%, the hybrid securities average coupon was 5.59%, the
fixed-rate securities average coupon was 5.79% and the CMO floaters average coupon was 1.13%. At December 31, 2008, our total Agency MBS portfolio had a weighted average coupon of 5.54%. The average coupon of the adjustable-rate securities was
5.19%, the hybrid securities average coupon was 5.56%, the fixed-rate securities average coupon was 5.79% and the CMO floaters average coupon was 2.01%.

At June 30, 2009, the average amortized cost of our Agency MBS was 101.36%, the average amortized cost of our adjustable-rate securities was 101.50% and the average amortized cost of our fixed-rate securities was
100.68%. Relative to our Agency MBS portfolio at June 30, 2009, the average interest rate on outstanding repurchase agreements was 0.53% and the average days to maturity was 44 days. After adjusting for interest rate swap transactions, the
average interest rate on outstanding repurchase agreements was 2.46% and the weighted average term to next rate adjustment was 371 days.

At December 31, 2008, the average amortized cost of our Agency MBS was 101.22%, the average amortized cost of our adjustable-rate securities was 101.35% and the average amortized cost of our fixed-rate securities was 100.68%. Relative
to our Agency MBS portfolio at December 31, 2008, the average interest rate on outstanding repurchase agreements was 2.07% and the average days to maturity was 34 days. After adjusting for interest rate swap transactions, the average interest
rate on outstanding repurchase agreements was 3.25% and the weighted average term to next rate adjustment was 422 days.



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At June 30, 2009 and December 31, 2008, the unamortized net premium paid for our Agency MBS was
$67.3 million and $63 million, respectively.

At June 30, 2009, the current yield on our Agency MBS portfolio was 5.35%, based on a
weighted average coupon of 5.42% divided by the average amortized cost of 101.36%. At December 31, 2008, the current yield on our Agency MBS portfolio was 5.47%, based on a weighted average coupon of 5.54% divided by the average amortized cost
of 101.22%.

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 CPR, the premium would be amortized over a longer time period, resulting in a higher yield to maturity.

Non-Agency MBS Portfolio

At
June 30, 2009, our Non-Agency MBS portfolio consisted of a fair value of $5.8 million of floating-rate CMOs with an average coupon of 0.56%, which were acquired at par value. At December 31, 2008, our Non-Agency MBS portfolio consisted of
$7.3 million of floating-rate CMOs with an average coupon of 0.72% 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 June 30, 2009, the fair value of our Non-Agency MBS portfolio declined to approximately $5.8 million from a fair
value of approximately $7.3 million at December 31, 2008 due to principal reductions of approximately $1.1 million, and unrealized losses (net of unrealized gains) of approximately $0.4 million.

At June 30, 2009, a security representing approximately 33% of the principal balance of our Non-Agency MBS portfolio was rated BB by
Standard & Poors and a security representing approximately 67% of the principal balance of our Non-Agency MBS portfolio was downgraded from B to CCC by Standard & Poors. At June 30, 2009, Moodys rated these
two securities as Ca. These ratings were unchanged from March 31, 2009.

We received valuations at December 31, 2008 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. Generally, we would consider this to be a Level 2 input. However, given the
severely reduced trading activity surrounding the Non-Agency MBS, which limited the observability of significant inputs utilized in valuing these securities, we reduced the fair value measurement to a Level 3 input at December 31, 2008 and it
remains a Level 3 input at June 30, 2009. For more detail on the fair value of our Non-Agency MBS, see Note 6 to the accompanying unaudited consolidated financial statements.



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The table below provides additional details regarding our Non-Agency MBS portfolio at June 30, 2009
and December 31, 2008:



