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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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



FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005



Commission File Number: 001-13709



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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, #250, Santa Monica, California              |  | 90401                               
|(Address of principal executive offices)                       |  | (Zip Code)                          



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



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



Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).    Yes  x    No ̈



As of May 6, 2005, the Registrant had 1,790,500
shares of Series A Cumulative Preferred Stock issued and outstanding and 47,376,618 shares of Common Stock issued and outstanding.



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##### Table of Contents

ANWORTH MORTGAGE ASSET CORPORATION



FORM 10-Q



INDEX



|         |  |            |  |                                                                                                                |  |     
|-------- |  | ---------- |  | -------------------------------------------------------------------------------------------------------------- |  | ----
|         |  |            |  |                                                                                                                |  | Page
|Part I.  |  |            |  | FINANCIAL INFORMATION                                                                                          |  | 2   
|         |  |            | 
|         |  | Item 1.    |  | Consolidated Financial Statements                                                                              |  | 2   
|         |  |            | 
|         |  |            |  | Consolidated Balance Sheets as of March 31, 2005 (unaudited) and December 31, 2004                             |  | 2   
|         |  |            | 
|         |  |            |  | Consolidated Statements of Income for the three months ended March 31, 2005 and 2004 (unaudited)               |  | 3   
|         |  |            | 
|         |  |            |  | Consolidated Statements of Stockholders Equity for the three months ended March 31, 2005 (unaudited)          |  | 4   
|         |  |            | 
|         |  |            |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (unaudited)           |  | 5   
|         |  |            | 
|         |  |            |  | Consolidated Statements of Comprehensive Income for the three months ended March 31, 2005 and 2004 (unaudited) |  | 6   
|         |  |            | 
|         |  |            |  | Notes to Unaudited Consolidated Financial Statements                                                           |  | 7   
|         |  |            | 
|         |  | Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                          |  | 24  
|         |  |            | 
|         |  | Item 3.    |  | Qualitative and Quantitative Disclosures About Market Risk                                                     |  | 48  
|         |  |            | 
|         |  | Item 4.    |  | Controls and Procedures                                                                                        |  | 51  
|         |  |            | 
|Part II. |  |            |  | OTHER INFORMATION                                                                                              |  | 51  
|         |  |            | 
|         |  | Item 1.    |  | Legal Proceedings                                                                                              |  | 51  
|         |  |            | 
|         |  | Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                    |  | 51  
|         |  |            | 
|         |  | Item 3.    |  | Defaults Upon Senior Securities                                                                                |  | 51  
|         |  |            | 
|         |  | Item 4.    |  | Submission of Matters to a Vote of Security Holders                                                            |  | 51  
|         |  |            | 
|         |  | Item 5.    |  | Other Information                                                                                              |  | 51  
|         |  |            | 
|         |  | Item 6.    |  | Exhibits                                                                                                       |  | 53  
|         |  |           
|         |  | Signatures |  | 55                                                                                                            



i



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##### Table of Contents

Part I. FINANCIAL INFORMATION



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



ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(in thousands, except per share amounts)



|                                                                                                                                                                                               |  |               |           |   |                  |   |           |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                               |  | March 31,2005 |           |   | December 31,2004 |  
|                                                                                                                                                                                               |  | (unaudited)   |           |   |                  |  
|ASSETS                                                                                                                                                                                         |  |               |           |   |                  |   |           |  
|Agency mortgage-backed securities:                                                                                                                                                             |  |               |           |   |                  |   |           |  
|Agency mortgage-backed securities pledged to counterparties at fair value                                                                                                                      |  | $             | 4,510,946 |   |                  | $ | 4,362,779 |  
|Agency mortgage-backed securities at fair value                                                                                                                                                |  |               | 271,026   |   |                  |   | 225,762   |  
|                                                                                                                                                                                               |  |               |           |   |                  |   |           |  
|                                                                                                                                                                                               |  |               | 4,781,972 |   |                  |   | 4,588,541 |  
|Other mortgage-backed securities pledged to counterparties at fair value                                                                                                                       |  |               | 59,147    |   |                  |   | 63,470    |  
|Residential real estate loans                                                                                                                                                                  |  |               | 2,879,583 |   |                  |   | 2,628,334 |  
|Allowance for loan losses                                                                                                                                                                      |  |               | (888      | ) |                  |   | (591      | )
|Cash and cash equivalents                                                                                                                                                                      |  |               | 24,958    |   |                  |   | 3,042     |  
|Restricted cash                                                                                                                                                                                |  |               | 1,250     |   |                  |   | 1,250     |  
|Interest and dividends receivable                                                                                                                                                              |  |               | 30,983    |   |                  |   | 28,141    |  
|Derivative instruments at fair value                                                                                                                                                           |  |               | 11,361    |   |                  |   | 6,399     |  
|Prepaid expenses and other                                                                                                                                                                     |  |               | 7,112     |   |                  |   | 484       |  
|                                                                                                                                                                                               |  |               |           |   |                  |   |           |  
|                                                                                                                                                                                               |  | $             | 7,795,478 |   |                  | $ | 7,319,070 |  
|                                                                                                                                                                                               |  |               |           |   |                  |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                           |  |               |           |   |                  |   |           |  
|Liabilities:                                                                                                                                                                                   |  |               |           |   |                  |   |           |  
|Accrued interest payable                                                                                                                                                                       |  | $             | 28,237    |   |                  | $ | 23,244    |  
|Repurchase agreements (Anworth Mortgage)                                                                                                                                                       |  |               | 4,323,865 |   |                  |   | 4,172,930 |  
|Repurchase agreements (Belvedere Trust)                                                                                                                                                        |  |               | 568,888   |   |                  |   | 544,506   |  
|Whole loan financing facilities                                                                                                                                                                |  |               | 11,683    |   |                  |   | 556,233   |  
|Mortgage-backed securities issued                                                                                                                                                              |  |               | 2,259,808 |   |                  |   | 1,494,851 |  
|Junior subordinated notes                                                                                                                                                                      |  |               | 37,380    |   |                  |   |          |  
|Derivative instruments at fair value                                                                                                                                                           |  |               | 523       |   |                  |   | 2,278     |  
|Dividends payable                                                                                                                                                                              |  |               | 868       |   |                  |   | 12,924    |  
|Accrued expenses and other                                                                                                                                                                     |  |               | 36,605    |   |                  |   | 4,837     |  
|                                                                                                                                                                                               |  |               |           |   |                  |   |           |  
|                                                                                                                                                                                               |  | $             | 7,267,857 |   |                  | $ | 6,811,803 |  
|                                                                                                                                                                                               |  |               |           |   |                  |   |           |  
|Minority interest                                                                                                                                                                              |  |               | 367       |   |                  |   | 231       |  
|Stockholders equity:                                                                                                                                                                          |  |               |           |   |                  |   |           |  
|Series A cumulative preferred stock, par value $0.01 per share, liquidation preference $25.00 per share; authorized 20,000 shares; 1,761 and
1,101 shares issued and outstanding, respectively |  |               | 18        |   |                  |   | 11        |  
|Common stock, par value $0.01 per share; authorized 100,000 shares; 47,160 and 46,497 issued and outstanding, respectively                                                                     |  |               | 472       |   |                  |   | 465       |  
|Additional paid-in capital                                                                                                                                                                     |  |               | 583,274   |   |                  |   | 560,745   |  
|Accumulated other comprehensive loss consisting of unrealized losses                                                                                                                           |  |               | (58,557   | ) |                  |   | (42,598   | )
|Accumulated earnings (deficit)                                                                                                                                                                 |  |               | 2,623     |   |                  |   | (10,991   | )
|Unearned restricted stock                                                                                                                                                                      |  |               | (576      | ) |                  |   | (596      | )
|                                                                                                                                                                                               |  |               |           |   |                  |   |           |  
|                                                                                                                                                                                               |  |               | 527,254   |   |                  |   | 507,036   |  
|                                                                                                                                                                                               |  |               |           |   |                  |   |           |  
|                                                                                                                                                                                               |  | $             | 7,795,478 |   |                  | $ | 7,319,070 |  
|                                                                                                                                                                                               |  |               |           |   |                  |   |           |  



See accompanying notes
to consolidated financial statements.



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##### Table of Contents



ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

(unaudited)



|                                                            |  |                             |         |   |      |   |         |  
|----------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                            |  | Three Months EndedMarch 31, |        
|                                                            |  | 2005                        |         |   | 2004 |  
|Interest income net of amortization of premium and discount |  | $                           | 66,440  |   |      | $ | 35,246  |  
|Interest expense                                            |  |                             | (48,763 | ) |      |   | (14,940 | )
|                                                            |  |                             |         |   |      |   |         |  
|Net interest income                                         |  |                             | 17,677  |   |      |   | 20,306  |  
|                                                            |  |                             |         |   |      |   |         |  
|Gain on sale of securities                                  |  |                             |        |   |      |   | 157     |  
|Net gain (loss) on derivative instruments                   |  |                             |        |   |      |   | (203    | )
|Expenses:                                                   |  |                             |         |   |      |   |         |  
|Compensation and benefits                                   |  |                             | (877    | ) |      |   | (396    | )
|Incentive compensation                                      |  |                             | (772    | ) |      |   | (1,125  | )
|Provision for loan losses                                   |  |                             | (297    | ) |      |   |        |  
|Other expenses                                              |  |                             | (1,113  | ) |      |   | (866    | )
|                                                            |  |                             |         |   |      |   |         |  
|Total expenses                                              |  |                             | (3,059  | ) |      |   | (2,387  | )
|                                                            |  |                             |         |   |      |   |         |  
|Income from operations before minority interest             |  |                             | 14,618  |   |      |   | 17,873  |  
|                                                            |  |                             |         |   |      |   |         |  
|Minority interest in net income of a subsidiary             |  |                             | (136    | ) |      |   |        |  
|                                                            |  |                             |         |   |      |   |         |  
|Net income                                                  |  | $                           | 14,482  |   |      | $ | 17,873  |  
|                                                            |  |                             |         |   |      |   |         |  
|Dividend on Series A cumulative preferred stock             |  | $                           | (868    | ) |      | $ |        |  
|                                                            |  |                             |         |   |      |   |         |  
|Net income available to common stockholders                 |  | $                           | 13,614  |   |      | $ | 17,873  |  
|                                                            |  |                             |         |   |      |   |         |  
|Basic earnings per share available to common stockholders   |  | $                           | 0.29    |   |      | $ | 0.41    |  
|                                                            |  |                             |         |   |      |   |         |  
|Weighted average number of shares outstanding               |  |                             | 46,839  |   |      |   | 43,677  |  
|                                                            |  |                             |         |   |      |   |         |  
|Diluted earnings per share available to common stockholders |  | $                           | 0.29    |   |      | $ | 0.41    |  
|                                                            |  |                             |         |   |      |   |         |  
|Weighted average number of diluted shares outstanding       |  |                             | 46,876  |   |      |   | 43,823  |  
|                                                            |  |                             |         |   |      |   |         |  



See accompanying notes
to consolidated financial statements.



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ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY

FOR THE THREE MONTH ENDED MARCH 31, 2005



(in thousands, except per share amounts)

(unaudited)



|                                                 |  |                      |  |                   |  |                         |    |                      |   |                          |  |                                                |         |  |                                             |         |                                         |  |   |                         |  |   |                         |   |  |                     |         |   |       |   |      |   |  |   |         |   |  |   |         |  
|------------------------------------------------ |  | -------------------- |  | ----------------- |  | ----------------------- | -- | -------------------- | - | ------------------------ |  | ---------------------------------------------- | ------- |  | ------------------------------------------- | ------- | --------------------------------------- |  | - | ----------------------- |  | - | ----------------------- | - |  | ------------------- | ------- | - | ----- | - | ---- | - |  | - | ------- | - |  | - | ------- | -
|                                                 |  | PreferredStockShares |  | CommonStockShares |  | PreferredStock ParValue |    | CommonStock ParValue |   | AdditionalPaid-InCapital |  | Accum. OtherComp.Income (Loss)AgencySecurities |         |  | Accum. Other Comp. Income (Loss)Derivatives |         | Accum. OtherComp.Income (Loss)Other MBS |  |   | Accum.Earnings(Deficit) |  |   | UnearnedRestrictedStock |   |  | ComprehensiveIncome |         |   | Total |  
|Balance, December 31, 2004                       |  | 1,101                |  | 46,497            |  | $                       | 11 |                      | $ | 465                      |  | $                                              | 560,745 |  | $                                           | (45,491 | )                                       |  | $ | 4,122                   |  | $ | (1,229                  | ) |  | $                   | (10,991 | ) |       | $ | (596 | ) |  |   |         |   |  | $ | 507,036 |  
|Issuance of Series A preferred stock             |  | 660                  |  |                   |  |                         | 7  |                      |   |                          |  |                                                | 16,127  |  |                                             |         |                                         |  |   |                         |  |   |                         |   |  |                     |         |   |       |   |      |   |  |   |         |   |  |   | 16,134  |  
|Issuance of common stock                         |  |                      |  | 663               |  |                         |    |                      |   | 7                        |  |                                                | 6,402   |  |                                             |         |                                         |  |   |                         |  |   |                         |   |  |                     |         |   |       |   |      |   |  |   |         |   |  |   | 6,409   |  
|Other comprehensive income (loss)                |  |                      |  |                   |  |                         |    |                      |   |                          |  |                                                |         |  |                                             | (22,589 | )                                       |  |   | 6,717                   |  |   | (87                     | ) |  |                     |         |   |       |   |      |   |  |   | (15,959 | ) |  |   | (15,959 | )
|Net income                                       |  |                      |  |                   |  |                         |    |                      |   |                          |  |                                                |         |  |                                             |         |                                         |  |   |                         |  |   |                         |   |  |                     | 14,482  |   |       |   |      |   |  |   | 14,482  |   |  |   | 14,482  |  
|                                                 |  |                      |  |                   |  |                         |    |                      |   |                          |  |                                                |         |  |                                             |         |                                         |  |   |                         |  |   |                         |   |  |                     |         |   |       |   |      |   |  |   |         |   |  |   |         |  
|Total comprehensive loss                         |  |                      |  |                   |  |                         |    |                      |   |                          |  |                                                |         |  |                                             |         |                                         |  |   |                         |  |   |                         |   |  |                     |         |   |       |   |      |   |  | $ | (1,477  | ) |  |   |         |  
|                                                 |  |                      |  |                   |  |                         |    |                      |   |                          |  |                                                |         |  |                                             |         |                                         |  |   |                         |  |   |                         |   |  |                     |         |   |       |   |      |   |  |   |         |   |  |   |         |  
|Amortization of restricted stock                 |  |                      |  |                   |  |                         |    |                      |   |                          |  |                                                |         |  |                                             |         |                                         |  |   |                         |  |   |                         |   |  |                     |         |   |       |   | 20   |   |  |   |         |   |  |   | 20      |  
|Dividends declared$0.539063 per preferred share |  |                      |  |                   |  |                         |    |                      |   |                          |  |                                                |         |  |                                             |         |                                         |  |   |                         |  |   |                         |   |  |                     | (868    | ) |       |   |      |   |  |   |         |   |  |   | (868    | )
|                                                 |  |                      |  |                   |  |                         |    |                      |   |                          |  |                                                |         |  |                                             |         |                                         |  |   |                         |  |   |                         |   |  |                     |         |   |       |   |      |   |  |   |         |   |  |   |         |  
|Balance, March 31, 2005                          |  | 1,761                |  | 47,160            |  | $                       | 18 |                      | $ | 472                      |  | $                                              | 583,274 |  | $                                           | (68,080 | )                                       |  | $ | 10,839                  |  | $ | (1,316                  | ) |  | $                   | 2,623   |   |       | $ | (576 | ) |  |   |         |   |  | $ | 527,254 |  
|                                                 |  |                      |  |                   |  |                         |    |                      |   |                          |  |                                                |         |  |                                             |         |                                         |  |   |                         |  |   |                         |   |  |                     |         |   |       |   |      |   |  |   |         |   |  |   |         |  



See accompanying notes
to consolidated financial statements.



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ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                  |  |                             |            |   |      |   |            |  
|--------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                  |  | Three Months EndedMarch 31, |           
|                                                                                  |  | 2005                        |            |   | 2004 |  
|Operating Activities:                                                             |  |                             |            |   |      |   |            |  
|Net income                                                                        |  | $                           | 14,482     |   |      | $ | 17,873     |  
|Adjustments to reconcile net income to net cash provided by operating activities: |  |                             |            |   |      |   |            |  
|Amortization of premiums and discounts (Anworth Mortgage)                         |  |                             | 9,150      |   |      |   | 9,200      |  
|Amortization of premiums and discounts (Belvedere Trust)                          |  |                             | 3,184      |   |      |   | 223        |  
|Gain on sales of securities in securitization                                     |  |                             |           |   |      |   | (157       | )
|Loss on hedging instruments                                                       |  |                             |           |   |      |   | 203        |  
|Provision for loan losses                                                         |  |                             | 297        |   |      |   |           |  
|Adjustment for minority interest in net income                                    |  |                             | 136        |   |      |   |           |  
|Amortization of restricted stock                                                  |  |                             | 20         |   |      |   | 20         |  
|Changes in assets and liabilities:                                                |  |                             |            |   |      |   |            |  
|(Increase) in interest receivable                                                 |  |                             | (2,842     | ) |      |   | (2,407     | )
|(Increase) in prepaid expenses and other                                          |  |                             | (4,408     | ) |      |   | (243       | )
|Increase in accrued interest payable                                              |  |                             | 4,993      |   |      |   | 2,764      |  
|Increase in accrued expenses and other                                            |  |                             | 31,768     |   |      |   | 239        |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Net cash provided by operating activities                                         |  |                             | 56,780     |   |      |   | 27,715     |  
|Investing Activities:                                                             |  |                             |            |   |      |   |            |  
|Available-for-sale agency securities:                                             |  |                             |            |   |      |   |            |  
|Purchases                                                                         |  |                             | (589,848   | ) |      |   | (633,887   | )
|Principal payments                                                                |  |                             | 364,677    |   |      |   | 332,170    |  
|Available-for-sale other mortgage-backed securities:                              |  |                             |            |   |      |   |            |  
|Purchases                                                                         |  |                             |           |   |      |   | (462,857   | )
|Proceeds from sales                                                               |  |                             |           |   |      |   | 196,428    |  
|Principal payments                                                                |  |                             | 3,916      |   |      |   | 590        |  
|Residential real estate loans:                                                    |  |                             |            |   |      |   |            |  
|Purchases                                                                         |  |                             | (365,565   | ) |      |   |           |  
|Principal payments                                                                |  |                             | 1,217      |   |      |   |           |  
|ARM loans collateralizing mortgage-backed securities issued:                      |  |                             |            |   |      |   |            |  
|Principal payments                                                                |  |                             | 113,959    |   |      |   |           |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Net cash used in investing activities                                             |  |                             | (471,644   | ) |      |   | (567,556   | )
|Financing Activities:                                                             |  |                             |            |   |      |   |            |  
|Borrowings from repurchase agreements                                             |  |                             | 5,115,218  |   |      |   | 2,181,479  |  
|Repayments on repurchase agreements                                               |  |                             | (4,939,901 | ) |      |   | (1,833,728 | )
|Borrowings on whole loan financing facilities                                     |  |                             | 351,109    |   |      |   | 434,460    |  
|Repayments on whole loan financing facilities                                     |  |                             | (895,659   | ) |      |   | (245,949   | )
|Borrowings on mortgage-backed securities issued                                   |  |                             | 848,139    |   |      |   |           |  
|Repayments on mortgage-backed securities issued                                   |  |                             | (86,906    | ) |      |   |           |  
|Proceeds from junior subordinated notes issued, net                               |  |                             | 35,160     |   |      |   |           |  
|Proceeds from preferred stock issued, net                                         |  |                             | 16,134     |   |      |   |           |  
|Proceeds from common stock issued, net                                            |  |                             | 6,409      |   |      |   | 21,140     |  
|Minority investments                                                              |  |                             |           |   |      |   | 50         |  
|Preferred stock dividends paid                                                    |  |                             | (369       | ) |      |   |           |  
|Common stock dividends paid                                                       |  |                             | (12,554    | ) |      |   | (14,093    | )
|                                                                                  |  |                             |            |   |      |   |            |  
|Net cash provided by financing activities                                         |  |                             | 436,780    |   |      |   | 543,359    |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Net increase in cash and cash equivalents                                         |  |                             | 21,916     |   |      |   | 3,518      |  
|Cash and cash equivalents at beginning of period                                  |  | $                           | 3,042      |   |      | $ | 196        |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Cash and cash equivalents at end of period                                        |  | $                           | 24,958     |   |      | $ | 3,714      |  
|                                                                                  |  |                             |            |   |      |   |            |  
|Supplemental Disclosure of Cash Flow Information:                                 |  |                             |            |   |      |   |            |  
|Cash paid for interest                                                            |  | $                           | 43,770     |   |      | $ | 12,176     |  
|Supplemental Disclosure of Investing and Financing Activities:                    |  |                             |            |   |      |   |            |  
|Certificates retained from securitization                                         |  |                             |           |   |      |   | 64,451     |  
|Mortgage-backed securities purchased, not yet settled                             |  | $                           |           |   |      | $ | 99,331     |  



See accompanying notes
to consolidated financial statements.



5



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##### Table of Contents



ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)



|                                                                        |  |                             |         |   |      |   |       
|----------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------
|                                                                        |  | Three Months EndedMarch 31,
|                                                                        |  | 2005                        |         |   | 2004
|Net income                                                              |  | $                           | 14,482  |   |      | $ | 17,873
|Available-for-sale agency securities, fair value adjustment             |  |                             | (22,589 | ) |      |   | 14,895
|Other mortgage-backed securities, fair value adjustment                 |  |                             | (87     | ) |      |   |      
|Unrealized gains on cash flow hedges                                    |  |                             | 5,817   |   |      |   |      
|Reclassification adjustment for interest expense included in net income |  |                             | 900     |   |      |   |      
|                                                                        |  |                             |         |   |      |   |       
|                                                                        |  |                             | (15,959 | ) |      |   | 14,895
|Comprehensive income (loss)                                             |  | $                           | (1,477  | ) |      | $ | 32,768
|                                                                        |  |                             |         |   |      |   |       



See accompanying notes
to consolidated financial statements.



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ANWORTH MORTGAGE ASSET CORPORATION AND SUBSIDIARIES



NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



|NOTE 1. | ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
|------- | ------------------------------------------------



Anworth Mortgage Asset Corporation was incorporated in Maryland on October 20, 1997. We commenced our operations of purchasing and managing an investment
portfolio of primarily adjustable-rate mortgage-backed securities on March 17, 1998 upon completion of the initial public offering of our common stock. We seek attractive long-term investment returns primarily by investing our equity capital and
borrowed funds in mortgage-related assets. Our returns are principally earned on the spread between the yield on our interest-earning assets and the interest cost of the funds we borrow.