|                                                                         |  |              |               |   |                  |   |               |  
|------------------------------------------------------------------------ |  | ------------ | ------------- | - | ---------------- | - | ------------- | -
|                                                                         |  | June 30,2009 |               |   | December 31,2008 |  
|Non-Agency MBS at fair value                                             |  | $            | 5.83 million  |   |                  | $ | 7.34 million  |  
|Principal balance of Non-Agency MBS                                      |  | $            | 43.73 million |   |                  | $ | 44.87 million |  
|Original principal balance on Non-Agency MBS                             |  | $            | 60 million    |   |                  | $ | 60 million    |  
|Original FICO (credit score)                                             |  |              | 731           |   |                  |   | 730           |  
|                                                                         |  |             
|Information on Loan Collateral of Non-Agency MBS Securitizations         |  |              |               |   |                  |   |               |  
|Loan principal as percentage of original loan principal                  |  |              | 73.5          | % |                  |   | 76.3          | %
|                                                                         |  |             
|Weighted average original loan-to-value (LTV)                            |  |              | 69            | % |                  |   | 69            | %
|Weighted average original LTV adjusted for negative loan amortization    |  |              | 74            | % |                  |   | 73            | %
|                                                                         |  |             
|California loans(1)                                                      |  |              | 68            | % |                  |   | 68            | %
|Pay-option ARM loans(1)                                                  |  |              | 100           | % |                  |   | 100           | %
|2006 loan originations(1)                                                |  |              | 99            | % |                  |   | 99            | %
|                                                                         |  |             
|3-month CPR                                                              |  |              | 8.0           | % |                  |   | 7.4           | %
|                                                                         |  |             
|Loans in foreclosure(1)                                                  |  |              | 13.8          | % |                  |   | 6.0           | %
|Real estate owned (REO)(1)(2)                                            |  |              | 3.1           | % |                  |   | 2.4           | %
|Total seriously delinquent(1)(3)                                         |  |              | 21.6          | % |                  |   | 12.3          | %
|Realized losses (as percentage of original collateral balance)           |  |              | 1.6           | % |                  |   | 0.5           | %
|                                                                         |  |             
|Information on Subordination Levels of Non-Agency MBS Securitizations(4) |  |              |               |   |                  |   |               |  
|Average securitization principal subordinate to Anworth-owned tranches   |  |              | 8.4           | % |                  |   | 9.5           | %
|Average securitization principal of Anworth-owned tranches               |  |              | 15.7          | % |                  |   | 15.5          | %
|Average securitization principal senior to Anworth-owned tranches        |  |              | 75.9          | % |                  |   | 75.0          | %



|(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 June 30, 2009 and December 31, 2008.
|--- | ---------------------------------------------------------------------------------------------------

Hedging

We periodically enter into derivative
transactions, in the form of forward purchase commitments and interest rate swaps, which are intended to hedge our exposure to rising 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. This provision became effective for transactions entered into after
July 30, 2008.

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 need for hedging agreements
on a regular basis consistent with our capital investment policy. At June 30, 2009,



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we were a counter-party to swap agreements with an aggregate notional amount of $2.48 billion and an average maturity of 1.8 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 June 30, 2009, there were unrealized losses of approximately $102.5 million on our swap agreements.

For more information on the amounts, policies, objectives and other qualitative data on our hedge agreements, see Note 1, Note 6 and Note 12 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 $4.49 billion at June 30, 2009. As collateral for the repurchase agreements and swap agreements, we have pledged approximately $4.9 billion in Agency MBS. Our
other significant source of funds for the three months ended June 30, 2009 consisted of payments of principal from our Agency MBS portfolio in the amount of $262.9 million.

During the three months ended June 30, 2009, there was a net decrease in cash and cash equivalents of approximately $85.1 million. This consisted of
the following components:



| |  |  | Net cash provided by operating activities for the three months ended June 30, 2009 was approximately $36.4 million. This is comprised primarily of net income
of $34 million, adding back the following non-cash item: the amortization of premium and discounts of approximately $4.2 million. Changes in assets and liabilities affecting net cash provided by operating activities decreased by $1.8 million.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net cash provided by investing activities for the three months ended June 30, 2009 was approximately $184.5 million, which consisted of $262.9 million from
principal payments on Agency MBS, partially offset by $79 million from purchases of reverse repurchase agreements; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Net cash used in financing activities for the three months ended June 30, 2009 was approximately $306 million. This consisted of borrowings on repurchase
agreements of approximately $6.74 billion, offset by repayments on repurchase agreements of approximately $7.04 billion, dividends paid of $30.5 million on common stock and dividends paid of approximately $1.5 million on preferred stock less net
proceeds from common stock issued of approximately $24 million.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Relative to our Agency MBS portfolio at June 30,
2009, all of our repurchase agreements were fixed-rate term repurchase agreements with original maturities ranging from 17 days to three months. At June 30, 2009, we had borrowed funds under repurchase agreements with 17 different financial
institutions. During the three months ended June 30, 2009, we added three new repurchase financing relationships. 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 June 30, 2009, 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.

Our leverage on capital (including all preferred stock and junior subordinated notes) decreased from 7.5x at December 31, 2008 to 5.1x at
June 30, 2009.

In the future, we expect that our primary sources of funds will continue to consist of borrowed funds under repurchase
agreement transactions and of monthly payments of principal and interest on our MBS portfolios. Our



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liquid assets generally consist of unpledged MBS, cash and cash equivalents and other short-term investments such as reverse repurchase agreements. 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 June 30, 2009, we raised approximately $16.5 million in capital under our Dividend Reinvestment and Stock Purchase Plan.