On November 3, 2003, we formed a wholly-owned subsidiary called Belvedere Trust Mortgage Corporation, or Belvedere Trust.
Belvedere Trust was formed to acquire, own and securitize mortgage loans, with a focus on the high credit-quality jumbo adjustable-rate, hybrid first-lien and second-lien mortgage markets. Belvedere Trust acquires mortgage loans, securitizes a
substantial amount of those mortgage loans and then retains a portion of those mortgage-backed securities while pledging the balance to third parties in the secondary market. The mortgage-backed securities that are retained (classified on our
consolidated balance sheets as residential real estate loans) are purchased by a qualified REIT subsidiary to maximize tax efficiency on the interest income on those securities. Belvedere Trust was formed as a qualified REIT subsidiary,
but it structures securitizations through taxable REIT subsidiaries (which generally are taxed as C corporations subject to full corporate taxation) which, in turn, establish special purpose entities that issue securities through real estate
mortgage investment conduit, or REMIC, trusts. Since its formation, Belvedere Trust has become an increasingly important part of our overall operations and, as of March 31, 2005, Belvedere Trusts assets comprised 38% of our overall assets. At
December 31, 2004, Belvedere Trusts assets comprised 37% of our overall assets. Through March 31, 2005, we had made an investment of approximately $96 million in Belvedere Trust to capitalize its mortgage operations.



Belvedere Trust is externally managed by BT Management Company, L.L.C., or BT
Management, a Delaware limited liability company that is owned 50% by us and 50% by the executive officers of Belvedere Trust. BT Management manages Belvedere Trust through a management agreement with Belvedere Trust pursuant to which BT Management
manages the day-to-day operations of Belvedere Trust in exchange for an annual base management fee and a quarterly incentive fee.



In January 2003, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51 (FIN 46). In December 2003, FASB issued FIN No. 46R which replaced FIN 46 and clarified ARB No. 51. This interpretation provides guidance on how to identify a variable interest entity, or VIE, and when a company
should include in its financial statements the assets, liabilities and activities of a VIE. Under FIN 46, a company must consolidate a VIE when it is considered to be its primary beneficiary. The primary beneficiary is the entity that will absorb a
majority (50% or more) of the risk of expected losses and/or receive most of the expected residual benefit from taking on that risk.



Belvedere Trust structures securitization transactions primarily through non-qualified special purpose entities (such as REMIC trusts). The principal
business activity involves issuing various series of mortgage-backed securities (in the form of pass-through certificates or bonds collateralized by residential real estate loans). The collateral specific to each series of mortgage-backed securities
is the sole source of repayment of the debt and, therefore, our exposure to loss is limited to our net investment in the collateral. Under FIN 46, these interests in non-qualified special purpose entities are deemed to be VIEs and we are considered
the primary beneficiary. We disclose our interests in VIEs under FIN 46 in the Investments in Residential Real Estate Loans footnote.



BASIS OF PRESENTATION AND CONSOLIDATION



The accompanying consolidated financial statements are prepared on the accrual basis of accounting in accordance with generally accepted accounting
principles, or GAAP, utilized in the United States. 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. Our consolidated financial
statements include the accounts of all subsidiaries and consolidated VIEs. Significant intercompany accounts and transactions have been eliminated.



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



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.



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Restricted Cash



Restricted cash may include principal and interest payments on real estate loans or securities held as collateral for mortgage-backed securities issued,
cash pledged as collateral on certain interest rate agreements and cash held from borrowers until certain loan agreement requirements have been met. Any corresponding liability for cash held from borrowers is included in Accrued expenses and
other liabilities on our consolidated balance sheets.



Mortgage-Backed
Securities (MBS)



Relative to our investment grade agency
MBS portfolio, we have invested primarily in fixed-rate and adjustable-rate mortgage-backed pass-through certificates and hybrid adjustable-rate mortgage-backed securities. Hybrid adjustable-rate mortgage-backed securities have an initial interest
rate that is fixed for a certain period, usually three to five years, and then adjust annually for the remainder of the term of the loan. 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.



Other mortgage-backed securities at fair value include securities which are
backed by first-lien hybrid adjustable-rate residential mortgages. These mortgage-backed securities include investment grade and non-investment grade securities with a carrying value of approximately $59 million. This amount consists of
approximately $41 million in securities that were retained from our first securitization during the first quarter of 2004. The remaining balance of approximately $18 million were securities that were purchased from major issuers.



The non-investment grade securities include first loss, second loss and third
loss securities. Credit losses are generally allocated to securities in order, beginning with the first loss security up to a maximum of the principal amount of the first loss security. Losses are then allocated in order to the second loss, third
loss and more senior securities. Since these securities include the first loss security, we bear credit risk associated with mortgages with a face value of $161 million (see Note 3).



We also bear the credit risk related to our residential real estate loans as discussed under Note 1 in the section titled
Credit Risk. As of March 31, 2005, we have not sold the first loss securities from our securitizations to third parties.



We classify our investments as either trading investments, available-for-sale investments or held-to-maturity investments. 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 agency and non-agency securities as available-for-sale.
All assets that are classified as available-for-sale are carried at fair value and unrealized gains or losses are included in Other comprehensive income or loss as a component of stockholders equity. Losses on securities classified
as available-for-sale which are determined by management to be other than temporary in nature are reclassified from accumulated other comprehensive income to current operations.



Interest income on our mortgage-backed securities 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 estimated prepayments based on the
Statement of Financial Accounting Standards, or SFAS, No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, an amendment of FASB Statements No. 13, 60, and
65 and a rescission of FASB Statement No. 17. Our policy for estimating prepayments speeds for calculating the effective yield is to evaluate historical performance, street consensus prepayment speeds and current market conditions. If our estimate
of prepayments is incorrect, we may be required to make an adjustment to the amortization or accretion of premiums and discounts that would have an impact on future income.



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



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The following table shows our investments gross unrealized losses and fair value of those
individual securities that have been in a continuous unrealized loss position, at March 31, 2005, aggregated by investment category and length of time:



|                                          |  |                     |           |                  |                   |   |            |       |                  |  |         |            |  |                  |           |  |         |  
|----------------------------------------- |  | ------------------- | --------- | ---------------- | ----------------- | - | ---------- | ----- | ---------------- |  | ------- | ---------- |  | ---------------- | --------- |  | ------- | -
|                                          |  | Less Than 12 Months |           |                  | 12 Months or More |   |            | Total |                 
|                                          |  | (in thousands)      |          
|Description of Securities                 |  | Fair Value          |           | UnrealizedLosses |                   |   | Fair Value |       | UnrealizedLosses |  |         | Fair Value |  | UnrealizedLosses |          
|Federal agency mortgage-backed securities |  | $                   | 2,210,663 |                  | (24,974           | ) |            | $     | 2,342,269        |  | (44,233 | )          |  | $                | 4,552,932 |  | (69,207 | )
|Other mortgage-backed securities          |  | $                   | 53,732    |                  | (1,503            | ) |            | $     |                 |  |        |            |  | $                | 53,732    |  | (1,503  | )



We do not consider
those securities that have been in a continuous loss position for 12 months or more to be other than temporarily impaired due to the fact that these are government-sponsored agency guaranteed securities with limited credit risk and the Company has
the ability and intent to hold these investments until a forecasted recovery of fair value up to the cost of the investment which, in certain cases, may mean until maturity.



Residential Real Estate Loans



We acquire residential mortgage loans and hold them as long-term investments through our Belvedere Trust subsidiary. We finance the mortgage loans with
short-term debt (see Note 6) until a sufficient quantity has been accumulated for securitization into mortgage-backed securities in order to obtain long-term financing and to enhance liquidity. While all mortgage loans are acquired with the
intention of securitizing them, we may not be successful in our efforts to securitize the loans into mortgage-backed securities. Our residential real estate loans are classified as held-for-investment and are carried at their unpaid principal
balance, adjusted for unamortized premiums or discounts. Premiums or discounts are amortized into current operations.



To meet our investment criteria, mortgage loans acquired by us will generally conform to the underwriting guidelines established by the Federal Home Loan
Mortgage Corporation, or Freddie Mac, Fannie Mae and the Government National Mortgage Association, or Ginnie Mae, or to secondary market standards for high credit-quality mortgage loans. Applicable banking laws generally require that an appraisal be
obtained in connection with the original issuance of mortgage loans by the lending institution and we do not intend to obtain additional appraisals at the time of acquiring mortgage loans. Mortgage loans may be originated by or purchased from
various suppliers of mortgage-related assets throughout the United States including savings and loans associations, banks, mortgage bankers and other mortgage lenders. We may acquire mortgage loans directly from originators and from entities holding
mortgage loans originated by others.



Our Belvedere Trust
subsidiary maintains an allowance for loan losses for residential real estate loans held in consolidated securitization trusts and for loans held prior to securitization. The balance is included in Allowance for loan losses on the
consolidated balance sheets.



Allowance for Loan Losses



We establish and maintain an allowance for estimated loan losses inherent in
our residential real estate loan portfolio. The loan loss reserves are based upon our assessment of various factors affecting the credit quality of our assets including, but not limited to, the characteristics of the loan portfolio, review of loan
level data, borrowers credit scores, delinquency and collateral value. The reserves are reviewed on a regular basis and adjusted as deemed necessary. The allowance for loan losses on our real estate loans is established by taking loan loss
provisions through our consolidated statements of income. The Company does not maintain a loan repurchase reserve, as any risk of loss due to loan repurchases (i.e., due to breach of representations) would normally be covered by recourse to the
companies from whom we acquired the loans.



Repurchase Agreements



We finance the acquisition of our MBS 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 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. At 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 or enter into new repurchase agreements at the then prevailing financing rate. When repurchase agreements are
renewed, the future repurchase price is reset. 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.



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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 to convert a percentage of our repurchase agreements to fixed-rate obligations over a period 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. 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, but we do not expect any of the
counterparties to fail to meet their obligations. In order to limit credit risk associated with swap agreements, our current policy is to only purchase swap agreements from financial institution counterparties rated A or better by at
least one of the rating agencies, limit our exposure 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.



To mitigate the impact
of rising interest rates on the consummation of forward loan purchase commitments in connection with planned securitization funding, Belvedere Trust uses Eurodollar futures. There is usually a time difference between the date we enter into an
agreement to purchase whole loans and the date on which we fix the interest rates paid for securitization financing. We are exposed to interest rate fluctuations during this period. We do not designate the Eurodollar futures for hedge accounting.



Accounting for Derivatives and Hedging Activities



In accordance with FASB No. 133, Accounting for
Derivative Instruments and Hedging Activities, or FASB 133, as amended by FASB No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, or FASB 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 FASB 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 is highly effective and that is designated and qualifies as a cash flow hedge, to the extent that the hedge is effective, are recorded in other comprehensive income and reclassified to earnings when the derivative is affected by
the variability of cash flows of the hedged transaction (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. Hedge
ineffectiveness, if any, is recorded in current-period earnings.



We formally document all relationships between hedging instruments and hedged items as well as our risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are
designated as cash flow hedges to (1) specific assets and liabilities on the balance sheet or (2) specific firm commitments or forecasted transactions. We also 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 prospectively, as discussed below.



We discontinue hedge accounting prospectively when (1) we determine that the derivative is no longer effective in offsetting changes in the cash flows of
a hedged item (including hedged items such as firm commitments or forecasted transactions); (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; (4) a hedged firm
commitment no longer meets the definition of a firm commitment; or (5) management determines that designating the derivative as a hedging instrument is no longer appropriate.



When we discontinue hedge accounting because it is no longer probable that the forecasted transaction will occur in the
originally expected period, the gain or loss on the derivative remains in accumulated other comprehensive income and is reclassified into earnings when the forecasted transaction affects earnings. However, if it is probable that a forecasted
transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were accumulated in other comprehensive income will be recognized immediately in
earnings. In all situations in which hedge



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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 earnings.



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



In connection with its loan acquisitions, Belvedere Trust enters into forward loan purchase commitments. To mitigate the impact of rising interest rates
on the consummation of forward loan purchase commitments in connection with planned securitization funding, Belvedere Trust uses Eurodollar futures. Both of these are treated as derivatives, carried at fair value and any changes in fair value are
recognized in current-period earnings.



Credit Risk



At March 31, 2005, we had limited our exposure to credit losses on our
portfolio of fixed-rate and adjustable-rate mortgage-backed securities by purchasing primarily securities from Freddie Mac and Fannie Mae. The payment of principal and interest on the Freddie Mac and Fannie Mae mortgage-backed securities are
guaranteed by those respective agencies. At March 31, 2005, because of the guarantee of these government-sponsored agencies, all of our agency mortgage-backed securities have an implied AAA rating.



Other-than-temporary losses on available-for-sale investment securities, as
measured by the amount of decline in estimated fair value attributable to factors that are considered to be other-than-temporary, are charged against income, resulting in an adjustment of the cost basis of such securities. The following are among,
but not all of, the factors considered in determining whether and to what extent an other-than-temporary impairment exists: (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 a significant change. At March 31, 2005, we had no assets on which an impairment charge had been taken.



Belvedere Trusts investment strategy of acquiring, accumulating and
securitizing loans involves credit risk. While Belvedere Trust intends to securitize the loans that it acquires into high quality assets in order to achieve better financing rates and to improve its access to financing, it bears the risk of loss on
any loans that its acquires and which it subsequently securitizes. Belvedere Trust acquires loans that are not credit enhanced and that do not have the backing of Fannie Mae or Freddie Mac. Accordingly, it will be subject to risks of borrower
default, bankruptcy and special hazard losses (such as those occurring from earthquakes) with respect to those loans to the extent that there is any deficiency between the value of the mortgage collateral and insurance and the principal amount of
the loan. In the event of a default on any such loans that it holds, Belvedere Trust would bear the loss equal to the difference between the realizable value of the mortgaged property, after expenses, and the outstanding indebtedness, as well as the
loss of interest.



We establish and maintain an allowance for
estimated loan losses on our residential real estate loans. The allowance for loan losses is based upon estimates of inherent losses on the portfolio of residential loans. Various factors, including borrowers credit scores and loan-to-value
ratios, are used to estimate losses. A provision for loan losses is recognized through our consolidated statements of income.



Income Taxes



We have elected to be taxed as a REIT and to comply with the provisions of the Internal Revenue Code of 1986, as amended, or the Code, with respect
thereto. Accordingly, we will not be subject to Federal income tax to the extent that our distributions to stockholders satisfy the REIT requirements and certain asset, income and stock ownership tests are met.



Belvedere Trust Finance Corporation, or BT Finance, an indirect wholly-owned
subsidiary of the Company, and BT Finances wholly-owned subsidiaries, BT Residential Funding Corporation and BellaVista Funding Corporation, are taxable REIT subsidiaries (TRS) of the Company. In general, a TRS of the Company may hold assets
that the Company cannot hold directly and may engage in any real estate or non-real estate related business. A TRS is subject to corporate federal and state income tax and will be taxed as a regular C corporation. Securities of a TRS will constitute
non-real estate assets for purposes of determining whether at least 75% of a REITs assets consist of real estate. Under current law, no more than 20% of a REITs total assets can consist of securities of one or more taxable REIT
subsidiaries. As of March 31, 2005, the amount of the Companys assets attributable to its taxable REIT subsidiaries was less than 5%.



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A more detailed description of federal income tax considerations regarding the Companys qualifications and taxation as a REIT appears in the
Companys 2004 Annual Report on Form 10-K on page 11.



Stock-Based
Compensation



SFAS 123, Accounting for Stock-Based
Compensation, amended by SFAS 148, Accounting for Stock-Based CompensationTransition and Disclosure, encourages companies to measure compensation cost of stock-based awards based on their estimated fair value at the date of
grant and recognize that amount over the related service period. We believe the existing stock option valuation models do not necessarily provide a transparent measure of the fair value of stock-based awards. Therefore, as permitted by SFAS 148, we
apply the existing accounting rules under APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. In general, as the exercise price of all options granted under these plans is equal to the market price
of the underlying common stock on the grant date, no stock-based employee compensation cost is recognized in net income. In addition, under these plans, options to purchase shares of common stock may be granted at less than fair market value, which
results in compensation expense equal to the difference between the market value on the date of grant and the purchase price. This expense is recognized over the vesting period of the shares in net income.



On December 16, 2004, the FASB issued the final statement on Accounting
for Share-Based Payments (FASB 123(R)) to be effective for certain public entities as of the first interim reporting period that begins after June 15, 2005. On April 14, 2005, the Securities and Exchange Commission amended the implementation
date to the interim reporting period for the first quarter of 2006. This statement replaces FASB 123, Accounting for Stock Based Compensation and supersedes APB Opinion 25, Accounting for Stock Issued to Employees. Instead of
disclosing the effect of stock options in a footnote to the financial statements, this statement will require that compensation cost relating to share-based payment transactions be recognized in the financial statements and that cost will be
measured on the fair value of the equity or liability instruments issued. The provisions of FASB 123(R) are not expected to have a material effect on the Companys financial statements. Prior to the effective date of FASB 123(R), the Company
has elected to continue to provide the disclosures set forth in SFAS 123, as amended by FASB 148.



As required by SFAS 123, as amended by SFAS 148, we provide pro forma net income and pro forma net income per common share disclosures for stock-based
awards as if the fair-value-based method defined in SFAS 123 had been applied. Had we determined compensation cost based on the fair value at the grant date for our stock options under FASB No. 123, our net income would have been reduced to the pro
forma amounts indicated below for the three months ended March 31:



|                                                                                                                               |  |      |        |      |   |       
|------------------------------------------------------------------------------------------------------------------------------ |  | ---- | ------ | ---- | - | ------
|(in thousands, except per share amounts)                                                                                       |  | 2005 |        | 2004
|Net income available to common stockholders, as reported                                                                       |  | $    | 13,614 |      | $ | 17,873
|Add: Stock-based compensation expense included in net income                                                                   |  |      | 20     |      |   | 20    
|Less: Total stock-based compensation expense determined under the fair value-based method for all awards, net of related taxes |  |      | 59     |      |   | 119   
|                                                                                                                               |  |      |        |      |   |       
|Pro forma net income                                                                                                           |  | $    | 13,575 |      | $ | 17,774
|Basic income per share, as reported                                                                                            |  | $    | 0.29   |      | $ | 0.41  
|Pro forma basic income per share                                                                                               |  | $    | 0.29   |      | $ | 0.41  
|Diluted income per share, as reported                                                                                          |  | $    | 0.29   |      | $ | 0.41  
|Pro forma diluted income per share                                                                                             |  | $    | 0.29   |      | $ | 0.41  



The fair value of the
aforementioned stock-based awards was estimated using the Black-Scholes model with the following weighted-average assumptions for the period ending March 31:



|                        |  |           |   |  |           |  
|----------------------- |  | --------- | - |  | --------- | -
|                        |  | 2005      |   |  | 2004      |  
|Assumptions:            |  |           |   |  |           |  
|Dividend yield          |  | 10.00     | % |  | 11.00     | %
|Expected volatility     |  | 32.00     | % |  | 32.00     | %
|Risk-free interest rate |  | 2.97      | % |  | 3.52      | %
|Expected lives          |  | 6.4 years |   |  | 8.4 years |  



Earnings Per Share



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



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The computation of EPS is as follows (amounts in thousands, except per share amounts):



|                                             |  |                                      |        |               |        |                  |   |     
|-------------------------------------------- |  | ------------------------------------ | ------ | ------------- | ------ | ---------------- | - | ----
|                                             |  | IncomeAvailable toCommonStockholders |        | AverageShares |        | EarningsPerShare
|For the three months ended Match 31, 2005    |  |                                      |        |               |        |                  |   |     
|Basic EPS                                    |  | $                                    | 13,614 |               | 46,839 |                  | $ | 0.29
|Effect of dilutive securities: Stock options |  |                                      |       |               | 37     |                  |   |    
|                                             |  |                                      |        |               |        |                  |   |     
|Diluted EPS                                  |  | $                                    | 13,614 |               | 46,876 |                  | $ | 0.29
|                                             |  |                                      |        |               |        |                  |   |     
|For the three months ended March 31, 2004    |  |                                      |        |               |        |                  |   |     
|Basic EPS                                    |  | $                                    | 17,873 |               | 43,677 |                  | $ | 0.41
|Effect of dilutive securities: Stock options |  |                                      |       |               | 146    |                  |   |    
|                                             |  |                                      |        |               |        |                  |   |     
|Diluted EPS                                  |  | $                                    | 17,873 |               | 43,823 |                  | $ | 0.41
|                                             |  |                                      |        |               |        |                  |   |     



Accumulated Other Comprehensive
Income (Loss)



The Financial Accounting Standard
Boards Statement 130, Reporting Comprehensive Income, divides comprehensive income into net income and other comprehensive income (loss), which includes unrealized gains and losses on marketable securities defined as
available-for-sale and unrealized gains and losses on derivative financial instruments that qualify for hedge accounting under FASB 133.



USE OF ESTIMATES



The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America 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



In March
2004, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board reached a consensus on Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This EITF applies to
all debt and equity securities currently accounted for under FASB 115, Accounting for Certain Investments in Debt and Equity Securities. EITF 03-1 requires evaluation of whether impairment is other than temporary. An impairment loss is
equal to the difference between the investments cost and fair value. An impairment is considered other than temporary if the investor does not have the ability and intent to hold for a reasonable period of time sufficient for recovery of fair
value and if it is probable that the investor will be unable to collect all contractual amounts due or if the impairment is considered other than a minor impairment. A minor impairment is considered 5% or less of value. For ordinary debt securities
with no credit problems where the decrease in fair value is caused solely by rising interest rates, an impairment is deemed other than temporary unless the investor has the ability and intent to hold for a reasonable period of time sufficient for
recovery of fair value or if it is considered a minor impairment. The Company does not believe this EITF will have a material impact on its financial statements as the Company has reviewed its securities portfolio and does not consider those
securities that have been in a continuous loss position for 12 months or more to be other than temporarily impaired due to the fact that they are government-sponsored agency securities with limited credit risk and the Company has the ability and
intent to hold these securities until a forecasted recovery, which may mean until maturity. The FASB suspended the effective date of the consensus, other than disclosure requirements.



On December 16, 2004, the FASB issued the final statement on Accounting for Share-Based Payments (FASB 123(R))
to be effective for all public entities as of the first interim reporting period that begins after June 15, 2005. On April 14, 2005, the Securities and Exchange Commission amended the implementation date to the interim reporting period for the first
quarter of 2006. This statement covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. This statement
replaces FASB 123, Accounting for Stock Based Compensation and supersedes APB Opinion 25, Accounting for Stock Issued to Employees. Instead of disclosing the effect of stock options in a footnote to the financial statements,
this statement will require that compensation cost relating to share-based payment transactions be recognized in the financial statements and that cost will be measured on the fair value of the equity or liability instruments issued. The provisions
of FASB 123 (R) are not expected to have a material effect on the Companys financial statements.



On March 3, 2005, the FASB issued staff position (FIN 46(R)-5), Implicit Variable Interests under FASB Interpretation No. 46, Consolidation of
Variable Interest Entities. The determination as to whether an implicit variable interest exists should be based on



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whether, in substance, the reporting enterprise, through its relationship with the variable interest entities (VIEs) will absorb a majority (50%
or more) of the risk of expected losses and/or receive most of the expected residual benefit from taking on that risk. The effective date of this position is the first reporting period beginning after March 3, 2005. This Company does not believe
this will have a material impact on its financial statements, as it has disclosed its interests in VIEs under FIN 46 in the Investments in Residential Real Estate Loans footnote.



|NOTE 2. | SECURITIES
|------- | ----------



The following table summarizes our mortgage-backed securities classified as available-for-sale as of March 31, 2005 and December 31, 2004, which are
carried at their fair value (amounts in thousands):



March 31, 2005



|                    |  |            |         |   |             |   |           |            |  |   |                       |   |  |   |           |  
|------------------- |  | ---------- | ------- | - | ----------- | - | --------- | ---------- |  | - | --------------------- | - |  | - | --------- | -
|                    |  | Ginnie Mae |         |   | Freddie Mac |   |           | Fannie Mae |  |   | TotalAgency MBSAssets |  
|Amortized cost      |  | $          | 120,572 |   |             | $ | 1,314,327 |            |  | $ | 3,395,276             |   |  | $ | 4,830,175 |  
|Paydowns receivable |  |            |        |   |             |   | 19,877    |            |  |   |                      |   |  |   | 19,877    |  
|Unrealized gains    |  |            |        |   |             |   | 156       |            |  |   | 971                   |   |  |   | 1,127     |  
|Unrealized losses   |  |            | (2,023  | ) |             |   | (15,742   | )          |  |   | (51,442               | ) |  |   | (69,207   | )
|                    |  |            |         |   |             |   |           |            |  |   |                       |   |  |   |           |  
|Fair value          |  | $          | 118,549 |   |             | $ | 1,318,618 |            |  | $ | 3,344,805             |   |  | $ | 4,781,972 |  
|                    |  |            |         |   |             |   |           |            |  |   |                       |   |  |   |           |  
|                    |  |            |         |  
|                    |  |            |         |   |             |   |           |            |  |   | Other MBS             |  
|Amortized cost      |  |            |         |   |             |   |           |            |  |   |                       |   |  | $ | 60,464    |  
|Unrealized losses   |  |            |         |   |             |   |           |            |  |   |                       |   |  |   | (1,503    | )
|Unrealized gains    |  |            |         |   |             |   |           |            |  |   |                       |   |  |   | 186       |  
|                    |  |            |         |   |             |   |           |            |  |   |                       |   |  |   |           |  
|Fair value          |  |            |         |   |             |   |           |            |  |   |                       |   |  | $ | 59,147    |  
|                    |  |            |         |   |             |   |           |            |  |   |                       |   |  |   |           |  



December 31, 2004



|                    |  |            |         |   |             |   |           |            |  |   |                       |   |  |   |           |  
|------------------- |  | ---------- | ------- | - | ----------- | - | --------- | ---------- |  | - | --------------------- | - |  | - | --------- | -
|                    |  | Ginnie Mae |         |   | Freddie Mac |   |           | Fannie Mae |  |   | TotalAgency MBSAssets |  
|Amortized cost      |  | $          | 131,686 |   |             | $ | 1,141,429 |            |  | $ | 3,334,582             |   |  | $ | 4,607,697 |  
|Paydowns receivable |  |            |        |   |             |   | 26,335    |            |  |   |                      |   |  |   | 26,335    |  
|Unrealized gains    |  |            |        |   |             |   | 228       |            |  |   | 1,639                 |   |  |   | 1,867     |  
|Unrealized losses   |  |            | (2,461  | ) |             |   | (10,082   | )          |  |   | (34,815               | ) |  |   | (47,358   | )
|                    |  |            |         |   |             |   |           |            |  |   |                       |   |  |   |           |  
|Fair value          |  | $          | 129,225 |   |             | $ | 1,157,910 |            |  | $ | 3,301,406             |   |  | $ | 4,588,541 |  
|                    |  |            |         |   |             |   |           |            |  |   |                       |   |  |   |           |  
|                    |  |            |         |  
|                    |  |            |         |   |             |   |           |            |  |   | Other MBS             |  
|Amortized cost      |  |            |         |   |             |   |           |            |  |   |                       |   |  | $ | 64,699    |  
|Unrealized losses   |  |            |         |   |             |   |           |            |  |   |                       |   |  |   | (1,302    | )
|Unrealized gains    |  |            |         |   |             |   |           |            |  |   |                       |   |  |   | 73        |  
|                    |  |            |         |   |             |   |           |            |  |   |                       |   |  |   |           |  
|Fair value          |  |            |         |   |             |   |           |            |  |   |                       |   |  | $ | 63,470    |  
|                    |  |            |         |   |             |   |           |            |  |   |                       |   |  |   |           |  



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The following table summarizes our agency securities at their fair value as of March 31, 2005 and
December 31, 2004 (amounts in thousands):



March 31, 2005



|                    |  |      |           |   |         |   |           |       |  |   |                   |   |       |   |        |  |   |           |  
|------------------- |  | ---- | --------- | - | ------- | - | --------- | ----- |  | - | ----------------- | - | ----- | - | ------ |  | - | --------- | -
|                    |  | ARMs |           |   | Hybrids |   |           | Fixed |  |   | Floating-Rate CMO |   | Total |  
|Amortized cost      |  | $    | 1,501,791 |   |         | $ | 3,116,177 |       |  | $ | 195,263           |   |       | $ | 16,944 |  | $ | 4,830,175 |  
|Paydowns receivable |  |      | 7,535     |   |         |   | 12,342    |       |  |   |                  |   |       |   |       |  |   | 19,877    |  
|Unrealized gains    |  |      | 771       |   |         |   | 40        |       |  |   | 292               |   |       |   | 24     |  |   | 1,127     |  
|Unrealized losses   |  |      | (16,042   | ) |         |   | (46,818   | )     |  |   | (6,347            | ) |       |   |       |  |   | (69,207   | )
|                    |  |      |           |   |         |   |           |       |  |   |                   |   |       |   |        |  |   |           |  
|Fair value          |  | $    | 1,494,055 |   |         | $ | 3,081,741 |       |  | $ | 189,208           |   |       | $ | 16,968 |  | $ | 4,781,972 |  
|                    |  |      |           |   |         |   |           |       |  |   |                   |   |       |   |        |  |   |           |  



December 31, 2004



|                    |  |      |           |   |         |   |           |       |  |   |                   |   |       |   |        |  |   |           |  
|------------------- |  | ---- | --------- | - | ------- | - | --------- | ----- |  | - | ----------------- | - | ----- | - | ------ |  | - | --------- | -
|                    |  | ARMs |           |   | Hybrids |   |           | Fixed |  |   | Floating-Rate CMO |   | Total |  
|Amortized cost      |  | $    | 1,427,620 |   |         | $ | 2,955,923 |       |  | $ | 205,717           |   |       | $ | 18,437 |  | $ | 4,607,697 |  
|Paydowns receivable |  |      | 8,929     |   |         |   | 17,406    |       |  |   |                  |   |       |   |       |  |   | 26,335    |  
|Unrealized gains    |  |      | 896       |   |         |   | 504       |       |  |   | 425               |   |       |   | 42     |  |   | 1,867     |  
|Unrealized losses   |  |      | (14,278   | ) |         |   | (28,453   | )     |  |   | (4,627            | ) |       |   |       |  |   | (47,358   | )
|                    |  |      |           |   |         |   |           |       |  |   |                   |   |       |   |        |  |   |           |  
|Fair value          |  | $    | 1,423,167 |   |         | $ | 2,945,380 |       |  | $ | 201,515           |   |       | $ | 18,479 |  | $ | 4,588,541 |  
|                    |  |      |           |   |         |   |           |       |  |   |                   |   |       |   |        |  |   |           |  



|NOTE 3. | SECURITIZATION ACTIVITIES
|------- | -------------------------



We acquire residential mortgage loans from third party originators, including banks and other mortgage lenders, through our Belvedere Trust subsidiary.
During the year ended December 31, 2004, Belvedere Trust transferred approximately $2.4 billion of residential mortgage loans in six separate transactions to securitization trusts pursuant to pooling and third party servicing agreements. Five of the
six securitization transactions in 2004 totaling approximately $2.1 billion utilized non-qualified SPEs requiring consolidation, which effectively resulted in the transactions being accounted for as financings. During the first quarter ending March
31, 2005, Belvedere Trust transferred approximately $0.9 billion of residential mortgage loans to a securitization trust pursuant to a pooling and third party service agreement. This transaction utilized non-qualified SPEs requiring consolidation,
which effectively resulted in the transaction being accounted for as a financing. The residential real estate loans remain as assets on our consolidated balance sheets subsequent to securitization, and the financing resulting from these
securitizations is shown on our consolidated balance sheets as Mortgage-backed securities issued. The servicing of the mortgage loans is performed by third parties under servicing arrangements that resulted in no servicing asset or
liability. Since its formation, Belvedere Trust has securitized approximately $3.3 billion of mortgage loans.



During the three months ended March 31, 2004, we transferred approximately $253 million of residential mortgage loans to a securitization trust pursuant
to a pooling and third party servicing agreement dated as of February 1, 2004. The transaction was accounted for as a sale. The net proceeds of the sale were used primarily to pay off a warehouse line of credit. The retained securities are carried
at amortized cost, adjusted for fair market valuation based on quoted market prices. As these securities include first loss security, we bear the credit risk associated with these mortgages. The principal balance outstanding, at March 31, 2005, of
all the securities from this transaction was $161 million; the amount of assets derecognized was $120 million and the amount recognized as our retained securities was $41 million. As of March 31, 2005, the delinquent amount of all the principal
balances from this transaction was $2 million and there have been no credit losses to date.



The information in the following table projects the impact of sudden changes in interest rates on the fair value of these retained securities at March 31, 2005 and December 31, 2004:



|                         |  |                                                      |   |  |                   |  
|------------------------ |  | ---------------------------------------------------- | - |  | ----------------- | -
|                         |  | Projected Percentage Change inRetained Securities at |  
|Change in Interest Rates |  | March 31, 2005                                       |   |  | December 31, 2004 |  
|-2.0%                    |  | 2.0                                                  | % |  | 1.3               | %
|-1.0%                    |  | 1.6                                                  | % |  | 0.7               | %
|0%                       |  |                                                     |   |  |                  |  
|1.0%                     |  | -2.9                                                 | % |  | -2.0              | %
|2.0%                     |  | -6.4                                                 | % |  | -5.4              | %



At March 31, 2005, we
had acquired approximately $12 million in residential mortgage loans (including related premiums) which are scheduled to be securitized at a later date.



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|NOTE 4. | RESIDENTIAL REAL ESTATE LOANS
|------- | -----------------------------



Our residential real estate loan portfolio of $2.9 billion at March 31, 2005 includes $12 million of loans pending securitization and $2.87 billion in
loans which have been financed through securitization.



The
following table represents the changes at March 31, 2005 and December 31, 2004 in our residential real estate loans (in thousands):



|                                                            |  |               |           |   |                  |   |           |  
|----------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                            |  | March 31,2005 |           |   | December 31,2004 |  
|Balance, beginning of period                                |  | $             | 2,628,334 |   |                  | $ |          |  
|                                                            |  |              
|New loan acquisitions                                       |  |               | 365,565   |   |                  |   | 3,030,405 |  
|Sales (other than to consolidated securitization trusts)(1) |  |               |          |   |                  |   | (258,164  | )
|Principal repayments                                        |  |               | (115,176  | ) |                  |   | (141,350  | )
|Premium amortization                                        |  |               | (2,864    | ) |                  |   | (3,079    | )
|Capitalized securitization costs and other adjustments      |  |               | 3,724     |   |                  |   | 522       |  
|                                                            |  |               |           |   |                  |   |           |  
|Balance, end of period                                      |  | $             | 2,879,583 |   |                  | $ | 2,628,334 |  
|                                                            |  |               |           |   |                  |   |           |  

---

|(1) | Includes related premium
|--- | ------------------------



The following table represents the changes at March 31, 2005 and December 31, 2004 in our residential allowance for loan losses (in thousands):



|                             |  |               |     |                  |   |    
|---------------------------- |  | ------------- | --- | ---------------- | - | ---
|                             |  | March 31,2005 |     | December 31,2004
|Balance, beginning of period |  | $             | 591 |                  | $ |   
|Additions                    |  |               | 297 |                  |   | 591
|                             |  |               |     |                  |   |    
|Balance, end of period       |  | $             | 888 |                  | $ | 591
|                             |  |               |     |                  |   |    



|NOTE 5. | REPURCHASE AGREEMENTS
|------- | ---------------------



Agency Repurchase Agreements



We have entered into repurchase agreements to finance most of our 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 had their basis on LIBOR. Relative to our agency MBS portfolio, at March 31, 2005, our repurchase agreements had a weighted average term to maturity of 144 days and a weighted
average borrowing rate of 2.61%. After adjusting for swap transactions, the weighted average term to the next rate adjustment was 252 days with a weighted average borrowing rate of 2.66%. At March 31, 2005, agency MBS with a fair value of
approximately $4.5 billion have been pledged as collateral under the repurchase agreements.



Relative to our agency MBS portfolio, at December 31, 2004, our repurchase agreements had a weighted average term to maturity of 184 days and a weighted average borrowing rate of 2.25%. After adjusting for swap
transactions, the weighted average term to the next rate adjustment was 304 days with a weighted average borrowing rate of 2.34%. At December 31, 2004, agency MBS with a fair value of approximately $4.36 billion have been pledged as collateral under
the repurchase agreements.



At March 31, 2005 and December 31,
2004, the repurchase agreements had the following remaining maturities:



|                             |  |               |   |  |                  |  
|---------------------------- |  | ------------- | - |  | ---------------- | -
|                             |  | March 31,2005 |   |  | December 31,2004 |  
|Less than 3 months           |  | 52.9          | % |  | 36.9             | %
|3 months to less than 1 year |  | 37.8          | % |  | 51.9             | %
|1 year to less than 2 years  |  | 9.3           | % |  | 11.2             | %
|2 years to less than 3 years |  |              |   |  |                 |  
|Greater than 3 years         |  |              |   |  |                 |  
|                             |  |               |   |  |                  |  
|                             |  | 100.0         | % |  | 100.0            | %



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Belvedere Trust Repurchase Agreements



Belvedere Trust has entered into repurchase agreements to finance most of
its other MBS. In addition, Belvedere Trust has entered into repurchase agreements to finance most of the retained portion of the residential real estate loans which they have securitized. The repurchase agreements are short-term borrowings that are
secured by the market value of the pledged assets and bear interest rates that have historically had their basis on LIBOR. At March 31, 2005, Belvedere Trusts repurchase agreements had a weighted average term to maturity of 289 days and a
weighted average borrowing rate of 2.96%. At December 31, 2004, Belvedere Trusts repurchase agreements had a weighted average term to maturity of 313 days and a weighted average borrowing rate of 2.65%.



At March 31, 2005 and December 31, 2004, the repurchase agreements had the
following remaining maturities:



|                             |  |               |   |  |                  |  
|---------------------------- |  | ------------- | - |  | ---------------- | -
|                             |  | March 31,2005 |   |  | December 31,2004 |  
|Less than 3 months           |  | 48.1          | % |  | 47.5             | %
|3 months to less than 1 year |  | 4.5           | % |  | 3.1              | %
|1 year to less than 2 years  |  | 41.0          | % |  | 44.5             | %
|2 years to less than 3 years |  | 6.4           | % |  | 4.9              | %
|Greater than 3 years         |  |              |   |  |                 |  
|                             |  |               |   |  |                  |  
|                             |  | 100.0         | % |  | 100.0            | %



|NOTE 6. | MORTGAGE-BACKED SECURITIES ISSUED AND WHOLE LOAN FINANCING FACILITIES
|------- | ---------------------------------------------------------------------



We finance our residential real estate loans using mortgage-backed securities issued (obligations due on pass-through certificates or bonds) through
securitizations. The interest rates on the mortgage-backed securities issued are variable and are based either upon the interest rates on the underlying loan collateral or upon LIBOR. The maturities on the mortgage-backed securities issued are also
based upon the maturities of the underlying mortgages. Principal is paid on the mortgage-backed securities issued following receipt of principal payments on the loans. The scheduled maturities of the mortgage-backed securities issued extend to
January 2045. At March 31, 2005, whole loans with a face value of approximately $2.8 billion have been pledged as collateral for the mortgage-backed securities issued. At December 31, 2004, whole loans with a face value of approximately $2 billion
were pledged as collateral for the mortgage-backed securities issued.



We have entered into whole loan financing facilities to finance our residential loan acquisitions prior to securitization. The whole loan financing facilities are short-term borrowings that are secured by the loans and bear interest rates
that have historically had their basis on LIBOR. At March 31, 2005, loans with a face value of approximately $12 million have been pledged as collateral under these facilities. At December 31, 2004, loans with a face value of approximately $567
million were pledged as collateral under these facilities.



The
following tables represent, at March 31, 2005 and December 31, 2004, the principal payments of the mortgage-backed securities issued and the whole loan financing facilities for each of the succeeding five years:



March 31, 2005



|                                  |  |                |         |      |   |         |  |      |         |      |   |         |  |   |        
|--------------------------------- |  | -------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                  |  | 2005           |         | 2006 |   | 2007    |  | 2008 |         | 2009
|                                  |  | (in thousands)
|Whole loan financing facilities   |  | $              | 11,683  |      | $ |        |  | $    |        |      | $ |        |  | $ |       
|Mortgage-backed securities issued |  |                | 438,421 |      |   | 455,159 |  |      | 341,369 |      |   | 256,027 |  |   | 192,020



December 31, 2004



|                                  |  |                |         |      |   |         |  |      |         |      |   |         |  |   |        
|--------------------------------- |  | -------------- | ------- | ---- | - | ------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|                                  |  | 2005           |         | 2006 |   | 2007    |  | 2008 |         | 2009
|                                  |  | (in thousands)
|Whole loan financing facilities   |  | $              | 556,233 |      | $ |        |  | $    |        |      | $ |        |  | $ |       
|Mortgage-backed securities issued |  |                | 373,523 |      |   | 280,142 |  |      | 210,107 |      |   | 157,580 |  |   | 118,185



The whole loan
financing facilities are short-term credit facilities. The total balance owed on the whole loan financing facilities, as of March 31, 2005, is due in 2005. Principal is paid on the mortgage-backed securities issued following receipt of principal
payments on the loans. For the table above, the principal payments have been estimated based on contractual payments on the underlying loans as adjusted for prepayment assumptions. The actual principal paid in each year will be dependent upon the
principal received on the underlying loans. The collateral specific to each mortgage-backed securities series is the sole source of repayment of the debt.



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|NOTE 7. | 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 will be 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 five years. 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 it does not meet the requirements for consolidation.



|NOTE 8. | FAIR VALUES OF FINANCIAL INSTRUMENTS
|------- | ------------------------------------



Agency MBS and other MBS are reflected in the financial statements at estimated fair value. Management bases its fair value estimates for agency MBS and
other MBS primarily on third-party bid price indications provided by dealers who make markets in these financial instruments when such indications are available. However, the fair value reported reflects estimates and may not necessarily be
indicative of the amounts we could realize in a current market exchange.



Cash and cash equivalents, interest receivable, repurchase agreements and payables for securities purchased are reflected in the financial statements at their costs, which approximates their fair value because of the
nature of these instruments.



The following table of the
estimated fair value of financial instruments at March 31, 2005 and December 31, 2004 is made by using available market information, historical data, and appropriate valuation methodologies. However, considerable judgment is required to interpret
market and historical data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts we could realize in a current market exchange.



The use of different market assumptions and/or estimation methodologies may
have a material effect on the estimated fair value amounts.



|                                                     |  |                |           |                     |   |                |  |                     |           |  |   |          
|---------------------------------------------------- |  | -------------- | --------- | ------------------- | - | -------------- |  | ------------------- | --------- |  | - | ---------
|                                                     |  | March 31, 2005 |           | December 31, 2004  
|                                                     |  | (in thousands) |           | (in thousands)     
|                                                     |  | CarryingAmount |           | EstimatedFair Value |   | CarryingAmount |  | EstimatedFair Value
|Residential real estate loans pending securitization |  | $              | 12,070    |                     | $ | 12,265         |  | $                   | 577,932   |  | $ | 578,189  
|Residential real estate loans securitized            |  |                | 2,867,513 |                     |   | 2,855,336      |  |                     | 2,050,402 |  |   | 2,039,828
|Mortgage-backed securities issued                    |  |                | 2,259,808 |                     |   | 2,251,299      |  |                     | 1,494,851 |  |   | 1,493,213



These fair value
estimates at March 31, 2005 and December 31, 2004 are based on pertinent information available to management as of the respective dates. Although management is not aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been revalued for purposes of these consolidated financial statements since those dates and, therefore, current estimates of fair value may differ significantly from the amounts presented herein.



| |  |  | Residential real estate loans are carried on the consolidated balance sheets at historical cost, net of amortization, as we hold these assets for investment. The fair value of the
residential real estate loans is calculated using assumptions based on historical experience, industry information and estimated rates of future prepayments and credit losses. The estimates of fair value are inherently subjective in nature, involve
matters of uncertainty and judgment and do not necessarily indicate the amounts that could be received in a current market exchange;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The estimated fair value of mortgage-backed securities issued (obligations due on pass-through certificates) is based on dealers quotes.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------



|NOTE 9. | PUBLIC OFFERINGS AND CAPITAL STOCK
|------- | ----------------------------------



In February 2004, we filed with the SEC an amended and restated Dividend Reinvestment and Stock Purchase Plan pursuant to a registration statement on Form
S-3, primarily to increase the number of shares authorized under our predecessor plan. The plan allows stockholders and non-stockholders to purchase shares of our common stock and to reinvest dividends in additional shares of our common stock.
During the three months ended March 31, 2005, we issued 662,827 shares of common stock under the plan, resulting in proceeds to us of approximately $6.4 million.