On February 9, 2009, we issued 8 million shares of common stock in a secondary public offering and received net proceeds of approximately $46
million (net of underwriting fees, commissions and other costs). We used all of the net proceeds from this offering to acquire Agency MBS.

At June 30, 2009, our authorized capital included 20 million shares of $0.01 par value preferred stock, which we have classified as 8.625% Series A Cumulative Preferred Stock, or Series A Preferred Stock, and 6.25% Series B
Cumulative Convertible Preferred Stock, or Series B Preferred Stock. During the three months ended June 30, 2009, we did not issue any shares of Series A or Series B Preferred Stock.

During the three months ended June 30, 2009, we issued 1.14 million shares of common stock under our Controlled Equity Offering Sales Agreement
with Cantor (as described in Note 9 to the accompanying unaudited consolidated financial statements), which provided net proceeds to us of approximately $7.622 million, net of sales commissions and less reimbursement of fees. Cantor, as sales agent,
received an aggregate commission of approximately $155 thousand, which represents an average commission of approximately 2.0% on the gross sales price per share.

Disclosure of Contractual Obligations

There were no material changes outside the normal course of business during the three
months ended June 30, 2009 to the contractual obligations identified in our Form 10-K for the fiscal year ended December 31, 2008.

Off-balance Sheet Arrangements

At June 30, 2009, 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 balance sheet at fair value rather than historical cost. Based upon these treatments, our total equity base at June 30, 2009 was $808.5 million. Common stockholders
equity was approximately $759.6 million, or a book value of $7.30 per share.

Under our available-for-sale accounting treatment, unrealized
fluctuations in fair values of investment securities are assessed to determine whether they are other-than-temporary. To the extent we determine that these unrealized fluctuations are not other-than-temporary and not credit-related, they do not
impact GAAP income or taxable income but rather are reflected on the balance sheet 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.

As a result of this mark-to-market accounting treatment, our book value and book value
per share are likely to fluctuate far more then 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 sheet may not be
meaningful.



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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 $140.5 million, or 2.7% of the amortized cost of our Agency MBS, at June 30, 2009. This, along with Accumulative other comprehensive losses, derivatives of approximately $102.5 million
and Accumulative other comprehensive income, unrealized losses on available-for-sale Non-Agency MBS of $365 thousand, constitute the total Accumulative other comprehensive gain of approximately $37.6 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 appropriate.

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 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 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 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 SFAS No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, an
amendment of FASB Statements No. 13, 60, and 65 and a rescission of FASB Statement No. 17. Our policy for estimating 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.

Valuation and Classification of Investment Securities

We carry our investment securities on the balance sheet 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



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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 (i.e., 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.

Accounting for Derivatives and Hedging Activities

In accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, or SFAS 133, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, or SFAS 138, 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 SFAS 133.

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 major
financial institutions, who are considered to be the 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 the 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.

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

We have evaluated subsequent events through August 5, 2009, which is the date that our consolidated financial statements are issued. For purposes of
these financial statements, we have not evaluated any subsequent events after this date.



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From July 1, 2009 through August 4, 2009, we sold 3.1 million shares of common stock pursuant
to our amended Controlled Equity Offering Sales Agreement with Cantor (as described in Note 9 to the accompanying unaudited consolidated financial statements), which provided net proceeds to us of approximately $22.6 million, net of sales
commissions less reimbursement of fees. Cantor, as the sales agent, received an aggregate commission of approximately $462 thousand, which represents an average commission of approximately 2.0% on the gross sales price per share.

On July 10, 2009, our board of directors declared a common stock dividend of $0.32 per share, which is payable on August 19, 2009 to our
holders of record of common stock as of the close of business on July 24, 2009.

On July 10, 2009, our board of directors
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 October 15, 2009 to our holders of record of Series A Preferred Stock and Series B
Preferred Stock, respectively, as of the close of business on September 30, 2009.

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 from 2.9075 shares of our common stock to 3.0035 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 $7.39 and (2) the annualized common stock dividend yield was 17.3207%.



|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 institutions 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 returns 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 MBS. 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.

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



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our mortgage assets and our funding sources will not be identical, thereby creating an interest rate mismatch between our assets and our 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 MBS 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 MBS 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 interest income may vary somewhat as the spread
between one-month interest rates and six- and twelve-month interest rates varies.