On April 21, 2004, we entered into a sales agreement with Cantor Fitzgerald & Co., or Cantor, to sell up to 6.0 million
shares of common stock from time to time through a controlled equity offering program under which Cantor acts as sales agent. On January 19, 2005, we entered into an Amended and Restated Sales Agreement with Cantor to sell up to 2.0 million shares
of our Series A



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##### Table of Contents

Preferred Stock, and up to 5.7 million shares of our Common Stock, from time to time through a controlled equity offering program under which Cantor acts as
sales agent. The agreement amended and restated the Sales Agreement that we entered into on April 21, 2004 with Cantor. Sales of the shares of our Series A Preferred Stock and Common Stock are made on the New York Stock Exchange by means of ordinary
brokers transactions at market prices and through privately negotiated transactions. From January 19, 2005 through March 31, 2005, we sold 659,200 shares of Series A Preferred Stock under the controlled equity offering program which provided
net proceeds to us of approximately $16.1 million. The sales agent received an aggregate of approximately $404,000, which represents an average commission of approximately 2.4% on the gross sales price per share.



In May 2004, we filed a shelf registration statement on Form S-3 with the
Securities and Exchange Commission for offering up to $300 million of our capital stock. The registration statement incorporated the securities available under our prior shelf registration statement and was declared effective on May 25, 2004. As of
March 31, 2005, $253 million of our securities remained available for issuance under the registration statement.



During November 2004, we completed a public offering of 1.15 million shares of 8.625% Series A Cumulative Preferred Stock and received net proceeds of
$26.4 million. The shares were sold pursuant to our shelf registration on Form S-3.



At March 31, 2005, our authorized capital included 20 million shares of $.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). 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.



|NOTE 10. | TRANSACTIONS WITH AFFILIATES
|-------- | ----------------------------



Anworth 2002 Incentive Compensation Plan



Under our 2002 Incentive Compensation Plan, eligible employees have the opportunity to earn incentive compensation for each fiscal quarter. The total
aggregate amount of compensation that may be earned by all employees equals a percentage of taxable net income, before incentive compensation, in excess of the amount that would produce an annualized return on average net worth equal to the Ten-Year
US Treasury Rate plus 1%, or the Threshold Return.



The 2002
Incentive Compensation Plan contains a high water mark provision requiring that in any fiscal quarter in which our taxable net income is an amount less than the amount necessary to earn the Threshold Return, we will calculate negative
incentive compensation for that fiscal quarter which will be carried forward and will offset future incentive compensation earned under the plan, but only with respect to those participants who were participants during the fiscal quarter(s) in which
negative incentive compensation was generated.



The percentage
of taxable net income in excess of the Threshold Return earned under the plan by all employees is calculated based on our quarterly average net worth as defined in the Incentive Compensation 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;
| | - |  | --------------------------------------------------------------------



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



The 2002 Incentive Compensation 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. For the quarter ended March 31, 2005, eligible employees under the 2002 Incentive
Compensation Plan earned $0.6 million in incentive compensation. For the quarter ended March 31, 2004, eligible employees under the 2002 Incentive Compensation Plan earned $1.1 million in incentive compensation.



Employment Agreements



Pursuant to the terms of employment agreements with us, Lloyd McAdams serves
as our President, Chairman and Chief Executive Officer, Joseph E. McAdams serves as our Chief Investment Officer and Executive Vice President, and Heather U. Baines serves as our Executive Vice President. Pursuant to the terms of an addendum to his
original employment agreement, Lloyd McAdams receives a base salary of $600,000 per annum. Pursuant to the terms of an addendum to his original employment agreement, Joseph McAdams receives a base salary equal to $400,000 per annum. Heather U.
Baines receives a $50,000 annual base salary. The terms of



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the employment agreements are for three years following June 13, 2002 and automatically renew for one-year terms 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 our 2002 Incentive Compensation 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 our common stock;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the incentive compensation plan may not be amended without the consent of the three executives;
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | in the event of a registered public offering of our shares, the three executives are entitled to piggyback registration rights in connection with such offering;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
McAdams, their employment agreements are not renewed, then the executives would be entitled to (1) all base salary due under the contracts, (2) all discretionary bonus due under the contracts, (3) a lump sum payment of an amount equal to three years
of the executives then-current base salary, (4) payment of COBRA medical coverage for eighteen months, (5) immediate vesting of all pension benefits, (6) all incentive compensation to which the executives would have been entitled to under the
contract 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 McAdams would each be entitled to
a lump sum payment equal to 150% of the greater of (i) the highest amount paid or payable to all employees under the 2002 Incentive Compensation Plan during any one of the three fiscal years prior to their termination, and (ii) the highest amount
paid, or that would be payable, 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 three executives received restricted stock grants of 20,000 shares each, which grants vest in equal, annual installments over ten years beginning June 13, 2002; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the three executives are each subject to a one-year non-competition provision following termination of their employment.
| | - |  | ------------------------------------------------------------------------------------------------------------------------



At March 31, 2005, the value of the 48,000 unvested shares of restricted
stock issued to the above executives is reflected on our consolidated balance sheets as a reduction to stockholders equity. This amount is being amortized to expense over the ten-year restricted period until such shares vest and is accounted
for as unearned restricted stock.



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 a trust controlled by certain of our officers. Under the sublease, we lease 5,500 square feet of office space from PIA and pay at a rate equal to PIAs obligation,
currently $46.72 per square foot. The sublease runs through June 30, 2012 unless earlier terminated pursuant to the master lease. During the three months ended March 31, 2005, we paid $64,235 in rent to PIA under the sublease which is included in
Other expenses on the consolidated statements of income. During the three months ended March 31, 2004, we paid $62,363 in rent to PIA under the sublease which is included in Other expenses on the consolidated statements of
income.



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



|                  |  |      |         |      |   |         |  |            |         |                 |   |           |  |   |          
|----------------- |  | ---- | ------- | ---- | - | ------- |  | ---------- | ------- | --------------- | - | --------- |  | - | ---------
|Year              |  | 2005 |         | 2006 |   | 2007    |  | Thereafter |         | TotalCommitment
|Commitment Amount |  | $    | 196,557 |      | $ | 268,611 |  | $          | 276,669 |                 | $ | 1,350,238 |  | $ | 2,092,075



On October 14, 2002,
we entered into an administrative agreement with PIA. Under the administrative agreement, PIA provides administrative services and equipment to us in the nature of accounting, 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 and 3.5 basis points thereafter (paid quarterly in advance) for those services. The administrative 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 at least 90 days before the expiration of the then-current annual term. We may also terminate the administrative agreement upon 30 days 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 $63,867 paid to PIA in



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connection with this agreement during the three months ended March 31, 2005. During the three months ended March 31, 2004, fees of $59,710 were paid to PIA
in connection with this agreement.



Belvedere Trust Mortgage
Corporation



On November 3, 2003, we formed our
wholly-owned subsidiary called Belvedere Trust Mortgage Corporation, or Belvedere Trust. Belvedere Trust was formed to acquire, own and securitize mortgage loans, with a focus on the high credit-quality jumbo adjustable-rate, hybrid and second-lien
mortgage markets. Belvedere Trust acquires mortgage loans, securitizes a substantial amount of these mortgage loans and then retains a portion of those mortgage-backed securities, while pledging the balance to third parties in the secondary market.
The mortgage-backed securities it retains are purchased by one of our qualified REIT subsidiaries to maximize tax efficiency on the interest income on those securities. Belvedere Trust was formed as a qualified REIT subsidiary, but it structures
securitizations through taxable REIT subsidiaries (which generally are taxed as C corporations subject to full corporate taxation), which in turn establish special purpose entities that issue securities through real estate mortgage investment
conduit, or REMIC, trusts. Since its formation, Belvedere Trust has become an increasingly important part of our overall operations and, at March 31, 2005, Belvedere Trusts assets comprised 38% of our overall assets. As of March 31, 2005, we
had made an investment of approximately $96 million in Belvedere Trust to capitalize its mortgage operations.



On November 3, 2003, we also formed BT Management Company, L.L.C., or BT Management, a Delaware limited liability company that is owned 50% by us, 27.5%
by Claus Lund, the Chief Executive Officer of Belvedere Trust, 17.5% by Russell J. Thompson, the Chief Financial Officer of Belvedere Trust, and 5% by Lloyd McAdams, our Chairman and Chief Executive Officer. BT Management has entered into a
management agreement with Belvedere Trust pursuant to which BT Management will manage the day-to-day operations of Belvedere Trust in exchange for an annual base management fee and a quarterly incentive fee. The annual base management fee is equal
to 1.15% of the first $300 million of average net invested assets (as defined in the management agreement), plus 0.85% of the portion above $300 million. The incentive fee for each fiscal quarter is equal to 20% of the amount of net income of
Belvedere Trust, before incentive compensation, for such quarter in excess of the amount that would produce an annualized return on equity (calculated by multiplying the return on equity for such fiscal quarter by four) equal to the Ten-Year U.S.
Treasury Rate for such fiscal quarter plus 1%.



The management
agreement requires that Belvedere Trust pay all amounts earned thereunder each quarter (subject to offset for accrued negative incentive compensation). For the three months ended March 31, 2005, Belvedere Trust paid BT Management incentive
compensation of $491,000. For the three months ended March 31, 2004, Belvedere Trust did not pay BT Management any incentive compensation and carried forward a negative incentive accrual of $58,000.



Certain of our executive officers serve as officers and directors of
Belvedere Trust and officers and managers of BT Management (and certain of our employees are also employees of BT Management). Our employees who are also employed by BT Management may receive compensation from BT Management in the form of salary,
employee benefits and incentive compensation. The compensation of all BT Management employees is the responsibility of the BT Management board of directors. However, compensation paid by BT Management to our executive officers who also serve as
officers, managers or employees of BT Management is subject to approval of the compensation committee of Anworths board of directors.



BT Management has also entered into employment agreements with Messrs. Lund and Thompson whereby Mr. Lund serves as the President of BT Management and Mr.
Thompson serves as Executive Vice President and Treasurer of BT Management. The employment agreements are for a term of three years and automatically renew for one-year terms unless written notice is provided by either party ninety days prior to the
end of the current term.



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 $1,000,000 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 $1,000,000 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 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



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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 plan.



|NOTE 11. | STOCK OPTION PLAN
|-------- | -----------------



At our May 27, 2004 annual stockholders meeting, our stockholders adopted the Anworth Mortgage Asset Corporation 2004 Equity Compensation Plan, or
the Stock Option Plan, which amended and restated our 1997 Stock Option and Awards Plan. The Stock Option Plan authorized the grant of stock options and other stock-based awards, as of March 31, 2005, for an aggregate of up to 3,500,000 of the
outstanding shares of our common stock. The plan authorizes our board of directors, or a committee of our board, to grant incentive stock options, as defined under section 422 of the Internal Revenue Code of 1986, as amended, options not so
qualified, restricted stock, dividend equivalent rights (DERs), phantom shares, stock-based awards that qualify as performance-based awards under Section 162(m) of the Internal Revenue Code, and other stock-based awards. The exercise price for any
option granted under the Stock Option 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. As of March 31, 2005, 1,639,804 shares remained available for future issuance under the
Stock Option Plan through any combination of stock options or other awards. The Stock Option Plan does not provide for automatic annual increases in the aggregate share reserve or the number of shares remaining available for grant.



|NOTE 12. | HEDGING INSTRUMENTS
|-------- | -------------------



At March 31, 2005, we were a counter-party to swap agreements, which are derivative instruments as defined by FASB 133 and FASB 138, with an aggregate
notional amount of $400 million and an average maturity of 3.4 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 will pay a fixed rate of interest during the term of the swap agreements and receive a payment that varies with the three-month LIBOR rate.



At March 31, 2005, there was an increase in unrealized gains of $6.7 million from $4.1 million at December 31, 2004 to $10.8 million on our swap
agreements included in Other comprehensive income (this increase consisted of unrealized gains on cash flow hedges of $5.8 million and a reclassification adjustment for interest expense included in net income of $0.9 million) and shown
as Derivative instruments at fair value on the consolidated balance sheets as an asset of $11.3 million and a liability of $0.5 million.



For the three months ending March 31, 2005, there was no gain or loss recognized in earnings due to hedge ineffectiveness. 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 4.3 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.



To mitigate
the impact of rising interest rates on the consummation of forward loan purchase commitments in connection with planned securitization funding, Belvedere Trust may enter into Eurodollar transactions. There is usually a time difference between the
date we enter into an agreement to purchase whole loans and the date on which we fix the interest rates paid for securitization financing. We are exposed to interest rate fluctuations during this period. In order to mitigate this risk, we hedge our
position using Eurodollar futures. Once the financing rates on the securitization are fixed, we remove the hedge positions. We do not designate the Eurodollar futures for hedge accounting.



For the three months ended March 31, 2005, there were no recognized gains or
recognized losses incurred on Eurodollar transactions. Belvedere Trust recognized losses, net of recognized gains, of $0 and $203,000 on Eurodollar futures during the quarters ended March 31, 2005 and March 31, 2004, respectively.



As of March 31, 2005, we did not have any positions outstanding on Eurodollar
futures transactions. It is possible that Belvedere Trust may enter into Eurodollar futures transactions within the next twelve months. As the transactions are short term, there may be either gain or loss recognized into earnings but we can not
anticipate the amount that would be recognized within the next twelve months at this time.



As of March 31, 2005, the Company had entered into approximately $300 million in forward loan purchase commitments for which the market value had not significantly fluctuated from the inception of the commitment to
March 31, 2005. These forward loan purchase commitments did not experience significant fluctuations in value during the periods for which the commitments were open.



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|NOTE 13. | COMMITMENTS AND CONTINGENCIES
|-------- | -----------------------------



| | (a) | Lease Commitment and Administrative Services CommitmentThe Company subleases office space and uses administrative services from PIA as more fully described in Note 10.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (b) | We sublease 2,305 square feet of office space for our Belvedere operations from an independent third party. The sublease commenced March 1, 2005 and ends on July 31, 2008. The
future minimum lease commitment (in whole dollars) is as follows:
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                  |  |      |        |      |   |        |  |            |        |                 |   |        |  |   |        
|----------------- |  | ---- | ------ | ---- | - | ------ |  | ---------- | ------ | --------------- | - | ------ |  | - | -------
|Year              |  | 2005 |        | 2006 |   | 2007   |  | Thereafter |        | TotalCommitment
|Commitment Amount |  | $    | 48,405 |      | $ | 64,540 |  | $          | 64,540 |                 | $ | 37,648 |  | $ | 215,133



|(c) | Loan Purchase CommitmentAs of March 31, 2005, Belvedere Trust has entered into commitments to purchase mortgage loans in the amount of $300 million.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------



|NOTE 14. | OTHER EXPENSE
|-------- | -------------



|                                        |  |                             |       |      |   |    
|--------------------------------------- |  | --------------------------- | ----- | ---- | - | ---
|                                        |  | Three Months EndedMarch 31,
|                                        |  | 2005                        |       | 2004
|                                        |  | (in thousands)             
|Legal and accounting fees               |  | $                           | 254   |      | $ | 148
|Fees related to loan acquisitions       |  |                             | 182   |      |   | 100
|Printing and stockholder communications |  |                             | 38    |      |   | 1  
|D&O insurance                           |  |                             | 84    |      |   | 89 
|Software and implementation             |  |                             | 85    |      |   | 55 
|Administrative service fees             |  |                             | 58    |      |   | 61 
|Rent                                    |  |                             | 75    |      |   | 69 
|Stock exchange and filing fees          |  |                             | 59    |      |   | 37 
|Custodian fees                          |  |                             | 32    |      |   | 22 
|Sarbanes-Oxley consulting fees          |  |                             | 79    |      |   | 15 
|Other                                   |  |                             | 167   |      |   | 269
|                                        |  |                             |       |      |   |    
|Total of Other Expense                  |  | $                           | 1,113 |      | $ | 866
|                                        |  |                             |       |      |   |    



|NOTE 15. | SUBSEQUENT EVENTS
|-------- | -----------------



On April 6, 2005, we declared a common stock dividend of $0.27 per share which is payable on May 17, 2005 to our common stockholders of record as of the
close of business on April 29, 2005.



On April 11, 2005, the
SEC declared effective a shelf registration statement on Form S-3 filed by Belvedere Trusts wholly-owned direct and indirect subsidiaries, BellaVista Finance Corporation and BellaVista Funding Corporation, as co-registrants. This registration
statement registered for sale to the public up to $4 billion in asset-backed securities.



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ANWORTH MORTGAGE ASSET
CORPORATION



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



Cautionary Statement



You should read the following discussion and analysis in conjunction with the financial statements and related notes thereto contained elsewhere in this
report. 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 common stock. We urge you to carefully review and consider the various
disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, or SEC, including our Annual Report on Form 10-K for the year ended December 31, 2004 and our Registration Statement on Form S-3 filed
with the SEC on May 11, 2004, that discuss our business in greater detail.



This Report contains forward-looking statements. 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 known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. These forward-looking statements are subject to
assumptions that are difficult to predict and to various risks and uncertainties. Therefore, our actual results could differ materially and adversely from those expressed in any forward-looking statements as a result of various factors, some of
which are listed under the section Risk Factors. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.



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



General



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



We are organized for tax purposes as a REIT. Accordingly, we generally distribute substantially all of our earnings to
stockholders without paying federal or state income tax at the corporate level on the distributed earnings. As of March 31, 2005, our qualified REIT assets (real estate assets, as defined in the tax code, cash and cash items and government
securities) were greater than 90% of our total assets, as compared to the tax code requirement that at least 75% of our total assets must be qualified REIT assets. Greater than 99% of our 2004 revenue qualifies for both the 75% source of income test
and the 95% source of income test under the REIT rules. We believe we met all REIT requirements regarding the ownership of our common stock and the distributions of our net income. Therefore, we believe that we continue to qualify as a REIT under
the provisions of the tax code.



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



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



On November 3, 2003, we formed a wholly-owned subsidiary called Belvedere
Trust Mortgage Corporation, or Belvedere Trust. Belvedere Trust was formed to acquire, own and securitize mortgage loans, with a focus on the high credit-quality jumbo adjustable-rate, hybrid and second-lien mortgage markets. Belvedere Trust
acquires mortgage loans, securitizes a substantial amount of those mortgage loans and then retains a portion of those mortgage-backed securities, while selling the balance to third parties in the secondary market. The mortgage-backed securities that
are retained (classified on our consolidated balance sheets as Residential real



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estate loans) are purchased by a qualified REIT subsidiary to maximize tax efficiency on the interest income on those securities. Belvedere Trust was
formed as a qualified REIT subsidiary, but it structures securitizations through taxable REIT subsidiaries (which generally are taxed as C corporations subject to full corporate taxation), which in turn establish special purpose entities, or SPE,
that issue securities through real estate mortgage investment conduit, or REMIC, trusts. Since its formation, Belvedere Trust has become an increasingly important part of our overall operations and, as of March 31, 2005, Belvedere Trusts
assets comprised 38% of our overall assets. Through March 31, 2005, we had made an investment of approximately $96 million in Belvedere Trust to capitalize its mortgage operations.



In January 2003, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No. 46, Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). In December 2003, FASB issued FIN No. 46R which replaced FIN 46 and clarified ARB 51. This interpretation provides guidance on how to identify a variable interest entity,
or VIE, and when a company should include in its financial statements the assets, liabilities and activities of a VIE. Under FIN 46, a company must consolidate a VIE when it is considered to be its primary beneficiary. The primary beneficiary is the
entity that will absorb a majority (50% or more) of the risk of expected losses and/or receive most of the expected residual benefit from taking on that risk. We disclose our interests in VIEs under FIN 46 in the Investments in Residential
Real Estate Loans footnote to the accompanying consolidated financial statements.



We acquire residential mortgage loans from third party originators, including banks and other mortgage lenders, through our Belvedere Trust subsidiary. During the year ended December 31, 2004, Belvedere Trust
transferred approximately $2.4 billion of residential mortgage loans in six separate transactions to securitization trusts pursuant to pooling and third party servicing agreements. Five of the six securitization transactions in 2004 totaling
approximately $2.1 billion utilized non-qualified SPEs requiring consolidation, which effectively resulted in the transactions being accounted for as financings. During the first quarter ending March 31, 2005, Belvedere Trust transferred
approximately $0.9 billion of residential mortgage loans to a securitization trust pursuant to a pooling and third party service agreement. This transaction utilized non-qualified SPEs requiring consolidation, which effectively resulted in the
transaction being accounted for as a financing. The residential real estate loans remain as assets on our consolidated balance sheets subsequent to securitization, and the financing resulting from these securitizations is shown on our consolidated
balance sheets as Mortgage-backed securities issued. The servicing of the mortgage loans is performed by third parties under servicing arrangements that resulted in no servicing asset or liability. Since its formation, Belvedere Trust
has securitized approximately $3.3 billion of mortgage loans.



During the three months ended March 31, 2004, we transferred approximately $253 million of residential mortgage loans to a securitization trust pursuant to a pooling and third party servicing agreement dated as of February 1, 2004. The
transaction was accounted for as a sale. The net proceeds of the sale were used primarily to pay off a warehouse line of credit. The retained securities are carried at amortized cost, adjusted for fair market valuation based on quoted market prices.
As these securities include first loss security, we bear the credit risk associated with these mortgages. The principal balance outstanding, at March 31, 2005, of all the securities from this transaction was $161 million; the amount of assets
derecognized was $120 million and the amount recognized as our retained securities was $41 million. As of March 31, 2005, the delinquent amount of all the principal balances from this transaction was $2 million and there have been no credit losses
to date.



Belvedere Trust is externally managed by BT
Management Company, L.L.C., or BT Management, a Delaware limited liability company that is owned 50% by Anworth and 50% by the executive officers of Belvedere Trust. BT Management manages Belvedere Trust through a management agreement with Belvedere
Trust pursuant to which BT Management manages the day-to-day operations of Belvedere Trust in exchange for an annual base management fee and a quarterly incentive fee.



Belvedere Trust, through taxable REIT subsidiaries, acquires mortgage loans from various suppliers of mortgage-related
assets throughout the United States, including savings and loan associations, banks, mortgage bankers and other mortgage lenders. Belvedere Trust may acquire mortgage loans directly from originators and from entities holding mortgage loans
originated by others. Belvedere Trust has built relationships with and continues to expand upon a diversified network of mortgage loan originators. Belvedere Trusts loan sourcing efforts determine the quality, consistency and volume of loans
that it purchases. Belvedere Trust targets the types and attributes of the mortgage loans it seeks to acquire and holds these mortgage loans until a sufficient quantity has been accumulated for securitization into high-quality mortgage-backed
securities.



At March 31, 2005, we had total assets of $7.8
billion. Our portfolio consisted of $4.8 billion of agency mortgage-backed securities allocated as follows: 31% agency adjustable-rate mortgage-backed securities, 64% agency hybrid adjustable-rate mortgage-backed securities, 4% agency fixed-rate
mortgage-backed securities and less than 1% agency floating-rate CMOs. Our non-agency mortgage-backed securities held at March 31, 2005 were approximately $59 million, mostly retained from our first whole loan securitization. Mortgage loans held for
securitization at March 31, 2005 were $12 million and securitized mortgage loans were $2.87 billion. As of March 31, 2005, Belvedere Trusts assets comprised 38% of our overall assets, or approximately $2.9 billion in mortgage-related assets.
Our total equity at March 31, 2005 was $527 million. Common stockholders equity was approximately $483 million, or $10.25 per share. For the three months ended March 31, 2005, we reported net income of $14.5 million, or $0.29 per diluted share
available to common stockholders.



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##### Table of Contents

Results of Operations



Three Months Ended March 31, 2005 Compared to March 31, 2004



For the three months ended March 31, 2005, our net income was $14,482,000, or $0.29 per diluted share available to common
stockholders, based on an average of 46,876,000 shares outstanding. For the three months ended March 31, 2004, our net income was $17,873,000, or $0.41 per diluted share available to common stockholders, based on an average of 25,926,000 shares
outstanding.



Net interest income for the three months ended
March 31, 2005 totaled $17,677,000 or 27% of total interest income, compared to $20,306,000, or 58% of total interest income, for the three months ended March 31, 2004. Net interest income is comprised of the interest income earned on mortgage
investments net of premium and discount amortization less interest expense from borrowings. Interest income net of premium amortization expense for the three months ended March 31, 2005 was $66,440,000, compared to $35,246,000 for the three months
ended March 31, 2004, an increase of 89%. Interest expense for the three months ended March 31, 2005 was $48,763,000, compared to $14,940,000 for the three months ended March 31, 2004, an increase of 226%. As a result of investing the proceeds of
our common and preferred stock offerings, our assets and borrowings and the related interest income and interest expense have increased significantly during the year. Although the amortized cost of Anworths agency mortgage-backed securities
increased by 5%, from $4.6 billion to $4.8 billion, the large increase in our mortgage-related assets and borrowings was due to the growth of Belvedere Trust, our wholly-owned subsidiary. Belvedere Trust, which was formed in November 2003, now
represents approximately 38% of our total assets. The larger percentage increase in interest expense was due primarily to the increase in interest rates during the year.



Premium amortization expense for Anworths agency securities decreased $50,000, or 0.5%, from $9,200,000 to $9,150,000,
and premium amortization expense on Belvedere Trusts assets was $3,183,000 during the three months ended March 31, 2005, compared to $223,000 for the three months ended March 31, 2004, due to the increase in Belvedere Trusts assets.



The table below shows the approximate constant prepayment rate
of our agency mortgage-backed securities:



|     |  |              |  
|---- |  | ------------ | -
|     |  | FirstQuarter |  
|2005 |  | 27           | %
|2004 |  | 27           | %



During the three
months ended March 31, 2005, we did not sell any securities, compared to a gain on sale of securities of $157,000, or 0.4% of total interest income, during the three months ended March 31, 2004. During the three months ended March 31, 2005, we did
not have any recognized gain or loss on derivative instruments compared to a realized net loss on derivative instruments of $203,000, or 0.6% of total interest income, during the three months ended March 31, 2004.



Total expenses were $3,059,000 for the three months ended March 31, 2005,
compared to $2,387,000 for the three months ended March 31, 2004. The increase of $672,000 in total expenses was due primarily to an increase in compensation and benefit expenses of $481,000 (due primarily to staffing at Belvedere Trust and an
increase in salaries at the Company), an increase in the provision for loan losses of $297,000 (relating to the residential real estate loans at Belvedere Trust) and an increase in other expense of $247,000, partially offset by a decrease in
incentive compensation expense of $353,000. Other expenses for the three months ended March 31, 2005 were $1,113,000, compared to $866,000 for the three months ended March 31, 2004. This increase was due primarily to an increase in legal and
accounting fees of $106,000 (due primarily to increased accounting and audit fees relating to Sarbanes-Oxley and the addition of Belvedere Trust), an increase in fees relating to residential real estate loan acquisitions and securitizations
(Belvedere Trust) of $82,000, an increase in software and implementation costs of $30,000 (due primarily to the demands of Sarbanes-Oxley regulations), an increase in Sarbanes-Oxley consulting fees of $64,000 and a net decrease in other costs of
$35,000 (due primarily to Belvedere Trust).



Financial Condition



At March 31, 2005, we held agency mortgage assets whose
amortized cost was approximately $4.8 billion, consisting primarily of $4.6 billion of adjustable-rate mortgage-backed securities, $17 million of floating rate CMOs and $195 million of fixed-rate mortgage-backed securities. This amount represents an
approximate 5% increase from the $4.6 billion held at December 31, 2004. Of the adjustable-rate agency mortgage-backed securities owned by us, 33% were adjustable-rate pass-through certificates whose coupons reset within one year. The remaining 67%
consisted of hybrid adjustable-rate mortgage-backed securities whose coupons will reset between one year and five years. Hybrid adjustable-rate mortgage-backed securities 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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##### Table of Contents

Agency Securities



The following table presents a schedule of agency mortgage-backed securities at fair value owned at March 31, 2005 and
December 31, 2004, classified by type of issuer (dollar amounts in thousands):



|                                        |  |                   |           |                     |                      |       |            |  |                     |           |  |       |  
|--------------------------------------- |  | ----------------- | --------- | ------------------- | -------------------- | ----- | ---------- |  | ------------------- | --------- |  | ----- | -
|                                        |  | At March 31, 2005 |           |                     | At December 31, 2004 |      
|Agency                                  |  | Fair Value        |           | PortfolioPercentage |                      |       | Fair Value |  | PortfolioPercentage |          
|Fannie Mae (FNM)                        |  | $                 | 3,344,805 |                     | $                    | 70.0  | %          |  | $                   | 3,301,406 |  | 72.0  | %
|Freddie Mac (FHLMC)                     |  |                   | 1,318,618 |                     |                      | 27.6  | %          |  |                     | 1,157,910 |  | 25.2  | %
|Ginnie Mae (GNMA)                       |  |                   | 118,549   |                     |                      | 2.4   | %          |  |                     | 129,225   |  | 2.8   | %
|                                        |  |                   |           |                     |                      |       |            |  |                     |           |  |       |  
|Total agency mortgage-backed securities |  | $                 | 4,781,972 |                     | $                    | 100.0 | %          |  | $                   | 4,588,541 |  | 100.0 | %
|                                        |  |                   |           |                     |                      |       |            |  |                     |           |  |       |  



The following table
classifies our portfolio of agency mortgage-backed securities owned at March 31, 2005 and December 31, 2004, by type of interest rate index (dollar amounts in thousands):



|                                        |  |                   |           |                     |                      |   |            |   |                     |  |       |  
|--------------------------------------- |  | ----------------- | --------- | ------------------- | -------------------- | - | ---------- | - | ------------------- |  | ----- | -
|                                        |  | At March 31, 2005 |           |                     | At December 31, 2004 |  
|Index                                   |  | Fair Value        |           | PortfolioPercentage |                      |   | Fair Value |   | PortfolioPercentage | 
|One-month LIBOR                         |  | $                 | 17,072    |                     | 0.4                  | % |            | $ | 18,584              |  | 0.4   | %
|Six-month LIBOR                         |  |                   | 16,850    |                     | 0.3                  | % |            |   | 20,008              |  | 0.5   | %
|One-year LIBOR                          |  |                   | 2,546,942 |                     | 53.3                 | % |            |   | 2,251,782           |  | 49.1  | %
|Six-month Certificate of Deposit        |  |                   | 5,807     |                     | 0.1                  | % |            |   | 6,402               |  | 0.1   | %
|Six-month Constant Maturity Treasury    |  |                   | 1,586     |                     | 0                    | % |            |   | 1,648               |  | 0     | %
|One-year Constant Maturity Treasury     |  |                   | 1,927,045 |                     | 40.3                 | % |            |   | 2,006,235           |  | 43.7  | %
|Cost of Funds Index                     |  |                   | 77,462    |                     | 1.6                  | % |            |   | 82,367              |  | 1.8   | %
|Fixed-Rate                              |  |                   | 189,208   |                     | 4.0                  | % |            |   | 201,515             |  | 4.4   | %
|                                        |  |                   |           |                     |                      |   |            |   |                     |  |       |  
|Total agency mortgage-backed securities |  | $                 | 4,781,972 |                     | 100.0                | % |            | $ | 4,588,541           |  | 100.0 | %
|                                        |  |                   |           |                     |                      |   |            |   |                     |  |       |  



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



Our total agency portfolio had a weighted average coupon of 4.33% at March 31, 2005. The average coupon of the adjustable-rate securities was 4.13%, the hybrid average coupon was 4.38%, the CMO floaters average coupon
was 3.62% and the average coupon of the fixed-rate securities was 5.12%. At December 31, 2004, our total agency portfolio had a weighted average coupon of 4.28%. The average coupon of the adjustable-rate securities was 4.13%, the hybrid average
coupon was 4.30%, the CMO floaters average coupon was 3.22% and the average coupon of the fixed-rate securities was 5.12%.



At March 31, 2005, the unamortized net premium paid for our agency mortgage-backed securities was $107 million. At December 31, 2004, the unamortized net
premium paid for our mortgage-backed securities was $111 million.



We analyze our mortgage-backed securities and the extent to which prepayments impact the yield of the securities. When the rate of prepayments exceeds expectations, we amortize the premiums paid on mortgage assets over a shorter time
period, resulting in a reduced yield to maturity on our mortgage assets. Conversely, if actual prepayments are less than the assumed constant prepayment rate, the premium would be amortized over a longer time period, resulting in a higher yield to
maturity.



At March 31, 2005, the average amortized cost of our
agency mortgage-related assets was 102.3%, the average amortized cost of the adjustable-rate securities was 102.2% and the average amortized cost of the fixed-rate securities was 102.9%. Relative to our agency MBS portfolio, at March 31, 2005, the
average interest rate on outstanding repurchase agreements was 2.61% and the average days to maturity was 144 days. After adjusting for interest rate swap transactions, the average interest rate on outstanding repurchase agreements was 2.66% and the
weighted average term to next rate adjustment was 252 days.



At
December 31, 2004, the average amortized cost of our agency mortgage-related assets was 102.5%, the average amortized cost of the adjustable-rate securities was 102.5% and the average amortized cost of the fixed-rate securities was 102.9%. Relative
to our agency MBS portfolio, at December 31, 2004, the average interest rate on outstanding repurchase agreements was 2.25% and the average days to maturity was 184 days. After adjusting for interest rate swap transactions, the average interest rate
on outstanding repurchase agreements was 2.34% and the weighted average term to next rate adjustment was 304 days.



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##### Table of Contents

Residential Real Estate Loans (Belvedere Trust)



Residential real estate loans held for securitization and held in
securitization trusts are reflected in the financial statements at their amortized cost. At March 31, 2005 and December 31, 2004, residential real estate loans consisted of the following (in thousands):



March 31, 2005



|                                 |  |                                                   |        |                                          |   |                                   |  |   |          
|-------------------------------- |  | ------------------------------------------------- | ------ | ---------------------------------------- | - | --------------------------------- |  | - | ---------
|Residential Real Estate Loans    |  | ResidentialReal EstateLoans PendingSecuritization |        | Residential RealEstate Loans,Securitized |   | Total ResidentialReal EstateLoans
|Principal balance                |  | $                                                 | 11,922 |                                          | $ | 2,813,224                         |  | $ | 2,825,146
|Unamortized premium and expenses |  |                                                   | 148    |                                          |   | 54,289                            |  |   | 54,437   
|                                 |  |                                                   |        |                                          |   |                                   |  |   |          
|Carrying value                   |  | $                                                 | 12,070 |                                          | $ | 2,867,513                         |  | $ | 2,879,583
|                                 |  |                                                   |        |                                          |   |                                   |  |   |          



December 31, 2004



|                                 |  |                                                   |         |                                          |   |                                   |  |   |          
|-------------------------------- |  | ------------------------------------------------- | ------- | ---------------------------------------- | - | --------------------------------- |  | - | ---------
|Residential Real Estate Loans    |  | ResidentialReal EstateLoans PendingSecuritization |         | Residential RealEstate Loans,Securitized |   | Total ResidentialReal EstateLoans
|Principal balance                |  | $                                                 | 566,748 |                                          | $ | 2,015,175                         |  | $ | 2,581,923
|Unamortized premium and expenses |  |                                                   | 11,184  |                                          |   | 35,227                            |  |   | 46,411   
|                                 |  |                                                   |         |                                          |   |                                   |  |   |          
|Carrying value                   |  | $                                                 | 577,932 |                                          | $ | 2,050,402                         |  | $ | 2,628,334
|                                 |  |                                                   |         |                                          |   |                                   |  |   |          



As of March 31, 2005,
residential real estate loans consisted of the following (in thousands):



|                                                        |  |                           |  |                 |  |               |  |                  |           |                            |   |                             |  |   |      
|------------------------------------------------------- |  | ------------------------- |  | --------------- |  | ------------- |  | ---------------- | --------- | -------------------------- | - | --------------------------- |  | - | -----
|Loan Description                                        |  | Interest RateType         |  | Interest Rate   |  | Maturity Date |  | PrincipalBalance |           | DelinquentBalance(30 Days) |   | DelinquentBalance(60+ Days)
|First Lien Adjustable-RateResidential Real Estate Loans |  | MovingTreasuryAverage ARM |  | 0.990%  6.375% |  | 2032 2045    |  | $                | 784,045   |                            | $ | 1,647                       |  | $ | 1,527
|First Lien Adjustable-RateResidential Real Estate Loans |  | 1-Month ARM               |  | 3.625%  6.250% |  | 2034          |  |                  | 152,784   |                            |   | 5,785                       |  |   |     
|First Lien Adjustable-RateResidential Real Estate Loans |  | 6-Month ARM               |  | 3.375%  6.250% |  | 2033 2035    |  |                  | 570,249   |                            |   | 10,303                      |  |   | 697  
|First Lien Adjustable-RateResidential Real Estate Loans |  | 1-Year ARM                |  | 3.625%  7.125% |  | 2033 2034    |  |                  | 7,561     |                            |   | 162                         |  |   |     
|First Lien Adjustable-RateResidential Real Estate Loans |  | 3-Year Hybrid             |  | 2.875%  7.000% |  | 2033 2035    |  |                  | 343,183   |                            |   | 4,325                       |  |   | 161  
|First Lien Adjustable-RateResidential Real Estate Loans |  | 5-Year Hybrid             |  | 3.375%  7.000% |  | 2033 2035    |  |                  | 741,092   |                            |   | 7,690                       |  |   | 1,707
|First Lien Adjustable-RateResidential Real Estate Loans |  | 7-Year Hybrid             |  | 3.750%  6.625% |  | 2033  2035   |  |                  | 203,080   |                            |   | 1,529                       |  |   |     
|First Lien Adjustable-RateResidential Real Estate Loans |  | 10-Year Hybrid            |  | 4.500%  6.750% |  | 2034 2035    |  |                  | 23,152    |                            |   |                            |  |   |     
|                                                        |  |                           |  |                 |  |               |  |                  |           |                            |   |                             |  |   |      
|                                                        |  |                           |  |                 |  |               |  | $                | 2,825,146 |                            | $ | 31,441                      |  | $ | 4,092
|                                                        |  |                           |  |                 |  |               |  |                  |           |                            |   |                             |  |   |      



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##### Table of Contents

At December 31, 2004, residential real estate loans consisted of the following (in thousands):



|                                                         |  |                           |  |                 |  |               |  |                  |           |                            |   |                             |  |   |      
|-------------------------------------------------------- |  | ------------------------- |  | --------------- |  | ------------- |  | ---------------- | --------- | -------------------------- | - | --------------------------- |  | - | -----
|Loan Description                                         |  | Interest RateType         |  | Interest Rate   |  | Maturity Date |  | PrincipalBalance |           | DelinquentBalance(30 Days) |   | DelinquentBalance(60+ Days)
|First Lien Adjustable-Rate Residential Real Estate Loans |  | MovingTreasuryAverage ARM |  | 1.000%  6.000% |  | 2034  2035   |  | $                | 492,003   |                            | $ |                            |  | $ |     
|First Lien Adjustable-Rate Residential Real Estate Loans |  | 1-Month ARM               |  | 1.000%  5.750% |  | 2034          |  |                  | 153,546   |                            |   |                            |  |   |     
|First Lien Adjustable-Rate Residential Real Estate Loans |  | 6-Month ARM               |  | 2.250%  6.750% |  | 2033  2035   |  |                  | 549,270   |                            |   | 1,939                       |  |   |     
|First Lien Adjustable-Rate Residential Real Estate Loans |  | 1-Year ARM                |  | 3.625%  7.125% |  | 2033  2034   |  |                  | 8,600     |                            |   |                            |  |   |     
|First Lien Adjustable-Rate Residential Real Estate Loans |  | 3-Year Hybrid             |  | 2.875%  7.000% |  | 2033  2035   |  |                  | 359,181   |                            |   | 3,838                       |  |   | 110  
|First Lien Adjustable-Rate Residential Real Estate Loans |  | 5-Year Hybrid             |  | 3.375%  7.125% |  | 2033  2035   |  |                  | 777,493   |                            |   | 5,406                       |  |   | 350  
|First Lien Adjustable-Rate Residential Real Estate Loans |  | 7-Year Hybrid             |  | 3.750%  6.625% |  | 2033  2035   |  |                  | 217,700   |                            |   | 1,219                       |  |   | 754  
|First Lien Adjustable-Rate Residential Real Estate Loans |  | 10-Year Hybrid            |  | 4.500%  6.750% |  | 2034  2035   |  |                  | 24,130    |                            |   |                            |  |   |     
|                                                         |  |                           |  |                 |  |               |  |                  |           |                            |   |                             |  |   |      
|                                                         |  |                           |  |                 |  |               |  | $                | 2,581,923 |                            | $ | 12,402                      |  | $ | 1,214
|                                                         |  |                           |  |                 |  |               |  |                  |           |                            |   |                             |  |   |      



As of March 31, 2005
and December 31, 2004, the residential real estate loans consisted of the following (in thousands):



|                                   |  |                |  |                   |           |                 |       |                  |   |          
|---------------------------------- |  | -------------- |  | ----------------- | --------- | --------------- | ----- | ---------------- | - | ---------
|                                   |  | March 31, 2005 |  | December 31, 2004
|Range of Carrying Amounts of Loans |  | Number ofLoans |  | PrincipalBalance  |           | Number of Loans |       | PrincipalBalance
|$0$99                             |  | 331            |  | $                 | 18,601    |                 | 261   |                  | $ | 16,976   
|$100$149                          |  | 774            |  |                   | 97,254    |                 | 779   |                  |   | 97,545   
|$150$199                          |  | 763            |  |                   | 132,853   |                 | 760   |                  |   | 131,914  
|$200$249                          |  | 712            |  |                   | 159,492   |                 | 719   |                  |   | 160,615  
|$250$299                          |  | 594            |  |                   | 162,677   |                 | 585   |                  |   | 159,731  
|$300$349                          |  | 632            |  |                   | 206,466   |                 | 634   |                  |   | 206,815  
|$350$399                          |  | 910            |  |                   | 342,283   |                 | 804   |                  |   | 301,503  
|$400$449                          |  | 688            |  |                   | 291,674   |                 | 611   |                  |   | 258,586  
|$450$499                          |  | 558            |  |                   | 264,913   |                 | 474   |                  |   | 224,893  
|$500$749                          |  | 1,204          |  |                   | 713,774   |                 | 1,030 |                  |   | 607,384  
|$750$999                          |  | 287            |  |                   | 253,585   |                 | 275   |                  |   | 243,157  
|$1,000 & greater                   |  | 146            |  |                   | 181,576   |                 | 140   |                  |   | 172,804  
|                                   |  |                |  |                   |           |                 |       |                  |   |          
|                                   |  | 7,599          |  | $                 | 2,825,148 |                 | 7,072 |                  | $ | 2,581,923
|                                   |  |                |  |                   |           |                 |       |                  |   |          



The weighted average
coupon on whole loans which we have securitized was 4.76% at March 31, 2005. At December 31, 2004, the weighted average coupon on whole loans which we have securitized was 4.30%.



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##### Table of Contents

As of March 31, 2005 and December 31, 2004, the residential real estate loans consisted of the following:



|                                    |  |               |   |  |                  |  
|----------------------------------- |  | ------------- | - |  | ---------------- | -
|Geographic Concentration            |  | March 31,2005 |   |  | December 31,2004 |  
|Southern California                 |  | 31            | % |  | 32               | %
|Northern California                 |  | 22            | % |  | 21               | %
|Florida                             |  | 6             | % |  | 6                | %
|Virginia                            |  | 4             | % |  | 4                | %
|Illinois                            |  | 3             | % |  | 3                | %
|Colorado                            |  | 3             | % |  | 3                | %
|Michigan                            |  | 3             | % |  | 3                | %
|Nevada                              |  | 2             | % |  | 3                | %
|Other states (none greater than 2%) |  | 26            | % |  | 25               | %
|                                    |  |               |   |  |                  |  
|Total:                              |  | 100           | % |  | 100              | %



Our residential real
estate loan portfolio of $2.9 billion as of March 31, 2005 includes $12 million of loans pending securitization and $2.87 billion in loans which have been securitized. The securitized residential real estate loans serve as collateral for $2.26
billion of mortgage-backed securities issued and $569 million of repurchase agreement financings. Belvedere Trust structures securitization transactions primarily through special purpose entities (such as real estate mortgage investment conduit, or
REMIC, trusts). The principal business activity involves issuing various series of mortgage-backed securities (in the form of pass-through certificates or bonds collateralized by residential real estate loans). The collateral specific to each
mortgage-backed securities series is the sole source of repayment of the debt and, therefore, our exposure to loss is limited to our net investment in the collateral. Although the $2.87 billion of residential real estate loans which have been
securitized are consolidated on our balance sheets, the special purpose entities that hold such loans, including BellaVista Funding Corporation, are legally separate from us and Belvedere Trust. Consequently, the assets of these special purpose
entities (including the securitized mortgage loans) are not available to our creditors or to creditors of Belvedere Trust, and such mortgage loans are not assets of Anworth or of Belvedere Trust. Only our interest in the securities issued by the
special purpose entities are legal assets of Anworth and Belvedere Trust.