At June 30, 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                     |  | $                 | 933,120   |                               | 17.35      | % |        | $ |                             |  |      |  
|Adjustable-Rate Investments/Obligations:   |  |                   |           |                               |            |   |        |   |                              |  |       |  
|Less than 3 months                         |  |                   | 180,856   |                               | 3.36       |   |        |   | 4,387,000                    |  | 97.8  | %
|Greater than 3 months and less than 1 year |  |                   | 877,654   |                               | 16.31      |   |        |   | 100,000                      |  | 2.2   |  
|Greater than 1 year and less than 2 years  |  |                   | 634,711   |                               | 11.80      |   |        |   |                             |  |      |  
|Greater than 2 years and less than 3 years |  |                   | 1,359,264 |                               | 25.27      |   |        |   |                             |  |      |  
|Greater than 3 years and less than 5 years |  |                   | 1,394,105 |                               | 25.91      |   |        |   |                             |  |      |  
|                                           |  |                   |           |                               |            |   |        |   |                              |  |       |  
|Total:                                     |  | $                 | 5,379,710 |                               | 100.0      | % |        | $ | 4,487,000                    |  | 100.0 | %
|                                           |  |                   |           |                               |            |   |        |   |                              |  |       |  



|(1) | Based on when they contractually reprice and do 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

At December 31, 2008, 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                     |  | $                 | 1,046,640 |                               | 19.69      | % |        | $ |                             |  |      |  
|Adjustable-Rate Investments/Obligations:   |  |                   |           |                               |            |   |        |   |                              |  |       |  
|Less than 3 months                         |  |                   | 351,344   |                               | 6.61       |   |        |   | 4,545,000                    |  | 97.4  | %
|Greater than 3 months and less than 1 year |  |                   | 475,668   |                               | 8.95       |   |        |   | 120,000                      |  | 2.6   |  
|Greater than 1 year and less than 2 years  |  |                   | 308,400   |                               | 5.80       |   |        |   |                             |  |      |  
|Greater than 2 years and less than 3 years |  |                   | 1,078,142 |                               | 20.29      |   |        |   |                             |  |      |  
|Greater than 3 years and less than 5 years |  |                   | 2,054,583 |                               | 38.66      |   |        |   |                             |  |      |  
|                                           |  |                   |           |                               |            |   |        |   |                              |  |       |  
|Total:                                     |  | $                 | 5,314,777 |                               | 100.0      | % |        | $ | 4,665,000                    |  | 100.0 | %
|                                           |  |                   |           |                               |            |   |        |   |                              |  |       |  



|(1) | Based on when they contractually reprice and do 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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##### Table of Contents

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 that is credit-related) reflected as part of Accumulated other comprehensive income that is included in the equity section of our consolidated balance sheets. The market value of our assets can fluctuate
due to changes in interest rates and other factors. 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.

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 June 30, 2009, our Agency MBS and Non-Agency adjustable-rate MBS had a weighted average term to next rate adjustment of approximately 26 months while our borrowings
had a weighted average term to next rate adjustment of 44 days. After adjusting for interest rate swap transactions, the weighted average term to next rate adjustment was 371 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 three months ended June 30, 2009, 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 June 30, 2009, we had unrestricted cash of $516 thousand, $79 million in overnight reverse repurchase
agreements and $474 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.

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



41



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##### Table of Contents

amount and a reduction of our net interest income by such amount. Finally, 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.

Tabular Presentation

Anworths MBS

The information presented in the table 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 investments in place at June 30, 2009, 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.

Changes in Projected Portfolio Value equals the change in 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%                      |  | 27.8%                                            |  | 0.4%                                        
|1%                      |  | 0.6%                                              |  | 0.6%                                         
|0%                       |  |                                                  |  |                                             
|1%                       |  | 4%                                               |  | 1.9%                                        
|2%                       |  | 12.0%                                            |  | 4.3%                                        

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 an 82% increase in the prepayment rate of our Agency
MBS and Non-Agency portfolios. The base interest rate scenario assumes interest rates at June 30, 2009. Actual results could differ significantly from those estimated in the table. The above table includes the effect of interest rate swap
agreements. At June 30, 2009, the aggregate notional amount of the interest rate swap agreements was $2.48 billion and the weighted average maturity was 1.8 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%                      |  | 49.2%                                             |  | 1.2%                                         
|1%                      |  | 77.6%                                             |  | 1.4%                                         
|0%                       |  |                                                  |  |                                             
|1%                       |  | 37.8%                                             |  | 2.6%                                        
|2%                       |  | 8.0%                                              |  | 5.9%                                        



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##### Table of Contents

General

Many assumptions are made to present the information in the above tables 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 above tables 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 and junior subordinated notes, 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.



|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 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.