At March 31, 2005, Belvedere Trust owned approximately $12 million in loans held for securitization. This figure includes the face amount of the mortgages as well as accrued interest and premium or discount. The loans
consist of adjustable-rate single-family residential mortgages and hybrid single-family mortgages with initial fixed-rate periods of three to ten years.



Hedging



We periodically enter into derivative transactions, in the form of forward purchase commitments which are intended to hedge our exposure to rising rates on funds borrowed to finance our investments in securities. We
designate the interest rate swap transactions as cash flow hedges. We also 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 for purposes of the 95% gross income test, but not the 75%
gross income test.



As part of our asset/liability management
policy, we may enter into hedging agreements such as interest rate caps, floors or swaps. These agreements would be entered into to try to reduce interest rate risk and would be designed to provide us with income and capital appreciation in the
event of certain changes in interest rates. We review the need for hedging agreements on a regular basis consistent with our capital investment policy. At March 31, 2005, we were a counter-party to swap agreements, which are derivative instruments
as defined by FASB 133 and FASB 138, with an aggregate notional amount of $400 million and an average maturity of 3.4 years. We utilize swap agreements to manage interest rate risk and do not anticipate entering into derivative transactions for
speculative or trading purposes. In accordance with the swap agreements, we pay a fixed rate of interest during the term of the swap agreements and receive a payment that varies with the three-month LIBOR rate. At March 31, 2005, there were
unrealized gains of approximately $10.8 million on our swap agreements.



To mitigate the impact of rising interest rates on the consummation of forward loan purchase commitments in connection with planned securitization funding, Belvedere Trust may enter into Eurodollar transactions. There is typically a time
difference between the date we enter into an agreement to purchase whole loans and the date on which we fix the interest rates paid for securitization financing. We are exposed to interest rate fluctuations during this period. In order to mitigate
this risk, we hedge our position using Eurodollar futures. We do not designate the Eurodollar futures for hedge accounting. Once the financing rates on the securitization are fixed, we remove the hedge positions. We recognize the change in value of
the projected cash flows on loans that we have purchased and loans that we have committed to purchase as well as the change in value of the Eurodollar transactions. The difference between these changes in value is included in income during the
current period. For the three months ended March 31, 2005, there were no recognized gains or recognized losses incurred on Eurodollar transactions. As of March 31, 2005, Belvedere Trust did not have any outstanding Eurodollar futures positions.



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##### Table of Contents

Liquidity and Capital Resources



Our primary source of funds consists of repurchase agreements, relative to our agency MBS portfolio, which totaled $4.3
billion at March 31, 2005 and Belvedere Trusts repurchase agreements, which totaled $569 million at March 31, 2005. Belvedere Trust also had $12 million in whole loan financing at March 31, 2005. Our other significant source of funds for the
three months ended March 31, 2005 consisted of payments of principal from our mortgage securities portfolio in the amount of $369 million and $115 million from our residential real estate loans. During the three months ended March 31, 2005, we also
had approximately $37 million in junior subordinated notes as more fully described in Note 7 in the accompanying consolidated financial statements.



Relative to our agency MBS portfolio, at March 31, 2005, all of our repurchase agreements were fixed-rate term repurchase agreements with original
maturities ranging from one to twenty-four months. Belvedere Trust enters into its own repurchase agreements. As of March 31, 2005, other than three repurchase agreements that reprice monthly subject to a cap, all of Belvedere Trusts
repurchase agreements were fixed-rate term repurchase agreements with original maturities ranging from eighteen days to thirty-six months. On March 31, 2005, we had borrowing arrangements with 19 different financial institutions and had borrowed
funds under repurchase agreements with 17 of these firms. 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 mortgage-backed securities and because
increases in short-term interest rates can negatively impact the valuation of mortgage-backed securities, our borrowing ability could be reduced and lenders may initiate margin calls in the event short-term interest rates increase or the value of
our mortgage-backed securities declines for other reasons. We had adequate cash flow, liquid assets and unpledged collateral with which to meet our margin requirements during the three months ended March 31, 2005.



We acquire residential mortgage loans from third party originators, including
banks and other mortgage lenders, through our Belvedere Trust subsidiary. Belvedere Trust structures securitization transactions primarily through special purpose entities (such as real estate mortgage investment conduit, or REMIC, trusts). The
principal business activity involves issuing various series of mortgage-backed securities (in the form of pass-through certificates or bonds collateralized by residential real estate loans). The collateral specific to each mortgage-backed securities
series is the sole source of repayment of the debt and, therefore, our exposure to loss is limited to our net investment in the collateral. During the first quarter ending March 31, 2005, Belvedere Trust transferred approximately $0.9 billion of
residential mortgage loans to a securitization trust pursuant to a pooling and third party service agreement. This transaction utilized non-qualified SPEs requiring consolidation, which effectively resulted in the transaction being accounted for as
a financing. During the year ended December 31, 2004, Belvedere Trust transferred approximately $2.4 billion of residential mortgage loans in six separate transactions to securitization trusts pursuant to pooling and third party servicing
agreements. Five of the six securitization transactions in 2004 totaling approximately $2.1 billion utilized non-qualified SPEs requiring consolidation, which effectively resulted in the transactions being accounted for as financings. The
residential real estate loans remain as assets on our consolidated balance sheets subsequent to securitization, and the financing resulting from these securitizations is shown on our consolidated balance sheets as Mortgage-backed securities
issued. The servicing of the mortgage loans is performed by third parties under servicing arrangements that resulted in no servicing asset or liability. Since its formation, Belvedere Trust has securitized approximately $3.3 billion of mortgage
loans.



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



During the three months ended March 31, 2005, we had raised approximately $6.4 million in capital under our Dividend Reinvestment and Stock Purchase Plan.



At March 31, 2005, our authorized capital included 20 million shares of $0.01 par value preferred stock. During the three
months ended March 31, 2005, we issued 659,200 shares of Series A preferred stock, par value $0.01 per share, liquidation preference $25.00 per share, resulting in net proceeds to us of approximately $16.1 million.



At March 31, 2005, Belvedere Trust has entered into commitments to purchase
mortgage loans in the amount of $300 million and whole loan financing facilities which provide for up to $950 million in financing secured by single-family mortgage loans. At March 31, 2005, Belvedere Trust has borrowed $11.7 million under the
facilities, secured by mortgage loans held for securitization with a face value of $12 million.



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Off-Balance Sheet and Contractual Arrangements



The following table represents the Companys contractual obligations as of March 31, 2005 (in thousands):



|                                            |  |                        |           |                  |   |           |  |           |           |                   |   |         |  |   |        
|------------------------------------------- |  | ---------------------- | --------- | ---------------- | - | --------- |  | --------- | --------- | ----------------- | - | ------- |  | - | -------
|                                            |  | Payments Due By Period
|                                            |  | Total                  |           | Less Than 1 Year |   | 1-3 Years |  | 3-5 Years |           | More Than 5 Years
|Repurchase agreements (Anworth Mortgage(1)) |  | $                      | 4,323,865 |                  | $ | 3,921,365 |  | $         | 402,500   |                   | $ |        |  | $ |       
|Repurchase agreements (Belvedere Trust(1))  |  |                        | 568,888   |                  |   | 299,388   |  |           | 269,500   |                   |   |        |  |   |       
|Whole loan financing facilities             |  |                        | 11,683    |                  |   | 11,683    |  |           |          |                   |   |        |  |   |       
|Mortgage-backed securities issued(2)        |  |                        | 2,259,808 |                  |   | 564,764   |  |           | 741,252   |                   |   | 416,955 |  |   | 536,837
|Junior subordinated notes(3)                |  |                        | 37,380    |                  |   |          |  |           |          |                   |   |        |  |   | 37,380 
|Purchase commitments                        |  |                        | 300,000   |                  |   | 300,000   |  |           |          |                   |   |        |  |   |       
|Lease commitment (Belvedere Trust)          |  |                        | 215       |                  |   | 65        |  |           | 128       |                   |   | 22      |  |   |       
|                                            |  |                        |           |                  |   |           |  |           |           |                   |   |         |  |   |        
|Total(4)                                    |  | $                      | 7,501,839 |                  | $ | 5,097,265 |  | $         | 1,413,380 |                   | $ | 416,977 |  | $ | 574,217
|                                            |  |                        |           |                  |   |           |  |           |           |                   |   |         |  |   |        

---

|(1) | These represent amounts due by maturity.
|--- | ----------------------------------------



|(2) | Principal is paid on the mortgage-backed securities issued following receipt of principal payments on the loans. For the table above, the principal payments have been estimated
based on the underlying contractual payments as adjusted for prepayment assumptions. The actual principal paid in each year will be dependent upon the principal received on the underlying loans.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | These represent amounts due by contractual maturity. However, we do have the option to redeem these in five years.
|--- | ------------------------------------------------------------------------------------------------------------------



|(4) | This does not include annual compensation agreements, leases with affiliates and incentive compensation agreements which are more fully described in Note 10.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



The following table represents the
Companys contractual obligations as of December 31, 2004 (in thousands):



|                                            |  |                        |           |                  |   |           |  |           |           |                   |   |         |  |   |        
|------------------------------------------- |  | ---------------------- | --------- | ---------------- | - | --------- |  | --------- | --------- | ----------------- | - | ------- |  | - | -------
|                                            |  | Payments Due By Period
|                                            |  | Total                  |           | Less Than 1 Year |   | 1-3 Years |  | 3-5 Years |           | More Than 5 Years
|Repurchase agreements (Anworth Mortgage(1)) |  | $                      | 4,172,930 |                  | $ | 3,705,930 |  | $         | 467,000   |                   | $ |        |  | $ |       
|Repurchase agreements (Belvedere Trust(1))  |  |                        | 544,506   |                  |   | 275,631   |  |           | 268,875   |                   |   |        |  |   |       
|Whole loan financing facilities             |  |                        | 556,233   |                  |   | 556,233   |  |           |          |                   |   |        |  |   |       
|Mortgage-backed securities issued(2)        |  |                        | 1,494,851 |                  |   | 373,523   |  |           | 490,249   |                   |   | 275,765 |  |   | 355,314
|Purchase commitments                        |  |                        | 350,513   |                  |   | 350,513   |  |           |          |                   |   |        |  |   |       
|                                            |  |                        |           |                  |   |           |  |           |           |                   |   |         |  |   |        
|Total(3)                                    |  | $                      | 7,119,033 |                  | $ | 5,261,830 |  | $         | 1,226,124 |                   | $ | 275,765 |  | $ | 355,314
|                                            |  |                        |           |                  |   |           |  |           |           |                   |   |         |  |   |        

---

|(1) | These represent amounts due by maturity.
|--- | ----------------------------------------



|(2) | Principal is paid on the mortgage-backed securities issued following receipt of principal payments on the loans. For the table above, the principal payments have been estimated
based on the underlying contractual payments as adjusted for prepayment assumptions. The actual principal paid in each year will be dependent upon the principal received on the underlying loans.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | This does not include annual compensation agreements, leases and incentive compensation agreements which are more fully described in Note 10.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------



Stockholders Equity



We use available-for-sale treatment for our agency mortgage-backed
securities which are carried on our consolidated balance sheets at fair value rather than historical cost. Real estate loans are carried at historical cost. Based upon these treatments, our total equity base at March 31, 2005 was $527 million.
Common stockholders equity was approximately $483 million, or $10.25 book value per share.



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



As a result of this mark-to-market
accounting treatment, our book value and book value per share are likely to fluctuate far more than if we used historical amortized cost accounting 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 mortgage-backed securities have one significant and direct effect
on our potential earnings and dividends: positive mark-to-market changes will increase our equity base and allow us to increase our borrowing capacity while negative changes will tend to reduce borrowing capacity under our capital investment policy.
A very large negative change in the net market value of our mortgage-backed securities might reduce our liquidity, requiring us to sell assets with the likely result of realized losses upon sale. Accumulative Other Comprehensive Income, Unrealized
Loss on Available-for-Sale Agency Securities was $68.1 million or 1.4% of the amortized cost of agency mortgage-backed securities at March 31, 2005. This, along with Accumulative Other Comprehensive Gain, Derivatives, of $10.8 million, and
Accumulative Other Comprehensive Loss, Other MBS, of $1.3 million, constitute the total Accumulative Other Comprehensive Loss of $58.6 million.



Critical Accounting Policies



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



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



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



Revenue Recognition



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



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



Allowance for Loan Losses



We establish and maintain an allowance for estimated loan losses inherent in
our residential real estate loan portfolio. The loan loss reserves are based upon our assessment of various factors affecting the credit quality of our assets including, but not limited to, the characteristics of the loan portfolio, review of loan
level data, borrowers credit scores, delinquency and collateral value. The reserves are reviewed on a regular basis and adjusted as deemed necessary. The allowance for loan losses on our real estate loans is established by taking loan loss
provisions through our consolidated statements of income.



Valuation of Investment Securities



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



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In March 2004, the Emerging Issues Task Force (EITF) of the FASB reached a consensus on Issue 03-1,
The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This EITF applies to all debt and equity securities currently accounted for under FASB 115, Accounting for Certain Investments in Debt and
Equity Securities. EITF 03-1 requires an evaluation of whether impairment is other than temporary. An impairment loss is equal to the difference between the investments cost and fair value. An impairment is considered other than
temporary if the investor does not have the ability and intent to hold for a reasonable period of time sufficient for recovery of fair value and if it is probable that the investor will be unable to collect all contractual amounts due or if the
impairment is considered other than a minor impairment. A minor impairment is considered 5% or less of value. For ordinary debt securities with no credit problems where the decrease in fair value is caused solely by rising interest rates, an
impairment is deemed other than temporary unless the investor has the ability and intent to hold for a reasonable period of time sufficient for recovery of fair value or if it is considered a minor impairment. The Company has reviewed its securities
portfolio and does not consider those securities that have been in a continuous loss position for 12 months or more to be other than temporarily impaired due to the fact that they are government-sponsored agency securities with limited credit risk
and the Company has the ability and intent to hold these securities until a forecasted recovery, which may mean until maturity. The FASB suspended the effective date of the consensus, other than disclosure requirements.



Variable Interest Entities



In January 2003, the Financial Accounting Standards Board, or FASB, issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (FIN 46). In December 2003, FASB issued FIN No. 46R which replaced FIN 46 and clarified ARB 51. This interpretation provides
guidance on how to identify a variable interest entity, or VIE, and when a company should include in its financial statements the assets, liabilities and activities of a VIE. Under FIN 46, a company must consolidate a VIE when it is considered to be
its primary beneficiary. The primary beneficiary is the entity that will absorb a majority (50% or more) of the risk of expected losses and/or receive most of the expected residual benefit from taking on that risk.



Belvedere Trust structures securitization transactions primarily through
non-qualified special purpose entities (such as real estate mortgage investment conduit, or REMIC, trusts). The principal business activity involves issuing various series of mortgage-backed securities (in the form of pass-through certificates or
bonds collateralized by residential real estate loans). The collateral specific to each series of mortgage-backed securities is the sole source of repayment of the debt and, therefore, our exposure to loss is limited to our net investment in the
collateral. Under FIN 46, these interests in non-qualified special purpose entities are deemed to be VIEs and we are considered the primary beneficiary. In addition, we consolidate our interest in loans financed through warehouse agreements where we
are acquiring assets prior to securitization. We disclose our interests in VIEs under FIN 46 in the Investments in Residential Real Estate Loans footnote.



Income Taxes



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



BT Finance, our indirect wholly-owned subsidiary, is a taxable REIT subsidiary and may be liable for corporate income tax expenses.



Subsequent Events



On April 6, 2005, we declared a common stock dividend of $0.27 per share which is payable on May 17, 2005 to our common
stockholders of record as of the close of business on April 29, 2005.



On April 11, 2005, the SEC declared effective a shelf registration statement on Form S-3 filed by Belvedere Trusts wholly-owned direct and indirect subsidiaries, BellaVista Finance Corporation and BellaVista Funding Corporation, as
co-registrants. This registration statement registered for sale to the public up to $4 billion in asset-backed securities.



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RISK FACTORS



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



General Risks Related to Our Business



Our leveraging strategy increases the risks of our operations.



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



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



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



| |  |  | A default of a mortgage-related asset that constitutes collateral for a repurchase agreement or warehouse loan could also result in an involuntary liquidation of the
mortgage-related asset. This would result in a loss to us of the difference between the value of the mortgage-related asset upon liquidation and the amount borrowed against the mortgage-related asset.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



These officers and employees are involved in investing both our assets and approximately $4.1 billion in mortgage-backed securities and other fixed income assets for institutional clients and individual investors
through PIA. These multiple responsibilities and ownerships may create conflicts of interest if these officers and employees of our company are presented with opportunities that may benefit both us and the clients of PIA. These officers allocate
investments among our portfolio and the clients of PIA by determining the entity or account for which the investment is most suitable. In making this determination, these officers consider the investment strategy and guidelines of each entity or
account with respect to acquisition of assets, leverage, liquidity and other factors that our officers determine appropriate. These officers, however, have no obligation to make any specific investment opportunities available to us and the above
mentioned conflicts of interest may result in decisions or allocations of securities that are not in our best interests.



Several of our officers and employees are also directors, officers and managers of BT Management Company, L.L.C., the company that manages the day-to-day
operations of Belvedere Trust, our mortgage loan subsidiary, and Lloyd McAdams is also an owner and Chairman of Syndicated Capital, Inc., a registered broker-dealer. Our officers service to PIA, BT Management Company, L.L.C. and Syndicated
Capital, Inc. allow them to spend only part of their time and effort managing our company as they are required



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to devote a portion of their time and effort to the management of other companies and this may adversely affect our overall management and operating results.



We may incur increased borrowing costs related to repurchase agreements
and that would adversely affect our profitability.



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



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



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



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



| |  |  | the value and liquidity of our mortgage-related assets.
| | - |  | -------------------------------------------------------



An increase in interest rates may adversely affect our book value and cause a decrease in the demand for mortgage loans, which could negatively affect the cash
available for distribution to you.



Increases in
interest rates may negatively affect the market value of our mortgage-related assets. Our fixed-rate securities are generally more negatively affected by these increases. In accordance with accounting rules, we reduce our book value by the amount of
any decrease in the market value of our mortgage-related assets. Losses on securities classified as available-for sale which are determined by management to be other than temporary in nature are reclassified from accumulated other comprehensive
income to current operations.



Furthermore, rising interest
rates generally reduce the demand for consumer credit, including mortgage loans. Interest rates have been at record low levels in recent years. The Mortgage Bankers Association of America has predicted that residential mortgage loan originations
will decrease in 2005 and for a period thereafter, primarily due to an anticipated decrease in refinancings caused by rising interest rates. In a period of rising interest rates, we expect to acquire and securitize fewer loans which would adversely
affect parts of our business, revenues and results of operations, which could adversely affect the amount of cash available for distribution to you.



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



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



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



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



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



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



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



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



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



Our hedging strategies may not be successful in mitigating our risks associated with
interest rates.



We engage in hedging activity. As
such, we use various derivative financial instruments to provide a level of protection against interest rate risks, but no hedging strategy can protect us completely. When interest rates change, we expect to record a gain or loss on derivatives,
which would be offset by an inverse change in the value of loans or residual interests. Additionally, from time to time, we may enter into hedging transactions in connection with our holdings of mortgage-backed securities and government securities
with respect to one or more of our assets or liabilities. Our hedging activities may include entering into interest rate swaps, caps and floors, options to purchase these items, and futures and forward contracts. Currently, we intend to primarily
use interest rate swap agreements to manage the interest rate risk of our portfolio of agency mortgage-backed securities and Eurodollar futures contracts to manage the interest rate risk associated with holding loans in our warehouse facility before
securitization; however, our actual hedging decisions will be determined in light of the facts and circumstances existing at the time and may differ from our currently anticipated hedging strategy. We cannot assure you that our use of derivatives
will offset the risks related to changes in interest rates. It is likely that there will be periods in the future during which we will incur losses after accounting for our derivative financial instruments. The derivative financial instruments we
select may not have the effect of reducing our interest rate risk. In addition, the nature and timing of hedging transactions may influence the effectiveness of these strategies. Poorly designed strategies or improperly executed transactions could
actually increase our risk and losses. In addition, hedging strategies involve transaction and other costs. We cannot assure you that our hedging strategy and the derivatives that we use will adequately offset the risk of interest rate volatility or
that our hedging transactions will not result in losses.



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



Our net income largely depends on our ability to acquire mortgage-related assets at favorable spreads over our borrowing costs. In acquiring
mortgage-related assets, we compete with other REITs, investment banking firms, savings and loan associations, banks, insurance companies, mutual funds, other lenders and other entities that purchase mortgage-related assets, many of which have
greater financial resources than us. As a result, we may not in the future be able to acquire sufficient mortgage-related assets at favorable spreads over our borrowing costs. If that occurs, our profitability will be harmed.



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



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



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



We depend on the diligence, experience and skill of
our officers and other employees for the selection, structuring and monitoring of our mortgage-related assets and associated borrowings. Our key officers include Lloyd McAdams, President, Chairman and Chief Executive Officer, Joseph E. McAdams,
Chief Investment Officer, Executive Vice President and Director, Thad M. Brown, Chief Financial Officer, Charles J. Siegel, Senior Vice President, Evangelos Karagiannis, Vice President and Bistra Pashamova, Vice President. Belvedere Trusts key
officers are Claus Lund and Russell Thompson. Our dependence on our key personnel is heightened by the fact that we have a relatively small number of employees, and the loss of any key person could harm our entire business,



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financial condition, cash flow and results of operations. In particular, the loss of the services of Lloyd McAdams or Joseph E. McAdams could seriously harm
our business.



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



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



Risk Related Primarily to Anworths Business



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



We fund most of our acquisitions of adjustable-rate mortgage-backed securities with borrowings that have interest rates based on indices and repricing
terms similar to, but of shorter maturities than, the interest rate indices and repricing terms of our mortgage-backed securities. Accordingly, if short-term interest rates increase, this may adversely affect our profitability.



Most of the mortgage-backed securities we acquire are adjustable-rate
securities. This means that their interest rates may vary over time based upon changes in a short-term interest rate index. Therefore, in most cases, the interest rate indices and repricing terms of the mortgage-backed securities that we acquire and
their funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. While the historical spread between relevant short-term interest rate indices has been relatively stable, there have been periods
when the spread between these indices was volatile. During periods of changing interest rates, these mismatches could reduce our net income, dividend yield and the market price of our stock.