43



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##### Table of Contents

PART II. OTHER INFORMATION



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

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



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

There are no material changes to the
risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008, as modified and supplemented by the risk factors disclosed in our Quarterly Report on Form 10-Q for the quarter ended March 31,
2009. 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.



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

None.



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

None.



|Item 4. | Submission of Matters to a Vote of Security Holders.
|------- | ----------------------------------------------------



| | a) | The Annual Meeting of stockholders of Anworth Mortgage Asset Corporation was held on May 21, 2009.
| | -- | --------------------------------------------------------------------------------------------------



| | b) | All director nominees were elected to serve for the ensuing year or until their successors are duly elected and qualified.
| | -- | --------------------------------------------------------------------------------------------------------------------------



|                  |  |                |  |               
|----------------- |  | -------------- |  | --------------
|Director          |  | Votes Received |  | Votes Withheld
|Lloyd McAdams     |  | 90,554,006     |  | 4,146,161     
|Lee A. Ault       |  | 90,423,910     |  | 4,276,257     
|Charles H. Black  |  | 89,003,869     |  | 5,696,299     
|Joe E. Davis      |  | 89,049,087     |  | 5,651,081     
|Robert C. Davis   |  | 91,537,714     |  | 3,162,454     
|Joseph E. McAdams |  | 89,970,979     |  | 4,729,189     



| | c) | The ratification of McGladrey & Pullen, LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2009 was approved.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|           |  |         |  |        
|---------- |  | ------- |  | -------
|Votes Cast
|For        |  | Against |  | Abstain
|94,179,368 |  | 413,342 |  | 107,454



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

None.



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##### Table of Contents

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

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



|              |  |                                                                                                                                                                                                                                         
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | 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 (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 the Company (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

|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|              | 
|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          |  | 2008 Dividend Reinvestment and Stock Purchase Plan (incorporated by reference from our Registration Statement on Form S-3, Registration No. 333-150210, which became effective under the Act on
April 11, 2008)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|              | 
|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) and December 30, 2008 (incorporated by
reference from our Current Report on Form 8-K filed with the SEC on January 2, 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|              | 
|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) and December 30, 2008 (incorporated by reference from our Current Report on Form 8-K filed with the SEC on January 2, 2009)
|              | 
|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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                       
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                                                                           
|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 E. McAdams, Thad Brown and the several Holders, as defined therein (incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2005, as filed with the SEC on March 16, 2006)
|              | 
|10.12         |  | Change in Control and Arbitration Agreement effective June 27, 2006 by and between Anworth Mortgage Asset Corporation 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 effective June 27, 2006 by and between Anworth Mortgage Asset Corporation 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 effective June 27, 2006 by and between Anworth Mortgage Asset Corporation 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 effective June 27, 2006 by and between Anworth Mortgage Asset Corporation 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 filed for the year ended December 31, 2008,
as filed with the SEC on March 12, 2009)                                                                                                                                                                                
|              | 
|14.1          |  | Code of Ethics and Business Conduct (incorporated by reference from our Annual Report on Form 10-K for the year ended December 31, 2006, as filed with the SEC on March 16,
2007)                                                                                                                                                                                                                                     
|              | 
|21.1          |  | Subsidiaries of the Registrant (incorporated by reference from our Annual Report on Form 10-K for the year ended December 31, 2008, as filed with the SEC on March 12, 2009)                                                                                                                                                                                                                                          
|              | 
|31.1          |  | Certification of the Chief Executive Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934                                                                                                                                                                                                                                                                                                    
|              | 
|31.2          |  | Certification of the Chief Financial Officer, as required by Rule 13a-14(a) of the Securities Exchange Act of 1934                                                                                                                                                                                                                                                                                                    
|              | 
|32.1          |  | Certifications of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                        
|              | 
|32.2          |  | Certifications of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                        



47



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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                          
|                      |  | 
|Dated: August 5, 2009 |  |  |  | /s/    JOSEPH LLOYD
MCADAMS                                 
|                      |  |  |  | Joseph Lloyd McAdams                                        
|                      |  |  |  | Chairman of the Board, President and Chief Executive Officer
|                      |  |  |  | (Chief Executive Officer)                                   
|                      |  | 
|Dated: August 5, 2009 |  |  |  | /s/    THAD M. BROWN                                        
|                      |  |  |  | Thad M. Brown                                               
|                      |  |  |  | Chief Financial Officer                                     
|                      |  |  |  | (Chief Financial Officer and Principal Accounting Officer)  



48