The interest rates on our borrowings generally adjust more frequently than
the interest rates on our adjustable-rate mortgage-backed securities. For example, at March 31, 2005, our agency adjustable-rate mortgage-backed securities had a weighted average term to next rate adjustment of approximately 18 months, while our
borrowings had a weighted average term to next rate adjustment of 144 days. After adjusting for interest rate swap transactions, the weighted average term to next rate adjustment was 252 days. Accordingly, in a period of rising interest rates, we
could experience a decrease in net income or a net loss because the interest rates on our borrowings adjust faster than the interest rates on our adjustable-rate mortgage-backed securities.



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



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



| |  |  | We usually purchase mortgage-backed securities that have a higher interest rate than the market interest rate at the time. In exchange for this higher interest rate, we pay a
premium over the par value to acquire the security. In accordance with accounting rules, we amortize this premium over the term of the mortgage-backed security. If the mortgage-backed security is prepaid in whole or in part prior to its maturity
date, however, we expense the premium that was prepaid at the time of the prepayment. At March 31, 2005, substantially all of our mortgage-backed securities had been acquired at a premium.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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



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



We generally
fund our acquisition of fixed-rate mortgage-backed securities with short-term borrowings. During periods of rising interest rates, our costs associated with borrowings used to fund acquisition of fixed-rate assets are subject to increases while the
income we earn from these assets remains substantially fixed. This reduces or could eliminate the net interest spread between the fixed-rate mortgage-backed securities that we purchase and our borrowings used to purchase them, which could lower our
net interest income or cause us to suffer a loss. At March 31, 2005, 4% of our mortgage-backed securities were fixed-rate securities.



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



Our adjustable-rate mortgage-backed securities are
subject to periodic and lifetime interest rate caps. Periodic interest rate caps limit the amount an interest rate can increase during any given period. Lifetime interest rate caps limit the amount an interest rate can increase through maturity of a
mortgage-backed security. Our borrowings are not subject to similar restrictions. Accordingly, in a period of rapidly increasing interest rates, the interest rates paid on our borrowings could increase without limitation while interest rate caps
would limit the interest rates on our adjustable-rate mortgage-backed securities. This problem is magnified for our adjustable-rate mortgage-backed securities that are not fully indexed. Further, some adjustable-rate mortgage-backed securities may
be subject to periodic payment caps that result in a portion of the interest being deferred and added to the principal outstanding. As a result, we could receive less cash income on adjustable-rate mortgage-backed securities than we need to pay
interest on our related borrowings. These factors could lower our net interest income or cause us to suffer a loss during periods of rising interest rates. At March 31, 2005, approximately 96% of our agency mortgage-backed securities were
adjustable-rate securities.



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



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



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



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



Risk Related Primarily to Belvedere Trusts Business



Belvedere Trusts use of short-term debt exposes us to liquidity, market value and execution risks.



In order to continue our securitization operations, Belvedere Trust requires
access to short-term debt to finance loan inventory accumulation prior to sale to securitization entities. In times of market dislocation, this type of short-term debt might become unavailable from time to time. During such periods Belvedere Trust
would have to reduce the volume of its holdings and the number of securitizations that it undertakes. Belvedere Trust uses the inventory of assets it acquires to collateralize the debt. The debt is recourse to Belvedere Trust, and if the market
value of the collateral declines Belvedere Trust may need to use its liquidity to increase the amount of collateral pledged to secure the debt or to reduce the debt amount. Belvedere Trusts goal is to sell these assets to a securitization
entity; however, if Belvedere Trust ability to sponsor a securitization is disrupted, Belvedere Trust may need to sell these assets (most likely at a loss) into the secondary mortgage or securities markets, or Belvedere Trust would need to extend
the term of the short-term debt used to fund these assets.



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Belvedere Trusts payment of commitment fees and other expenses to secure borrowing lines may not
protect us from liquidity issues or losses. Variations in lenders ability to access funds, lender confidence in Belvedere Trust, lender collateral requirements, available borrowing rates, the acceptability and market values of Belvedere Trust
collateral, and other factors could force Belvedere Trust to utilize its liquidity reserves or to sell assets, and, thus, affect its liquidity, financial soundness, and earnings.



If Belvedere Trust is unable to complete securitizations or experiences delayed mortgage loan sales or securitization closings, it
could face a liquidity shortage which would adversely affect our operating results.



Belvedere Trust relies significantly upon securitizations to generate cash proceeds to repay borrowings and replenish its borrowing capacity. If there is a delay in a securitization closing or any reduction in its
ability to complete securitizations, Belvedere Trust may be required to utilize other sources of financing, which, if available at all, may not be on similar terms. In addition, delays in closing mortgage sales or securitizations of our mortgage
loans increase our risk by exposing us to credit and interest rate risks for this extended period of time. Several factors could affect Belvedere Trusts ability to complete securitizations of its mortgage loans, including:



| |  |  | conditions in the securities and secondary markets;
| | - |  | ---------------------------------------------------



| |  |  | credit quality of the mortgage loans acquired;
| | - |  | ----------------------------------------------



| |  |  | volume of its mortgage loan acquisitions;
| | - |  | -----------------------------------------



| |  |  | its ability to obtain credit enhancements;
| | - |  | ------------------------------------------



| |  |  | downgrades by rating agencies of its previous securitizations; and
| | - |  | ------------------------------------------------------------------



| |  |  | lack of investor demand for purchasing components of the securities.
| | - |  | --------------------------------------------------------------------



Belvedere Trusts business may be significantly harmed by a slowdown in the economy of California.



At March 31, 2005, approximately 53% of the residential mortgage loans that
Belvedere Trust owns or credit enhances are secured by property in California. An overall decline in the economy or the residential real estate market, or the occurrence of a natural disaster that is not covered by standard homeowners
insurance policies, such as an earthquake, could decrease the value of mortgaged properties in California. This, in turn, would increase the risk of delinquency, default or foreclosure on mortgage loans underlying Belvedere Trusts
mortgage-backed securities. This could adversely affect Belvedere Trusts credit loss experience and other aspects of Belvedere Trusts business, including Belvedere Trusts ability to securitize mortgage loans.



Belvedere Trust has had only limited experience in the business of acquiring and
securitizing whole mortgage loans and it may not be successful.



Belvedere Trust was formed in November 2003 as our subsidiary to engage in the business of acquiring and securitizing mortgage loans and it has a limited operating history. The acquisition of whole loans and the
securitization process are inherently complex and involve risks related to the types of mortgage loans Belvedere Trust seek to acquire, interest rate changes, funding sources, delinquency rates, prepayment rates, borrower bankruptcies and other
factors that Belvedere Trust may not be able to manage. Incorrect management of these risks may take years to become apparent. If it fails to manage these and other risks, this could harm our business and the results of our operations.



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



While
Belvedere Trust securitizes the loans it acquires in order to improve its access to financing, it bears the risk of loss on any loans that it acquires and which it subsequently securitizes. Belvedere Trust has risk of loss for all loans it holds on
its balance sheet. Belvedere Trust acquires loans that are typically not credit enhanced and that do not have the backing of Fannie Mae or Freddie Mac. Accordingly, Belvedere Trust is subject to risks of borrower default, bankruptcy and special
hazard losses (such as those occurring from earthquakes) with respect to those loans to the extent that there is any deficiency between the value of the mortgage collateral and insurance and the principal amount of the loan and any premium paid for
the loan. In the event of a default on any such loans that Belvedere Trust holds, Belvedere Trust would bear the loss of principal between the realized value of the mortgaged property and the principal amount of the loan, as well as foreclosure
costs and the loss of interest. We have not established any limits upon the geographic concentration or the credit quality of suppliers of the mortgage loans that Belvedere Trust acquires.



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Belvedere Trusts efforts to manage credit risk may not be successful in limiting delinquencies and defaults
in underlying loans or losses on its investments.



Loan losses may be greater than we anticipated. Despite our efforts to manage credit risk, there are many aspects of credit that we cannot control, and there can be no assurance that Belvedere Trusts quality control and loss
mitigation operations will be successful in limiting future delinquencies, defaults and losses. Belvedere Trusts underwriting reviews or third-party reviews may not be effective. The securitizations in which Belvedere Trust has invested may
not receive funds that Belvedere Trust believes are due from mortgage insurance companies. Loan servicing companies may not cooperate with Belvedere Trusts loss mitigation efforts, or such efforts may otherwise be ineffective. Various service
providers to securitizations, such as trustees, bond insurance providers, and custodians, may not perform in a manner that promotes Belvedere Trusts interests. The value of the homes collateralizing residential loans may decline. Belvedere
Trust acquires loans that allow for negative amortization; if the borrowers make payments that are less than the amount required to pay the interest due on these loans, the principal balance of the loans will increase. If loans become real
estate owned, servicing companies will have to manage these properties and may not be able to sell them. Changes in consumer behavior, bankruptcy laws, and other laws may increase loan losses. In most cases, the value of the underlying
property will be the sole source of funds for any recoveries. Expanded loss mitigation efforts in the event that defaults increase could increase Belvedere Trusts operating costs.



Belvedere Trust requires a significant amount of capital, and if it is not available, our business and financial performance could be
significantly harmed.



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



To date, we have invested approximately $96 million in Belvedere Trust to capitalize its mortgage operations. If Belvedere Trust fully invests all of the proceeds of our investment in it prior to the point at which it
can access external sources of capital, if it ever can, then Belvedere Trust will need to either restructure the securities supporting its portfolio or, if it is unable to sell additional securities on reasonable terms or at all, it will need to
either reduce its acquisition business or sell a higher portion of its loans. In the event that Belvedere Trusts liquidity needs exceed its access to liquidity, Belvedere Trust may need to sell assets at an inopportune time, thus reducing its
earnings. Adverse cash flow could threaten Belvedere Trusts ability to maintain solvency or to satisfy the income and asset tests necessary to elect and maintain REIT status.



Second-lien mortgage loans expose Belvedere Trust to greater credit risks.



To the extent Belvedere Trust invests in second-lien mortgage loans, its
security interests in the property securing the second-lien mortgage loans is subordinated to the interests of the first mortgage holder and the second mortgages have a higher loan-to-value ratio than does the first mortgage. If the value of the
property is equal to or less than the amount needed to repay the borrowers obligation to the first mortgage holder upon foreclosure, the second-lien mortgage loan will not be repaid.



Residential mortgage loan delinquencies, defaults, and credit losses could reduce
Belvedere Trust ability to complete securitizations.



Credit losses from any of the mortgage loans in the securitized loan pools reduce the principal value of and economic returns from residential mortgage-backed securities. Credit losses could reduce Belvedere Trusts ability to sponsor
new securitizations of residential loans. Therefore, Belvedere Trust may have to hold loans longer on its balance sheet which may change its risk profile with regard to credit and interest rate risk, preventing it from completing securitizations.



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



If Belvedere Trust utilizes over-collateralization as a credit enhancement to its securitizations, Belvedere Trust expects that such over-collateralization will restrict its cash flow if loan delinquencies exceed certain levels. The terms
of Belvedere Trusts



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securitizations will generally provide that, if certain delinquencies and/or losses exceed the specified levels based on rating agencies (or the
financial guaranty insurers, if applicable) analysis of the characteristics of the loans pledged to collateralize the securities, the required level of over-collateralization may be increased or may be prevented from decreasing as would
otherwise be permitted if losses and/or delinquencies did not exceed those levels. Other tests (based on delinquency levels or other criteria) may restrict Belvedere Trusts ability to receive net interest income from a securitization
transaction. We cannot assure you that the performance tests will be satisfied. Failure to satisfy performance tests may materially and adversely affect our results of operations.



Representations and warranties made by Belvedere Trust in loan sales and securitizations may subject Belvedere Trust to liability.



In connection with securitizations, Belvedere Trust
makes representations and warranties regarding the mortgage-related assets transferred into securitization trusts. The trustee in the securitizations has recourse to Belvedere Trust with respect to the breach of the standard representations and
warranties regarding the loans made at the time such mortgage-related assets are transferred. While Belvedere Trust generally has recourse to its loan originators for any such breaches, there can be no assurance of the originators abilities to
honor their respective obligations. Belvedere Trust attempts to generally limit the potential remedies of the trustee to the potential remedies Belvedere Trust receives from the originators from whom Belvedere Trust acquired the mortgage loans.
However, in some cases, the remedies available to the trustee may be broader than those available to Belvedere Trust against the originators of the mortgage-related assets and should the trustee enforce its remedies against Belvedere Trust, it may
not always be able to enforce whatever remedies it has against its loan originators. Furthermore, if Belvedere Trust discovers, prior to the securitization of a loan, that there is any fraud or misrepresentation with respect to the mortgage and the
originator fails to repurchase the mortgage, then Belvedere Trust may not be able to sell the mortgage or may have to sell the mortgage at a discount.



The mortgage-related assets Belvedere Trust own expose it concentrated risks and thus are likely to lead to variable returns.



Belvedere Trusts permanent asset portfolio produces a significant
amount of its revenue. It consists principally of mortgage loans that have been securitized by Belvedere Trust and, to a lesser extent, securities acquired from securitizations sponsored by others. The mortgage-related assets Belvedere Trust owns
employ a high degree of internal structural leverage that concentrates risk into the assets that Belvedere Trust acquires. No amount of risk management or mitigation can change the variable nature of cash flows, market values, and financial results
generated by concentrated risks in Belvedere Trusts mortgage-related investments, which, in turn, can result in variable returns to Belvedere Trust. Due to the concentration of risks, the assets Belvedere Trust hold may be exposed to greater
credit, interest-rate, and prepayment risk.



The success of Belvedere
Trusts business will depend upon its ability to determine that mortgage loans are serviced effectively.



The success of Belvedere Trusts mortgage loan business will depend to a great degree upon its ability to determine that its mortgage loans are
serviced effectively. In general, it is Belvedere Trusts intention to acquire loans servicing retained, where the loans will be serviced by the originating or selling institution. Belvedere Trust has no experience servicing a
portfolio of loans. In those instances where Belvedere Trust is required to purchase the servicing of a loan portfolio in order to acquire a portfolio with desirable attributes, Belvedere Trust will be required to sell the servicing rights,
implement a servicing function or transfer the servicing of the loans to a third party with whom Belvedere Trust has established a sub-servicing relationship. We cannot assure you that Belvedere Trust will be able to service the loans or effectively
supervise a sub-servicing relationship according to industry standards. Failure to service the loans properly will harm Belvedere Trusts business and operating results. Prior to either building the servicing capabilities that Belvedere Trust
may require or acquiring an existing servicing operation that has such capabilities, if ever, Belvedere Trust has contracted with an experienced servicer of the type of loans it acquires to sub-service its loans. The fees paid to such
subservicer will reduce to a certain extent the revenue Belvedere Trust is able to retain from its mortgage loans, and Belvedere Trusts net interest income will be reduced and at risk, depending on the effectiveness of the servicing company.



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



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



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



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



Risks Related to REIT Compliance and Other Matters



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



We believe that
since our initial public offering in 1998 we have operated so as to qualify as a REIT under the Internal Revenue Code of 1986, as amended, or the Code, and we intend to continue to meet the requirements for taxation as a REIT. Nevertheless, we may
not remain qualified as a REIT in the future. Qualification as a REIT involves the application of highly technical and complex Code provisions for which only a limited number of judicial or administrative interpretations exist. Even a technical or
inadvertent mistake could require us to pay a penalty or jeopardize our REIT status. Furthermore, Congress or the IRS might change tax laws or regulations and the courts might issue new rulings, in each case potentially having retroactive effects
that could make it more difficult or impossible for us to qualify as a REIT. If we fail to qualify as a REIT in any tax year, then:



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



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



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



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



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



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



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



Complying with REIT requirements may force us to liquidate otherwise attractive investments or to make investments inconsistent with our business plan.



In order to qualify as a REIT, we must also determine that at the end of
each calendar quarter at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets. The remainder of our investment in securities generally cannot include more than 10% of the
outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets can consist of the securities of any one issuer.
The 5% and 10% limitations described above will apply to our investment in Belvedere Trust unless



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Belvedere Trust is a qualified REIT subsidiary of ours (i.e., we own 100% of Belvedere Trusts outstanding stock), Belvedere Trust is a qualified REIT
or Belvedere Trust is a taxable REIT subsidiary of ours. If we fail to comply with these requirements, we must dispose of a portion of our assets within 30 days after the end of the calendar quarter in order to avoid losing our REIT status and
suffering adverse tax consequences. The need to comply with these gross income and asset tests may cause us to acquire other assets that are qualifying real estate assets for purposes of the REIT requirements that are not part of our overall
business strategy and might not otherwise be the best investment alternative for us.



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



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



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



As long as we own 100% of Belvedere Trusts outstanding stock, Belvedere Trust will be treated as a qualified REIT subsidiary for federal income tax purposes. As such, for federal income tax purposes, we will not
be treated as owning stock in Belvedere Trust and, Belvedere Trusts assets, liabilities and income will generally be treated as our assets, liabilities and income for purposes of the REIT qualification tests described above under Certain
Federal Income Tax Considerations. If, however, we do not own 100% of Belvedere Trusts outstanding stock, and Belvedere Trust does not qualify as a REIT, a qualified REIT subsidiary or a taxable REIT subsidiary, we will lose our REIT
status if, at the end of any calendar quarter, the value of our Belvedere Trust securities exceeds 5% of the value of our total assets or we own more than 10% of the value or voting power of Belvedere Trusts outstanding securities. If we fail
to satisfy the 5% test or the 10% test at the end of any calendar quarter, a 30-day cure period may apply following the close of the quarter. If we make an election to treat Belvedere Trust as a taxable REIT subsidiary, the total value
of any securities we own in Belvedere Trust and all of our other taxable REIT subsidiaries, if any, may not exceed 20% of the value of our total assets at the end of any calendar quarter. Since Belvedere Trust may elect to be taxed as a REIT in the
future, however, we do not intend to make a taxable REIT subsidiary election for Belvedere Trust. In the event of a more than de minimis failure of the 20% asset test occurring in taxable years after 2004, we will not lose our REIT status as long as
(i) the failure was due to reasonable cause and not to willful neglect, (ii) we dispose of the assets causing the failure or otherwise comply with the 20% asset test within six months after the last day of the applicable quarter in which we identify
such failure, and (iii) we pay a tax equal to the greater of $50,000 or 35% of the net income from the non-qualifying assets during the period in which we failed the 20% asset test. If there is more than a de minimis failure of the 20% asset test
occurring in taxable years after 2004 and we do not satisfy the requirements described in the preceding sentence, we would lose our REIT status.



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



Though Belvedere
Trust was formed as a qualified REIT subsidiary, it may elect to be taxed as a REIT in the future, possibly as early as its taxable year ending December 31, 2005. Although Belvedere Trust expects to operate in a manner to permit it to qualify as a
REIT if and when it makes a REIT election and to continue to maintain such qualification, the actual results of Belvedere Trusts operations for any particular taxable year may not satisfy these requirements. If Belvedere Trust fails to qualify
for taxation as a REIT in any taxable year after it makes a REIT election, and the relief provisions of the Code do not apply, Belvedere Trust will be required to pay tax on Belvedere Trusts taxable income in that taxable year and all
subsequent taxable years at regular corporate rates. Distributions to us in any year in which Belvedere Trust fails to qualify as a REIT will not be deductible by Belvedere Trust. As a result, we anticipate that if Belvedere Trust failed to qualify
as a REIT after it makes a REIT election, this would reduce the cash available for distribution to us. Unless entitled to relief under specific statutory provisions, if Belvedere Trust fails to maintain its REIT status after it makes a REIT
election, Belvedere Trust will also be disqualified from taxation as a REIT for the four taxable years following the year in which it loses its qualification.



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We conduct a portion of our business through taxable REIT subsidiaries, which could have adverse tax consequences.



We conduct a portion of our business, including
securitizations, through taxable REIT subsidiaries, such as Belvedere Trust Finance Corporation. Despite our qualification as a REIT, our taxable REIT subsidiaries must pay federal income tax on their taxable income. In addition, we must comply with
various tests to continue to qualify as a REIT for federal income tax purposes, and our income from, and investments in, our taxable REIT subsidiaries generally do not constitute permissible income and investments for these tests. While we attempt
to determine that our dealings with our taxable REIT subsidiaries will not adversely affect our REIT qualification, no assurance can be given that we will successfully achieve that result. Furthermore, we may be subject to a 100% penalty tax, or our
taxable REIT subsidiaries may be denied deductions, to the extent our dealings with our taxable REIT subsidiaries are not deemed to be arms-length in nature.



The tax imposed on REITs engaging in prohibited transactions will limit our ability to engage in transactions, including
certain methods of securitizing loans, that would be treated as sales for federal income tax purposes.



A REITs net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of
property, other than foreclosure property, but including any mortgage loans, held in inventory primarily for sale to customers in the ordinary course of business. We might be subject to this tax if we were to sell a loan or securitize loans in a
manner that was treated as a sale of such inventory for federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans other than through a taxable REIT subsidiary,
and may limit the structures we utilize for our securitization transaction even though such sales or structures might otherwise be beneficial for us. In addition, this prohibition may limit our ability to restructure our investment portfolio of
mortgage loans from time to time even if we believe that it would be in our best interest to do so.



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



We believe that we conduct our business in a manner that allows us to avoid being regulated as an investment company under
the Investment Company Act of 1940, as amended. If we fail to continue to qualify for an exemption from registration as an investment company, our ability to use leverage would be substantially reduced and we would be unable to conduct our business
as planned. The Investment Company Act exempts entities that are primarily engaged in the business of purchasing or otherwise acquiring mortgages and other liens on and interests in real estate. Under the SECs current
interpretation, qualification for this exemption generally requires us to maintain at least 55% of our assets directly in qualifying real estate interests. Mortgage-backed securities that do not represent all the certificates issued with respect to
an underlying pool of mortgages may be treated as securities separate from the underlying mortgage loans and thus may not qualify for purposes of the 55% requirement. Therefore, our ownership of these mortgage-backed securities is limited by the
Investment Company Act. In meeting the 55% requirement under the Investment Company Act, we treat as qualifying interests mortgage-backed securities issued with respect to an underlying pool for which we hold all issued certificates. If the SEC or
its staff adopts a contrary interpretation, we could be required to sell a substantial amount of our mortgage-backed securities under potentially adverse market conditions. Further, in order to maintain our exemption from registration as an
investment company, we may be precluded from acquiring mortgage-backed securities whose yield is somewhat higher than the yield on mortgage-backed securities that could be purchased in a manner consistent with the exemption.



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



In general, dividend income that a
tax-exempt entity receives from us should not constitute unrelated business taxable income as defined in Section 512 of the Internal Revenue Code. If we realize excess inclusion income and allocate it to stockholders, however, then this income would
be fully taxable as unrelated business taxable income under Section 512 of the Internal Revenue Code. If the stockholder is foreign, it would generally be subject to United States federal income tax withholding on this income without reduction
pursuant to any otherwise applicable income tax treaty. United States stockholders would not be able to offset such income with their operating losses.



We generally structure our borrowing arrangements in a manner designed to avoid generating significant amounts of excess inclusion income. However, excess
inclusion income could result if we held a residual interest in a real estate mortgage investment conduit, or REMIC. Excess inclusion income also may be generated if we were to issue debt obligations with two or more maturities and the terms of the
payments or these obligations bore a relationship to the payments that we received on our mortgage loans or mortgage-backed securities securing those debt obligations. For example, we may engage in non-REMIC collateralized mortgage obligations, or
CMO, securitizations. We also enter into various repurchase agreements that have differing maturity dates and afford the lender the right to sell any pledged mortgage securities if we default on our obligations. The Internal Revenue Service may
determine that these transactions give rise to excess inclusion income that should be allocated among our stockholders. We may invest in equity securities of other REITs and it is possible that we might receive excess inclusion income from those
investments. Some types of entities, including, without limitation, voluntarily employee benefit associations and entities that have borrowed funds to acquire their shares of our stock, may be required to treat a portion of or all of the dividends
they receive from us as unrelated business taxable income.



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Misplaced reliance on legal opinions or statements by issuers of mortgage-backed securities and government
securities could result in a failure to comply with REIT gross income or asset tests.



When purchasing mortgage-backed securities and government securities, we may rely on opinions of counsel for the issuer or sponsor of such securities, or statements made in related offering documents, for purposes of
determining whether and to what extent those securities constitute REIT real estate assets for purposes of the REIT asset tests and produce income that qualifies under the REIT income tests. The inaccuracy of any such opinions or statements may harm
our REIT qualification and result in significant corporate level tax.



Additional Risk Factors



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



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



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



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



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



Our future offerings of debt or preferred equity securities may adversely affect the value of our Series A Preferred Stock.



Our charter provides that we may issue up to 20 million shares of preferred stock in one or more series. In addition to our
outstanding Series A Preferred Stock, we currently have an agreement with Cantor pursuant to which we may issue up to 2.0 million shares of our Series A Preferred Stock. The issuance of additional preferred stock on parity with or senior to our
Series A Preferred Stock could have the effect of diluting the amounts we may have available for distribution to holders of our Series A Preferred Stock. In addition, our Series A Preferred Stock will be subordinated to all our existing and future
debt. None of the provisions relating to our Series A Preferred Stock contains any provisions affording the holders of our Series A Preferred Stock protection in the event of a highly leveraged or other transaction, including a merger or the sale,
lease or conveyance of all or substantially all our assets or business, that might adversely affect the holders of our Series A Preferred Stock.



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



For the purpose of preserving our REIT qualification and for other reasons, our charter prohibits direct or constructive ownership by any person of more than 9.8% of the lesser of the total number or value of the
outstanding shares of our common stock or more than 9.8% of the outstanding shares of our preferred stock. Our charters constructive ownership rules are complex and may cause the outstanding stock owned by a group of related individuals or
entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of the outstanding stock by an individual or entity could cause that individual or entity to own constructively in excess of
9.8% of the outstanding stock, and thus be subject to our charters ownership limit. Any attempt to own or transfer shares of our common or preferred stock in excess of the ownership limit without the consent of the board of directors shall be
void, and will result in the shares being transferred by operation of law to a charitable trust. Our board of directors has granted an unrelated third party institutional investor an exemption from the 9.8% ownership limitation as set forth in our
charter documents. This exemption permits this entity to hold up to 170,400 preferred shares or 9.8% of our outstanding shares of preferred stock, whichever is greater.



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



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



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



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



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



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



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



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



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



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



Our charter provides that we may issue up to 20 million shares of preferred stock in one or more series. The issuance of additional preferred stock on
parity with or senior to the Series A Preferred Stock could have the effect of diluting the amounts we may have available for distribution to holders of the Series A Preferred Stock. The Series A Preferred Stock will be subordinated to all our
existing and future debt. Thus, our Series A Preferred Stockholders bear the risk of our future offerings reducing the market price of our Series A Preferred Stock.



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|Item 3. | QUALITATIVE AND QUANTITATIVE 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 compensation to justify taking those risks and to maintain capital levels consistent with the risks
we undertake.



Interest Rate Risk



We primarily invest in adjustable-rate, hybrid and fixed-rate
mortgage-related assets. Hybrid mortgages are adjustable-rate mortgages 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.



Adjustable-rate mortgage-backed assets are typically subject to periodic and lifetime interest rate caps that limit the amount an adjustable-rate
mortgage-backed securities interest rate can change during any given period. Adjustable-rate mortgage 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-backed securities that are not fully indexed. Further, some adjustable-rate mortgage-backed securities 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 adjustable-rate
mortgage-backed debt securities with borrowings that have interest rates based on indices and repricing terms similar to, but of somewhat shorter maturities than, the interest rate indices and repricing terms of our mortgage assets. Thus, we
anticipate that in most cases the interest rate indices and repricing terms of our mortgage assets and our funding sources will not be identical, thereby creating an interest rate mismatch between assets and liabilities. During periods of changing
interest rates, such interest rate mismatches could negatively impact our net interest income, dividend yield and the market price of our common stock.



Most of our adjustable-rate assets are based on the one-year constant maturity treasury rate and 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 adjustable-rate mortgage-backed securities and borrowings reset at various different dates for the specific asset or obligation. In general, the
repricing of our debt obligations occurs more quickly than on our assets. Therefore, on average, our cost of funds may rise or fall more quickly than does our earnings rate on the assets.



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



At March 31, 2005, our agency mortgage-backed
securities and related borrowings will prospectively reprice based on the following time frames (dollar amounts in thousands):



|                                           |  |        |           |                                |            |   |        |   |                               |  |       |  
|------------------------------------------ |  | ------ | --------- | ------------------------------ | ---------- | - | ------ | - | ----------------------------- |  | ----- | -
|                                           |  | Assets |           |                                | Borrowings |  
|                                           |  | Amount |           | Percentage of TotalInvestments |            |   | Amount |   | Percentage of TotalBorrowings | 
|Investment Type/Rate Reset Dates:          |  |        |           |                                |            |   |        |   |                               |  |       |  
|Fixed-rate investments                     |  | $      | 189,208   |                                | 4.0        | % |        | $ |                              |  |      |  
|Adjustable-Rate Investments/ Obligations:  |  |        |           |                                |            |   |        |   |                               |  |       |  
|Less than 3 months                         |  |        | 205,066   |                                | 4.3        | % |        |   | 2,288,155                     |  | 52.9  | %
|Greater than 3 months and less than 1 year |  |        | 1,305,957 |                                | 27.3       | % |        |   | 1,633,210                     |  | 37.8  | %
|Greater than 1 year and less than 2 years  |  |        | 711,033   |                                | 14.9       | % |        |   | 402,500                       |  | 9.3   | %
|Greater than 2 years and less than 3 years |  |        | 1,596,405 |                                | 33.4       | % |        |   |                              |  |      |  
|Greater than 3 years and less than 5 years |  |        | 774,303   |                                | 16.1       | % |        |   |                              |  |      |  
|                                           |  |        |           |                                |            |   |        |   |                               |  |       |  
|Total                                      |  | $      | 4,781,972 |                                | 100.0      | % |        | $ | 4,323,865                     |  | 100.0 | %
|                                           |  |        |           |                                |            |   |        |   |                               |  |       |  



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At December 31, 2004, our agency mortgage-backed securities and related borrowings will prospectively
reprice based on the following time frames (dollar amounts in thousands):



|                                           |  |        |           |                                |            |   |        |   |                               |  |       |  
|------------------------------------------ |  | ------ | --------- | ------------------------------ | ---------- | - | ------ | - | ----------------------------- |  | ----- | -
|                                           |  | Assets |           |                                | Borrowings |  
|                                           |  | Amount |           | Percentage of TotalInvestments |            |   | Amount |   | Percentage of TotalBorrowings | 
|Investment Type/Rate Reset Dates:          |  |        |           |                                |            |   |        |   |                               |  |       |  
|Fixed-rate investments                     |  | $      | 201,515   |                                | 4.4        | % |        | $ |                              |  |      |  
|Adjustable-Rate Investments/ Obligations:  |  |        |           |                                |            |   |        |   |                               |  |       |  
|Less than 3 months                         |  |        | 335,616   |                                | 7.3        | % |        |   | 1,540,060                     |  | 36.9  | %
|Greater than 3 months and less than 1 year |  |        | 1,106,030 |                                | 24.1       | % |        |   | 2,165,870                     |  | 51.9  | %
|Greater than 1 year and less than 2 years  |  |        | 902,916   |                                | 19.7       | % |        |   | 467,000                       |  | 11.2  | %
|Greater than 2 years and less than 3 years |  |        | 1,504,897 |                                | 32.8       | % |        |   |                              |  |      |  
|Greater than 3 years and less than 5 years |  |        | 537,567   |                                | 11.7       | % |        |   |                              |  |      |  
|                                           |  |        |           |                                |            |   |        |   |                               |  |       |  
|Total                                      |  | $      | 4,588,541 |                                | 100.0      | % |        | $ | 4,172,930                     |  | 100.0 | %
|                                           |  |        |           |                                |            |   |        |   |                               |  |       |  



Market Value Risk



Substantially all of our mortgage-backed securities and
equity securities 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 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.



Liquidity Risk



Our primary liquidity risk arises from financing long-maturity mortgage-backed securities with short-term debt. The interest rates on our borrowings
generally adjust more frequently than the interest rates on our adjustable-rate mortgage-backed securities. For example, at March 31, 2005, our agency adjustable-rate mortgage-backed securities had a weighted average term to next rate adjustment of
approximately 18 months, while our borrowings had a weighted average term to next rate adjustment of 144 days. After adjusting for interest rate swap transactions, the weighted average term to next rate adjustment was 252 days. Accordingly, in a
period of rising interest rates, our borrowing costs will usually increase faster than our interest earnings from mortgage-backed securities. 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 not had difficulty rolling 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.



At March 31, 2005, we had unrestricted cash
of $25 million 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 assets vary from time to time and may cause changes in the amount of our net interest income. Prepayments of adjustable-rate mortgage 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 and adjustable-rate mortgage loans underlying mortgage-related assets. The purchase prices of
mortgage-related assets 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 mortgage-related assets. To the extent such assumptions differ
from the actual amounts of prepayments, we could experience reduced earnings or losses. The total prepayment of any mortgage-related assets purchased at a premium by us would result in the immediate write-off of any remaining capitalized premium
amount and a reduction of our net interest income by such amount. Finally, in the event that we are unable to acquire new mortgage-related assets to replace the prepaid mortgage-related assets, 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 securities. In accordance with accounting rules, we amortize this
premium over the term of the mortgage-related asset. As we receive repayments of mortgage principal, we amortize the premium balances as a reduction to our income. If the mortgage loans underlying a mortgage-related asset were prepaid at a faster
rate than we anticipate, we would amortize the premium at a faster rate. This would reduce our income.



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Tabular Presentation



Anworth Agency Mortgage-Backed Securities



The information presented in the table below projects the impact of sudden changes in interest rates on Anworths
annual projected net income and Portfolio Value (excluding Belvedere Trusts operations) as more fully discussed below, based on investments in place at March 31, 2005, and includes all of Anworths interest rate-sensitive assets,
liabilities and hedges such as interest rate swap agreements. Changes in Portfolio Value equals the change in value of our assets that Anworth carries at fair value rather than at historical amortized cost and any change in the value of any
derivative instruments or hedges, such as interest rate swap agreements. Anworth acquires interest rate-sensitive assets and funds them with interest rate-sensitive liabilities. Anworth generally plans to retain such assets and the associated
interest rate risk to maturity.



|                         |  |                                                    |  |                                               
|------------------------ |  | -------------------------------------------------- |  | ----------------------------------------------
|Change in Interest Rates |  | Projected Percentage Change in Net Interest Income |  | Projected Percentage Change in Portfolio Value
|2.0%                    |  | -156%                                              |  | 0.7%                                          
|1.0%                    |  | -71%                                               |  | 0.6%                                          
|0%                       |  |                                                   |  |                                              
|1.0%                     |  | -94%                                               |  | -1.5%                                         
|2.0%                     |  | -164 %                                             |  | -3.6%                                         



When interest rates
are shocked, prepayment assumptions are adjusted based on managements best estimate of the effects of changes in interest rates on prepayment speeds. For example, under current market conditions, a 100 basis point decline in interest rates is
estimated to result in a 60% increase in the prepayment rate of our mortgage-backed securities portfolio. The base interest rate scenario assumes interest rates at March 31, 2005. Actual results could differ significantly from those estimated in the
table. The above table includes the effect of interest rate swap agreements. At March 31, 2005, the aggregate notional amount of the interest rate swap agreements was $400 million and the average maturity was 3.4 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 Portfolio Value (excluding Belvedere Trusts operations) and excludes the effect of the interest rate swap agreements.



|                         |  |                                                    |  |                                               
|------------------------ |  | -------------------------------------------------- |  | ----------------------------------------------
|Change in Interest Rates |  | Projected Percentage Change in Net Interest Income |  | Projected Percentage Change in Portfolio Value
|2.0%                    |  | -125%                                              |  | 1.2%                                          
|1.0%                    |  | -55%                                               |  | 0.9%                                          
|0%                       |  |                                                   |  |                                              
|1.0%                     |  | -105%                                              |  | -1.8%                                         
|2.0%                     |  | -186%                                              |  | -4.0%                                         



Belvedere Trust



The information presented in the table below projects the
impact of sudden changes in interest rates on Belvedere Trusts annual projected net income and Portfolio Value as more fully discussed below based on investments in place at March 31, 2005. Changes in Portfolio Value equals the change in value
of our assets that Belvedere Trust carries at fair value (shown on the consolidated balance sheets as Other mortgage-backed securities) rather than at historical amortized cost and any change in the value of any derivative instruments or
hedges, such as interest rate swap agreements and Eurodollar futures contracts, divided by Belvedere Trusts equity. Belvedere Trusts residential real estate loans are carried at historical amortized cost and therefore are not included in
Portfolio Value in the table below. Belvedere Trust acquires interest rate-sensitive assets and funds them with interest rate-sensitive liabilities. Belvedere Trust generally plans to retain such assets and the associated interest rate risk to
maturity.



|                         |  |                                                    |  |                                               
|------------------------ |  | -------------------------------------------------- |  | ----------------------------------------------
|Change in Interest Rates |  | Projected Percentage Change in Net Interest Income |  | Projected Percentage Change in Portfolio Value
|2.0%                    |  | 13.2%                                              |  | 1.9%                                          
|1.0%                    |  | 10.6%                                              |  | 1.4%                                          
|0%                       |  |                                                   |  |                                              
|1.0%                     |  | -21.2%                                             |  | -2.3%                                         
|2.0%                     |  | -46.4%                                             |  | -4.8%                                         



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 increase from 28.0% to 33.6% in the prepayment rate of Belvedere Trusts mortgage-related assets



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(which include those assets that have been securitized). The base interest rate scenario assumes interest rates at March 31, 2005. Actual results could
differ significantly from those estimated in the table.



General



Many assumptions are made to present the
information in the above tables, 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 Anworth and
Belvedere Trust. The tables quantify the potential changes in net income and net asset value should interest rates immediately change (are shocked). The results of interest rate shocks of plus and minus 100 and 200 basis points are
presented. The cash flows associated with the portfolio of mortgage-related assets for each rate shock are calculated based on a variety of assumptions, including prepayment speeds, time until coupon reset, yield on future acquisitions, slope of the
yield curve and size of the portfolio. Assumptions made on the interest-rate sensitive liabilities, which are repurchase agreements, include anticipated interest rates (no negative rates are utilized), collateral requirements as a percent of the
repurchase agreement and amount of borrowing. Assumptions made in calculating the impact on net asset value of interest rate shocks include interest rates, prepayment rates and the yield spread of mortgage-related assets relative to prevailing
interest rates.



|Item 4. | 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), designed to determine
that information required to be disclosed by us in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported on a timely basis.



Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. 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.



Part II. OTHER INFORMATION



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



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



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



(a) None



(b) None



(c) None



(d) None



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



None



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



None



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



On March 15, 2005, we declared a preferred stock dividend of $0.539063 per share which was payable on April 15, 2005 to our preferred stockholders of
record as of the close of business on March 31, 2005.



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On April 6, 2005, we declared a common stock dividend of $0.27 per share which is payable on May 17, 2005
to our common stockholders of record as of the close of business on April 29, 2005.



On April 11, 2005, the SEC declared effective a shelf registration statement on Form S-3 filed by Belvedere Trusts wholly-owned direct and indirect subsidiaries, BellaVista Finance Corporation and BellaVista
Funding Corporation, as co-registrants. This registration statement registered for sale to the public up to $4 billion in asset-backed securities.



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



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



|              |  |                                                                                                                                                                                                                                                                                                                                                                          
|------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description                                                                                                                                                                                                                                                                                                                                                              
|3.1           |  | Amended Articles of Incorporation of Anworth (incorporated by reference from our Registration Statement on Form S-11, Registration No. 333-38641, which became effective under the Securities
Act of 1933 on March 12, 1998)                                                                                                                                             
|              | 
|3.2           |  | 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 Securities and Exchange Commission on May 14, 2003)                                                                                                  
|              | 
|3.3           |  | Articles Supplementary for Series A Cumulative Preferred Stock (incorporated by reference from our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 3,
2004)                                                                                                                                                                     
|              | 
|3.4           |  | Articles Supplementary for Series A Cumulative Preferred Stock (incorporated by reference from our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 21,
2005)                                                                                                                                                                     
|              | 
|3.5           |  | Bylaws (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)                                                                                                                                                                                   
|              | 
|4.1           |  | 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 Securities and Exchange Commission on November 3,
2004)                                                                                                                                                                           
|              | 
|10.1          |  | 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
Securities and Exchange Commission on April 26, 2004)                                                                                                                             
|              | 
|10.2          |  | 2003 Dividend Reinvestment and Stock Purchase Plan (incorporated by reference from Post-Effective Amendment No. 1 to our Registration Statement on Form S-3, Registration No. 333-110744, which
became effective under the Act on February 20, 2004)                                                                                                                     
|              | 
|10.3          |  | 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
Securities Exchange Commission on May 17, 2002)                                                                                                                                
|              | 
|10.4          |  | Agreement and Plan of Merger dated April 18, 2002 by and among Anworth, Anworth Mortgage Advisory Corporation (the Manager) and the shareholder of the Manager (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 Securities Exchange Commission on May 17, 2002)
|              | 
|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 Securities and Exchange Commission on August 14, 2002)                                                                                                        
|              | 
|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 Securities and Exchange Commission on August 14, 2002)                                                                                                    
|              | 
|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 Securities and Exchange Commission on August 14, 2002)                                                                                                    
|              | 
|10.8          |  | Addendum to Employment Agreement dated April 18, 2002, among Anworth, 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 Securities and Exchange Commission on August 14, 2002)                                                                                      
|              | 
|10.9          |  | Addendum to Employment Agreement dated April 18, 2002, among Anworth, 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 Securities and Exchange Commission on August 14, 2002)                                                                                  
|              | 
|10.10         |  | Addendum to Employment Agreement dated April 18, 2002, among Anworth, 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 Securities and Exchange Commission on August 14, 2002)                                                                                   
|              | 
|10.11         |  | Second Addendum to Employment Agreement dated as of May 28, 2004 between Anworth and Lloyd McAdams (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June
30, 2004, as filed with the Securities and Exchange Commission on August 9, 2004)                                                                                        



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|      |  |                                                                                                                                                                                                                                                                                                  
|----- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.12 |  | Second Addendum to Employment Agreement dated as of June 13, 2002 by and among Anworth 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 Securities and Exchange Commission on August 14, 2002)     
|      | 
|10.13 |  | Third Addendum to Employment Agreement dated as of May 28, 2004, between Anworth and Joseph E. McAdams (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended
June 30, 2004, as filed with the Securities and Exchange Commission on August 9, 2004)            
|      | 
|10.14 |  | Sublease dated June 13, 2002, between Anworth and Pacific Income Advisers, Inc. (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June 30, 2002, as filed
with the Securities and Exchange Commission on August 14, 2002)                                  
|      | 
|10.15 |  | Amendment to Sublease dated July 8, 2003 between Anworth and Pacific Income Advisers, Inc. (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended June 30,
2003, as filed with the Securities and Exchange Commission on August 8, 2003)                        
|      | 
|10.16 |  | Administrative Agreement dated October 14, 2002, between Anworth and Pacific Income Advisers, Inc. (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002, as filed with the Securities and Exchange Commission on November 14, 2002)        
|      | 
|10.17 |  | 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 Securities and Exchange Commission on March
26, 2003)                                                                                          
|      | 
|10.18 |  | BT Management Company, L.L.C. (BT Management) Operating Agreement dated November 3, 2003 (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003, as filed with the Securities and Exchange Commission on November 13, 2003)                
|      | 
|10.19 |  | Management Agreement dated November 3, 2003 between BT Management and Belvedere Trust Mortgage Corporation (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003, as filed with the Securities and Exchange Commission on November 13, 2003)
|      | 
|10.20 |  | Employment Agreement dated November 3, 2003 between BT Management and Claus Lund (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2003, as
filed with the Securities and Exchange Commission on November 13, 2003)                          
|      | 
|10.21 |  | Employment Agreement dated November 3, 2003 between BT Management and Russell J. Thompson (incorporated by reference from our Quarterly Report on Form 10-Q for the quarter ended September 30,
2003, as filed with the Securities and Exchange Commission on November 13, 2003)                 
|      | 
|10.22 |  | Amended and Restated Sales Agreement dated January 19, 2005 between Anworth and Cantor Fitzgerald & Co. (incorporated by reference from our Current Report on Form 8-K filed with the
Securities and Exchange Commission on January 21, 2005)                                                    
|      | 
|10.23 |  | Sublease dated January 6, 2005 between Belvedere Trust Mortgage Corporation and Keefe, Bruyette & Woods, Inc. (incorporated by reference from our Annual Report on Form 10-K for the year
ended December 31, 2004, as filed with the Securities and Exchange Commission on March 16, 2005)       
|      | 
|12    |  | Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends                                                                                                                                                                                                         
|      | 
|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                                                                                                                                   



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SIGNATURES



Pursuant to the
requirements 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/s/    JOSEPH LLOYD
MCADAMSJoseph Lloyd McAdamsChairman of the Board, President and Chief Executive Officer (authorized officer of registrant)




Dated: May 9, 2005



/s/    THAD M. BROWNThad M. BrownChief Financial Officer (principal accounting officer)




Dated: May 9, 2005



55